First-time homebuyers have spent the past two years watching mortgage rates hover near 7%, and many have quietly given up on the idea of buying anything at all.
But there's a corner of the mortgage market that keeps chugging along, and it's the one most buyers overlook: FHA loans.
Backed by the Federal Housing Administration, these loans let you put down as little as 3.5% with a credit score of 580.
Drop to a 500 score, and you can still qualify with 10% down.
That's a far cry from the 620-plus most conventional lenders demand.
First, you'll pay an upfront mortgage insurance premium of 1.75% of the loan amount, which gets rolled into your balance.
Second, there's an annual premium that runs between 0.45% and 1.05% depending on your down payment and loan term.
On a $350,000 home with 3.5% down, that upfront premium alone adds roughly $6,000 to what you owe.
The monthly insurance tacked on top can run $200 or more.
For many buyers, it's still cheaper than waiting another two years for rates to fall.
There's also a ceiling on how much you can borrow.
FHA loan limits vary by county, but for 2024 the floor sits at $498,257 for single-family homes, with a ceiling of $1,149,825 in high-cost areas like parts of California and New York.
If the home you want costs more, you're looking at a conventional jumbo loan instead.
The property itself has to pass an FHA appraisal, which is stricter than a standard one.
Peeling paint, a broken handrail, or a missing carbon monoxide detector can stall your closing.
Sellers sometimes balk at these repairs, which is why some buyers lose out in competitive markets.
Most lenders cap your total monthly debts at 43% of gross income, though some will stretch to 50% with compensating factors like cash reserves or a strong payment history.
Here's the part that trips people up: the annual mortgage insurance premium is permanent in most cases.
If you put down less than 10%, you'll pay it for the life of the loan.
Put down 10% or more, and it drops off after 11 years.
Conventional loans, by contrast, let you cancel PMI once you hit 20% equity.
That single detail changes the math significantly.
A buyer who plans to stay in a home for 15 years could pay tens of thousands more with an FHA loan than with a conventional one, even at a slightly higher rate.
Still, for buyers with thinner credit files, shorter savings, or a recent bankruptcy, FHA remains one of the few doors that stays open.
Student loan debt is calculated more leniently than under conventional rules.
The practical move for most shoppers is to get quotes on both an FHA and a conventional loan on the same day.
The gap in total monthly cost is often smaller than expected, and sometimes the FHA option wins outright.
My take: FHA loans aren't a trap, but they're not a free pass either.
If you can get your score to 620 and scrape together 5% down, run the conventional numbers before committing.
Final Thoughts
The permanent insurance premium is the line item most buyers miss until it's too late to change course.