VIDEO: FHA Home Loans Explained

The Federal Housing Administration (FHA) is not a bank, but more like an insurance for the bank.

An FHA loan is backed by the Federal Housing Administration, which means if a borrower defaults on the loan, the FHA guarantees that it will pay the lender.

As a result, lenders will issue larger loan amounts and give you lower rates.

Practically everyone can get an FHA loan. Typically, it does not matter how much or how little you earn. What does matter is how much you want to borrow.

There are limits to how much you can borrow, and these depend on your residence.

To fund this guarantee, the FHA requires that you pay mortgage insurance. Usually, when a borrower puts a down payment of less than 20%, he or she will be required to pay mortgage insurance.

The minimum down payment required for an FHA loan is 3.5% (as of 2009), with most borrowers choosing to put less money down.

The borrower pays the mortgage insurance every month at a low rate of 0.5% of the loan amount. The FHA also requires an upfront mortgage insurance premium (MIP), which is 1.5% of the loan amount. This fee is paid at closing and can be financed.

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