Mortgage Insurance for 1- to 4-Family Homes (Section 203(b))

Summary:
Through this program, HUD's Federal Housing Administration (FHA) insures mortgages made by qualified lenders to people purchasing or refinancing a home of their own.

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, by 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.

Section 203(b) is the centerpiece of FHA's single-family insurance programs�the successor of the program that helped save homeowners from default in the 1930s, that helped open the suburbs for returning veterans in the 1940s and 1950s, 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 homeownership opportunities for first-time homebuyers and other borrowers who would not otherwise qualify for conventional loans on affordable terms, as well as for those who live in underserved areas where mortgages may be harder to get. In FY 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.

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 new or existing one- to four-family housing, as well as to refinance debt. Section 203(b) 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(b) make it possible to reduce downpayments 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. With most conventional loans, the borrower must pay, at the time of purchase, 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: 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 fee charged by the lender 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. 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 Section 203(b) loans.

Eligible Customers:
Anyone intending to use the mortgaged property as their primary residence is eligible to apply for mortgage insurance. However, the program is not open to investors.

Application:
Any person able to meet the cash investment, the mortgage payments, and credit requirements can apply. The program is limited to owner-occupants. Applications are made through an FHA-approved lending institution. Most lenders who use this mortgage insurance product, however, 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 (b), (i)). Program regulations are in 24 CFR Part 203. 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 (http://www.hudhcc.org) , or the toll-free FHA Mortgage Hotline, 1-800-CALLFHA. Research�A recent general study of this program and its place in today's mortgage finance system is HUD's Analysis of FHA's Single Family Mortgage Insurance Program (Office of Policy Development and Research, 1996), available from HUDUser (http://www.huduser.org), 1-800-245-2691.