FHA Loans: The Original Low-Down Payment Mortgage
FHA mortgages have a storied history. They were born from the Great Depression to make homeownership possible during a period when banks just didn’t want to make loans against homes.
As the housing market collapsed, the government formed the Federal Housing Administration (FHA). The agency’s role was simple — provide insurance to banks so that banks would be willing to make loans for real estate.
The decree that formed the FHA was made eight decades ago. Today, the agency continues to fulfill its primary role as an insurer of mortgage loans. Meanwhile, understanding that the FHA is a mortgage insurer — not a mortgage lender — is an important distinction for home buyers to make. It means that you can get FHA-insured loan from just about any mortgage lender that you want.
You don’t “go to the FHA” to get an FHA loan. You go to your mortgage lender. In fact, even labeling an FHA-insured mortgage as an “FHA loan” is somewhat misleading because FHA loans are not really “loans from the FHA”. They are loans from a lender, insured by the FHA, and the FHA is the biggest insurer of mortgages in the world.
Because of FHA mortgage insurance, today’s home buyers can purchase homes with as little as a 3.5% down payment, and can get approved for mortgage loans with credit scores of below 600. Lenders are happy to make such loans because the Federal Housing Administration insures the loans against loss.
If you, as a home owner with FHA mortgage insurance, find yourself suddenly unable to make your monthly mortgage payment, your bank won’t take a loss. The FHA’s insurance policy kicks in, and pays the bank for its trouble. Thanks to the FHA, banks are willing to make aggressive loans to deserving buyers of homes and this helps to promote homeownership.