What is the purpose of FHA insurance?

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FHA mortgage insurance exists to shield lenders from losses when a borrower defaults or the loan goes into foreclosure. Because the loan is insured by the FHA, lenders can offer loans with lower down payments and looser qualification standards, confident they have protection if things go wrong. If a borrower stops paying and foreclosure occurs, the FHA Mortgage Insurance Fund contributes to cover a portion of the lender’s loss, helping keep the loan program available. This isn’t a guarantee of the borrower’s repayment, nor does it insure the property against damage or set the loan’s interest rate—rates come from the lender and market conditions.