What is the Role of the FHA in Home Financing?
The Federal Housing Administration, or FHA, is one of the most important mortgage institutions in the country. Founded as part of the National Housing Act of 1934, this organization was one of the many expansions made by President Franklin D. Roosevelt as part of the “New Deal,” a sweeping legislation that sought to ease the Great Depression.
The FHA is now part of the Department of Housing and Urban Development, or “HUD.”
The FHA holds numerous goals, which include the improvement of housing standards and the support of affordable mortgage loans. Homeownership is considered one of the most important pillars of American prosperity, given a level of prominence that rivals employment levels and market growth. If Americans own their home, the philosophy goes, the country is stronger. Therefore, the FHA works to support homeownership by making home loans readily available to more Americans.
FHA Loan Myths and Lender Requirements
There is, however, a slight misconception behind “FHA loans.” Based on the term, it’s easy to assume that these loans are given out by the FHA. This is not actually the case. Instead of lending money for home purchases, the FHA provides insurance on loans, making lenders more confident and, in turn, allowing them to write more loans to American buyers.
To have their loans insured by the FHA, lenders need to make sure the borrower and the property, as well as the terms of the loan, fit the specific requirements set by the FHA. If the loan meets the agency’s standards, the loan will then be insured by the agency. This insurance provides financial support to the lender in the event of a default. Simply put, if the borrower is unable to make payments on the FHA loan, the lender receives financial compensation from the insurance.
This insurance reduces the risk to lenders. Without it, they would be less inclined to write loans and may avoid making loans to certain borrowers. But as we said, the FHA won’t insure any loan; they only back loans that meet their specific guidelines; guidelines that include factors like credit scores, debt-to-income ratio, loan-to-value ratio, and more.