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Insurance for Adjustable Rate Mortgages (Section 251)

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), includes insurance for condominium units) and Mortgage Insurance for Rehabilitation Loans (Section 203(k)). 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 3.5 percent. This is because FHA insurance allows borrowers to finance approximately 96.5 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. 

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 should contact a HUD approved lender.

Funding Status:
In FY 2012, 14,563 adjustable rate mortgages valued at about $3.9 billion were insured under Section 251.

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 FHA Resource Center.

For More Information:
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 Resource Center at (800) CALLFHA. The Federal Reserve Board has prepared a booklet on ARMs, Consumer Handbook on Adjustable Rate Mortgages.