How an FHA Loan Works for First-Time Buyers in Indianapolis

An FHA loan is a mortgage from a private lender that the Federal Housing Administration insures. In Marion County in 2026 the most you can borrow on a one-unit home is $541,287. You can put down as little as 3.5% with a credit score of 580 or higher, and you pay mortgage insurance twice: once at closing and again every year.

I wrote this for renters who keep hearing "get an FHA loan" and want to know what that means for a house in Indianapolis. If you are still at the start of the process, read my guide on where to start as a first-time buyer in Indianapolis first, then come back here to compare loan types.

Every program rule and limit below comes from HUD, the Consumer Financial Protection Bureau, Fannie Mae or IHCDA. I link each page in the sources at the end. The $300,000 example is my own math on those rules. Mortgage rules change, so treat this as a map and let your lender confirm the numbers on your own Loan Estimate.

How an FHA loan works

The CFPB describes it this way: "FHA loans are loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA), a government agency." A bank or mortgage company makes the loan. If you stop paying, the FHA insurance repays the lender. You pay for that insurance, which is why the loan carries mortgage insurance premiums (MIP).

Three things shape every FHA purchase: how much you can borrow, how much you put down, and what the house itself has to meet. I take them in that order.

The 2026 FHA loan limit for Marion County

HUD sets FHA loan limits by county each calendar year. For 2026, HUD's data file lists Marion County, Indiana, in the Indianapolis-Carmel-Greenwood metro area with a one-unit limit of $541,287. That is the national "floor," the lowest limit HUD sets, and it applies to counties where home prices sit below the high-cost range. HUD's announcement says the new limits "are effective for FHA case numbers assigned on or after January 1, 2026."

The multi-unit rows come from the same HUD file. FHA requires that at least one borrower occupy the home. The HUD handbook says that borrower "must occupy the Property within 60 Days of signing the security instrument and intend to continue occupancy for at least one year." That rule is how some buyers use a duplex to live in one side and rent the other.

Check the number yourself on HUD's FHA mortgage limits lookup: choose Indiana, FHA Forward and CY2026. For context, my post on how much income you need to buy a house in Indianapolis shows what monthly payment different prices create, and the limit is far above what most first-time buyers in the metro need.

Down payment and credit score

HUD Handbook 4000.1 ties your down payment to your credit score. The handbook says the borrower must make "a Minimum Required Investment (MRI) of at least 3.5 percent of the Adjusted Value" for FHA to insure the maximum mortgage, and that "for purchase transactions, the maximum LTV is 96.5 percent of the Adjusted Value." LTV means loan-to-value, the loan amount divided by the home's value. A 96.5% LTV is a 3.5% down payment.

The handbook words the two tiers this way: "at or above 580: eligible for maximum financing. Between 500 and 579: limited to a maximum LTV of 90%." It also says the borrower is "not eligible for FHA-insured financing if the MDCS is less than 500," where MDCS is the minimum decision credit score the lender determines from your credit reports.

HUD's floor is only the start. Your lender can ask for a higher score, and so can a down payment assistance program. IHCDA's program guide says the borrower "must have a minimum FICO credit score that meets the requirement set forth by IHCDA and/or the Master Servicer." Ask your lender for the score they need before you spend months chasing the wrong target.

FHA mortgage insurance: the upfront and annual premiums

This is the cost people forget. HUD's Mortgagee Letter 2023-05, effective for loans endorsed on or after March 20, 2023, sets the current premiums. The upfront premium is "175 Basis Points (bps) (1.75%) of the Base Loan Amount." The handbook says the upfront premium "may be financed into the Mortgage" and must be either entirely financed or entirely paid in cash. The annual premium is "payable monthly," so it sits inside your monthly payment.

Here is what that looks like on a $300,000 purchase with 3.5% down.

• Down payment: $10,500, so the base loan is $289,500.
• Upfront premium: 1.75% of $289,500 is $5,066.25. If you finance it, your balance at closing is about $294,566.
• Annual premium: 0.55% of $289,500 is $1,592.25 a year, about $133 a month at the start, on the base loan before the financed upfront premium. Your lender will show the exact figure.

I checked HUD's 2026 mortgagee letters and found none that change these rates. Your lender will confirm the exact premium on your Loan Estimate.

With 3.5% down, the annual premium lasts for the full mortgage term. Put down 10% or more and it ends after 11 years. With 3.5% down, refinancing or selling are the ways to end it, so ask your lender to show you the payment with the premium in it before you fall for a low rate.

FHA versus a conventional loan with 3% down

Conventional loans follow Fannie Mae or Freddie Mac rules. Some of them also allow a small down payment. Fannie Mae's HomeReady program, for example, has a section for "Transactions with LTV, CLTV, or HCLTV Ratios of 95.01 – 97%," which means as little as 3% down. Programs differ, so your lender should tell you which one fits you. This table uses HomeReady as the conventional example.

HomeReady also has an income cap. The Fannie Mae guide says "the total annual qualifying income may not exceed 80% of the AMI for the property's location," where AMI is area median income. Ask your lender whether you fit under it.

The CFPB gives a useful rule of thumb: "For borrowers with good credit and a medium (10-15 percent) down payment, FHA loans tend to be more expensive than conventional loans. For borrowers with lower credit scores or a smaller down payment, FHA loans can often be the cheapest option." It adds that there are no hard-and-fast rules and tells buyers to ask lenders for quotes on both and compare the total cost.

That is what I do with every buyer. I ask the lender to price the same house three ways, as I describe in my IHCDA First Step versus Next Home comparison. Look at the monthly payment, the cash to close and what you pay in mortgage insurance over the years you plan to stay. The cheapest monthly payment on day one and the cheapest loan over seven years are sometimes different loans.

What FHA asks of the house

An FHA loan comes with an FHA appraisal, and the appraiser checks the home against HUD's standards. The handbook says Minimum Property Requirements "refer to general requirements that all homes insured by FHA be safe, sound, and secure." The appraiser must note every item that does not meet them. Three examples from the handbook:

• Roof: the appraiser reports a roof with less than two years of remaining life and makes the appraisal subject to inspection by a professional roofer.
• Paint: on homes built after 1978, the appraiser must "require repair of any defective paint that exposes the subsurface to the elements." Homes built on or before December 31, 1978 follow the lead-based paint rules.
• Structure: the appraiser does a visual check of the foundation and structure and reports any structural issues.

When the appraiser requires repairs, the handbook lets a lender add the cost to the sales price before figuring the loan if the buyer pays for the repairs and the sales contract names the buyer as responsible. In practice, repairs on an FHA deal get negotiated into the contract, so this is a good moment to talk through the asks with your agent. My post on what a first-time buyer can ask for in Indianapolis covers them.

The FHA appraisal is a value and safety review for the lender. It is a different job from a home inspection. HUD requires lenders to give every buyer the form "For Your Protection: Get a Home Inspection" at first contact, and I agree with it. Hire your own inspector. My list of what to look for at your first showing helps you spot problems before you write an offer.

How FHA pairs with IHCDA down payment assistance

IHCDA, the Indiana Housing and Community Development Authority, offers down payment assistance programs that sit on top of a first mortgage. Its program guide states that "all reservations must be for either FHA or Conventional (Fannie Mae or Freddie Mac), thirty (30) year fixed rate mortgages." So an FHA loan is one of the two first mortgages IHCDA accepts.

The guide describes First Step as providing "five percent (5%) of non-forgivable down payment assistance (DPA)" with FHA, Freddie Mac or Fannie Mae financing, as a second mortgage held by IHCDA. Non-forgivable means you repay it, usually when you sell, refinance or stop living in the home. IHCDA's homebuyer page lists a lower figure than the guide, so I follow the guide and tell you to confirm the amount with your lender at reservation. The guide also requires a homebuyer education certificate for occupying applicants on conventional and FHA loans, and it says FHA appraisals must follow HUD Handbook 4000.1.

I break down the amounts, income limits and repayment in my post on IHCDA First Step versus Next Home. For the whole cash picture, including closing costs and the savings you keep after closing, read how much down payment you need in Indiana.

What I would do before choosing FHA

1. Pull your credit and write down the score. It decides whether you start at 3.5% or 10%.
2. Pick the monthly payment you want to live with, using the method in my post on why pre-approval is not a budget. Work back from that number to a price.
3. Ask your lender for FHA, conventional and IHCDA versions of the same house. Compare the monthly payment, the cash to close and the mortgage insurance.
4. Ask how long the mortgage insurance lasts on each option and what it costs over the years you plan to stay.
5. Keep savings in the bank after closing. FHA lowers the down payment and leaves the water heater and the HVAC to you.

If you want help putting those numbers side by side, take the Quiz Insight and we will start from where you are.

Sources I read

• HUD, CY2026 FHA Forward Limits data file, row for Marion County, Indiana: hud.gov CHUMS data.
• HUD, FHA Mortgage Limits lookup: entp.hud.gov.
• HUD press release announcing 2026 FHA loan limits, December 11, 2025: HUD No. 25-145.
• HUD Mortgagee Letter 2023-05, annual and upfront mortgage insurance premiums: archives.hud.gov.
• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook: hud.gov.
• Consumer Financial Protection Bureau, FHA loans: consumerfinance.gov, page last modified June 30, 2025.
• Consumer Financial Protection Bureau, when you can remove PMI: consumerfinance.gov, last reviewed August 28, 2026.
• Fannie Mae Selling Guide, B5-6-01 HomeReady Mortgage Loan and Borrower Eligibility: selling-guide.fanniemae.com.
• IHCDA Homeownership Program Guide: in.gov/ihcda.