A brief history of FHA Loans and why newbie investors should love them

It may feel like the world is nothing like what it once was, but the FHA insured loan remains as it always has, the staple in place that provides light at the end of the real estate investing tunnel. 1930s America served as a pendulum, swinging violently downward post American highs from the roaring 20s. The real estate market saw foreclosure after foreclosure propelling the United States into the Great Depression for the next decade. With people out of work and forced to abandon their homes, a fear so great was instilled in Americans that we’ve spent the last 90 years preventing such a catastrophe from ever happening again.

While we may not have completely avoided economic depression all together since then, there are many reasons to argue that the first major steps toward change in American real estate took place only a few years after our greatest mistakes were made. The National Housing Act of 1934 created the Federal Housing Administration (FHA) in order to boost jobs, increase home constructions (which practically stopped all together in the early 1930s), and serve as a loan insurance program prior to PMIs.

The FHA has changed roles numerous times over the years, shifting with each social change so that it may better serve the community it was meant to support. And today is no different. Many of you (myself included) are sitting there pecking away at your keyboard trying to find ways to continue to get paid even after your W-2 job falls through. And in the news, I see comparisons of today to the Great Depression, mainly because of the shocking transition our entire world has been forced to make.

So if you feel that real estate investing is meant for you but your bank account doesn’t agree, an FHA insured loan may be what gets you out of disaster much like it did for millions of other people looking to provide themselves with a better future.

Why is an FHA insured loan such an attractive strategy for newbie, not so wealthy investors right now? The first being qualification. If you have at least a 580-credit score, you will qualify for an FHA insured loan and you’ll put roughly 3.5% down. Even those with a 500 to 579 credit score can still be considered eligible with a 10% down payment.

Do I have your attention yet?

FHA insured loans are also assumable meaning that you can transfer the previous owners financing agreements and “assume” their remaining debt. This means that you don’t even have to obtain your own mortgage. And while they are popular among first time buyers because of the terms stated above, you do not have to be a first-time buyer to qualify.

How are lenders able to do this you may be asking?

The FHA does not provide the loans, they only insure them. Lenders tend to feel more comfortable taking on someone with little money and a poor credit score when the government is there to back them up. People who otherwise had no shot of obtaining a conventional loan are suddenly able to be homeowners.

What’s the catch?

Of course there’s a catch! FHA loans were once considered to not be for investors because of the biggest factor: owner occupancy in a residential building. An FHA recipient must live in a single-family residence or a 2 to 4 unit multifamily property for at least one year. There are also maximum limits based on property type and location. With the realization of house hacking though, this factor is okay for most people who choose the MFR route to have roommates pay most, if not all, of the mortgage payment in rent.

FHA insured loans also have limited closing costs and require you to work with certain lenders who must cooperate with their own strict set of rules. They are going to charge you a premium fee up front totaling 1.75% of your base loan amount. This can be paid off right away, or you can also factor it into the loan, but expect to pay insurance premiums throughout the life of the loan no matter how you decide to pay the initial fee. investors

Also, just because you have money to put down doesn’t mean you get the insured loan right away. A borrower is required to have a debt-to-income ratio of 45% or less and have been employed for at least two years prior to the loan origination. With COVID though, I have seen some cases in the forums where people who were not employed for the past two years consecutively were able to obtain the insured loan due to their current, stable job.

So, it’ll be up to you to weigh the pros and cons for the FHA insured loan and decide whether or not you’re too far in the hole. For someone with a poor credit score and little money to put down though, this gives you the opportunity (maybe your only opportunity) to own property and maybe even make a little money along to the way.

This gives a person who maybe thought their finances and credit score were holding them back from being an investor significant time to improve their situation all while being an investor! The beauty of an FHA insured loan is that you can always refinance to a conventional loan should your situation allow for it.