Mortgage questions
What is an FHA mortgage loan?
An FHA mortgage loan is a home loan that a private lender makes and the federal government insures. Because the government takes on most of the risk if you stop paying, the lender can say yes to lower credit scores and smaller down payments than it would on a loan it holds alone. You pay for that insurance, both up front and every month, and on most FHA loans it lasts for the life of the loan.
The insurance is the whole point, and you pay for it
A regular lender takes the full loss if you default. On an FHA loan, the lender gets paid back by the government instead, so it can loosen its rules. That is why the minimum down payment is 3.5% of the purchase price and why a credit score in the 580 range can still qualify. The trade-off is that you fund the insurance. There is an upfront premium of 1.75% of the base loan amount, which is the loan before that premium is added. On a base loan of three hundred thousand dollars that premium comes to a few thousand dollars, and most borrowers roll it into the loan rather than paying it in cash at closing. Then there is an annual premium of 0.55% of the balance, billed monthly, for the full loan term when your down payment is under 5%. Put that annual figure against your balance and it turns into a real monthly cost, one that does not stop when you build equity the way conventional mortgage insurance does. If your down payment is 10% or more, the annual premium drops to 0.50% and ends after eleven years. Where you see this: the upfront premium shows up in Section B of your Loan Estimate, and the monthly amount is part of your escrow payment on page 1.
FHA is forgiving on credit and tough on debt
The credit side is genuinely easier. A score of 580 gets you the 3.5% down payment. Below that, down to 500, you can still qualify but you need 10% down. Conventional loans usually want a higher score for the same low down payment. The debt side is where FHA can bite. Lenders compare your total monthly debt payments to your monthly income, a ratio called debt-to-income. FHA files get manually underwritten more often, and manual reviewers are stricter than the automated systems conventional loans use, which can approve total debt up to half your income. So a borrower with a thin credit file but a clean, low-debt budget often does better with FHA. A borrower with a strong score and a lot of existing payments may do better elsewhere. Ask any lender you talk to which of the two they would run for your file, and why.
The mortgage insurance decision flips when you have equity
This is the part people miss. Conventional mortgage insurance is temporary. You can ask to cancel it once your balance reaches 80% of the home's original value, and it ends automatically when the balance is scheduled to hit 78%. On an FHA loan with less than 10% down, the annual premium runs for the full term no matter how much equity you build. Say you buy with the minimum down payment and the home appreciates. Five years later you owe far less than the home is worth. On a conventional loan you would call your servicer and stop paying mortgage insurance. On that FHA loan you would keep paying it until you sell, refinance into a different loan, or pay the loan off. That is why FHA is often a starting point rather than a destination. Many FHA borrowers refinance into a conventional loan once their score and equity improve. Ask your lender up front what your exit would look like and roughly when it would make sense.
FHA has loan limits, and they vary by county
FHA caps how much it will insure. The ceiling moves with home prices and differs by county, from lower limits in inexpensive rural areas up to a high-cost maximum in expensive metros. If the home you want costs more than the county limit, you cannot use FHA for the whole purchase. You can check the limit for any address before you shop, and it takes about a minute. If you are near the line, compare an FHA loan against a conventional loan at the same price. Sometimes the conventional loan wins on total cost even with a higher rate, because you avoid the lifetime insurance.
What to ask before you pick a lender
FHA loans are not sold by the government. Private lenders make them, and the same loan can cost different amounts at different companies. Nearly half of borrowers seriously consider only one lender, and Freddie Mac's research puts the savings from comparing several quotes at roughly $600 to $1,200 a year. Ask each lender for a full Loan Estimate, not a verbal quote. Then compare three lines: the origination charges in Section A, the upfront FHA premium in Section B, and the lender credits in Section J. Section A charges cannot go up at closing unless something documented changes, so it is the fairest line to compare across lenders. You can also check any company's license for free in the public NMLS lookup, and use a rate index to see where quotes sit against a national average rather than trusting one number in isolation.
Figures used on this page
| Figure | Value | Source |
|---|---|---|
| FHA upfront mortgage insurance premium | 1.75% of the base loan amount | HUD Mortgagee Letter 2023-05 |
| FHA annual premium, 30-year loan up to $726,200 with less than 5% down | 0.55% of the balance, for the full loan term | HUD Mortgagee Letter 2023-05 |
| FHA 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 |
| 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 |
| Borrowers who seriously consider only one lender | Nearly half | CFPB borrower survey |
| Savings from comparing multiple lender quotes | $600–$1,200 per year | Freddie Mac research |
| Verifying any mortgage company’s license | free public lookup on NMLS Consumer Access | NMLS Consumer Access |
| Section A (lender origination charges) at closing | zero tolerance — cannot exceed the Loan Estimate absent a documented changed circumstance, a floating-rate lock repricing points, or an expired estimate | CFPB TRID rules |
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.