An FHA home loan is a mortgage insured by the Federal Housing Administration, according to the U.S. Department of Housing and Urban Development. It is an alternative to a conventional mortgage. FHA loans are intended to help people with limited down payment funds or modest credit history.
A major difference between an FHA loan and a conventional mortgage is that FHA borrowers only have to put down 3.5 percent on the purchase, according to Bankrate. In contrast, conventional borrowers must put 20 percent down to avoid paying private mortgage insurance. The credit requirements are also easier to meet for FHA loans, according to HUD. Closing costs are typically lower on FHA mortgages as well.
The original purpose of the FHA when it started in 1934 was to aid more people in buying homes, according to HUD. However, lenders take on greater risks when issuing loans to people with relatively low credit and lower down payments. Therefore, FHA borrowers are required to pay for mortgage insurance, according to Zillow. This insurance includes an upfront payment and ongoing premiums. This insurance coverage means that if the homeowner fails to keep up with payment obligations, the lender gets the remainder of the debt from the insurance provider.