FHA loan

An FHA loan is a residential mortgage insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development. The FHA doesn't lend the money directly, private lenders originate the loan, and the FHA insures it against borrower default.

How it works: FHA underwriting allows lower down payments (as low as 3.5% with a credit score of 580+) and somewhat more flexible debt-to-income ratios than conventional loans. The trade-off is the mortgage insurance premium (MIP), which has two parts: a 1.75% upfront premium charged at closing and typically rolled into the financed loan, plus a monthly premium of roughly 0.50% to 0.85% of the loan amount annually.

Why it matters: FHA is often the practical financing path for buyers with lower credit scores, smaller down payments, or thinner reserves. It's also commonly used by first-time buyers who don't yet have 20% down for a conventional loan with cancelable PMI. The headline rate on an FHA loan is often similar to conventional, but the all-in cost over time depends on how long the borrower keeps the loan.

Common gotcha: when the original loan-to-value ratio is greater than 90% (which it usually is, given the 3.5% down minimum), the monthly MIP stays for the life of the loan, it doesn't auto-cancel the way conventional PMI does at 78% LTV. The most common way borrowers exit FHA's lifetime MIP is by refinancing to a conventional loan once enough equity has built up.