What Is FHA Loan?

Review of: FHA Loan
Home loan:
FHA Mortgage

Reviewed by:
On September 1, 2009
Last modified:January 28, 2013


FHA loan is a loan guarantee program insured by FHA. Borrowers are still required to obtained the loan from a commercial lender and have met certain requirements such as credit score and down payment.

The process of selling our house is moving forward. This morning, our attorney told that the attorney review has completed and now the house is officially under contract. The buyer will do the home inspection this weekend. After that we will move to Virginia and leave the house and all other matters to our agent, who has been handling our case very professionally so far. However, until the deal is closed in one month from now, we still have to keep our fingers crossed and hope that nothing major will happen.

Now taking another look at the three offers we got last week, they all have a few things in common: First, the offers are all pretty low, lower than our already reduced list price. Second, the buyers are all buying their home for the first time. Finally, they all will get a FHA loan. When we bought our house five years ago, all I knew was to get a  mortgage from a private lender and make 20% down payment. I didn’t know there are federally insured FHA loans (not that we needed one). Now all the sudden, all three potential buyers need to get a FHA loan in order to buy our house. So what is FHA loan and how is it different from a conventional loan?

What Is FHA Loan?

Well, FHA stands for Federal Housing Administration and FHA loan isn’t exactly a loan. Rather, it is a loan guarantee program insured by FHA. The borrower still has to obtain the loan from a commercial lender who qualifies for issuing a FHA loan. According to Wikipedia, the program started during the Great Depression to provide private lenders insurance for the loans they issued. Now FHA loans mostly serve low-income homebuyers who can’t afford a down payment required by private mortgage insurance companies or otherwise don’t qualify for a conventional mortgage from a private lender. Since each lender sets their own rates and terms, FHA loans will different rates, though most loans carry fixed rates throughout the term (FHA also insures adjustable rate loans).

FHA Loan Requirements

Since FHA loan is primarily to help low-income homebuyers to realize their homeownership, there are certain requirements in order to get a FHA loan. These requirements include:

  • Credit score: Though FHA does not require a minimum credit score, many lenders have their own requirement on the borrower’s credit that are usually less strict than what lenders impose on conventional loans. Usually, before underwriting a FHA loan, the lender examines the borrower’s credit with more attentions on the overall pattern of how the borrower uses his/her credit to assess the risk. As long as the borrower shows that he or she has managed previous payments responsibly, past minor mistakes in the credit history will not prevent the borrower from getting a FHA loan. Even people with no credit history can borrow a FHA loan.
  • Down payment: Another feature that makes FHA loan attractive to first-time homebuyers with little savings is that the down payment can be as little as 3% of the purchase price of the house. On the other hand, private lenders usually require 3 – 5% down payment and for a down payment that’s less than 20% of the home’s value, the borrower is required to get a private mortgage insurance (PMI).

There are some other requirements for FHA loan, but I found the above two are most related to many of first-time homebuyers, making FHA loan a good choice to help them own their own home :)

FHA loan is a loan guarantee program insured by FHA. Borrowers are still required to obtained the loan from a commercial lender and have met certain requirements such as credit score and down payment.

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5 Responses to “What Is FHA Loan?”

  1. FFB |  Sep 04, 2009 at 9:35 am

    I know what you mean about keeping your fingers crossed! We’re selling our co-op but until the ink is dry anything can happen. Thanks for the FHA info. We’ll have to look into this option when we’re ready to buy.

  2. FHA Secure Loan |  Sep 07, 2009 at 8:33 pm

    The financial crisis has practically swept the entire world, affecting both large and small economies. The American economy has not been spared from the battering, and it has inevitably shown in the rising unemployment rate, and as a consequence, the number of people getting further buried in debt and losing their houses to foreclosure increases.