What is an FHA Loan?

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An FHA loan is a government-backed loan offered by FHA-approved lenders. The FHA (Federal Housing Administration) guarantees the loans for approved lenders. If an FHA borrower defaults on their loan and goes into foreclosure, the FHA promises to pay the lender back a portion of what they lost.

Because of the government guarantee, FHA loans have flexible underwriting guidelines making it an easier loan to get, especially if you have bad credit or little money to put down on the home. FHA loans are great for borrowers with less-than-perfect credit, little money to put down, or borrowers with higher existing debts.

FHA Loan Highlights

FHA loans’ lenient guidelines are attractive for both first-time homebuyers and subsequent homebuyers looking for a second chance. FHA loans offer:

• Low 3.5 percent down payment
• Gift funds of up to 100 percent of the down payment (with a 619 or higher credit score)
• Low credit score requirements of 580
• Some borrowers with a credit score as low as 500 may qualify with a 10 percent down payment
• High debt-to-income ratio allowances

Despite its name, the FHA has nothing to do with the loans' underwriting and funding. They leave that to the FHA-approved lenders. Instead, the FHA insures the loans, and they have insured over 47 million FHA loans since they began the program in 1934.