What Are FHA Loans?

Basically, an FHA loan is a loan that is guaranteed by the Federal Housing Administration. Lenders are insured against loss when they make loans to people who otherwise would not qualify for a mortgage. The FHA has been around for a while, and over the years, its role has changed but not dramatically.

The FHA lending program started back in the 1930s during the Great Depression. The foreclosure rate and the rate of loan defaults reached epidemic proportions so the government stepped in to provide relief. The idea was to help the LENDERS and not the borrowers. The idea was for the borrowers to actually pay for the program through premiums paid.

Big business, of course, could see the money in the bank, and Private Mortgage Insurance (PMI) has now replaced many of those that were once under the FHA program. Today, the FHA is primarily used by people who could not otherwise make a large down payment and don't qualify for PMI.

In August 2007, the FHA added a new program for refinancing loans. This new program is called FHA-Secure. The idea for this new program is to help borrowers who have been hurt by the mortgage meltdown caused by the subprime mortgage crisis. The program might help some borrowers, but it is basically a band-aid that has been applied to a major blood-gushing wound.

The FHA does not actually fund loans, and the organization doesn't draw up plans for homes or oversee construction of homes. The borrower must make his own financial arrangements for purchasing (or building) a home. If the borrower can qualify for an FHA-insured loan, his down payment will be small (or even nonexistent) and a loan will be granted that he could not otherwise qualify for. The FHA and the VA operate in virtually the same way.