What is an FHA Mortgage Loan?

An FHA Loan is a mortgage insured by the Federal Housing Administration (FHA). The FHA doesn’t actually provide the loan; instead, it insures the loan for the lender. If the borrower defaults, the lender can look to the FHA. Since this lowers the lenders’ risk, they are more likely to issue a loan. The organization has insured more than 33 million home mortgages, including 800,000 current homeowners.

There are several advantages to an FHA loan. The main advantage is more lenient credit criteria than for conventional loans. You can qualify even if you have had some credit problems in the past, and if your income is not high enough for a conventional mortgage. Also, FHA home loans are assumable, allowing a person to take over the mortgage without having to obtain a new loan. Closing costs are less and some can be wrapped into the mortgage. FHA loans may require less income to qualify, and down payments are as low as 3 percent.

The greatest disadvantage to these loans is that FHA limits the loan size that a borrower can borrow. In other words, they will only finance homes under a certain value. This value changes from location to location, but any FHA lender can tell you this amount. The buyer may also have to pay an upfront mortgage insurance premium.