FHA-Insured Home Loans (FHA)

How It Works

The Federal Housing Administration, part of HUD, does not lend money to homebuyers. It insures mortgages made by approved private lenders. If a borrower defaults and the home goes to foreclosure, FHA pays the lender’s claim. That guarantee makes lenders willing to offer loans with low down payments and more flexible credit standards than many conventional mortgages.

The core program, Section 203(b), insures loans to buy or refinance homes with one to four units. A companion program, Section 203(k), insures loans that combine a purchase or refinance with the cost of rehabilitation.

Key features:

• Low down payment. The statute requires a cash investment of at least 3.5% of the appraised value. Under a 2010 FHA rule, that minimum applies to borrowers with credit scores of 580 or higher. Borrowers scoring 500 to 579 need at least 10% down.
• Mortgage insurance premiums. Borrowers pay an upfront premium, which can be added to the loan, and an annual premium paid monthly. The law caps these at 3% upfront and, for most loans, 1.5% a year, or 1.55% when the loan exceeds 95% of the home’s value. HUD sets the actual rates and has changed them over time. CRS reported in 2022 that the upfront premium had been 1.75% since April 2012.
• Loan limits. For a single-family home, the maximum loan is 115% of the area’s median home price. It cannot fall below 65% or rise above 150% of the national conforming loan limit set for Fannie Mae and Freddie Mac. Limits are higher for two- to four-unit homes.

Premiums flow into FHA’s Mutual Mortgage Insurance Fund, which pays claims. By law, the fund must keep a capital ratio of at least 2%.

Who It Serves

FHA has no income limit. Borrowers who meet its credit, income-documentation and debt standards can qualify, generally only for a home they will occupy as their principal residence. In practice, the program serves many first-time and moderate-income buyers, and many people buying a starter home. According to CRS, nearly 85% of FHA-insured purchase loans in fiscal year 2021 went to first-time homebuyers. That year, FHA insured about 1.4 million new purchase and refinance mortgages totaling $343 billion.

Because it accepts small down payments, FHA is often paired with state or local down payment assistance. A related HUD homeownership program is Good Neighbor Next Door.

How to Access It

Borrowers apply to any FHA-approved lender. The lender orders an FHA appraisal, checks the borrower’s finances, and submits the loan for insurance. Federal law requires the lender to give each FHA applicant a one-page comparison of the FHA loan’s rate, premiums and fees with other mortgage products the borrower would qualify for.

History

The National Housing Act of 1934 created FHA during the Depression to revive mortgage lending. By insuring private lenders against losses, it helped standardize longer-term home mortgages. FHA also played a central part in redlining. A Federal Reserve History essay calls it “the architect of federally sponsored redlining from 1934 until the 1960s.” FHA staff treated loans as unsound if the property was in a neighborhood that had, or might gain, Black residents.

The 21st Century ROAD to Housing Act of July 2026 made several changes:

• It allows state-licensed appraisers, not just certified appraisers, to perform FHA appraisals, once HUD issues guidance that is due by March 2027.
• It requires lenders to give FHA applicants a comparison with VA loan terms, in addition to the comparison with conventional loans already required.
• It requires monthly reports to Congress on the insurance fund’s capital ratio.
• It allows HUD to set up a four-year FHA pilot program to expand access to small-dollar mortgages.

Limitations

• Mortgage insurance premiums raise the monthly cost compared with a conventional loan that has 20% down.
• Loan limits can fall short of prices in high-cost areas.
• Properties must meet FHA appraisal and condition standards, which can exclude homes needing major repairs unless a 203(k) loan is used.
• A low down payment means little equity at the start, so owners are more exposed if prices fall.