Federal Housing Administration is a government program that has a lot of sway in the real estate market. More than 50% of all home loans are insured by this administration, so the odds are that a good portion of your friends acquired their homes with the help of the Federal Housing Administration program. So a couple of questions that are worth asking are ‘what is FHA?’ and ‘how will it affect me and the purchase of my home?’
The History of the Administration
During the depression, the government formed the Federal Housing Administration in an effort to help pull the real estate market out of the economic crisis that was affecting the entire country. If the real estate market improved, it was a safe assumption to make that the rest of the economy might follow. At the time, less than 50% of all Americans had the ability to purchase a home; most spent their lives renting. So the best way to improve the real estate economy was to tip the scales in the favor of owning a home.
The reason most people were unable to purchase a home was simply because they could not afford the loan requirements. Loans typically had to be paid back over a three to five year period and they were limited to about half of the market value of the home. In addition, whatever hadn’t been paid on the principle during the life of the loan had to be covered when it expired. This means that homeowners were slapped with a large sum that they often couldn’t afford. Needless to say, while owning a home may have been the dream for many, it was a dream that was often impossible to bring to fruition.
Where Does FHA get its Funding and Can You Benefit from It?
While many Government administrations and off shoots are supported through taxpayer dollars, the Federal Housing Administration operates a little differently. When you ask somebody ‘what is FHA’ you’re not likely to hear that it’s basically an insurance program. You’ll hear about the history or that it’s part of the government, and while those are accurate descriptions for it, at the bare bones level it is an insurance company. It doesn’t get its funding through your taxes or the taxes of your friends, and it’s not supported by government funds. Instead, the financial ebb and flow of this particular federal program comes from the program itself. When you purchase a home through an approved lender, one of the conditions is that you pay mortgage insurance on the loan. Rather than purchase that insurance through a private lender, you actually purchase it through federal sources. This means that a lot of money is going into the program. This money eventually goes out and helps to improve neighborhoods, homes, and the overall economy.
So now the question ‘What is FHA’ has been answered. The next question you might have is whether or not this program can benefit you. The short answer is yes, it can. The longer answer requires an explanation. Federally insured loans are loans given to people who have subpar financial histories. These loans are for people with lower credit scores and blighted credit histories. They are great for people that have gone through bankruptcy or foreclosure. They are also excellent for those people who don’t have a ton of money coming in but still want to be homeowners.
Typically you can secure one of these loans while only being required to pay around a 3.5% down payment. Your closing costs will need to be paid, but there are ways that these can be rolled into the loan so you’re not paying them up front. Financially, you will need to have a stable work history of at least two years employment with the same employer. You will have to show proof that you have been responsible with your finances and made your bill payments in a timely manner, and your debt-to-income ratio will need to be attractive to your lenders; they need to know that you can afford your payment. These requirements are not difficult to meet, and many homeowners find that they can be approved for an FHA loan when conventional lenders won’t look at them. So what is FHA? It is an insurance company, it is a federal program, it is a driving force in the economy, and it may be the key that gets you into your home.