The Federal Housing Administration (FHA) is a government-backed institution that provides mortgage insurance to banks and mortgage companies that loan funds to low-income borrowers. Lenders must be approved by the agency through a stringent set of guidelines before they provide insurance in any type of mortgage transaction. It is important to keep in mind that the FHA is not a lender; they do not provide funds to individual borrowers. The FHA insures lenders who provide funds to low-income borrowers who could not otherwise qualify for a traditional mortgage. The insurance provides a barrier to lenders who have loaned money to borrowers who may go into default over the course of their loan. If borrowers go into default on an FHA approved loan, the agency will pay a claim to the lender in an effort to keep losses at a minimum. FHA loans must meet a certain set of guidelines before insurance is approved.
