A common misconception is that the government funds FHA loans.  The truth is, the government insures FHA loans.  Let me explain. 

A lender will qualify and fund the loan as long as the borrower and the home falls within the FHA guidelines.  FHA will now insure this loan.  The insurance is very important to the lender because if the borrower in the future defaults on the loan and the lender eventually takes the home to recover its investment, FHA will pay for any loss that loan may have created for that lender. 

This insurance in turn makes it less risky for the the lender and increases their ability to lend at a higher loan to value.