How FHA loans work
The FHA guarantees all FHA loans. What that means is that if the borrower defaults on the loan, the FHA will pay the lender the remaining balance on the loan. That guarantee makes FHA loans a low-risk option for lenders, which in turn means that lenders tend to be more flexible with their FHA loan lending requirements than they would be for their more conventional loans. Because of those lower requirements, people who may otherwise not be able to qualify for a conventional loan can still get approved for home financing through an FHA loan.
Advantages of FHA loans
There are a lot of advantages to FHA loans. For one, you can still get approved for an FHA loan even if your credit rating is less than stellar. The lender will be reassured that even if you can’t pay off your loan, the FHA will be able to step in if needed. If this is your first time buying a house or if you are recovering from bankruptcy then an FHA loan may be right for you. Additionally, minimum down payment requirements are much lower with an FHA loan than with conventional loans, with the minimum down payment on an FHA loan just 3.5%. There are other advantages too, such as the fact that there is no prepayment penalty and FHA loans can be used for home improvement projects.