What is an FHA loan?

An FHA loan is defined as a mortgage that is insured by the Federal Housing Administration (FHA). This type of loan was created to encourage homeownership by making it easier for individuals to qualify for a mortgage, particularly first-time homebuyers and those with lower credit scores or limited financial resources. The FHA provides lenders with insurance against default, which reduces the risk for lenders, allowing them to offer loans with lower down payments and more flexible qualification criteria.

This insurance aspect is crucial because it supports borrowers who might otherwise struggle to secure financing. FHA loans typically enable a down payment as low as 3.5% of the purchase price, making homeownership more accessible. The presence of this backing from the government contributes to the growth of affordable housing by promoting the lending process to those unable to afford the more stringent requirements of conventional loans.

In contrast, the other options describe types of loans that do not accurately represent the characteristics and purpose of an FHA loan.