A lot of people go to the Federal Housing Administration to purchase homes sans the conventional loan hassle. But have you ever wondered how or why the FHA was initiated, to begin with? Let this blog post educate you about how the FHA began.
The Great Depression
FHA’s history dates way back in the early 1900s when the economy was just as polarising as it is today. Many say that this particular government’s home loan program was a huge help in letting America escape the Great Depression. In 1934, the federal government conceived the National Housing of 1934 to prevent even more foreclosures that were incredibly rampant back then. The FHA was made to introduce a construct of lending money without lending firms hold back from giving applicants grants in fear of the defaulting somewhere along their loan journey. The FHA promised, and it still does, to compensate lenders if any of their borrowers ever decide to flake.
Banks in America made lending difficult.
Before FHA was ever introduced to the home loan market, it was common knowledge that acquiring a mortgage grant to purchase and finance a property was almost impossible for many people and that various banks called for different guidelines and standards. At that time, universal standards for loans in banks were nowhere to be found, and so these financial institutions established their own terms.
Before the loan types the FHA offers, most home loans had very brief terms—as short as only less than three years. What’s more, these loans were fundamentally interest-only. Why? Because a fully amortized mortgage wasn’t available back then yet. By the term’s end, borrowers had to refinance another home loan that was equally just as short-term. Also, down payments were as huge as 40%, sometimes even more.
Dying US economy
As the US economy spiraled downward all the more, the government tried to explore financial methods and schemes that could improve the economy. Thus, the FHA mortgage was birthed. The setting of universal standards then ensued, and so banks immediately found a pattern and continued operations from there. The FHA established terms and guidelines as well as rates on interest issued by financial companies. In return, these banks were insured that they would be kept safe and compensated, should any loanee flake.
FHA’s arrangement called for having lenders and banks follow FHA standards in the approval of a loan. Once that was in place, a guarantee was issued in the position of a mortgage insurance. VA and USDA home loans have resembling funding fees and guarantees. At that point, the percentage of homeownership grew, and a lot more people became eligible for the program.
Lower Down payments
Lower down payments were also put in place as banks became more comfortable granting loans as long as the government insured them. Fast forward to 1965; the FHA was moved to the Department of Housing and Urban Development, where it is still very much a part of until today.
Click the link to find out what are the requirements of an FHA loan.