FHA Loan Requirements: Costs, Credit, and Who Benefits

FHA loans let you buy a home with as little as 3.5% down and credit scores that would get laughed out of a conventional underwriting file. That flexibility comes at a price: mortgage insurance you can’t easily cancel and FHA loan limits that vary by county. I’ve closed FHA loans for first-time buyers in Phoenix who had 580 credit scores and for move-up buyers in Sacramento who just wanted to keep more cash in the bank. Here’s what actually matters when you’re deciding if FHA is right for you.

The 3.5% Down Payment (and When It’s Actually 10%)

FHA’s headline feature is the 3.5% minimum down payment, available to borrowers with a credit score of 580 or higher. Drop below 580 — down to 500 — and FHA still allows it, but you’ll need 10% down. Most lenders, Loanatik included, look at the whole file at that lower tier, not just the score.

Down payment funds can come from savings, an eligible gift from family, or approved down payment assistance programs. Arizona and Colorado both have state-backed assistance programs that pair well with FHA financing, and I regularly point first-time buyers in Denver or Tucson toward those before we lock in a rate.

Credit Flexibility Is Real, But Not Unlimited

FHA’s underwriting guidelines are genuinely more forgiving than conventional loans in a few ways:

• Lower minimum credit scores — 580 for 3.5% down, 500-579 for 10% down
• Higher debt-to-income tolerance — many borrowers get approved with DTI in the mid-40s or higher with compensating factors
• More lenient view of past credit events — bankruptcy and foreclosure waiting periods are typically shorter than conventional
• Non-traditional credit — in some cases, rent and utility payment history can help build a file for borrowers with thin credit

What FHA won’t do is ignore red flags. Recent late payments, collections, and unresolved judgments still matter. In my experience, lenders tend to weigh unexplained recent derogatory marks more heavily than a lower score by itself — though credit score is still just one factor among several in any approval decision. If that’s you, let’s talk before you apply, not after.

The MIP Reality Nobody Explains Well

This is the part that trips people up. FHA loans require mortgage insurance premium (MIP) in two forms:

• Upfront MIP — a one-time premium, typically financed into the loan balance rather than paid out of pocket
• Annual MIP — paid monthly, built into your payment for the life of the loan in most cases when you put down less than 10%

That last point is the one that surprises people: unlike conventional PMI, which drops off once you hit 20% equity, FHA’s annual MIP generally sticks around for the full loan term if your down payment was under 10%. The only way out is to refinance into a conventional loan once your equity and credit support it. I walk almost every FHA client through this exit plan up front — it shouldn’t be a surprise three years in.

For example, a buyer in Omaha financing a $280,000 home with 3.5% down would have upfront MIP financed into the loan and an ongoing monthly MIP charge added to principal, interest, taxes, and insurance. It’s not a dealbreaker, but it does change your long-term cost math compared to conventional financing — worth running side by side before you commit.

FHA Loan Limits Vary by County — A Lot

FHA loan limits aren’t one national number. They’re set annually by county based on local home prices, and the swings between areas we lend in are significant:

• Maricopa County, AZ (Phoenix/Scottsdale) — higher-cost limit reflecting the metro’s price growth
• Sacramento County, CA — moderate limit, though many California coastal counties sit at the high-cost ceiling
• Denver County, CO — elevated limit given the metro’s appreciation over the past decade
• Douglas County, NE (Omaha) — closer to the FHA floor, reflecting lower regional home prices

Limits get updated every year, so the number that applied to a friend’s purchase two years ago isn’t necessarily current. HUD’s official FHA mortgage limits page always reflects the current numbers by county. Before you fall in love with a listing, confirm the FHA loan limits for that specific county — it can be the difference between qualifying with FHA or needing to shift strategy to a conventional or jumbo loan.

Who FHA Actually Makes Sense For

I steer clients toward FHA when one or more of these is true:

• Credit score is below the low-700s threshold where conventional pricing gets favorable
• Down payment savings are limited and you want to preserve cash reserves
• You’ve had a past credit event (bankruptcy, foreclosure) inside conventional waiting periods
• You’re buying in a lower-cost area where FHA limits comfortably cover the purchase price

Where FHA usually doesn’t make sense: strong credit, 10%+ down payment available, and a purchase price near or above the local FHA limit. In those cases, conventional financing often costs less over time once you factor in MIP versus cancellable PMI. I’ll tell clients this directly, even when it means a smaller loan for us — a mortgage that fits your situation beats one that just closes.

How to Move Forward

FHA requirements are straightforward on paper but the details — MIP duration, county limits, credit event timelines — are where deals get made or delayed. If you want a clear read on where you stand, get pre-approved and we’ll go through your credit, down payment options, and the current FHA loan limits for your county before you start shopping. You can also run the numbers on FHA versus conventional payments to see the cost difference for your specific scenario.

FAQ

Can I remove FHA mortgage insurance later?
In most cases with less than 10% down, annual MIP lasts for the life of the loan. The common path off it is refinancing into a conventional loan once you’ve built enough equity and your credit supports it.

Do FHA loan limits change every year?
Yes. Limits are set annually by county and can move up or down based on local home price data, so always confirm the current limit before making an offer.

Is FHA available on investment properties?
No — FHA financing is for owner-occupied primary residences. Loanatik offers separate investor and DSCR loan programs, available nationwide, for rental and investment property purchases.

---

This article is general education, not financial advice or a commitment to lend. Loan programs, terms, and availability are subject to credit approval and may change. Loanatik LLC is an Equal Housing Lender. See our licensing & disclosures.