An FHA (Federal Housing Administration) loan is a government-backed mortgage program designed to make homeownership more accessible, particularly for first-time buyers and those with lower credit scores or limited down payment funds. The FHA does not lend money directly to borrowers but rather insures loans issued by approved lenders, such as banks and mortgage companies. This insurance reduces the risk for lenders, making them more willing to extend loans to individuals who might not qualify for conventional mortgages.
FHA loans typically require a lower down payment compared to conventional loans, often as low as 3.5% of the home’s purchase price. Additionally, FHA loans are more forgiving when it comes to credit scores, allowing borrowers with scores as low as 500 to 579 to qualify with a higher down payment. The FHA also sets loan limits, which vary by location, to ensure borrowers can access affordable homes within their regions. Borrowers are required to pay mortgage insurance premiums (MIP), both upfront and annually, to protect the lender in case of default. Overall, FHA loans aim to promote homeownership by offering more lenient qualification criteria and lower initial financial barriers.