A FHA loan is a loan insured by the Federal Housing Administration (FHA). If you default on the loan, the FHA will repay the bank’s loss.
Since the loan is insured, the lender can offer you good terms including:
- a low down payment (as low as 3.5% of the purchase price)
- the financing of some closing costs (which means they are included in the loan amount), and
- low closing costs.
This type of loan is often easier to qualify for than a conventional mortgage and anyone can apply. However, FHA loans have a maximum loan limit that varies depending on the average cost of housing in a given region.
Also, you’ll have to pay MIP (mortgage insurance premium) as part of an FHA loan. (Conventional mortgages have PMI and FHA loans have MIP.) The premiums that borrowers pay contribute to the Mutual Mortgage Insurance Fund. FHA draws from this fund to pay lenders’ claims when borrowers default.