The Federal Housing Administration has been helping Americans obtain loans for more than 70 years. Here is an overview of the Administration, better known as the FHA.
Federal Housing Administration
The Federal Housing Administration is, ironically, more of an insurer than anything else. FHA does not provide mortgage loans to you or me. Instead, mortgage insurers and home loans provide them to us. This makes lenders more willing to lend to people who would otherwise be frowned upon.
The insurance aspect of the FHA is a fairly common tool used by the federal government to promote a specific behavior. Student loans are a classic example. Typically, an 18-year-old wouldn’t qualify for a sandwich loan, but student loans are plentiful and easy to obtain. This is because the federal government wants to promote education and does so by guaranteeing loans. If you don’t pay the lender back, the government is in trouble. The FHA provides similar insurance for the purpose of promoting homeownership in the United States. In fact, the FHA is the largest mortgage insurer in the world, with more than 30 million mortgages since it was created in the 1930s.
FHA loans are a very attractive mortgage option. Unlike a private mortgage, FHA loans are designed to give you a big break so you can buy a home. The break comes in the form of a very small down payment. The typical down payment is just three percent, a big difference compared to the 20 percent most traditional mortgage lenders like to see.
To the surprise of many, the FHA is not funded by our tax dollars. Instead, it is funded by premium payments. If you choose an FHA loan, you will have to pay the insurance premiums that FHA collects when providing the loan. This typically occurs during the first five years of the loan or until the home equity ratio is approximately 78 percent. Numbers change, so be sure to get an accurate description if you’re considering an FHA loan.
In many ways, the FHA has revolutionized the mortgage industry. When it was formed in 1934, homeownership was pretty rare. To buy a house, he usually had to put down a down payment equal to half the value of the house. Mortgages were also quite short, some of them as short as three years. At the end of that time period, you had to calculate the total amount owed at that time. Talk about a tough real estate market!
Ultimately, the FHA serves as a stabilizing force in the real estate market. Private lenders can change mortgage requirements for better or worse, which can drastically affect people’s ability to buy homes. The FHA smooths out these fluctuations by always providing a home loan resource.