FHA loan
An FHA loan is a mortgage insured by the Federal Housing Administration. The agency does not lend — it insures lenders against loss, which is what allows them to accept borrowers they would otherwise decline.
What it opens up#
Two things, and both matter enormously to first-time buyers.
Credit. The programme permits 3.5 percent down at a 580 score, and 10 percent down for scores between 500 and 579. Individual lenders often impose higher minimums of their own — an overlay — so a decline from one lender is not the programme's answer.
Down payment. 3.5 percent is a materially different barrier from ten or twenty, and gift funds are permitted.
What it costs#
Mortgage insurance, in two parts.
An upfront premium, charged at closing and normally financed into the loan. And an annual premium, collected monthly.
For most FHA loans written since 2013, that annual premium runs for the life of the loan. It does not cancel at an equity threshold the way conventional PMI does. A borrower at fifty percent loan-to-value is still paying it.
Escaping it generally means refinancing out of FHA entirely, which is worth calculating once there is twenty percent equity even if the rate would not otherwise justify a refinance.
The owner-occupancy rule, and the way around it#
FHA requires the borrower to occupy the property as a principal residence. It is not investor financing.
But it will finance a two-, three- or four-unit property, and the occupancy requirement is satisfied by living in one unit. The rest can be rented, and the rental income can often be counted toward qualifying.
That combination — small down payment, multi-unit property, rental income counted — is one of the most effective routes into property ownership available to someone without capital. It is used far less than it could be.
Minimum property standards#
FHA appraisals assess condition against minimum property standards, not just value. Peeling paint on an older home, missing handrails, an unsafe roof or non-functioning systems can each generate required repairs before the loan funds.
This is why some sellers prefer other offers. On a house in poor condition the concern is legitimate. On a maintained house it is mostly reputation.
For genuinely distressed property the answer is a different FHA product — the 203(k), which finances the rehabilitation into the loan rather than requiring the condition to be fixed first.