FHA loans are federally backed loans insured by the Federal Housing Administration. FHA loans are traditionally used by buyers who cannot come up with the larger down payments required on a Conventional loan (which are normally 5% down to 20% down). FHA loans were typically used more by lower to moderate income buyers, however, that has all changed recently.
The program started during the Great Depression of the 1930s, when the rate of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance to encourage them to lend.
FHA loans fell out of favor during the real estate boom of 1998-2006, as sellers did not want to be exposed to the more marginally qualified buyers that were usually attached to an FHA loan, nor did they want to hassle with the more stringent appraisal requirements of an FHA loan.
However, in a buyer's market, FHA loans are now commonly accepted in most markets, and FHA loans have become a savior for many home buyers, and the real estate and mortgage industry in general. If it were not for the FHA loan, many real estate transactions would not occur.
FHA loans have more relaxed underwriting standards, below is a sample:
-credit scores as low as 620 are acceptable (for a Conventional loan a 720 is preferred). (REVISION: as of 2013 this is now 640 for FHA)
-a down payment as small as 3.5% is acceptable (for a Conventional loan 5% to 20% is required).
-in high cost areas an FHA loan can go as high as $625,500, just like a Conventional loan. (REVISION: as of 2013 this is now $729,750 for FHA, but may not last into 2014)
-on an FHA loan the seller can pay all closing costs (this is also usually the case on most Conventional loans).
-with an FHA loan all of the 3.5% down payment can be a gift from a family member (whereas on a Conventional loan you must have at least 5% of your own savings into the transaction).
-co-signers are OK on an FHA loan (they are usually not OK on a Conventional loan).
-Lenders can still order from appraisers they know and have a relationship with on FHA loans (not so on Conventional). (REVISION: as of 2013 this is not the case for FHA any longer)
-On an FHA condo loan FHA requires that 51% or more of the condo building be occupied by primary residents versus tenants (on a Conventional loan that figure can be as high as 60% to 70%), but the condo must be on the FHA approved list.
-The underwriting guidelines in other ways are generally more flexible on an FHA loan, than any other.
As a buyer if any of the above is appealing or fits your financial circumstances then an FHA loan is worth looking into. If you are a seller, being open to an FHA loan will help you sell your property.
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