FHA Loans Explained: Down Payment, Mortgage Insurance and Who Should Use One

FHA loans are insured by the Federal Housing Administration, which lets lenders offer more flexible terms. They’re popular with first-time buyers, but they aren’t always the cheapest option. Here’s how to tell.

The basics

Feature	FHA rule
Minimum down payment	3.5% with a 580+ credit score
Upfront mortgage insurance	1.75% of the base loan, usually financed
Annual mortgage insurance	About 0.50% to 0.55% for most 30-year loans; higher on larger loans
How long annual MIP lasts	Life of the loan with under 10% down; 11 years with 10% or more
Occupancy	Must be your main home
Assumable	Yes, with lender approval

A worked example

Say you buy a $450,000 condo with 3.5% down, or $15,750. Your base loan is $434,250. The upfront premium adds $7,599, for a total loan of about $441,849. At an example rate of 6.5%, principal and interest is about $2,793. Annual MIP at 0.55% adds about $199 a month, before taxes, insurance and condo fees.

Add property taxes, homeowners or HO-6 insurance and the condo fee, and the full monthly cost is often well over $3,500. That’s why I always ask lenders to show the complete payment, not just principal and interest. FHA also counts the condo fee in your debt-to-income ratio, so a building with a high fee can lower how much you qualify for.

FHA vs. conventional

	FHA	Conventional (3% to 5% down)
Credit flexibility	More flexible	Best pricing with strong credit
Mortgage insurance	Upfront plus annual; often permanent	Monthly PMI; can be removed at 20% equity
Best for	Credit scores under about 680 or higher debt ratios	Strong credit

With a credit score in the mid 700s, a conventional loan is often cheaper over time because PMI can be removed. With lower scores, FHA pricing can win. Ask your lender to quote both.

Condos and FHA

To use FHA on a condo, the building usually must be on the FHA approved list, or qualify for a single-unit approval. Many Northern Virginia condo buildings aren’t approved, so I check this before you fall in love with a unit.

FHA 203(k) renovation loans

An FHA 203(k) loan lets you finance the purchase and the cost of repairs or upgrades in one mortgage. It can open up older homes that need work, which are common in parts of Arlington, Fairfax and Alexandria. The process takes longer, requires contractor bids and has extra oversight, so plan your timeline and find a lender who does these often.

Steps to get an FHA loan

1. Check your credit and pull your reports for errors.
2. Gather two years of income history, recent pay stubs and bank statements.
3. Get preapproved with a lender who quotes both FHA and conventional.
4. Confirm condo approval before making an offer on a condo.
5. Plan for the FHA appraisal, which also checks basic safety and condition.

Common mistakes

• Forgetting the exit plan. Since MIP often lasts for the life of the loan, many FHA buyers plan to refinance into a conventional loan once they have about 20% equity.
• Skipping the condo check. It can sink a deal late in the process.
• Assuming FHA is only for low incomes. There’s no income limit.

Also read 5 Down Payment Myths and PMI Explained.

FHA isn’t a second-class loan. It’s a tool. For the right buyer, it’s the difference between buying soon and waiting several more years, and a lot of happy Northern Virginia owners started with one.

Frequently asked questions

Can I use gift money for an FHA down payment?

Yes, with proper documentation. See Gift Funds for a Down Payment.

Are there FHA loan limits?

Yes, they’re set by county and updated each year. Northern Virginia has high-cost limits.

Can sellers help with closing costs?

Yes, FHA allows seller concessions of up to 6% of the price.