How Do FHA Loans Work?

The Federal Housing Administration (FHA) is a government organization that will offer insurance protection against the principle balance of a mortgage loan for those borrowers who would otherwise be unable to obtain residential real estate financing. Understanding that home ownership is a positive and powerful thing, and also considering that many people have less than perfect credit but could otherwise handle a mortgage payment, the FHA will work on the borrower's behalf and provide insurance to calm the concerned lender. This insurance stipulates that if the borrower defaults on the loan then the policy will repay the lender.

Acknowledging insurance coverage of this type, lenders are more open to offering loans to individuals who would otherwise be declined a loan based on standard criteria and requirements. There is very little risk to the lender since the government is guaranteeing their principle, leaving only the interest (profit) to be risked and lost. Mortgage lenders working with FHA loans have slightly different criteria for approval, yet there still exists the possibility that a borrower will be declined funding. Simply having FHA insurance does not guarantee that just anybody can get a loan.

Similarly, the FHA itself has internal requirements regarding the types of loans and the total amount of funding that they will insure. Loan types made available to borrowers in this situation are often restricted to those that are pre-approved by FHA, and the lenders themselves must meet FHA requirements to be included in the list of organizations with whom FHA will work.

There is no definitive or detailed list of all the available loan types or lenders working with FHA loans, so a borrower or mortgage broker may have to conduct some additional research to locate such lenders. Either way, a borrower must become familiar with exactly what it means to have a mortgage that is insured by the FHA, and what additional requirements will need to be met prior to receiving approval.