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 if you don't have a large down payment. With an FHA-backed mortgage, you only need a 3.5% down payment, and your credit score doesn't need to be perfect. 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.
Best for: Online application process
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Led the transition to online-only applications, and that seamless process is one reason why it has become the largest U.S. lender. Consistent No. 1 J.D. Power customer service rankings and its high-quality app make it hard to ignore.
Best for: Diverse loan terms and products
CitiMortgage
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The diverse set of loan products and terms and relationship discounts make it a top pick, particularly for first-time homebuyers and people interested in FHA loans. The high customer satisfaction ratings are the cherry on top.
Best for: Diverse loan terms and products
Bank of America Mortgage
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Few lenders can match the lineup of loan products and terms, and the interest rate and fee discounts for Preferred Rewards members define what relationship banking should look like.
Best for: Diverse loan terms and products
PNC Bank Mortgage
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Diverse loan products and terms mean PNC can accommodate many borrowers, including those looking for mortgage options with no PMI.
Best for: Diverse loan terms and products
Chase Mortgage
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The wide array of loan types and low- to no-down-payment options makes it a compelling lender to consider for a purchase or refi.
Best for: Low rate guarantee
PennyMac Mortgage
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We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor.
Bottom Line
By offering rate transparency, online only help, flexible loan terms, and a rate guaranteed to beat competitors, PennyMac is a great place for people to start looking for a mortgage.
What is an FHA loan?
An FHA loan is a type of mortgage insured by the Federal Housing Administration, or FHA. Even if you have low credit, can't afford a large down payment, or can't qualify for a conventional mortgage, you might qualify for an FHA loan. Because FHA mortgages are guaranteed by the government, they don't have the same strict credit or down payment requirements as conventional mortgages.
There are two common types of FHA mortgage loans to know about before starting your search for the best FHA lenders:
- 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. In a nutshell, an FHA 203(k) loan allows buyers to take out a single loan with the FHA's low down payment and credit score requirements. It can be used to finance both the home purchase and repair costs.
If you're a first-time home buyer, you've probably heard of FHA loans already. But they're also open to people who have previously purchased homes. The best lenders for FHA loans offer low rates and are transparent with borrowers about costs and fees.
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 or investment property.
Learn more: FHA vs. Conventional Loan
How do FHA loans work?
An FHA mortgage is a private home loan insured by the government. People who don't qualify for conventional mortgages can often qualify for FHA home loans. Because the loan amount is backed by the FHA, lenders are more willing to take on high-risk borrowers.
What types of properties can you purchase with an FHA loan?
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.
Are there extra costs with an FHA loan?
As mentioned above, FHA loans are guaranteed by the FHA. It's important to know that this guarantee doesn't come for free. Borrowers are required to purchase FHA mortgage insurance. That involves both an upfront cost and an ongoing mortgage insurance premium. The best lenders for FHA loans walk you through these fees to make sure you understand what you're paying for.
The upfront FHA mortgage insurance premium is currently 1.75% of the loan amount. For example, let's say you buy a $300,000 home and put 3.5% down (more on the down payment in the next section). Your base loan amount is $289,500. This loan amount results in an upfront mortgage insurance premium of $5,066.25. That amount has to be paid at closing or rolled into the loan.
The ongoing FHA mortgage insurance premium depends on the loan length, amount, and down payment. For 15-year FHA loans, it ranges from 0.45% to 0.95% per year. For 30-year FHA loans, it's in the 0.80% to 1.05% range. And in most cases, the FHA mortgage insurance premium must be paid for the entire term of the loan. This is different from private mortgage insurance (PMI) on conventional loans -- PMI can be canceled when the loan-to-value ratio drops below 80%.
FHA loan requirements
To qualify for an FHA loan, you need to meet a few requirements. These requirements usually include:
- Down payment of at least 3.5%
- Credit score of at least 500
- Not too much debt
- Two years of steady employment
- Safe, livable property
Let's take a look at each of those.
Down payment
You need 3.5% of the purchase price as a down payment to qualify for an FHA mortgage loan. If your credit score is especially low, you may need to put more down. This means that for every $100,000 you plan to spend on a home, you should have $3,500 to put toward a down payment.
In addition to the down payment, FHA loans have closing costs. These 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 -- even with the best FHA loan lenders.
Here are three ways to save money on your FHA loan:
- All or part of your down payment can come from a down payment gift. The down payment doesn't necessarily need to be your money.
- You can roll many of the closing costs of an FHA loan into the loan itself.
- 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.
Credit score
The minimum credit score to qualify for an FHA loan is 500. That's if you can afford a down payment of 10% or more. If your down payment is less than 10% of the purchase price, you need a minimum credit score of 580.
FHA loans are designed to provide mortgage loans for borrowers with bad credit. So either way, the credit score requirements are lower than those of conventional mortgages. The requirement for conventional loans typically starts at a minimum credit score of 620.
It's important to know that you have a different FICO® Score from each of the three major credit bureaus (Equifax, Experian, and TransUnion). The best lenders for FHA loans check all three bureaus. Typically, your middle score is used to determine whether you qualify.
Debts and income
I've grouped debts and income into one category because lenders look at these two things together.
If you earn a high salary, but have tons of credit card and other debts, you might not be able to afford a mortgage payment. And if you earn a relatively modest salary but are otherwise debt free, you could be in a strong position to take on a new mortgage. The metric quantifying your debt is known as the debt-to-income ratio, or DTI.
The best lenders for FHA loans typically look at two numbers here. Your "front-end DTI" is your proposed mortgage payment as a percentage of your total pre-tax income. Your "back-end DTI" is your proposed mortgage payment plus all of your other monthly debt obligations as a percentage of your total pre-tax income.
The back-end DTI is what most lenders focus on. Many of the best FHA loan lenders look for a back-end DTI of 43% or less. This means if your pre-tax income is $5,000 per month, your total monthly debt obligations (including the new mortgage payment) should be no more than $2,150.
Lenders may have different DTI requirements. Some FHA lenders make loans to borrowers with DTI ratios as high as 50%, and in some cases FHA lenders accept borrowers with a DTI as high as 57%. But it's fair to expect most to be a bit more conservative.
Employment history
FHA lenders typically want to see at least two years of steady employment in the same field. That doesn't necessarily mean you need to be at the same job for two years -- just the same field. And there's an exception if you were in school for some of the time. For example, if you graduated from college one year ago 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 are designed for homes you're going to live in. Before an FHA loan can be finalized, the property must meet standards for safety, security, and soundness. Your new home needs to be approved by an FHA appraiser.
While there are some specific requirements, the general idea is that the property shouldn't be hazardous to its occupants. Your new home should already be a secure place to live, and should be free of structural issues or major problems.
That's not to say that you can't do renovations or repairs before you move in. As I mentioned earlier, there's a type of FHA mortgage loan specifically for that. However, the property needs to meet certain minimum standards.
TIP
How much will my monthly mortgage payment be?
Use our mortgage calculator to help you estimate your monthly mortgage payments using various loan terms, insurances, and taxes.
Is there an income limit for FHA loans?
No, there are no income restrictions in obtaining an FHA loan. But there are maximum loan amounts -- FHA mortgage loans are not meant to purchase luxury homes.
In 2022, the standard FHA loan limit for a one-unit property is $420,680 for most U.S. housing markets. This figure is set at 65% of the national limit for conforming mortgages each year.
In certain high-cost markets, the FHA loan limit is higher. The one-unit loan limit in some areas in the continental U.S. can be as high as $970,800. That limit is even higher in Alaska and Hawaii.
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 2022.
| Number of Housing Units | Base FHA Loan Limit | High-Cost FHA Loan Limit | Alaska, Hawaii, Guam, U.S. Virgin Islands FHA Loan Limit |
|---|---|---|---|
| 1 | $420,680 | $970,800 | $1,456,200 |
| 2 | $538,650 | $1,243,050 | $1,864,575 |
| 3 | $651,050 | $1,502,475 | $2,253,700 |
| 4 | $809,150 | $1,867,275 | $2,800,900 |
Data source: HUD.
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 search tool.
How to choose the best FHA lender
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 lender 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 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 5% 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 lenders with large mortgage operations offer FHA loans, especially mortgage lenders for bad credit. Our picks for the best FHA lenders (at the top of this page) are a good place to start.
It pays to shop around
Comparing interest rates from different lenders is the best way to get the most competitive rate. Check out today's FHA mortgage rates to get started!
Is an FHA loan right for me?
If you're looking to get a mortgage with bad credit or without a large down payment, an FHA loan could be a smart option. But if you have stellar credit or 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. And even if you don't have such a large down payment, high-credit borrowers can 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.
Do all lenders work with FHA loans?
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.
Pros and cons of FHA loans
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.
Pros:
- Lower credit score requirements
- Lower down payment requirements
- Available to first-time home buyers and repeat buyers alike
- Can buy a multi-unit property as long as you occupy one unit
- No income maximums
Cons:
- Upfront and ongoing mortgage insurance premiums
- Can't borrow for a vacation home or investment property you rent out completely
- Must stick to the annual loan limits
| Lender | Rating | Best For |
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Best For: Online application process | |
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Best For: Diverse loan terms and products | |
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Best For: Diverse loan terms and products | |
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Best For: Low rate guarantee |
FAQs
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An FHA loan is a type of mortgage loan that is designed for buyers who don't have strong credit histories or don't have a large down payment. FHA loans are made by private mortgage lenders, such as banks, credit unions, and specialized mortgage lenders, and are guaranteed by the Federal Housing Administration.
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Yes, but they don't require private mortgage insurance (PMI). Instead, the FHA acts as the loan insurance. There are still fees associated with the FHA's guarantee.
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Yes, the minimum FICO credit score required for an FHA loan is 580 with a down payment between 3.5% and 10%, and is just 500 if the borrower's down payment is 10% or more.
About the Author
Maurie Backman is a personal finance writer who covers topics ranging from Social Security to credit cards to mortgages to REITs. She also has an editing background and appears on live podcasts to talk about financial matters.
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