An FHA loan is insured by the Federal Housing Administration, a federal agency within the U.S. Department of Housing and Urban Development (HUD). The FHA does not loan money to borrowers; rather, it provides lenders protection through mortgage insurance (MIP) in case the borrower defaults on his or her loan obligations. Available to all buyers, FHA loan programs are designed to help creditworthy low-income and moderate-income families who do not meet requirements for conventional loans.

FHA loan programs are particularly beneficial to those buyers with less cash. The rates on FHA loans are generally lower than market rates, while down payment requirements are lower than for conventional loans. Some of the other benefits of FHA financing:

  • Only a 3.5 percent down payment is required

  • Higher Debt to Income ratios

  • More flexible underwriting criteria than conventional loans

  • Less than perfect credit, scores down to 580

  • Lower Monthly Mortgage insurance compared to conventional loans for borrowers with lower credit scores

What Is FHA Approval?

Not every mortgage broker is FHA approved-far from it. In order to become FHA (or “HUD”) approved, a mortgage broker must go through a lengthy process of sponsorship, financial auditing and governmental reporting. All mortgage brokers that are FHA approved must meet a certain net worth threshold. They must also submit to a third-party audit of their books and records on a yearly basis.

There are also ethical requirements. Mortgage brokers must have no “black marks” (regulatory action) on their records. They must also continue to conduct their business with the highest of ethical standards or risk suspension or debarment from the FHA Program.