Insurance for Adjustable Rate Mortgages (Section 251)

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

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, 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. The basic FHA mortgage insurance program is Mortgage Insurance for One- to Four-Family Homes (Section 203(b)). FHA administers a number of programs, based on Section 203(b), that have special features. One of these programs, Section 251, insures adjustable rate mortgages (ARMs) which, particularly during periods when interest rates are high, enable borrowers to obtain mortgage financing that is more affordable by virtue of its lower initial interest rate. This interest rate is adjusted annually, based on market indices approved by FHA, and thus may increase or decrease over the term of the loan.

Type of Assistance:
This program provides insurance for adjustable-rate mortgages, used in conjunction with other widely used FHA single-family products—Mortgage Insurance for One- to Four-Family Homes (Section 203(b)), Single-Family Rehabilitation Mortgage Insurance (Section 203(k)), and Single-Family Mortgage Insurance for Condominium Units (Section 234(c)). Under this FHA-insured mortgage product, the initial interest rate and monthly payment are low, 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 increase or decrease in any one year is 1 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. In addition, borrowers must be informed at least 25 days in advance of any adjustment to the monthly payment. In most other respects, Section 251 loans are similar to basic FHA-insured single-family loans:

-- Downpayment.requirements can be low—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.

-- 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. In addition to the downpayment, the purchaser must pay for items such as the appraisal and the title search. 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 charge 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, property appraisal and inspection fees are set by FHA.

-- 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 loans under Section 251 through HUD Field Offices.

Eligible Customers:
All persons intending to occupy the property as their principal residence are eligible to apply. (All FHA-approved lenders may make adjustable rate mortgages; creditworthy applicants may qualify for such loans.)

Application:
Any person able to meet the cash investment, the mortgage payments, and credit requirements can apply. The program is generally limited to owner-occupants. Applications are made through an FHA-approved lending institution. Borrowers can locate FHA-approved lenders through the searchable listing provided on HUD’s homepage.

Funding Status:
In FY 1996, 184,213 units valued at about $17 billion were insured under Section 251. Through September 30, 1996, 874,838 units valued at $75.6 billion had been insured.

Technical Guidance:
Insurance for ARMs is authorized under Section 251 of the National Housing Act (12 U.S.C. 1715z-16). Program regulations are at 24 CFR 203.49. 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.

For More Information:
General—To learn more about this program and other financing options, homebuyers should contact a HUD-approved lender for a searchable listing of approved lenders nationwide, a HUD-approved housing counseling agency, or the toll-free FHA Mortgage Hotline, 1-800-CALLFHA. The Federal Reserve Board has prepared a booklet on ARMs, Consumer Handbook on Adjustable Rate Mortgages, which is available on the Internet or by mail from HUD.