Real Estate Glossary > F > Federal Housing Administration Loan Definition

One of two types of alternatives to a conventional loan (the other is a Veterans Affairs (VA) loan), FHA loans are insured by the Federal Housing Administration; if the home-buyer can't pay the loan, the government pays the lender for any losses. Because of the government's insurance, an FHA loan requires only a 3.5% down payment, and is available to home-buyers with credit scores as low as 620. Each mortgage lender, bank or broker will offer different rates, terms and fees for FHA loans, so it's best to get Good Faith Estimates from a number of different places to find the best loan for you. As private mortgage insurance has become hard to obtain and rates have increased, FHA loans have become more popular. Nearly every lender, from Bank of America to Wells Fargo, has been qualified by the federal government to offer an FHA loan. To pay for FHA insurance, the buyer is charged an up-front 1.75% mortgage insurance premium (can also be financed into the monthly mortgage payments), along with an insurance premium as part of the home-buyer's monthly mortgage payments.

To qualify for a FHA loan, the home-buyer must be employed and have avoided bankruptcy for the past two years, and foreclosure for the past three years. A property purchased using an FHA loan must be appraised by an FHA-approved appraiser. The government also limits the size of FHA loans, with different limits for different areas. Due to these requirements, some sellers would rather not see buyers with FHA funding because the appraisal and underwriting process can be more involved than with conventional loans. In addition, some condo building homeowners associations aren't approved to consider borrowers with FHA financing due to an older law in the association's covenants, conditions and restrictions document that gives the association a "right of first refusal" that allows them to deny a prospective buyer. This law violates the Fair Housing Act established by the Department of Housing and Urban Development (HUD) , the government agency that controls the FHA, which provides funding for FHA loans.