History of the FHA Loan An FHA loan is a government loan insured by the Federal Housing Administration (FHA). The Federal Housing Administration is a government owned institution set up by Franklin D. Roosevelt during the Great Depression. The FHA loan heralded in an era of trust and security for financial institutions that would be lending large amounts of money to purchase houses. It lowered risk for financial institutions by insuring mortgage lenders against losses that came from defaulting on a loan. With that extra blanket of security, banks, and other lenders became more confident with approving applicants. That’s not all the Federal Housing Administration made available though.
Effects of Down Payments Up until that point, insurance companies were the ones setting the terms. They often required at least a 50% down payment on a property and then set up terms for a three to five year pay back plan. At the end of those years, the homeowner was required to pay back the remaining balance or look into a refinancing program. In many cases, these terms were impossible to meet, meaning many families weren’t able to try to purchase a home—because a 50% down payment was expensive. On top of that, many insurance companies wanted their clients to default, so they could take over the property at a relatively cheaper price—considering that their client’s already paid for over half the property. Few people that could afford a home were keeping them. The Federal Housing Administration changed all that when they developed a thirty year fixed-rate loan program. Paying off a home suddenly became more affordable.
Similarities between FHA and VA Loans Not only that, thirty year loans meant that the down payment could be greatly reduced, again allowing more aspiring homeowners the ability to get themselves into a home of their own. The way an FHAinsured loan works is much like a VA loan. An aspiring homeowner applies to the Federal Housing Administration to insure a mortgage for a house. The FHA takes a look at the application, including the property, and decides whether or not to insure it. If the approval stamp comes in the mail, then they can take that stamp to a lender and ask for the mortgage. Financial institutions see very little risk in this and are far more likely to approve a loan.
FHA and VA loans come with very little risk and help both the lender and aspiring homeowner. They have been popular ever since. The system didn’t always have enough money to insure as many mortgage lenders as they wanted to though. There simply wasn’t enough money to handle the new demand for FHA-insured loans. That’s where Fannie Mae came in to help. The government set up the Fannie May system to purchase FHA-insured loans and sell them as securities on the financial markets. By purchasing the insured loans, the FHA had a source of income to keep their funds filled. It created a replenishing cycle that wasn’t crippling the government’s budget. So that’s how the system works. FHA and VA loans are incredibly helpful in the obtaining of a home you couldn’t otherwise afford. Photo credit: AMagill via photopin cc photo credit: JMR_Photography via photopin cc