Did you know that Federal Housing Administration is the world’s largest mortgage insurer?
Fact: The FHA has insured over 34 million properties since 1934.
How does the FHA operate? What does it mean to have an FHA loan?
When you apply for a mortgage on a house, you have to pass certain credit and income guidelines. The amount you can borrow is also based upon the appraised value of the property. Most banks will loan up to 80% of the appraised value to customers with enough income and a good credit history. These guidelines however, greatly limit the amount of people that can get mortgages because it can be difficult for many families to pay rent AND put away enough savings to come up with a 20% down payment. The FHA(Federal Housing Administration) was started by congress in 1934 when 4 out of 10 households in the U.S. were renters. It was a way to help safely stimulate the housing market and promote growth again in America. The FHA has done a lot of good for many Americans and it is the only government agency that operates solely from its own generated income.
When you get an “FHA” loan it does not mean you are getting a loan from the government. It means that you, your property, and your lender have all met the required guidelines so that the FHA will “insure” your mortgage. It basically gives your bank a guarantee that if you become unable to pay your mortgage, the bank will still be able to recoup much of its investment because the FHA will then pay them. Interesting idea right? There have been many debates in recent years about the housing market, the mess it has become, the role the government has played and the list goes on. Please feel free to start a discussion on my blog with your thoughtful insights on how we can avoid another housing bubble.
Upcoming Changes to FHA Fees
Starting in June, the FHA will require you to pay mortgage insurance premiums for the LIFE of the loan- up to 30 years. For the past 10 years or so, the FHA insurance premium portion of your mortgage would automatically drop off when your loan to value went below 78%. This will no longer be the case. Borrowers will have to pay their loan in full or refinance in order to stop paying those unwanted insurance premiums. These premiums can make a pretty big difference in the amount you have to pay back to the bank.
There have been rumors that the FHA is having a hard time being solvent with the market crash, however proof of this has not been provided. Additionally, while some portions are requiring greater payouts- such as the reverse mortgage section, other sections are seeing a strengthening as the housing market stabilizes and rises. Many critics think the move to make these premiums permanent could do more harm to the market and in the long run hurt the FHA.
Private mortgage insurers are seeing this as an opportunity to grow as borrowers would rather turn to them for a better deal. Federal law requires private companies to drop their premiums once the loan to value drops below 80%. That is a big difference!