What is an FHA Loan?
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). FHA loans are designed to make homeownership accessible to borrowers with lower credit scores and smaller down payments. The minimum down payment is 3.5% with a credit score of 580+, or 10% with a score of 500-579.
FHA loans are not made by the government. Private lenders originate and service the loans, but the FHA insures them against default, reducing the lender's risk and allowing more flexible qualification standards. FHA loans represent approximately 15-20% of all home purchase mortgages in the U.S.
FHA loan requirements
- Down payment: 3.5% minimum (580+ credit) or 10% (500-579 credit)
- Credit score: 500 minimum, though most lenders require 580+
- Debt-to-income ratio: Generally 43% maximum, sometimes up to 50% with compensating factors
- Occupancy: Must be owner-occupied primary residence (not investment property)
- MIP: 1.75% upfront premium + 0.45-1.05% annual premium for the life of the loan
- Property standards: Must meet FHA Minimum Property Requirements (MPR) for health, safety, and structural soundness
FHA property standards and investors
FHA's Minimum Property Requirements can affect investors on both ends of a transaction. As a seller, if your buyer is using FHA financing, the property must pass an FHA appraisal that checks for safety hazards (peeling paint in pre-1978 homes, handrail requirements, working utilities), structural integrity, and habitability. Properties that need significant repairs may not qualify for FHA financing, which limits your buyer pool to cash buyers and conventional borrowers.
As an investor-buyer, FHA loans can be used strategically for house-hacking: buying a 2-4 unit property as an owner-occupant with 3.5% down, living in one unit, and renting the others. This allows significant leverage on a multifamily property with minimal capital. The rental income from other units helps qualify for the loan and often covers the entire mortgage.
FHA 203(k) renovation loans
The FHA 203(k) program allows buyers to finance both the purchase and renovation of a property in a single loan. This can be useful for investors buying distressed properties as owner-occupants and renovating them. The Standard 203(k) covers renovations over $35,000, while the Limited 203(k) covers up to $35,000 in repairs.