FHA Loans
An FHA insured loan is a US Federal Housing Administration mortgage insurance backed mortgage loan which is provided by an FHA-approved lender. FHA insured loans are a type of federal assistance and have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. Because this type of loan is more geared towards new house owners rather than real-estate investors, FHA loans are different than a conventional loan in the sense that the house must be owner occupant for at least a year. Since loans with lower down-payments usually involve more risk to the lender, the home-buyer must pay two-part mortgage insurance which involves a one-time bulk payment in addition to a monthly payment to compensate for the increased risk.
The program originated during the Great Depression of the 1930s when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. Some FHA programs were subsidized by the government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers. Over time, private mortgage insurance (PMI) companies came into play, and now FHA primarily serves people who cannot afford a conventional down payment or otherwise do not qualify for PMI.
The National Housing Act of 1934 created the Federal Housing Administration (FHA), which was established primarily to increase home construction, reduce unemployment, and operate various loan insurance programs. The FHA makes no loans, nor does it plan or build houses. As in the Veterans Administration’s VA loan program, the applicant for the loan must make arrangements with a lending institution. This financial organization then may ask if the borrower wants FHA insurance on the loan or may insist that the borrower applies for it. The federal government, through the Federal Housing Administration, investigates the applicant and, having decided that the risk is favorable, ensures the lending institution against loss of principal in case the borrower fails to meet the terms and conditions of the mortgage. The borrower, who pays an insurance premium of one half of 1 percent on declining balances for the lender’s protection, receives two benefits: a careful appraisal by an FHA inspector and a lower interest rate on the mortgage than the lender might have offered without the protection.
SOURCE: https://en.wikipedia.org/wiki/FHA_insured_loan