An FHA mortgage is a very popular option for first-time home buyers primarily because of its competitive interest rates, which can be as low as three per cent. The requirements are also simple.

But first of all, what does FHA stand for? It is the acronym for Federal Housing Administration. The FHA mortgage program was established by the Department of Housing and Urban Development in the 1930s to help Americans improve their housing conditions or for as many citizens to have their own houses.

When FHA was started in 1934, a hefty down payment of as high as half of the prices of the house was required and repayment period is very short at between one year and five years only. Nowadays though, FHA mortgages require less than five per cent down payment, starting at three per cent only.

The FHA is not really the one that lends the money to borrowers. The FHA simply acts as a guarantor or insurer of the borrower. It insures that the lender will be paid the mortgage loan if and when the buyer defaults. Borrowers however are also required to pay private mortgage insurance or PMI on the mortgage, which also ensures that the total amount of the mortgage will be paid to the lender if and when the borrower defaults.

FHA mortgages have no mortgage value restrictions, borrowers can apply for any amount of FHA mortgage as long as they qualified or eligible for it. There are various types of FHA mortgages. These include fixed rate mortgages, adjustable rate mortgages, teacher next door, officer next door, FHA renovation mortgages and, special FHA program (FHA bridal registry program).

The fixed rate mortgage is the most popular type of FHA mortgage. As its name implies, its interest rate is fixed and does not change. It requires interest rates as low as three per cent of the total amount borrowed and it insures the lender for the total amount of the mortgage if and when the buyer defaults. Fixed rate mortgages can have repayment periods of 10, 15, 20 or 30 years. It is not only the interest rates that are fixed, even the borrower’s monthly payment is fixed throughout the life of the mortgage.

Adjustable rate mortgages or ARM have interest rates that fluctuate or go up and down depending on the prevailing federal interest rates index. ARM’s interest rates are usually lower than the interest rates of fixed rate mortgages. If interest rates are high, ARM is advantageous because its interest rates are lower than fixed rates.

FHA renovation mortgages are for existing homeowners who want to borrow money to renovate or repair their homes. Borrowers can receive as much as 110 per cent of the costs they need to renovate or repair their home, the minimum amount is $5,000.

The other FHA mortgage types are specialized or customized ones—for teachers (teacher next door mortgages), soldiers or law enforcement officers (officer next door) and, for newlyweds (FHA bridal registry program), which their loved ones or friends can give to them as gifts.