FHA Mortgage: A Step-by-Step Guide to a Government-Backed Home Loan

Written by Pierre

What is an FHA Mortgage?

An FHA mortgage is a home loan insured by the Federal Housing Administration. The FHA is part of the Department of Housing and Urban Development (HUD).

FHA mortgages allow buyers to purchase a primary residence with low down payments and more lenient credit than conventional loans. Borrowers pay mortgage insurance in exchange for the easier underwriting standards.

The most common type of FHA mortgage is the 203(b) for buying or refinancing a primary home. You can use FHA financing to buy a single-family house, condo, townhouse or manufactured home.

FHA Mortgage Requirements

Do you meet the eligibility requirements for an FHA mortgage? Here are the key criteria:

Down payment – Just 3.5% of the purchase price is required. The money can be gifted. Seller contributions aren’t allowed.

Credit score – A minimum of 580 FICO is required for 3.5% down. Scores as low as 500 can qualify with 10% down.

Debt ratios – Your total debt-to-income ratio must be under 43%.

Occupancy status – You must intend to use the home as your primary residence.

Property type – Single-family homes, condos, townhouses and manufactured homes are eligible.

First-time homebuyer – There are no first-time homebuyer requirements for FHA loans. Both first-timers and repeat buyers can qualify.

Meeting these FHA mortgage requirements is the first step toward getting approved. Now let’s look at the paperwork and documentation you’ll need.

Documents Needed for an FHA Mortgage

When applying for an FHA mortgage, you should have these documents handy:

  • Identification like a driver’s license, passport or military ID
  • Social Security card or ITIN number
  • W2s or paystubs covering the last 30 days
  • Federal tax returns for the past 2 years
  • Bank statements for the past 2 months
  • Credit history report
  • Earnest money deposit documentation
  • Debt information like credit card and student loan statements
  • Property/flood insurance quotes if available
  • VA Certificate of Eligibility if a veteran

Providing these documents allows the lender to verify your identity, income, employment, assets and overall financial health. Having your paperwork in order makes for a smoother mortgage application process.

How to Apply for an FHA Mortgage

Ready to move forward with an FHA mortgage application? Follow these steps:

1. Check your credit – Order a credit report and review your scores. Dispute any errors.

2. Get pre-approved – Apply with lenders and compare pre-approvals. Shop interest rates.

3. Find a home – Once pre-approved, start touring suitable houses within your budget and search area.

4. Make an offer – Submit a purchase offer with your real estate agent’s assistance.

5. Complete loan application – Provide documents to your chosen lender to complete the full application.

6. Home inspection – An FHA appraisal and inspection will check for any required repairs.

7. Final approval – Your lender issues a clear to close once all conditions are met.

8. Closing – Review final documents, sign, and get the keys!

Now you have a better idea of what to expect as you move through the FHA mortgage process from start to finish.

How Much Does an FHA Mortgage Cost?

FHA mortgages have some costs that conventional loans don’t. Here are the main expenses:

Mortgage insurance – An upfront 1.75% insurance premium and an annual 0.45% to 1.05% premium.

Loan fees – A 1.75% upfront fee and 0.45% to 0.55% annual fee.

Interest rate – Rates are competitive but may be 0.25 to 0.5 points higher than conventional loans.

Closing costs – Around 2% to 5% of the loan amount including appraisal, origination fees and more.

Repairs – If repairs are required based on the inspection, you’ll need to cover these.

Shop lenders to compare rates and ensure you’re getting the best pricing on an FHA mortgage for your situation.

How to Get the Best FHA Mortgage Rates

Follow these tips to score the lowest possible interest rate on an FHA mortgage:

  • Raise your credit score above 740 if possible
  • Lower your debt-to-income ratio
  • Shop multiple lenders and compare interest rates
  • Buy discount points to buy down the rate
  • Make a larger down payment if able
  • Enroll in a first-time homebuyer program
  • Opt for a shorter 15 or 20-year loan term

Even a small reduction in your FHA mortgage rate can lead to substantial interest savings over the life of your loan.

Pros and Cons of an FHA Mortgage

FHA mortgages make homeownership attainable for many buyers. But weigh the pros and cons before choosing this route:


  • Low 3.5% down payment requirement
  • More flexible credit standards
  • Allows gift funds for down payment
  • Lower upfront mortgage insurance rates
  • Can be assumed when selling home


  • Pay mortgage insurance for life of loan
  • Slightly higher interest rates
  • Limitations on condo financing
  • Loan limits in pricier markets
  • Upfront and annual loan fees

An FHA mortgage makes sense if you want to buy with limited funds and have past credit issues. Just ensure it’s your most cost-effective option.

Alternatives to an FHA Mortgage

Beyond an FHA loan, also consider these other mortgage programs:

Conventional 97 – Just 3% down with flexible income and credit requirements.

VA loans – 100% financing for veterans and service members. No down payment or PMI.

USDA loans – 100% financing for low-income borrowers in rural areas.

Bank portfolio loans – Programs from community banks and credit unions to assist local buyers.

State/local programs – Special first-time buyer and down payment assistance options in your state.

Compare all programs to find the optimal mortgage solution for purchasing your dream home.

FHA Mortgage FAQs

Do you still have some questions about FHA mortgages and how they work? Here are answers to the most frequently asked questions:

Can I remove FHA mortgage insurance?

Yes, with an initial down payment of 10% or higher, mortgage insurance cancels once you reach 22% equity in the home. With less than 10% down, it remains for the duration of the loan.

What FICO score is needed for an FHA mortgage?

The minimum credit score is 580. But scores of 620 or higher get the best mortgage rates. You can qualify with scores in the 500s with a larger down payment.

Can I buy a multi-family home?

No, FHA mortgages must be used to purchase a single-family home, condo, townhouse, or manufactured home. Multi-family properties don’t qualify.

How do I calculate FHA mortgage payments?

Use an online mortgage calculator to estimate principal, interest, taxes, insurance and total monthly costs of an FHA mortgage based on the loan amount, rate, term and your down payment.

Can I use an FHA mortgage for a second home?

No, FHA mortgages are only allowed for owner-occupied primary residences where you’ll live at least 51% of the year. You cannot use an FHA loan for a vacation home or rental property.

Are there income limits for FHA mortgages?

There are no set income limits. But your income, assets, employment and credit profile must demonstrate you can repay the mortgage comfortably based on your debts.

Finding the Right FHA Mortgage Lender

Choosing the right lender is key to getting your best deal on an FHA mortgage. Compare interest rates and fees for several banks, credit unions and online lenders. Check their reputation and FHA mortgage approval volume. A lender search tool can help find options.

Work with a lender who can walk you through the FHA mortgage process from application to close. They should make the paperwork smooth and help you determine if an FHA loan is your most affordable path to homeownership.

Make Your Homeownership Dreams Reality with an FHA Mortgage

If you need flexible qualifying criteria to purchase your first home, an FHA mortgage can make it possible. Just be sure to have all your documents ready, shop multiple lenders, and understand the costs. With the right FHA mortgage lender on your side, you can confidently navigate the road to owning your own piece of the American dream.

Read More Articles:

FHA Loan Limits 2023: Here’s How Much You Can Borrow

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