Tips from a Buyer’s Agent: What is FHA?
Gearing up to buy your first home can feel like an incredibly daunting task. Made all the more difficult when you begin to be showered by acronyms commonly used to describe various elements of a real estate transaction. One of the most frequent of the acronyms is FHA. Sounds impressive, but what does FHA mean? Let’s take a look!
History Lesson:
Congress created the Federal Housing Administration (FHA) in 1934 during the Great Depression. As you can guess during this tumultuous economic era the housing industry took a pretty big hit. Default & foreclosure rates had skyrocketed, loans were limited to 50% of a property’s value, and mortgage terms became extremely difficult for the average homebuyer to meet. All this resulted in the US being primarily a nation of renters (only ~40% of Americans owned their homes). The housing market was in dire straits & this led the government to create FHA to stimulate the industry. As a result, homeownership rates rose steadily in the US reaching an all-time high of ~69.2% in 2004.
Federal Housing Administration (FHA) loans are mortgages in which FHA insures a large portion of a borrower’s loan against default. FHA “loans” were designed for low-to-moderate-income borrowers to have access to adequate housing & get their piece of the American dream. In the spirit of this aim they qualify individuals with lower credit scores & require minimum down payments (sometimes as little as 3.5% down!). Calling these assurances “loans” is a bit misleading because FHA does NOT actually issue funds. Rather they insure FHA-approved lenders from taking on naked risk by lending to people who otherwise may not qualify for conventional mortgages. In order to guarantee these lenders against the risk of default FHA qualified borrowers are required to purchase private mortgage insurance (PMI) & make mortgage insurance premium (MIP) payments to FHA.
Because of the programs assistance to those with low credit or inability to meet stringent 20% down payment requirements of traditional lenders, FHA insured loans are very popular with first-time homebuyers. Despite having pros & cons (which we will cover in part 2 of this series), FHA insured loans can be an excellent way for people to break into the housing market & begin building equity.
In our next section, we will go over the different types of FHA loans & how you qualify!
