FHA's mortgage insurance programs help low and moderate income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages mortgage companies to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, by protecting the mortgage company against loan default on mortgages for properties that meet certain minimum requirements. This includes manufactured homes, single-family and multifamily properties, and some health-related facilities.
Section 203(b) is the centerpiece of FHA's single family insurance programs. It is the successor of the program that helped save homeowners from default in the 1930s, helped open the suburbs for returning veterans in the 1940s and 1950s, and helped shape the modern mortgage finance system. Today, FHA One to Four Family Mortgage Insurance is still an important tool through which the Federal Government expands home ownership opportunities for first time homebuyers and other borrowers who would not otherwise qualify for conventional loans on affordable terms, as well as for those who live in under served areas where mortgages may be harder to get. In 1997, FHA insured more than 790,000 homes, valued at almost $60 billion, under this program. FHA currently insures a total of about 7 million loans valued at nearly $400 billion. These obligations are protected by FHA's Mutual Mortgage Insurance Fund, which is sustained entirely by borrower premiums.
Section 203(b) has several important features:
Downpayment requirements can be low. In contrast to conventional mortgage products, which frequently require down payments of 10 percent or more of the purchase price of the home, single family mortgages insured by FHA under Section 203(b) make it possible to reduce down payments to 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, in some cases.
Many closing costs can be financed. With most conventional loans, the borrower must pay, at the time of purchase, closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program allows the borrower to finance many of these charges, thus reducing the up front cost of buying a home. 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 mortgage companies may charge in making a loan. For example, the loan origination fee charged by the mortgage company for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.
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.
FHA requires a mortgage insurance premium (MIP) for its home buying programs. An up front premium of 1.50% of the loan amount is paid at closing and can be financed into the mortgage amount. In addition, there is a monthly MIP amount included in the PITI. Condos do not require up front MIP - only monthly MIP.
The mortgage insurance premium paid on an FHA loan is always significantly higher than on a conventional program. On an FHA loan the borrower will be charged a mortgage insurance premium equal to 1.50% of the purchase price of the property and a renewal premium of .500% in subsequent years. By contrast, the mortgage insurance premium charged at closing on a conventional program is as low as .500% (with 10% down payment) with renewal rate as low as .300% in subsequent years.
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If you have ever paid off a home loan backed by FHA, you may have money owed to you. And the government wants to pay you back. About 1 in 10 FHA borrowers leave money in their escrow accounts when they pay off their loans. The average refund for each borrower is about $700. Former FHA borrowers who think they might be due a refund can call a toll free number, 800-697-6967, write HUD at P.O. Box 23669, Washington DC 20026-3699, or look for his/her name with the HUD Refund Search Form on their web site. |
The down payment for an FHA mortgage can be 100% gift funds. This is one of the key benefits to the FHA program.
Verification of the source of gift money is not required. However, it is necessary that the gift funds be deposited in the borrower's bank or savings account, or in an escrow account, prior to underwriting approval. Proof of deposit is required.
Gift donors are restricted primarily to a relative of the borrower. They can also be certain organizations, such as a labor union or charitable organization. Contact your local branch for complete information.
There may be closing costs customary or unique to a certain locality, but closing costs are usually made up of the following:
Any documentation preparation fees
FHA has permitted streamline refinances on insured mortgages since the early 1980's. The word streamline refers only to the amount of documentation and underwriting that needs to be performed by the mortgage company, and does not mean that there are no costs involved in the transaction.
The basic requirements of a streamline refinance are:
Companies may offer streamline refinances in several ways. Some companies offer "no cost" refinances (actually, no out of pocket expenses to the borrower) by charging a higher rate of interest on the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the company pays any closing costs that are incurred on the transaction.
Companies may offer streamline refinances and include the closing costs into the new mortgage amount. This can only be done if there is sufficient equity in the property, as determined by an appraisal. Streamline refinances can also be done without appraisals, but the new loan amount cannot exceed what is currently owed, i.e., closing costs may not be added to the new mortgage with those costs either paid in cash or through the premium rate as described above. Investment properties (properties in which the borrower does not reside in as his or her principal residence) may only be refinanced without an appraisal and, thus, closing costs may not be included in the new mortgage amount.
Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home.
Section 203(k) is one of many FHA programs that insure mortgage loans, and thus encourage mortgage companies to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first time homebuyers) and to residents of disadvantaged neighborhoods (where mortgages may be hard to get).
Section 203(k) fills a unique and important need for homebuyers in another way as well. When buying a house that is need of repair or modernization, homebuyers usually have to follow a complicated and costly process, first obtaining financing to purchase the property, then getting additional financing for the rehabilitation work, and finally finding a permanent mortgage after rehabilitation is completed to pay off the interim loans. The interim acquisition and improvement loans often have relatively high interest rates and short repayment terms.
However, Section 203(k) offers a solution that helps both borrowers and mortgage companies, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money, and also protect mortgage companies by allowing them to have the loan insured even before the condition and value of the property may offer adequate security. For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD's Title I Home Improvement Loan program.
The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k)-insured loans can finance the rehabilitation of the residential portion of a property that also has non residential uses; they can also cover the conversion of a property of any size to a one to four unit structure. The types of improvements that borrowers may make using Section 203(k) financing include:
Section 203(i) provides mortgage insurance for a person to purchase a principal residence in a rural area. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.
What are the eligibility requirements?
Eligible properties are one to four unit structures, including farm housing located on 2 acres or more of land adjacent to an all weather road.
FHA’s single family ARM program provides mortgage insurance for a person to purchase or refinance a principal residence at a lower initial interest rate. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.
What are the eligibility requirements?
Eligible properties are one to four unit structures.
The Federal Housing Administration (FHA) makes it easier for consumers to obtain affordable home improvement loans by insuring loans made by private lenders to improve properties that meet certain requirements. This is one of HUD's most frequently used loan insurance products.
The Title I program insures loans to finance the light or moderate rehabilitation of properties, as well as the construction of non residential buildings on the property. This program may be used to insure such loans for up to 20 years on either single or multi family properties.
These are fixed rate loans, for which lenders charge interest at market rates. The interest rates are not subsidized by HUD, although some communities participate in local housing rehabilitation programs that provide reduced rate property improvement loans through Title I lenders.
Only lenders approved by HUD specifically for this program can make loans covered by Title I insurance. While most lenders and contractors use this program responsibly, HUD urges consumers to use caution in choosing and supervising home repair contractors conducting Title I repair/renovation work. A recent HUD review of Title I uncovered many instances of "unscrupulous contractors performing shoddy work, falsifying documents, overcharging homeowners, and using deceptive advertising." HUD encourages homeowners to work directly with their lender in selecting a home repair contractor in order to prevent inflated estimates.
FHA energy efficient mortgage program provides mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy efficient improvements into the mortgage. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.
What are the eligibility requirements?
The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating system (HERS) or energy consultant.
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Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes. Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options. Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Mortgage companies recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the company the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage. The size of reverse mortgage loans is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed. For example, based on a loan at an interest rate of 9 percent, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent of the home's value, and an 85-year-old could borrow up to 56 percent of the home's value. There are no asset or income limitations on borrowers receiving HUD's reverse mortgages. There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area. As a result, owners of higher priced homes can't borrow any more than owners of homes valued at the FHA limit. HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up front payment plus one half percent on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower's principal balance. FHA's reverse mortgage insurance makes HUD's program less expensive to borrowers than the smaller reverse mortgage programs run by private companies without FHA insurance. |
If you have ever paid off a home loan backed by FHA, you may have money owed to you. And the government wants to pay you back.
About 1 in 10 FHA borrowers leave money in their escrow accounts when they pay off their loans. The average refund for each borrower is about $700.
Former FHA borrowers who think they might be due a refund can call a toll free number, 800-697-6967, write HUD at P.O. Box 23669, Washington DC 20026-3699, or look for his/her name with the HUD Refund Search Form on their web site.
Jeff Lazerson - Mortgage Columnist since 2011
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