An FHA loan is a federal-assistance mortgage loan offered by qualified lenders and backed by the Federal Housing Administration.
FHA insures loans to the benefit of lenders and borrowers
During the Great Depression of the 1930s, soaring foreclosure and default rates led lenders to tighten their loan requirements to the detriment of the prospective homeowner. The FHA was created during this time to provide lending institutions (such as banks, savings and loan associations, and mortgage companies) with sufficient insurance to allow them to ease up on eligibility requirements for borrowers so that they could be approved for loans that they could not otherwise afford. If a borrower defaults on an FHA loan, the FHA pays off the mortgage from a reservoir of collected fees. The FHA funds this reservoir with fees charged to the borrower, such as an upfront mortgage insurance premium, and small, ongoing monthly fees.
FHA loans offer the following benefits over conventional loans:
- Low Down Payments to close on a home loan.
- You only need 3.5% down according to FHA guidelines.
- Closing cost are usually less than conventional mortgage loans.
- Less difficult to qualify - with less credit.
- Ability to use "gifts" for down payments.
- No Prepayment Penalty (paying more or paying more frequently only helps)
- Your FHA will probably be assumable.
- Possible leniency or loan deferment during financial hard times.
- Funding for home improvement through FHA 203k Programs.