FHA Loans Explained: The Math Behind the 3.5% Down Payment

When I first looked at buying a home, every conventional loan calculator told me I needed 20% down. On a $350,000 house, that is $70,000. For a lot of first-time buyers, that number might as well be a million. Then someone mentioned FHA loans, and the math changed entirely. An FHA loan is a mortgage insured by the Federal Housing Administration. The key difference is the down payment: 3.5% instead of the conventional 20%. On that same $350,000 house, your down payment drops to $12,250. The trade-off is that you pay mortgage insurance premiums, and understanding that trade-off is where most people get confused. How FHA mortgage insurance works FHA loans require two types of mortgage insurance: Upfront Mortgage Insurance Premium (UFMIP) : 1.75% of the loan amount, paid at closing. On a $337,750 loan (that $350,000 house minus 3.5% down), that is $5,910. Most borrowers roll this into the loan balance rather than paying it in cash. Annual Mortgage Insurance Premium (MIP) : 0.55% of the loa