What is an FHA Loan?

Wondering what is FHA loan? An FHA loan is a mortgage that is insured by the Federal Housing Administration of the United States. This means that the lender is protected from the risk of the borrower defaulting on the loan.

An FHA loan has commonly been designed for those within the United States who can be categorized as a specific type of borrower. People who are interested in buying a home for the first time and don't have a significant amount of money available for a down payment often qualify. These individuals may also have lower credit scores and are concerned about getting approved for a conventional mortgage.


FHA Loan Benefits

Lenders and borrowers benefit from FHA loans. The insurance from the Federal Housing Administration insures a percentage of the loan that reduces the lender's risk. This makes it easier for the lender to provide loans to individuals who may not meet all of the requirements necessary for a conventional loan. That is why borrowers are able to reap the benefits.

Since the federal government insures these loans, borrowers can enjoy lower interest rates, smaller down payments, and easier approval. Down payment requirements are much lower than the conventional mortgage requirement, which is commonly 20% of the home purchase price. Borrowers can close on an FHA loan with less than a 5% down payment in many cases.

Approval is also easier, since the credit history requirements are much more lenient with this type of mortgage loan. The FHA insurance allows lenders to offer lower interest rates to borrowers with poor credit. This is opposed to sub-prime mortgages, which are not insured and can have interest rates that are up to 3 percent higher than that of an FHA loan.

Borrowers may also have the option of a fixed rate loan, adjustable rate loan, or a rehabilitation loan. The FHA insures all of these types of loans, and there are many different private lenders that are federally qualified to issue them. There are several choices so prospective borrowers can compare rates and term options between multiple lenders before deciding who to submit an application to.

What is a FHA Loan For?

FHA loans can be used for the purchase of a home, remodeling or repair of a home, and energy-efficient upgrades. That means that first time home buyers are not the only ones who can benefit from an FHA loan. Of course, there are specific requirements for remodels and repairs, especially those for energy efficient upgrades. Check with a lender for specific details.