Government-Backed Financing
FHA Loans Explained for Real Estate Exam Students
FHA loans are insured by the Federal Housing Administration — not issued by the FHA. The exam tests down payment minimums, MIP rates, HUD property standards, and who qualifies.
What Is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA), a division of HUD. The FHA does not lend money — it insures the loan, allowing lenders to offer more favorable terms to buyers who might not qualify for conventional financing.
FHA loans are popular with first-time homebuyers because of their lower down payment (as low as 3.5%) and more flexible credit score thresholds. Because the FHA insures the loan, borrowers must pay Mortgage Insurance Premiums (MIP).
FHA Loan Key Features
Down Payment
Minimum 3.5% down for borrowers with a 580+ credit score. 10% minimum for scores between 500–579.
Mortgage Insurance Premium
Upfront MIP: 1.75% of loan amount. Annual MIP: 0.55%–1.05% depending on loan term and LTV, paid monthly.
Loan Limits
FHA loan limits vary by county and are set annually by HUD. Loans above these limits require jumbo financing.
Property Requirements
FHA appraisals include a condition review. The property must meet HUD Minimum Property Standards (MPS). Major defects can cause loan denial.
FHA Exam Questions
Question 1
A buyer wants an FHA loan on a $300,000 home. What is the minimum down payment, and what is the upfront MIP?
Minimum down payment: 3.5% × $300,000 = $10,500. Loan amount: $289,500. Upfront MIP: 1.75% × $289,500 = $5,066.25. (MIP is based on the loan amount, not the purchase price.)
Question 2
Who actually issues FHA loans — the FHA or a private lender?
Private lenders (banks, credit unions, mortgage companies) issue FHA loans. The FHA insures the loan, meaning if the borrower defaults, the FHA reimburses the lender. This is why FHA loans are 'FHA-insured' not 'FHA-issued.'
FHA Loan FAQ for the Exam
What is the difference between MIP and PMI?
MIP (Mortgage Insurance Premium) applies to FHA loans and is paid to HUD. PMI (Private Mortgage Insurance) applies to conventional loans and is paid to a private insurer. Both protect the lender if the borrower defaults.
Can FHA loans be used for investment properties?
No. FHA loans are for owner-occupied primary residences only. Investors must use conventional or portfolio financing.
What are HUD Minimum Property Standards?
HUD requires that FHA-financed properties meet standards covering safety, security, and structural soundness. Major issues like a failing roof, faulty electrical, or no working heat can cause an FHA appraisal to fail.