A federal agency created to execute the provisions of the National Housing Act of 1934, which also established the Mutual Mortgage Insurance Fund. The objective was to encourage lending of money for home mortgage loans and, thereby, stimulate the depressed construction industry. FHA achieves this by insuring lenders against loss due to mortgage default.
FHA insures mortgage loans made by approved banks, mortgage companies, and other approved lending institutions. This eliminates the risk for lenders. In turn, this enables house buyers to secure high mortgages with low down payments. FHA neither processes loans nor builds houses. All FHA loans are made by private lenders. FHA reviews and approves the transaction and provides insurance for the lender against loss due to borrower default. In case of default, the lender may foreclose the mortgage and transfer title to the FHA in exchange for cash or FHA debentures equal to the unpaid loan and foreclosure costs. In multi-family programs, lenders may choose to assign defaulted mortgages to the FHA in exchange for insurance benefits instead of proceeding with foreclosure and title transfer.
Interest rates are fixed by law. Generally, they are a little below prevailing market rates. Because of this and the high loan-to-value ratios, FHA loans are very popular. Insured loan amounts are based on the lesser of the FHA appraised value of the property or its purchase price. Secondary financing is not permitted in the purchase of property for which FHA-insured loans are granted. FHA charges an insurance premium, which is included in the regular monthly mortgage payments. Construction of properties financed with FHA-insured mortgages must meet FHA construction standards.
Any lender, who is a member of the Federal Reserve System or the Federal Deposit Insurance Corporation, may originate FHA-insured loans. Final approval of FHA-insured loans is retained by the FHA. Lenders, who are not members of the Federal Reserve System or the FDIC, may become approved lenders by submitting appropriate documentation to HUD.
The FHA was the first of several government agencies or government-controlled corporations established to help to create a secondary mortgage market. Others include Government National Mortgage Association (Ginnie Mac), Federal National Mortgage Association (Fannie Mae), and Federal Home Loan Mortgage Corporation (Freddie Mac). In 1965 when HUD, the U.S. Department of Housing and Urban Development, came into being, the FHA became an agency within that department.
