FHA Loans: Down Payment, MIP, and Qualification
FHA loans open homeownership with 3.5 percent down, but mortgage insurance works differently. Here is the full cost picture.
FHA loans allow down payments as low as 3.5 percent with credit scores of 580 or higher, but they charge both an upfront mortgage insurance premium (1.75 percent of the loan, usually rolled into the balance) and an annual premium (around 0.55 percent for most borrowers) that lasts the life of the loan if the down payment is under 10 percent.
Who FHA loans are for
FHA loans are insured by the Federal Housing Administration and designed for buyers with smaller down payments or thinner credit. The headline feature is a 3.5 percent minimum down payment with a credit score of 580 or higher. Scores between 500 and 579 can still qualify with 10 percent down.
They are especially popular with first-time buyers, but repeat buyers can use them too. The property must be your primary residence, and the loan must fall within FHA loan limits for your county.
The two mortgage insurance premiums
FHA mortgage insurance comes in two parts. The upfront MIP is 1.75 percent of the loan amount; most borrowers roll it into the loan balance rather than paying cash. The annual MIP is charged monthly and runs about 0.55 percent of the loan amount per year for most borrowers putting less than 5 percent down.
The catch: with less than 10 percent down, annual MIP lasts for the life of the loan. It does not drop off at 20 percent equity the way conventional PMI does. With 10 percent or more down, it lasts 11 years. This lifetime MIP is the biggest long-term cost difference versus conventional loans.
A cost example
On a $350,000 purchase with 3.5 percent down ($12,250), the loan starts at $337,750 before the upfront MIP. Adding 1.75 percent upfront MIP ($5,911) brings the balance to about $343,661. At 6.5 percent for 30 years, principal and interest run about $2,172 a month, plus roughly $155 a month in annual MIP, before taxes and insurance.
Compare that with a conventional loan at 5 percent down: the PMI might be $150 to $200 a month but drops off at 20 percent equity. For buyers who expect to build equity or refinance within several years, conventional often wins on total cost. For buyers who need the low down payment now, FHA wins on access.
Qualifying: DTI and credit
FHA allows higher debt-to-income ratios than conventional loans, often up to about 43 percent back-end, and sometimes higher with compensating factors like strong reserves or residual income. Lenders still verify income, employment, and assets the usual way.
Sellers and appraisals get extra scrutiny: FHA appraisals double as a basic health check of the property, and the home must meet minimum property standards. Fixer-uppers with serious issues can stall an FHA deal unless you use the FHA 203(k) renovation program.
Skip the arithmetic
Estimate the principal and interest side of any loan with the free mortgage calculator, then add MIP for the FHA total.
FHA loan questions
What credit score do I need for an FHA loan?
A 580 credit score qualifies for the 3.5 percent minimum down payment. Scores from 500 to 579 can still get an FHA loan with 10 percent down. Note that individual lenders often set their own minimums above the FHA floor, commonly 580 or 620.
Does FHA mortgage insurance ever go away?
With less than 10 percent down, the annual MIP lasts for the life of the loan; the practical exit is refinancing into a conventional loan once you have 20 percent equity. With 10 percent or more down, MIP is charged for 11 years and then ends.
What are FHA loan limits?
FHA loan limits vary by county and are updated annually. Most counties use the national floor, while high-cost areas get higher limits. Check the current limit for your county before house hunting, since the limit caps the loan amount, not the purchase price.