What Was the FHA 235 Loan?

The Federal Housing Authority (FHA) helps some borrowers obtain credit for new and refinanced properties. The FHA's Section 235 loan is now a defunct program, but the effects of it are still felt by some homeowners. Having learned from its mistake, the federal government now offers different programs with more stringent guidelines for eligibility.

History

The FHA's Section 235 loan, pioneered in the 1960s, was designed to help new borrowers achieve homeownership. To ease this transition, the program allowed borrowers to take out government-insured mortgages with no money down on new properties. In essence, the government began shouldering a huge debt burden, because all the Section 235 loans were 100 percent financed.

Defaults

The Section 235 program was discontinued by HUD on October 1, 1989 after a detrimental string of defaults and foreclosures nearly bankrupted the program. Because the federal government insured the lenders who made these loans, it had to pay millions of dollars in insurance benefits to lenders saddled by FHA foreclosures.

New FHA Programs

The newer FHA homeownership programs require a borrower to put down a down payment, usually at least 3 percent of the purchase price. These new FHA loans are still insured by the federal government in an attempt to motivate lenders to reach out to marginalized borrowers, but they have far lower rates of default and foreclosure.

Refinancing a 235 Loan

Most borrowers who had a Section 235 loan eventually refinanced it. if you still have a Section 235 loan, you can contact a mortgage company to have it refinanced. If you attempt to pay off one of these loans with a new mortgage, you'll need to contact the FHA and notify the department of the refinance.

Warning

The FHA's Section 235 loan proved that financing a home with no down payment can be a risky proposition. Borrowers should work to save for a substantial down payment and then finance the rest of the price of a home.

references