Yes, FHA loans still exist and still allow down payments as low as 3.5 percent

The Federal Housing Administration (FHA) loan program has not closed. You can still borrow money to buy a home with a down payment of 3.5 percent of the purchase price, and the program operates the same way it has for years. The confusion often comes from news about tighter lending standards or higher insurance costs—those changes are real, but they do not mean FHA loans disappeared.

What has changed is who can get approved and how much the loan costs. Lenders have become stricter about credit scores, debt levels, and proof of income. The mortgage insurance premium (the fee you pay to protect the lender if you default) has also shifted. But the program itself remains open, and thousands of borrowers use FHA loans every month.

Key Takeaways

  • FHA loans allow down payments as low as 3.5 percent, and the program is still active through the Federal Housing Administration.
  • Most lenders now require a credit score of 580 or higher to may have access to, though some will work with scores as low as 500 with a larger down payment.
  • You must pay an upfront mortgage insurance premium (1.75 percent of the loan amount) and an annual premium that stays on your loan for the life of the mortgage unless you put down 10 percent or more.
  • The property must be your primary residence, and you cannot use an FHA loan to buy an investment property or a second home.
  • Debt-to-income ratio limits typically cap out at 43 to 50 percent, depending on the lender, so your total monthly debt payments cannot exceed that percentage of your gross income.

Current credit score and debt requirements

Most lenders will not approve an FHA loan if your credit score is below 580. At that score, you can put down 3.5 percent. If your score falls between 500 and 579, some lenders will still work with you, but you will need to put down at least 10 percent instead of 3.5 percent.

Beyond the credit score, lenders look at your debt-to-income ratio (DTI). This is the total of all your monthly debt payments—car loans, credit cards, student loans, child support, and the new mortgage—divided by your gross monthly income. Most FHA lenders cap this at 43 percent, though some will go as high as 50 percent if you have strong compensating factors like savings, a stable job history, or a co-borrower with good credit.

If you have recent late payments, collections, or a bankruptcy, approval becomes harder but not impossible. Lenders want to see that the problem is behind you. A bankruptcy discharged two years ago is easier to explain than one from six months ago. Late payments from three years back carry less weight than recent ones.

Mortgage insurance costs and how long you pay them

An FHA loan requires two insurance payments. The first is the upfront mortgage insurance premium (UFMIP), which is 1.75 percent of your loan amount. This is usually rolled into your mortgage, so you do not pay it out of pocket at closing, but you do pay interest on it for 30 years.

The second is the annual mortgage insurance premium (MIP), which is a monthly fee added to your mortgage payment. The rate depends on your loan amount, down payment, and loan term. For a 30-year loan with a 3.5 percent down payment, annual MIP typically runs between 0.55 and 0.80 percent of the loan amount per year, paid in monthly installments.

Here is the key difference: if you put down less than 10 percent, you pay MIP for the entire life of the loan—all 30 years. If you put down 10 percent or more, MIP drops off after 11 years. This is why some borrowers choose to put down 10 percent even though they could do 3.5 percent—the long-term savings on insurance can outweigh the extra cash needed upfront.

What lenders check before approval

Lenders verify your income through tax returns, W-2s, and recent pay stubs. If you are self-employed, expect to provide two years of tax returns and possibly a profit-and-loss statement. If you changed jobs recently, lenders want to see a letter from your new employer confirming your salary and that your position is permanent.

They also pull your credit report and check for recent inquiries, open accounts, and payment history. A hard inquiry from a car loan you took out last month will show up. Multiple inquiries in a short time can lower your score slightly and raise red flags about desperation for credit.

Lenders order an appraisal of the property you want to buy. The FHA has minimum property standards—the home must be safe, sound, and sanitary. If the appraisal comes back low, you may have to renegotiate the price or walk away. The property must also pass an FHA inspection, which is stricter than a standard home inspection.

Down payment sources and gift money rules

Your down payment can come from your own savings, a gift from a family member, or a combination of both. If someone gives you money, the lender will require a gift letter stating that the money is a gift, not a loan you have to repay. The gift letter must be signed by both you and the person giving the money.

The lender will also ask for bank statements showing where the gift came from. If a family member transfers $20,000 to your account two weeks before closing, the lender wants to see that the money came from their account, not from a loan or credit line. This is called "seasoning" the funds—they need to be in your account long enough to prove they are really yours.

You cannot borrow your down payment from anyone, including the seller. If the seller offers to give you a credit toward closing costs, that is allowed, but it cannot reduce your actual down payment below 3.5 percent.

When an FHA loan makes sense versus other options

An FHA loan is useful if your credit score is below 620 or your down payment savings are limited. Conventional loans typically require a 620 credit score and 5 to 20 percent down, so FHA is often the only path forward for borrowers in that position.

FHA loans are also more forgiving of past credit problems. A conventional lender might reject you outright for a bankruptcy from three years ago, while an FHA lender will consider it if your income and current situation are stable. The trade-off is that FHA loans cost more in insurance and have stricter property requirements.

If you have a higher credit score and more savings, a conventional loan may be cheaper in the long run because you can avoid mortgage insurance altogether by putting down 20 percent. But if you want to buy sooner with less money down, FHA is still a real option.

How to start the process

Contact an FHA-approved lender—most major banks and mortgage companies are approved. You do not need to go through a special FHA office; the lender handles everything. Ask the lender for a pre-qualification or pre-approval letter, which estimates how much you can borrow based on your income and credit.

Gather your documents: recent pay stubs, last two years of tax returns, bank statements showing your down payment savings, and a list of your debts (credit cards, car loans, student loans). The lender will pull your credit report themselves, so you do not need to order one.

Once you find a property and make an offer, the lender orders the appraisal and property inspection. This usually takes one to two weeks. If everything passes, you move to underwriting, where a different team reviews all your documents one more time. Underwriting typically takes another one to two weeks. Closing happens after that, usually within 30 to 45 days from the time you made the offer.

Frequently Asked Questions

Can I use an FHA loan to buy a second home or investment property?

No. The FHA requires that the property be your primary residence—the place where you live most of the time. You cannot use an FHA loan to buy a vacation home, a rental property, or a second residence.

What happens if the appraisal comes back lower than the purchase price?

The lender will not approve the loan for more than the appraised value. You have three options: renegotiate the price down with the seller, make up the difference in cash, or walk away. If you walk away, you lose your earnest money deposit unless the contract allows you to cancel based on appraisal.

Can I remove the mortgage insurance later if my home value goes up?

Only if you put down 10 percent or more initially. If you put down 3.5 percent, the insurance stays for the life of the loan. You could refinance into a conventional loan once your home equity reaches 20 percent, but that requires a new application and approval process.

Do I need a co-signer if my credit score is low?

Not necessarily. FHA loans do not require a co-signer, but a co-borrower with good credit can help you may have access to for a larger loan or lower rate. A co-borrower is someone whose income and credit are counted toward the application; they are on the deed and the mortgage.

What is the maximum loan amount for an FHA loan?

FHA loan limits vary by county and change each year. In most areas, the limit is around $420,000 to $766,000 for a single-family home, depending on local housing costs. Check your county's limit on the HUD website or ask your lender.