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The Ultimate Guide to FHA Loans

fha loans

WHAT ARE FHA LOANS?

The “Ultimate Guide to FHA Loan Programs” is your in-depth look at government insured mortgages. Each article is designed to that will help you understand– in plain English — your financing options as well as the approval process. Since the 1930s, FHA loans have helped millions of Americans become homeowners. You could be next.

FHA loans are mortgages backed by the U.S. government, specifically the Federal Housing Administration (FHA) which is a subsidiary of the United States Department of Housing and Urban Development (HUD).

“Backed” is the key word in the preceding paragraph. To be clear, the US government doesn’t make the loans. They are not a lender. What they do is insure loans made by private lenders (banks, credit unions, mortgage companies, etc.) If borrowers have difficulty making payments and default, the lender has a federally-insured backstop. Yep, government insurance will cover the lender’s loss.  It’s a pretty clever arrangement, FHA’s insurance stimulates broad economic activity by providing an umbrella for private lenders. Pretty sweet.

A few very important things come from this government/private partnership.

First, with the risk spread around, lenders take on less of it and can offer financing to a broader pool of potential borrowers.

Second, the backing of the US Government means less established borrowers (vis a vis lower credit scores) can get a loan with competitive interest rates, keeping monthly mortgage payments smaller.

Third, FHA mortgages require a smaller down payment. People of more modest means can own a home.

Home ownership in America wasn’t always as easy. In fact, prior to the creation of the FHA it was less common and pretty hard. History is a favorite subject around here; hopefully you find the quick timeline below interesting, too.

HISTORY OF FHA LOANS

During the Great Depression, the Roosevelt administration took a very experimental approach with the role of government in American life called the New Deal. Several government programs and agencies were created to help Americans survive a pervasive, crushing level of poverty as well efforts to kick start the economy.

One of the most enduring agencies to come out of the New Deal was The Federal Housing Administration (FHA), born in 1934. The FHA was one of the Roosevelt administration’s key counter measures to an extremely sluggish economy.

Why was housing targeted? What’s the connection between housing and job growth?

Housing was (and still is) an important engine of job creation. When houses are built, bought, sold or improved, jobs for builders to plumbers to appliance manufacturers are created. During the Great Depression, 2 million construction workers alone had been put out of work). The plan for the FHA was to encourage home ownership and help kick start economy activity.

Before The Great Depression, home ownership was much harder for the average American to achieve. Only 40% owned a home (compared to 68 percent by 2001).

The two main barriers to owning a home before The New Deal:

  • A typical down payment was 50 percent of the loan amount (compared to 3.5 percent today)
  • The typical term (length of the loan) was 10 years or less which is very short (causing a higher monthly payment)

How the FHA made it easier going forward:

  • Lowered the down payment amount required to own a home – allowing more people to acquire a home
  • Increased the term of the loan – spreading out payments over 15 or 30 years thus reducing the monthly payment into a more affordable size

The FHA “experiment” has been wildly successful, insuring over 40 million properties since its inception in 1934. Today, there are over 4.7 million single family mortgages in the FHA portfolio. About 1 in 10 home loans are backed by it.

If you get a loan backed by the FHA, you’ll be joining a popular and long-held American tradition (of sorts).

WHO GETS FHA MORTGAGES?

Many people believe that FHA loans are only for first-time home buyers. What a lot of people don’t know — and that we’re going to reveal in this guide — is that the FHA insures a broad array of loan products available for all kinds for borrowers, including:

  • Senior citizens who want to stay in their homes and use their existing home equity to help pay their bills
  • Current borrowers who want to refinance for a better rate or term
  • Borrowers who want to refinance and cash out a portion of their home’s equity
  • People who love fixer-uppers who want a home improvement loan, including the ability to finance energy-saving upgrades
  • And, of course, first-time home buyers