Adjustable Rate FHA Mortgage Loan Program

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Section 251 insures refinancing loans or home purchase with interest rates that may decrease or increase over time, enabling consumers to refinance or purchase their home at a lower initial interest rate.

By lowering some of the costs of their mortgage loans, FHA's mortgage insurance programs help moderate and low income families become homeowners. FHA mortgage insurance also encourages lenders to make loans to otherwise credit worthy projects and borrowers that might not be able to meet underwriting requirements that are conventional, protecting the lender against loan default on mortgages for properties that meet certain minimum requirements--including single-family, manufactured homes, and multifamily properties, and some health-related facilities. The basic FHA mortgage insurance program is Mortgage Insurance for One to Four-Family Homes (Section 203(b)). Based on Section 203(b), FHA administers a number of programs, that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, enable borrowers to obtain mortgage financing that is more affordable by virtue of its initial interest rate that is lower, particularly during periods when interest rates are high. Based on market indices approved by FHA, this interest rate is adjusted annually, and thus may decrease or increase over the term of the loan.


This program provides insurance for mortgages that are adjustable-rate, used in conjunction with other widely used FHA single-family FHA products-Mortgage Insurance for One-to Four-Family Homes (Section 203(b)), Single-Family Mortgage Insurance for Condominium Units (Section 234(c)), and Single-Family Rehabilitation Mortgage Insurance (Section 203(k)). The initial monthly payment and interest rate are low under this FHA-insured mortgage product, 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 decrease or increase in any one year is one 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. Also, at least twenty-five days in advance, borrowers must be informed of any adjustment to the monthly payment. Section 251 loans, in most other respects, are similar to basic FHA-insured single-family loans:

Requirements for a down payment can be low-as little as three percent. This is because FHA insurance allows borrowers to finance through their mortgage approximately ninety-seven percent of the value of their home purchase.

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. The purchaser must pay for items such as the title search and the appraisal in addition to the down payment. FHA mortgage insurance is not free: borrowers pay at the time of purchase an insurance premium up-front (which may be financed), as well as monthly premiums that are not financed that are added to the regular mortgage payment instead.

Some fees are limited. In making a loan, FHA rules impose limits on some of the fees that lenders may charge. For example, the charge for loan origination 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, inspection fees and property appraisal are set by FHA.

HUD sets limits on the amount that may be insured. To make sure that its programs serve moderate and low income people, FHA sets limits on the dollar value of the mortgage loan. The current limit ranges from $81,548 to $160,950. These figures by vary by place and over time, depending on the cost of living and other factors (higher limits also exist for two to four-family properties).

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