Federal Housing Administration Paved the Way For Mortgages

Mortgage History

The first mortgage lenders were not banks , believe it or not! The first mortgages were originally created by insurance companies and the intent was not to make money on the interest of the mortgage loans or fees, but because they had hoped to own the properties when the borrowers didn’t keep up with their payments! The first mortgage loans were lent in the 1930’s, and the main requirements for a borrower to obtain a loan was “to know someone” that could help you get the loan!

Federal Housing Administration

In 1934, mortgages as we know them today, began. The Federal Housing Administration (FHA) was attempting to help get the country out of it’s economic depression by creating a new mortgage type specifically designed to help individuals who were unable to obtain mortgages under traditional underwriting requirements. It was during a time when very few families owned homes, about four in every ten households owned a home. You could only borrow up to 50% of the property value price, and it had to be paid back monthly over a three to five year span, at the end of which you would have a balloon payment to pay the remaining loan. Today, when you get an 80% mortgage, it means you are financing 80% of the home’s value. In the 1930’s, an 80% mortgage meant the borrowers had to come up with an 80% down payment! The Federal Housing Administration started the act of “qualifying” individuals and families for loans based on their ability to make payments. They also were instrumental in making the American Dream come true by creating programs that made the required down payment more reasonable. The LTV (80 percent loan to value) program was created, as was the 90 percent LTV. Soon after the FHA started these programs, banks and commercial mortgage lenders followed, making it possible for more average American families to obtain financing to purchase a home. Foreclosures were very common in the early mortgage lending days. Most mortgages consisted of the three to five year monthly repayment schedule, with a huge balloon payment at the end of the term. The FHA created amortization of loans, which enabled the principal amount to be spread out for seven, to fifteen, to eventually thirty year terms with interest. Rather than having a short monthly payment schedule and a huge payment at the end that often caused families to foreclose on the homes, mortgages were now available to make payments monthly over a longer period of time, reducing the loan principal gradually until it was completely paid off in installments. Not only was the FHA instrumental in making it possible for more families to obtain financing to purchase a home, but they also set standards of quality for the construction of homes to ensure that the buildings were strong enough to last as long as the new lengthier mortgage terms! Once again, as the Federal Housing Administration set standards, the banks and commercial mortgage lenders soon followed.