The Federal Housing Administration (FHA) is a program administered through the federal Department of Housing and Urban Development (HUD). The program does not fund loans; it insures home loans. The FHA enables qualified buyers to obtain home loans with lower down payments intended for home purchases.
If a lender loans 100 percent on a home, the buyer has no financial investment in the property, making the loan more risky for the lender. If a buyer gives a 20 percent down payment of the purchase price, the buyer's investment makes the loan less risky for the lender. Yet, not all buyers have 20 percent to put down. With an FHA mortgage, HUD insures the loan, meaning the lender faces less loss should the buyer default on the loan. Yet, it is the lender, not HUD, who initially funds the loan.
Not all lenders offer FHA-insured loans. Only FHA-approved lenders have the ability to offer FHA loans to borrowers. Even with an FHA loan, the borrower must qualify for the loan, which includes a credit check and proof of employment history. If the borrower is using the loan to purchase investment property, as opposed to a primary residence, she will be required to put down a larger down payment.
Those who may qualify for an FHA-insured mortgage include individuals, nonprofit entities and government agencies. The borrower must have a valid Social Security number and legal residency status in the United States. Citizenship is not a requirement to qualify as an FHA buyer. Qualifying purchases include a condominium, affixed manufactured home with land, single-family house or a one- to four-unit residential building.
The function of an FHA loan is to fund home purchases. Yet, it is possible to use them to purchase land, such as in a construction loan or mobile home with land purchase. Guidelines specify loan distributions and typically include time limits for completion of land development. This prevents borrowers from using an FHA loan to purchase land without an immediate intention to develop it.
When purchasing a home that includes excess land, beyond the normal lot size of the neighborhood, the FHA appraisal rules for that area may not allow the appraiser to give the extra land value. Excess land is land that has other uses, such as the ability to be subdivided.