More home buyers are turning to FHA mortgages, which have more lenient eligibility requirements than conventional loans. Real estate agents who learn the ins and outs of this type of financing can help ensure a smooth transaction.
Federal Housing Administration loans are designed to help Americans who are struggling to afford a home. These government-backed mortgages have more lenient requirements for borrowers, like lower credit score and down payment thresholds for approval, which could make a big difference.
FHA loans made up about 15% of the purchase mortgage market in September, according to the Mortgage Bankers Association, as more Americans seek affordable mortgages amid higher home prices and borrowing costs. FHA loans, which often help low- to moderate-income buyers and first-time buyers, have insured tens of millions of properties since 1934.
“FHA loans are a big part of my toolbox when working with buyers, especially first-timers or those who might not have a hefty down payment saved up,” says real estate pro Clint Jordan, founder of the Mil-Estate Network and The Jordan Group in Colorado Springs, Colo. “These loans can make homeownership accessible for more people given their lower down payment requirements and more lenient credit criteria.”
Nicholas Barta, division president and loan originator for Security First Financial in Englewood, Colo., has noticed an uptick in FHA loans. Barta processes some of the highest volume of FHA loan originations in the country.
“I believe [the increase] is due to the higher interest rates and the lack of savings,” Barta says, adding that FHA loans provide for down payment requirements as low as 3.5% down payment and more flexibility when it comes to credit and debt-to-income ratios. “We are also seeing more people utilize down payment assistance than ever before. Many buyers just don’t have the savings to do traditional down payments in this economy.”
Barta hopes more real estate professionals learn how FHA loans work and understand FHA loan requirements so potential home buyers can benefit from their agent’s knowledge. “There are a lot of misconceptions about FHA loans and how hard they are to complete,” says Barta. “Real estate professionals should find a good lender in their area who is well-versed in FHA and get educated.”
Knowing how to work with FHA buyers also can give you a competitive advantage when courting new clients Learn more about FHA home loans, including which home buyers may benefit the most from them and how these loans can impact real estate negotiations and home purchase agreements.
Debunking 6 FHA Loan Myths
1. Only buyers with bad credit can apply for FHA loans.
While home buyers with credit scores as low as 500 can apply for an FHA loan, borrowers who are faring better also may apply. The average credit score for FHA borrowers is 683, and 80% of FHA borrowers have a credit score of 600 or higher, according to 2024 data from Ellie Mae .
2. FHA loans are only for first-time home buyers.
First-time home buyers and low- to moderate-income households often use FHA loans, but repeat buyers who are trading up also can use them.
3. FHA loans come with higher interest rates.
FHA loans offer competitive interest rates—sometimes even better than conventional financing. Borrowers with high credit scores or high down payments may qualify for some of the best rates. Borrowers may want to explore both conventional and FHA loan options to find the best mortgage rate.
4. FHA loans take longer to close than conventional financing.
FHA and conventional loans have similar closing timelines, averaging 47 days, according to 2024 data from Value Penguin, a personal finance resource.
5. FHA loans can only be used for purchasing a single-family home.
An FHA loan can be used to purchase a single-family house, townhome, manufactured home or HUD-approved condo. Borrowers also can use an FHA loan to purchase a multifamily property with up to four units (including a duplex, triplex, apartment building, etc.), but one of the units must be used as a primary residence.
6. FHA loans have borrower income limits.
FHA loans do not have any minimum or maximum income limits. That means even high-earning households can apply.
Understanding FHA Loan Requirements
FHA government-backed loans are different from conventional mortgages, which are issued by private lenders and more commonly used by consumers. But conventional mortgages typically have stricter eligibility requirements. One of the main draws to FHA loans is its more lenient requirements for buyers who have less money saved up for their home purchase. FHA borrowers may be eligible for a 3.5% down payment if they have a credit score of 580 or higher; borrowers with a credit score between 500 and 579 may need a 10% down payment.
How to Qualify for an FHA Loan
Credit score: at least 500
Down payment: 3.5% (for credit scores 580 or higher); 10% (for credit scores between 500 to 579)
Debt-to-income ratio: < 43%
Only can be used for a primary residence
Properties must meet FHA’s “minimum property standards”
Borrower must show proof of employment and steady income
Mortgage balance must meet FHA loan limits
What are FHA loan limits?
This is the maximum loan amount that FHA lenders will approve for a home purchase. FHA loan limits can vary geographically and are updated annually to reflect any changes in the real estate marketplace. In 2024, the FHA loan limit for most parts of the country was $498,257 for a single-family home. Find the latest FHA loan limits in your area at HUD.gov.
One main difference with FHA loans compared to other financing is that FHA requires the property to meet minimum standards set by the Department of Housing and Urban Development. These standards help ensure buyers avoid purchasing a home with safety hazards and reduces lenders’ risks.
HUD requires that each property insured with an FHA mortgage be evaluated by an appraiser for safety, security and structural soundness. The appraiser will check whether the electrical system complies with building codes; the water supply is sanitary; utilities are in good condition (sewer, gas, etc.); proper ventilation exists in the attic and basement; and pests are present. FHA also has requirements for the home’s exterior, including direct street access, proper water drainage and a structurally sound roof. HUD offers a detailed list of its minimum property requirements at HUD.gov.
The lender will then determine from the appraiser’s report whether repairs need to be addressed prior to finalizing the loan.
FHA Loan Requirements and Repair Negotiations
If the appraiser identifies issues that don’t meet FHA’s “minimum property standards,” the buyer’s agent likely will need to negotiate repair credits or fixes on the buyer’s behalf. FHA generally requires repairs to be made prior to closing; in some cases, funds can be placed in an escrow account if repairs are delayed. If a seller does not agree to repairs, the lender will not approve the FHA loan.
“Most of the time, the repairs are minor, and the seller will do the repairs without any additional credits,” Barta says. “Chipping paint is probably the one we see the most. There are those times when everyone is aware that a major repair needs to be completed. If the roof needs to be replaced or a sewer line repaired, those are things that should be negotiated and addressed in the sales contract.”
But that doesn’t have to be a dealbreaker: Regardless of whether the purchase is being financed by FHA, major issues still often need to be addressed in a home sale, Jordan adds. “Communication with the listing agent, ensuring the buyer’s financials are solid and, perhaps, being flexible with closing timelines [can help FHA] offers stand just as strong as those backed by conventional loans,” he says.
Strategies for Negotiating Seller Concessions With FHA Loan Requirements
FHA allows seller concessions of up to 6% on a home’s purchase price or appraised value, whichever is lower. “This is one of the highest allowed compared to other loan programs,” Barta says. This often becomes a negotiation point in real estate transactions. The buyer’s agent may negotiate that the seller cover some of the buyer’s closing costs, like loan origination fees, appraisal fees and title search fees as well as real estate taxes, homeowners association fees and inspection fees. In addition, “I see buyers using seller concessions to do temporary or permanent rate buydowns, cover the rest of their closing costs and even pay for the buyer’s agent commission,” Barta says.
Example of seller concessions: Seller concessions are expressed as a percentage of a home’s purchase price or a fixed dollar amount. So, say a home buyer wants to purchase a $300,000 home with an FHA loan. The agent may negotiate with the seller to provide concessions of 3%, meaning that seller would contribute $9,000 toward the buyer’s closing costs or other relevant expenses. This can help bring the buyer’s costs down and may even mean the difference for them in being able to move forward in a transaction.
“Negotiating seller concessions effectively comes down to understanding the market and your seller’s position,” Jordan says. “These concessions can significantly reduce the cash buyers need to bring to the table, making the property more affordable. The key is to communicate clearly how these concessions can expedite the sale while also easing the financial burden on the buyer.”