Created in 1934 during the Great Depression, the FHA is a government agency that provides mortgage insurance to lenders. An FHA loan offers more flexible credit qualifying guidelines than other loan types. This is due to the fact that the Federal Housing Administration (FHA) insures this type of loan. FHA does not lend the money, they guarantee the loan. Due to the fact that the government is backing the loan, a lender is able to offer a competitive interest rate.
FHA guidelines set a lower credit score (example: 620 credit score) to qualify for an FHA loan, where a conventional loan will require a higher (example: a 700 credit score). However, this number may vary from lender to lender. FHA loans also require a Mortgage Insurance Premium.
An FHA loan is a home loan that the U.S. Federal Housing Administration (FHA) guarantees. Private lenders like banks and credit unions issue the loans, and the FHA provides the guarantee to the lender.