The Federal Housing Administration was created under the National Housing Act of 1934. Under this act the FHA was granted the authority to insure mortgage loans made by private lenders. It is important to understand that the FHA issues an insurance policy, whose premiums are paid by the borrower, which guarantees that the lenders will receive their money in the event the mortgagors fail to make their payments.

There are several types of FHA mortgage programs including low-income housing, nursing homes, cooperative apartments and condominium apartments. The most common FHA program is for single-family homes as authorized by Title 1 1 , Section 203, of the National Housing Act. Under this program the borrower pays a one-time insurance premium based on several factors. This premium may be financed over the life of the loan if the skller pays the closing costs. The premiums for FHA insurance are deposited in the Mutual Mortgage Insurance Fund. The FHA reimburses a lender from this fund if a borrower defaults, the mortgagor’s interest has been foreclosed and the Secretary of HUD has taken title to the property. The FHA then must sell the property.

Lenders will generally loan a higher percentage of the appraised value with an insured mortgage. There may be times when a potential home buyer does-not have a sufficient down payment to qualib for a conventional loan. In this case, an FHA-insured mortgage may be appropriate. However, the insurance premium is an added expense to the borrower.