Credit Scores and Down Payments for FHA Loans

While mortgage professionals have the final say, FHA guidelines apply credit scores to down payment requirements. For borrowers with FICO scores of at least 580, the down payment recommendation is 3.5% of the home’s purchase price. For FICO scores between 500 and 579, the down payment recommendation is 10%.

The down payment determines mortgage insurance; if you put down less than 10%, you’ll need to pay insurance for the life of the loan. If you put down 10% or more, you pay insurance for 11 years. You can use an FHA loan calculator to see how much this insurance will cost.

Down payment money can be a gift from the borrower’s family, friends, employer, and government and non-government organizations.

FHA Loan Requirements

FHA loans require borrowers to accept certain conditions. These usually include:

• • Primary residence. Typically, one borrower must live at the home for at least one year, starting within 60 days of closing. During that year, there’s no renting, no flipping, and no using the residence as a vacation home. After that year, owners can use the home as they please.
  • An appraisal. The FHA requires an appraisal, and it’s separate from a home inspection. Certified by the state, FHA appraisers determine a home’s fair market value and condition. An appraiser may require repairs before loan approval.
  • Debt-to-income ratio (DTI). While mortgage professionals have discretion over how a borrower’s DTI relates to loan terms and approval, the FHA has guidelines. For credit scores from 500 to 579, the FHA wants to see a DTI of less than 43%. Borrowers with higher credit scores may get approved with DTIs of up to 50% or more.
  • Property types. With an FHA loan, you can finance single-family homes, multi-family homes with up to four units, condominiums, and some manufactured homes.
  • Loan limit. For 2025, the FHA loan limit for single-family homes in lower-cost areas is $524,225. In higher-cost areas, the single-family limit is $1,209,750. Multi-family properties have higher limits: $671,200 to $3,490,300.
  • One home, one loan. Typically, borrowers can’t have more than one FHA loan at a time. There are, however, exceptions, including job relocation, a change in family size, and jointly owned properties.

Refinancing With an FHA Loan

FHA loans have refinancing options similar to conventional loans. These include:

• • Simple refinancing. Swapping one FHA loan for another FHA loan. Borrowers often do simple refinancing to lower monthly payments with a better interest rate or to extend or shorten the loan’s term.
  • Conventional refinancing. Swapping an FHA loan for a conventional mortgage. Borrowers often choose this refinancing option to get rid of mortgage insurance; with at least 20% equity in a home, most conventional loans don’t require insurance.
  • Cash-out refinancing. Here, borrowers replace one FHA loan with a larger one and take out the difference in cash, often up to 80% of the home’s equity.
  • Rehab refinancing. Also called 203(k) refinancing, borrowers replace an existing FHA loan with a new one that includes renovation and repair costs. The money for repairs goes into an escrow account and is released when the work on the home is complete.

Who do FHA loans work best for?

Moderate-income families and first-time homebuyers often reap the biggest benefits of FHA loans. Borrowers with past bankruptcies, foreclosures, limited savings, and less-than-perfect credit many times choose FHA loans because of the more lenient approval criteria.

Types of FHA Loans

The FHA offers over a dozen loan options, including some for specific needs, such as disaster relief. The most common types of FHA loans are:

• • Basic home mortgage. The 203(b) loan is for single-family homes, with 15- or 30-year terms, and fixed- and adjustable-rate options.
  • Rehabilitation mortgage. The 203(k) loan is for buying fixer-uppers, allowing borrowers to roll purchase and renovation costs into a single loan.
  • Energy-efficient mortgage. The EEM loan is for buying an energy-efficient house or upgrading the energy efficiency of a home.

Pros and Cons of an FHA Loan

The pros of FHA loans include:

• • Easier qualification. Borrowers with checkered credit histories and low credit scores who may not qualify for conventional loans may get FHA loans.
  • Lower down payments. Recent Redfin data shows the typical homebuyer puts down an average of 18.6% of the purchase price. Most FHA borrowers put down less than 10%.
  • Competitive interest rates. FHA rates are typically similar to or lower than rates for conventional mortgages.
  • Fast qualification. As FHA loans are easier to qualify for, the approval time usually moves faster than other loan types. That means you get to move in sooner.

The cons of FHA loans include:

• • Property types. Not all properties qualify for FHA loans. You can’t buy investment properties; even Airbnb hosting could violate the mortgage terms. No vacation homes. No homes that cost more than the FHA limit. Homes that need significant repairs may not qualify.
  • Mortgage insurance. With an FHA loan, you must pay 1.75% of the loan amount as an upfront mortgage premium. Monthly insurance payments vary. For example, on a $300,000 30-year loan with 3.5% down, the insurance could cost around $135 a month.