FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration, designed for first-time and lower-income homebuyers with lower down payment requirements (3.5%) and more flexible credit standards, requiring mortgage insurance premium (MIP).
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Exam Tip
FHA = 3.5% down (580+ credit), MIP required for LIFE unless 10%+ down. FHA INSURES loans (does not make them). Primary residence only. Upfront MIP = 1.75%, annual MIP = ~0.55%.
What is an FHA Loan?
An FHA loan is a mortgage backed by the Federal Housing Administration, a government agency within the Department of Housing and Urban Development (HUD). FHA does not make loans directly—it insures loans made by approved lenders, protecting them against borrower default.
Key FHA Loan Features
| Feature | Details |
|---|---|
| Down Payment | 3.5% minimum (with 580+ credit score) |
| Credit Score | 580+ for 3.5% down; 500-579 for 10% down |
| Mortgage Insurance | Required (upfront and annual MIP) |
| Property Standards | Must meet HUD minimum property requirements |
| Occupancy | Primary residence only |
| Loan Limits | Varies by county (2024: $472,030 - $1,089,300) |
Down Payment Requirements
| Credit Score | Minimum Down Payment |
|---|---|
| 580 or higher | 3.5% of purchase price |
| 500-579 | 10% of purchase price |
| Below 500 | Not eligible for FHA |
FHA Mortgage Insurance Premium (MIP)
| MIP Type | Amount | When Paid |
|---|---|---|
| Upfront MIP (UFMIP) | 1.75% of loan amount | At closing (can be financed) |
| Annual MIP | 0.15% - 0.75% (varies) | Monthly (added to payment) |
MIP Duration
| Down Payment | MIP Duration |
|---|---|
| Less than 10% | Life of loan |
| 10% or more | 11 years |
FHA vs. Conventional Loan
| Feature | FHA | Conventional |
|---|---|---|
| Down Payment | 3.5% | 3-20%+ |
| Credit Score | 500+ | 620+ (typically) |
| Mortgage Insurance | Always required | Only if <20% down |
| MI Cancellation | Cannot cancel (unless 10%+ down) | Can cancel at 20% equity |
| Property Standards | More strict | Less strict |
| Loan Limits | Government limits | Higher limits available |
Who Benefits from FHA Loans
| Borrower Type | Benefit |
|---|---|
| First-time buyers | Low down payment, flexible credit |
| Lower credit scores | More lenient requirements |
| High debt-to-income | More flexible ratios |
| Gift funds | 100% of down payment can be gift |
FHA Loan Limits (2024)
| Area Type | Standard Limit | High-Cost Limit |
|---|---|---|
| Floor | $472,030 | - |
| Ceiling | - | $1,089,300 |
FHA Loan Requirements
| Requirement | Standard |
|---|---|
| Employment | 2 years same field |
| Income | Documented and stable |
| DTI Ratio | Front-end: 31%, Back-end: 43% (can exceed with compensating factors) |
| Property | Must be primary residence |
| Appraisal | FHA appraisal required |
Exam Alert
FHA loan key facts: 3.5% minimum down payment with 580+ credit score (10% down if 500-579). Requires BOTH upfront MIP (1.75%) AND annual MIP. MIP is for LIFE of loan unless 10%+ down payment. FHA INSURES loans - does not make them. Property must be PRIMARY RESIDENCE.
Study This Term In
Related Terms
Mortgage
A mortgage is a loan used to purchase real estate, where the property serves as collateral, typically repaid over 15-30 years with interest.
Conventional Loan
A conventional loan is a mortgage not insured or guaranteed by a government agency (unlike FHA, VA, or USDA loans), typically requiring a 20% down payment to avoid private mortgage insurance (PMI).
VA Loan
A VA loan is a government-backed mortgage guaranteed by the U.S. Department of Veterans Affairs for eligible veterans, active-duty service members, and surviving spouses, featuring 0% down payment, no private mortgage insurance (PMI), and competitive interest rates.
PMI (Private Mortgage Insurance)
Private Mortgage Insurance (PMI) is insurance required on conventional loans when the down payment is less than 20%, protecting the LENDER (not the borrower) against default. PMI can be canceled once the borrower reaches 20% equity, unlike FHA mortgage insurance.
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