History of the FHA mortgage

The Federal Housing Administration (FHA) was established in 1934, which, in U.S. history, was a period of “heavy renting”. The country was emerging from The Great Depression.

Just 4 in 10 households owned their homes.

At the time, the mortgage terms offered by lenders were onerous. To get a loan meant to make a 50% down payment; to agree to a loan term of 5 years or fewer; and, to make a large “balloon” payment to the bank after the mortgage’s first few years.

Few U.S. consumers could meet the terms of a 1930s mortgage.

Meanwhile, the government wished to increase the rates of homeownership nationwide. With more homeowners, the government reasoned, neighborhoods would stabilize and the U.S. economy would get back on track.

From this, the FHA and its flagship mortgage program was born.

The main feature of the FHA-backed mortgage was its Mortgage Insurance Premium (MIP) program, a self-sufficient insurance fund through which the FHA could ensure the nation’s lenders against “bad loans”.

In order for a bank to get the FHA’s insurance on its loans, it was required to verify that its loans met the FHA’s minimum qualification standards.

These rules came to be known as the FHA mortgage guidelines.

In time, the FHA MIP system gave banks confidence to make better loans with better terms for hopeful U.S. home buyers. Soon, the down payment requirements for a home loan dropped; 5-year loan terms were replaced with longer terms of 15 and 30 years, and mortgage rates dropped.

The FHA is currently the largest insurer of mortgages in the world.