Since the Federal Housing Administration (FHA) was created in 1934, the government backed agency has been instrumental in the nation’s evolution from renting living accommodations to buying them. Although the FHA does not make loans, the agency does provide mortgage insurance against loan default. That muscle has boosted the confidence of lenders for decades and that backing has been used for over 34 million properties sales since the creation of the company.

Consumers who have planned on pursuing their American Dream of homeownership with a mortgage backed by an FHA loan (as opposed to private mortgage insurance) should modify their budgets to include rate increases from the organization.

History of the FHA

The FHA was created as part of the National Housing Act of 1934. Also dubbed the Capehart Act, the National Housing Act was the governments’ response to the Great Depression and they created the platform as part of the New Deal in order to make housing and mortgages an obtainable goal for a majority of Americans. The FHA and the Federal Savings and Loan Insurance Corporation (FDIC) were both products of the Act.

In its earliest incarnation the FHA was responsible for calculating property appraisal value based on an eight point system of checks and balances. After several decades the FHA joined the Department of Housing and Urban Development (HUD) in 1965 and currently remains under that government branch.

Prior to the advent and development of the FHA only four out of every 10 households owned their homes, however, since the FHA became an arm of HUD over 34 million home mortgages and 47,205 multifamily project mortgages have been covered by the organization.

On average, FHA has been historically responsible for assisting two percent of homebuyers achieve the goal of becoming a borrower and home owner. Thanks to the mortgage meltdown fueled by the subprime mortgage mess, experts estimate that nearly one-third of mortgages from luxury New York condominiums, to single family detached homes in the Midwest are backed by the FHA. This imbalance was fueled by the credit crunch and experts have estimated that a $100 billion deficit from the organization is looming on the horizon. To balance the books and still provide the security of an FHA backed loan, rate hikes are a necessity.

FHA Rate Increases

Earlier this summer Congress passed a vote allowing the FHA to increase the fees associated with their loan process and President Barack Obama signed the legislation into law in August, 2010. The fee changes mandated in the act are expected to generate a $3.6 billion annual revenue stream for the FHA and help offset losses.

Prior to the new provisions, the annual fees (only one fee requirement of FHA loans) associated with FHA loans were .55 percent of the total loan, however, with the changes new maximum fee limits of 1.55 percent may be possible. Additionally, the policy changes will allow more flexibility to the HUD and FHA and provide the organizations with the ability to:

• Adjust Mortgage Insurance Premiums: Currently, the origination fee (the second fee) is approximately 2.25, however, the agency is interested in lowering that rate to 1 percent but have the right to change their minds at will.
• Increase Down Payment Requirements: Historically, FHA backed loans allowed consumers to put down a conservative 3.5 down payment. The new laws will allow the FHA to require a 10 percent down payment for first time mortgage applicants with FICO scores below the 580 point.
• Limit Concessions: Historically, sellers have been known to sweeten the deal with concessions, and the new laws have reduced the opportunities from 6 percent to 3 percent of the total home purchase price.

Disadvantages of FHA Loans

There is no denying the importance of FHA loans in regards to homeownership. However, some borrowers may be better off locating a traditional fixed rate loan from a mortgage rates origination tools such as Mortgage Marvel as depending on the circumstances, it could save money.

Consumers who qualify for a FHA loan will need to pay both loan original fees and annual fees. The charges are typically incorporated into the entire mortgage expenses and paid back courtesy of a monthly payment schedule. Overtime, these fees can cost more than securing a loan from a private lender and backing up the debt with private mortgage insurance. Another con of FHA loans include limit caps eliminating jumbo mortgages from the FHA coverage equation.

For those with the cash to spare, using a down payment exceeding 20 percent can result in huge savings. Typically, lenders require borrowers to get private mortgage insurance if the total loan amount is more than 80% of the home's value. If a consumer can put down more, no insurance will be required.