The FHA loan is popular because a low down payment is allowed, and the rates are wonderful. In fact, they are better than many conventional loans, but you have to look at the total payment because an FHA loan also requires monthly mortgage insurance to be added to your payment. You can use this product for purchases and refinances.
While FHA is commonly referred to as a loan, it is actually a mortgage-insurance product designed by the government. It was created to ensure lenders that if they loan to borrowers who meet FHA guidelines that the government (FHA) has created, then they will pay the lender if a borrower defaults on his or her mortgage.
The monthly mortgage insurance added to the monthly payment, along with the upfront mortgage insurance of the loan amount that is financed into the loan amount, is where the FHA mortgage insurance program receives the premiums necessary to pay for non-performing loans. When an FHA loan is foreclosed on, the lender gets paid out, and then FHA transfers ownership to the Department of Housing and Urban Development (HUD).
Without such a guarantee, most lenders would likely require perfect credit and 20% down for every loan. FHA-insured loans have a much higher tolerance for lower credit scores and allow you to borrow more — in respects to income — than any other loan product. These facts, coupled with a low down-payment requirement and allowing a seller to pay up to 6% of the purchase price, make this choice a no-brainer for most buyers.