Federal Housing Administration

The Federal Housing Administration was established by the National Housing Act of 1934, during the depths of the Great Depression. The mortgage market had essentially collapsed by 1933: lenders had tightened standards severely after widespread defaults, most mortgages were short-term balloon structures requiring refinancing every three to five years, and down payment requirements of 50% or more excluded the majority of American households from homeownership. The FHA was created to transform mortgage lending into the long-term, self-amortizing structure that defines U.S. housing finance today.

The FHA does not make loans directly to borrowers. Instead, it insures loans made by approved private lenders. If an FHA-insured borrower defaults, the FHA reimburses the lender for the loss, removing the default risk from the lender's balance sheet. This insurance allows FHA-approved lenders to extend credit on more favorable terms than would otherwise be available — particularly important for borrowers with lower credit scores, limited down payment savings, or higher debt-to-income ratios than conventional loan programs permit.

FHA loan requirements are more flexible than conventional conforming loan standards in several key dimensions. The minimum down payment for an FHA loan is 3.5% for borrowers with credit scores of 580 or higher, compared to 3% to 20% requirements on conventional loans. Borrowers with scores between 500 and 579 may qualify with a 10% down payment. FHA loans also allow higher debt-to-income ratios in certain circumstances, making them accessible to borrowers whose monthly obligations represent a larger share of income than conventional underwriting permits.

Borrowers who use FHA loans pay mortgage insurance premiums (MIP) to fund the FHA's insurance programs. MIP consists of an upfront premium (currently 1.75% of the loan amount, typically financed into the loan) and an annual premium expressed as a percentage of the outstanding loan balance divided into monthly installments. Unlike private mortgage insurance on conventional loans — which can be canceled when the borrower builds sufficient equity — FHA annual MIP historically remained in place for the life of the loan for borrowers who put down less than 10%, a feature that has made FHA loans more costly over time relative to conventional alternatives once home equity grows.

FHA loan limits are set annually by county and mirror the conforming loan limit structure in relation to local median home values. FHA is also the insurer of loans securitized through Ginnie Mae, forming the pipeline through which affordable housing lending flows from borrowers through originating lenders to capital markets investors.