An in-depth examination of the major federally backed home mortgage loan initiatives
The History of the Federal Housing Administration and the FHA Home Loan
According to the FHA website, the Federal Housing Agency was created in 1934 as a response to the Great Depression, which had decimated the housing market and thrust the country into a unemployment downward spiral never seen before. Because millions of Americans were out of work, and an epidemic of homelessness had accompanied the economic collapse, the federal government decided that the only way to prop up the housing market and turn Americans into homeowners—thereby stabilizing the economy as well—was to create an agency expressly designed to nurture the entire home-buying process. Thus, the Federal Housing Administration was born.
Since its creation, the FHA has played one of the largest roles in creating homeowners in America, which, to date, has raised the overall rate of homeownership to 68% and has helped some 46 million Americans buy a home. The creation of FHA mortgage insurance allowed mortgage lenders to take on more of a risk because the federal government backed the loans against potential defaults by borrowers.
It was a clever solution to a devastating problem, and one that worked so well it continues to this day, though now the FHA is no longer a stand-alone entity, having been folded into the Department of Housing and Urban Development (HUD) in 1965. However, many first-time homebuyers are not aware of the benefits of an FHA loan, mostly because of the lack of education or awareness of the program, which is why we are choosing to highlight this and the three other major government-backed mortgage programs throughout this four-part series in an effort to bring more awareness to the very people who need it most.
The FHA Loan as a Powerful Tool for First-Time Homebuyers
Though many people have heard of FHA loans—and possibly some of the three other major government-backed mortgage loan programs—few really understand how the program works and why it can be such a powerful tool to help people enter the realm of homeownership and begin to create generational wealth and financial stability. Through its mortgage insurance program, the FHA has accumulated a $1.3 trillion portfolio, making it literally the only government program that is entirely self-funded.
What makes the FHA loan such a powerful tool is that buyers are not required to bring to the table the same things that they do for a conventional loan not backed by any government homeownership program. For example, most conventional mortgage loans require buyers to have a minimum credit score of 650—and often lenders prefer more in the range of 700 to 750—but, with an FHA loan, buyers can qualify with a credit score as low as 580. Of course, the higher your credit score, the lower your interest rates, since banks tend to base your interest rates on—among other factors—the risk they believe you are based on your credit score. The higher the credit score, the lower the risk, and the lower the interest rates. Still, even if a buyer gets a mortgage loan with a slightly higher interest rate, the monthly cost of purchasing a home is often far lower than the cost of renting. This means it might be worth it to begin the home buying process even if your credit score isn’t as high as you’d like it to be.
Another major benefit of the FHA loan is that the minimum down payment is a very affordable 3.5% of the purchase price of the home. Most conventional loans that aren’t government backed prefer buyers who come to the table with a minimum of 20% of the purchase price in hand, though often they will settle for 10%. Obviously, the difference between 3.5% and 20% on a $100,000 home is a significant one. For the average person, saving $3,500 for a down payment, versus $20,000, could be the difference of waiting years to buy, and the amount of potential wealth generation—not to mention savings on cost of rent—can make a substantial difference over the course of a homebuyer’s lifetime. This, frankly, is one of the most important aspects of the FHA loan program overall.
However, it is worth noting that the less money a buyer brings to the table as a down payment, the higher the cost of her PMI (the dangers of which we discuss in this previous blog post), resulting in the mortgage taking longer to pay down. Of course, for many would-be homebuyers, this additional cost of purchasing a home is still well worth it, since even with PMI, homeowner’s insurance, loan interest, principal payment, and property taxes, the overall monthly cost is still usually lower than paying rent. Furthermore, with FHA loans, the mortgage insurance buyers are required to purchase as protection against default is the FHA’s own mortgage insurance, rather than PMI, which stands for Private Mortgage Insurance. Because it is a government insurance, the cost is lower from private insurance and the terms are far more understandable and transparent.
Last, but not least, closing costs—the amount of fees paid at the time of signing the home over to the buyer—are regulated more strictly by the FHA, and therefore are often far lower than the standard conventional mortgage. So, besides needing less money down, buyers also pay substantially less in closing costs and fees, making this method of purchasing a home far more affordable and realistic for average Americans.
Though these four benefits outlined here are significant and meaningful reasons to consider an FHA loan—especially as a low-income or minority buyer—there are additional benefits, as well as terms for eligibility that buyers are encouraged to research before moving forward. The FHA’s comprehensive homebuyer education site is a valuable place to turn to learn the many ways this mortgage loan program can benefit a first-time homebuyer, and even work with an FHA-approved home counselor who can explain the details of the program in full.
How AHP 75 Can Help
At AHP 75, where our mission is to bring the rates of homeownership up to 75% for all Americans regardless of income or race, we encourage aspiring homebuyers to look into FHA loans as an option. The power of this government loan program for getting a first-time homebuyer into a home cannot be understated.
AHP 75 is also pleased to note that our ally company, AHP Mortgage Direct, not only originates FHA loans, but also provides micro mortgages as low as $5,000 up to $100,000 to help buyers purchase homes in America’s most affordable communities. To learn more about our micro mortgage program, as well as to see our entire suite of services designed to help prospective buyers through the entire process of buying a home, visit AHP 75 and see which programs are best for you. We can even refer you to a social-justice-oriented Community Impact Real Estate Agent in your area who can assist you in the search for your home
Are you ready to become a homeowner? Visit AHP75.com to learn about our homebuyer programs designed specifically to help you join the ranks of homeowners and get onto the path of financial stability and wealth generation.
Aaron Morales is the Social Justice Writer for AHP 75, based out of Chicago, IL.