Mortgage questions
What is an FHA mortgage loan?
An FHA mortgage is a home loan made by a private lender and insured by the Federal Housing Administration, a part of HUD. The insurance is the whole point: because the government covers the lender's loss if you default, lenders accept smaller down payments and lower credit scores than they usually would. You pay for that insurance, up front and every month, and that cost is the main trade-off you're weighing.
The insurance is what makes the low down payment possible
A lender taking a risk on a first-time buyer wants protection. With a conventional loan, that protection usually comes from private mortgage insurance you pay for. With an FHA loan, the federal government stands behind the loan instead, and the lender's risk drops. That's why the entry bar is lower. You can put down as little as 3.5% of the purchase price, and the credit score floor for that down payment is 580. If your score sits between 500 and 579, you can still qualify, but you'll need 10% down. A lender can set its own stricter rules on top of these; the government minimums are a floor, not a promise. Here's the everyday version. Take a house priced at a round number you pick. At 3.5% down you'd bring that small share of the price to closing plus costs, rather than the larger sum a conventional loan with a similar down payment might demand from a buyer with a thin credit file. Run your own numbers against your actual price before you get attached to a program.
You pay two insurance premiums, and one of them sticks around
FHA insurance comes in two pieces. The first is an upfront premium of 1.75% of your base loan amount, which is the loan before the upfront premium is added. On most FHA loans that amount gets folded into what you borrow rather than paid in cash, so it quietly raises your balance. The second is an annual premium, billed monthly, calculated as a percentage of your loan balance. For a 30-year loan at or under the county limit with less than 5% down, that rate is 0.55% of the balance, and it runs for the full loan term. Put 10% or more down and the annual rate drops to 0.50%, and it ends after 11 years. This is where FHA differs sharply from conventional loans. On a conventional loan, private mortgage insurance can be cancelled once your balance reaches 80% of the home's original value, and it ends automatically when the balance is scheduled to reach 78%. On an FHA loan with a small down payment, the monthly premium stays for the life of the loan unless you refinance out of it. Ask any lender to show you the monthly premium in dollars next to a conventional quote with the same rate, and the comparison becomes concrete fast.
Where the costs appear on your paperwork
The upfront premium shows up as a line in the closing costs on page 2 of your Loan Estimate, and again on your Closing Disclosure. The monthly premium appears in the estimated escrow payment on page 1, grouped with taxes and homeowners insurance, because it's collected the same way. If a lender quotes you an FHA loan without mentioning the monthly premium, the quote is incomplete. Ask for the total monthly payment including escrow, not just principal and interest. That single number is what you'll actually budget for.
FHA versus conventional: the trade-off flips with your credit and your down payment
FHA wins when your credit score is modest, your savings are thin, or your debt-to-income ratio is high. Conventional loans with automated underwriting can stretch to a back-end ratio of up to 50%, meaning all your monthly debt payments as a share of gross income, but lenders layer their own limits on top, and a lower score narrows your options. Conventional wins when your credit is solid and you can put down enough to avoid or quickly shed mortgage insurance. A borrower with good credit and 10% or more down often pays less each month on a conventional loan even at a slightly higher rate, because the insurance cost is smaller or temporary. The flip point is usually the monthly insurance bill compared with the rate difference. Get both quotes side by side, in writing, for the same loan amount and term. Then compare the total monthly payment and the total cost over the first five years, since that's the window in which most people move or refinance.
FHA loans have property rules that can surprise you
The house itself has to meet FHA standards, which are stricter than many sellers expect. Peeling paint, a shaky handrail, or a roof near the end of its life can hold up the appraisal. That matters in a competitive market, because sellers sometimes favor offers that don't carry those conditions. Ask your agent to flag anything obvious before you make an offer, and ask your lender who orders the appraisal and how long a repair re-inspection takes. Knowing this in advance keeps a fixable issue from feeling like a crisis.
How to compare FHA offers without getting lost
A mortgage broker arranges the loan with a lender and doesn't lend the money itself, so a broker can put an FHA quote from one lender next to a conventional quote from another and show you the difference in total monthly cost. Ralo is a broker, not a lender, and is paid a thin commission set in advance per lender, which can't change based on the rate or terms you end up with. Ask every lender three questions: what is my total monthly payment including escrow, how long does the monthly insurance premium last on this loan, and what would this same loan cost as a conventional loan at my credit score? You can also check any company's license for free through NMLS Consumer Access before you share documents. If you want a second opinion on a quote you already have, Ralo will review it against what its pricing shows for your scenario. That's a useful check whether or not you end up working together.
Figures used on this page
| Figure | Value | Source |
|---|---|---|
| Who insures the loan | The Federal Housing Administration, part of HUD | CFPB |
| Minimum down payment | 3.5% of the purchase price | HUD |
| Minimum credit score for 3.5% down | 580 (500 to 579 requires 10% down) | HUD Handbook 4000.1 |
| Upfront mortgage insurance premium | 1.75% of the base loan amount | HUD Mortgagee Letter 2023-05 |
| Annual premium, 30-year loan up to $726,200, more than 95% loan-to-value | 0.55% of the loan balance, for the full loan term | HUD Mortgagee Letter 2023-05 |
| Annual premium when the down payment is 10% or more | 0.50%, ending after 11 years | HUD Mortgagee Letter 2023-05 |
| When you can ask to cancel conventional PMI | When the balance reaches 80% of the home’s original value | CFPB |
| When conventional PMI ends automatically | When the balance is scheduled to reach 78% of the original value | CFPB |
| Conventional maximum DTI with automated-underwriting approval | up to 50% back-end | Fannie Mae Selling Guide B3-6-02 |
| What a mortgage broker does | Arranges the loan with a lender; does not lend the money itself | CFPB, What is a mortgage broker? |
| Broker compensation structure | fixed in advance per lender; cannot vary with your rate or terms | CFPB loan originator compensation rule (Regulation Z) |
| Verifying any mortgage company’s license | free public lookup on NMLS Consumer Access | NMLS Consumer Access |
Ralo is an automated mortgage broker — not a lender — that compares multiple lenders from one application, earns a thin commission, and shows rate, APR, and fees upfront. Rates shown anywhere on this site are illustrative examples, not a loan approval, rate lock, or commitment. Available where licensed: California, Colorado, and Texas.