What an FHA Loan Is
An FHA loan is a mortgage insured by the Federal Housing Administration. The government does not lend the money — it guarantees the lender against loss, which allows approval at lower credit scores and smaller down payments than conventional underwriting permits.
The cost of that guarantee is two insurance premiums, and understanding them is most of understanding FHA loans.
The Two Premiums
- Upfront MIP — 1.75% of the base loan, paid at closing or, almost always, financed into the loan. On a $337,750 base loan that is $5,911 added to the balance.
- Annual MIP — 0.50% to 0.55% of the loan a year for most borrowers, divided into twelve monthly instalments. It is not annual in practice; it is a permanent addition to the payment.
The critical difference from conventional PMI: with less than 10% down, FHA annual MIP lasts the life of the loan. It never cancels, no matter how much equity accumulates. At 10% or more it stops after 11 years.
Qualification
| Requirement | FHA | Conventional |
|---|---|---|
| Minimum credit score | 580 (500 with 10% down) | 620, typically |
| Minimum down payment | 3.5% | 3% |
| Maximum DTI | Up to 50% with compensating factors | 43–45% |
| Mortgage insurance cancels | Only above 10% down, after 11 years | Automatically at 78% LTV |
| Property standards | FHA appraisal, stricter condition rules | Standard appraisal |
The Refinance Exit
Because FHA insurance is permanent at low down payments, the standard strategy is to refinance into a conventional loan once the home reaches 20% equity. That removes mortgage insurance entirely, and the saving frequently justifies the refinance costs on its own even without a rate improvement.
Loan Limits
FHA caps loan size by county. In 2025 the floor is $524,225 for most areas and the ceiling reaches $1,209,750 in high-cost counties. Above the local limit, an FHA loan is not available regardless of qualification.
Frequently Asked Questions
Is an FHA loan a good deal?
It is the right tool for a buyer whose credit score or down payment blocks conventional approval. For someone who qualifies both ways, conventional is usually cheaper because the mortgage insurance eventually cancels.
Can the upfront MIP be avoided?
No. It applies to every FHA loan. It can be paid in cash rather than financed, which avoids paying interest on it for thirty years.
Can I use an FHA loan for an investment property?
No. FHA financing requires the property to be your primary residence, occupied within 60 days of closing. Two-to-four unit properties qualify if you live in one of the units.