In the 1800s and early 1900s, less than half of American families owned their own homes. Those who did own their home had bought or built it by saving money over many years or even decades. There were few opportunities to get a home loan.
In the 1930s, insurance companies began financing mortgages. Most mortgages during this time were for 3-5 years and financed only 40-50% of the home’s cost. They were generally balloon loans where the monthly payments covered only the interest and the full balance of the loan amount (the principal) was due at the end of the loan.
During the Great Depression, many banks crashed and were forced to recall many mortgages because they needed the money to pay other obligations. At the same time, many individuals had lost their jobs and were no longer able to make their mortgage payments. Many homes were foreclosed and the housing market suffered greatly.
The National Housing Act of 1934 created the Federal Housing Administration (FHA) to insure home loans made by banks and private lenders. Its intent was to regulate the interest rate and the terms of the mortgages that it insured. The agency’s goals are to improve housing standards and conditions, provide an adequate home financing system, and stabilize the mortgage market.
FHA backed loans financed 80% or 90% of the home’s value (compared to previous mortgages that financed only 40-50%) and banks and other lenders soon followed suit. The FHA made the loan process more official and qualified a person’s ability to borrow money based on their ability to pay it back instead of the traditional way of knowing the right people. The FHA also lengthened the loan terms, offering 15-year loans and later introducing the 30-year loans that have become standard today.
Instead of balloon loans, the FHA established the amortization of loans, which meant that the homeowner would pay a portion of the loan’s principal in each monthly payment, gradually reducing the amount of the loan until it is completely paid off.
In 1965, the FHA became part of the Department of Housing and Urban Development (HUD). Since 1934, the FHA and HUD have insured more than 34 million home mortgages.
Thanks to these and other changes in the housing market, home ownership is now a possibility for a greater number of families. Today, approximately two-thirds of Americans own their own home and the great majority of them are able to do so thanks to mortgage financing.