The Center For Debt Management
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Guide To Single Family
Home Mortgage Insurance

... Continued From Previous Page

Applying for the Loan

When you have selected a lender, arrange a meeting with the loan officer to fill out the application forms. At the interview, you will have to provide the lender with your most recent bank statement and pay stub, picture identification, and proof of your social security number. You will also have to pay fees for an appraisal and a credit report.

The lender will take care of processing the loan for FHA insurance and will arrange to close the loan.

Many lenders are authorized to approve mortgage applications without submitting any paperwork to HUD. These companies are called Direct Endorsement lenders. Most FHA-insured loans are handled by these lenders. In some cases, however, HUD reviews information submitted by the lender and determines whether the property and the borrower are acceptable risks for an FHA-insured mortgage. Regardless of the type of loan you select, you will deal only with the lender, and the lender will handle all transactions with HUD.

Payments on an FHA-Insured Mortgage

Monthly Payments
The amount of your monthly payment will depend on how much money you borrow and the interest rate on your loan. Your monthly mortgage payment will include money to repay the principal amount you borrowed, the interest on that money, your FHA mortgage insurance premium, and amounts for taxes and property insurance. Typically, your combined monthly payment for principal, interest, taxes, and insurance should be no more than 29 percent of your gross (before taxes) monthly income for buying an existing home and 31 percent for new construction.

Advance Payments
With an FHA-insured mortgage, you can make extra payments toward the principal when you make your regularly monthly payment. By making extra payments, you can repay the loan faster and save on interest. However, extra payments do not relieve you from continuing to make regular payments every month.

You can also pay off the entire balance of your FHA-insured mortgage at any time.

Limits on FHA-Insured Mortgages

Amount of the Mortgage
There is a limit on the maximum mortgage HUD will insure. However, FHA loan limits are adjusted annually to the median cost of housing in your area.  Information about the mortgage limits for the area you live in may be obtained from HUD approved lending institutions.

Property Appraisal
For an existing home, HUD's estimate of the appraised value is based on the condition of the house and recent sales of comparable properties in the neighborhood. If there are obvious, serious defects, the house must be repaired before HUD insures the mortgage.

If your house has not yet been built, HUD will base the estimate of its value on the plans and specifications for the house and the value of the land where it will be built.

Existing houses are generally sold "as is" unless the buyer and seller agree, usually in writing, to repairs. Since there may be hidden defects in a home, the homebuyer should carefully examine the house or have the house inspected by a professional home inspection firm and be satisfied of its soundness before purchasing. HUD lets you use up to $300 of the cost of the inspection as part of your down payment.  Typically, a home inspection costs from $200 - $500.  An appraisal is not an inspection, and HUD does not warrant the condition of the house you buy.

The Most Frequently Used
FHA Mortgage Insurance Programs

Section 203(b)
Home Mortgage Insurance

(Federal Domestic Assistance Codes 14.117 and 14.118)
Section 203(b) of the National Housing Act is the most commonly used HUD single family program. This program is available in all areas of the country, provided a market exists for the property and the home meets HUD's Minimum Property Standards. You may use the Section 203(b) Program to purchase a new or existing one- to four-family home in both urban and rural areas.

A Section 203(b) mortgage may be repaid in monthly payments over 10, 15, 20, 25, or 30 years.

Section 234(c)
Condominium Units

(Federal Domestic Assistance Code 14.133)
Section 234(c) provides mortgage insurance for buyers who wish to purchase a unit in a condominium project. The condominium may consist of more than one building, such as a group of row apartments, high-rise buildings, townhouses, or any combination of these structures.

When you buy a unit in a condominium, you will own one unit in a multi-unit project, and you will have a voting interest in the condominium association that governs the day-to-day operation of the project.

You will share an undivided interest with other owners in the common areas and facilities that serve the project and share the obligation to maintain them. All owners pay a monthly condominium fee to the association to maintain the shared common areas and facilities, including common land areas, roofs, floors, main walls, stairways, lobbies, halls, and parking spaces. This payment is separate from the regular monthly mortgage payment.

Generally, a condominium project must be approved by HUD before you can purchase a unit using an FHA-insured mortgage. HUD requires that 51 percent of the units in the project must be owner-occupied before FHA will offer mortgage insurance for individual units in the project.

Section 203(k)
Rehabilitation Home Mortgage Insurance
(Federal Domestic Assistance Code 14.108)
Section 203(k) mortgages allow you to purchase or refinance and rehabilitate a home at least one year old. A portion of the loan proceeds are used to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed.

The loan may be used to purchase a home and the land on which it is located and rehabilitate it; purchase a home on one site and move it onto a new foundation at another site and rehabilitate it; or refinance an existing mortgage to rehabilitate the home. In addition, a Section 203(k) mortgage may be used to convert non-residential buildings to residential use or to change the number of family units in the home.

The maximum allowable mortgage for a 203(k) loan is the lesser of:

bullet

The estimate of the as-is value or the purchase price of the property before rehabilitation, which ever is less, plus the estimated cost of rehabilitation and allowable closing costs, or

bullet

110 percent of the expected market value of the property upon completion of the work, plus allowable closing costs.

Money can be escrowed to help you make mortgage payments during the rehabilitation work. In determining the maximum mortgage amount, this Mortgage Payment Reserve is considered a part of the cost of rehabilitation.

Section 245(a)
Growing Equity Mortgage

(Federal Domestic Assistance Code 14.159)
A Growing Equity Mortgage (GEM) is a graduated payment mortgage that provides for rapid principal payment and a shorter mortgage term by increasing payments over a period of time.

Scheduled increases in monthly payments are applied directly to the principal, allowing a shorter term than a GPM or a level payment mortgage. The total cost of your mortgage will also be reduced because you pay off the balance sooner.

The length of the mortgage varies according to the plan you choose.

Section 251
Adjustable Rate Mortgage
(Federal Domestic Assistance Code 141.75)
An Adjustable Rate Mortgage differs from a fixed rate mortgage because the interest rate and monthly payments may increase or decrease during the life of the loan.

The initial interest rate on your mortgage will remain in effect from 12 to 18 months. Your mortgage documents will indicate the date when the first change in your interest rate will occur. Thereafter, your monthly payments will increase if the one-year Treasury Constant Maturities index goes up and will decrease if this Index falls.

Your interest rate cannot increase or decrease more than one percent in any one year. Over the life of the loan, the interest rate may not increase or decrease more than five percent from the initial interest rate.

Your lender must explain how the Adjustable Rate Mortgage is calculated when you apply for your loan. Your lender must inform you at least 25 days in advance if there is an adjustment to your monthly payment. More details about these programs are available at www.hud.gov.

Other FHA Mortgage Insurance Programs

Although the following FHA mortgage insurance programs are still active, they are not used as much as the six major FHA programs, because they were designed to serve certain specific purposes.

Section 203(h)
Mortgage Insurance for Disaster Victims

(Federal Domestic Assistance Code 14.119)
You may use this program to finance the purchase of a home if your home was damaged or destroyed because of a major disaster. The President of the United States must designate the area a major disaster area. The loan may be used to purchase an existing home or a newly built home.

Disaster victims are not required to meet minimum investment requirements, and a down payment is not required.

Section 203(i)
Mortgage Insurance for Outlying Area Properties
(Federal Domestic Assistance Code 14.121)
You may use Section 203(i) to purchase a home in a rural area. You may also use it to purchase a new farm house on 2.5 or more acres of land adjacent to an all-weather road.

Section 220
Urban Renewal Mortgage Insurance

(Federal Domestic Assistance Code 14.122)
This program is used in conjunction with local governments to rehabilitate existing dwellings for up to 11 families or to build new dwellings in redevelopment areas where concentrated housing, physical development, and public service activities are being carried out. If the building houses more than four families, the mortgage limit increases $9,165 for each additional unit.

Section 220(h)
Insured Improvement Loans in Urban Areas
These loans are used to finance alterations, repairs, or improvements to existing dwellings housing up to 11 families in a redevelopment area as defined in Section 220. The mortgage limit is the lesser of:

bullet

HUD's estimate of the cost of improvements;

bullet

$40,000; or

bullet

$12,000 for each family unit ($17,400 in high cost areas).

Section 221(d)(2)
Home Mortgage Insurance for Low and Moderate Income Families
(Federal Domestic Assistance Code 14.120)
This program may be used by low- to moderate-income families to finance the purchase of a home. It may also be used by families displaced by urban renewal, code enforcement, condemnation, etc., or as a result of the President declaring an area a major disaster. The mortgage limit for a one-family unit is $31,000. This amount may be increased up to $36,000 in high cost areas determined by the Department.

Section 223(e)
Miscellaneous Housing Insurance

(Federal Domestic Assistance Code 14.123)
You may use Section 223(e) to purchase a property in an older, declining urban area where normal requirements for mortgage insurance cannot be met. Only HUD can determine whether a property is eligible for Section 223(e) mortgage insurance. This program is intended to supplement other HUD mortgage insurance programs.

This program is limited by law to mortgages up to $18,000 ($21,000 in high cost areas.)

Section 238(c)
Mortgage Insurance in Military Impacted Areas

(Federal Domestic Assistance Code 14.165)
You may use Section 238(c) to finance the repair, rehabilitation, or purchase of a home near any military installation in a federally-impacted area. The Secretary of Defense must certify the need for additional housing in the area.

Section 245(a)
Graduated Payment Mortgage

(Federal Domestic Assistance Code 14.159)
The Graduated Payment Mortgage (GPM) Program allows you to make lower payments during the early years of the loan. As your income increases, your payments also gradually increase for several years, then level off and remain steady for the balance of the mortgage.

With a GPM, you in effect borrow additional money during the early years of your mortgage by deferring interest payments. This allows you to have smaller initial monthly payments. The deferred interest is added to the loan balance in later years.

FHA offers five GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years. For example:

>Year

>203(b)

>GPM Loan

1

526.80

400.22

2

526.80

430.24

3

526.80

462.50

4

526.80

497.20

5

526.80

534.49

6

526.80

574.57

Remaining Payments

526.80

574.57

To give you an idea of how a 245(a) GPM works, the following table compares the monthly payment schedule of a 203(b) FHA-insured loan with Plan 3, the most frequently used GPM plan. In Plan 3, payments increase 7.5 percent each year for 5 years before leveling off. The example uses a 30-year, $60,000 mortgage, with an interest rate of 10 percent:

GPM Plan

Increase in Monthly Payments

Frequency of Increase

Plan 1

2.5 %

First 5 years

Plan 2

5 percent

First 5 years

Plan 3

7.5 percent

First 5 years

Plan 4

2 percent

First 10 years

Plan 5

3 percent

First 10 years

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