Have you been looking for financing on a new home, but struggling to find anything reasonable? With subprime mortgages a thing of the past, if you have less-than-perfect credit, and FHA loan may be just what you need. An FHA loan is a federal assistance mortgage loan, backed by the Federal Housing Administration that insures lenders against loss, incase the borrower is unable to meet the terms of the loan. And because it provides protection to lenders, it allows borrowers to purchase a home, who might not otherwise be able to do so, at a reasonable rate.

The FHA itself was created as part of the National Housing Act of 1934, when defaults and foreclosures were on the rise, to facilitate various loan insurance programs, as well as increase home production, and provide jobs. The FHA doesn't directly make loans, or build houses, but rather oversees these things on a broader scale, and of course, provides insurance to lenders.

These days, due to the wide availability of Private Mortgage Insurance companies, FHA loans aren't utilized quite as often as they were in the days of their inception, and tend to best serve lower income Americans, who may find it difficult to acquire a typical loan or private mortgage insurance, or are unable to provide the necessary down payment.

Typically, when applying for a loan, the lender will ask whether or not you'd like to apply for FHA loan insurance, and if so, will guide you through the application process. The FHA then evaluates the borrower, based on several factors including debt-to-income ratio, as well as credit history. If they find the risk to be acceptable, they will then insure the lender in the event that for any reason you fail to meet the terms of the loan. The borrower typically pays a premium for the insurance, of one-half of one percent.

There are several ways this situation benefits you. First off, you receive an expert appraisal by an official FHA appraiser, assuring an accurate valuation, so you won't have to worry about paying too much for your new home. Also, because the lender has the extra peace of mind provided by federal insurance, they are typically willing to allow you to borrow at a much lower rate than had the FHA not agreed to provide insurance for your loan.

Additionally, the FHA administers various programs with special features, such as the ability to insure adjustable rate mortgages (ARMs). What sets adjustable rate mortgages apart from regular home mortgage loans, is that the rate is adjusted every year (hence the name), allowing you to potentially refinance or purchase your home at a lower rate than the initial loan rate. In 2006, the FHA was even approved to insure hybrid adjustable rate mortgages, in which the rate is fixed for the first 3 or 5 years, and then adjusts annually.

As I mentioned, the FHA doesn't directly make loans. What this means is that different lenders offer different terms, and different rates. Some are very competitive. Some aren't. It's important that you shop around. Call lenders and inquire as to whether or not they originate FHA home loans. It will take some time, but doing a little homework will make a world of difference to your financial future.