What Is An FHA Loan, Anyways?

"Are you getting an FHA mortgage?" "Apply for an FHA loan. You'll get a better rate!" If you're house hunting in the United States, there's a good chance your friends, or perhaps even your realtor, have been making these statements. You might nod and agree, and you might even go through with applying for an FHA loan because that's what someone knowledgeable told you do to. But if you're like many house hunters, you don't really know what an FHA mortgage is or how it benefits you. Here's a look.

What does FHA stand for?

FHA stands for "Federal Housing Administration." This is a government agency that was formed in 1934 with the goal of improving housing standards and stabilizing the mortgage market. The FHA's original intent was to regulate interest rates, which would increase the number of people who could afford mortgage loans. The way the organization functions has changed a bit over the years, but its goal is the same – to make housing more available for those with limitations like bad credit, a lack of savings for a down payment, or a short work history.

What is an FHA loan?

An FHA loan is a loan that is backed by the Federal Housing Administration. The loan is still held by a bank or credit union. However, the FHA "insures" the loan. In other words, they promise the lender that if you do not make payments, they will. This reduces the risk that the bank experiences in lending to you, which makes them more willing to give out loans that they may not otherwise make.

What are the benefits of an FHA loan?

FHA loans allow you to get a mortgage when you otherwise might be turned down by lenders. You don't have to save as large of a down payment. (The amount required varies by credit score, so check with your realtor to get a sense of exactly how large of a down payment you do need with your FHA loan.) You can get approved even if your credit score is poor or fair. If mortgage rates are, on average, very low right now, getting an FHA loan will allow you to take advantage of those lower rates, which may not still be available if you were to wait a year while you save a bigger down payment or repair your credit.

If you are about to buy a home, talk to your realtor or mortgage broker to learn more about FHA loans. For many buyers, they are a wise choice.