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 incentivizes mortgage companies to approve loans for otherwise creditworthy borrowers and projects– that might not be able to meet conventional underwriting requirements– by protecting the mortgage company against loan default for properties that meet certain minimum requirements. These include 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. It is the successor of the program that helped save homeowners from default in the 1930’s that helped open the suburbs for returning veterans in the 1940’s and 1950’s 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 home-ownership opportunities for first-time home buyers and other borrowers who would not otherwise qualify for conventional loans on affordable terms, as well as for those who live in under-served areas where mortgages may be harder to get. In 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.
Section 203(b) has several important features:
Down payment requirements can be low. In contrast to conventional mortgage products, which frequently require down payment 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 down payments 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. At the time of purchase, most conventional loans will have the borrowers pay 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 though; 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 mortgage companies may charge in making a loan. For example, the loan origination fee charged by the mortgage company 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.