FHA Loan

An FHA loan is backed by the federal government through the Federal Housing Administration. Because the government insures the lender against loss, lenders can offer these loans to buyers with lower credit scores or smaller down payments than conventional loans typically require.

FHA loans allow down payments as low as 3.5% for buyers with credit scores of 580 or higher. Credit scores between 500 and 579 may still qualify with a 10% down payment, though individual lenders can set their own stricter requirements.

FHA loans are popular with first-time buyers, but they're available to any qualified buyer, not just first-timers.

FHA loans expand access to homeownership for buyers who might not qualify for conventional financing. If you're working with limited savings or a credit score that needs some work, an FHA loan may be a path to buying sooner than you thought.

The tradeoff is mortgage insurance. FHA loans require both an upfront mortgage insurance premium (paid at closing or rolled into the loan) and an annual mortgage insurance premium, regardless of your down payment amount. This adds to the overall cost of the loan.

A first-time buyer has a 620 credit score and $12,000 in savings. On a $250,000 home, an FHA loan allows a down payment of $8,750 (3.5%), leaving approximately $3,250 for closing costs, which may also be covered in part by seller concessions. A conventional loan with the same credit profile would likely require a higher down payment or better terms.

"FHA loans are always the cheapest option."

FHA loans can be a great fit, but they're not automatically the cheapest. Mortgage insurance on FHA loans stays for the life of the loan in most cases (if your down payment was less than 10%). On a conventional loan, PMI can be removed once you reach 20% equity. Comparing the total cost of FHA vs. conventional over the life of the loan, with a lender, helps you make the right call.