Federal Housing Administration (FHA)

What is the Federal Housing Administration (FHA)?

Updated August 2, 2021

The Federal Housing Administration, commonly referred to as the FHA, is an agency within the U.S. government that sells mortgage insurance to borrowers who take out loans from FHA-approved lenders in order to purchase a property. Properties range from single-family homes to hospitals.

Mortgage insurance protects lenders in the event a borrower fails to pay their mortgage. The FHA will then step in to cover the unpaid principal balance to the lender. The FHA typically provides mortgage insurance for those who wouldn’t be otherwise able to afford a traditional home mortgage loan. This type of mortgage insurance is most popular with first-time home buyers. An FHA-backed mortgage is a good option for those who don’t have a lot of money saved for a down payment as well as those who have had to foreclose on a former property or file bankruptcy.

FHA borrowers must meet a few requirements in order to qualify for this type of mortgage insurance. Borrowers with a FICO credit score of 580 or above only need to pay a 3.5% down payment on the purchase of their property where borrowers with FICO scores between 500 and579 are required to put 10% down. The borrower’s debt-to-income ratio must also be less than 43%, and they must be able to prove employment and a steady income. Any FHA borrower is also required to make the purchased property their primary residence, which is why this type of mortgage insurance isn’t commonly used by investors. 

The FHA sells mortgage insurance to borrowers who take out loans from approved lenders in order to purchase a property. Credit: Dhruv Mehra

The FHA was created in 1934 with the goal of improving housing conditions and standards. The agency was created when the housing industry was struggling during a time when only four out of every 10 households owned their property after the Great Depression. Since then, the FHA has become one of the biggest mortgage insurers in the world. In the 1940s, the agency supported the war by financing military housing and helping veterans secure housing for their families. 

From the 1950s to the ’70s, the FHA focused on financing privately owned housing for the elderly and those with lower incomes. In 1965, the FHA joined the Department of Housing and Urban Development’s Office of Housing (HUD). During the 2008 recession, the FHA provided backup support in the form of mortgage credit for those who couldn’t access financing elsewhere as it was very limited. This allowed middle-class families to get home loans, which sent more money into the market and prevented more foreclosures from happening. 

Now, the FHA provides mortgage insurance for more than eight million single-family homes. In the FHA’s portfolio, the total balance of unpaid principal tops US$1.3 trillion. In 2020 alone, the FHA provided home mortgage loans to almost 818,000 borrowers with over 83% being first-time buyers.

The FHA program is funded solely from the income generated by insurance premiums collected from borrowers. The FHA stimulates the economy in the U.S. by allowing more people to purchase properties, which strengthens communities in the form of improved schools, a better tax base and more jobs.