FHA loans: What you need to know to buy a home sooner

If you’re hoping to buy a home sooner rather than later but can’t qualify for a conventional loan, you may want to give an FHA loan a closer look.

Backed by the federal government, FHA loans can help make homeownership more accessible thanks to their lower down payment requirements and more flexible credit standards. But before you jump in to applying for one, it’s important to understand how FHA loans work, what you’ll need to qualify and the tradeoffs that come with those borrower-friendly features. Taking a closer look at the benefits, requirements and costs can help you decide whether an FHA loan is a good fit for your homeownership goals.

The Federal Housing Administration (FHA) is a government agency within the Department of Housing and Urban Development (HUD) that insures mortgages issued by FHA-approved private lenders. If a borrower defaults on an FHA loan, the FHA helps cover the lender’s losses by paying the unpaid loan balance.

That government backing encourages lenders to work with a range of borrowers, including aspiring home buyers who may have a harder time qualifying for a conventional mortgage.

While FHA loans are closely associated with first-time home buyers and those buyers consistently account for between 75% and 85% of FHA borrowers, according to HUD data, you don’t have to be a first-time buyer to qualify. The program’s goal is to make mortgages more accessible, helping eligible low- to moderate-income borrowers buy a primary residence.

With lower down payment requirements and more flexible credit standards, FHA loans can make buying a home more affordable and put homeownership within reach sooner than you may have thought.

Here are some of the key benefits that make FHA financing an attractive option for many buyers.

With an FHA loan, you may be able to buy a home with as little as 3.5% down, which is an incredible benefit if you have limited savings. That lower down payment requirement can help you become a homeowner and start building equity. Qualifying for the minimum down payment depends on your credit score.

If your credit isn’t perfect, you may still be able to qualify for an FHA loan. In some cases, borrowers with credit scores as low as 500 may be eligible. If your score falls between 500 and 579, you’ll typically need to make a 10% down payment. With a score of 580 or higher, you may qualify for as little as 3.5% down.

FHA loans often come with lower interest rates than conventional loans, helping make your monthly mortgage payment manageable and potentially saving you money over the life of the loan.

Coming up with the cash for a down payment and closing costs can be one of the biggest hurdles to surmount when buying a home. Fortunately, the FHA allows eligible gift funds to help cover your down payment, closing costs and certain other homeownership expenses. These funds can come from family members and other approved sources, including employers, charities, friends with a clearly documented relationship to you and certain government or public homeownership assistance programs.

While FHA loans lower the bar to homeownership in many ways, that doesn’t mean you’re automatically guaranteed approval. You still have to meet their specific eligibility requirements. So before you apply, make sure you understand what it takes to qualify:

FHA loan pros and cons

While an FHA loan can be the perfect solution for some aspiring home buyers, it’s not the right fit for everyone. As with any mortgage, you’ll want to consider your financial situation, credit profile and homeownership goals before deciding whether an FHA loan makes sense for you.

Here’s a quick look at some of the biggest advantages and drawbacks to help you determine if it’s worth pursuing.

Yes, FHA loans can make buying a home more affordable, but that doesn’t mean you get to avoid all the costs that come with a mortgage. You’ll still need to budget for some upfront and ongoing expenses, so it’s important to understand what you’ll pay both at closing and throughout the life of the loan.

The amount you’ll need for a down payment depends on your credit profile. On a $400,000 home, if you qualify for a 3.5% down payment, you’ll need to put down $14,000, while a 10% down payment would require $40,000.

In addition to your down payment, be ready to pay a variety of closing costs when you finalize your FHA loan. These costs typically include lender fees, underwriting fees, an FHA appraisal, a title search, title insurance, credit report fees and, if applicable, attorney fees. Closing costs generally range from 2% and 6% of the loan amount. So if we use a midpoint of 4%, you could pay about $16,000 in closing costs on a $400,000 home.

Regardless of your down payment amount, FHA loans require an upfront mortgage insurance premium (UFMIP). This one-time fee helps support the FHA program, which insures mortgages and protects lenders if a borrower is unable to repay the loan. The UFMIP is always equal to 1.75% of the loan amount. For example, if you put 10% down on a $400,000 home, your $360,000 loan would come with a $6,300 UFMIP. If you put 3.5% down, your $386,000 loan would result in a $6,755 UFMIP.

In addition to the upfront premium, you’ll also pay an annual mortgage insurance premium (MIP). This cost ranges from 0.15% to 0.75% of your loan amount, depending on your loan size and loan-to-value (LTV) ratio, and is divided into 12 monthly payments. If you make a 10% down payment, MIP can be removed after 11 years. However, if you put down less than 10%, you’ll typically be required to pay MIP for the life of the loan.

Property taxes vary based on where you buy your home. For example, New Jersey has some of the highest property taxes in the country, according to Tax Foundation data, while several other states have significantly lower rates. That means the property tax bill on a $400,000 home could differ by thousands of dollars per year depending on where you’re buying, making it an important cost to factor into your budget.

Although homeowners insurance isn’t required by law, most lenders will require you to carry coverage until you’ve paid off your loan. After all, your home serves as collateral for the mortgage, so lenders want to protect their investment if something happens to the property.

At closing, you’ll need to pay any interest that accrues on your loan between your closing date and your first mortgage payment.

As you can see, closing costs can add up quickly. The good news is that shopping around and comparing loan estimates from multiple lenders can help you find the best deal and potentially reduce your borrowing costs.

Whether an FHA loan or a conventional loan is right for you depends on your finances and what you’re looking for in a mortgage. A conventional mortgage is a home loan offered by a private lender rather than one insured or backed by a government program, like the FHA loans discussed here. Both types have pros and cons, so the best choice comes down to your individual situation.

Here’s a quick comparison of some of the key features of each loan type.

An FHA loan offers some clear advantages, but it’s not automatically the best fit for every home buyer. If you have limited savings, less-than-perfect credit or are struggling to qualify for a conventional mortgage, an FHA loan could help make homeownership possible sooner than you expected.

That said, FHA loans aren’t always the least expensive option. Between the upfront mortgage insurance premium and ongoing annual mortgage insurance costs, your total borrowing costs can add up over time. If you’re seriously considering an FHA loan, shop around and compare offers from multiple FHA-approved lenders, including banks, credit unions and online lenders. Taking the time to compare rates, fees and loan terms can help you find the most affordable FHA loan and potentially save you thousands over the life of your mortgage.

How we evaluate mortgage lenders and rates

According to CNN Underscored’s mortgages and loans methodology, we evaluate mortgage lenders based on a 100-point scoring system. Based on their internal scoring results in each category, lenders rank in one of our weighted lender tiers.

A low interest rate is important, but the lowest advertised rates are typically reserved for the borrowers with the strongest financial profiles. That’s why we dig into not only how competitive lenders rates appear on the surface but also how accessible their loan products are for a broad range of borrowers.

We consider how accessible lenders are through their customer support channels, the quality of the digital experience they offer and how quickly a borrower can expect to typically close on a loan. We also evaluate whether lenders provide reasonably attainable rate or fee discounts that can help reduce borrower costs.

CNN Underscored’s Money team is guided by a transparent methodology, independent editorial judgment and a commitment to helping readers understand which home loan products genuinely deserve their consideration. Our mortgage rate and lending coverage is grounded in analysis of mortgage rate trends, lender offerings and borrower priorities, with the goal of helping readers navigate an often complex borrowing landscape with clear, practical guidance.

For this article, CNN Underscored money writer Robin Rothstein drew on more than five years of experience covering home lending, mortgage rates and housing market trends. That expertise helped her formulate clear, accurate guidance on how FHA loans work, who may benefit from them and what prospective buyers should know before applying.