FHA loans are often marketed as the easy on-ramp to homeownership. Easier qualifying. Lower down payment. More flexibility on credit. All of that is true. But the full picture, especially the mortgage insurance, gets glossed over in most lender conversations. Here it is unvarnished.
What is an FHA loan?
FHA loans are insured by the Federal Housing Administration, a government agency within HUD. Because the government backs the loan, lenders take on less risk, which is why they can offer more flexible terms to borrowers who don't meet conventional standards.
FHA is not a lender. It's insurance. You still borrow from a bank or mortgage company. FHA just guarantees the lender gets paid if you default, and you pay for that guarantee in the form of mortgage insurance premiums (MIP).
Who qualifies for an FHA loan?
Credit score: 580+ for 3.5% down. 500–579 for 10% down (fewer lenders offer this). Below 500 is not eligible.
Down payment: 3.5% minimum with 580+ credit. On a $400,000 purchase, that's $14,000.
DTI: FHA allows higher DTI ratios than conventional, up to 50% or higher with automated underwriting approval. This makes FHA accessible for borrowers whose debt load would disqualify them for conventional.
Employment: Two years of stable income history. Same standard as conventional.
Property: Primary residences only. FHA will not finance investment properties or second homes.
Loan limits for 2025: Vary by county. In DC, Montgomery County MD, and Fairfax County VA, limits are higher than the national floor due to high-cost area designations. Confirm current limits with your lender.
The real cost of FHA mortgage insurance.
This is where the conversation needs to be honest.
FHA mortgage insurance has two components:
Upfront MIP: 1.75% of the loan amount, paid at closing. On a $400,000 loan, that's $7,000. It is almost always financed into the loan, meaning it gets added to your balance, which you pay interest on for the life of the loan.
Annual MIP: For most FHA loans today (30-year, down payment under 10%), the annual rate is 0.55% of the outstanding loan balance, charged monthly. On a $400,000 loan, that's $183/month at closing, decreasing slightly each year as your balance goes down.
The part most buyers don't hear: For FHA loans with less than 10% down, mortgage insurance does not automatically cancel. It stays for the life of the loan. The only way to eliminate it is to refinance into a conventional loan once you have at least 20% equity.
MIP vs. conventional PMI: $400,000 purchase, 3.5% down vs. 5% down:
| FHA (3.5% down) | Conventional (5% down) | |
|---|---|---|
| Down payment | $14,000 | $20,000 |
| Upfront MI | $6,895 (financed) | $0 |
| Monthly MI | ~$181 | ~$150 |
| MI cancellation | Never (must refi) | At 80% LTV |
| 5-year MI cost | ~$10,860 | ~$9,000 (then cancels) |
Illustrative only. Actual amounts vary by credit score, lender, and market conditions.
For a buyer who plans to stay in the home long-term and expects to build equity, this ongoing MIP cost adds up. The conventional borrower pays PMI for a few years and then it's gone. The FHA borrower keeps paying, or refinances, which has its own closing costs.
When FHA actually makes sense.
FHA is the right tool in specific situations:
Credit between 580 and 680. This is the primary sweet spot. Conventional loan pricing with a sub-680 score involves significant LLPAs that can make the rate worse than an FHA rate, even accounting for MIP. Run the comparison.
Recent credit events. FHA has shorter waiting periods after bankruptcy (2 years), foreclosure (3 years), and short sale (3 years) than conventional.
High DTI. If your debt-to-income ratio is above 45%, conventional may not work. FHA's more flexible DTI limits can be the deciding factor.
Short-term plan with equity strategy. If you plan to refinance into conventional once you hit 20% equity, and your market supports appreciation, FHA can be a calculated bridge.
FHA and condos: a complexity most buyers don't expect.
FHA condo financing requires that the condo complex itself be FHA-approved. This is a project-level approval, not a unit-level one.
In the DMV, many condo buildings are not FHA-approved, either because they've never applied, because their owner-occupancy ratio is too low, or because their HOA financials don't meet FHA requirements.
If you're buying a condo with an FHA loan, your lender needs to confirm FHA project approval before you go under contract, or you risk losing your earnest money when the deal falls through at underwriting.
This doesn't mean FHA condos are impossible. It means you need to verify early. And if your target building isn't approved, a conventional loan may be your only path, or the building may qualify for a spot approval process under certain conditions.
Seller concessions with FHA.
FHA allows sellers to contribute up to 6% of the sales price toward the buyer's closing costs. This is more generous than conventional (which caps at 3% at high LTVs).
In markets where you have negotiating room, asking for seller concessions can significantly reduce your cash to close, particularly useful for buyers who are stretching to meet the down payment minimum.
FHA or conventional: which is actually better for your numbers?
The answer depends on your credit score, down payment, and how long you plan to stay. We'll run both scenarios side by side so you can see the actual cost difference.