What Is a Federal Housing Administration Loan (FHA) Loan?

Federal Housing Administration (FHA) loan is a mortgage that is insured by the FHA and issued by an FHA-approved lender. FHA loans are designed for low- to moderate-income borrowers. They require a lower minimum down payment and lower credit scores than many conventional loans do.

Because of their many benefits, FHA loans are popular with first-time homebuyers.

KEY TAKEAWAYS

  • Federal Housing Administration (FHA) loans are federally backed mortgages designed for homeowners who may have lower-than-average credit scores.
  • FHA loans require a lower minimum down payment and a lower credit score than many conventional loans do.
  • Federal Housing Administration loans are issued by FHA-approved banks and lending institutions; these institutions will evaluate your qualifications for the loan.
  • In order to secure the guarantee of the FHA, borrowers that qualify for an FHA loan are also required to purchase mortgage insurance, and premium payments are made to FHA.

Understanding Federal Housing Administration (FHA) Loans

In 2021, you can borrow up to 96.5% of the value of a home with an FHA loan. This means you’ll need to make a down payment of just 3.5%. You’ll need a credit score of at least 580 to qualify. If your credit score falls between 500 and 579, you can still get an FHA loan as long as you can make a 10% down payment.1 With FHA loans, your down payment can come from savings, a financial gift from a family member, or a grant for down-payment assistance.

It’s important to note that with an FHA loan, the FHA doesn’t actually lend you money for a mortgage. Instead, you get a loan from an FHA-approved lender—a bank or another financial institution. However, the FHA guarantees the loan. Some people refer to it as an FHA-insured loan, for that reason.

In order to secure the guarantee of the FHA, borrowers who qualify for an FHA loan are also required to purchase mortgage insurance, and premium payments are made to FHA. Your lender bears less risk because the FHA will pay a claim to the lender if you default on the loan.3

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