Start with the two premiums
The Federal Housing Administration does not lend money. It insures loans made by private lenders and absorbs their losses when borrowers default, and that backing is what lets a lender accept a 580 credit score and 3.5 percent down. The insurance is not free, and it arrives as two separate charges that together decide what the loan really costs.
The first charge is the upfront premium, paid once at closing. The second is annual MIP, billed monthly for as long as the loan requires it. The table shows both against the default scenario, a base loan of $337,750 on a $350,000 home with the minimum down payment. All in, that scenario lands near $2,810 a month once tax and insurance are added.
| Premium | Rate | Cost on a $337,750 base loan |
|---|---|---|
| Upfront MIP (UFMIP) | 1.75% one time | $5,911, usually financed into the balance |
| Annual MIP, 30-year term | 0.55% per year | about $155 per month at the start |
| Annual MIP, 15-year term | 0.40% per year (0.15% with 10%+ down) | a lower charge over a shorter payoff |
| Annual MIP with 10%+ down | ends after 11 years | stops early instead of running the full term |
Base loan reflects a $350,000 home with the 3.5% minimum down payment.
Financing the upfront premium has a price
Rolling the $5,911 premium into the loan feels painless because nothing changes at the closing table. The cost shows up later. Financed at the default 6.5 percent over 30 years, that premium adds about $37 a month, roughly $13,500 repaid over the full term for a $5,911 charge.
For most FHA buyers the trade is still right. The whole point of the program is preserving scarce cash, and $5,911 kept in reserve covers moving costs, a furnace repair, or two months of payments after a job loss. A buyer with ample savings can pay UFMIP at closing and skip the interest, but a buyer with ample savings often has cheaper options than FHA in the first place.
Plan around MIP that does not cancel
Annual MIP starts near $155 a month on the default loan and declines only slowly as the balance amortizes. Here is the expensive part: with less than 10 percent down, which describes most FHA loans, the charge never cancels on its own. It runs the full 30 years unless you sell or refinance into a different loan type. Conventional PMI ends at 20 percent equity; FHA MIP at this down payment level does not end at all.
The standard exit is a refinance into a conventional loan once you hold 20 percent equity, through payments, appreciation, or both. That swap trades one set of closing costs for the permanent removal of the monthly premium, and for borrowers whose credit has improved since purchase it often lowers the rate at the same time.
The appraisal reviews condition as well as value
An FHA appraisal does two jobs. It estimates market value like any appraisal, and it checks the property against HUD's minimum standards. The appraiser looks for peeling paint in homes built before 1978 because of lead risk, missing handrails, broken windows, roof damage, inadequate heat, and pest evidence. Any flagged repairs must be completed before closing, which is why some sellers view FHA offers as slower and more fragile than conventional ones.
Property type matters too. The home must be your primary residence; investment properties and vacation homes are out. Condos need to sit on the FHA-approved list or clear a single-unit approval. Two-to-four-unit buildings work if you live in one unit, and manufactured homes qualify only on a permanent foundation, built to HUD standards and titled as real property.
Loan limits reset every county, every year
HUD caps how much FHA will insure in each county and recalculates the caps annually from median home prices. Lower-cost counties share a national floor, high-cost metros get a ceiling well above it, and Alaska, Hawaii, Guam, and the U.S. Virgin Islands carry special higher limits. Because the figures change each January, look up your county's current cap on HUD's FHA pages instead of relying on a number from an article that may be a year stale.
When a purchase price tops the local cap, a larger down payment can bring the loan back under it. Otherwise the deal moves to conventional financing, which follows its own conforming limits published through Fannie Mae, or to a jumbo loan above those.
Decide between FHA and conventional
Neither program wins across the board. FHA exists for borrowers that conventional pricing treats badly, and it does that job well. The mistake is defaulting to FHA when a conventional loan would cost less over time. The CFPB's loan-options guide is a useful second read on the same decision.
- Scores from 580 to about 680 usually price better with FHA, since conventional rate adjustments hit that range hardest.
- At 700 and above, conventional PMI typically costs less than MIP and cancels at 20 percent equity.
- On the default $350,000 purchase, FHA MIP is about $155 a month for the life of the loan; comparable conventional PMI might run $120 to $180 and then end.
- FHA allows seller concessions up to 6 percent of the price, versus 3 percent on a low-down conventional loan.
- If you start with FHA, treat a later refinance into conventional financing as part of the plan, not an afterthought.