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Monday, April 29, 2013

FHA-Insured Home Loans: An Overview

Katie Jones
Analyst in Housing Policy

The Federal Housing Administration (FHA) was created by the National Housing Act of 1934 in order to broaden homeownership, protect lending institutions, and stimulate the building industry. FHA does not make mortgage loans. Rather, it insures mortgage loans made by private lenders that meet certain underwriting and other criteria, thereby expanding the availability of mortgage credit beyond what may be available otherwise. If the borrower defaults on the mortgage, FHA will repay the lender the remaining amount owed. While FHA insures a range of mortgage types, including multifamily properties and hospital facilities, this report focuses on FHA’s single-family insurance program.

FHA requires a minimum downpayment of 3.5% from most borrowers, which is lower than the downpayment required for most other types of mortgages. FHA-insured mortgages cannot exceed a statutory maximum mortgage amount, which varies by area but cannot exceed a specified ceiling in high-cost areas. (The ceiling is currently set at $729,750, but is scheduled to fall to $625,500 after December 31, 2013.) Borrowers are charged fees, called mortgage insurance premiums, in exchange for the insurance.

FHA’s share of the mortgage market tends to vary with economic conditions and other factors. In recent years, due to housing market turmoil and a contraction of private lending, FHA has been insuring more mortgages than it had in previous years. In FY2012, FHA insured about 1.2 million new loans with a combined principal balance of over $200 billion. FHA-insured mortgages, like all mortgages, have experienced increased default rates in recent years, leading to concerns about the stability of the FHA insurance fund for single-family mortgages, the Mutual Mortgage Insurance Fund (MMIF). In response to these concerns, FHA has recently adopted a number of policy changes, including changes related to the fees that it charges and its mortgage requirements, in an attempt to limit risk to the MMIF. These policy changes have included increasing mortgage insurance premiums, instituting a minimum credit score requirement, and raising downpayment requirements for borrowers with lower credit scores.

This report briefly discusses the basic features of the FHA program to insure loans on singlefamily homes and describes some recent changes to program requirements.

Date of Report: April 18, 2013
Number of Pages: 14
Order Number: RS20530
Price: $29.95

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