FHA Loan Requirements: Down Payment, Credit Score, and MIP Explained

The Government's Entrance into Mortgage Lending

The Federal Housing Administration insured over 1.24 million single-family mortgage loans in fiscal year 2023, representing roughly 15% of all purchase originations. Created by Congress in 1934—in the depths of the Great Depression, when conventional lenders required 50% down payments and offered 3-to-5-year balloon loans—the FHA transformed American homeownership by backing long-term, low-down-payment mortgages that private lenders would not otherwise offer. The FHA does not lend money itself; it insures approved lenders against borrower default, reducing lender risk and expanding credit access.

Nine decades after its creation, the FHA remains the dominant pathway to homeownership for first-time buyers, lower-income borrowers, and those with limited credit histories. The trade-off is explicit: lower barriers to entry in exchange for mandatory mortgage insurance premiums that persist for the life of many FHA loans.

Core Eligibility Requirements

The 580 credit score threshold applies to the official FHA minimum, but many FHA-approved lenders impose "lender overlays"—additional requirements stricter than HUD's published standards. A lender may require a 620 or 640 minimum FICO score even for FHA loans, and borrowers may need to shop multiple lenders to find one that will lend at the floor standards.

Down Payment: 3.5% and the Gift Fund Rules

Three-and-a-half percent sounds simple. The details are not.

On a $350,000 home, the 3.5% FHA down payment equals $12,250. Unlike conventional loans, FHA allows the entire down payment to come from gift funds provided by a family member, domestic partner, employer, or charitable organization—with no requirement that the borrower contribute from their own savings. The donor must provide a signed gift letter confirming no repayment is expected, and lenders will source-trace the gift funds to verify they did not originate as a personal loan.

• Down payment assistance programs (DPAs) operated by state housing finance agencies and HUD-approved nonprofits can cover all or part of the FHA down payment, though DPA terms vary widely.
• Seller concessions up to 6% of the home's purchase price are permitted for FHA loans and can cover closing costs (not the down payment).
• The down payment must come from permissible sources; unsourced cash deposits in the bank account in the 60–90 days before closing require documentation.

Mortgage Insurance Premiums: The Unavoidable Cost

MIP is the real price of FHA accessibility.

FHA mortgage insurance has two components: an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (AMIP) paid monthly. The UFMIP is currently 1.75% of the base loan amount, almost always financed into the loan rather than paid at closing. The annual premium varies based on loan term, LTV, and loan amount, but the standard rate for a 30-year loan with less than 10% down is 0.55% of the loan balance per year as of 2024.

The life-of-loan MIP provision is a critical disadvantage of FHA loans compared to conventional PMI. Conventional private mortgage insurance cancels automatically when the loan reaches 78% LTV (under the Homeowners Protection Act of 1998). FHA annual MIP with a down payment below 10% continues for the entire 30-year term regardless of how much equity the borrower accumulates. On a $350,000 FHA loan, annual MIP at 0.55% costs approximately $1,925 per year—$160 per month—indefinitely. Many borrowers refinance into a conventional loan once they reach 20% equity specifically to eliminate this cost.

FHA Loan Limits by Geography

FHA loan limits are set county-by-county by HUD and updated annually. In 2024:

• Floor limit (low-cost areas): $498,257 for a single-family home. Applied in counties where 115% of the area median home price is below this threshold.
• Ceiling limit (high-cost areas): $1,149,825 for a single-family home in the highest-cost markets (e.g., many California and New York counties).
• Multi-unit properties: FHA limits scale with unit count—2-unit properties have higher limits, up to $1,472,550 for a 4-unit property in high-cost areas.

FHA vs. Conventional: Which Makes More Sense?

• Borrowers with credit scores of 740+ and a 5%+ down payment will almost always find lower total costs through conventional loans, since conventional PMI rates at high credit scores are lower than FHA MIP.
• Borrowers with credit scores between 580 and 660 frequently find FHA rates and terms more favorable than conventional alternatives, which price low-credit risk aggressively.
• The FHA's streamline refinance program allows existing FHA borrowers to refinance with minimal documentation and no appraisal—a significant advantage if rates fall after origination.

This article is for informational purposes only and does not constitute financial advice.