How an FHA Loan Works

An FHA loan is a great way for a first-time home buyer to finance a home.

Since 1934, FHA loans have been helping people achieve the American dream of home-ownership. This type of loan offers better deals for people who may otherwise have trouble getting a desirable mortgage.

What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration. It has several key components.

• Low down payment. FHA loans usually require just a 3 percent down payment. Because this down payment can be gifted to the borrower, it makes home ownership much more obtainable for the first-time home buyer.
• Low closing costs. Using an FHA-approved lender generally means lower closing costs than a conventional mortgage.
• Easier qualifying. Those with less-than-perfect credit find approval easier through FHA programs because the federal government insures FHA loans.
• Lower overall costs. An FHA loan can have a better interest rate, which cuts down on the overall cost of the loan.
• Avoiding foreclosure. The Federal Housing Administration provides programs to help avoid foreclosure in case of financial difficulties.

How does an FHA loan work?
An FHA loan has a lot of beneficial characteristics. What steps are involved in requesting and receiving such a loan?

1. Request an FHA loan through an FHA-approved lender. This includes being approved for the loan, which entails providing financial information such as income, assets, and debt load and undergoing a credit check.

2. After loan approval, the federal government does not provide the funds but does insure the loan.

3. Because the Federal Housing Administration insures the loan, the borrower receives several benefits:

• A down payment that can be as low as 3 percent
• A down payment that can be gifted to the borrower
• Lower closing costs than with a conventional mortgage
• Possibly a lower interest rate than what is available through a conventional product
• Assistance from the federal government in case of foreclosure.

4. Once the loan process is complete, you go through closing -- the meeting that involves the legal transfer of the property.

5. You move into your new home and make your monthly mortgage payments.

As with any loan, it is important to comparison shop. Although you may find a great deal with an FHA loan, it is still smart to compare it to a conventional mortgage product to be sure that you get the best deal available to you.