An FHA loan is a mortgage loan for the purchase of a single-family or multifamily residence extended by an FHA-approved mortgagee (lender) and insured by the Federal Housing Administration (FHA).
FHA-approved mortgagees (lenders) will originate and underwrite mortgage loans, or purchase them from Sponsored Third-Party Originators (mortgage brokers). Though the lenders may keep the loans in their own loan portfolios, the FHA will insure those loans against loss. So, if one of the FHA-insured loans defaults and the default results in a loss to the lender, the FHA will share the loss with the lender. FHA insurance will not cover the full extent of the loss to the lender, but will share a percentage of the loss.
With FHA insurance, lenders have been able to offer up to 96.5% financing (only 3.5% down payment required) and below-market interest rates to qualified mortgagors (homebuyers).