FHA loans come up in almost every conversation we have with first-time buyers. They're one of the most used mortgage programs in the country, and the reasons are easy to understand: lower credit requirements, a small down payment, and a path to homeownership for people who might not qualify for conventional financing. But the FHA loan pros and cons don't always get a fair, complete treatment — and that gap creates real problems for borrowers who end up in a loan that doesn't fit their situation as well as it should.

In our experience working with buyers in Colorado and across Florida, the most common FHA mistake isn't choosing the program — it's choosing it without fully understanding the mortgage insurance structure. Once you see how that works, the decision becomes a lot clearer.

What Makes FHA Loans Worth Considering

The appeal of FHA financing starts with access. Per HUD guidelines, borrowers with credit scores of 580 or higher qualify for FHA financing with a minimum 3.5% down payment, while those with scores between 500 and 579 may still qualify with a 10% down payment — making FHA one of the few programs with a realistic path for borrowers who are still rebuilding their credit.

The flexibility extends beyond the down payment. Per HUD's Single Family Housing Policy Handbook, FHA loans may be approved with debt-to-income ratios up to 57% in cases where compensating factors are present. [STAT NEEDED — verify exact DTI ceiling from current HUD handbook 4000.1] That's meaningfully higher than the 45–50% ceiling most conventional lenders apply in practice, which can make a difference for buyers carrying student loans, car payments, or other recurring debt.

Interest rates on FHA loans also tend to be competitive — often lower than what the same borrower would receive on a conventional loan, particularly when credit scores are in the 580–650 range. That difference can be a few basis points or more, depending on the lender and market conditions.

Then there's a feature that doesn't get nearly enough attention: assumability. FHA loans can be transferred to a new buyer when you sell your home. In practice, this means a buyer can take over your existing loan balance and its interest rate, rather than taking out a new mortgage at current rates. In a market where rates have risen well above what many existing homeowners locked in, an assumable FHA loan can be a genuine selling advantage — something that sets your listing apart from comparable homes.

Where FHA Loans Come With Real Trade-Offs

The most significant downside — and the one most buyers underestimate — is mortgage insurance. FHA loans require two separate mortgage insurance premiums: an upfront charge and an ongoing annual premium paid monthly.

Per current HUD guidelines, the upfront mortgage insurance premium is 1.75% of the loan amount, which can be paid at closing or rolled into the loan balance. On a $350,000 loan, that's $6,125 added to what you're financing before you've made a single payment.

The annual premium adds a monthly cost on top of that. Annual MIP on a 30-year FHA loan with less than 10% down is currently 0.55% of the outstanding loan balance per year, per HUD's current MIP rate schedule. On that same $350,000 loan, that's roughly $160/month in mortgage insurance added to your payment — every month.

FHA loans also carry county-specific loan limits. According to HUD's 2024 FHA loan limits, the standard baseline for a single-family home is $498,257 in most U.S. counties, with high-cost areas reaching up to $1,149,825. [STAT NEEDED — verify 2024 FHA loan limits at HUD.gov or FHFA] If your purchase price exceeds the local limit, FHA isn't an option — you'd need a conventional loan or jumbo financing instead.

Finally, FHA is for primary residences only. If you're buying a second home or an investment property, FHA won't apply.

The Mortgage Insurance Reality Most Buyers Miss

This is the part of the FHA conversation that catches the most people off guard — and where we spend the most time in borrower consultations.

Per HUD's Single Family Housing Policy Handbook, FHA loans originated after June 3, 2013, with a loan-to-value ratio above 90% carry mortgage insurance premiums for the life of the loan. That's not a temporary cost. If you put 3.5% down — meaning your LTV starts at 96.5% — you will pay MIP every single month until you refinance into a different loan type or pay off the mortgage entirely.

We worked with a buyer recently — we'll call him David — who had a 610 credit score and was excited about getting into a home. FHA made complete sense for him at that moment. But his plan was to drop the mortgage insurance once he'd built some equity. When we walked through how MIP actually works under current rules, he had to rethink his timeline. His real question wasn't "should I use FHA?" — it was "if rates move in a year or two, what does refinancing out of FHA actually cost me?" That's the question worth asking before you close.

Contrast that with conventional private mortgage insurance (PMI). According to the CFPB, private mortgage insurance on a conventional loan can be canceled once a borrower reaches 20% equity in their home — a right that does not apply to most FHA mortgage insurance premiums originated after 2013.

The exception worth knowing: if you put 10% or more down on an FHA loan, MIP cancels after 11 years. For some borrowers, that changes the math. But for the majority of FHA buyers who are using the program specifically because they have limited savings for a down payment, the 3.5% option is the common path — and that means MIP stays.

FHA vs. Conventional — Where the Line Usually Falls

The right loan for you depends more on your credit score and how long you plan to stay in the home than on the down payment alone.

For borrowers with credit scores below 620, FHA is often the practical choice. Most conventional programs require a minimum 620 score, and pricing at that threshold tends to be less favorable than FHA anyway.

Once your score reaches 680 or higher, the comparison shifts. At that tier, conventional PMI rates become competitive with FHA's annual MIP — and PMI can be canceled. Per Fannie Mae's HomeReady program guidelines, qualifying borrowers can access conventional financing with as little as 3% down, making down payment a less differentiating factor than many buyers assume.

The rough framework we use with buyers: if your credit score is below 620, start with FHA. Between 620 and 679, run both scenarios. At 680 and above, a conventional loan often costs less over time — especially if you're planning to stay in the home long enough for equity to build and PMI to cancel.

What FHA's Property Standards Actually Mean in Practice

FHA appraisals do two things at once: they establish the market value of the home, and they confirm the property meets HUD's minimum property standards for safety and habitability. That second part is where buyers sometimes run into problems.

An FHA appraiser will flag things a standard conventional appraisal might not: peeling exterior paint on homes built before 1978 (due to lead paint requirements), broken windows, missing handrails on stairs, non-functioning HVAC systems, roof issues showing signs of imminent failure, or significant foundation concerns. [STAT NEEDED — percentage of FHA appraisals resulting in required repairs; suggest checking HUD annual report or NAR REALTORS® Confidence Index]

This doesn't mean FHA won't work for older homes. It means the home needs to meet a baseline standard. In practice, most well-maintained resale homes pass without issue. The properties that cause problems tend to be distressed sales, estate sales that have sat vacant, or bank-owned properties that haven't been actively maintained.

If you're specifically targeting a fixer-upper, FHA actually has a program built for that scenario — the 203(k) rehabilitation loan, which allows the purchase price and renovation costs to be rolled into a single loan. That's worth exploring separately if it applies to your search, and you can see other options in our full range of loan programs.

Frequently Asked Questions