What Is an FHA Insured Loan?

Purpose

FHA-insured loans are designed to assist homebuyers in purchasing their first homes, making energy-efficiency improvements or necessary renovations. The FHA also insures reverse mortgages for senior citizens, ensuring that the nation's seniors have access to financing for their homes. The goal of FHA-insured mortgages is to promote home ownership and eliminate homelessness in the nation.

Since the loans are insured by a government agency, banks and other lenders offer more favorable mortgage terms to borrowers. Interest rates, fees and other loan costs are used to cover the risk lenders incur in extending a loan---as the level of risk goes down, so does the level of compensation lenders demand in order to take the risk. Closing costs, origination fees, brokers fees and other costs are generally lower with FHA-insured mortgages, as well. Credit standards and other financial considerations can be less stringent for these loans, as well. Since lenders know that the program exists to help lower-income families and seniors to purchase homes, they are more lenient in their lending decisions.

The personal requirements for obtaining an FHA-insured loan vary by state and according to the specific institution with which you are applying. In general, loan applicants must meet minimum credit requirements set by the lending institution. Applicants must be legal residents of the U.S. and willing to submit to a credit check and must obtain mortgage insurance at the beginning of the loan term.

Lenders also analyze borrowers' debt-to-income ratios before extending an FHA-insured loan. The debt-to-income ratio compares your outstanding debt to your regular income, shedding light on your ability to repay debt using your existing income.

One of the main purposes of FHA-insured loans is for first-time homebuyers with less-than-perfect credit histories to obtain a mortgage to buy their first home. The FHA also insures loans specifically for fixer-upper homes, bundling mortgage and renovation costs into a single loan. As mentioned before, a reverse mortgage for seniors is also a permissible use of FHA-insured funds. The FHA even goes as far as to offer insured loans for mobile homes and manufactured houses.