FHA loan tips: How to qualify, save, and manage the loan

Written by Samantha SheltonNMLS 1647301Updated October 2026

The FHA tip that moves the most cash is to get your credit score to 580 before you apply, because 580 is the line between a 3.5% down payment and the 10% FHA requires at scores of 500 to 579. On a $250,000 home, that one threshold is worth $16,250 in cash at the closing table.

First-time buyer reviewing FHA loan tips at her kitchen table in a Michigan starter home

The rest of the program stretches whatever cash you do have. FHA lets 100% of your down payment come from a documented gift, lets interested parties contribute up to 6% of the sales price toward closing costs, and lets a manual underwriter approve qualifying ratios as high as 40/50 with two documented compensating factors.

Learn the FHA loan tips that actually move money: how the credit-score bands work, how to use gift funds and seller credits, what mortgage insurance really costs, and how Michigan’s county limits and MSHDA assistance stack on top. Still comparing programs? Start with our Loan Types & Programs guide or our FHA loans hub.

Key takeaways:

580 is the number that moves the money: A 580 minimum decision credit score unlocks FHA’s 3.5% down payment, while 500 to 579 caps you at 90% LTV, a $16,250 swing on a $250,000 home.
Gift funds and seller credits stretch what you bring: All of your 3.5% down payment can come from a documented gift, and interested parties may contribute up to 6% of the sales price toward closing costs and prepaids.
Mortgage insurance is permanent at 3.5% down: FHA charges 1.75% upfront plus an annual premium that runs the full mortgage term above 90% LTV. Put 10% down and that premium stops after 11 years.

What is an FHA loan?

An FHA loan is a mortgage made by a private lender and insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. FHA does not lend the money. It insures the lender against loss, which is why lenders can accept lower credit scores and smaller down payments than they would on their own paper.¹

FHA has insured these loans since 1934 and has been part of HUD since the department was created in 1965. The program covers one- to four-unit properties. See HUD’s FHA loan program overview and our guide to government-backed loans for how FHA compares to VA and USDA financing.

Two rules shape everything below. Maximum loan-to-value on a purchase is 96.5% of the Adjusted Value, the lesser of purchase price less inducements, or appraised value. And at least one borrower must occupy the property within 60 days of signing the security instrument and intend to stay a year.

How much down payment do you need for an FHA loan?

You need 3.5% down if your credit score is 580 or higher, and 10% if it falls between 500 and 579. HUD’s Single Family Housing Policy Handbook 4000.1 sets the bands directly.

Minimum decision credit score	Maximum LTV on a purchase	Minimum down payment	Cash down on a $250,000 home	Annual MIP on a 30-year loan
580 and above	96.5%	3.5%	$8,750	0.55%, full mortgage term
500 to 579	90%	10%	$25,000	0.50%, 11 years
Below 500	Not eligible for FHA-insured financing.

On a $250,000 Michigan purchase, a 580 score means $8,750 down on a $241,250 base loan. A 570 score means $25,000 down on a $225,000 base loan, $16,250 more cash for the same house.² For some borrowers, paying down one card balance closes a gap that size; how far a score moves depends on the whole credit file.

Know which score FHA will actually use. HUD calls it the minimum decision credit score: with three scores it’s the median, with two it’s the lower, and on a joint application the lender takes the lowest borrower’s number. Improving the strong borrower’s score does nothing. Before you repair anything, learn what actually goes into your FICO score, payment history is 35% of it, amounts owed another 30%, then read what counts as a good credit score to buy a house.

How do you get approved for an FHA loan?

Most FHA approvals turn on three things you can influence before you apply: where the cash comes from, who pays the closing costs, and how your ratios get evaluated.

Use gift funds. All of it can be a gift: FHA permits your entire minimum required investment to come from a gift. Acceptable donors are a family member, your employer or labor union, a close friend with a clearly defined and documented interest in you, a charitable organization, or a government homeownership program. The donor signs a gift letter naming the amount and stating no repayment is required.
Ask for seller credits, up to 6% of the sales price: Interested parties, sellers, agents, builders, developers, may contribute up to 6% toward origination fees, other closing costs, prepaid items and discount points. On a $250,000 purchase that’s up to $15,000, and the same 6% absorbs rate buydowns and the upfront premium. Critical limit: those contributions may never fund your minimum required investment, so a credit cuts closing costs, not your down payment.
Know which DTI rule your file falls under: Nearly every FHA application runs through FHA’s TOTAL Mortgage Scorecard first, and when TOTAL returns an Accept, that automated risk assessment governs the file. HUD’s fixed ratio matrix applies only to manually underwritten loans, 31/43 as the baseline at 580 and above, 37/47 with one compensating factor, 40/50 with two. Below 580, manual ratios cannot exceed 31/43 at all. Calculate yours using the CFPB’s explanation of debt-to-income ratio: monthly debt payments divided by gross monthly income.
Build the compensating factors on purpose: HUD names four, verified cash reserves, a minimal increase in housing payment, significant additional income, and residual income. A borrower two months out can often build one by leaving a tax refund untouched in savings.
Document two full years of employment: Your lender must verify your two most recent years of employment and income. A gap of six months or more still works, but you’ll need six months in the current job plus a two-year history before it.
Watch the identity-of-interest trap: Buying from a family member, or from a landlord you rent from, drops your maximum LTV to 85%, 15% down instead of 3.5%. Two exceptions matter most here and bring the 3.5% back: buying the principal residence of another family member, and buying the home you have rented for at least the six months immediately before the sales contract. The tenant purchase needs a lease or other written proof of occupancy in the file, so never assume a friends-and-family deal qualifies for minimum financing on its own.

Rules shift as HUD issues new mortgagee letters. Compare the qualifying bar across programs in our loan types and programs guide.

How much are FHA loan limits?

For calendar year 2026, FHA’s one-unit limit runs from a national floor of $541,287 up to a ceiling of $1,249,125, and which applies depends entirely on your county.

FHA does not use the conforming loan limit as its own cap, it builds its limits around that baseline. The low-cost-area floor is 65% of the conforming limit and the high-cost ceiling is 150% of it. With the Federal Housing Finance Agency setting the 2026 baseline at $832,750, that produces HUD’s floor of $541,287 and ceiling of $1,249,125, effective January 1, 2026. In between, a county’s limit is 115% of its median sale price.

Multi-unit limits are fixed multiples of the one-unit figure. At the floor, HUD’s 2026 limits are $693,050 for two units, $837,700 for three and $1,041,125 for four, which is what makes an owner-occupied duplex feasible on FHA financing. Our guide to FHA loan limits shows how to look up your county.

What FHA mortgage insurance costs, and how to get rid of it

Every FHA borrower pays twice: an upfront premium of 1.75% of the base loan amount, plus an annual premium collected monthly. On a $241,250 base loan the upfront premium is about $4,222, almost always financed rather than paid in cash.

The annual premium is where the down payment decision compounds. Under HUD Mortgagee Letter 2023-05, on a term longer than 15 years and a base loan amount of $726,200 or less, the threshold written into that 2023 letter’s premium tables:

Above 95% LTV: 0.55% annually, for the full mortgage term. This is where a 3.5%-down borrower lands.
Above 90% but at or below 95% LTV: 0.50% annually, still for the full mortgage term.
At or below 90% LTV: 0.50% annually, and it stops after 11 years.

Read that third line twice. The 11-year cutoff is a real planning lever: reaching 10% down buys a lower premium for a fixed period instead of a higher one forever. Loans above the threshold pay the higher annual premium in the same letter’s second table. No Michigan one- or two-unit FHA loan reaches it, because the county loan limit binds first, but a three- or four-unit loan can: at the 2026 floor those limits are $837,700 and $1,041,125, so a base loan above that threshold pays the higher premium.

How to remove FHA mortgage insurance

At 3.5% down, you don’t remove it, you refinance out of it. FHA’s annual premium above 90% LTV runs for the life of the loan and does not cancel at 20% equity the way conventional private mortgage insurance does; the CFPB notes you may request PMI cancellation at 80% of original value and that a servicer must terminate it automatically at a scheduled 78%. FHA has no equivalent, so the standard exit is a refinance into a conventional loan. Run it as arithmetic and confirm the break-even lands inside how long you’ll keep the house, our FHA loans hub covers both sides.

Tips for managing your FHA loan after you close

The occupancy rule is the one that gets people in trouble. FHA insures principal residences, so converting the house to a rental in month three is a compliance problem, not a strategy.

Buy two to four units and live in one: This turns the program into a way to build rental income as well as a home, and one a government-backed loan makes unusually accessible. Rental income from the subject property may count as effective income on a two- to four-unit dwelling, documented with an appraiser’s fair market rent estimate on Fannie Mae Form 1025.
Budget for the three- and four-unit extras: You must hold reserves equal to three months of principal, interest, taxes and insurance after closing, and the building must pass a self-sufficiency test: PITI divided by net self-sufficiency rental income may not exceed 100%.
Use 203(k) when the house needs work: FHA’s rehabilitation program folds repair costs into the purchase mortgage. Mortgagee Letter 2024-13 rebuilt it for case numbers assigned on or after November 4, 2024, capping Limited 203(k) rehabilitation costs at $75,000, a limit HUD re-evaluates annually. See the benefits of FHA 203(k) loans for when it beats paying cash.

What Michigan buyers should know

Michigan is a floor state. All 83 Michigan counties sit at HUD’s national one-unit FHA loan limit floor of $541,287 for calendar year 2026, Wayne, Oakland and Macomb included, because no Michigan market’s median sale price is high enough to lift its limit above the floor.

Every county gets the same number: $541,287 for one unit, $693,050 for two, $837,700 for three and $1,041,125 for four, effective January 1, 2026. HUD’s median-price estimate for the Detroit metro was $362,000, and even Traverse City, Michigan’s highest at $435,000, lands under the floor once you apply the 115% formula.
MSHDA’s credit minimum is 640, not 580: The Michigan State Housing Development Authority’s MI Home Loan requires a 640 minimum credit score, sixty points above FHA’s threshold. It’s open to first-time buyers statewide, meaning no home ownership in the previous three years, and to repeat buyers in targeted areas. Income limits vary by family size and location, and the sales price limit is $566,355 after June 1, 2026.
Stack MI 10K DPA on top of the FHA loan: MSHDA’s MI 10K Down Payment Assistance provides up to $10,000 toward down payment, closing costs and prepaids as a statewide interest-free loan with no monthly payments. Repayment is deferred until you pay off the first mortgage, sell, refinance, or stop occupying the home. It must be paired with a MI Home Loan, and every buyer needs a homebuyer education certificate.
Ask about the Mortgage Credit Certificate: MSHDA also runs a Mortgage Credit Certificate program, but only through lenders on its MCC participating-lender list, which MSHDA keeps on its website. An MCC converts part of the mortgage interest you pay each year into a federal tax credit, and what it’s worth depends entirely on your tax situation, price it with a professional before you count on it.³

How Align shops an FHA loan

FHA sets the program rules, but each lender adds its own on top, from credit score floors to how it reads your debts. Those extra rules are called overlays, and they are why one lender's no can be another lender's yes.

Because Align is a broker, Samantha can take your file to the wholesale lender whose overlays fit it. She also places FHA 203(k) loans when the house needs work, and MSHDA loans when you need help with the down payment.

FHA loans in Michigan

FAQ: FHA loan tips

Here are answers to common questions about FHA loan tips.

What credit score do you need for an FHA loan?

FHA’s floor is 500, but the score sets your down payment: 580 or higher qualifies for 96.5% financing and 3.5% down, while 500 to 579 is capped at 90% LTV and 10% down. Below 500 there is no FHA-insured financing. Individual lenders add overlays on top, so shopping matters most between 580 and 620. See what counts as a good credit score to buy a house.

Can the entire FHA down payment be a gift?

Yes. FHA permits 100% of your minimum required investment to come from a family member, your employer or labor union, a close friend with a documented interest in you, a charitable organization, or a government homeownership program. The donor signs a gift letter stating no repayment is expected, and cash on hand is not an acceptable source. Compare the alternatives in our guide to government-backed loans.

How much are FHA mortgage insurance premiums?

The upfront premium is 1.75% of the base loan amount and is typically financed. The annual premium on a 30-year loan with a base loan amount of $726,200 or less, the threshold in HUD Mortgagee Letter 2023-05, is 0.55% above 95% LTV and 0.50% at or below 95%. Duration is what matters: above 90% LTV it runs the full term, and at or below 90% it stops after 11 years.

Can you use an FHA loan for an investment property?

No. FHA insures principal residences, and at least one borrower must occupy the home within 60 days of signing the security instrument and intend to stay a year. You can, however, buy a two- to four-unit property as long as you live in one unit, and rental income from the other units may count toward qualifying. Multi-unit caps run higher, see FHA loan limits.

The bottom line on FHA loans

The FHA loan tips that move real money are narrow and specific. Get to 580 and your down payment drops from 10% to 3.5%, a $16,250 swing on a $250,000 home. Take the down payment as a documented gift if you can, negotiate up to 6% of the sales price in seller credits, and know that at 3.5% down the 0.55% annual premium follows you for the full term unless you refinance out of FHA. All 83 Michigan counties share the same 2026 one-unit limit of $541,287. MSHDA’s MI 10K DPA can add up to $10,000 of interest-free help if your score clears 640.

If you want to see how different lenders treat your credit profile, talk to Align Lending. We’ll shop your FHA scenario across our lender network and show you the pricing and overlays side by side. Call 248-506-5727 or start online.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA program requirements are set by HUD in the Single Family Housing Policy Handbook 4000.1 and in mortgagee letters, and are subject to change. Return to text.

2. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your down payment, loan amount, premiums and terms will depend on your application, your property’s adjusted value, your county’s loan limit and market conditions, and will be itemized on your Loan Estimate and Closing Disclosure. Return to text.

3. This is general information, not tax advice. The value of a Mortgage Credit Certificate depends on your individual tax circumstances, income and liability. Consult a qualified tax professional about your situation. Return to text.

Sources: minimum decision credit score bands (580 and above eligible for maximum financing, 500 to 579 limited to 90% LTV, ineligible below 500) and how the MDCS is determined; 96.5% maximum purchase LTV and the adjusted value definition; the 3.5% minimum required investment; the 85% LTV restriction on identity-of-interest and tenant/landlord transactions, together with its family-member and six-month tenant-purchase exceptions; occupancy within 60 days with one-year intent; acceptable gift donors, gift letter contents and transfer documentation; interested party contributions up to 6% of the sales price and the prohibition on using them for the minimum required investment; the function of the TOTAL Mortgage Scorecard and the conditions requiring a downgrade to manual underwriting; manual approvable ratios of 31/43, 37/47, 40/40 and 40/50 with acceptable compensating factors; two-year employment and income verification and employment gaps of six months or more; rental income from two- to four-unit subject properties; three months PITI reserves and the net self-sufficiency rental income test on three- to four-unit properties, HUD Single Family Housing Policy Handbook 4000.1. Upfront premium of 1.75% and annual premium rates of 50 and 55 basis points with 11-year and mortgage-term durations, plus the $726,200 base loan amount threshold in its premium tables, HUD Mortgagee Letter 2023-05, effective for case numbers endorsed on or after March 20, 2023. Limited 203(k) rehabilitation cost cap of $75,000 and its annual re-evaluation, HUD Mortgagee Letter 2024-13, effective for case numbers assigned on or after November 4, 2024. CY2026 FHA one-unit floor of $541,287, ceiling of $1,249,125, two-, three- and four-unit limits of $693,050, $837,700 and $1,041,125, the January 1, 2026 effective date, and county limits and median sale price estimates for all 83 Michigan counties, HUD CY2026 FHA Forward Limits dataset. 2026 baseline conforming loan limit of $832,750 and 150% high-cost ceiling, Federal Housing Finance Agency. Insurance of one- to four-unit properties, FHA’s creation in 1934 and its move into HUD in 1965, U.S. Department of Housing and Urban Development. Debt-to-income definition and calculation, and conventional PMI cancellation at 80% and automatic termination at 78% of original value with FHA following different requirements, Consumer Financial Protection Bureau. FICO weights of 35% payment history and 30% amounts owed, myFICO. MI Home Loan 640 minimum credit score, eligibility, income limits and the $566,355 statewide sales price limit after June 1, 2026; MI 10K Down Payment Assistance of up to $10,000 as a deferred interest-free loan requiring a MI Home Loan and homebuyer education certificate; and the Mortgage Credit Certificate participating-lender list, Michigan State Housing Development Authority (michigan.gov/mshda).

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. FHA program rules, mortgage insurance premiums, loan limits and state assistance program terms change and vary by borrower, property, county and lender; confirm your figures with your lender and your Loan Estimate and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.