FHA Loan 2025: Buy a House with Only 3.5% Down (Even with Bad Credit)

The “20% down payment” rule is a myth. If you are waiting to save $80,000 to buy a $400,000 home, you might be renting forever.

The FHA Loan (Section 203(b)) is the government’s way of helping regular people become homeowners. Backed by the Federal Housing Administration, this program encourages banks to lend to people who might not have perfect credit or a massive savings account.

Here is the headline: You can buy a house with a credit score as low as 580 and a down payment of just 3.5%.

If your credit is even lower (between 500 and 579), you can still buy a house, but you’ll need 10% down.

Key Details at a Glance

What This Opportunity Offers

1. Low Barrier to Entry Conventional loans often require a 620+ credit score and strict debt-to-income ratios. FHA loans are designed to be forgiving.

• Scenario: You have a 590 credit score because of a medical bill from 3 years ago. A conventional lender will deny you. An FHA lender will likely approve you.

2. The “House Hacking” Superpower This is the secret weapon of real estate investors. You can use an FHA loan to buy a duplex, triplex, or fourplex.

• The Math: You buy a 4-unit building for $600,000.
• Down Payment: $21,000 (3.5%).
• Result: You live in Unit 1. You rent out Units 2, 3, and 4. The rent from the other units pays your mortgage. You live for free and build equity.

3. Assumable Mortgages FHA loans are “assumable.” This means when you sell your house, the buyer can take over your interest rate.

• Why this matters: If you lock in a 5.5% rate today, and rates go up to 8% in five years, your house is worth more because you can sell the house with the 5.5% loan attached.

Who Should Apply

1. The “Credit Rebuilder” If you have a bankruptcy in your past (Chapter 7), you only have to wait 2 years after discharge to get an FHA loan. For conventional loans, the wait is usually 4 years.

2. The Cash-Strapped Buyer If you have good income but no savings, the 3.5% down payment is a lifesaver. Plus, the FHA allows 100% of the down payment to come from a gift (e.g., from a parent or relative). You literally don’t need any of your own money to close if you have generous family.

3. Borrowers with Student Loans FHA rules for student loans are specific.

• The Rule: If your payment is $0 (deferment or IDR), the lender must assume a payment of 0.5% of the balance.
• Example: You owe $50,000. Even if you pay $0, the lender adds $250/month to your debt ratio. This is much better than the old 1% rule!

Insider Tips for a Winning Application

1. Watch Out for the “MIP” (Mortgage Insurance Premium) FHA loans come with a catch: Mortgage Insurance.

• Upfront MIP: 1.75% of the loan amount (added to your loan balance).
• Monthly MIP: About 0.55% per year (for most buyers).
• The Kicker: Unlike conventional loans where PMI falls off when you reach 20% equity, FHA MIP stays for the life of the loan (if you put down less than 10%).
• Strategy: Plan to refinance into a conventional loan once your credit improves and you have 20% equity to get rid of the MIP.

2. The “FHA Appraisal” is Strict FHA appraisers are picky. They look for “Safety, Soundness, and Security.”

• Peeling paint (lead risk)? Fail.
• Missing handrail? Fail.
• Broken window? Fail.
• Tip: Don’t try to buy a “fixer-upper” with a standard FHA loan unless the seller agrees to fix these things before closing. (Or use the FHA 203(k) Rehab Loan).

3. Use “Seller Concessions” The FHA allows the seller to pay up to 6% of the purchase price toward your closing costs.

• Strategy: Offer $310,000 for a house listed at $300,000, and ask for $10,000 back in closing costs. This reduces the cash you need to bring to the table.

Application Timeline

• Month 1: Check your credit. Pay down credit cards to boost your score over 580.
• Month 2: Find a lender. Ask for a “Pre-Approval Letter.” Do not just get a “Pre-Qualification.”
• Month 3: Shop for homes. Tell your realtor you are using FHA financing so they show you homes that will pass the inspection.
• Month 4: Make an offer, get the inspection/appraisal, and close.

Required Materials

• 2 Years of Tax Returns: To prove steady income.
• 2 Recent Pay Stubs: To prove current employment.
• Bank Statements: To prove you have the 3.5% down payment (or a gift letter).
• ID and SSN.

Common Mistakes to Avoid

1. Buying a Car During the Process This is the #1 deal killer. Buying a car increases your debt-to-income ratio and can disqualify you days before closing. Do not buy anything on credit until you have the keys in your hand.

2. Ignoring the “Occupancy” Rule You must move in within 60 days and live there for at least one year. You cannot use FHA to buy a vacation home or pure rental property (unless you live in one unit).

3. Forgetting Closing Costs The 3.5% is just the down payment. You also need money for closing costs (title, appraisal, taxes), which can be another 3-4%.

• Fix: Ask for seller concessions or look for “Down Payment Assistance” (DPA) programs in your state.

Frequently Asked Questions

Can I use FHA if I’ve owned a home before? Yes! You do not have to be a first-time buyer. You just have to use the home as your primary residence.

Can I rent out the house later? Yes. You generally have to live in it for one year. After that, you can move out, keep the FHA loan, and rent the house out.

Is the interest rate higher? Actually, FHA rates are often lower than conventional rates because the government guarantees the loan. However, the APR (which includes the fees and insurance) might be higher.

How to Apply

1. Find a Mortgage Lender: Almost all banks and mortgage brokers offer FHA loans.
2. Get Pre-Approved: Submit your docs to see how much you can afford.
3. Start Shopping: Find your dream home.

Official HUD FHA Page