Mortgage Insurance for 1- to 4 Family Homes
(Section 203(b)) - HUD
Summary:
Through this program, HUD's Federal Housing
Administration (FHA) insures mortgages made by qualified lenders
to people purchasing or refinancing a home of their own.
Purpose:
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 lenders to make loans to otherwise creditworthy
borrowers and projects that might not be able to meet conventional
underwriting requirements, by protecting the lender 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—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.
Type of Assistance:
This program provides mortgage
insurance to protect lenders against the risk of default on loans
to qualified buyers. Insured loans may be used to finance the purchase
of new or existing one- to four-family housing, as well as to refinance
debt. Section 203(b) has several important features:
-- Downpayment requirements can be low. In contrast to conventional
mortgage products, which frequently require downpayments 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 downpayments
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 lenders may charge in making a loan. For example, the
loan origination fee charged by the lender 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. The current
limit ranges from $81,548 to $160,950. These figures vary over time
and by place, depending on the cost of living and other factors
(higher limits also exist for two- to four-family properties).
Eligible Grantees:
FHA-approved lending institutions,
such as banks, mortgage companies, and savings and loan associations,
can make insured Section 203(b) loans.
Eligible Customers:
Anyone intending to use the
mortgaged property as their primary residence is eligible to apply
for mortgage insurance. However, the program is not open to investors.
Application:
Any person able to meet the cash investment,
the mortgage payments, and credit requirements can apply. The program
is limited to owner-occupants. Applications are made through an
FHA-approved lending institution. Most lenders who use this mortgage
insurance product, however, make their requests through a provision
known as Direct Endorsement, which authorizes
them to consider applications without submitting paperwork to HUD.
Borrowers can locate FHA-approved
lenders through the searchable listing provided on HUD's homepage.
Technical Guidance:
This program is authorized
under Section 203, National Housing Act (12 U.S.C. 1709 (b), (i)).
Program regulations are in 24 CFR Part 203. The program is administered
by HUD's Office of Housing-Federal Housing Administration. Prospective
lenders should contact the Director
of Single Family Programs at the nearest HUD field office about
participating in this program. Loan processing and administration
for this and other FHA single-family mortgage insurance products
are handled through one of four consolidated Single Family Homeownership
Centers.
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