Defined: What is a FHA Loan?

A mortgage issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA is a federal agency within the U.S. Department of Housing and Urban Development (HUD). An important fact is that FHA does not loan money to borrowers, it provides lenders protection through mortgage insurance (MIP) in case the borrower defaults on their obligations. FHA loans are very helpful for home buyers that want to put a low down payment, have issues with their credit or qualifying income.

Benefits:

  • Home buyers can put as little as 3.5% for a down payment.
  • The down payment can be a gift from a family member.
  • The guidelines for credit and income are more relaxed than convential lenders.

Drawbacks:

  • Can only be used for homes that you will occupy (not for investment properties).
  • There are limits to the amount that can be borrowed.
  • There is an additional monthly cost with mortgage insurance (MI), and an initial up front cost with up front mortgage insurance premium (UPMIP).
  • A property purchased using an FHA loan must be appraised by an FHA-approved appraiser. There are certain livability requirements that the house must meet. Sometimes sellers are hesitant to accept offers from buyers using FHA loans.
  • A condo complex has to be FHA approved.

** Please consult your loan provider for a thorough explanation of how a FHA loan works.