What Is an FHA Title II Loan?

Technically, the home mortgage loans guaranteed by the Federal Housing Administration can also be called Title II loans. This is because they are authorized under Title II of the National Housing Act, passed in 1934. While the original law was relatively limited in its scope, today's Title II loan program insures homes all over America.

In the aftermath of the 1929 stock market crash, the government took broad actions to try to fix the economy. One of the earliest actions was the creation of the Federal Home Loan Bank Board in 1932 in the hopes that it would spur better availability of mortgages. While it didn't help very much, the gradually improving economy created an opportunity for the government to support increased homeownership through the passage of the National Housing Act of 1934. Title II of that law created a mutual mortgage insurance program and the Federal Housing Administration.

The $10 million original fund under Title II was used to insure mortgages, and while it helped some prospective homeowners, its scope didn't reach to lower income families. During the period leading up to World War II, the government created new agencies and programs that would set the stage for greater involvement in housing. After the war, those programs and the FHA worked together with new laws to increase the scope of the FHA's mortgage insurance programs.

Loans made under section 203(b) of Title II of the National Housing Act of 1934 offer down payments as low as 3.5 percent and limits as high as $729,750, as of October 2013. The program offers relaxed qualification standards relative to a borrower's income and credit, as well. In addition to traditional mortgages on one- to four-unit homes, the FHA also backs loans that allow home purchasers to borrow money to rehabilitate their homes, under section 203(k) of Title II.

Before creating the FHA, the National Housing Act of 1934 also created a loan program for existing property rehabs -- the Title I program. As of the date of publication, these loans can have a balance of up to $25,000 on a single family house and can be repaid over up to 20 years. Like Title II loans, you will have to find a private lender to make the loan, but the FHA will guarantee your performance.