FHA loans are mortgages that are insured through the Federal Housing Administration (FHA). These loans include mortgage insurance which protects the lender from a loss if the borrower defaults. This insurance enables lenders to offer better rates with lower lending standards and less exacting qualification requirements.
Many lenders are willing to make much larger mortgage loans for FHA secured loans than they would otherwise, because of the insurance that guarantees the loan. As a government agency, the FHA is a secure prospect for such a guarantee and gives lenders the reassurance they need to be willing to make loans that are otherwise quite a bit riskier.
For mortgage loan originators, this insurance makes it easier to match seemingly higher-risk borrowers with a loan to help them take the leap to home ownership.
Flexible down payment options and less-restrictive credit score requirements make FHA loans accessible to many borrowers who otherwise wouldn’t have the chance to own a home.
In many cases the FHA loans only ask for 3.5% of the price of the home for the down payment, which is extremely attractive to many borrowers. Not everyone has a large amount of money to put 20% or more towards the down payment of their house.
FHA borrowers can also use a variety of sources to make the down payment, including state or local government grants, gifts from family members, and their own savings.
FHA loans are easily accessible for anyone with a credit score of 500 or better, with rates as low as 3.5% available if your credit score is 580 or above. There are some circumstances in which the FHA loans are available if your credit score is not 500 or above, if you have nontraditional credit history or insufficient credit if you are able to meet their specific requirements.
The low down payment requirements, flexibility on down-payment sources, and low interest rates, and lenient credit score requirements open the possibility of home ownership to a much larger pool of people than conventional, non-insured loans. For mortgage loan originators, this means a wider pool of potential borrowers to work with.
FHA loans are not for everyone though. There are many appealing features, but in many cases the corresponding restrictions can outweigh the benefits for a borrower.
For instance, if your borrower needs a large loan, an FHA loan might not provide enough money. Mortgage insurance is also a consideration. The upfront and ongoing mortgage insurance premiums can cost quite a bit, and sometimes more than private mortgage insurance might cost. This may make an FHA loan not as appealing for a particularly cost-conscious borrower.