FHA loans are mortgages insured by the Federal Housing Administration, the largest mortgage insurer in
the world. The FHA was established in 1934 after The Great Depression, and its continuing mission is to
create more homeowners in the U.S. Therefore, it is plainly obvious that the popularity of FHA loans
comes from their ability to extend mortgage loans to most people trying to buy a home. It is important
to remember that the FHA doesn't lend money, but insures lenders instead.
Mortgage Insurance Premiums
To qualify, the FHA charges a single upfront mortgage insurance payment (MIP) along with annual mortgage
insurance premiums. The mortgage insurance payments from borrowers are mandatory in order to protect
lenders from losses in instances of defaults on loans. The upfront MIP is the same for all, which is
1.75% of the loan amounts and can be financed directly into the mortgage loans. The annual MIP varies
based on the loan term, loan amount, and loan-to-value (LTV) ratio. Use the tables below to figure out
proper MIP rates.
2024 FHA Annual MIP Rates
Loan Term—Longer than 15 Years
Loan Amount
LTV Ratio
Annual MIP Ratio
$726,200 or Less
95% or Less
0.5%
$726,200 or Less
more than 95%
0.55%
More than $726,200
95% or Less
7%
More than $726,200
more than 95%
0.75%
Loan Term—15 Years or Less
Loan Amount
LTV Ratio
Annual MIP Ratio
$726,200 or Less
90% or Less
0.15%
$726,200 or Less
more than 90%
0.4%
More than $726,200
78% or Less
0.15%
More than $726,200
78% - 90%
0.4%
More than $726,200
more than 90%
0.65%
Pros and Cons of FHA Loans
Like any financial product, FHA loans have pros and cons.
Pros
No requirement for large down payment. FHA loans are famous for requiring down payments as low as
3.5%. This might be the single biggest contributing factor to FHA's importance in helping to realize
the dreams of home ownership to less-than-qualified households.
No requirement for high credit scores. As a matter of fact, the FHA approves loans for households
with credit scores of 580 or even lower.
No prepayment penalties.
No expectation for income must be met. As long as borrowers can show that they can repay the loan
(either through a history of payments or large savings), even the lowest income households can
qualify.
Certain scenarios where FHA loan borrowers are allowed to spend up to 57% of their income on all
monthly debt obligations, which can be considered exceedingly high compared to the debt-to-income
ratio requirements of other mortgage loans.
Not only do they have very appealing incentives for borrowers, but for certain mortgage lenders also;
because they are a federal entity upheld by tax dollars, FHA loans basically guarantee the ability to
take over any remaining loan payments when borrowers happen to default.
Cons
With as many benefits as they come with, there are reasons why they haven't been adopted as the universal
method for mortgage loans.
The MIP and subsequent payments contribute to why FHA loans tend to be more expensive than
conventional loans. Also, unlike the latter, FHA insurance premiums cannot be canceled once 20% of
home equity is reached; this is a very expensive and important cost to account for. When people
speak the good virtues of FHA, it is usually coupled with the 'catch' afterward - the insurance
payments. FHA insurance is often unavoidable without paying off the loan entirely.
They hand out relatively smaller loans than otherwise. People seeking more expensive home purchases
may want to look at conventional loans instead.
Borrowers with excellent credit are more likely to get better rates from conventional loans.
There are certain limitations to properties that can qualify for FHA loans because they must meet
standards such as basic health and safety.
As a general assumption, potential buyers that finance using FHA loans may raise eyebrows from
sellers. As compared to conventional mortgage loans, FHA loan borrowers carry rash generalizations
associated with low-income demographics.
As with any other big financial decision, take the time to evaluate all options. While FHA loans are a
viable choice, conventional loans may be better for some people, such as when the down payment is over
20% or they have excellent credit scores. Veterans and similarly applicable individuals should consider
VA loans. Compare rates offered by different lenders.
Home Affordability
The Department of Housing and Urban Development (HUD) is the organization that sets specific guidelines
for FHA debt-to-income ratios and formulas used to manage the risk of each potential household that
borrows FHA loans for home purchases. To determine the house affordability of an FHA loan, please use
our House Affordability Calculator. In the
Debt-to-Income Ratio drop-down selection, there is an option for FHA loan.
It becomes immediately apparent that FHA loans have the most stringent debt-to-income ratio requirements.
After all, the FHA was essentially created to absorb the risk inherent in handing out many loans that
could be defaulted at any time.
However, there are exceptions that can be made for borrowers who cannot adhere to the front or back-end
ratios of 31% and 43%, respectively. The HUD can give mortgage lenders leeway to approve borrowers as
long as lenders give evidence of significant compensating factors. One or more is typically sufficient
to qualify borrowers. These compensating factors include:
A higher down payment than the minimum requirement of 3.5%, which most FHA loan borrowers take
advantage of.
Applicants showing dutiful mortgage payments in the past equal to or greater than the new potential
loan.
Excellent credit scores (however, people with great credit scores will probably get more enticing
offers from conventional loans).
Proof of substantial savings, usually three months' worth of mortgage payments in the bank.
Prepayment
There is no prepayment penalty for FHA loans, so it can make financial sense for some FHA borrowers to
supplement an FHA loan with additional payments. However, we recommend it only when the financial
situation allows for it, and our calculator can help. Inside the More Options input section of the
calculator is an Extra Payments section to input monthly, yearly, or single payments. Use the results to
see how much the length of the loan is cut short.
FHA 203K Loans
An FHA 203(k) loan allows borrowers to finance both the purchase and renovation of a primary residence or
to finance the renovation of their existing home. Basically, it allows borrowers to buy and refinance a
home that needs work and roll the renovation costs into the mortgage.
FHA 203k loans carry many of the same aspects as the regular FHA loan, such as ease of qualification for
loans, high insurance premiums, and a small ongoing fee. The completion of improvements must be finished
within six months. FHA loan funds are transferred into an escrow account and paid to contractors as
improvements occur. A minimum of $5,000 must be borrowed and maximum limits are set by the FHA that
differs according to locations. Similar to regular FHA loans, they tend to be enough for most families
purchasing homes that aren't decked-out mansions. Funds can also be used for temporary housing while
improvements are being made for up to six months.
There also exists a mini version of the FHA 203k called the Streamlined FHA 203k made specifically for
lower borrowing amounts that are processed much more easily.
