The Federal Housing Administration was created by Congress in 1934. In 1965, the agency was put under the umbrella of the Department of Housing and Urban Development. The FHA does not administer loans. Instead, private lenders offer "FHA loans." What is commonly called an FHA loan is a mortgage contract that the Federal Housing Administration guarantees, or endorses through mortgage insurance.
FHA Lenders
According to HUD, the majority of mortgages the FHA endorses for insurance go through the lender insurance process. During this process, the majority of lenders do the review of the borrower's application and insure the mortgages prior to obtaining an endorsement by FHA. Lenders eligible to conduct this process must have an established record with FHA loans and receive prior approval from the agency to conduct the process. When the lender conducts the pre-insurance review, all applicable HUD requirements must be met.
Benefits
FHA loan endorsements make it possible for people without a long, established credit history to obtain a mortgage. This can be particularly helpful for young couples purchasing their first home. In addition, qualifying for an FHA loan may make it possible for you to pay less of a down payment and obtain a lower interest rate over the life of the mortgage than you might with a typical private loan.
Purpose
An FHA loan endorsement protects the lender from the risk of default. Should the borrower fail to meet the terms of the mortgage contract, the FHA insures that the lender will receive payment. An endorsement is basically loan insurance for the lender. The borrower pays the premiums for the insurance as part of the monthly mortgage payment. According to HUD, once the borrower builds equity in the home, around 22 percent, or has made timely payments for five years, the insurance expense is generally reduced.
Applying
When applying for an FHA loan, you will be asked to provide details about your income and employment for the previous two years to meet the credit requirements of the agency to receive an endorsement. Paperwork needed includes W-2 forms and copies of your income tax returns from the past two years. You will also be asked to provide employment references and information on where you have lived for the past two years.
Lender Assistance
Lenders that the FHA has pre-approved can complete the application for you and obtain an endorsement or guarantee from the agency on your behalf. The lender ensures that your credit and employment history meets the requirements for FHA approval. After this process, called direct endorsement, is completed, the lender submits the full application to HUD to obtain an FHA endorsement on mortgage insurance for your loan.
References
- Federal Housing Administration: FHA Loan Tips Where FHA Mortgages Come From
- Federal Housing Administration: FHA Loan Tips FHA Loan Requirements
- Federal Housing Administration:FHA Requirements Mortgage Insurance
- Department of Housing and Urban Develpment: Endorsing a Single Family FHA Case
- Department of Housing and Urban Develpment: Section A. Mortgage Loan Submission and Endorsement Process
- Department of Housing and Urban Develpment: Federal Housing Administration
Writer Bio
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.