FHA Loans: Lower Credit Score, Lower Down Payment
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, designed to make homeownership accessible to borrowers with lower credit scores or smaller down payments than conventional financing typically allows. FHA itself doesn't lend the money — approved private lenders do, with FHA insuring the loan against default.
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FHA Loan Basics
| Feature | Detail |
|---|
| Down Payment | 3.5% with a 580+ credit score; 10% with a 500-579 score |
| Loan Terms | 15 or 30 years, fixed rate |
| Down Payment Source | Savings, gift funds, or an approved grant program |
| 2026 Maricopa County Loan Limit | $530,150 |
The Trade-Off: Mortgage Insurance Premium (MIP)
FHA's flexible qualifying comes with a cost: mandatory mortgage insurance, paid in two parts:
| MIP Type | Rate | How It's Paid |
|---|
| Upfront MIP | 1.75% of the base loan amount | Paid at closing, or financed into the loan balance |
| Annual MIP | Roughly 0.45%-1.05%, depending on loan term, amount, and LTV (average around 0.85%) | Divided into 12 payments, included in your monthly mortgage payment |
Example: $350,000 FHA Loan Upfront MIP: 1.75% × $350,000 = $6,125 (financed into the loan or paid at closing)
Annual MIP at 0.85%: $350,000 × 0.85% = $2,975/year, or about $248/month
⚠️ The MIP Rule Most Borrowers Get Wrong: Annual MIP only cancels after 11 years if your original down payment was 10% or more. If you put down the standard 3.5%, your MIP runs for the life of the loan — it does not automatically go away at 78% or 80% equity like conventional PMI does. The only way to remove it in that case is to refinance into a conventional loan once you have enough equity.
FHA Closing Costs
FHA lenders typically charge closing costs of 3-5% of the loan amount for loan origination. FHA also allows sellers, builders, or lenders to contribute up to 6% toward the buyer's closing costs — covering items like appraisal fees, credit reports, and title search — which can meaningfully reduce your cash needed at closing.
FHA vs. Conventional: Which Costs Less Long-Term?
| Factor | FHA | Conventional |
|---|
| Minimum Down Payment | 3.5% (580+ score) | 3% (qualified first-time buyers) |
| Minimum Credit Score | 500 (10% down) or 580 (3.5% down) | 620 |
| Mortgage Insurance Duration | Life of loan if under 10% down | Cancels at 78-80% LTV |
Why This Matters Long-Term: FHA's easier qualifying is valuable upfront, but the life-of-loan MIP (for most 3.5%-down borrowers) can add up significantly over time compared to conventional PMI, which eventually cancels. Many FHA borrowers plan to refinance into a conventional loan once their credit improves and they've built equity — worth discussing as part of your overall strategy, not just your initial approval.
Frequently Asked Questions
What credit score do I need for an FHA loan? A 580 credit score qualifies for the minimum 3.5% down payment. Scores between 500-579 are still eligible, but require a 10% down payment instead.
Does FHA mortgage insurance ever go away? It depends on your down payment. If you put down 10% or more, annual MIP cancels after 11 years. If you put down less than 10% (the common 3.5% scenario), MIP lasts for the life of the loan unless you refinance into a conventional mortgage.
Can someone else help with my FHA down payment? Yes. FHA allows down payment funds to come from your own savings, a gift from a family member or other qualified donor, or an approved down payment assistance grant program.
How much are FHA closing costs? Typically 3-5% of the loan amount. FHA also permits sellers, builders, or lenders to contribute up to 6% toward your closing costs, which can significantly reduce what you need in cash at closing.
Wondering If FHA Is Right for You?
Let's look at your credit score, down payment savings, and long-term plans to see if FHA — or another program — is the better fit.
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