FHA Loans Are Ideal for Today's Mortgage Climate
Richard BarringtonLoanBiz Columnist
Potential home buyers who are concerned that a mortgage
might be tough to come by in today's economic environment should learn about FHA
loans. FHA loans are designed to give lenders confidence so that potential home
buyers can obtain credit more readily. In particular, FHA loans are designed to
assist home buyers who have relatively modest income and savings.
It should come as no surprise that
FHA loans seem so well suited to today's economy, because the program was born
when the housing market had some similarities to today's market.
History
A housing slump. Wary lenders,
burned by bad loans, reluctant to extend credit. Sound familiar? Actually, this
is not a reference to the housing market of 2008, but rather a description of
conditions that led to the creation of the FHA loan program in 1934.
Then, as now, the real estate
market was in a downturn, and policy makers recognized that housing was a key
driver of the overall economy. The FHA program was created to stimulate the
housing market by helping potential home buyers get credit. Today, the Federal
Housing Administration is the largest mortgage insurer in the world. Since its
inception, it has insured 34 million mortgages, including 4.8 million current mortgages.
This history helps put the current
situation in perspective. For all of today's concerns about housing, credit,
and a slow economy, no one would argue that these conditions are anywhere near
as bad as those of the Great Depression. It was the Great Depression which
inspired the FHA loan program, and if FHA loans could help home buyers and
stimulate the economy under those conditions, they certainly can do the same
today.
Purpose of FHA Loans
The concept of FHA loans is
simple: provide mortgage insurance so lenders will be more willing to extend
credit. FHA loan guidelines are not targeted towards people with terrible credit,
but rather those with a short credit history, low-to-moderate income, and/or
less savings.
FHA loans have both immediate and
long-term economic impacts. The immediate impact is to help support housing
demand. The long-term impact comes from helping people build wealth over time
by accumulating equity in their homes.
Significantly, FHA insurance is
funded not by tax dollars, but by the insurance premiums paid by borrowers. This
self-sustaining nature helps make the program less susceptible to budget cuts,
and better able to grow to meet demand.
Key Advantages
From a borrower's standpoint, FHA
loans have a couple key advantages. FHA loan guidelines do not require a
substantial down payment on a home. Also, FHA loan guidelines as to borrower
income are less stringent than those lenders would normally impose on uninsured
loans.
Even the structure of the program
is advantageous. The FHA simply provides the insurance--the actual loans are
made by independent lending institutions. This allows borrowers to shop around
and pick the terms and lender that suits them best.
In short, potential home buyers do
not have to fear that tough economic times will rob them of their chance at
home ownership. The FHA loan program can make mortgages available even during
tough times--in fact, that's exactly the type of climate the program was
created to address.
Source:
United States Department
of Housing and Urban Development
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
