An FHA loan is a government-insured mortgage that allows lower credit scores (580+ for 3.5% down) and smaller down payments than conventional loans. The Federal Housing Administration insures the loan, reducing lender risk and enabling more lenient qualification. FHA loans require mortgage insurance (UFMIP upfront + annual MIP) that typically lasts the life of the loan.
How FHA Works: Government-Insured, Lender-Funded
FHA loans are originated by approved lenders but insured by the Federal Housing Administration. This insurance protects the lender if you default, which allows them to offer more flexible terms. The FHA does not lend the money directly. It backs the loan so lenders feel safe approving borrowers who might not qualify for conventional financing.
Because the government is backing the loan, FHA lenders can accept lower credit scores, higher debt-to-income ratios, and smaller down payments than conventional lenders. This makes FHA the most accessible loan program for buyers who do not qualify for VA loans. For a deeper breakdown, see how FHA loans actually work.
FHA Requirements: Credit, Down Payment, DTI
- Credit score: 580+ for 3.5% down; 500-579 for 10% down. Much more flexible than conventional.
- Down payment: 3.5% minimum. Can be gifted from family or qualified sources.
- Debt-to-income ratio: Generally up to 43%, but can go higher with compensating factors.
- Property requirements: Must meet FHA minimum property standards for safety and soundness.
- Loan limits: Vary by county. In most Texas counties, the 2026 limit is around $530,000 for a single-family home.
FHA Mortgage Insurance: UFMIP + Annual MIP
The biggest downside of FHA loans is the mortgage insurance. It comes in two parts:
- Upfront MIP (UFMIP): 1.75% of the loan amount paid at closing. Can be rolled into the loan.
- Annual MIP: Ranges from 0.45% to 1.05% of the loan amount, paid monthly. On most loans with less than 10% down, this stays for the life of the loan.
The upfront MIP on a $400,000 loan is $7,000. The annual MIP on that same loan would be about $183 per month. And it does not go away.
FHA vs Conventional: Which Is Better?
FHA is better when your credit is below 660 or you have limited savings. Conventional is better when your credit is 660+ and you want long-term savings because PMI drops off. The table below shows the comparison:
| Feature | FHA | Conventional |
|---|---|---|
| Down Payment | 3.5% | 3-20% |
| Minimum Credit | 580 (3.5% down) | 620 |
| Mortgage Insurance | Upfront + annual life of loan | PMI drops at 80% equity |
| Rate Advantage | Slightly lower rates than conventional | Better with 740+ credit |
| Best For | Lower credit, limited savings | Strong credit, long-term |
When FHA Is Best
FHA is the right choice if your credit score is between 580-659 or you have limited savings for a down payment. It is also useful if you have a higher debt-to-income ratio that would not qualify for conventional financing. For many first-time buyers, FHA is the only realistic path to homeownership.
When Conventional Is Better
If your credit score is 660+ and you have at least 3-5% saved, conventional is often better long-term. The key reason: PMI drops off automatically when you reach 80% equity. On a $300K home, that can save you $150+/month starting around year 6-7. Over 20 years, that is $36,000+ in savings compared to FHA's lifetime MIP.
