What role does the Federal Housing Administration (FHA) serve in home financing?

The Federal Housing Administration (FHA) plays a pivotal role in home financing by offering mortgage insurance to lenders. This insurance protects lenders against losses that may occur if a borrower defaults on their mortgage. By providing this safety net, the FHA encourages lenders to offer loans to a broader range of buyers, including those with lower credit scores or smaller down payments who might otherwise struggle to secure financing.

This function is crucial as it facilitates access to home ownership for many Americans, especially first-time buyers or those with limited financial resources. The presence of FHA mortgage insurance thus stimulates the housing market by increasing lending and reducing the risk for lenders, ultimately contributing to a more stable housing sector.