What is an FHA loan?
The word ‘loan’ is a bit of a misnomer, since Federal Housing Administration (FHA) loans are not loans at all. What the FHA does is insure loans so that lenders can offer mortgage assistance to people who:
- May have only fair credit
- May only have a low down payment (must have at least 3.5%)
- May have undergone bankruptcy
- May have been foreclosed on
Essentially, the federal government insures loans for FHA-approved lenders so that lenders reduce their risk of loss if they lend to borrowers who could default on their mortgage payments. The FHA program has been in place since the 1930s to help stimulate the housing market by making loans accessible and affordable. Traditionally, FHA loans have helped military families who return from war, the elderly, handicapped, or lower-income families, but really, anyone can get an FHA loan – they are not just for first-time home buyers.
What are the advantages of FHA loans?
An FHA loan is the easiest type of real estate mortgage loan to qualify for because it requires a low down payment and you can have less-than-perfect credit. Also, because FHA insures your mortgage, lenders are more willing to provide loans. Another advantage of an FHA loan is it’s assumable, which means if you want to sell your home, the buyer can “assume” the loan you have. FHA loans can be used for a home purchase or a refinance.