FHA Loans: Buying a Home With 3.5% Down

1Why this matters

For many first-time buyers, the down payment and credit score, not the monthly payment, are what stand between them and owning a home. FHA loans lower both barriers, but they cost more in mortgage insurance than some alternatives, and the trade-off is not always clear in a lender's pitch. This guide explains how FHA loans work, who qualifies, what the insurance costs and how to compare offers. It is general information, not a loan offer.

2How does an FHA loan work?

FHA does not lend money. It insures mortgages made by approved lenders, paying the lender if a borrower defaults. That protection lets lenders accept smaller down payments and weaker credit histories. You apply with any FHA-approved lender, and terms such as the interest rate and fees vary from lender to lender, so shopping around matters.

FHA loans can be used to buy a home of one to four units, a condominium in an approved project, or certain manufactured homes, as long as you live there as your primary residence. A version called the 203(k) loan can also finance repairs or renovation along with the purchase. FHA loans are also assumable: a qualified buyer can take over your loan and its interest rate when you sell, which can help when rates are higher.

3Who qualifies?

• Credit: a score of 580 or higher for the 3.5 percent minimum down payment, or 500 to 579 with 10 percent down. Many lenders set higher minimums.
• Income and debts: steady, documented income and a manageable share of income going to debts, which the lender checks.
• Residence: the home must be your primary residence, usually moved into within 60 days of closing.
• Past problems: generally at least two years after a Chapter 7 bankruptcy discharge and three years after a foreclosure, with some exceptions.

Borrowers must generally be U.S. citizens or lawful permanent residents; since May 2025, other noncitizens, such as people on work or student visas, no longer qualify. There is no income limit and no requirement to be a first-time buyer. Loan limits, set for each county, cap how much you can borrow.

4Where can the down payment come from?

The 3.5 percent can come from your own savings, from a gift from a family member, employer, union or eligible charity, or from down payment assistance offered by state and local housing finance agencies. A gift usually needs a signed letter saying it is a gift and not a loan, and the lender will ask to trace the money. Sellers can pay part of your closing costs, up to a limit, but not your down payment.

Ask your state housing finance agency about assistance programs, which may offer grants or forgivable loans for down payments and closing costs to buyers with moderate incomes.

5What does mortgage insurance cost?

FHA loans require two kinds of mortgage insurance premium:

• Upfront: 1.75 percent of the loan amount, paid at closing or, more often, added to the loan.
• Annual: a percentage of the loan balance paid in monthly installments; most borrowers today pay 0.55 percent a year, though the rate depends on the loan amount, term and down payment.

With a down payment of less than 10 percent, the annual premium generally lasts for the life of the loan; with 10 percent or more it ends after 11 years. Many borrowers later refinance into a conventional loan to drop it once they have enough equity.

6Comparing an FHA loan with other options

Conventional loans can also require as little as 3 percent down for some buyers, and their private mortgage insurance can be canceled once you reach enough equity, which can make them cheaper for borrowers with good credit. VA loans for eligible veterans and USDA loans for rural areas can require no down payment at all; our guide to rural home loans and grants covers USDA's programs. FHA tends to be most useful for buyers with lower credit scores or higher debts.

Ask at least two lenders for a written Loan Estimate for each type you qualify for, and compare the total monthly payment, the cash needed at closing and how long mortgage insurance lasts.

7Special situations

Condominiums and manufactured homes

A condominium generally must be in a project approved by FHA, though a single unit in an unapproved project can sometimes be approved on its own. A manufactured home must be on a permanent foundation, meet federal construction standards and be classed as real estate. Check before you make an offer.

Buying with a relative's help

FHA allows a family member who will not live in the home to be a co-borrower, adding their income to help you qualify. They share responsibility for the loan, so both of you should understand the commitment.

8Steps to buying with an FHA loan

1. Check your credit reports and scores, and fix errors.
2. Talk to a HUD-approved housing counselor about your budget and assistance programs; counseling is free or low cost, and some assistance programs require it.
3. Get preapproved by an FHA-approved lender.
4. Find a home within your county's FHA loan limit and make an offer.
5. The lender orders an FHA appraisal, which also checks basic safety and condition.
6. Close on the loan and move in.

If you rent with a housing voucher, ask your housing agency whether it runs a program that lets voucher holders use the assistance toward a mortgage; see our guide to Section 8.

9If you have trouble paying later

If you fall behind or expect to, contact your loan servicer at once. FHA requires servicers to consider options to help you keep the home, such as a repayment plan, forbearance, a loan modification, or a partial claim, in which FHA pays part of the missed amount as a separate zero-interest loan due when you sell or refinance. A HUD-approved housing counselor can help you ask for these options free. Be wary of companies that charge upfront fees to save your home.

10Common mistakes

• Comparing only interest rates and ignoring mortgage insurance and fees.
• Assuming the 580 credit score is enough at every lender.
• Not documenting a gift, which can delay or stop closing.
• Forgetting closing costs, which are separate from the down payment.
• Missing down payment assistance offered by a state or local housing agency.

12What this does not tell you

Credit score minimums, premiums and loan limits change, and lenders may add their own rules. Ask your lender for current terms before relying on any figure here.

This guide is general information, not a loan offer or financial advice. Compare an FHA loan with other mortgage types before you choose.