Written By: Joan Ewing, Op-Ed Writer
Hello Everybody – Another week in the mortgage industry is here and I am sure everyone uses the acronym FHA quite a few times a week. However, do we really know anything about FHA, when they were created, why they were created and what they really do? Who is FHA?
Let’s go first to the history of FHA – Congress created the Federal Housing Administration in 1934. Back when FHA was created the housing market was flat; two million construction workers lost their jobs. Homebuyers could not qualify for the mortgages needed to purchase a home. Mortgage terms were 50% loan to value and the repayment of the mortgage was 3-5 years. With these terms owning a home was not easy – only 40% of Americans were homeowners. Since owning a home was, and still is, the American Dream – something needed to make this possible.
Initially FHA was set up to finance the military housing for veterans returning from the war. In addition, they financed privately-owned apartments for elderly, handicapped and lower income Americans. We understand now FHA is for all buyers – I would say FHA has reached an all-time high of available mortgages.
Many borrowers today still do not understand FHA Mortgage Insurance. So let’s see how we can explain this. FHA insures loans they do not make the loan. FHA has set up guidelines and the lenders are responsible for actually loaning the money to the borrower and then if all of FHA guidelines were followed – FHA will insure the loan. For lenders, FHA mortgage insurance protects them against loss if the borrower defaults on his or her mortgage loan.
FHA Mortgage Insurance came into being because unlike conventional loans FHA loans require a smaller down payment. There is more flexibility in an FHA loan than conventional loans. The cost of the mortgage insurance is passed along to the homeowner and is included in the monthly payment. Also the FHA insurance will drop off after five years or when the remaining balance on the loan is 78% of the value of the property, whichever is longer.
How is FHA funded? – FHA operates entirely from self-generated income. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program. FHA still provides a huge economic stimulation to the country in the form of home and community development.
In the 1950s, 60s and 70s, FHA helped to spark the production of millions of units of privately owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs in the 70’s threatened the survival of thousands of private apartment buildings; FHA’s emergency financing kept the cash strapped apartments afloat.
Also – back in the 80’s there was a time when FHA would run out of money – I remember actually a time when a home could not settle until FHA was funded again by the Senate. However, now days – it is refunded through payments as explained above.
By 2001, the nations homeownership rate soared to 68% - which was an all time high.
FHA has undergone many changes since its inception in the 1930s. Just reading the calendar of events above explains how it has changed. Two years ago with the 80/20 mortgages it was almost impossible for a borrower to agree to an FHA mortgage. You needed 3% down on an FHA mortgage – the borrowers were getting 100% financing conventionally. However, again the market has done a 180 and FHA is again in vogue for any borrower who is looking for a mortgage.
About The Author
Joan Ewing - As an op-ed writer and an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base.