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The History of FHA Loans



FHA loans are by far the most popular among the three government-backed home loan programs. The other two are the VA and USDA options. But unlike VA and USDA, there are no restrictions as to who can qualify for a loan or where the property must be located. FHA loans are also the most popular among first time home buyers due to the low down payment and relaxed credit guidelines compared to low down payment conventional loans. But FHA loans do have their own history and many give credit to the program for helping to stabilize the home loan industry.

The FHA loan was first introduced in 1934. Prior to its introduction, lending guidelines were all over the map and banks required sizable down payments before issuing a loan approval which kept many out of their homes. Such bank loans were also very short term in nature such as only three years or so. At the end of the term borrowers had to take out yet another loan. Profitable for the bank to be sure but not so much for the home owners. The FHA program changed all that.

1934 was a period right smack in the middle of the Great Depression. Banks were loath to make loans and when they did they were rather onerous. It truly was that banks would only lend to those who really didn’t need it. Yet buying a home spurs additional economic activity and Congress recognized this. Buying a home provided stability and pride to a community as well. The FHA program was put into place to both boost economic activity and stimulate home buying.

The FHA doesn’t make loans and never did but instead provided banks with universal guidelines banks could follow. If the bank used the FHA guidelines to approve an FHA application properly should the loan ever go into default the bank would be compensated for the loss. This was a game changer back then. The FHA program might be considered more of an insurance policy and less of a mortgage loan. The FHA program took hold and never looked back. And today, it’s still the preferred choice among many who want a loan with a low down payment, competitive rates and easier qualifying.

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