FHA is the program for buyers with a smaller down payment (3.5%), a credit history that isn’t perfect, or a debt-to-income ratio that’s a little high for conventional. The trade-off is mortgage insurance, and it’s worth understanding exactly how that works before you choose FHA over a low-down-payment conventional loan. Sometimes FHA wins. Sometimes it doesn’t. I’ll show you both.
The two pieces of FHA mortgage insurance
FHA loans have two pieces of mortgage insurance. It’s what allows FHA to offer a low down payment and more flexible credit guidelines.
Upfront premium. This is a one-time charge of 1.75% of the loan amount. Almost everyone adds it to the loan rather than paying it at closing, so it doesn’t come out of your pocket.
Monthly premium. This is built into your monthly payment. For most buyers with 3.5% down, it’s 0.55% of the loan per year, divided into 12 payments.
Some ball park numbers on a $400,000 purchase with 3.5% down:
- Base loan: $386,000
- Upfront premium: $6,755 (386,000 x 1.75%), added to the loan for a total of $392,755
- Monthly premium: about $177 (386,000 x 0.55% / 12)
When it goes away
| Down payment | Monthly premium lasts |
|---|---|
| Less than 10% | Life of the loan |
| 10% or more | 11 years |
With less than 10% down, the way it goes away is by refinancing into a conventional loan once you’ve built enough equity. That’s a very common path, and something we can keep an eye on together. I’ve done it for plenty of clients: 3.5% down on FHA, then a refinance a couple of years later once the equity was there.
FHA versus 3% down conventional
Conventional programs like Home Ready and Home Possible allow as little as 3% down, and their mortgage insurance drops off at 20% equity without a refinance. If your credit is strong, one of those often beats FHA. If your credit is bruised or your ratios are tight, FHA’s flexibility is the reason it exists. This is exactly the kind of side-by-side I put in front of you.
Duplexes and small multi-family
FHA is one of the few ways to buy a two- to four-unit property with a small down payment, as long as you live in one unit. On multi-family, FHA is pretty good and the rates are often better than the conventional alternative.
FHA refinances
If you already have an FHA loan, the FHA streamline can lower your rate with minimal paperwork. But if you have enough equity, moving to a conventional loan to eliminate the monthly mortgage insurance is usually the bigger win. I’ll run both.