Most Americans need a mortgage to buy a home, but saving enough for a traditional 20% down payment can be an unattainable goal, particularly for first-time homebuyers. Enter the Federal Housing Administration, or FHA, loan program, which guarantees lenders full payment, allowing them to offer borrowers lower down payments and easier credit qualifications than conventional loans. Some FHA mortgage lenders may allow credit scores as low as 500, depending on your down payment.

Homebuyers considering an FHA loan should shop around to find the best mortgage lenders.

This guide explains what you need to know about FHA loans and offers recommendations for the best FHA lenders that can meet your homebuying needs. What you’ll learn:

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FHA loans are government-backed mortgages that reduce the barrier to entry for low- to moderate-income homebuyers. They are issued by FHA-approved lenders and guaranteed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development. With a government guarantee, a lender can offer more flexible underwriting requirements than on conventional loans, including lower minimum down payments.

The guarantee allows lenders to work with borrowers who might not qualify for a conventional mortgage. Conventional mortgage lenders typically expect a 20% down payment, but the FHA minimum down payment requirement is 3.5%.

FHA loans also have lower minimum credit score requirements and may allow a higher debt-to-income, or DTI, ratio. This is a measure of how much you owe each month compared with how much you earn.

These loans can be a good choice for first-time homebuyers and consumers with nontraditional credit histories or low credit scores.

General FHA loan requirements for borrowers include:

You can use an FHA loan more than once, but the FHA will not guarantee more than one home per borrower at a time. That means if you have an FHA loan and you want another one, you will need to pay off your existing FHA loan first.

The FHA also has maximum loan amounts it will insure, known as FHA loan limits. FHA loan limits are based on median local home values.

The type of property and the county you live in affect your limits. Home loan limits are higher in costly metro areas, including San Francisco, New York City and Washington, D.C., and lower in more affordable markets, such as Montgomery, Alabama.

The upper limit, or ceiling, on FHA loans in 2020 for single-family homes in low-cost counties is $331,760, and the ceiling in high-cost areas is $765,600. Exceptions apply in select very high-cost areas, such as Honolulu. In these areas, the upper limit on an FHA loan for single-family properties is $1,148,400.

FHA loans are a good idea for homebuyers who can’t qualify for a conventional mortgage, whether the barriers are minimum credit score or minimum down payment requirements. For example, first-time homebuyers who are new to credit and lack the cash for a large down payment can benefit from FHA loans.

But get all of the information you can about FHA loans before you sign on the dotted line.

“Numerous studies have demonstrated that pre-purchase homebuyer education can have a positive impact on a wide range of financial behavior,” says Bruce McClary, vice president of public relations and communications for the National Foundation for Credit Counseling and U.S. News contributor.

An FHA loan can make a mortgage more accessible, but it might not be the best choice for every borrower. Make sure you consider the drawbacks.

Chiefly, these are that your offer could be less attractive to sellers than buyers with traditional mortgages and that you’ll pay FHA mortgage insurance. FHA mortgage insurance protects the lender from losses if you default on the loan.

“If a borrower has good credit but limited cash on hand, other government-backed loans are available for less money down,” says Stephen Moye, sales manager and senior loan officer for Tustin, California-based mortgage lender New American Funding. “For a borrower with a bankruptcy, foreclosure or other credit issue, the FHA loan has a much lower barrier to entry.”

FHA mortgage insurance is an extra expense, as with private mortgage insurance, that can make FHA loans more costly than conventional mortgages. There are two different FHA mortgage insurance premiums, or MIPs: upfront mortgage insurance premium and annual mortgage insurance premium.

Upfront MIP is 1.75% of the loan amount. This upfront mortgage insurance may be paid at closing or rolled into the loan.

Annual mortgage insurance premium depends on loan size, repayment term, loan-to-value ratio and annual home loan balance. Borrowers who make a down payment of at least 10% will pay annual MIP for 11 years; borrowers who make smaller down payments must pay mortgage insurance premiums for the entire mortgage term.

In addition to cost concerns for the buyer, some sellers may dislike FHA loan requirements.

If a home is appraised for less than your offer, the seller has to reduce the sales price to the appraised value or walk away from the deal. Also, any major health, safety or security defects identified during the appraisal must be repaired before the sale at the seller’s expense.

Another potential drawback of FHA loans is that they require you to live in a home for the entire loan term. That makes FHA loans inappropriate for an investor unless you’d plan to buy a multi-unit property and live on-site.

The process of obtaining an FHA loan is largely the same as the conventional mortgage process.

The main difference is that the search for a suitable FHA loan lender is limited to those that offer FHA loans. Banks, credit unions and online mortgage lenders may offer FHA loans, but not all do.

You can select the right FHA lender by using prequalification to compare mortgage offers from multiple FHA-approved lenders. Once you’ve found the best FHA lender for your needs, you will complete these steps in the mortgage process:

Shop around to find the best FHA mortgage lender to meet your needs. When looking for the best FHA loan, consider these criteria:

Product offerings include loan terms and types. The right FHA lender may mean be the one with the right loan to meet your needs, whether you’re looking for a 30-year fixed-rate loan or an adjustable-rate mortgage.

Not all lenders will make loans to borrowers who meet only the minimum requirements for the loan program. While the FHA will guarantee loans to borrowers with a 500 or 580 credit score or better, lender credit score requirements vary.

If you have a lower credit score than the lender is willing to accept, you won’t be approved. Research each lender’s minimum credit score and maximum DTI ratio requirements.

Compare annual percentage rates, or APRs, from one lender to the next. Because this figure includes your interest rate, as well as points and other fees, the APR will be higher than the interest rate and is a more accurate measure of the true cost of the loan.

Lower interest rates – even by a few tenths of a percent – can equate to a lower monthly mortgage payment and thousands of dollars saved over the life of a loan.

Expect to pay 2% to 5% of your loan amount in closing costs. Luckily, you can shop for a lender with low closing costs.

Make sure to evaluate closing costs and interest charges to determine the total cost of the loan over time. A low closing-cost option and a high interest rate could cost more over time than higher closing costs and lower interest rates.

Also, if you roll closing costs into your loan’s monthly mortgage payment, remember that you will pay interest on those costs.