FHA Loan Requirements: What You Qualify For, and What the Mortgage Insurance Really Costs
An FHA loan will get many buyers into a house that conventional underwriting would refuse. The cost is mortgage insurance that, above 90% loan-to-value, never comes off, which makes the exit plan part of the purchase.
- Published
- Read
- 9 min
- 3.5%
- Down payment at 580 or above
- 1.75%
- Upfront mortgage insurance, financed
- Life
- MIP duration above 90% loan-to-value
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The FHA loan exists to do one thing conventional lending will not: approve a buyer with a modest score, thin reserves and a stretched debt ratio. It does that well, and for a great many households it is the difference between owning and renting, but it charges for the privilege in a way that deserves to be stated plainly at the start, on a 3.5% down payment, the annual mortgage insurance stays on the loan for as long as you hold it. Not until 20% equity, not until 78% loan-to-value. For the life of the loan.
That single provision is what turns an FHA loan from a product into a plan. Used deliberately, get in, build equity, refinance out. It is an excellent instrument. Used passively, it is a permanent surcharge of a few hundred dollars a month on a house you have long since had equity in.
The requirements, in the order underwriting checks them
| Requirement | FHA minimum | What lenders often require | Notes |
|---|---|---|---|
| Credit score, 3.5% down | 580 | 620–640 typically | Lender overlays are common and legal |
| Credit score, 10% down | 500 | 580 typically | Very few lenders go below 580 at all |
| Down payment source | Gift, grant, savings, or employer | Documented 60-day paper trail | 100% gift funds permitted |
| Debt-to-income, housing only | 31% | Flexible via automated underwriting | Called the front-end ratio |
| Debt-to-income, total | 43% | Up to ~56.9% with compensating factors | Reserves, residual income, score all help |
| Employment history | Two years, gaps explainable | Same | Job changes within a field are fine |
| Occupancy | Primary residence only | Same | No investment properties, no second homes |
| Property condition | Meets HUD minimum property standards | Same | Peeling paint, bad roof or no handrail can stop a closing |
| Appraisal | FHA appraiser from the approved roster | Same | Valid 180 days; sticks to the property for that period |
| Loan limit | Set per county, revised annually | Same | Ranges widely between low-cost and high-cost areas |
Lender overlays are the most misunderstood item here. The FHA insures the loan; individual lenders decide who they will lend to, and almost all impose stricter minimums than the programme allows. A 585 score declined by one lender is frequently approved by another, this is worth a second and third application, not a conclusion.
What the mortgage insurance actually costs
There are two separate premiums and they behave differently. The upfront premium is a one-time 1.75% of the base loan amount, almost always added to the balance. The annual premium is a percentage of the loan, divided by twelve and added to your payment.
| FHA, 3.5% down | Conventional, 5% down | Conventional, 10% down | |
|---|---|---|---|
| Down payment | $11,200 | $16,000 | $32,000 |
| Base loan amount | $308,800 | $304,000 | $288,000 |
| Upfront mortgage insurance | $5,404 (1.75%, financed) | $0 | $0 |
| Total loan amount | $314,204 | $304,000 | $288,000 |
| Monthly mortgage insurance | $144 | $157 | $91 |
| Does the insurance ever end? | No. Life of loan | Yes, at 78–80% LTV | Yes, at 78–80% LTV |
| Typical years until MI drops | Never, without refinancing | ~7–9 years | ~4–6 years |
| Cash needed at closing (approx.) | $11,200 + costs | $16,000 + costs | $32,000 + costs |
Conventional private mortgage insurance rates vary sharply with credit score. A 760 score pays roughly a third of what a 660 score pays, while FHA's annual premium is score-blind. That is the real trade: FHA is cheaper for weaker credit and more expensive for strong credit, and it never ends.
The exit: refinancing out of MIP
How the FHA-then-conventional path actually runs
Buy with FHA and note the target: 20% equity
A conventional refinance with no mortgage insurance requires 80% loan-to-value or better. Write down the loan balance that represents 80% of today's appraised value, and understand that both amortisation and appreciation move you toward it.
Check the number annually, not the calendar
Pull a rough valuation once a year. A broker's opinion, comparable sales, or a lender's automated estimate. Most FHA borrowers reach 20% equity faster than they expect in an appreciating market and slower in a flat one, and only the number tells you which you are in.
Price the refinance properly when you get close
Compare your current rate to the new one, add closing costs of roughly 2–3% of the loan, and divide by the monthly saving from dropping MIP plus any rate change. If the break-even is under about thirty months, refinance. If the new rate is much higher than your FHA rate, the MIP saving may not cover it. Run the numbers rather than assuming.
Consider the FHA Streamline if rates fall and equity has not arrived
The Streamline refinance requires no appraisal, no income documentation and minimal credit review, but it keeps you in FHA and keeps the mortgage insurance. It is a rate fix, not an MIP exit. Use it when rates have dropped materially and you are still years from 20% equity.
Ask about a partial UFMIP refund on a fast refinance
If you refinance from one FHA loan to another within three years, a portion of the original upfront premium may be credited. It declines monthly and disappears entirely after 36 months. It is rarely volunteered and worth asking about by name.
Where FHA wins, and where it does not
- Approvable at credit scores conventional lending declines outright, and at debt-to-income ratios well above conventional comfort.
- The entire down payment may be gifted, with a documented gift letter. Conventional programmes are considerably more restrictive.
- Waiting periods after bankruptcy and foreclosure are roughly half as long as conventional requirements.
- The annual insurance premium is score-blind, which makes it cheaper than conventional PMI for anyone below roughly a 700 score.
- FHA loans are assumable, which becomes a genuine selling advantage if you hold a low rate in a higher-rate market.
- Non-occupant co-borrowers are permitted, which can rescue a marginal debt-to-income ratio.
- Above 90% loan-to-value, annual mortgage insurance never cancels. The loan must be refinanced to escape it.
- The 1.75% upfront premium is financed, so you start with a loan balance larger than the purchase price minus your down payment.
- Property standards are strict, and a seller unwilling to fix peeling paint, a missing handrail or a failing roof can kill the deal.
- Primary residences only. No second homes, no rentals, and occupancy is certified at closing.
- County loan limits can put mid-priced homes out of reach in expensive markets.
- In competitive markets some sellers prefer conventional offers, fairly or not, because of the appraisal and repair requirements.
VerdictTake the FHA loan if it is what gets you approved, and treat the refinance as part of the purchase rather than a maybe. If you can reach 10% down, do. It converts lifetime mortgage insurance into an eleven-year cost. If your score is above roughly 700 and you can put 5% down, price conventional against it first, because cancellable PMI at a good score is usually cheaper overall.
Free calculator
Compare the FHA and conventional payments side by side
Before you commit to an FHA loan
- Credit scores pulled, and at least three lenders' overlay minimums asked about directly
- Conventional 5% and 10% down options priced against the FHA quote, PMI included
- Whether 10% down is reachable. It caps mortgage insurance at eleven years
- Upfront premium confirmed as financed, and the resulting total loan amount understood
- County loan limit checked against your target price range
- Gift funds documented with a proper gift letter and a 60-day paper trail
- Property walked with the FHA minimum standards in mind. Paint, handrails, roof, water heater
- The 80% loan-to-value refinance target written down as a specific loan balance
- Annual reminder set to check the valuation against that target
- $11,200
- Cash down on a $320,000 home
- $5,404
- Upfront MIP added to the loan
- 11 yrs
- MIP duration at 90% LTV or below
- ~$29,000
- Extra MI cost if never refinanced
3.5% at 580+
1.75% financed
Versus life of loan above
Versus conventional 5% down
An FHA loan is a bridge, and bridges are supposed to be crossed. The expensive version is the one you park on.
Frequently asked questions
- What credit score do I need for an FHA loan?
- The FHA allows 3.5% down at 580 and 10% down between 500 and 579. Individual lenders almost always require more, commonly 620 to 640. Through what are called overlays. Those overlays vary between lenders, so a score declined by one is often approved by another. If you are near a lender's floor, apply somewhere else rather than concluding you do not qualify.
- Does FHA mortgage insurance ever go away?
- Only if your loan-to-value was 90% or lower at origination, in which case it drops after eleven years. On the standard 3.5% down loan it lasts for the life of the loan and the only way out is to refinance into a conventional mortgage once you have 20% equity. This is the single most important thing to understand before choosing FHA.
- How much is FHA mortgage insurance?
- Two premiums. An upfront charge of 1.75% of the base loan amount, which is almost always financed into the balance, plus an annual premium charged monthly. On a $314,000 loan the annual premium works out around $144 a month, unlike conventional PMI, it does not vary with your credit score, which makes FHA relatively cheaper for weaker credit and relatively expensive for strong credit.
- What debt-to-income ratio does FHA allow?
- 43% is the standard benchmark, but automated underwriting regularly approves higher. Into the mid-50s, when there are compensating factors such as cash reserves, a strong credit score, significant residual income, or a documented history of paying similar housing costs. FHA is considerably more flexible here than conventional underwriting, which is often the actual reason a borrower ends up with an FHA loan.
- Can I use gift money for an FHA down payment?
- Yes, and this is one of FHA's real advantages. The entire down payment may be gifted by a family member, employer, labour union, or a charitable or government agency. You need a signed gift letter stating the funds are not a loan, plus documentation of the transfer. Conventional programmes are stricter about gift sourcing, particularly at low down payments.
- Can I buy a fixer-upper with an FHA loan?
- Not with a standard FHA loan, because the property must meet HUD minimum standards at closing. Safety, security and soundness. Peeling exterior paint, a missing stair handrail, an inoperable water heater or a failing roof can all stop the closing. The FHA 203(k) renovation loan exists for properties needing work and finances the repairs into the mortgage, at the cost of a considerably more involved process.
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