There are lots of mortgage options out there, but not all of them are right for every borrower.
Conventional loans, for example, are the most popular type of mortgage in the country. They made up about 75% of all mortgages in 2025, according to Home Mortgage Disclosure Act data, but they’re typically best reserved for high-credit borrowers with plenty saved for a down payment.
USDA loans, on the other hand, are a good option for rural homebuyers with little to put down, while VA loans are a great choice for military members and veterans.
For first-time buyers, a common recommendation is the FHA loan — the second-most popular type of mortgage in the U.S., according to HMDA. How exactly do these loans work, though, and what makes them good for first-time homebuyers? Here’s what borrowers need to know.
What are FHA loans?
FHA loans are mortgages that are backed by the Federal Housing Administration. They made up about 15% of all mortgages last year, HMDA data shows, and you can use them to buy a move-in-ready home, fund and fix up an older home, or even build a home from the ground up.
FHA loans have low credit score requirements (in some cases, you can have a credit score as low as 500), and the minimum down payment is just 3.5%. They also have limits that are set annually by the U.S. Department of Housing and Urban Development. For 2026, this limit is $541,287 in most parts of the country, though higher-cost markets can see limits go up to $1,249,125.
How FHA loans work
Despite being their namesake, the FHA doesn’t actually issue FHA loans. Instead, it “guarantees” the loans, while private, FHA-approved lenders originate them.
This means that if a borrower fails to repay their loan as agreed, the FHA will cover certain lender losses. It reduces the risk lenders take on with FHA loans and allows lenders to accept borrowers with lower credit scores, higher debt-to-income ratios, and lower down payments than other loan programs might allow.
“FHA loans have lower credit score requirements and more flexible debt-to-income ratios than conventional loans,” says Ashley Harris, director of homebuyer education at Neighbors Bank.
The FHA doesn’t cover losses out of taxpayer dollars, though. Instead, each FHA loan requires buyers to pay a Mortgage Insurance Premium, or MIP, at closing and as part of their regular monthly payment. This money goes into the FHA’s Mutual Mortgage Insurance Fund, which the department uses to pay back lenders if a borrower defaults on their loan.
Who FHA loans are best for
FHA loans have more flexible qualifying requirements than many other loan programs, particularly the popular conventional loan. They also require only 3.5% down, making them a great choice for first-time homebuyers who may not have a strong credit history or much saved for a down payment — an advantage that is not well known.
According to a recent survey by Neighbors Bank, more than half of renters surveyed believe a 20% down payment is required to buy a home, while 94% didn’t know that you could buy with as little as 3% to 3.5% down.
“For a first-time buyer with decent income, but limited savings or less-than-perfect credit, FHA is often the realistic entry point,” Harris says. “You don’t have to wait five years to save for a massive down payment.”
FHA loans can also be a good choice for buyers with a high debt load, as they allow for debt-to-income ratios as high as 50%, in some cases. This means your minimum debt payments could potentially take up as much as 50% of your monthly income, and you’d still qualify.
As Harris puts it, “For a buyer who checks every other box with a stable job, reasonable income, etc., and just has a credit scar or higher debt load, FHA is the path forward into a home.”
FHA qualifying requirements vs. other loan programs
To get a good idea of who FHA loans are best suited for, it can help to compare its qualifying standards with those of other loan programs.
Here’s a look at how FHA loan requirements measure up to the requirements on conventional, USDA and VA loans:
|
FHA |
Conventional |
VA |
USDA |
|
|---|---|---|---|---|
|
General |
Any borrowers |
Any borrowers |
Only active-duty military members, eligible veterans, qualifying National Guard and Reserve members and some surviving spouses |
Only rural homebuyers below certain income thresholds |
|
Down payment |
3.5% (with a 580+ credit score) |
3% minimum, 20% to avoid Private Mortgage Insurance |
$0 |
$0 |
|
Credit score |
Varies by lender, but as low as 500 |
Varies by lender, but typically 620 |
Varies by lender, but typically 620 |
Varies by lender, but typically 640 |
|
DTI |
43% to 50% |
45% |
41% |
41% |
|
Property |
Primary residence, must meet FHA appraisal standards |
Primary residence, investment property, second home, must meet certain livability standards |
Primary residence, must meet VA appraisal and livability standards |
Primary residence |
|
Mortgage Insurance |
Required upfront and monthly |
Usually required for down payments under 20% |
Not required, but borrower has to pay a one-time funding fee ranging from 0% to 3.3% |
No PMI, but must pay an upfront USDA guarantee fee and ongoing annual fee |
|
Loan limits |
$541,287 in most housing markets |
$832,750 in most housing markets |
None |
None |
Drawbacks of FHA loans
FHA loans can be great options for first-time homebuyers, low-credit borrowers, and buyers with small down payments, but they aren’t without faults.
For one, MIP can be expensive. Upfront, it costs 1.75% of the base loan amount, which, on today’s median home price of $403,200 bought with a 3.5% down payment, would come to about $6,809. This amount would be due at closing or could be rolled into the loan, although you would then pay interest on it.
There’s also an annual MIP, which ranges from 0.80% to 1.05% of the loan balance per year, spread across your monthly payments. Most borrowers are currently paying 0.55%, although the exact percentage depends on the loan amount, term, and original loan-to-value ratio. For most borrowers, this annual MIP lasts for the entirety of the loan’s term — a key difference between FHA mortgage insurance and conventional mortgage insurance.
“Borrowers need to know that it doesn’t go away once you hit 20% equity like conventional loans,” Harris says. “That insurance sticks around for the life of the loan unless you put 10% or more down.”
Another drawback is that FHA loans have strict property requirements. They can usually only be used on primary residences, and the properties must meet certain FHA standards for safety and soundness, too. This can complicate or even delay the closing process, depending on what the FHA appraiser finds.
“The FHA appraisal is focused on safety issues or structural concerns,” Harris says. “If things come up, you have to fix them before you close.”
An FHA loan with a plan
FHA loans can be a good foot in the door to homeownership. But because they have mortgage insurance that lasts for many years, it’s smart to have a plan to exit the loan once you’re in the financial position to. As Harris explains, “Once you’ve built equity and improved your credit, you may be able to refinance into a conventional loan.”
You may want to review your financial position and the equity you’ve gained in your home periodically. You don’t need to have 20% or more equity to refinance your FHA loan into a conventional mortgage, but having that amount allows you to avoid paying for private mortgage insurance on the new loan.
However, refinancing may still make sense even if you don’t reach that threshold. It will depend on the new rate you qualify for, the new loan terms and closing costs, and how long you plan to remain in the home.
