FHA loans make homeownership possible for buyers who can't yet meet conventional loan standards. In 2026, you can buy a home with just 3.5% down and a credit score of 580 — a bar low enough that a significant portion of buyers who think they can't qualify actually can. But FHA loans come with a cost that many buyers underestimate: mortgage insurance premiums (MIP) that, unlike conventional PMI, often last the entire life of the loan.
This guide covers every FHA requirement in plain language, the true cost comparison with conventional financing, and the specific situations where FHA is the right choice — and the ones where it isn't.
FHA Credit Score Requirements: The Exact Rules
The FHA doesn't set a single credit score threshold — it uses a tiered system based on your score and the down payment you're making:
Credit Score Tiers
| Credit Score | Minimum Down Payment | Notes |
|---|---|---|
| 580 and above | 3.5% | Standard FHA down payment |
| 500–579 | 10% | Higher down payment compensates for lower score |
| Below 500 | Not eligible | FHA does not insure loans below 500 |
Important caveat: these are FHA minimums, not lender minimums. Most FHA lenders impose their own "overlays" — additional requirements beyond the official minimums. In practice, many FHA lenders require a 620 or even 640 minimum score, even though the FHA technically allows 580. If you're declined by one lender at 600, try smaller banks or credit unions that may adhere closer to official FHA minimums.
How FHA Handles Collections, Bankruptcies, and Foreclosures
FHA is more forgiving of past credit events than conventional programs:
- Bankruptcy (Chapter 7): 2-year waiting period from discharge date with re-established credit
- Bankruptcy (Chapter 13): 12 months of on-time plan payments with trustee approval
- Foreclosure: 3-year waiting period from completion date
- Collections/charged-off accounts: FHA does not require paying off all collections before closing (though lenders may require this through their overlays)
FHA Down Payment Requirements
The 3.5% Minimum — And Who Can Gift It
On a $350,000 home, the FHA minimum down payment is $12,250. What makes FHA particularly accessible is that this entire amount can come from gift funds — a family member, close friend, or nonprofit can cover 100% of your down payment. This is different from conventional loans, which typically require at least 5% of the down payment from the borrower's own funds for lower down payment scenarios.
Gift funds require a gift letter (signed by the donor) stating the money is a gift, not a loan, along with documentation showing the funds were transferred. Your lender will provide the gift letter template.
Down Payment Assistance Programs That Work With FHA
Many state and local down payment assistance programs are specifically designed to work with FHA loans. The HUD's list of HUD-approved housing counselors can help you identify programs in your area. Many programs offer forgivable second mortgages (often 3%–5% of the purchase price) that can cover your entire down payment and some closing costs.
FHA Income and Employment Requirements
Stable Income for 2 Years
FHA doesn't have a minimum income requirement — any income level can qualify as long as the debt-to-income ratios are met. What FHA does require is proof of stable employment for the past two years. "Stable" doesn't mean the same employer for two years — it means consistent employment history in the same field, without large unexplained gaps.
Career changes within the same industry are generally acceptable. A significant change to a lower-income field, or a gap of more than 30 days without explanation, may require a letter of explanation and documentation.
FHA DTI Limits
FHA is more flexible on debt-to-income ratios than conventional programs. The official FHA limits are:
- Front-end DTI: 31% preferred (housing costs only)
- Back-end DTI: 43% preferred, up to 50%–57% with "compensating factors"
Compensating factors that allow higher DTI include: a significant down payment (10%+), substantial liquid reserves, residual income above HUD thresholds, minimal increase in housing costs from current rent, and strong employment history.
FHA Loan Limits 2026
FHA sets maximum loan amounts by county, based on local median home prices. For 2026:
| Area Type | Single-Family Limit 2026 |
|---|---|
| Low-cost areas (floor) | $498,257 |
| High-cost areas (ceiling) | $1,149,825 |
| Special exceptions (Alaska, Hawaii, Guam) | $1,724,725 |
To find the FHA limit for your specific county, visit HUD's mortgage limits page. If the home you're buying exceeds the FHA limit for your area, you'll need to look at conventional or jumbo financing.
The True Cost of FHA: Understanding MIP
This is where most buyers get surprised. FHA loans require mortgage insurance premium (MIP) — and unlike conventional PMI, FHA MIP is often permanent.
Upfront MIP (UFMIP)
At closing, FHA charges 1.75% of the loan amount as an upfront premium. On a $332,500 loan (3.5% down on $345,000 home), that's $5,819 — typically rolled into the loan balance rather than paid in cash.
Annual MIP
FHA also charges annual MIP paid monthly. After HUD's 2023 reduction, the most common rate is 0.55% annually for 30-year loans with less than 10% down and loan amounts below $726,200. On a $332,500 loan: 0.55% ÷ 12 = $152/month added to every payment.
When FHA MIP Cancels (The Critical Difference From PMI)
| Down Payment at Closing | MIP Duration |
|---|---|
| Less than 10% | Life of loan (never cancels automatically) |
| 10% or more | 11 years |
This is the most important FHA fact that buyers overlook: if you put down less than 10% on an FHA loan, you pay MIP for the entire 30 years. There is no cancellation at 20% equity — unlike conventional PMI. The only way to eliminate MIP from an FHA loan with less than 10% down is to refinance into a conventional loan once you have sufficient equity.
FHA vs. Conventional: A Real Cost Comparison
Let's compare two buyers purchasing the same $350,000 home with 5% down — one using FHA, one using conventional financing:
| Cost Factor | FHA Loan (5% down) | Conventional (5% down) |
|---|---|---|
| Down payment | $17,500 | $17,500 |
| Loan amount | $332,500 | $332,500 |
| UFMIP (rolled in) | +$5,819 | $0 |
| Effective loan | $338,319 | $332,500 |
| Interest rate | 6.50% | 6.75% |
| Monthly P&I | $2,140 | $2,157 |
| Monthly MIP/PMI | +$152 (never cancels) | +$249 (cancels at 20% equity) |
| Total monthly | $2,292 | $2,406 initially |
| After PMI cancels (~yr 9) | $2,292 (still paying) | $2,157 (free and clear) |
In the first 9 years, FHA is $114/month cheaper. After year 9 (when conventional PMI cancels), conventional becomes $135/month cheaper — and stays that way forever. Over a 30-year hold, conventional financing saves approximately $32,000 more in total, despite the higher initial rate.
When FHA Is Clearly the Right Choice
- Credit score below 680: Conventional PMI becomes prohibitively expensive below 680. FHA's MIP is more cost-effective at lower score ranges.
- High DTI (43%–50%): FHA's more flexible DTI limits may be the only path to qualification.
- All-gift down payment: FHA is uniquely flexible about 100% gift funds.
- Recent credit events (bankruptcy 2+ years ago, foreclosure 3+ years ago): FHA's shorter waiting periods make it the only option.
- Plan to sell or refinance within 5 years: The permanent MIP burden matters less if you'll refinance into conventional once you have 20% equity.
When to Choose Conventional Instead
- Credit score above 680 with stable employment
- Planning to stay in the home long-term (10+ years)
- Can reach 20% equity within a reasonable timeframe
- Home purchase price exceeds FHA county limits
Use our free mortgage calculator to estimate your monthly payment under both FHA and conventional scenarios. The total monthly cost, including insurance, is the number that matters — not just the interest rate.