The Federal Housing Administration (FHA) has a mortgage program that can help you qualify for a home loan even if your credit history isn't flawless or you don't have a large down payment. With an FHA loan, you can finance a home with a 3.5% down payment and a minimum credit score of 580 (or 500 if you have a 10% down payment). Read on to learn more about the best FHA lenders, how FHA mortgages work, and a step-by-step guide to securing an FHA mortgage.

An FHA loan is a type of mortgage insured by the Federal Housing Administration. These mortgage loans have lower barriers to entry and can help you finance a home even if you don't have a high credit score or large down payment. Because the requirements aren't as strict as conventional mortgages, these loans are perfect for first-time home buyers or those with poor credit.

FHA mortgages come in two different types: 

• FHA 203(b) loan: This is the "standard" FHA loan. It's designed for buying a home that is essentially move-in ready.
• FHA 203(k) loan: This is an FHA mortgage loan designed for purchasing homes that need significant repairs or renovations before move-in. Many of the best FHA 203(k) lenders will let you roll these costs into a monthly mortgage payment with a competitive interest rate. 

One of the most important points to know about FHA loans is that they are meant only for owner-occupied properties. You can't use an FHA loan to buy a vacation home, rental, or investment property.

Learn more: FHA vs. Conventional Loan

An FHA mortgage is a private home loan insured by the government. Because the loan amount is backed by the FHA, lenders are more willing to take on high-risk borrowers.That said, FHA does have some requirements, such as: 

• Down payment of at least 3.5%
• Credit score of at least 580 (or 500 if your down payment is 10% or more) 
• Debt-to-income ratio of at most 43% 
• Loan must be for an owner-occupied property 
• Two years of stable income and explanations for any gaps in employment history  
• Safe, sound, and secure property

Let's take a look at each of these in more detail.

Down payment

You need 3.5% of the purchase price as a down payment to qualify for an FHA mortgage loan (or 10% if your credit score is between 500 and 579).  That means for every $100,000 you plan to spend on a home, you should have $3,500 to put toward a down payment.

Credit score

In general, the minimum credit score to qualify for an FHA loan is 580. But many of the best  FHA lenders for bad credit may allow a score as low as 500 if you can afford a down payment of 10% or more. For comparison, conventional mortgage lenders typically require credit scores of 620 or higher. 

Debts and income

Generally speaking, many of the best FHA loan lenders look for a debt-to-income (DTI) ratio of at most 43%. That means, your total monthly debt obligations (including your proposed monthly mortgage payment) should be less than 43% of your pre-tax monthly income. For example, if you're bringing in $5,000 per month (before taxes), your mortgage payment should be no more than $2,150. 

That said, if you have certain "compensating factors," such as a high credit score or a hefty amount of savings, lenders may issue loans for higher DTI ratios. 

Employment history

Top FHA lenders typically want to see at least two years of steady employment. That doesn't mean you have to stay with the same employer for two years, nor does it require you to stay within the same line of work. As long as a lender can verify that you have two years of steady work history, you can check this box. That said, you may still qualify if you have gaps in your work history. Typically, you just need to provide your FHA lender with a letter explaining any gaps that span a month or longer. For instance, if you graduated from college last year and have been steadily employed since then, you could still potentially qualify. Lenders just want to know that your income is likely to continue for years to come.

Property standards

FHA loans can be used to purchase single-family homes, condominiums, and even multi-family properties with as many as four housing units. As long as the buyer plans to live in one of the units, the property qualifies.

The home must also meet standards set by the U.S. Department of Housing and Urban Development (HUD). While HUD has some specific requirements, the department just wants the home to be safe, sound, and secure, which generally means free of any hazards that could adversely affect occupants. To ensure the home meets HUD's requirements, an appraiser approved by the FHA must inspect the property.

If the home needs major renovations or repairs before you move in, then you'll need to apply for a FHA 203(k) loan. The standard FHA loan -- 203(b) -- doesn't usually cover homes that need major work. 

READ MORE: If you would like to learn about some of the major players in the mortgage industry, check out The Ascent's research piece on the largest mortgage lenders.

Yes, FHA loans come with costs above what you'll pay on the mortgage. Perhaps the most significant is the FHA mortgage insurance premium (MIP), which is broken down into two types: upfront and annual. 

The upfront MIP is 1.75% of the loan amount. For example, if you buy a $300,000 home and put 3.5% down, your base loan amount is $289,500. The upfront MIP on this loan amount would be 1.75% of $289,500, or $5,066.25. This amount is paid only once and can be rolled into your FHA loan. The annual MIP is a bit more complicated to calculate. It depends on the loan length, amount, and down payment. For most 15-year FHA loans, it ranges from 0.15% to 0.40% per year. For 30-year FHA loans, it's in the 0.50% to 0.55% range. 

If your down payment is less than 10%, you'll pay annual MIPs for the entire length of your FHA loan. This is different from private mortgage insurance (PMI) on conventional loans, which can be canceled when the loan-to-value ratio drops below 80%. For those FHA borrowers who can put down 10% or more, annual MIPs can be dropped after 11 years for both 15- and 30-year loan terms. 

In addition to mortgage insurance, FHA loans have closing costs, which may include:

• Your lender's origination fee
• Prepaid taxes and insurance
• Discount points
• Appraisal fees
• The FHA mortgage insurance premium

If you're working with one of the best lenders for FHA mortgages, your lender should be glad to answer any questions about closing costs associated with your mortgage. Still, there are ways you can potentially lower your out-of-pocket costs, such as: 

1. Gift money. The down payment doesn't necessarily need to be your money. All or part of your down payment can come from a down payment gift. This could help lower your monthly expenses and eventually cancel your annual MIP. 
2. Roll in closing costs. Many FHA lenders will let you roll closing costs into the FHA loan itself, freeing your money up for other things, such as putting down a bigger down payment. Likewise, if you need to renovate a home, the best 203(k) loan lenders will let you roll those costs into your monthly mortgage.
3. Seller concessions. You can ask the seller to pay some or all of your closing costs (as much as 6% of the purchase price) as part of your purchase offer.

No, you don't need a minimum or maximum income to qualify for an FHA loan. But there are FHA loan limits -- that is, a maximum amount you can borrow. 

In 2023, the standard FHA loan limit for a one-unit property is $472,030 for most U.S. housing markets, while certain high-cost areas could have limits as high as $1,089,300 . These figures are based on the national limit for conforming mortgages, which is currently $726,200. The Federal Housing Finance Agency (FHFA) sets the "floor" at 65% and the "ceiling" at 150%. Again, the current floor is 65% of $726,200 (or $472,030) and the ceiling is 150% of that figure, or $1,089,300.  FHA loans can be made in higher amounts for a duplex, because there are more units involved. Here's a quick reference chart that can help illustrate the FHA loan limits for 2023.

If you're curious about the FHA loan limit for a specific geographic location, the Department of Housing and Urban Development (HUD) has a quick and easy.

To find the best lender for an FHA loan, start by getting pre-approved for a mortgage with a few lenders. Then, compare mortgage rates, terms, and fees.

Mortgage rates

Each FHA mortgage company sets its own rate for the sum you borrow. Even a small difference in interest rate from one lender to another could result in big savings over the life of your repayment period, especially if you end up with a 30-year mortgage.

Terms

You may want to take out a 30-year mortgage, or you may want to pay off your home in 15 years. The FHA mortgage lender you choose should be able to offer a loan term with a repayment period that works for you.

Fees

When you sign a mortgage, you pay closing costs to finalize that loan. Those fees vary from lender to lender. It's common for closing costs to amount to 2% to 6% of your loan amount. But since that's a big range, it may be that one FHA lender offers substantially lower closing costs than another.Most big lenders offer FHA loans, especially those focused on helping borrowers with poor credit. Our picks for the best FHA mortgage lenders (at the top of this page) are a good place to start.

If you're looking to get a mortgage with poor credit or without a large down payment, an FHA loan could be a smart option. Use our list above as a starting point to find the best FHA lenders for bad credit.

But if your credit score is above 580 or you have a relatively large down payment, you'll probably save money with a conventional mortgage.

For example, if your down payment is 20% of the purchase price on a conventional loan, you can avoid paying mortgage insurance altogether. With an FHA loan, however, you would still pay annual MIP for 11 years. Even if you don't have a large down payment, borrowers with excellent credit scores might still get conventional mortgages with down payments as low as 3%. Plus, you'll find better mortgage insurance terms than with even the best lenders for FHA loans. If that's your situation, get started with our list of this month's best mortgage lenders.

For lenders to offer FHA loans, they must be approved by the Federal Housing Administration, which backs those loans. Many banks and lending institutions offer FHA loans, but there are some lenders that are not approved to offer them.

FHA loans have their benefits and drawbacks so it's important to consider both.

Here's a closer look at a few pros and cons.