Becoming an atlanta, Ga Homeowner
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Many Americans dream of owning their own
homes, but few families
are able to pay cash for them. Many people who could not
otherwise afford to own a house become homeowners with the help
of FHA mortgage insurance programs.
Helping people obtain financing for their homes is one of the
chief purposes of FHA. FHA is the Federal Housing Administration.
It is part of the U.S. Department of Housing and Urban
Development (HUD).
Once you have found the home you want to buy, you must decide how
to finance your dream. This booklet gives you information about
FHA programs to help you meet that challenge. It explains:
* How FHA mortgage insurance works.
* How to shop for a HUD-approved lender.
* How to apply for an FHA-insured loan.
* How your payment schedule will operate.
* What restrictions apply to FHA-insured mortgages.
* Which specific FHA program can best help you.
How FHA Mortgage Insurance Works
FHA mortgage insurance allows a homebuyer to make a modest
downpayment and obtain a mortgage for the balance of the purchase
price.
The mortgage loan is made by a bank, savings
and loan association, mortgage company, credit union, or other
FHA-approved lender. FHA (HUD) insures the loan and pays the
lender if the borrower defaults on the mortgage. Because the
lender is protected by this insurance, it can offer more liberal
mortgage terms than the prospective homeowner might otherwise
obtain.
HUD does not make direct loans to help people build or buy homes.
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Who Can Get an FHA-Insured Mortgage
Almost any individual who has a satisfactory credit record,
enough cash to close the loan, and sufficient steady income to
make monthly mortgage payments without difficulty can be approved
for an FHA-insured mortgage.
Generally, only people who will reside in the property are
eligible for FHA-insured mortgages. However, investors can
participate in FHA's Section 203(k) rehabilitation insurance
program.
HUD sets no upper age limit for the borrower, nor does HUD
require that the borrower have a certain income level to buy a
home at a certain price. Income is simply one of several factors
that help a lender and HUD determine whether the borrower will be
able to repay the mortgage.
FHA mortgages are available to individuals regardless of race,
creed, religion, sex, or marital status.
Special terms are available to qualified veterans purchasing a
single-family home. The veteran must present a Certificate of
Veterans Status from the Department of Veterans Affairs. There is
no limit on the number of times an eligible veteran can
use his/her eligibility in HUD programs.
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Types of Mortgages FHA Insures
HUD insures mortgages to buy existing homes, to improve homes, to
purchase a newly built home, and to refinance existing
indebtedness. FHA-insured mortgages are available for many types
of properties, including:
- One-family residences.
- Two-, three-, and four-unit properties.
- Condominium units.
- Houses needing rehabilitation.
The terms of FHA-insured mortgages can also be structured in
different ways, such as:
- Fixed rate, level payment mortgages.
- Graduated payment mortgages.
- Growing equity mortgages.
- Adjustable rate mortgages.
Each of these mortgages is explained later in this brochure.
Shopping for an FHA-Insured Loan
After you have found the home you want to buy, you should call
various lenders listed under "Mortgages" in the Yellow Pages to
find the lender offering the best terms.
The costs associated with a loan can vary significantly from one
lender to another. It pays to comparison shop for a mortgage. The
most important factors to consider in comparing loans are:
- Interest Rate.
- Discount points.
- Closing costs and other fees, such as charges to
originate the loan, commitment fees to "lock in" the
mortgage terms you and the lender have agreed to for a
certain period, and mortgageinsurance premiums (MIP).
- Annual Percentage Rate.
All of these factors are negotiated between you and your lender.
HUD does not establish minimum or maximum amounts for the
interest rate, discount points, or most processing fees you pay
the lender.
Interest Rate
The interest rate a borrower pays for the mortgage is negotiated
between the borrower and the lender. Interest rates fluctuate
daily, depending on conditions in the mortgage market. It is
always a good idea to check with several mortgage lenders to make
sure you are getting the best interest rate available.
The following chart shows how the principal and interest on your
mortgage will vary according to the interest rate.
Monthly Payment for Principal and Interest on a 30-Year Fixed Rate,
Level Payment Mortgage
Interest Rate
Mortgage
Amount 7.0% 8.0% 9.0% 10.0%
$40,000 266.40 293.60 322.00 351.20
$50,000 333.00 367.00 402.50 439.00
$60,000 399.60 440.40 483.00 526.80
$70,000* 466.20 513.80 563.50 614.60
$80,000* 532.80 587.20 644.00 702.40
$90,000* 599.40 660.60 724.50 790.20
*The maximum FHA-insured mortgage is $67,500.
In areas where the cost of housing is high, the limit may go up
to $151,725.
Initial Investment (Downpayment)
The borrower's initial cash investment is the difference between
the amount of the mortgage and the total cost of the home. The
total cost includes the purchase price plus closing costs, but it
does not include prepaid items that you have to pay at
settlement, such as
real estate taxes and hazard insurance. Most
FHA programs require the borrower to invest a minimum of between
3 and 5 percent of the total cost of the home.
Discount Points
Lenders can charge discount points to borrowers. A point is $1
for every $100 of the mortgage amount. Points are charged when
the interest rate is lower than the yield required by investors
who buy mortgage securities. (Yield is the ratio of investment
income to the total amount invested over a given period of time.)
Securities are "packaged," usually in portfolios of $1 million
dollars or more, and bought and sold in the financial markets.
This creates additional mortgage money to lend to other
homebuyers.
The numbers of points charged varies in different places at
different times and among different lenders.
Discount points for an FHA-insured mortgage
may be paid by homebuyer, the builder of the house, or the person
selling the house. Discount points may not be financed as part of
the mortgage amount (unless you are refinancing your mortgage and
you have sufficient equity in the home to cover the points).
HUD does not control the number of points you agree to pay your
lender. HUD does not set the points that a lender may require,
and HUD does not receive any of this money.
Closing Costs and Prepaid Items
When your loan is finalized, you will have
to pay closing costs. These fees may include
a lender's service charge or origination fee, cost of the title
search, fees for preparing, notarizing, and recording the deed
and the mortgage, and other items. You will also be
asked to make payments in advance for such items as taxes,
property insurance, and interest to the end of the month.
Certain closing costs, such as recording fees and taxes, title
examination, and credit reports, may be paid by the seller, or
they may be shared between the borrower and the seller, depending
on the terms of the sales contract. Most of the closing costs
paid by the borrower may be financed as part of the mortgage.
The
real estate Settlement Procedures Act (RESPA) requires that
your lender give you an information booklet and a Good Faith
Estimate of your closing costs within 3 days of receiving your
written loan application. RESPA also requires that at closing or
shortly afterward, you must receive a Uniform Settlement
Statement , which is a permanent record of all the final
settlement charges. You are entitled to review the Settlement
Statement 1 business day before you close on your loan.
Origination Fees
Lenders may charge a service charge (called an origination fee)
when you submit your mortgage application. In most cases, this
charge cannot exceed 1 percent of the mortgage amount. However,
if you are buying and rehabilitating your purchase under the
Section 203(k) Program, a lender can charge an additional $350 or
2 1/2 percent of the portion of the mortgage that is escrowed for
the rehabilitation.
Commitment Fees
The lender may charge a fee to "lock in" the interest rate,
number of discount points, and other terms you have agreed to, or
to limit the extent to which the terms may be changed. Lenders
may agree to offer the loan terms for a definite period of time
(30 days, 60 days, 90 days, etc.), or they may refuse to do so.
The terms of your commitment agreement will determine to what
extent, if any, the interest rate and discount points may change
before your loan closes. Any increase in the number of discount
points or a 1-percent increase in the interest rate requires that
your mortgage application be reprocessed.
Mortgage Insurance Premium
HUD charges a premium to insure mortgages. The premiums are used
to pay claims to lenders when a borrower defaults on an
FHA-insured mortgage.
Most borrowers with FHA-insured mortgages currently pay an
up-front mortgage insurance premium (MIP) and an annual MIP as
well. The up-front MIP can be financed into the mortgage. Your
lender can provide you with more information about MIP charges.
Annual Percentage Rate
The Truth in Lending Act requires lenders to disclose to
borrowers the annual percentage rate charged on a mortgage to
finance the purchase of residential real estate. The annual
percentage rate is calculated by adding the interest rate, the
discount points, the initial service charge, the premium paid to
insure the mortgage, and certain other charges collected by the
lender. The Truth in Lending Act is administered by the Board of
Governors of the Federal Reserve System.
Your monthly payment will be determined
by the amount of your mortgage, the interest rate, and the length
of the loan. A longer mortgage term will lower your monthly pay-
ment, but it will increase the total amount of interest you pay.
For example, if you borrow $50,000 with an interest rate of 10
percent, your payment to principal and interest will be:
Monthly Term Total
Payment
$537.50 15 years $96,750
$439.00 30 years $158,040
Applying for the Loan
When you have selected a lender, arrange a meeting with the loan
officer to fill out the application forms. At the interview, you
will have to provide the lender with your most recent bank
statement and pay stub, picture identification, and proof of your
social security number. You will also have to pay fees for an
appraisal and a credit report.
The lender will take care of processing the loan for FHA
insurance and will arrange to close the loan.
Many lenders are authorized to approve mortgage applications
without submitting any paperwork to HUD. These companies
are called Direct Endorsement lenders. Most FHA-insured loans are
handled by these lenders. In some cases, however, HUD
reviews information submitted by the lender and determines
whether the property and the borrower are acceptable risks for an
FHA-insured mortgage. Regardless of the type of loan you select,
you will deal only with the lender, and the lender will handle
all transactions with HUD.
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Payments on an FHA-Insured Mortgage
Monthly Payments
The amount of your monthly payment will depend on how much money
you borrow and the interest rate on your loan. Your monthly
mortgage payment will include money to repay the principal amount
you borrowed, the interest on that money, your FHA mortgage
insurance premium, and amounts for taxes and property insurance.
Typically, your combined monthly payment for principal, interest,
taxes, and insurance should be no more than 29 percent of your
gross (total) monthly income (before taxes.)
Advance Payments
With an FHA-insured mortgage, you can make extra payments toward
the principal when you make your regularly monthly payment. By
making extra payments, you can repay the loan faster and save on
interest. However, extra payments do not relieve you from
continuing to make regular payments every month.
You can also pay off the entire balance of your FHA-insured
mortgage at any time.
Limits on FHA-Insured Mortgages
Amount of the Mortgage
There is a limit on the maximum mortgage HUD will insure.
Generally, for a single family home, HUD insures mortgages up to
$67,500. If you live in an area where the cost of housing is
high, HUD may insure a mortgage up to $151,725. Information about
the mortgage limits for the area you live in may be obtained from
HUD-approved lending institutions or the local HUD Field Office.
Property Appraisal
For an existing home, HUD's estimate of the appraised value is
based on the condition of the house and recent sales of
comparable properties in the neighborhood. If there are obvious,
serious defects, the house must be repaired before HUD insures
the mortgage.
If your house has not yet been built, HUD will base the estimate
of its value on the plans and specifications for the house and
the value of the land where it will be built.
Existing houses are generally sold "as is" unless the buyer and
seller agree, usually in writing, to repairs. Since there may be
hidden defects in a home, the homebuyer should carefully examine
the house or have the house inspected by a professional home
inspection firm and be satisfied of its soundness before
purchasing. An appraisal is not an inspection, and HUD does not
warrant the condition of the house you buy.
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The Most Frequently Used FHA Mortgage Insurance Programs
Section 203(b)
Home Mortgage Insurance
(Federal Domestic Assistance Codes 14.117 and 14.118)
Section 203(b) of the National Housing Act is the most commonly
used HUD single family program. This program is available in all
areas of the country, provided a market exists for the property
and the home meets HUD's Minimum Property Standards. You may use
the Section 203(b) Program to purchase a new or existing one- to
four-family home in both urban and rural areas.
A Section 203(b) mortgage may be repaid in monthly payments over
10, 15, 20, 25, or 30 years.
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Section 234(c)
Condominium Units (Federal Domestic Assistance Code 14.133)
Section 234(c) provides mortgage insurance for buyers who wish to
purchase a unit in a condominium project. The condominium may
consist of more than one building, such as a group of row
apartments, high-rise buildings, townhouses, or any combination
of these structures.
When you buy a unit in a condominium,
you will own one unit in a multi-unit project, and you will have
a voting interest in the condominium association that governs the
day-to-day operation of the project.
You will share an undivided interest with other owners in the
common areas and facilities that serve the project and share the
obligation to maintain them. All owners pay a monthly condominium
fee to the association to maintain the shared common areas and
facilities, including common land areas, roofs, floors, main
walls, stairways, lobbies, halls, and parking spaces. This
payment is separate from the regular monthly mortgage payment.
Any condominium project must be approved by HUD before you can
purchase a unit using an FHA-insured mortgage. HUD requires that
51 percent of the units in the project must be owner-occupied
before FHA will offer mortgage insurance for individual units in
the project.
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Section 203(k)
Rehabilitation Home Mortgage Insurance
(Federal Domestic Assistance Code 14.108)
Section 203(k) mortgages allow you to purchase or refinance and
rehabilitate a home at least 1 year old. A portion of the loan
proceeds are used to pay off the existing mortgage, and the
remaining funds are placed in an escrow account and released as
rehabilitation is completed.
The loan may be used to purchase a home and the land on which it
is located and rehabilitate it; purchase a home on one site and
move it onto a new foundation at another site and rehabilitate
it; or refinance an existing mortgage to rehabilitate the home.
In addition, a Section 203(k) mortgage may be used to allows you
to have smaller initial monthly payments. The deferred
interest is added to the loan balance in later years.
FHA offers five GPM payment plans, which vary in the rate of
payment increases and the number of years over which the payments
will increase. The greater the rate of increase or the longer the
period of increase, the lower the mortgage payments in the early
years. For example:
Increase in Frequency of
GPM Plan Monthly Payments Increase
Plan 1 2.5 percent First 5 years
Plan 2 5 percent First 5 years
Plan 3 7.5 percent First 5 years
Plan 4 2 percent First 10 years
Plan 5 3 percent First 10 years
To give you an idea of how a 245(a) GPM works, the following
table compares the monthly payment schedule of a 203(b)
FHA-insured loan with Plan 3, the most frequently used GPM plan.
In Plan 3, payments increase 7.5 percent each year for 5 years
before leveling off. The example uses a 30-year, $60,000
mortgage, with an interest rate of 10 percent:
Year 203(b) GPM Loan
1 526.80 400.22
2 526.80 430.24
3 526.80 462.50
4 526.80 497.20
5 536.80 534.49
6 526.80 574.57
Remaining
Payments 526.80 574.57
life of the loan, the interest rate may not increase or decrease
more than 5 percent from the initial interest rate.
Your lender must explain how the Adjustable Rate Mortgage is
calculated when you apply for your loan. Your lender must inform
you at least 25 days in advance if there is an adjustment to your
monthly payment.
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Other FHA Mortgage
Insurance Programs
Although the following FHA mortgage insurance programs are still
active, they are not used as much as the six major FHA programs,
because they were designed to serve certain specific purposes.
Section 203(h)
Mortgage Insurance for
Disaster Victims
(Federal Domestic Assistance Code 14.119)
You may use this program to finance the purchase of a home if
your home was damaged or destroyed because of a major disaster.
The President of the United States must designate the area a
major disaster area. The loan may be used to purchase an existing
home or a newly built home.
Disaster victims are not required to meet minimum investment
requirements, and a downpayment is not required.
Section 203(i)
Mortgage Insurance for Outlying Area Properties
(Federal Domestic Assistance Code 14.121)
You may use Section 203(i) to purchase a home in a rural area.
You may also use it to purchase a new farm house on 2.5 or more
acres of land adjacent to an all-weather road.
Section 220
Urban Renewal Mortgage Insurance
(Federal Domestic Assistance Code 14.122)
This program is used in conjunction with local governments to
rehabilitate existing dwellings for up to 11 families or to build
new dwellings in redevelopment areas where concentrated housing,
physical development, and public service activities are being
carried out. If the building houses more than four families, the
mortgage limit increases $9,165 for each additional unit.
Section 220(h)
Insured Improvement Loans
in Urban Areas
These loans are used to finance alterations, repairs, or
improvements to existing dwellings housing up to 11 families in a
redevelopment area as defined in Section 220. The mortgage limit
is the lessor of:
* HUD's estimate of the cost of
improvements;
* $40,000; or
* $12,000 for each family unit ($17,400 in
high cost areas).
Section 221(d)(2)
Home Mortgage Insurance for Low and Moderate Income Families
(Federal Domestic Assistance Code 14.120)
This program may be used by low- to moderate-income families to
finance the purchase of a home. It may also be used by families
displaced by urban renewal, code enforcement, condemnation, etc.,
or as a result of the President declaring an area a major
disaster. The mortgage limit for a one-family unit is
$31,000. This amount may be increased up to $36,000 in high cost
areas determined by the Department.
Section 222
Mortgage Insurance for Service Members
(Federal Domestic Assistance Code 14.166)
You may use Section 222 to purchase a home if you are on active
duty with the Department of Transportation (Coast Guard) or the
Department of Oceanic and Atmospheric Administration). While
there is no upfront mortgage insurance premium, the employing
agency pays the monthly mortgage insurance premium directly to
HUD as long as you remain in active service. The employing agency
must issue a certificate of eligibility.
Section 223(e)
Miscellaneous Housing Insurance
(Federal Domestic Assistance Code 14.123)
You may use Section 223(e) to purchase a property in an older,
declining urban area where normal requirements for mortgage
insurance cannot be met. Only HUD can determine whether a
property is eligible for Section 223(e) mortgage insurance. This
program is intended to supplement other HUD mortgage insurance
programs.
Section 237
Mortgage Insurance for Special Credit Risks
(Federal Domestic Assistance Code 14.140)
Low- and moderate-income families who are unable to meet the
normal underwriting standards of HUD's other single family
programs because of their credit history may use Section 237 to
finance the purchase of new, existing, or substantially
rehabilitated single-family homes or condominiums.
To qualify for a Section 237 mortgage, you must obtain counseling
assistance from a HUD-approved counseling agency. These agencies
provide budget, debt-management, and related counseling services
to families as needed.
This program is limited by law to mortgages up to $18,000
($21,000 in high cost areas).
Section 238(c)
Mortgage Insurance in Military Impacted Areas
(Federal Domestic Assistance Code 14.165)
You may use Section 238(c) to finance the repair, rehabilitation,
or purchase of a home near any military installation in a
federally impacted area. The Secretary of Defense must certify
the need for additional housing in the area.
Section 240
Purchase of Fee-Simple Title from Lessors
(Federal Domestic Assistance Code 14.130)
You may use Section 240 to finance the purchase of fee simple
title if your home is on leased land. The maximum mortgage amount
is the lessor of:
* $10,000 per family unit ($30,000 if the
property is in Hawaii);
* The cost of purchasing the fee simple
title; or
* An amount that does not exceed the
maximum mortgage insurable under Section 203(b).