What type of loans does the FHA insure to mitigate risk?

The Federal Housing Administration (FHA) insures loans that generally allow for a higher loan-to-value (LTV) ratio, making homeownership more accessible for borrowers. FHA loans typically permit LTV ratios of up to 96.5%, meaning that borrowers can finance a significant portion of the property’s purchase price. This feature enables buyers with limited funds for a down payment to qualify for a mortgage, as the FHA insurance lowers the lender’s risk in case of default.

Fixed-rate loans and variable-rate loans can both exist outside of the FHA's framework, and they do not specifically align with the FHA's goal of supporting borrowers who may not afford a traditional down payment. Conventional loans tend to require lower LTV ratios and often impose stricter credit and underwriting standards, making them less accessible to certain first-time homebuyers or those with less than perfect credit history. Hence, the focus of the FHA is on insuring high loan-to-value ratio loans, which is the key component that differentiates these types of loans and underpins the safety net the FHA provides to both lenders and borrowers.