FHA Mortgage Loans
 he Federal Housing Administration (FHA) is a federal agency within the U.S Department of Housing and Urban Development (HUD). FHA's primary objective is to assist in providing housing opportunities for low to moderate income families. FHA has both single family (1-4 unit homes) and multi-family (5 or more units) mortgage lending programs. The agency does not generally provide the funds for the mortgages, but rather insures home mortgage loans made by private industry lenders such as mortgage bankers, savings & loans and banks.
The insurance issued by FHA is paid for with premiums collected from the borrowers who use the programs. The mortgage insurance protects lenders and investors against loss resulting from borrower defaults and foreclosures. This partnership between the government and the residential lending community has proven effective over the years in increasing home ownership throughout the country since the agency was created in 1934.
HUD/FHA offers a variety of single family home loan programs designed to meet the various needs of mortgage borrowers. Under the federal statutes authorizing FHA's existence, there are a number of Sections that provide for specific loan types. Following are descriptions of some of those loan program variations, identified by the Federal Housing Act Section for the individual loan type, starting with the most popular:
- Section 203 (b)
- This loan program is a 10- to 30-Year, Fixed Rate, Fully Amortizing mortgage loan intended for the purchase of proposed, under-construction or existing, 1-4 Family, owner-occupied primary homes. It is also available for refinance of homes under the same guidelines. This program has the following maximum loan amount limits:
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- 1 Unit
- Standard Limits: $78,660
- High-Cost Area Limits: $155,250
- HI, AK & Guam: $232,875
- 2 Units
- Standard Limits: $100,600
- High-Cost Area Limits: $198,550
- HI, AK & Guam: $297,800
- 3 Units
- Standard Limits: $121,600
- High-Cost Area Limits: $240,000
- HI, AK & Guam: $360,000
- 4 Units
- Standard Limits: $151,150
- High-Cost Area: $298,350
- HI, AK & Guam: $447,500
Loan amounts within these limits are established from the average cost of homes in each marketplace, usually county by county throughout the nation. You can find the regional loan limits at the Housing and Urban Development web site, or on our site here.
The amount of an FHA loan is based on the lesser of the purchase price + allowable loan closing costs or the value of a property, up to the limits noted above. FHA will finance 97% of the first $25,000; 95% of the next $100,000 and 90% of the amount of $125,000. Generally loans have a maximum Loan-to-Value (LTV) ratio of 94% to 97%, depending on the purchase price.
Refinance loans with no cash out are available under the same terms and limits as a purchase loan. Loans with cash out to the borrower are limited to an 85% LTV.
This loan program is limited to use with detached and Planned Unit Development (PUD) homes, including manufactured homes meeting certain eligibility requirements.
- Section 234
- This Section provides for the financing of Single Family Condominium properties. FHA does not permit loans on multi-family (2-4 Units) Condominiums. The maximum loan amounts are the same as the 1-Unit limits noted above.
- Section 251
- Approximately 10 years ago, FHA began permanently offering an Adjustable Rate Mortgage (ARM) loan under the authority of this Section, at the same loan limits noted above. This type of loan is subject to a rate adjustment every year indexed to the rates of US Treasury Securities. However, there are limits (Caps) on how much the rate can change at any one time ((1.00%) and over the life of the loan ((5.00%). The loan is fully amortizing over a 30-year period, thus resulting in monthly payment changes at the time of each rate adjustment.
- Section 203 (k)
- This program is designed to provide for rehabilitation of existing homes (over 1 year old or damaged by a natural disaster and located in a Presidential declared disaster area). With the exception of some special programs with very limited availability, this is the only FHA-Insured program that is usable by non-occupant or investor borrowers, up to an LTV limitation of 85%. Following are some of the program's highlights:
- The program can be used for purchase of a new home or refinance of a current home;
- Rehabilitation loans can be either Fixed Rate or Adjustable Rate Mortgages;
- They can be used for repair and/or remodeling and updating;
- 1-, 2-, 3- and 4-Unit properties are eligible for this financing, except condominiums;
- 203(k) loans may be used to purchase a lot and move an existing home onto the lot;
- A single family home could be converted and expanded to a multi-family home;
- It is available for some commercial real estate use (some restrictions apply);
- Certain qualified borrowers can assume a 203(k) with no down payment;
- Maximum loan amounts are the same as noted above for the 203(b) loans.
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- Section 203 (h)
- Loans under this Section of the Act are a variation of the 203(b) program described above. Homeowners and renters who have had their homes destroyed or otherwise made uninhabitable due to a natural disaster may be eligible for this 100% (NO down payment) program, under the following parameters:
- Only fixed rate loans on 1-unit properties are available;
- The damaged home must have been within a Presidential declared disaster area;
- The loan must close with one year of the Presidential declaration;
- Destruction of the existing home must be independently verified.
- Section 245
- This section authorizes the Graduated Payment Mortgage (GPM). It is a fixed rate, 30-year loan that has a lower first year payment and gradually increasing payments over the next 5 years. The program provides for a scheduled negative amortization to cover the low early payments, offset by increases over the next five years, and repaid in full in the remaining 25 years of the total term of 30 years.
Payment increases occurring in each of the first five years are limited to +7.5% of the previous year's payment amount. Only 1-unit, owner-occupied properties are eligible for a GPM. Maximum loan amounts are the same as is noted above.
Other sections of the Housing act provide for more limited use loan programs including:
- Section 221 (d) (2) for the purchase and rehabilitation of 1- to 4-unit homes by borrowers displaced through government action (e.g., urban renewal, building code enforcement, eminent domain condemnation, etc.)
- Section 203 (I) for rural home purchase and refinance on sites of up to 2.5 acres. This program is generally limited in loan amount to 75% of the maximums noted above.
- Section 240 assists borrowers with the purchase of fee ownership of leasehold land.
- Section 220 (d) (3) (A) provides lending in specially designated redevelopment areas.
- Section 255 authorizes Home Equity Conversion Mortgages (HECM) also called Reverse Equity Mortgages (REMs). This loan allows older borrowers to receive a monthly advance from their equity in a home with a low existing mortgage or that is free and clear. The program is intended to offer a source of monthly income for retired individuals who might otherwise be forced to sell their home because of lower retirement income levels.
As previously noted, FHA does not make direct loans except under rare programs. Instead FHA provides default or loss insurance for loans made by qualified private lenders. That insurance is purchased by borrowers with each loan and comes in two formats. Some loans require payment of both types, some only the annual premiums.
One Time Mortgage Insurance Premium (OTMIP) is paid at loan closing in the amount of 2.25% of the loan (2.00% for loans with a term of 15 years or less) and may be financed into the amount borrowed. This premium is payable for all 203(b), 203(h), 245 and some other limited use programs, in addition to an annual premium.
Annual Mortgage Insurance Premiums are paid over the life of the loan in the amount of .50% of the outstanding balance of the loan. This premium is collected each month with the borrowers principal and interest payment and remitted to FHA by the lender. It is applicable on all loans including the loans with the One Time premium.
All FHA loans are fully assumable by qualified borrowers. Individuals assuming an FHA loan must meet the same credit standards as the original borrower. When approved, a qualified assumptor takes over the monthly payments and responsibility for the remaining mortgage balance due.
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