FHA stands for Federal Housing Administration; the FHA is an arm of the Department of Housing and Urban Development (HUD). The primary focus of the FHA is to encourage homeownership in the United States. To do this, the FHA insures mortgages against borrower default. By insuring mortgages, the FHA makes homeownership possible for a broader range of buyers.
The FHA developed as an effort to stimulate the housing market during the Great Depression. This effort was codified by an act of Congress in 1934 to overcome some of the obstacles to homeownership. According to the FHA, at the time the agency was created, mortgages financed a maximum 50 percent of market value. In addition, mortgage repayment schedules were limited a range of three to five years and required a substantial final payment to pay off the mortgage. The limiting nature of these mortgage terms made homeownership inaccessible to the majority of Americans.
To ease mortgage lending terms, the FHA insures mortgages against financial losses. By providing this guarantee, lenders can ease their lending terms because the risk of losing money is mitigated by mortgage insurance provided by the FHA. If, for example, a borrower loses his home, the lender files a claim with the FHA and the FHA covers the losses incurred by the lender.
For potential homeowners, the benefit of an FHA mortgage is the flexible lending standards. Conventional mortgage lenders require a 20 percent down payment. FHA borrowers can qualify to finance 96.5 percent of the home loan, making only a 3.5 percent down payment, which is easier to manage than 20 percent. Closing costs, which can be substantial, can be included in the mortgage loan.
To qualify for an FHA loan borrowers must meet certain criteria. The FHA requires that borrowers pay the initial mortgage insurance payment and make subsequent premium payments every year. In addition, borrowers are subject to the credit standards established by the FHA. Although FHA mortgage insurance grants flexibility in lending terms, there are limits to the amount of a mortgage loan and type of property. According to the FHA, loan amounts vary by conditions in the borrower’s area. The FHA insures mortgages on single homes and buildings that contain one to four housing units, as long as one of the units is owner-occupied.
Impact on Housing
Since its creation, the FHA has influenced the housing market in substantial and meaningful ways. According to FHA figures, more than 34 million single-family mortgages and 47,205 multi-family housing mortgages have been insured since the agency was created. The current portfolio of properties includes 4.8 million single-family and 13,000 multi-family mortgages. After World War II, the FHA partly financed homes for military veterans and their families. In addition, the FHA has encouraged the development of millions of apartments for handicapped, low-income and elderly Americans.