There is a sub-group of the U.S. Department of Housing and Urban Development (HUD) that is known as the FHA which is the Federal Housing Administration. The FHA came about as a by-product of the National Housing Act which was passed in 1934.
The FHA is not a lender nor does it build homes. The FHA exists to insure lenders against loss in the event that a homeowner defaults on a mortgage.
Therefore, even though it is an inappropriate label, FHA backing is referred to as an FHA loan. For correctly referring to the function of the FHA, the term “FHA-insured” should be used.
Because of the FHA guarantee to back loans, more lenders might grant loans that they would not consider without such backing. With this backing, lenders could feel more secure about granting the loan. Borrower rates may stay lower in such situations.
An FHA loan may be worth considering if a borrower needs a loan that is less than 80% of the property value. This would mean that the borrower has a down payment less than 20%. If this is the case, there will be mortgage insurance payments required which will be 1.5% paid at closing against the loan and 0.50% annually which is paid monthly.
When the mortgage loan balance for any homeowner gets to 78% of the value of the home, the yearly mortgage insurance requirement is no longer in effect. Also, if the property owner has a fixed rate 15 year FHA loan , this insurance isn’t required.
FHA loan rates have typically been higher than comparable mortgage loans. However, because of the recent new Freddie Mac and Fannie Mae risk based loan pricing, people who have credit scores lower than 680 may find that FHA can be less expensive and more appropriate.
Source FHA Loan Wikipedia, April1, 2008 http://en.wikipedia.org/wiki/FHA_loan