Share
Federal Housing Administration loans are designed to help Americans who are struggling to afford a home. These government-backed mortgages have more lenient requirements for borrowers, like lower credit score and down payment thresholds for approval, which could make a big difference.
FHA loans made up about 15% of the purchase mortgage market in September, according to the Mortgage Bankers Association, as more Americans seek affordable mortgages amid higher home prices and borrowing costs. FHA loans, which often help low- to moderate-income buyers and first-time buyers, have insured tens of millions of properties since 1934.
“FHA loans are a big part of my toolbox when working with buyers, especially first-timers or those who might not have a hefty down payment saved up,” says real estate pro Clint Jordan, founder of the Mil-Estate Network and The Jordan Group in Colorado Springs, Colo. “These loans can make homeownership accessible for more people given their lower down payment requirements and more lenient credit criteria.”
Nicholas Barta, division president and loan originator for Security First Financial in Englewood, Colo., has noticed an uptick in FHA loans. Barta processes some of the highest volume of FHA loan originations in the country.
“I believe [the increase] is due to the higher interest rates and the lack of savings,” Barta says, adding that FHA loans provide for down payment requirements as low as 3.5% down payment and more flexibility when it comes to credit and debt-to-income ratios. “We are also seeing more people utilize down payment assistance than ever before. Many buyers just don’t have the savings to do traditional down payments in this economy.”
Barta hopes more real estate professionals learn how FHA loans work and understand FHA loan requirements so potential home buyers can benefit from their agent’s knowledge. “There are a lot of misconceptions about FHA loans and how hard they are to complete,” says Barta. “Real estate professionals should find a good lender in their area who is well-versed in FHA and get educated.”
Knowing how to work with FHA buyers also can give you a competitive advantage when courting new clients Learn more about FHA home loans, including which home buyers may benefit the most from them and how these loans can impact real estate negotiations and home purchase agreements.
Debunking 6 FHA Loan Myths
1. Only buyers with bad credit can apply for FHA loans.
While home buyers with credit scores as low as 500 can apply for an FHA loan, borrowers who are faring better also may apply. The average credit score for FHA borrowers is 683, and 80% of FHA borrowers have a credit score of 600 or higher, according to 2024 data from Ellie Mae .
2. FHA loans are only for first-time home buyers.
First-time home buyers and low- to moderate-income households often use FHA loans, but repeat buyers who are trading up also can use them.
3. FHA loans come with higher interest rates.
FHA loans offer competitive interest rates—sometimes even better than conventional financing. Borrowers with high credit scores or high down payments may qualify for some of the best rates. Borrowers may want to explore both conventional and FHA loan options to find the best mortgage rate.
4. FHA loans take longer to close than conventional financing.
FHA and conventional loans have similar closing timelines, averaging 47 days, according to 2024 data from Value Penguin, a personal finance resource.
5. FHA loans can only be used for purchasing a single-family home.
An FHA loan can be used to purchase a single-family house, townhome, manufactured home or HUD-approved condo. Borrowers also can use an FHA loan to purchase a multifamily property with up to four units (including a duplex, triplex, apartment building, etc.), but one of the units must be used as a primary residence.
6. FHA loans have borrower income limits.
FHA loans do not have any minimum or maximum income limits. That means even high-earning households can apply.
Understanding FHA Loan Requirements
FHA government-backed loans are different from conventional mortgages, which are issued by private lenders and more commonly used by consumers. But conventional mortgages typically have stricter eligibility requirements. One of the main draws to FHA loans is its more lenient requirements for buyers who have less money saved up for their home purchase. FHA borrowers may be eligible for a 3.5% down payment if they have a credit score of 580 or higher; borrowers with a credit score between 500 and 579 may need a 10% down payment.
How to Qualify for an FHA Loan
- Credit score: at least 500
- Down payment: 3.5% (for credit scores 580 or higher); 10% (for credit scores between 500 to 579)
- Debt-to-income ratio: < 43%
- Only can be used for a primary residence
- Properties must meet FHA’s “minimum property standards”
- Borrower must show proof of employment and steady income
- Mortgage balance must meet FHA loan limits
What are FHA loan limits?
This is the maximum loan amount that FHA lenders will approve for a home purchase. FHA loan limits can vary geographically and are updated annually to reflect any changes in the real estate marketplace. In 2024, the FHA loan limit for most parts of the country was $498,257 for a single-family home. Find the latest FHA loan limits in your area at HUD.gov.
One main difference with FHA loans compared to other financing is that FHA requires the property to meet minimum standards set by the Department of Housing and Urban Development. These standards help ensure buyers avoid purchasing a home with safety hazards and reduces lenders’ risks.
HUD requires that each property insured with an FHA mortgage be evaluated by an appraiser for safety, security and structural soundness. The appraiser will check whether the electrical system complies with building codes; the water supply is sanitary; utilities are in good condition (sewer, gas, etc.); proper ventilation exists in the attic and basement; and pests are present. FHA also has requirements for the home’s exterior, including direct street access, proper water drainage and a structurally sound roof. HUD offers a detailed list of its minimum property requirements at HUD.gov.
The lender will then determine from the appraiser’s report whether repairs need to be addressed prior to finalizing the loan.
FHA Loan Requirements and Repair Negotiations
If the appraiser identifies issues that don’t meet FHA’s “minimum property standards,” the buyer’s agent likely will need to negotiate repair credits or fixes on the buyer’s behalf. FHA generally requires repairs to be made prior to closing; in some cases, funds can be placed in an escrow account if repairs are delayed. If a seller does not agree to repairs, the lender will not approve the FHA loan.
“Most of the time, the repairs are minor, and the seller will do the repairs without any additional credits,” Barta says. “Chipping paint is probably the one we see the most. There are those times when everyone is aware that a major repair needs to be completed. If the roof needs to be replaced or a sewer line repaired, those are things that should be negotiated and addressed in the sales contract.”
But that doesn’t have to be a dealbreaker: Regardless of whether the purchase is being financed by FHA, major issues still often need to be addressed in a home sale, Jordan adds. “Communication with the listing agent, ensuring the buyer’s financials are solid and, perhaps, being flexible with closing timelines [can help FHA] offers stand just as strong as those backed by conventional loans,” he says.
Strategies for Negotiating Seller Concessions With FHA Loan Requirements
FHA allows seller concessions of up to 6% on a home’s purchase price or appraised value, whichever is lower. “This is one of the highest allowed compared to other loan programs,” Barta says. This often becomes a negotiation point in real estate transactions. The buyer’s agent may negotiate that the seller cover some of the buyer’s closing costs, like loan origination fees, appraisal fees and title search fees as well as real estate taxes, homeowners association fees and inspection fees. In addition, “I see buyers using seller concessions to do temporary or permanent rate buydowns, cover the rest of their closing costs and even pay for the buyer’s agent commission,” Barta says.
Example of seller concessions: Seller concessions are expressed as a percentage of a home’s purchase price or a fixed dollar amount. So, say a home buyer wants to purchase a $300,000 home with an FHA loan. The agent may negotiate with the seller to provide concessions of 3%, meaning that seller would contribute $9,000 toward the buyer's closing costs or other relevant expenses. This can help bring the buyer’s costs down and may even mean the difference for them in being able to move forward in a transaction.
“Negotiating seller concessions effectively comes down to understanding the market and your seller’s position,” Jordan says. “These concessions can significantly reduce the cash buyers need to bring to the table, making the property more affordable. The key is to communicate clearly how these concessions can expedite the sale while also easing the financial burden on the buyer.”
Learn more: A Guide for REALTORS® on Seller Concessions
“Negotiating seller concessions effectively comes down to understanding the market and your seller’s position. These concessions can significantly reduce the cash buyers need to bring to the table, making the property more affordable.”
—Clint Jordan, founder of The Jordan Group and Mil-Estate Network in Colorado Springs, Colo.
Avoiding FHA Red Flags
FHA delinquencies are rising, up 131 basis points at the end of the fourth quarter of 2023, according to the Mortgage Bankers Association’s National Delinquency Survey. Economists blame a rise in property taxes and insurance, credit card debt delinquency and lower personal savings as reasons for the higher defaults.
Real estate purchase agreements can help home buyers avoid potential FHA loan pitfalls. “Maintain open lines of communication with your buyers about what the process entails and set realistic expectations,” Jordan recommends. “Also, work closely with lenders who are experienced in handling FHA loans—they can be instrumental in the process.”
Avoiding FHA Loan Pitfalls
Not factoring in all the fees: FHA home buyers are required to pay a mortgage insurance premium (MIP), regardless of their down payment amount. An upfront fee is typically 1.75% of the purchase price, which can be financed into the mortgage. Borrowers also will have to pay an annual fee, ranging from 0.15% to 0.75% of the loan, according to averages from NerdWallet, a personal finance resource.
Sales prices and appraisal mismatch: The FHA amendatory clause, an addendum in a purchase contract, can help protect borrowers in situations where an appraisal is lower than the agreed-upon sales price. This clause allows a borrower to cancel a home purchase and receive a refund of their earnest money if the home appraises below the sale price. Buyers who wish to proceed anyway can work with their agent to renegotiate the sales price with the seller or even pay the difference in cash.
Properties that don’t meet FHA standards: Real estate agents should become aware of FHA’s minimum property standards to help their buyers find homes that are likely to qualify, Jordan recommends. Beware of “fixer-uppers,” which may be less likely to get approval. (However, in those situations, the FHA 203(k) loan could help borrowers wrap the purchase and renovation costs into one mortgage.)
Location issues: The location of the property may be a factor in FHA approval. Lenders may require home buyers to obtain additional insurance, like flood insurance, when approving properties in a designated flood zone. Also, appraisers may flag noise or other hazards—even low-flying aircrafts for homes near an airport—that could hamper the property’s future marketability.
Changing your credit profile: Just like with other loans, home buyers could jeopardize their FHA financing prior to closing. During the loan’s underwriting, borrowers should avoid making changes to employment or how they’re paid; making major purchases, particularly on credit cards; opening new debt; and missing or making late payments, Barta says.
Property use: FHA loans can only be used for purchasing a primary residence. They cannot be used to purchase a rental property or second home.
Forgoing a home inspection: FHA appraisals should not be mistaken as a home inspection. Home inspections are not required for an FHA-insured mortgage but can offer a thorough evaluation of the property’s condition beyond the FHA appraisal.
Missing home warranty addendums: HUD requires, in certain cases, that FHA loans include a 10-year warranty that covers the construction and structural integrity of the home. FHA loan borrowers purchasing properties that are “proposed,” under construction or less than a year old are required to obtain a HUD-accepted, insured 10-year protection plan.
Dismissive home sellers: “Many agents and sellers worry that the appraisal will call out a repair or deficiency that will cause a hurdle that cash or conventional financing will not,” says Nick Buche, a real estate pro with RE/MAX Professionals in Maplewood, Minn. Some sellers may not want to accept an offer from an FHA buyer because of those concerns. Buyer’s agents can make offers more competitive by including the buyer’s mortgage preapproval letter, having the buyer make a larger earnest money deposit or down payment and working with FHA lenders who can help allay the buyer’s fears about the process.
Identifying Potential FHA Loan Qualifiers
Jordan credits FHA loans for helping several of his first-time buyers who were repairing their credit after having financial issues. “If someone has experienced credit challenges in the past or hasn’t accumulated a large amount of savings, FHA loans can be their stepping stone into homeownership,” he says.
For example, Barta notes that in some cases, FHA borrowers can have a maximum debt-to-income ratio of 57% and a credit score of 580 and still qualify for a 3.5% down payment.
“I think that every buyer should take a look at FHA financing if they are not putting down 20%,” Barta says. “If an agent has a buyer that needs to qualify [for a mortgage] as high as possible or maybe has limited credit or a lower score, they should definitely recommend checking out FHA financing.” For example, a buyer who qualifies for conventional financing on a $300,000 home could even qualify for a larger loan amount—possibly $375,000—with an FHA loan, Barta says. In some cases, buyers may even get a better interest rate with an FHA loan, Buche adds.
Still, not all home buyers will qualify for an FHA loan, including those who have no credit history, a bankruptcy or foreclosure (at least until credit and payment history has been re-established), late payments or situations involving collections or federal debt.
Conventional vs. FHA Loans
Conventional loans
- Higher credit score requirements (usually 620 or higher)
- Higher down payment requirements to avoid paying mortgage insurance (some low down payment options available)
- More lenient property standards
- Private mortgage insurance required for down payments below 20%
- Debt-to-income ratio requirement is often 36% or less, possibly more
- Purchases can be for a primary residence, vacation home or investment property
- Higher loan limits ($766,550 for most areas in 2024; jumbo loans available)
FHA Loans
- Lower credit score requirements (as low as 500)
- Lower down payments (as low as 3.5%)
- Property must meet minimum standards and have an FHA appraisal
- Mortgage insurance premium (MIP) payment is required, regardless of down payment amount
- Debt-to-income ratio can be 50% or less, possibly more
- Must be used for a primary residence
- Lower loan limits ($498,257 for most areas in 2024; higher in high-cost areas)
Source: NerdWallet
Elevating Client Satisfaction With FHA Expertise
Agents should refer their clients early on to a lender to explore loan options, whether FHA or other products. Real estate professionals who understand FHA loans may broaden their client base, Jordan says.
“An agent well-versed in FHA loans brings more than just transactional expertise; they bring an invaluable tool to the [transaction],” Jordan says. “These loans, known for their specific and often stringent appraisal requirements, can be navigated more smoothly with an agent who is prepared from the get-go.”
For example, agents can anticipate issues that might arise during FHA inspections and be ready to negotiate them. Also, they can preemptively address any unique demands or concerns among buyers or sellers with these loans, Jordan says. “This expertise not only aids in avoiding delays but also boosts communication between all parties involved, setting clear expectations and guiding buyers—and sometimes listing agents—through complex processes,” he says.
“Don’t be scared of FHA,” Barta adds. “If you are the listing agent or the buyer’s agent, FHA can provide both of you more qualified buyers. FHA is a great tool to get more qualified buyers into the market and, ultimately, more homeowners.”
