Ever wondered how the Federal Housing Administration “FHA” was created? It really has quite a history and some could even claim it helped move the country out of the Great Depression. Back in 1934 the United States government created the National Housing Act of 1934 to help stop the wave of foreclosures and introduced a form of insurance that would compensate lenders should a loan ever go into default.
Prior to the introduction of the FHA home loan, getting a mortgage to buy and finance a home could be very different from bank to bank. There were no universal standards to follow so banks set their own terms. Most home loans prior to the introduction of FHA standards home loans were very short in term, as short as two or three years and they were primarily “interest only” as a fully amortized mortgage didn’t exist. At the end of the term, borrowers were forced to refinance to yet another short-term home loan. Down payments could be as high as 40 percent or more.
As the economy continued to drag, the government searched for ways to help jump start the economy and the FHA mortgage was born, setting standards banks could universally follow. The FHA set the terms as well as the interest rates on home loans issued by banks and in return, the bank could receive a guarantee. If the bank or lender followed the new FHA standards when approving a loan, a guarantee is issued in the form of mortgage insurance. USDA and VA home loans have a similar guarantee or funding fee. Home ownership began to increase as more people could qualify for the program. Down payments were lowered and banks felt more comfortable issuing a loan that carried the government-backed guarantee.
One year after the introduction of the FHA loan program, the first rental housing project was developed and entirely FHA-insured. The success of the development led to more such projects being built also carrying the FHA guarantee. Later in 1965 the Federal Housing Administration was transferred to the Department of Housing and Urban Development, or HUD, where it remains today. Homeownership in the 1930s was around 40% and eventually hitting the 65% mark in the 1990s. Over the years, various tweaks have been added to the program and today is the most popular of all government-backed home loan programs.
The minimum down payment for an FHA loan today is only 3.5% making it very popular among first time buyers who may have trouble saving up for a down payment. The down payment can come from the buyer’s own funds, in the form of a financial gift from a family member or from a qualified non-profit in the form of a grant. The FHA loan is also considered to be a bit less stringent compared to other low down payment loans and is also offered in a variety of loan terms including fixed rate and adjustable rate programs in the form of hybrids with amortization periods ranging from 10 to 30 years.
Please contact us today to learn about FHA loans and getting pre-approved.