What Is an FHA Mortgage Loan?

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An approved mortgage loan application with keys to a house.
An approved mortgage loan application with keys to a house. (Image: pricelessphoto/iStock/Getty Images)

The Federal Housing Administration makes home buying more affordable for moderate-income borrowers. The FHA is best known for its low down-payment requirement, which was 3.5 percent at the time of publication. Lenders that participate in FHA programs can offer competitive interest rates and may exercise some flexibility with credit-challenged borrowers. Rather than provide loans directly, the FHA authorizes certain lenders to approve and fund mortgages. In exchange, lenders receive a government insurance guarantee, which allows them to recoup losses if borrowers default.

Mortgages for Buying and Refinancing

You can use an FHA-insured mortgage to buy or refinance a primary residence. Individuals may mortgage a one- to four-unit property, including a condominium, manufactured home or single-family house. In general, real estate investors don't qualify for FHA mortgages, and you can't buy or refinance a two- to four-unit property unless you live in one of the units. You can refinance an FHA or non-FHA mortgage, which allows you to pay off your previous mortgage in favor of an FHA-insured mortgage.

Borrowers Pay for FHA Mortgage Insurance

Lenders are willing to finance borrowers with modest down payments and credit issues because of the FHA's insurance backing. FHA borrowers pay the cost of this insurance coverage with each mortgage payment. You pay the annual mortgage insurance premium in monthly installments for as long as you keep the FHA loan. You can also pay a one-time lump sum at closing for the coverage, known as an Upfront Mortgage Insurance Premium. At the time of publication, the annual mortgage insurance premium charged on most FHA mortgages was 0.85 percent of the loan amount.

Lower Credit Means Higher Down Payment

Most buyers are eligible for the minimum down payment requirement of 3.5 percent. However, individuals with marginal credit -- scores less than 580 -- have to come up with a higher down payment of at least 10 percent down. Some FHA lenders may elect not to finance borrowers with less than 580 scores, as they apply stricter credit rules on top of the FHA's. On refinances, borrowers with at least 3.5 percent equity can get an FHA mortgage.

Mortgage Availability Varies by Lender

FHA lenders range from large commercial banks to private mortgage companies, mortgage brokers and credit unions. Because not all lenders are approved to make FHA mortgages, you can look up the most current list of FHA lenders in your area on the Department of Housing and Urban Development's website. Lenders vary in the types of FHA mortgages offered. The most popular program is the Section 203(b) for purchases and refinances. Other programs include the reverse mortgage for borrowers 62 years and older, known as the Home Equity Conversion Mortgage, or HECM. Lenders can also offer a home-improvement loan known as the 203(k).

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