FHA loans are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single family and multifamily homes. The FHA doesn't issue loans or set interest rates, it just guarantees against default.
FHA loans allow individuals who may not qualify for a conventional mortgage obtain a loan, especially first time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.
In 1934, the Federal Housing Administration (FHA) was established to improve housing standards and to provide an adequate home financing system with mortgage insurance. Now, families that may have otherwise been excluded from the housing market could finally buy their dream home.
FHA does not make home loans, it insures a loan. If a homebuyer defaults, the lender is paid from the insurance fund.
The main difference between an FHA loan and a Conventional loan is that an FHA loan requires a lower down payment and the credit qualifying criteria for a borrower is not as strict. This allows those without a credit history, or with minor credit problems to buy a home. FHA requires a reasonable explanation of any derogatory items, but will use common sense credit underwriting. Conventional financing relies heavily upon credit scoring, a rating given by a credit bureau such as Experian, Trans-Union or Equifax. If your score is below the minimum standard, you may not qualify.