FHA stands for the Federal Housing Administration. It is a federal housing agency that promotes home ownership in the United States by insuring mortgage loans originated by FHA-Approved lenders.
FHA was established in 1934 in order to promote mortgage lending in the US. In 1965 FHA was made a part of the U.S Department of Housing and Urban Development (HUD).
Prior to FHA, it was common for mortgage lenders to require a down payment of 50%! Since many families could not save up such a large down payment, the majority of households in the United States were not able purchase a home.
FHA provides mortgage insurance in order to reduce the risk an FHA-Approved mortgage lender assumes when they make a residential loan that conforms to the FHA lending standards. FHA insures loans made on a wide variety of single-family and multi-family properties.
Today, FHA makes it possible for households to buy a home with as little as a 3.5% down payment. FHA also has more flexible lending standards which helps FHA-Approved lenders make loans to first-time homebuyers that they otherwise may not be willing to make.
FHA’s most common type of loan is the 203(b) loan which is limited to single-family properties with 1-4 units.
FHA also offers a popular loan to finance the purchase and renovation of a home referred to as a FHA 203(k) loan.
FHA is a self-supporting federal agency. FHA generates revenues by collecting mortgage insurance premiums from FHA borrowers. These revenues are used to cover any losses incurred by the lender if a borrower is not able to fully repay the loan and the lender has to take the property back.
In the event that a property must be foreclosed upon, the FHA-Approved lender can recover most, if not all, of their costs associated with foreclosing and selling the FHA insured property.
In many cases, the FHA-Approved lender will foreclose on the property and then transfer the title to the U.S. Department of Housing and Urban Development (HUD). HUD then resells what they refer to as a “HUD Home” to a new owner who may be an owner occupant or an investor.