An FHA loan is a government-insured mortgage that lets you buy with as little as 3.5% down and a 580 credit score, or 10% down with a score between 500 and 579. In exchange for those looser credit standards, you pay two layers of mortgage insurance: an upfront premium of 1.75% of the loan amount, usually financed into the balance, plus an annual premium of roughly 0.50% – 0.55% that most borrowers carry for the full loan term.

That makes FHA the right answer for some buyers and the wrong one for others, and the deciding factor is usually your credit score, not your down payment. Learn how FHA loans work, including current FHA loan limits, how both layers of mortgage insurance are priced, and when a 203(k) renovation loan fits better.

Key takeaways:

• Down payment and score: FHA allows 3.5% down at a 580 credit score, or 10% down with a score between 500 and 579, the most forgiving credit standard in mainstream lending.
• The mortgage insurance tradeoff: FHA charges 1.75% upfront plus roughly 0.50% – 0.55% annually, and with less than 10% down that annual premium doesn’t fall off with equity the way conventional PMI does.
• Who it’s for: FHA usually wins below a 680 score or after a recent credit event; with stronger credit, a conventional loan with 5% down often costs less over time. Because Align is a broker, we price both and show you the difference.

What is an FHA loan?

An FHA loan is a mortgage insured by the Federal Housing Administration and issued by an FHA-approved lender, which lets that lender accept lower credit scores and smaller down payments than it otherwise would. It’s one of the six main types of mortgage loans. The one built for buyers whose credit file isn’t perfect.

Here’s what most buyers get wrong: the FHA doesn’t lend money. It insures the lender against loss, and your premiums fund that insurance, you still apply with a bank, credit union or wholesale lender that underwrites your file.³ The program basics are published by the U.S. Department of Housing and Urban Development.

How FHA loans work in practice

Say you’re buying a $250,000 home in Waterford with 3.5% down. You bring $8,750 to closing, leaving a base loan of $241,250. The 1.75% upfront premium adds $4,221, financed, not paid in cash, so you close on about $245,471. The 0.55% annual premium is collected monthly on the base balance about $111 a month in year one.¹

Otherwise an FHA file moves like any other: preapproval, offer, appraisal, underwriting, closing. Our FHA loan tips cover what to fix before the appraiser arrives.

FHA loan requirements

FHA’s published requirements are floors, not guarantees. Every lender layers its own overlays on top, which is why the same file can be approved at one lender and declined at another.

• Credit score: 580 is the line for 3.5% down. A score of 500 – 579 caps you at 90% loan-to-value, which means 10% down, and below 500 there’s no FHA option. Lenders in Align’s network typically set their own FHA minimum between 580 and 620, so approval depends on where your file lands. Our credit and qualifying hub covers how to move a score first.
• Down payment: 3.5% minimum, and the entire minimum required investment can come from a documented gift from an eligible donor, a relative, an employer or an approved assistance program.
• Debt-to-income ratio: FHA’s manual underwriting benchmark is 31% for the housing payment and 43% for total debt, stretching to 37/47 with one documented compensating factor and 40/50 with two. Files approved through FHA’s automated TOTAL Scorecard routinely run above those benchmarks, so one lender’s “too much debt” isn’t the final answer.
• Mortgage insurance: 1.75% upfront, plus roughly 0.50% – 0.55% annually depending on your loan-to-value and term, see how mortgage insurance is billed inside your monthly payment.
• Occupancy: Primary residences only. FHA doesn’t insure second homes or investment properties.
• Property condition: The FHA appraisal grades safety, security and soundness alongside value. Peeling paint, a missing handrail, exposed wiring and a dead furnace are routine repair conditions, negotiated between buyer and seller before closing.
• What changed recently: FHA updates its handbook and premium structure more often than buyers realize. Check the recent changes to FHA loan requirements before relying on last year’s answer.

FHA loan limits: how much you can borrow

FHA doesn’t publish one national maximum. It sets a limit for every county, anchored to the national conforming loan limit: the floor is 65% of that number, and the ceiling in designated high-cost counties is 150% of it.

For 2026, the conforming limit on a one-unit home is $832,750, which puts the FHA floor at $541,287 and the FHA ceiling at $1,249,125. Only high-cost metros reach the ceiling; counties in between get a limit set from local median prices. The full county table and multi-unit limits live in our guide to FHA loan limits.

What to do if you’re over the limit

Being over your county’s FHA limit isn’t a dead end. FHA was probably never the cheapest option at that price. A conventional loan with 5% down often reaches a higher amount at similar monthly cost, a piggyback second can keep the first mortgage under the conforming line, and above that line a jumbo loan takes over. Run all three side by side, the head-to-head math lives in our loan comparisons hub.

FHA 203(k) renovation loans

A 203(k) rolls the purchase price and the renovation budget into one FHA loan, so you finance a house and its repairs with one mortgage at the same 3.5% down. It’s underwritten on what the home will be worth after the work, not its condition the day you write the offer.

Standard vs. Limited 203(k)

The Limited 203(k) covers cosmetic and non-structural work up to $75,000 in rehabilitation costs, a ceiling HUD raised from $35,000 for case numbers assigned on or after November 4, 2024, and a HUD consultant is optional. The Standard 203(k) handles structural work, requires at least $5,000 of rehabilitation, and requires a HUD-approved 203(k) consultant to write the work scope and sign off on the draws.

Why buyers use them

Renovation financing solves the problem that kills most offers on dated houses: repairs have to happen before the lender funds, but the buyer’s cash is committed to the down payment. Rolling both into one loan turns a house nobody can finance into one you can, see the benefits of FHA 203(k) loans.

The tradeoffs

A 203(k) is slower than a standard FHA purchase. Contractors have to be approved, bids collected before closing, and funds released in draws as work is inspected, plan on extra weeks, not extra days, and expect some sellers to pass for that reason. Weigh the pros and cons of FHA 203(k) loans before you commit.

203(k) vs. HomeStyle

Fannie Mae’s HomeStyle renovation loan does the same job on the conventional side and allows work a 203(k) won’t, but it asks for stronger credit. Because Align is a broker, we can price a 203(k) and a HomeStyle side by side rather than steering you to whichever one a single bank offers. Both sit in our specialty financing hub.

Conventional vs. FHA: which one actually costs less?

With stronger credit, roughly a 680 to 700 score and up, a conventional loan usually wins over a five- to ten-year hold, because its mortgage insurance can be cancelled and FHA’s generally can’t. Below that, FHA’s pricing and its tolerance for credit events win.

Feature	FHA loan	Conventional loan
Minimum credit score	580 for 3.5% down; 500 – 579 with 10% down	Set by the lender and the automated underwriting system; 620 is a common floor
Minimum down payment	3.5%	3% for eligible buyers through 97% loan-to-value programs
Mortgage insurance cost	1.75% upfront plus roughly 0.50% – 0.55% per year	PMI only, priced on credit score and down payment; no upfront premium
Can the insurance be removed?	No with less than 10% down; drops off after 11 years at 10% or more	Yes. You can request cancellation at 80% loan-to-value, and it terminates automatically at 78%
Best-fit borrower	Thinner credit files, past credit events, higher debt ratios	Solid credit, or anyone planning to hold the loan long enough for PMI to fall off

The deciding number is total cost over the years you’ll actually keep the loan, not the payment in month one. An FHA note rate often prices slightly below conventional at the same score, and the annual premium quietly erases that advantage over time. Worth knowing: Fannie Mae’s Selling Guide no longer applies a minimum credit score to loan casefiles underwritten through Desktop Underwriter, so conventional deserves a quote on files that used to be automatic FHA candidates.

FHA also isn’t the only government option: VA loans allow 0% down with no monthly mortgage insurance for those who served, and in eligible rural areas USDA loans and assistance programs do the same.²

What Michigan buyers should know

Michigan changes the FHA math in four ways, all of which come up on our files regularly.

• One limit statewide: No Michigan county is designated high-cost by FHA and none sits above the floor, so the 2026 limit of $541,287 on a one-unit home applies across all 83 counties. Confirm the multi-unit numbers in our county limit guide.
• MSHDA stacks on FHA: The Michigan State Housing Development Authority pairs its MI Home Loan with up to $10,000 of assistance through MI 10K DPA, and that money can sit on top of an FHA first mortgage. MSHDA adds a 640 minimum credit score, stricter than FHA on score, looser on cash.
• Older housing stock triggers conditions: Much of Metro Detroit’s affordable inventory predates 1978, the cutoff for federal lead-based paint rules, so chipping paint, aging roofs and dated electrical are routine FHA repair conditions here. Budget time for them, or weigh the pros and cons of FHA 203(k) loans and finance the work instead.
• Winter appraisals: A Michigan appraiser can’t always evaluate a roof or a septic field under snow, which occasionally produces a subject-to condition and a re-inspection. Our FHA loan tips cover how to keep that from moving your closing date.

FAQ: FHA loans

Here are answers to common questions about FHA loans.

Can you ever remove FHA mortgage insurance?

Only in limited cases. On FHA loans with a case number assigned on or after June 3, 2013 and the minimum 3.5% down, the annual premium runs for the full loan term. Put down 10% or more and it drops off after 11 years. For everyone else the practical exit is refinancing into a conventional loan once you reach roughly 20% equity and a qualifying score.

Why do some sellers reject FHA offers?

Usually because of the appraisal, not the buyer. FHA appraisals include a property-condition review, so sellers of older homes worry about being asked to fix peeling paint, handrails or a failing roof before closing. In a multiple-offer situation that risk can cost an FHA buyer the house. A fully underwritten preapproval and a shorter closing timeline are the strongest counters, see our FHA loan tips.

Can I get an FHA loan after a bankruptcy or foreclosure?

Yes, sooner than with most programs. FHA generally allows a new loan two years after a Chapter 7 discharge and three years after a foreclosure or deed-in-lieu, and Chapter 13 borrowers can sometimes qualify while still in the plan with 12 months of on-time payments and written court approval. Lenders add their own overlays on top, so check the recent changes to FHA loan requirements before assuming an older answer applies.

How many FHA loans can I have at one time?

Usually one, because FHA loans are for primary residences. HUD allows narrow exceptions. A relocation beyond commuting distance, a documented increase in family size, or vacating a jointly owned home a co-borrower will keep occupying. If you need a second property and don’t fit an exception, a conventional or portfolio loan through our lender network is typically the path.

The bottom line on FHA loans

An FHA loan buys the widest credit door in mainstream lending. 3.5% down at a 580 score, or 10% down between 500 and 579, and charges for it with 1.75% upfront mortgage insurance plus roughly 0.50% – 0.55% a year that doesn’t cancel on most files. That’s a good trade when your credit is the obstacle and a poor one when it isn’t. With stronger credit, a conventional loan with cancellable PMI usually costs less over the years you’ll hold it.

If you’re ready to see whether FHA or conventional actually costs you less, talk to Align Lending, we’ll shop both across our lender network and show you the numbers side by side. Call 248-506-5727 or get started online today.

Footnotes:

1. Example figures 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 rate and terms will depend on your application and market conditions. Back
2. Align Lending works with VA-approved lenders and is not endorsed or sponsored by the Department of Veterans Affairs or any government agency. Back
3. Align Lending is not acting on behalf of or at the direction of FHA or HUD. Back

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Consult a qualified professional about your situation. Program terms, credit score minimums, premium rates and loan limits shown are illustrative, are not a rate quote or an offer of credit, and are subject to lender overlays and change. Align Lending works with FHA- and VA-approved lenders and is not acting on behalf of, endorsed by, or sponsored by FHA, HUD, the Department of Veterans Affairs, or USDA.