Even though the Federal Government is not directly in the business of financing home mortgages, they do offer a number of programs designed to help make it easier for Americans purchase a home. The main government agency responsible for administering these programs is the Federal Housing Administration (FHA.)
The FHA was created in 1934 and is primarily targeted at those who are unable to get a traditional mortgage due to a poor credit rating or low income. It was created to provide mortgage insurance on home loans made by government approved lenders in the United States. The FHA not only insured mortgages on single family homes, but also multi-family homes, hospitals, and manufactured homes.
The Federal Housing Administration is not the only government agency that provides mortgage assistance. About 10 years after the creation of the Federal Housing Administration, the Veterans Administration (VA) began offering a mortgage assistance program for enlisted personal and veterans of the Armed Services. The Rural Housing Service(RHS) also provides assistance for mortgages on homes in rural areas.
Together, the FHA, VA, and RHS work together to help people who might not otherwise be able to get a home loan by offering a guarantee to the lender. These agencies guarantee that if the borrower defaults, they will pay the remainder of the mortgage.
The Federal Housing Administration is currently the largest mortgage insurance company in the World. It was created while the Great Depression was still fresh in lawmakers minds and many citizens were unable to receive a loan.
The FHA, and programs like it, help reduce the risk of a default, specifically for borrowers who have less than 20% available for a down payment. Typically, the FHA requires only a 3% down payment, which can be a gift of contribution.
While the FHA will cover a number of different types of homes, they do not offer insurance on multi-million dollar dwellings.
Instead, they will insure mortgages for about $360,000 in areas deemed as high cost and about $200,000 for lower cost areas. In Alaska, Hawaii, the Virgin Islands, and Guam, the FHA will insure homes up to almost $550,000.
While an FHA Loan can be a great choice for someone with poor credit or who has previously filed bankruptcy, they do charge a premium for the insurance. The FHA requires 1.5% of the value of the loan at the time of closing and 0.5% annual charge over the course of the loan.
The Veterans Administration offers mortgage insurance for veterans and insure mortgages for up to $417,000.
As is the case with an FHA loan, a VA loan can be used by veterans who have limited credit or even those who have previously filed for bankruptcy, as long as it has been at least 2 years.
Rural Housing Service Loans (RHS) became available in 1994, with the passage of the Department of Agriculture Reorganization Act.
RHS Loans are intended to help stimulate rural areas that have been in a recession over the last twenty years. These types of loans are also called Section 502 Guaranteed Rural Housing Loans and do not require a down payment.
RHS loans can be used to help rebuild a rural home or prepare a site for a home, including installing water and septic facilities.
While an RHS loan can be an excellent way to purchase a rural home, the interest rate is based off of the income of the borrower and can go up if the individuals income increases. There are also may be a charge for selling the home early.
A mortgage is a special type of loan that can allow almost anyone to eventually own a loan. Owning a home can be a great investment and for many, getting a mortgage is the only way that this can be achieved. The first mortgages actually date back to medieval times, but they have changed a great deal since then.
Basically, a mortgage is just a loan that uses a home or land as collateral. Typically, historians credit England with having created the first mortgages, but these were often very unfair to the borrower. For instance, these first mortgages would require a very large down payment by todays standards, often over 50% and the borrower was not considered to actually own the land, until the mortgage had been completely paid off. It would not be until the 17th century that the rights of borrowers would begin to take a turn upwards, when it became the standard for the borrower to have ownership rights to the land, even if it had not been paid off yet.
Today, in addition to the general benefits of owning a home, such as not having a landlord and being able to modify the home and property however you wish, there are also a number of other tax benefits. The mortgage interest deduction, which allows a tax payer to deduct interest payments from their taxes, was instated in 1913 and today is a very powerful incentive for home ownership.
While today, many people take advantage of this tax credit, at the time it was intended to stimulate business mortgages, because during the beginning of the 20th century, most homeowners would save up their money until they had enough time to purchase a home without a mortgage.
It would not be until the US Federal Housing Administration (FHA) and the Federal National Mortgage Association (Fannie Mae) were created that average citizens began taking advantage of the tax credit allowing interest payments to be deducted from their taxes. This is because these institutions were in part responsible for increasing the amount of money available to lenders, which in turn allowed the lenders to offer more home loans.
Currently, there is another powerful incentive for new homeowners, who can receive 10% of the cost of their home in the form of a credit from the federal government. This can be up to $8,000 and is part of the Federal Housing Tax Credit for new Homeowners.
Prior to the Great Depression, most lenders took money from deposits and lend it out to new homeowners. However, when the banking system began to crumble, the Federal Government created a several government agencies to fund the mortgage market.
Today, the government agencies responsible for circulating funds in the mortgage market are the Federal National Mortgage Association (Fannie Mae,), the Federal Home Loan Mortgage Corporation (Freddie Mac,), and the Government National Mortgage Association (Ginnie Mae.) These agencies help support the home mortgage industry and act in some regards as a stock market.
Fannie Mae is responsible for creating financial products, which help low to middle income families purchase homes. Ginnie Mae creates a number of security products that are made up of mortgage loans is part of HUD, which is the US Department of Housing and Urban Development. Ginnie Mae has a guarantee that even if the debtors become delinquent, investors who purchase their securty products will still get paid. Freddie Mac is in some regards similar to Ginnie Mae, because they also create investment packages, which are guaranteed, then reinvest this money in the mortgage market.
Often, people think of their bank as the source of their loan, but in many cases this is only partially true. Often, the bank will simply process the application and take the monthly mortgage payment, but they are not the one actually lending the money. Instead, they are simply servicing the loan and the actual lenders are investors who have purchased mortgage based securities.
One of the reasons that mortgage based securities are so popular as investments is that even if the homeowner is unable to pay for their home and goes into foreclosure, the investors still have the land and home. They are in turn almost always able to sell this property, in many cases still making a profit.