The pros and cons of FHA loans

You may have heard about FHA loans, which are a type of government-backed mortgage with more lenient eligibility requirements than conventional loans. Though there’s a lot to like about FHA loans, they’re not right for everyone. Here’s a closer look at the pros and cons of FHA loans to help you decide whether they are the best option for you.

Read more: Best FHA mortgage lenders

An FHA loan is a mortgage insured by the Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development (HUD), and issued by a bank or lender approved by the FHA.

Since the FHA backs them, these types of mortgage loans are less risky for lenders and, therefore, come with less stringent borrower eligibility criteria. This typically means lower credit scores and down payment requirements than conventional mortgages.

FHA loans make homeownership possible for those who wouldn’t otherwise qualify for conventional mortgages. Here are a few benefits of FHA loans that make them worth looking into.

An FHA loan only requires you to put 3.5% down if your credit score is 580 or higher. If your score is between 500 and 579, the down payment requirement is 10% of the home’s purchase price. While many mortgage lenders have 3% down options for conventional loans, some require higher down payments, especially if other aspects of your finances aren’t stellar.

A low down payment also frees up funds to cover FHA loan closing costs, which generally account for 3% to 6% of the purchase price.

While most conventional loans require a minimum credit score of 620, you can qualify for an FHA loan with a credit score of 580 (with 3.5% down) or 500 (with 10% down). But remember that even if you meet the FHA minimum credit score requirement, mortgage lenders will still consider other aspects of your financial profile to determine your interest rate.

It’s also worth noting that these credit score minimums won’t work with every lender, regardless of your financial profile. Some set overlays, which are additional guidelines that can make it tougher to get approved for a mortgage, even if you meet the program rules.

So, despite FHA loans only mandating a 580 credit score (or 500 with a higher down payment) for approval, the lender could require a 620 or even 640 to approve your mortgage application.

Since the government backs FHA loans, the lender is protected against loss if you stop making monthly payments and default on your mortgage. This protection allows lenders to offer more competitive rates, making monthly mortgage payments more affordable.

You can also choose from a fixed-rate or adjustable-rate mortgage. Fixed-rate FHA loans give you a set interest rate and predictable monthly mortgage payments. Adjustable-rate loans start with a lower interest rate for a set period, followed by a fluctuating rate based on market conditions. The latter could be ideal if you want lower mortgage payments to start and plan to refinance into a loan with competitive terms once your financial situation improves.

Your debt-to-income ratio (DTI) is calculated by dividing your total monthly debt payments — including student loans, car loans, and mortgage payments — by your gross (pre-tax) monthly income, and it’s typically expressed as a percentage. Most conventional loans allow for a DTI ratio of no more than 41%, while FHA loans usually allow a DTI of up to 43%.

However, some lenders allow for higher DTIs on both mortgage types, depending on your circumstances. Compensating factors often include higher income levels, multiple income sources, or hefty cash reserves. So shopping around with various mortgage lenders to find the right fit is crucial.

Though FHA loans offer many benefits, they also have a few drawbacks to consider when shopping for a mortgage.

To qualify for an FHA loan, the property you want to buy must first meet the U.S. Department of Housing and Urban Development’s minimum property standards. The appraisal process for an FHA loan can be stricter and more demanding than a conventional loan, with the goal of ensuring the property is safe, secure, and structurally sound.

If the home has serious issues, the seller could be forced to make repairs before the loan can close. There’s also a chance that the appraisal will be low, which means a reduced sales price, coming out of pocket to pay the difference with your own money, or receiving a refund for your deposit and walking away from the deal.

Loan limits cap the amount you can borrow for a home. As of 2025, the FHA loan limit for a one-unit property is $524,225 in low-cost areas and $1,209,750 in high-cost areas.

If you need to borrow more, consider jumbo loans, a type of conventional mortgage with stricter eligibility requirements. These loans could be a better fit if you’re buying a home in an expensive market.

Perhaps the biggest downside of taking out an FHA loan is that you’re stuck paying mortgage insurance premiums (MIPs) for the life of your loan. MIP consists of two parts: the up-front mortgage premium, which is 1.75% of your base loan amount, and the annual MIP, which depends on various factors.

You could only eliminate FHA mortgage insurance if your loan origination date was June 3, 2013, or later, and you put down at least 10%. In this scenario, your lender will cancel your FHA mortgage insurance after 11 years. You could also eliminate FHA MIP after reaching 22% equity in your home if your loan origination date was between Jan. 1, 2001, and June 2, 2013.

Again, FHA loans are one of the more lenient mortgage options. You may have better luck with an FHA loan than you would with a conventional mortgage if one of the following applies:

• You’re a first-time home buyer (FHA loans are not restricted to first-time buyers, but they’re often good choices for these types of borrowers).

• You have limited cash reserves for a down payment.

• You have a less-than-ideal credit score.

Before taking out an FHA loan, though, make sure you’ve considered all the downsides of this mortgage option and don’t mind paying the mandatory mortgage insurance premium.

If you don’t think taking out an FHA loan is the right financial move for you, consider these alternatives that may be a better fit.

• VA loan: The Department of Veterans Affairs offers VA loans to help service members, veterans, and their families afford homeownership. These loans don’t require a down payment and usually carry affordable interest rates.

• USDA loan: A USDA loan is a no-down-payment mortgage insured by the United States Department of Agriculture. It is designed to help home buyers with low-to-moderate incomes purchase properties in rural areas.

• Conventional loan: If you have a solid credit score and DTI ratio, it’s worth considering conventional loans when you shop for a mortgage. Though conventional loans aren’t guaranteed by any government agency, they offer more flexibility regarding loan terms and mortgage insurance requirements.

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It’s generally easier to qualify for FHA loans than conventional loans since the federal government insures them, and they have more lenient eligibility requirements. However, though FHA loans allow you to qualify for a mortgage even with a low credit score, your desired home must meet the FHA’s minimum property standards.

Yes, you can switch from an FHA loan to a conventional loan by refinancing your mortgage. This means you’ll get a new conventional loan to pay off and replace your existing FHA loan. Remember that this option is only available if you’ve increased your credit score and built enough equity in your home to qualify for a conventional loan. With at least 20% equity in the house, you’ll not only get rid of FHA mortgage insurance but also avoid paying for private mortgage insurance (PMI). Before refinancing, compare the pros and cons of FHA loans versus conventional loans so you know what to expect.

An underwriter could deny your FHA loan for many reasons. Some of the most common ones include having too low a credit score, owing too much debt compared to what you earn, trying to buy a house that doesn’t meet the FHA’s minimum property standards, having a history of missed payments on rent or mortgages, or turning in an incomplete application.

Laura Grace Tarpley edited this article.