The year is 1934- The War to End all Wars (WWI) is a distant memory, but the United States is fighting a new battle; The Great Depression. Most Americans have given up on the Great American Dream and are just trying to stay alive. Many Americans lived in “Hooverville” or “Shantytown”; cardboard cities set on the outskirts of towns all over America. It was under these conditions that Congress first formed the Federal Housing Administration (FHA) in 1934.
In 1934, mortgage loans were nearly impossible to get. Banks required a 50% down payment and most mortgage loans had to be repaid in 5 years. With the formation of the FHA, mortgage loans changed and the American Dream began to seem a possibility again.
The FHA did not lend money, rather it insured the mortgage loan. This meant that should a borrower default on a loan, the FHA would pay the lender for its losses. This greatly reduced the risk to the lender. In exchange for this insurance, the FHA demanded that lenders make loans more affordable and easier to obtain.
The FHA demanded that lenders require only a 3% down payment from its borrowers and to allow that down payment to come from any source. Additionally, loan repayment terms were to be extended up to 30 years. Simply changing these requirements made the American Dream once again a reality for many.
The FHA did not require tax payer revenue to support its cause. All money for default payments came from insurance fees charged the borrower over the life of the loan. The FHA was made part of the Federal Department of Housing and Urban Development in 1965.
Today the FHA continues to function as it did in its inception. With few exceptions (i.e. a 3.5% down payment) requirements remain the same. Without exception the goal of the FHA remains the same; to make America a nation of homeowners.
FHA loans were not in vogue in the mortgage boom but today they account for around a third of all mortgage applications. The economic stimulus bill is the main driver of the growth in FHA applications with some new, home buyer friendly legislation.
In May of 2009, the FHA announced that it will allow first time home buyers to use the Recovery Acts new first time home buyers tax credit for immediate assistance.
The American Recovery and Reinvestment Act of 2009 offers first time homebuyers a tax credit of up to $8,000 for purchasing a home. Ordinarily this tax credit is only available to first time home buyers after they file their tax return with the IRS. The new change announced in May will make home ownership more affordable to many.
The new rules will allow certain FHA approved agencies to monetize the tax credit prior to tax filing, allowing first time home buyers access to the full $8000.00 tax credit when purchasing their new home.
Home buyers can apply the tax credit to the down payment in addition to the required 3.5%. Increasing the down payment will lower interest rates and make home ownership more affordable for many. Additionally, the tax credit may be applied to other cost associated with purchasing a new home (i.e. closing costs). The FHA anticipates that the new tax credit will encourage the purchase of approximately 160,000 homes.
The FHA warns first time home buyers to beware of mortgage scams. Although there are plans in place to ward against misuse of the applied tax credit, the buyer should always beware. The FHA suggests that first time home buyers compare the services of several agencies approved to use the tax credit and choose the servicer that makes the most sense for them. The FHA intends to track the approved servicers to be sure the newly available funds are not misused.