FHA stands for Federal Housing Administration. The FHA is a U.S. government agency that offers insurance to lenders who provide loans to home buyers. Since Congress created the FHA in 1934, it has enabled millions of home buyers to purchase homes when they might not have qualified otherwise. They are a self-funding department, which means not only do they benefit mortgage loan borrowers, but they don’t cost American taxpayers money either.
For many Americans who consider owning a home as part of the quintessential American Dream, the FHA enables them to accomplish their goals of home ownership with very little money down. In fact, many borrowers can get FHA loans with as little as 3.5% down. FHA loans are insured by the federal government with mortgage insurance premiums (FHA MIP) paid for by borrowers.
Why was the FHA Created?
In 1934, when the FHA was created, the U.S. housing economy desperately needed to improve. According to the U.S. Department of Federal Housing and Urban Development (HUD), which the FHA became a part of in 1965, most people were renters during the 1930's.
At that time, it was very hard to get a mortgage, and the typical mortgage terms were unreachable for many people. In fact, according to HUD, most mortgages "were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment.”
Since people in the 1930's were just coming out of the Great Depression, the FHA made a big impact on the housing economy in the United States. In the 1940's, they were able to help military personnel get housing loans and secured housing for the elderly.
Essentially, because the FHA exists, lenders don't have to worry about riskier borrowers defaulting on their loans. If borrowers do default on the loan, the FHA insurance would cover any losses. It also helps borrowers who are getting back on their feet with lower credit scores or a history of bankruptcy to have a chance to improve their situations and make their dreams of home ownership a reality.
What are the Types of Loans the FHA Offers?
The FHA offers several different types of loans. Below are three of the most common ones.
A fixed rate mortgage is just as the name implies. When you sign the mortgage paperwork, you agree to an interest rate that won't change. You can also choose many different lengths of a mortgage, from a 10 year to a 30-year term.
Adjustable rate mortgages have interest rates that will change. However, with this type of mortgage, your interest rate doesn't necessarily have to change every single year. You can get a 5/1 mortgage where your interest rate is fixed for 5 years and then the rate adjusts every year thereafter. There is also a 7/1 adjustable rate mortgage and even a 10/1, too. This can be a good option if you know you will be moving before your rate starts to adjust.
Home Equity Conversion Mortgage
The more common name for this type of FHA mortgage is a reverse mortgage. These are for seniors over 62 years old who own their home entirely or have a lot of equity. Essentially, you borrow against the equity in your home in order to receive payments or a line of credit. Many people do this when they need additional money after they have retired.
While the types of mortgage loans mentioned above are the most popular, there are other types of FHA loans including the FHA Graduated Payment Mortgage (GPM), FHA's Growing Equity Mortgage (GEM), and FHA's Energy Efficient Mortgage Program.
What Impact has the FHA had on Home Buyers?
The FHA, as previously stated, has made it possible for millions of people to become homeowners. In fact, according to HUD, "The FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934."
It's important to note that FHA loans are typically more expensive than traditional mortgages in the long run. For example, homeowners who finance more than 80% of their home loans have to pay Private Mortgage Insurance on top of their regular mortgage payments. On the other hand, those who get FHA loans can typically qualify for a mortgage with as little as 3.5% down on their home and they don't even have to put down their own money. The money can be given to the homebuyer in the form of a gift or grant that can then be applied to the down payment of the home.
For most borrowers, high down payment amounts and poor credit are what holds them back from becoming homeowners. The FHA makes it possible for people who don't meet these qualifications to get a home loan because lenders are insured by the FHA and don't have to worry as much about losing money if a borrower defaults.