Single Family Mortgage Insurance
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 mortgage companies to make loans to otherwise creditworthy borrowers and
projects that might not be able to meet conventional underwriting requirements, by
protecting the mortgage company 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. It is 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.
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 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.
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