Federal Housing Administration (FHA)

What Is the Federal Housing Administration (FHA)?

The Federal Housing Administration (FHA) is a U.S. agency offering mortgage insurance to FHA-approved lenders that meet specific qualifications. Mortgage insurance protects lenders against losses from mortgage defaults. If a borrower defaults on a loan, the FHA pays the lender a specified claim amount.

Understanding the Federal Housing Administration (FHA)

The primary goal of establishing the FHA was to stimulate the housing industry. The underlying idea was that, in providing insurance to lenders, more individuals would ultimately qualify for mortgages to buy homes. Most FHA loans are for individuals who could not afford, and would not ordinarily qualify for, a traditional home mortgage loan.

The mortgage insurance premium (MIP) is the money a homeowner pays to the FHA as a part of the FHA mortgage program. As of 2020, for all loan terms and a loan to value (LTV) ratio larger than 90%, the annual MIP will be collected until the end of the loan term, or 11 years, whichever occurs first. Loan to value (LTV) ratios less than, or equal to, 90%, will have annual MIP due until the end of the loan term, or 11 years, whichever occurs first. For borrowers with a 15-year fixed term, they must pay 3.5% interest. For borrowers with a 30-year fixed term, they must pay 3.375% interest.

History of the Federal Housing Administration (FHA)

During the Great Depression, bank failure caused the number of home loans and homeownership to decrease significantly. During this period, home mortgages were generally for short periods (e.g., three to five years), with balloon instruments at LTV ratios of less than 60% and with no amortization. 

This significant banking crisis forced lenders to seek out borrowers of unpaid mortgages immediately. Because refinancing was impossible, most borrowers failed to make mortgage payments, and their homes were foreclosed upon, which further adversely affected the housing industry.

Because the federal banking system needed restructuring, Congress enacted the National Housing Act of 1934. Its primary purpose was to improve housing standards and conditions, provide a method of mutual mortgage insurance, and reduce foreclosures on family home mortgages. The legislation created two agencies, the Federal Savings and Loan Insurance Corporation (FSLIC) and the FHA. 

These acts caused an increase in the single-family home market and built more affordable housing and mortgages. The FHA officially became part of the Department of Housing and Urban Development (HUD) in 1965.

The FHA operates from self-generated income resulting in no burden on taxpayers. The FHA holds proceeds from mortgage insurance in an account used to pay for the program. FHA programs provide substantial economic stimulation to the United States via community and home development which flows down to local communities in the form of jobs, schools, and other sources of revenue.