An FHA loan is a government-backed loan insured by the Federal Housing Administration.
The popularity of FHA loans has skyrocketed in recent years. The federal government backs FHA loans so they have relatively competitive interest rates, less stringent underwriting standards, and require smaller down payments. They're particularly appealing to first-time homebuyers who lack substantial credit histories and cash reserves, especially since loan underwriters permit non-traditional lines of credit, like insurance premiums and utility bills.
Down payments may be as low as 3.5 percent and funds can come from a gift, and buyers don’t need financial reserves beyond immediate closing costs. Also, an applicant may co-sign with a non-occupant co‐borrower like a parent to offset any qualification issues.
These loans are relatively easy to refinance and are relatively forgiving of bankruptcies and foreclosures. They simply require a two-year waiting time following a discharge. However, be prepared for stricter appraisals, strict accounting of income, and lower loan limits. Also, FHA loans don't work for investment and vacation homes and a spouse’s debts can work against you, even if the spouse doesn’t co‐sign the mortgage.