FHA Programs
FHA Adjustable Rate Mortgage (or FHA ARM)
Section 251 insures home purchase or refinancing loans with interest rates that may increase or decrease over time (adjustable rate mortgages), enabling consumers to purchase or refinance their home at a lower initial interest rate.
FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan.
FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan.
Type of Assistance:
This program provides insurance for adjustable-rate mortgages, used in conjunction with other widely used FHA single-family products - Mortgage Insurance for One- to Four-Family Homes (Section 203(b)), Single-Family Rehabilitation Mortgage Insurance (Section 203(k)), and Single-Family Mortgage Insurance for Condominium Units (Section 234(c)). Under this FHA-insured mortgage product, the initial interest rate and monthly payment are low, but these may change during the life of the loan. FHA uses 1-year Treasury Constant Maturities Index to determine interest rate changes. The maximum amount the interest rate may increase or decrease in any one year is 1 percentage point. Over the life of the loan, the maximum interest rate change is 5 percentage points from the initial rate. Lenders must disclose to the borrower the terms of the ARM at the time of loan application. In addition, borrowers must be informed at least 25 days in advance of any adjustment to the monthly payment. In most other respects, Section 251 loans are similar to basic FHA-insured single-family loans:
-- Downpayment requirements can be low-as little as 3 percent. This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage.
-- Many closing costs can be financed. This program allows the borrower to finance many of these charges, thus reducing the up-front cost of buying a home. However, not all of these up-front expenses can be folded into the mortgage. In addition to the downpayment, the purchaser must pay for items such as the appraisal and the title search. FHA mortgage insurance is not free: borrowers pay an up-front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment.
-- Some fees are limited. FHA rules impose limits on some of the fees that lenders may charge in making a loan. For example, the loan origination charge charged by the lender for the administrative cost of processing the loan may not exceed one "point"-that is, one percent of the amount of the mortgage (minus the mortgage insurance premium, if it is being financed). In addition, property appraisal and inspection fees are set by FHA.
-- HUD sets limits on the amount that may be insured. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage loan. See the current FHA loan limits. These figures vary over time and by place, depending on the cost of living and other factors (higher limits also exist for two- to four-family properties).
Eligible Customers:
All persons intending to occupy the property as their principal residence are eligible to apply. (All FHA-approved lenders may make adjustable rate mortgages; creditworthy applicants may qualify for such loans.)
Application:
Any person able to meet the cash investment, the mortgage payments, and credit requirements can apply. The program is limited to owner-occupants. Applications are made through an FHA-approved lending institution. Most lenders who use this mortgage insurance product, however, make their requests through a provision known as Direct Endorsement, which authorizes them to consider applications without submitting paperwork to HUD.
FHA LOAN QUESTION # 13 [ -more FHA questions- ]
Q: What types of closing costs are associated with FHA-insured loans?
A: Except for the addition of an FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan. The FHA requires a single, up-front mortgage insurance premium equal to 2.25% of the mortgage to be paid at closing (or 1.75% if you complete the HELP program). This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for an annual premium - paid monthly - if your mortgage is over 15 years or if you have a 15-year loan with an LTV greater than 90%.
