FHA Loan and Mortgage

Many people have heard the term "Federal Housing Administration Loan," but may not be clear on what an FHA loan really is.

FHA stands for Federal Housing Administration. The FHA was created in 1934 in an effort to help more Americans secure loans to purchase their own homes.

The FHA does not lend money to home buyers. Instead, it insures loans made by traditional lenders, such as banks. If a home buyer defaults on an FHA-insured loan, the FHA repays the lender for the loss. This eliminates most of the lending risk for financial institutions, which encourages those institutions to make loans to home buyers.

FHA loans are an excellent option for many home buyers who would not qualify for a conventional mortgage.

• Credit score requirements are lower than those of a conventional loan; around 620 is considered the minimum for an FHA loan.
• Buyers need only a 3.5% down payment to qualify
• Greater flexibility for home buyers with recent bankruptcies
• FHA loans are assumable.
• No pre-payment penalty

• You must pay monthly mortgage insurance, as well as an up-front mortgage insurance premium.

FHA loans are popular among first-time home buyers, but are available to anyone who meets the FHA's lending guidelines. These guidelines include having a credit score of at least 620 to receive the maximum loan amount, though home buyers with scores as low as 580 may be approved for loans of up to 90% of the home's purchase price.

It depends on your area -- you can check maximum loan amounts, by county at the Department of Housing and Urban Development (HUD) website.