What is an FHA Loan?

Launched in 1934 to help boost the housing market, the Federal Housing Administration (FHA) loan is still pretty much the same today. It’s a government-backed loan that allows people to buy a moderately priced home with a down payment as low as 3.5 percent. The partnership between the FHA and HUD has helped many people since its inception, insuring over 34 million home mortgages and 47,205 multifamily project mortgages. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio. In the 80 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world.

The government doesn’t actually lend the money, but it does insure the mortgages. That way, if the borrower can’t repay the loan, the FHA insurance reimburses the lender. This allows mortgage lenders to offer loans to less affluent applicants who might otherwise be denied.

Top 5 Reasons to Get an FHA Loan

Small Down Payment
You can put as little as 3.5% down. It doesn’t even have to be your own money – the down payment can be a gift or loan.
Less-than-perfect Credit
FHA underwriting guidelines are more flexible than conventional (non-government) guidelines.
Sensible Underwriting
FHA lenders take what they call “compensating factors” into account when they underwrite loan applications. This can help those who are not perfect on paper but still deserving of a home loan.
Interest Rates Can Be Lower
FHA loans can be less expensive than non-government loans for people with small down payments or credit issues.
FHA loans are assumable. This feature can help you sell your property if rates are higher in the future.

Glossary Terms

Credit Score
A credit score is a number generated by a statistical system used to rate the credit of an applicants according to various characteristics relating to... <a href='/glossary/what-is-credit-score' title='See the full definition of Credit Score'>read more</a>
FHA Loan
A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they are... <a href='/glossary/what-is-fha-loan' title='See the full definition of FHA Loan'>read more</a>
FHA Mortgage Insurance
Requires a small fee (up to 3 percent of the loan amount) paid at closing or a portion of this fee added to each monthly payment of an FHA loan to... <a href='/glossary/what-is-fha-mortgage-insurance' title='See the full definition of FHA Mortgage Insurance'>read more</a>
Conversion Option
A conversion option allows you to convert an ARM to a fixed rate mortgage. You will likely pay a higher rate or more points to have this option. <a href='/glossary/what-is-conversion-option' title='See the full definition of Conversion Option'>read more</a>

FHA Loan Requirements

There are some basic eligibility requirements for an FHA Loan. They include:

Minimum Credit Score of 580

This is for a mortgage with a 3.5 percent down payment. Ten percent down is required for applicants with scores between 500 and 579.

3.5 Percent Down Payment from an Acceptable Source

Your down payment can come from your savings, a loan or a gift, but not from anyone who would directly benefit from the transaction, such as the seller, agent or lender.

Documentation of Income

Lenders are required by law to make sure you can afford your mortgage. You’ll have to supply paystubs, W-2s and possibly tax returns.


CAIVRS is the government’s Credit Alert Interactive Verification Reporting System. It’s a database of people who have defaulted on government loans, owe back taxes or have other federal debt. If you turn up on this list, you must be cleared before you can get an FHA loan.

Primary Residence

This loan cannot be used to purchase a vacation home or second home. However, FHA financing can be used to buy a primary home for a family member.

What's Cheaper? An FHA Loan or a Conforming Loan?

Unlike FHA loans, conforming mortgages are not government-backed. They’re called "conforming" because they must conform to guidelines issued by Fannie Mae and Freddie Mac, to huge companies that buy mortgages from lenders and sell them to investors. About half of all mortgages are conforming loans. Conforming mortgage include community mortgage programs, which allow three percent down payments but have income restrictions.

For most applicants, conforming mortgages are less expensive than FHA home loans. However, those with fair-to-poor credit scores and low down payments might do better with FHA, as might borrowers refinancing with cash out. Have your lender provide estimates for both types when you shop for your mortgage.

Side by side loan comparison.

FHA Loan Conforming
Lower down payment requirements
Lower credit score requirements
Lower mortgage rates
Possible prepayment penalty
Ease of qualification
Reserve requirement (for 1-2 properties)
Gift funds can cover 100% of closing cost and down payment
Always subject to mortgage insurance
No mortgage insurance with 20% down payment
More loan program options
More lenders to choose from
Can be used on all occupancy types
More available for condominium complexes
Higher debt-to-income ratio

If you’re unsure if you’ll qualify for a conforming home loan, apply for both FHA and conforming financing to increase your chances of getting approved. In addition, there are conforming programs for people with moderate incomes that have reduced mortgage insurance, flexible underwriting and require just three percent down. Make sure to ask your lender about My Community Mortgage (Fannie Mae) or Home Possible (Freddie Mac) if you think you might qualify.

We find that many customers who apply for an FHA loan actually qualify for conforming financing. Why not view free offers?

It’s always good to know where you stack up before shopping for a home loan, so be sure to check your credit score. As always, there’s never any obligation and it’s completely FREE.

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Where Do I Find an FHA Lender?

FHA mortgage lenders are not hard to find.
FHA Lenders must be approved through the US Department of Housing and Urban Development (HUD) in order to fund FHA loans.

Nearly all major US banks are FHA-approved and so are many local banks and mortgage brokers.

To find out more about any FHA lender, search by lender name on the HUD website.

Find FHA Lenders in Your Area >

What is FHA Refinance & FHA Streamline?

There are a few scenarios in which refinancing from non-government mortgages to an FHA loan make sense.

For example, if you’re a borrower with little home equity, a high debt-to-income ratio or shaky credit, you could pay less with an FHA refinance. Also, FHA doesn’t charge you extra fees for cash-out refinancing (up to 85 percent of the home’s value).

If you’re a homeowner with more home equity and stronger credit, you’ll probably pay less by refinancing with a conventional (non-government) loan.

If you already have an FHA home loan, you may be able to refinance cheaply and quickly through FHA’s Streamline Refinance program. This is a great option if you’re underwater on your property because appraisals are not required.

  • Tips for a Streamline Refi:
  • Have an acceptable mortgage payment history – no more than one 30-day late payment in the last 12 months
  • Get an appraisal to wrap your FHA loan fees into your new loan
  • Don’t get an appraisal if you don’t add in your closing costs
  • Keep a close eye on your credit. You may need to provide your credit score

How do I Apply?

The process is almost exactly like applying for a conventional mortgage. You’ll complete a standard mortgage application and document your income, employment history, investments and other assets.. The lender checks your credit, so be prepared and get your credit score in advance.

Before you shop for your home, apply for FHA preapproval. It’s like coming to the table with cash.

Check Your Eligibility Now >

Frequently Asked Questions

What are the 5 basic steps to refinancing?

1. Determine if you should refinance
2. Find a lender
3. Choose a program
4. Apply here
5. Lock in your rate

When does it pay to refinance a mortgage?

Any time you can get a no-cost refi with a lower interest rate, go for it – you have no break-even period, so the savings go straight to your bottom line. You can invest it, pay down your debts or accelerate your mortgage payoff.

Should I refinance to an FHA mortgage?

You don’t need to have an FHA mortgage to refinance with FHA. And the fact that you can refi up to 97.5 percent of your home’s current value is a compelling reason to consider this option. For those with credit scores under 740 or loan-to-values above 80 percent, an FHA refi may be cheaper than Fannie Mae and Freddie Mac’s risk-based surcharges. But FHA also has its costs.

How does cash-out refinancing work?

Cash-out refinancing is based on your home equity, which is the part of the home that you actually own. For example, if you have a home worth $250,000, and you owe $200,000 on the mortgage, you have $50,000 worth of equity in the home. If you refi the loan, that $50,000 is available for you to use (depending on your lender’s rules).

When do rising rates may make refinancing ARMs riskier?

Before you decide to refinance your loan, review your current ARM with your loan officer. Find out how much your interest rate and payment could increase and when each adjustment will occur. How comfortable--or uncomfortable--would you be if the worst-case scenario for your ARM came true? If that scenario makes you queasy, refinancing could be a smart way to protect yourself from that risk.

What are the top reasons to consider refinancing an ARM?

1. Your ARM is about to reset at a higher interest rate 2. You believe interest rates are going up long-term 
 3. You want the stability of a fixed rate 
 4. You want to refinance to another ARM 5. You’re staying put for a while 
 6. You’ve got higher-interest rate debt to consolidate 
 7. You want to cash out some of your home equity.

Is it time to refinance your ARM?

As a rule of thumb, it’s worth considering a refinance if your new interest rate will be around 1.5 to 2 percent lower than your current rate. (Otherwise, fees may eat up any potential savings.) Compare your current rate with the posted rates offered by other lenders, but be sure to ask about the index and margin -- if they are different from those of your existing ARM, you may be comparing apples and oranges.

How does the VA IRRRL Program assist veteran homeowners?

If you’re a qualified homeowner with a VA mortgage, you can refinance without worrying about your home's value or your credit rating. The U.S. Department of Veterans Affairs (VA) offers their Interest Rate Reduction Refinance (IRRR) loan to eligible borrowers who want to replace their existing VA home loans with new VA mortgages.

How does refinancing a reverse mortgage work?

A reverse mortgage refi allows you to improve on your loan’s rates or terms with a lower interest rate. You can also replace an ARM rate with a fixed rate. This can be useful for other reasons as well, including adding a spouse or partner to the loan, borrowing additional funds or allowing heirs to pay off your reverse mortgage.

What is cash-out mortgage refinancing?

Borrowers who refi their mortgage often want to convert some of their equity in their home into cash. If you take out cash when you refinance, your new loan will be bigger than the loan you want to replace. The difference between the current pay-off amount and the new balance is paid to you in cash.

Can cash-out refinancing save you money?

Before refinancing for cash-out, make sure it's a good idea. Mortgage fees for cash-out refi's are higher than those of ordinary rate-and-term. If you can’t significantly lower your rate, then that may not be the best way to get your cash.

How do you compare a cash-out refi to a home equity loan?

It depends on several factors – how the loan will be used, if the homeowner can improve the terms of their existing mortgage and calculating blended rates and refinance rates. Ultimately, home equity lines can often be set up for free, and home equity loans cost much less to set up than rate-and-term or cash-out refinances. Unless the homeowner can get refi offers that are significantly better than the existing home loan, taking a second mortgage (either home equity loan or line of credit) is a smarter choice.

Should you refinance your ARM before it resets?

Of course, no one can predict for certain where interest rates will be headed next month, let alone four years from now. Rates may rise like in the example above, or they may decline, in which case you may see your ARM rate stay the same or even decline. Remember, too, that refinancing carries upfront costs that eat into your overall savings. In general, the longer you are planning to stay in your home, the more sense it makes to do it now. 

To help you determine what your new monthly payments are likely to be when your ARM resets, use the LendingTree adjustable rate mortgage payment calculator.

When does using cash-out refinancing in order to fund major home improvements make sense?

It's easy for life's events to get ahead of your home repair plans and budget. A cash out refinance can help you update your home and may cost less than financing provided by contractors and home improvement suppliers and vendors. When making home improvements by choice rather than in an emergency it's important to consider which types of improvements can add the most value to your home.

When is cash-out refinancing a good choice to pay off debt?

The key to using a cash-out refi is to be sure that you curtail your spending. If you use this strategy, but go back to your old spending habits, then you will have made a mistake. Not only will you have increased your mortgage, but you will have high interest credit card debt again.

Should you use cash-out refinancing?

If you have high interest debt that you want to pay off and you are able to rein in your spending, the answer may be yes. You may be able to use cash-out refinancing to get a much lower interest mortgage with a larger principal, where the difference is enough to pay off that credit card debt. Used wisely, that can be a smart move.

How can refinancing an ARM protect you from rising interest rates?

You can’t control interest rates. But you can protect yourself when rates are on the rise by refinancing your adjustable rate mortgage (ARM). Consider a Fixed-rate mortgage, a hybrid ARM or an ARM with a more stable index or more favorable caps.

What is HARP and how can it help you?

HARP is the Home Affordable Refinance Program and it can allow people get some extra mileage out of lower interest rates by refinancing into a shorter mortgage.