What an FHA Loan Actually Costs You — and What It Saves

FHA loans let you buy a home with a down payment as low as 3.5 percent, but you pay mortgage insurance for the life of the loan, and you cannot borrow above the limit your county sets.

An FHA loan trades a lower barrier to entry for higher long-term costs and stricter rules about the property itself. The real question is not whether FHA is "good" or "bad" — it is whether the trade-off makes sense for your situation right now, and whether you have other options available to you.

The math looks different depending on how much you have saved, what your credit score is, what interest rates are doing, and how long you plan to stay in the home. This guide walks through what you actually pay, what you cannot do, and the specific moments where FHA stops working for you.

Key Takeaways

• FHA requires a down payment of 3.5 percent minimum, but adds mortgage insurance (called MIP) that you pay every month for the entire loan, even after you build equity.
• Your county has a maximum loan amount — in rural areas it may be $472,000, in expensive cities it can exceed $1 million — and you cannot borrow above that ceiling regardless of the home's price.
• The property must pass an FHA appraisal, which is stricter than a standard appraisal and can kill a deal if the inspector finds safety or structural issues.
• If you put down less than 10 percent, you pay mortgage insurance for the full 30 years; if you put down 10 percent or more, insurance drops off after 11 years.
• You need a credit score of at least 580 to may have access to, but lenders often require 620 or higher, and your debt-to-income ratio cannot exceed 50 percent.

The mortgage insurance you pay every month, and why it does not go away

Mortgage insurance protects the lender if you stop paying. With an FHA loan, this insurance is called Mortgage Insurance Premium (MIP), and it comes in two pieces: an upfront payment and a monthly payment.

The upfront MIP is typically 1.75 percent of your loan amount. On a $200,000 loan, that is $3,500, and it gets rolled into your monthly payment — you do not pay it out of pocket at closing. The monthly MIP varies based on your loan amount and how much you put down, but it usually runs between 0.55 and 0.80 percent of your loan amount per year, divided into 12 payments.

Here is the critical part: if you put down less than 10 percent, you pay MIP for the entire 30-year loan. If you put down 10 percent or more, MIP drops off after 11 years. This means a buyer with a 3.5 percent down payment will pay insurance for 360 months straight, even after they have paid down half the principal. A conventional loan, by contrast, drops private mortgage insurance (PMI) once you reach 20 percent equity.

The monthly cost adds up. On a $200,000 FHA loan with 3.5 percent down, MIP might add $150 to $200 to your monthly payment. Over 30 years, that is $54,000 to $72,000 in insurance alone — money that does not go toward owning the home.

Loan limits that vary by county and can block you from buying what you want

Every county in the United States has an FHA loan limit. The limit is set by the Federal Housing Finance Agency and changes each year. In 2024, limits range from around $472,000 in rural counties to over $1 million in high-cost areas like San Francisco and New York City.

If the home you want to buy costs more than your county's limit, you cannot use an FHA loan, period. You would need a conventional loan instead, which means a larger down payment (usually 5 to 20 percent) and different insurance rules. Some lenders offer "jumbo" FHA loans above the standard limit, but these are rare and come with higher rates.

The limit also affects how much house you can afford. If your county limit is $400,000 and you have saved $14,000 (3.5 percent down), you can borrow up to $400,000 but not a dollar more. A conventional loan might let you borrow $420,000 with the same down payment, because there is no ceiling — only the lender's own rules about how much they will lend you.

The FHA appraisal is stricter and can kill a deal

An FHA appraisal does two things: it estimates the home's value (like any appraisal), and it inspects for safety and structural problems. The second part is where FHA differs from conventional loans.

An FHA appraiser will reject a home if it has:

• Significant structural damage, foundation cracks, or roof problems
• Lead paint (in homes built before 1978) that has not been professionally remediated
• Mold, water damage, or evidence of pest infestation
• Broken windows, missing doors, or utilities that do not work
• Unsafe electrical or plumbing systems

If the appraiser flags problems, the seller must fix them before closing, or the deal falls apart. This is different from a conventional appraisal, where the lender cares only about value — the buyer can choose to accept the risk and buy anyway. With FHA, you do not have that choice.

In a competitive market, sellers often reject FHA offers because they know the appraisal might require expensive repairs. A home that passes a conventional appraisal might fail an FHA one, leaving you without a loan and without the house.

Lower credit score requirements, but lenders often set their own bar higher

FHA officially allows borrowers with a credit score as low as 580. Conventional loans typically require 620 or higher. This makes FHA an option for people rebuilding credit or those who have had past financial trouble.

However, individual lenders can set their own minimum. Many FHA lenders require 620, 640, or even 660. A score of 600 might may have access to you for an FHA loan in theory, but you may find only a handful of lenders willing to work with you, and they will charge a higher interest rate to offset the risk.

Your debt-to-income ratio (DTI) also matters. FHA allows a DTI up to 50 percent, meaning your total monthly debt payments (mortgage, car loans, credit cards, student loans) can be up to half your gross monthly income. Conventional loans typically cap DTI at 43 percent. If you have high existing debt, FHA gives you more room, but lenders often impose their own 43 percent limit anyway.

When FHA makes sense and when it does not

FHA works best when you have saved 3.5 to 10 percent and cannot save more, your credit is below 620, or you are buying in a lower-cost market where the loan limit is not a constraint. If you plan to stay in the home for at least seven years, the lifetime MIP cost becomes more acceptable because you are spreading it over a longer period.

FHA does not work when you are buying above your county's limit, when you have saved 15 percent or more (a conventional loan would be cheaper), or when you are buying a fixer-upper that might fail the FHA appraisal. It also does not work if you plan to sell or refinance within five years — the upfront MIP and years of monthly insurance mean you will owe more than the home is worth for a long time.

If you have the option to wait and save more, waiting often beats taking an FHA loan. Every additional percentage point of down payment reduces your MIP and your monthly payment. Saving an extra $10,000 to move from 3.5 percent to 8 percent down can save you $100 per month or more.

How FHA compares to conventional loans and other options

Feature	FHA Loan	Conventional Loan	VA Loan (if may be able to access)
Minimum down payment	3.5%	3% to 5% (varies by lender)	0% (no down payment)
Mortgage insurance	MIP for life (if <10% down) or 11 years (if 10%+ down)	PMI until 20% equity, then drops	Funding fee instead of insurance; no monthly insurance
Minimum credit score	580 (lenders often require 620+)	620 to 680 (varies by lender)	No minimum; lenders set their own
Loan limit	County-specific ceiling	No federal ceiling	County-specific ceiling
Property appraisal	Stricter; must pass safety inspection	Value-focused; no safety requirement	Value-focused; no safety requirement
Interest rate	Usually 0.5% to 1% higher than conventional	Baseline rate	Often lower than conventional

If you are may be able to access for a VA loan (you are a veteran, active-duty service member, or surviving spouse), that is almost always better than FHA. You put down zero, pay a one-time funding fee instead of monthly insurance, and have no loan limit in most cases.

If you have saved 10 percent or more, a conventional loan usually costs less over time because PMI drops off once you hit 20 percent equity. The higher interest rate on FHA (typically 0.5 to 1 percent more) plus lifetime MIP adds up to thousands in extra cost.

Frequently Asked Questions

Can I refinance out of an FHA loan later to avoid paying MIP forever?

Yes, but only if your home has gained enough value or you have paid down enough principal to reach 20 percent equity. If you bought with 3.5 percent down and the market has not moved, you will owe more than the home is worth and cannot refinance. Refinancing also costs money (closing costs, appraisal, title search), so you need to stay in the home long enough for the savings to justify the expense.

What happens if the FHA appraisal finds problems?

The seller must fix the issues before closing, or you can renegotiate the price down to cover the cost of repairs. If the seller refuses and you walk away, you lose your earnest money deposit unless your offer included an appraisal contingency. Always include one.

Can I use an FHA loan to buy a condo or townhouse?

Yes, but the condo complex or townhouse community must be FHA-approved. The building has to meet certain standards, and the homeowners association cannot have too many units in foreclosure. Ask your lender to check before you make an offer.

Do I have to pay the upfront mortgage insurance at closing?

No. The upfront MIP (usually 1.75 percent of the loan) is rolled into your loan amount, so you pay it over 30 years as part of your monthly payment. Some lenders let you pay it upfront if you want to reduce your monthly payment, but most borrowers do not.

What if my debt-to-income ratio is above 50 percent?

You do not may have access to for an FHA loan. You would need to pay down debt or increase your income before applying. Some lenders will go above 50 percent in rare cases (if you have significant savings or a co-borrower), but this is uncommon and comes with a higher interest rate.