In the 1930’s the real estate market took a turn for the worst, along with the rest of the United States economy. The depression was stifling jobs and lives. Home ownership was at a serious low with less than 50% of all Americans owning their own home. Hoping to change that percentage and to boost the economy in the process, the government created a program known as the Federal Housing Administration. The purpose of this administration was to make it possible for more people to become homeowners. The idea was to offer special FHA financing that would target individuals whose finances were not in pristine condition, people who had imperfect credit records and blighted financial histories. Today, due in large part to the fact that this administration has been successful, the percentage of Americans that own a home is now significantly higher than 50%.
A Brief History
The concept behind this administration is fairly simple. At the time of conception, loans were typically given out on the purchase of a home with the understanding that the loan would be repaid over a three to five year period, with any balance remaining at the expiration of the loan to be paid in full. The result was that people had monthly payments that were larger than they could afford, with a huge balance at the end that couldn’t be paid. This made it extremely difficult to qualify for any loan. If a person was able to qualify through the traditional banking institutions, it was not always possible to maintain the loan or to pay it off at the end. It took a huge toll on a person’s finances, a toll that was more often than not too much for a person to handle.
When the Federal Housing Administration began to put a new plan into action, it started by changing the way loans operated. Instead of having potential homeowners go through traditional lending institutions, FHA financing was given through approved lenders who were willing to follow the guidelines as they had been established by this federal administration. If they were unwilling to operate under these guidelines, they were not approved to work with the program. As more lending institutions signed on and more people started applying for loans, the plan slowly but surely began to take place. Eventually, things in the real estate market began a slow but powerful shift back up to the top.
Today, to become an approved lender for the Federal Housing Administration, the guidelines that must be adhered to include lower down payments, leniency on closing costs, and flexibility when looking at a person’s financial record. With these key issues being addressed, it is much easier to secure FHA financing on a home. Now, instead of having to pay higher percentages down – up to twenty percent sometimes – approved lending companies typically require only around three and a half percent. Closing costs are required but there are loopholes in place that can make these easier to pay, and if your finances have gone through the wringer but are on the mend, you may be considered for the loan. This is the biggest reason this federal administration began to turn things around; it made more people potential homeowner candidates. FHA financing makes it possible to qualify for the loan and to get the house.
Mortgage Insurance and the Federal Housing Administration
The Federal Housing Administration was able to turn the market around because they carried the potential risk that comes with a poor financial history, meaning lending institutions are more willing to work with those individuals. While this federal program has been termed an ‘administration’, it is actually a large insurance company. They insure the mortgages. In the event of a foreclosure, they pay the lending companies and take ownership of the home. The lending institutions know that by participating with this government program, they are guaranteed not to lose huge amounts of cash if something happens to the loan – the risk for them has been largely eliminated making them much more willing to work with a wide range of financial situations.
While the Federal Housing Administration is not a perfect system, and isn’t necessarily the right choice for a loan every time, it can be the key to getting you into a new home. When you begin the process for a loan approval, just remember to consider all of your options, both federal and otherwise, because you never know which option will unlock the door to the financing you need.