What is an FHA Loan?
An FHA loan is a type of mortgage loan designed to help U.S. citizens purchase homes. It's a popular program for first-time homebuyers since it requires less cash up front, offers competitive interest rates, and has more lenient credit score requirements.
If you're considering using an FHA loan for your home purchase or refinance, here's what you should know.
Most borrowers need the following to qualify for an FHA loan:
- A minimum down payment of 3.5%
- A credit score of 580 or higher* (many lenders require 620+)
- Steady income and employment
- Ability to manage monthly debt and mortgage payments
- U.S. citizenship or eligible residency status
- To live in the home as your primary residence (1–4 unit properties only)
- Money to cover closing costs, estimated 2 to 6% of the loan amount
*Credit score requirements vary by lender; read more below.
How Do FHA Loans Work?
FHA loans are a government-backed mortgage program, meaning they're insured by the Federal Housing Administration (FHA) and designed to lower some of the barriers to homeownership.
The FHA doesn't lend money directly. Instead, private banks and lenders offer the loans, and the FHA backs these mortgages by sharing some of the risk with lenders if a borrower can't repay the loan.
Because some of the risk is shared, lenders can be more flexible in who they approve compared to many other loan programs.
2026 FHA Loan Requirements
The FHA sets minimum standards for down payment, credit, and affordability, but individual lenders can be a bit stricter. Let's walk through the key requirements, so you know what lenders are really looking for.
Minimum Down Payment of 3.5%
FHA guidelines allow a minimum down payment of 3.5% for buyers with a credit score of 580 or higher. If your credit score falls between 500 and 579, you must provide a 10% down payment or more to be eligible.
While these are the FHA's baseline rules, many lenders apply their own standards on top of them, which can affect how much you need to put down.
Acceptable Credit Score
The FHA allows credit scores as low as 500, but lenders decide what they're comfortable approving. In practice, many lenders look for scores above 600 across most mortgage programs.
Neighbors Bank typically requires a minimum credit score of 620. If your score isn't there yet, we offer free credit counseling to help you understand your options and next steps. Get started here!
Steady Income and Employment
FHA loans are designed for everyday buyers, but lenders still need to see that you can comfortably make your payments. Lenders typically look for:
- A steady income history, usually over the past two years
- Employment in the same or similar line of work over the last two years
To show proof of income, your lender may ask you to provide pay stubs, W-2s, tax returns, and bank statements. They may also ask for additional documents to verify your employment.
Manageable Debt
Lenders want to ensure that you have enough income to comfortably support the responsibility of a mortgage payment on top of any other debts you have. FHA loans are known for offering more flexibility with debt. Lenders evaluate this by considering your debt-to-income (DTI) ratio, which gives them a picture of how much your monthly income goes toward housing costs and other debts like car loans, credit cards, and student loans.
For FHA loans, lenders typically prefer a ratio of 43% or lower. If your DTI ratio is above 43%, it is possible to still qualify, but your lender may require compensating factors.
FHA Mortgage Insurance
FHA loans also require a mortgage insurance premium, which counts as part of your monthly payment. FHA mortgage insurance is paid to the FHA, which uses the funds to cover potential losses if a borrower defaults on their loan.
MIP has two parts:
- Upfront MIP: 1.75% of the loan amount (paid at closing or rolled into the loan)
- Monthly MIP: Typically between 0.15% and 0.75%, depending on your loan details
If you put 10% or more down, monthly MIP can be removed after 11 years. Otherwise, it stays for the life of the loan unless you refinance into another loan type down the line.
Funds To Cover Closing Costs
In addition to your down payment, you'll need to plan for closing costs. These are the fees that come with finalizing your loan and typically range from 2% to 6% of the total loan amount, including FHA mortgage insurance.
For example, if you buy a $250,000 home and make the minimum 3.5% down payment, your closing costs could be roughly $5,000 to $15,000. The exact number depends on things like your location, loan details, and which costs are paid upfront versus rolled into the loan.
The good news? Closing costs aren't always something you have to cover entirely on your own. In many cases, seller concessions, lender credits, or down payment assistance programs can help reduce how much cash you need at closing.
Loan Limits
Loan limits are the maximum amount a borrower can finance through certain types of loans. FHA loans have loan limits that vary by location and adjust annually to account for inflation.
For 2026, most parts of the country have a standard loan limit of $541,287 for single-family homes. While in higher-cost housing markets, the limit is $1,249,125.
Property & Appraisal Requirements
When you purchase a property with an FHA loan it also must meet certain requirements.
For one, you can only use FHA loans on a home intended as your primary residence. That means you can't buy a rental home or investment property using an FHA loan. The one exception is if you purchase a multi-unit property, live in one unit, and rent out the rest.
Homes must also meet FHA's minimum property standards, which ensure the place is safe and hazard-free, and that the home is a good long-term investment. Your lender will require an FHA appraisal of the home to ensure it meets these standards and to assess its current market value during the application process.
Pros & Cons of FHA Loans
Here's a side-by-side look at what FHA loans tend to do well and where they may fall short:
| Pros of FHA Loans | Cons of FHA Loans |
|---|---|
| Low minimum down payment requirement | Upfront and annual mortgage insurance add to monthly costs |
| More flexible credit requirements than many conventional loans | Mortgage insurance can last the life of the loan if you put less than 10% down |
| Higher debt-to-income flexibility, which can help if you carry other monthly payments | Primary residence only — not available for investment properties |
| Allows 1–4 unit homes if you live in one unit | Property standards are stricter, which can affect buyers buying in markets with older homes |
For many buyers, the flexibility on credit, down payment, and income makes FHA loans a powerful starting point, especially if saving cash or rebuilding credit has been a challenge. The tradeoff is higher mortgage insurance and limits on how the loan can be used.
Is an FHA Loan Right For Me?
FHA loans are often a strong option for first-time buyers and for people who don't have perfect credit or a large amount saved. Because the FHA backs the loan, lenders can be more flexible with credit scores, debt levels, and down payments than they might be with conventional loans.
One key difference to keep in mind is mortgage insurance. FHA loans use MIP, which works differently than PMI on conventional loans. PMI can usually be removed once you build enough equity, while FHA MIP often lasts for the life of the loan. For many buyers, the easier qualification still makes FHA MIP a worthwhile tradeoff.
If saving 3.5% for a down payment still feels out of reach, an FHA loan may not be your only path forward. Some buyers qualify for 0% down loan programs, like USDA loans and VA loans. These programs can significantly reduce the cash needed upfront and may suit you better depending on your buying location and background.
The right loan isn't about checking a box; it's about matching your finances, timeline, and comfort level. If you'd like more guidance on what home loan could be right for you, get started here, and a Neighbors Bank loan expert will be in touch.
FAQs About FHA Loans
Are FHA loans only for first-time buyers?
No, FHA loans are available to both first-time and repeat homebuyers.
As long as you meet the eligibility requirements and plan to use the home as your primary residence, you can qualify for an FHA loan, even if you've owned a home before.
Are FHA loans better than conventional for first-time buyers?
It depends on your financial situation. FHA loans are often easier to qualify for if you have a lower credit score, limited savings, or higher monthly debt, which makes them appealing to many first-time buyers.
Conventional loans, on the other hand, may offer lower long-term costs if you have stronger credit and can put more money down, since private mortgage insurance can usually be removed once you build enough equity.
How long does it take to get approved for an FHA loan?
It typically takes about 40 to 50 days from the day you apply to close on an FHA loan.
What are the costs of getting an FHA loan?
Like most mortgage options, FHA loans come with closing costs, which typically include lender fees, an FHA appraisal, and other costs tied to finalizing your loan. FHA loans also require mortgage insurance, which includes an upfront cost and an ongoing monthly premium.
The upfront mortgage insurance premium (MIP) is 1.75% of the loan amount. In many cases, you can roll this upfront cost into your loan, rather than pay it out of pocket at closing.
In certain cases, a lender may offer to cover part or all of your closing costs in exchange for a slightly higher interest rate, which is often called a lender credit. It can reduce how much cash you need at closing, but it will increase your monthly payment.
Can I get an FHA loan if I don't have 3.5% saved?
Possibly, but an FHA loan may not be your only option. While FHA loans typically require a minimum 3.5% down payment, some buyers qualify for 0% down loan programs that can reduce the upfront cash needed even further.
For example, USDA loans offer 0% down for eligible homes in qualifying rural and suburban areas, and VA loans offer 0% down for qualifying service members, Veterans, and surviving spouses. If saving for a down payment has been a challenge, it may be worth exploring how these options compare to FHA loans.
There are also FHA loan down payment assistance programs.
Can I refinance out of an FHA loan later?
Yes, many buyers start with an FHA loan and refinance once their financial situation improves. This can be especially helpful if you want to remove FHA mortgage insurance, lower your interest rate, or switch to a conventional loan down the road.
What will disqualify you from an FHA loan?
FHA loans are designed to be flexible, but a few situations can make qualifying more difficult. While the FHA sets minimum guidelines, individual lenders make the final approval decision, and some may require higher credit scores or stricter financial standards than others.
You may also face a waiting period if you've recently gone through major credit events. For example, a bankruptcy within the past two years or a foreclosure within the past three years can affect eligibility, depending on your circumstances and how much time has passed.
That said, being turned down by one lender doesn't always mean you're out of options. Requirements can vary, and in many cases, the right guidance can help you understand what's holding you back.