Federal Housing Administration - FHA

DEFINITION of 'Federal Housing Administration - FHA'

The Federal Housing Administration (FHA) is a U.S. agency that offers mortgage insurance to lenders that are FHA-approved and meet specified qualifications. Such insurance allows for the protection of lenders against losses that may arise with mortgage defaults. If a borrower defaults on a loan, the FHA pays the lender a specified claim amount.

BREAKING DOWN 'Federal Housing Administration - FHA'

The FHA was established with the primary goal of stimulating the housing industry. The underlying idea was that by providing insurance to lending parties, more individuals/customers would qualify for mortgages and be able, or more able, to buy homes. Most FHA loans are given to individuals who would not qualify, or be able to afford, a traditional home mortgage loan.

The History of the FHA

Home loans and ownership dropped dramatically when banks failed during the Great Depression. During this period, home mortgages, for the most part, were for short periods of time, such as three to five years, with balloon instruments at loan-to-value (LTV) ratios at less than 60% and with no amortization. The major banking crisis forced lenders to go after unpaid mortgages immediately. Because refinancing was not a possibility, most borrowers failed to make mortgage payments and their homes were foreclosed on, which ultimately negatively affected the housing industry.

Because the federal banking system needed restructuring, the National Housing Act of 1934 was formulated by the FHA, meant to regulate the terms and the rate of interest of the mortgages it insured. Such lending practices boosted the number of individuals who could afford homes and monthly mortgage payments. This also increased the single-family home market. The FHA officially became part of the Department of Housing and Urban Development (HUD) in 1965.

Loan Terms

As of 2016, for all loan terms that are greater than 15 years and less than and equal to 15 years with an LTV greater than 90%, the annual mortgage insurance premium (MIP) is collected until the end of the loan term or until 30 years have passed, whichever date occurs first. For LTVs that are less than or equal to 90%, the annual MIP is collected until the end of the loan term or until 11 years have passed, again, whichever date occurs first. Also, 1.75% interest, for any loan amount, must also be paid for all LTVs.

Funding and Impact

The FHA operates completely from self-generated income; there is no burden on taxpayers. Proceeds from mortgage insurance are stored in an account that is used to pay for the entire program. The FHA provides a substantial economic stimulation to the United States via community and home development that flows down to local communities in the form of jobs, schools and other sources of revenue.

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