FHA's
(Federal Housing Administration)
FHS 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--including
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, that helped open the suburbs for returning veterans
in the 1940s and 1950s, and that 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 homeownership 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
underserved areas where mortgages may be harder to get. In FY
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:
Down payment
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 Mortgage
Insurance
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 of .50%. 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 in subsequent years as
low as .300% in subsequent years.
One alternative to
avoid MIP, is a first mortgage of 80% and a second mortgage up to
20%.
Dependable
