• The Federal Housing Authority (FHA) loan is a type of mortgage that is federally guaranteed by the Department of Housing and Urban Development (HUD). The government-backed loan is offered through a number of commercial lenders and banks. One attractive feature of FHA loans is the down payment requirement, which is typically much lower than other loan products offered by commercial lenders.
  
  

Down payment amount

• The minimum down payment amount for a FHA loan is 3.5 percent. This is a much lower down payment than many conventional loan products, which average between 10 and 20 percent down. This lower down payment opens up home ownership to borrowers who can afford monthly mortgages but are unable to put down a larger down payment. The down payment has to be paid directly by the borrower and cannot be rolled into the overall mortgage amount. The down payment is paid with the closing costs when an offer is accepted and a house passes inspection.
  
  

Mortgage insurance

• The disadvantage to FHA loans and lower down payments is the necessity of mortgage insurance. Mortgage insurance is applied to loans that are above a certain loan-to-value number; in FHA's case, this is 78 percent in almost all cases. An additional mortgage insurance requirement requires borrowers to pay mortgage insurance for a minimum of five years, regardless of the loan-to-value on the home. The only way to get around this is a 15-year mortgage with an initial loan-to-value ratio of 89.99 percent.
  
  

Qualifying

• Another feature that attracts many borrowers to FHA loans are qualification requirements. The credit guidelines for FHA are not as strict as many other mortgages. Credit scores as low as 580 are accepted, although the minimum score requirements are set by the individual lender instead of HUD. Borrowers with no credit who can prove creditworthiness through alternative means can use FHA loans as well. FHA loan rates are fairly competitive, although they are usually a point or two higher than standard loan rates.