What is an FHA loan?
An FHA loan is a home loan insured through the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). The loan is made by an FHA-approved lender and follows FHA guidelines for borrower qualification, property eligibility, occupancy, and mortgage insurance.
Not just for first-time buyers
FHA financing is not limited to first-time homebuyers. However, if you already own a home—especially one financed with FHA—additional occupancy and eligibility rules can apply when purchasing another property with FHA financing. The new home generally must become your primary residence, and certain exceptions may be required if you already have an FHA-insured mortgage.
Mortgage insurance matters
Standard FHA forward mortgages include an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP), which is generally paid as part of the monthly mortgage payment. Conventional financing does not have an upfront mortgage insurance premium, and conventional PMI—when required—is structured differently. That’s why FHA and Conventional should be compared using the full payment and cash to close, not just the note rate.
Property and occupancy
FHA financing is for a primary residence, not a second-home or investment-property purchase. Occupying borrowers must intend to use the property as their principal residence. FHA can allow a specifically designated non-occupant co-borrower in certain situations, but that borrower is treated differently for qualifying and occupancy purposes. FHA also has property-condition and appraisal requirements that can affect the transaction.
What I compare with borrowers
- Property type and primary-residence occupancy
- Borrower income, credit, debt-to-income ratio, and overall qualifications
- FHA versus Conventional or other available options, when applicable
- Interest rate and overall pricing
- FHA mortgage insurance versus conventional PMI, when Conventional financing is a viable alternative
- Monthly payment
- Cash needed to close
- Property condition and FHA appraisal requirements
- Long-term loan structure and whether another option may make more sense
FHA Streamline Refinance
Homeowners with an existing FHA loan may be eligible for an FHA Streamline Refinance. The program is designed to simplify the refinance process by reducing certain documentation and underwriting requirements, while still requiring the new loan to provide an eligible financial benefit to the borrower. It can be an especially useful option when market rates improve after an FHA purchase.
“Streamline” refers to the underwriting and documentation process—it does not mean the refinance has no costs or that every FHA borrower automatically qualifies. Depending on the rate and how the transaction is structured, a Streamline Refinance may be completed with reduced out-of-pocket closing costs, including through lender credits or premium pricing when available. The full rate, payment, costs, and loan structure should still be compared before proceeding.
There is also a seasoning requirement. Generally, the borrower must have made at least six payments on the existing FHA loan, at least six full months must have passed since the first payment due date, and at least 210 days must have passed since the original FHA loan closed.
Common Questions
Can I buy a home with 3.5% down using FHA?
Yes. FHA financing can allow an eligible borrower to purchase with as little as 3.5% down. The borrower still has to meet FHA and lender qualification requirements, and the actual amount needed at closing can include closing costs and prepaid expenses in addition to the down payment.
Can I use gift funds with an FHA loan?
Yes. FHA allows eligible gift funds to be used toward the down payment and/or closing costs. The gift must come from an acceptable source, cannot require repayment, and the source and transfer of the funds must be properly documented. Because the transfer has to be documented correctly, borrowers should not move gift funds until directed by their loan officer or loan team.
Can down payment assistance be used with FHA financing?
Yes. FHA financing can be combined with eligible down payment assistance programs that may help with the down payment and/or closing costs. The assistance program has its own eligibility, repayment, income, property, and other requirements, so both the FHA loan and the assistance program have to work together.
How long does FHA mortgage insurance stay on the loan?
It depends on the original loan-to-value (LTV), which compares the loan amount to the property value when the loan is made. With a typical FHA purchase using 3.5% down, the loan starts at 96.5% LTV, and the annual mortgage insurance premium (MIP) generally remains for the life of the FHA loan. If the original LTV is 90% or less—which generally means putting at least 10% down—annual MIP is generally required for 11 years. Refinancing into another loan later may be an option for removing FHA mortgage insurance, depending on the homeowner’s circumstances and qualification at that time.
Can FHA financing be used for a 2–4 unit property?
Yes. FHA financing can be used to purchase eligible 2-, 3-, and 4-unit residential properties, as long as the borrower occupies one of the units as their primary residence. Two-unit properties generally follow the standard FHA qualification requirements for multi-unit homes, while 3- and 4-unit properties are also subject to an additional FHA self-sufficiency test.