Primary Objective:                                                

....to assist in providing housing opportunities for low to moderate income families through both it's one to four family and multi-family (5 or more units) mortgage lending programs. 

The agency does not provide the mortgage funds but rather insures the home mortgages loans made by private industry lenders such as savings & loans, banks, and mortgage brokers.

Advantages to Borrowers

• Lower down payment is required
• May be assumed by a subsequent buyer at the same loan rate (no due-on-sale clause)
• No prepayment penalty (Certain limitations may apply)

Disadvantages to Borrower

• Requires more time for processing the loan application.
• Established loan limits for FHA loans may prevent a borrower from borrowing all he needs even though he may qualify for a larger loan.
• FHA sets high standards on the property and will not usually insure obsolete, poorly located homes, or homes in areas where essential utilities are lacking.

Lender Advantages

• FHA lenders have a competitive advantage over non-FHA lenders because FHA loans are so attractive to many borrowers.
• If forecloses, FHA takes title and resells the property relieving the lender and lowering administrative costs. 

Lender Disadvantages

• Greater administrative burden due to the number of FHA programs and regulations associated with FHA loans.
• Greater risk of borrower default in the earlier years due to the less stringent qualifying and higher loan to value ratios.

The FHA program is like a partnership between the federal government and the private residential lending sector.   The insurance issued by FHA is paid for with premiums collected from borrowers who use the various programs. The mortgage insurance protects both lenders and secondary market investors against loss  from default and foreclosure by the borrower. 

HUD/FHA offers a variety of single family home loan programs listed below in order of popularity:

Section 203 (b)

A 10- to 30-year, fixed rate, fully amortizing mortgage loan for the purchase or refinance of proposed, under-construction, or existing one to four family, owner-occupied primary dwellings.  This includes detached and Planned Unit Development (PUD) homes, and manufactured homes meeting certain eligibility requirements.

Section 245 authorizes the Graduated Payment Mortgage (GPM), a fixed rate, 30-year loan having a lower first year payment with gradually increasing payments over the next 5 years, then higher payments in years 6 through 30. The program is intended to benefit young applicants who cannot afford the payments required by a level payment loan but who are expected to have increased income in future years.

There are several plans under this section with most involving some degree of "negative amortization" i.e., the payments are not sufficient to pay the interest due or pay off the loan within the required period of years.  

Payment increases in each of the first five years are limited to 7.5% of the previous year's payment and only single family, owner-occupied homes are eligible.  Maximum loan amounts are the same as  noted above but the interest rate charged is usually a one-fourth point (1/4%) higher than 203(b) loans.

Additional Sections

• Section 221 (d) (2) - for borrowers displaced through government action (e.g., urban renewal, building code enforcement, eminent domain condemnation, etc.,),  this program finances the purchase and rehabilitation of 1- to 4-unit homes
• Section 203 (I)  - is limited to 75% of the above maximums for the purchase or refinance of rural homes on sites of up to 2.5 acres.
• Section 240 - provides financing to borrowers for the purchase of fee ownership in leasehold land.
• Section 220 (d) (3) (A) - makes financing available in specially designated redevelopment areas.
• Section 255 - popular with older borrowers.  Provides Home Equity Conversion Mortgages (HECM) also called Reverse Equity Mortgages (REMs).  The program allows older borrowers to receive a monthly advance from the equity in their home.  This program  is available to buyers having a low existing mortgage or that their home is paid off and is free and clear of a mortgage.  It is intended to offer a source of monthly income for retired, limited income individuals  who might otherwise be forced to sell their home. 

Mortgage Insurance Premiums 

For most FHA programs, there is a "one time" mortgage insurance premium (OTMIP) required at loan closing that is 2.25% of the loan (2.00% for loans of 15 years or less).  This OTMIP may be financed in the loan amount along with an Annual Mortgage Insurance Premium which is paid over the life of the loan.  This additional MIP is equivalent to .50% of the outstanding balance of the loan and is collected each month in addition to principal and interest payments.  The annual MIP is applicable on all loans in addition to the "one time" premium feature.

Key Points Of FHA Loans

• FHA does not generally make direct loans.
• FHA merely provides loss insurance to qualified private lenders.
• Required insurance paid by the borrower includes two types- annual MIP and OTMIP.
• All FHA loans are fully assumable by qualified borrowers. 
• FHA does not set their interest rates - lenders do
• FHA does not build houses
• Operates as a "federal mortgage insurance agency."
• Encourages lenders to make funds available to borrowers of high risk having minimal down payment and higher loan-to-value ratio.
• Most popular programs are Sections 203 (b), 234 (c), and 245 (a)(b).
• Loan programs for:

For more information, visit the HUD web site.