An FHA insured loan is a US Federal Housing Administration mortgage insurance-backed mortgage loan that is provided by an FHA-approved lender. FHA mortgage insurance protects lenders against losses. They have historically allowed lower-income Americans to borrow money to purchase a home that they would not otherwise be able to afford. Because this type of loan is more geared towards new house owners than real estate investors, FHA loans are different from conventional loans in the sense that the house must be owner-occupant for at least a year. Since loans with lower down payments usually involve more risk to the lender, the home-buyer must pay two-part mortgage insurance that involves a one-time bulk payment and a monthly payment to compensate for the increased risk. 15 Frequently, individuals “refinance” or replace their FHA loan to remove their monthly mortgage insurance premium. Removing mortgage insurance premium by paying down the loan has become more difficult with FHA loans as of 2013.
The program originated during the Great Depression of the 1930s when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. The government-subsidized some FHA programs, but the goal was to make it self-supporting based on borrowers’ insurance premiums. Over time, private mortgage insurance (PMI) companies came into play. Now FHA primarily serves people who cannot afford a conventional down payment or do not qualify for PMI. The program has since this time been modified to accommodate the heightened recession.