An FHA loan is insured by the Federal Housing Administration, a federal agency within the U.S. Department of Housing and Urban Development (HUD). The FHA does not loan money to borrowers, rather, it provides lenders protection through mortgage insurance (MIP) in case the borrower defaults on his or her loan obligations.
Available to all buyers, FHA loan programs are designed to help creditworthy low-income and moderate-income families who do not meet requirements for conventional loans.
FHA loan programs are particularly beneficial to those buyers with less available cash. The rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans.
Some of the other benefits of FHA financing:
Only a 3.50% percent down payment is required
Closing costs can be financed
Lower monthly mortgage insurance premiums and, under certain conditions, automatic cancellation of the premium
More flexible underwriting criteria than conventional loans
FHA limits the amount lenders can charge for some closing cost fees
(e.g. the origination fee can be no more than 1% of mortgage)
Ability to streamline or take cash out after 6 months of on time payments