Mortgage Insurance for Homes in Outlying Areas (Section 203(i))

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Summary:
Through Section 203(i) HUD's Federal Housing Administration (FHA) insures mortgages made by qualified lenders to individuals purchasing homes in outlying areas, where lack of a normal market could make resale in case of default difficult.

Purpose:
FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the initial 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.

Section 203(i) is one more tool for expanding homeownership opportunities for borrowers who would not otherwise qualify for conventional loans on affordable terms and who live in historically underserved areas where mortgages may be harder to get. This program is rarely used today--only 3 mortgages were insured under Section 203(i) in FY 1996.

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 proposed, under-construction, or existing one-family housing, or new farm housing on 2 ½ or more acres adjacent to an all-weather public road. Like other FHA mortgage insurance programs, Section 203(i) 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(i) make it possible to significantly reduce downpayments. Through this program, FHA insurance allows most borrowers to finance approximately 97 percent of the first $25,000 of a home purchase (including total allowable closing costs), 95 percent of the first $125,000 of the mortgage, and 90 percent of any amount over $125,000. The mortgage may never exceed 98.75 percent of value for properties worth up to $50,000 or 97.75 percent for properties worth more than $50,000.

-- FHA mortgage insurance is not free. Morgagees collect from the borrowers 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 lender's loan origination charge 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 based on what is "reasonable and customary" in a given area.

-- HUD establishes the maximum mortgage term, which is normally 30 years.

-- 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 for the buyer of a one-family home under this program is 75 percent of the loan limit under standard FHA mortgage insurance program, which 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 Providers:
FHA-approved lending institutions, such as banks, mortgage companies, and savings and loan associations, are eligible for Section 203(i) insurance.

Eligible Customers:
Anyone trying to finance a housing purchase in an outlying area who is able to meet the cash investment, mortgage payments, and credit requirements is eligible to apply for Section 203(i) mortgage insurance. The program is generally limited to owner-occupants.

Application:
Applications are made through FHA-approved lending institutions, who 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, 1715(b)). Program regulations are in 24 CFR Part 203. These regulations, as well as applicable handbooks and notices, are available electronically through HUDCLIPS. Section 203(i) is administered by HUD's Office of Housing-Federal Housing Administration.

For More Information:
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.

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. Locate a HUD-approved housing counseling agency through a searchable online list, or call the Housing Counseling Clearinghouse at 1-888-HOME-4US (1-888-466-3487).

A recent general study, HUD's Analysis of FHA's Single Family Mortgage Insurance Program (Office of Policy Development and Research, 1996), describes this program and its place in today's mortgage finance system. It is available from HUD USER, 1-800-245-2691.