What Is An FHA Loan In Real Estate?

Since 1934, many Americans have chosen to accept Federal Housing Administration (FHA) loans in order to achieve their homeownership goals, as per the U.S. Department of Housing and Urban Development. For context, the U.S. Department of Housing and Urban Development is a federal agency that is often referred to by the shortened descriptor, HUD. 

In a practical sense, FHA mortgage loans are a type of debt that the government insures. During these transactions, a bank or other lender will typically issue the loans, while HUD must also provide its approval as a federal agency. 

In general, FHA loans may hold appeal for specific populations, particularly those whose investments and assets reflect less access to cash. FHA loans also require smaller down payments than many traditional home loan options, as Investopedia reported. This makes sense, as FHA loans are designed with the specific purpose of assisting families whose incomes fall in the low-to-moderate earning range.

While the FHA loan process is not appropriate for all demographics, part of its appeal is that people with rockier credit scores remain eligible to make such a substantial purchase. Specifically, people whose credit scores are at or above 580 can borrow nearly 97% of their home's value with an FHA loan, as per Investopedia. These homebuyers can also expect to present a 3.5% down payment, which is quite attractive for those who don't have a lot of savings to fall back on. 

Homebuyers with credit scores between 500 and 579 can also obtain an FHA loan. However, they will need to provide a down payment of at least 10% in order to qualify. For these homebuyers, the down payment source may also differ. For example, some tap into their personal savings while others turn to alternative income sources, such as familial gifts or grant funding.