FHA loans are a popular path to homeownership for borrowers with modest down payments and credit scores above 580, but the total cost of getting one goes well beyond the down payment itself. Understanding the full breakdown—down payment requirements, upfront mortgage insurance premiums, annual insurance fees, and closing costs—helps you budget accurately and compare offers from different lenders. This guide walks you through each cost component so you know exactly what to expect.
Down Payment Requirements
FHA loans allow down payments as low as 3.5% of the home's purchase price, compared to the conventional 20% standard. On a $250,000 home, that's $8,750 versus $50,000—a significant difference for first-time buyers building savings.
The minimum 3.5% applies if your credit score is 580 or higher. If your score falls between 500 and 579, FHA permits a 10% down payment instead. Keep in mind that while a lower down payment reduces your upfront cash requirement, it increases the size of your loan and triggers higher mortgage insurance costs.
Upfront Mortgage Insurance Premium (UFMIP)
The Upfront Mortgage Insurance Premium is a one-time fee due at closing, calculated as a percentage of your base loan amount. Currently, FHA charges 1.75% of the mortgage amount for most borrowers.
On a $240,000 loan (after your 3.5% down payment), that's $4,200 added to your closing costs. This fee can be rolled into your mortgage, meaning you don't pay it all at closing—but you'll pay interest on it for the life of the loan, adding thousands to your total interest expense.
Annual Mortgage Insurance Premium (MIP)
This is an ongoing yearly cost that protects the lender if you default. The annual MIP rate depends on your loan-to-value ratio (how much you're borrowing versus the home's value) and your loan term.
Typical annual MIP rates range from 0.35% to 0.85% of your outstanding loan balance. A borrower with a 10% down payment (higher LTV) pays more than one with a 15% down payment. The insurance premium is rolled into your monthly mortgage payment, so you don't see it as a separate bill—but it meaningfully increases your payment.
For example, on a $240,000 loan, annual MIP of 0.55% adds approximately $132 monthly to your payment ($240,000 × 0.0055 ÷ 12).
When Does FHA Mortgage Insurance End?
Mortgage insurance doesn't automatically disappear once you reach 20% equity. With FHA loans, the rules are stricter:
- Put down 10% or more: You must carry mortgage insurance for 11 years.
- Put down less than 10%: Mortgage insurance lasts the entire 30-year loan term.
If you put down only 3.5%, you're locked into mortgage insurance payments for three decades unless you refinance into a conventional loan (which requires 20% equity and better credit).
Closing Costs
Beyond mortgage insurance, FHA loans carry standard closing costs:
- Origination fees: 0.5% to 1.5% of the loan amount ($1,200–$3,600 on a $240,000 loan)
- Appraisal: $400–$600
- Title search and insurance: $600–$1,200
- Inspection: $300–$500
- Survey (if required): $150–$400
- Attorney or escrow fees: $150–$300
Total closing costs typically run 2% to 5% of the loan amount, or $4,800–$12,000 on a $240,000 purchase. FHA allows sellers to contribute up to 6% toward your closing costs, which can offset some of this expense.
Comparing FHA with VA and USDA Loans
VA loans (for eligible veterans) offer advantages: zero down payment, no mortgage insurance, and lower interest rates. USDA loans (for rural buyers) also eliminate down payments and require only 1% upfront guarantee fee plus 0.35% annual insurance—less expensive than FHA's structure.
If you qualify for VA or USDA programs, compare total costs directly. Many borrowers assume FHA is cheapest because of the low down payment, but VA's lack of insurance can save tens of thousands over the loan term.
How to Lock in the Best Terms
Shop with multiple lenders. Interest rate differences of just 0.25% change your monthly payment by approximately $60 per $100,000 borrowed. Confirm whether the lender rolls UFMIP into the loan or requires it at closing. A higher credit score (620+) may qualify you for lower MIP rates with some lenders.
Platforms like Mercoly let you compare FHA, VA, and USDA loan offers from trusted lenders side-by-side, so you can see the full cost picture before committing.
Frequently Asked Questions
Q: Can I get an FHA loan with a 500 credit score? Yes, but only with a 10% down payment instead of 3.5%, which significantly increases your upfront costs.
Q: How much of my closing costs can the seller pay on an FHA loan? FHA allows sellers to cover up to 6% of the purchase price toward your closing costs, which can cover most or all of them on many deals.
Q: Is it worth paying extra to remove FHA mortgage insurance early? Only if you can reach 20% equity and refinance into a conventional loan; FHA doesn't let you remove insurance by building equity alone.
Ready to compare real FHA, VA, and USDA loan quotes with all costs itemized? Start shopping with trusted lenders today.