QandAs: Loans

What Is The FHA?

Answer:
FHA stands for Federal Housing Administration,

and it is a part of the United States Department of Housing and Urban Development. The FHA provides mortgage insurance on loans that are made by FHA-approved lenders throughout the United States and its territories.

The FHA will issue mortgage insurance on single family and multi-family homes, as well as manufactured homes and hospitals. The FHA insures more mortgages than any other entity in the world, having insured over 34 million properties since it was formed in 1934.

The mortgage insurance that the FHA issues give banks and other lenders protection against losses caused by homeowners defaulting on their mortgage loans. This reduces the risk to the bank because the FHA will pay a claim to the lender if a homeowner defaults on their loan. In order to qualify for the insurance, the mortgage loans must meet certain requirements.

Conventional loans have strict underwriting guidelines, but FHA-insured loans require the borrower to put up only a small cash down payment in order to close on the loan. There is also more flexibility when calculating household income and payment ratios when writing the loan. The cost of this mortgage insurance is not borne by the bank. The cost is passed onto the consumer and is including in the monthly payment. Most of the time, this insurance will drop off of the loan after five years or when the loan reaches 78 percent of the property value, whichever is longer.

The FHA is the only government agency which is fully self-supporting. It operates solely on its self-generated income at no cost to the taxpayers. The proceeds from the mortgage insurance that homeowners pay are held in a special account that is used to operate this program.

The FHA was first created by Congress in 1934, and in 1965 the agency became part of the Department of Housing and Urban Development (HUD). This agency was formed during the Great Depression when the housing industry was almost destroyed. During the 1940s, FHA programs were used to help finance military housing and homes for returning veterans after the war. From the 1950s until the 1970s, the FHA helped to create millions of privately-owned apartments for the elderly, handicapped, and low income people. During the crisis of the 1970s, emergency financing from the FHA helped to keep many units open. In the 1980s, home prices were falling and many lenders were ceasing business in oil states, and the FHA stepped in to steady home prices. Due to their efforts, by 2001, the overall home ownership had risen to 68.1%, an all time high.

Currently, the FHA insures 4.8 million single family mortgages, and 13,000 multi-family properties.