The FHA offers a variety of mortgage insurance programs and by far the best known and most widely used is Sec. 203(b).
Sec. 203(b) is designed to help families acquire real property by reducing down payment requirements. The basic down payment formula under Sec. 203(b) is 3 percent of the first $25,000 and 5 percent of the balance. With a $75,000 FHA mortgage, the down payment would be $750 ($25,000 x 3 percent) plus $2,500 ($50,000 x 5 percent) or a total of $3,250. In this example, the down payment is equal to only 4.3 percent of the mortgage.
Loans under Sec. 203(b) can be used to acquire not only single-family homes but also structures with two, three and four units as well. As the number of units increases, so does the base mortgage which the FHA will insure. As this is written, for instance, the basic limit for a single-family FHA 203(b) loan is $67,500, $76,000 for a duplex, $92,000 for a three-unit structure and $107,000 for a four-unit building. In areas with a higher base, perhaps $90,000 for a single-family house, the maximum loan amounts for multiple-unit buildings would be greater. In addition, the FHA limits can be stretched by up to 20 percent when such additional funds are used to purchase solar-heating equipment.
When used for the purchase of multiple unit buildings, FHA loans can be an attractive financing tool, particularly for individuals with limited capital. As an owner occupant, a purchaser can acquire property with only the most minimal down payment, thus preserving his or her capital for the repair and upgrading of the property. While non-occupant owners can get FHA loans at the established interest rate, investors cannot get the FHA's preferential down payment terms. Instead, the FHA will only permit investor loans equal to 85 percent of the mortgage amount available to owner occupants.
Sec. 203(b) also contains a provision which should be of some interest to those with military service who are looking for single-family, owner/occupied housing. While VA loans are not directed toward members of the National Guard or Reserve forces unless otherwise qualified for VA benefits, Sec. 203(b) provides that a portion of the down payment normally required for FHA financing will be waived for qualified individuals. The FHA includes guardsmen and reservists with at least 90 days of continuous active duty service--including training periods--among those who qualify for this benefit.
VA-qualified buyers should certainly consider FHA financing as an alternative to a VA loan. While both the down payment and monthly costs of FHA financing are somewhat higher, vets who elect to use the FHA program can avoid the potential problem of having their VA entitlements tied up in a first small house. This difficulty can develop when veterans cannot pay off their first loan when they sell or cannot find a VA-qualified purchaser who will substitute his or her VA entitlement for that of the owner.
In addition to Sec. 203(b), the FHA offers a variety of loan insurance plans of special interest to single-family home buyers.
* Sec. 203(h). This FHA program is directed toward individuals who live in major disaster areas. It provides up to $14,400 for home replacement or reconstruction. This sum, however, may rise to the full value of Sec. 203(b) financing in the near future if appropriate changes are made in the law, according to John J. Coonts, director of the FHA's Single Family Development Division.
* Sec. 203(i). If you buy a single family home in a given area for, say, $90,000, then the maximum of 203(i) loan would be $67,500.
* Sec. 221(d) (2). A program designed for individuals and families displaced by governmental action such as urban renewal or the construction of a new highway, Sec. 221(d)(2) provides mortgage insurance for up to $36,000 to individuals who need single-family, owner-occupied housing, more money for families of five or more or those who acquire two to four units.
Sec. 203(k). This FHA program is designed to insure financing for the purchase and/or rehabilitation of housing. Initially such loans are viewed as construction financing and then, upon completion of the work, the loan is converted into permanent financing. This is an excellent program for both investors and those who do their own repairs and thus can earn "sweat equity."
Sec. 223(e). Not all properties meet FHA underwriting guidelines for 203(b) loans and in those cases where homes are unqualified because they are located in "declining" areas, financing may be available under Sec. 223(e). Down payment and maximum mortgage amounts available under Sec. 223(e) vary but such financing may represent a plausible financing choice, particularly since regular FHA lending standards are waived.
To obtain an FHA-backed loan, buyers must be financially qualified and the property evaluated by an FHA-approved appraiser. If it is found that the FHA appraised value is less than the selling price, then either the sales price must be lowered or the purchaser must be willing to cover the difference in cash. The FHA will not permit the use of a second trust to augment a home buyer's mortgage. However, a second trust may be made once the property has been acquired.
The FHA interest rate is often below that charged for conventional loans and the result is that FHA financing, as with VA loans, may require the payment of points at settlement. Also like VA loans, the FHA will not approve deals which show the buyer paying points and so the seller must pay all required loan discount fees. During those times when there is a significant gap between FHA and conventional interest rates, many sellers will not market their homes to FHA purchasers because of the additional financing cost represented by points.
For more information about FHA mortgage insurance programs, contact local FHA-approved lenders, generally savings and loan associations, commercial banks, local mortgage bankers and mortgage brokers. While FHA interest rates are the same among all lenders at any given time and in any given location, there are likely to be different charges for points and other application fees. Also buyers and sellers generally can use a VA Certificate of Reasonable Value to obtain FHA and VA financing. Check any appraisal questions with your lender.
(Note: Other FHA programs, such as graduated mortgages and condo and co-op financing, will be discussed as part of future columns concerning those specific areas. Also, readers should be aware that loan limits mentioned here are subject to change.)
Questions to ask.
* What is the current FHA loan limit for single-family housing under Sec. 203(b)?
* What is the current interest rate for FHA-backed loans?
* How many points are lenders generally seeking for FHA loans today? Contact several local mortgage loan officers for this information.
Next Week: Private Mortgage Insurance