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FHA Loans Are Ideal for Today's Mortgage Climate

Richard Barrington
LoanBiz Columnist

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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.

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