The Federal Housing Administration is one of the oldest and largest sources of mortgage assistance available to the general public. While VA mortgages can be seen as a reward for public service, FHA-backed loans are an outgrowth of a different public policy, the view that readily available mortgage funds will stimulate the economy in general and the housing industry in particular.
What are the characteristics of FHA mortgages? How does such financing compare with conventional or VA-backed loans?
* FHA mortgages feature low down payments, usually 5 percent or less, compared with 20 percent down for conventional loans and no-money-down VA financing.
* While the VA guarantees 60 percent of the value of a GI mortgage or a set entitlement, lenders have 100 percent protection under most FHA programs.
* FHA loans are fully assumable at their original rates and terms except for mortgages insured through state and local housing authorities. Such loans can only be assumed by individuals qualified to participate in these programs.
* Residential FHA mortgages may be prepaid in whole or in part under two conditions. First, the lender must be given 30 days notice. If a payment is due Sept. 5, the lender must be informed by Aug. 5. Second, a prepayment can be no smaller than the regular monthly payment.
* Unlike VA or conventional financing, there is a size limit to an FHA loan. This limit is established by the federal government and varies according to whether a region is considered a "high-cost" housing area. As this is written, the current FHA limit for single-family housing is $89,500 in Washington, D.C. and $67,500 in West Virginia.
* The interest rate for both FHA- and VA-backed loans is identical. However, the expense of FHA insurance raises the true cost of such financing, and FHA loans thus are marginally more expensive than VA mortgages.
For many years, the insurance premium of the most popular FHA single-family program, Sec. 203(b), was equal to one-half percent of the remaining mortgage balance, insurance that stayed in effect so long as the loan was outstanding. Because the loan balance declines over time, the cost of FHA insurance also drops each month.
Now, however, the FHA is adopting a new approach to insurance funding. Rather than paying a one-half percent premium on a monthly basis, the FHA instead will require a single, lump-sum insurance payment up front, an amount equal to 3.8 percent of the mortgage balance. With a $60,000 mortgage, for instance, the up-front fee would amount to $2,280.
How does the new insurance payment plan compare with the old formula? If the FHA interest rate for a 30-year, $60,000 loan was 12 1/2 percent, the monthly payment would be $640.54. Add a one-half percent insurance fee and the effective cost to the borrower is 13 percent, or $663.72 the first month. With the lump-sum program, a purchaser most likely would borrow $62,166, a sum equal to the $60,000 mortgage plus most of the insurance fee. However, 5 percent of the additional value represented by the insurance fee--$2,166, in this case--must be subtracted if the loan is to meet FHA down-payment requirements. At 12 1/2 percent interest, the buyer would pay $663.47 a month, plus $114 in cash at settlement.
John J. Coonts, director of the FHA's Single Family Development Division, said the new premium system is likely to show up at settlements in early September. NEXT WEEK: The FHA continued