When most people begin to look into buying a new home, the most common type of loan they think of is the venerable 30 year, fixed rate mortgage loan. However the Federal Housing Administration mortgage loan or FHA loan has become much more popular due the economic slow-down. Even with its varied benefits, many people still do not know much about this type of federally insured loan.

What is an FHA loan?

The Federal Housing Administration is part of the U.S. Department of Housing and Urban Development or HUD. To promote homeownership, especially for first-time buyers, an FHA loan is a federally insured mortgage with less restrictions. This allows more people to qualify to purchase a new home. Lenders are protected from loss if a borrower defaults, due to the FHA covering the loss through mortgage insurance paid for by the borrower. This protection allows lenders offering FHA loans better options than standard mortgages. Here are the top 3 reasons for an FHA loan when looking for a new home.

#1 Fewer Requirements

The whole purpose of the FHA loan is to promote homeownership. If there is one thing economists can agree upon it is that homeownership is important to a healthy economy. With the housing bubble crash of 2007, thousands of homeowners across the nation either lost their home or had their home’s value plummet. Sales of new homes also dropped and the home construction industry went into a slump.

While FHA requirements for a loan were low prior to the financial crisis, the need for FHA loans is higher than ever. Credit is the biggest factor. Economists have been taking banks to task throughout 2012 for being stingy when issuing credit which kept many potential home buyers from getting the loan they needed. The lowered need for a good credit score to obtain an FHA loan means a lot of people whose credit suffered during the economic downturn can get a new home and start working on repairing their credit.

The Home Affordable Refinance Program (HARP) which is a specialized FHA loan designed for homeowners whose homes are worth less than the mortgage they are paying on. A refinanced FHA loan through the HARP program allows the homeowner to have lower monthly payments which helps prevent them from defaulting on their loan.

#2 Lower Down Payment

Trying to come up with the 20-25% cash down-payment has been a deal breaker in many potential home sales. With an FHA loan, however, the down-payment can be as low as 3.5% of the sale price. This allows first time home buyers who have not had the time to accumulate the cash needed to still buy a home.

#3 Other Costs Covered

There is more to a home purchase than the sales price. There are also closing costs, appraisals and potential title expenses. The FHA allows some of these costs – such as a builder covering the closing cost - to be paid by other parties as inducements to purchase a home.