With respect to FHA loans, what does the FHA do?

The Federal Housing Administration (FHA) plays a crucial role in the mortgage loan process by insuring loans, rather than directly guaranteeing or issuing them. When the FHA insures a loan, it provides a safety net for lenders, which means that if the borrower defaults on the mortgage, the FHA will cover a portion of the loss. This insurance makes lenders more willing to provide loans to borrowers who might be considered higher risk, such as first-time homebuyers or those with lower credit scores.

The FHA does not act as a lender, meaning it does not provide the funds for the loans itself. Instead, it works with approved lenders who make the actual loans to borrowers. Additionally, while the FHA is involved in promoting affordable housing, it does not issue private mortgage insurance (PMI); that is typically provided by private mortgage insurance companies. The distinction between insuring loans and guaranteeing them is important, as the insurance model used by the FHA helps to stabilize the housing market and encourage lending, particularly in underserved areas.