FHA has helped bolster homeownership in the U.S.
The Federal Housing Administration ( FHA ) was established in 1934 in the midst of the Great Depression. Economic conditions were bleak at that time. Unemployment was at 25%. If someone wanted to buy a home, the lending terms were very difficult, sometimes requiring a 50% down payment, high interest rates, three-year to five-year loan terms, and a huge balloon payment at the end of the term. Only about 40% of all households owned their own homes.
The FHA began by insuring loans for lenders. Because of this insurance, lenders were more willing to extend credit. To avoid the problems with mortgages in the past, the FHA developed the 30-year fully amortizing fixed-rate loan program. Borrowers were no longer faced with large balloon payments and could be assured that their loan could be paid off at the end of the term. This also provided lower monthly payments for borrowers.
During the 1940s, new FHA programs were developed to help veterans returning home from World War II. Later, other programs were developed to help the elderly, the disabled and lower income Americans obtain home ownership.
Most standard, conventional mortgage loans today require a down payment between 5 to 20% of the purchase price (95 to 80% loan to value or LTV). This reduces the risk to the lender in case of default because there is a buffer between the current market value and the amount the lender is putting at risk to lend to the borrower.
FHA is not a direct lender, yet it works with private lending institutions to offer special loan programs that may help people purchase residential properties. FHA has loan guidelines that are more lenient than conventional loan products, as well as lower down payment requirements, as low as 3.5% of the purchase price. FHA loans are only for owner-occupied, single family homes, condos, townhomes, or multi-unit homes up to four units. Commercial properties, apartment buildings, or other properties that would not be used as a primary residence, such as a vacation home, would not be eligible for an FHA loan.
FHA loans also removed the requirement for three-year to five-year loan terms with large balloon payments. Instead, FHA loans instituted 15-year and 30-year loan terms with full amortization, meaning when the loan term ends, the loan is fully and completely paid off.