Federal Housing Administration (FHA) – Definition

Cite this article as:"Federal Housing Administration (FHA) – Definition," in The Business Professor, updated September 17, 2019, last accessed October 27, 2020, https://thebusinessprofessor.com/lesson/federal-housing-administration-fha-definition/.

Back To: Real Estate, Personal, & Intellectual Property

Federal Housing Administration (FHA) Definition

The Federal Housing Administration (FHA) is a government agency in the US that facilitates mortgage insurance for lenders who meet FHA administration. FHA was established in 1934 when Franklin Delano Roosevelt was the president of the United States. FHA insures loans offered by approved lenders such as banks and private lenders in the mortgage industry.

The 1934 National Housing Act birthed FHA, this is an agency that administers loan programs, insures loans by approved lenders, facilitate home financing in order to improve mortgage standards in the United States.

A Little More on What is the Federal Housing Administration (FHA)

The Federal Housing Administration (FHA) was established to improve housing standards in the US. Basically, FHA as a government agency gives mortgage insurance to FHA-approved lenders. This means that such lenders offer mortgage loans to borrowers, if the borrowers default, FHA covers the losses by paying the lender an amount. Aside from providing insurance to lenders, FHA also offer mortgage insurance to individuals who meet specific FHA requirements. As part of the obligations of FHA, this government agency administers loan programs to individuals that are financially constrained and could not afford mortgages. Those who do not qualify for traditional loans are also covered by FHA loans.

Loan Terms

FHA loans and mortgage insurance have guarantees and are reliable. There are specific terms of FHA loans, these are;

Borrowers or homeowners are required to pay a mortgage insurance premium (MIP) to FHA. The premium payment is part of the requirements for FHA program.

For loan programs whose loan to value (LTV) ratio is above 90%, MIP must be paid at the end of the loan term or 30 years after the commencement of the loan term. Loan to value (LTV) less than or equal to 90% have MIP which is due 11 years after the loan term or at the end of the loan term.

The History of the FHA

The Federal Housing Administration (FHA) was established in 1934 as part of the National Housing Act. Since its inception, FHA has provided mortgage insurance to approved lenders and FHA loan programs to qualified individuals. During the Great Depression period, there was a significant crisis that rocked the banking industry, this made lenders come down heavy on borrowers who have their mortgage debt unsettled. Due to financial hardship prevalent in this period, many borrowers could not make payments and went into default causing their homes to be foreclosed to make debt payments.

This led to a decrease in home ownership and FHA was established as an intervention to this crisis. The intervention of FHA created an improvement in the mortgage industry and increase in the number of homeowners. In 1965, FHA became the Department of Housing and Urban Development (HUD).

FHA Funding and Benefits to Society

To a great extent, the FHA with the help of mortgage insurance and mortgage programs brings stability to the housing industry. Through the improvements of standards of community and homes, the United States has experienced economic stimulation. FHA also has an impact on the creation of jobs, and revenue to home improvement. All revenues in which FHA operates are self-generated and not derived from taxes by individuals.

References for “Federal Housing Administration (FHA)”






Was this article helpful?