FHA Loans: Requirements, Rates, & Guidelines (2023)

By Grant Edrington – Updated May 3, 2023

Are you in the market for a new home, but struggling with credit issues or having difficulty coming up with a large down payment? An FHA loan may be a great option for you. To help you learn more, we’ll cover almost everything you need to know about FHA loans, including their requirements, rates, guidelines, and other aspects of this federally-funded loan program. 

What is an FHA Loan?

An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA), which allows lenders to offer lower down payment requirements and more lenient credit score requirements. While these are government-backed loans, interest rates are still set by the lender. 

FHA loans are a popular choice for some first-time homebuyers, as well as those with financial setbacks in their history. Despite these benefits, a mortgage insurance premium (MIP) is required regardless of the size of your down payment, which protects the lender in case the borrower defaults on the loan. While conventional loans also come with private mortgage insurance (PMI), it’s only applied when the down payment is less than 20% and can go away once you reach that 20% threshold.

Pros of FHA Loans

  • Less stringent credit score requirements compared to other loan types
  • Lower down payments than conventional mortgages
  • Potential eligibility for individuals and families with previous bankruptcies or other financial difficulties
  • The ability to include closing costs in the loan amount
  • Reduced waiting period to obtain a mortgage after a negative credit event such as going into foreclosure (three years with an FHA loan vs. 7 years for a conventional loan) or declaring bankruptcy (a two-year waiting period compared to four years with a conventional loan)
  • More affordable mortgage insurance premiums (MIP) than with conventional loans – annual MIP usually ranges between 0.15%-0.75% whereas PMI usually ranges between 0.1%-2%.

Cons of FHA Loans

  • FHA loans require a mortgage insurance premium (MIP), both upfront and annual, regardless of the down payment size
  • The home you intend to purchase must meet minimum property standards 
  • Some sellers may not accept offers from buyers with an FHA loan
  • The annual percentage rate (APR) on your loan, which takes into account lender fees and other charges in addition to your interest rate, may be higher than those of conventional loans, even though your interest rate may be lower. This is mostly due to the mortgage insurance premium (MIP) that we mentioned earlier
  • The FHA limits borrowers to a loan maximum of $472,030 for a single-family home loan or $1,089,300 for a single-family home in high-cost area

What are the Requirements for FHA Loans?

To be eligible for an FHA loan, there are certain requirements that must be met. 

  • The property you’re considering must be appraised by an FHA-recognized appraiser.
  • FHA loans are only available for properties that will be primary residences, meaning you can’t use them to buy an investment property, a second home, or a vacation home.
  • You must move into the property within 60 days of closing the loan.
  • An inspection is required to ensure that the property meets the minimum property standards set by the FHA.

There are additional requirements to qualify, including a down payment, mortgage insurance, credit score, income, and loan limits. These requirements generally apply to Deferred Action for Childhood Arrivals (DACA) status recipients, as well.

Down Payment Requirements

One of the biggest advantages of an FHA loan is that it offers prospective homeowners a lower down payment requirement. While conventional loans typically require a 20% down payment, FHA loans only require a 3.5% down payment for borrowers with a credit score of 580 or higher. Borrowers with a credit score between 500 and 579 will need to make a 10% down payment.

It’s important to note that if the down payment is a gift from a family member or friend, it must be properly documented and sourced.

Credit Score Requirements

Credit score requirements for FHA loans are more lenient than those associated with conventional loans. FHA borrowers must have a minimum credit score of at least 500 compared to a score of at least 620 for conventional loans. 

Although FHA borrowers can obtain a loan with a lower credit score, they still need to meet certain conditions. In general, borrowers with credit scores of 580 or higher are eligible for the 3.5% down payment option. Borrowers with credit scores between 500 and 579 will need to make a 10% down payment.

If you have a lower credit score, you may be able to qualify for an FHA loan, but you may still need to work on improving your credit score before applying.

Income Requirements

To qualify for an FHA loan, you’ll need to have a stable income and a verifiable employment history. Your lender will review your income and employment history to determine your ability to repay the loan.

There are no specific income requirements for FHA loans, but your debt-to-income (DTI) ratio must be within acceptable limits. Your DTI is the percentage of your monthly income that goes toward paying off debt, including your mortgage payment. In general, your DTI should be no higher than 43% to qualify for an FHA loan.

Mortgage Insurance Requirements

Mortgage insurance is required for all FHA loans, however, it can be cheaper than the standard private mortgage insurance (PMI) associated with conventional loans depending on factors like your credit score, down payment amount, loan size, and lender. 

Mortgage insurance protects the lender in case you default on the loan. There are two types of mortgage insurance premiums for FHA loans:

  • Upfront Mortgage Insurance Premium (UFMIP): This is a one-time fee that is typically added to the loan amount. The current UFMIP rate for most FHA loans is 1.75% of the loan amount.
  • Annual Mortgage Insurance Premium (MIP): This is an ongoing fee that is paid in monthly installments. This premium and its duration can vary depending on your loan terms and down payment size, with shorter terms and larger down payments often leading to lower MIP costs. 

Loan Limits 

FHA loans have specific loan limits that vary by county. In general, the loan limit for a single-family home in 2023 is $470,030 in most areas of the country. However, in high-cost areas, the loan limit can be as high as $1,089,300.

It’s important to note that these loan limits are subject to change each year. You can check the FHA mortgage limits website to learn about the current limits in your area.

Interest Rates 

Interest rates for FHA loans are typically lower than conventional loans, but they can vary based on factors such as your credit score and the loan amount. It’s a good idea to shop around and compare rates from multiple lenders to find the best rate for your situation.

It’s also important to note that interest rates for FHA loans are not set by the FHA but by individual lenders. This means that different lenders may offer different rates for FHA loans.

Additional Requirements

In addition to the conditions listed above, there are a few other requirements you’ll need to meet in order to qualify for an FHA loan:

  • The property you’re purchasing must be your primary residence.
  • You must be able to prove your identity and citizenship or legal residency status.
  • You must be at least 18 years old.
  • You must have a valid Social Security number.

How FHA Loans Work With Co-Borrowers

In some instances where a prospective buyer doesn’t meet eligibility criteria, they can include a non-occupying co-borrower to improve their chances of securing a loan. If you are applying for an FHA loan with a co-borrower, your co-borrower must meet certain eligibility requirements, such as having a qualifying credit score and DTI. Although the minimum credit score to obtain an FHA loan is 500, lenders may require that both borrowers have a minimum 580 median qualifying score. DTI requirements may be more flexible for co-borrowers with credit scores above 620. 

The FHA requires that co-borrowers are related either by blood, marriage, or law (such as a domestic partner, step-parent, step-grandparent, step-sibling, or in-law). In order to be a co-borrower, you must also be a U.S. citizen or have a primary residence in the U.S. 

How Do Closing Costs Work with FHA Loans?

Closing costs on your FHA loan range between 2% to 6% of the price of your new home. Closing costs include your UFMIP / MIP, lender fees, and third-party fees (such as notary and recording fees). The FHA may allow you to roll your closing costs into your mortgage principal. However, this means you’ll pay interest on these closing costs over the lifetime of your loan. 

To reduce closing costs, you can negotiate with your lender to potentially waive some of their fees or look to first-time home buyer assistance programs that help cover closing costs on FHA loans, as well as other state and local homebuying programs

Additionally, you can accept gift funds from family, friends, or employers, so long as you’re able to provide proof (such as a gift letter) that these funds are a gift to the borrower that do not have to be repaid.  

Types of FHA Loans

There are several different types of FHA loans available, each designed for different types of borrowers and situations. Let’s take a closer look at some of the most common types of FHA loans.

FHA Purchase Loan

An FHA purchase loan is designed for borrowers who are buying a new home. With a purchase loan, you can use an FHA loan to finance up to 96.5% of the purchase price of the home.

FHA Refinance Loan

An FHA refinance loan allows you to refinance your existing mortgage with a new FHA loan of up to 97.75% of your home’s value. You’ll need at least a 580 score and can roll your FHA closing costs into the loan amount. 

FHA Streamline Loan

An FHA streamline loan is a type of refinance loan that is designed to streamline the process and reduce the amount of paperwork required. With an FHA streamline loan, you can refinance your existing FHA loan into a new FHA loan with a lower interest rate and reduced mortgage insurance premiums.

FHA Cash-Out Refinance Loan

An FHA cash-out refinance loan allows you to refinance your existing mortgage and take out cash at the same time. With a cash-out refinance loan, you can borrow up to 80% of the appraised value of your home, minus any outstanding mortgage balance.

FHA 203(k) Loan

An FHA 203(k) loan is a type of renovation loan that allows you to finance the cost of home repairs and renovations into your mortgage. This can be a good option if you’re purchasing a fixer-upper or looking to make major renovations to your current home. 

With an FHA 203(k) loan, you can choose between two programs: the limited program, which is designed for smaller projects that cost less than $35,000, and the standard program, which gives you more cash to work with for larger projects.

What is the Difference Between an FHA Loan and a Conventional Loan?

While FHA loans and conventional loans both offer financing for purchasing a home, there are some key differences between the two. One of the biggest differences is the down payment requirement. As mentioned previously, FHA loans only require a 3.5% down payment, while conventional loans typically require a 20% down payment.

Another difference is the credit score requirement. FHA loans are more lenient with credit score requirements, while conventional loans typically require a higher credit score.

It’s also important to note that conventional loans are not insured by the government, while FHA loans are. This means that if you default on a conventional loan, the lender is not protected by insurance, whereas if you default on an FHA loan, the lender is protected by FHA insurance.

This table highlights the major differences between FHA and conventional loans.

FeatureFHA mortgageConventional mortgage
Minimum down payment3.5% with a credit score of 580 or better3%
Minimum credit score500–579 with a 10% down payment620
DTI ratio43% with exceptions possible above 50%45% with exceptions up to 50%
Maximum loan limitsLower loan limits than conventional loansHigher loan limits than FHA loans 
Appraisal requirementsRequired on all purchase loansMay be waived on purchase loans
Mortgage insuranceTwo types of mortgage insurance requiredRequired regardless of down payment amountOne type of mortgage insurance required

Requirement waived with a 20% down payment
OccupancyProperty must be the primary residenceProperty can be a primary, secondary or investment home
Streamline refinance available?Yes, for homeowners with current FHA loansNo, borrowers must fully qualify for refinance loans

Is an FHA Loan or Conventional Loan Better?

Whether an FHA loan or a conventional loan is better for you will depend on your individual situation. FHA loans can be a good option if you have a low credit score or are unable to make a large down payment. They also offer more lenient guidelines for debt-to-income ratio and may have lower interest rates.

On the other hand, conventional loans could be a better option if you have a higher credit score and can make a larger down payment. They may also offer more flexibility in terms of loan options and may not require mortgage insurance.

Ultimately, it’s important to compare the pros and cons of each type of loan and determine which one is best for your individual needs.

Looking for other ways to save on your home? Check out our Guide to First-Time Home Buyer Programs

How to Apply for an FHA Loan

Applying for an FHA loan is similar to applying for any other type of home loan, but there are a few key differences. Here are several basic steps you can expect to encounter when applying for an FHA loan:

1. Shop around for FHA-approved lenders and rates. Not all lenders offer the same types of FHA loans, so compare the rates and costs of at least three-to-five lenders. You can do this by contacting mortgage brokers, mortgage lenders, or your local bank or credit union. You can also use an online rate comparison site to input your basic financial information and get lenders to call you with their best offers.

2. Apply for pre-approval for an FHA loan. To get pre-approved for an FHA loan, you’ll need to provide proof of identity, as well as proof of your income and employment status. Additionally, the lender will pull your credit report to confirm that you meet the minimum FHA credit score requirement. They’ll also review your debt-to-income ratio, as well as make sure any past credit issues have been resolved. 

3. Go through the underwriting process. Your lender will evaluate your likelihood of being able to pay back your home loan before they approve your mortgage application. If you’re approved, your lender will give you a formal pre-approval letter. 

4. Get a budget and rate. Your pre-approval letter will include the amount your lender is willing to offer you, along with your approved interest rate. This will help you set your budget for purchasing a new home. 

Divvy Could Get You on the Path to Homeownership

Divvy offers a unique path to homeownership compared to more traditional programs. In addition to financial requirements that support diverse income types, your monthly payment can include savings towards your home ownership goals, like a down payment on your future home.

Simply apply with Divvy to see if you can get prequalified for a home-shopping budget. Choose from any Divvy-ready home (quicker move-in and no offer required), or a Divvy-approved home already on the market, so long as it fits within your budget. If you love your home, you’ll have the option to purchase it within a few years. If you decide you don’t want to buy the home, you can walk away with your Divvy savings, minus a relisting fee equal to 2% of the initial purchase price.

Learn more about how Divvy works. 

FAQs About FHA Loans

Is it a good idea to get an FHA loan?

Getting an FHA loan can be a good idea if you have a lower credit score, don’t have a lot of money saved for a down payment, or have a previous bankruptcy or foreclosure on your record. However, it’s important to compare rates and costs from multiple lenders to make sure it’s the best option for you.

What is the downside to an FHA loan?

The downside to an FHA loan is that you’ll have to pay mortgage insurance premiums for the lifetime of the loan. This can add up to a significant cost over time. Additionally, if you have a higher credit score and more money for a down payment, you may be able to get better rates and terms with a conventional loan.

What gets you approved for an FHA loan?

To get approved for an FHA loan, you’ll need to meet certain conditions, such as having a minimum credit score of 500 or better (with a 10% down payment) or 580 or better (with a 3.5% down payment), and being able to demonstrate steady employment and income.

What could disqualify you from an FHA loan?

You may be disqualified from an FHA loan if you have a recent bankruptcy or foreclosure on your record, owe money to the federal government, or have a history of late or missed payments on previous loans or other payment obligations.

Do FHA loans have higher interest rates?

FHA loans don’t necessarily have higher interest rates, but they do require mortgage insurance, which can add to the amount of your monthly payments. It’s important to compare rates and fees from multiple lenders to get the best deal.

Why would a house not qualify for FHA?

A house may not qualify for an FHA loan if it doesn’t meet certain property standards, such as having a leaky roof, a damaged foundation, or peeling paint. Additionally, FHA loans are only available for properties that will be used as the borrower’s primary residence.

What is the minimum age to qualify for an FHA mortgage?

There is no minimum age requirement for an FHA mortgage, but you will need to be at least 18 years old to sign a legal contract.

What is the FHA 5% rule?

The FHA 5% rule refers to a requirement that a borrower must pay at least 5% of the sale price or appraised value of a home as a down payment when using an FHA loan.

What is the maximum amount you can borrow for an FHA loan?

The maximum amount you can get from an FHA loan depends on the location of the property and whether it’s a single-family home, a multi-unit property, or a manufactured home. You can check the FHA mortgage limits website to learn about the current limits in your area of interest.

Are FHA loans available in all 50 states?

Yes, FHA loans are available in all 50 states. However, the loan limits and other requirements may vary depending on the location of the property. It’s important to check with your lender or a HUD-approved housing counselor for specific information about your area.

Learn More About Purchasing a Home in Your State

First-time homebuyers should also research which programs and grants are available in their state. If you live in a state where Divvy operates, explore first-time homebuyer information specific to your state:


Grant is a member of the marketing team and focuses on connecting aspiring homeowners in our metros with Divvy. He's worked on marketing teams spanning all parts of the homeownership journey, including home loans, power tools and home improvement, siding and flooring, and now Divvy. Grant graduated from Villanova University and became a homeowner in 2021.