Characteristics of FHA Mortgage Loans

A crucial distinction to understand is that the FHA does not lend money directly to buyers. Instead, loans are originated by approved private lenders, such as banks or mortgage companies. The FHA’s role is to provide loan insurance, which protects the lender against financial loss if the borrower stops making payments and the home is foreclosed. While the interest rate is determined by the private market and negotiation between the borrower and lender, the FHA regulates other costs. For instance, discount points can be paid by either the buyer or the seller to lower the interest rate, but these are subject to negotiation and market conditions just like in conventional lending.