Monday, May 19, 2014 - Article by: Lender411 Member
FHA ARMs are adjustable rate mortgages that have been insured by the Federal Housing Administration. This type of loans are limited to home buyers who will occupy the property the are financing.
The Federal Housing Administration, FHA, is a government agency that aims to improve housing standards and conditions,(1) throughout the country. One if its functions, is to facilitate access to credit for low and moderate income households, and for first time homebuyers. Generally, a mortgage down payment requires a 20% of the loan amount as a downpayment. When a borrower cant afford this down payment, he/she is required to carry private mortgage insurance. However, the cost of private mortgage insurance can be prohibitive for low and moderate income households, or for first time home buyers who may represent a higher risk to lenders. To maintain open access to credit, and healthy and diverse housing market, the FHA steps in and offers a low cost mortgage insurance alternative to borrowers who qualify under its guidelines.(2)
The first requirement to qualify for a FHA sponsored loan, is a minimum down payment of 3.5%. The agency makes it even easier for borrowers to qualify by allowing the funds required at the time of the mortgage closing to come from a gift. Generally, lenders require closing funds to come from sources like accumulated savings from salary and earnings, or other regular sources which will continue to be a stream of income for the borrower.
Another benefit from FHA loans, is these can be assumed by a future buyer of the financed property. For example, if your finance your home through an FHA loan, and ten years from now you decide to sell it, the future buyer could assume your mortgage. This can be an incentive for the sale of your house, if at the time of sale the interest rates are higher than the interest of the assumable mortgage.
Other than the benefits mentioned above, an FHA ARM is very much like a regular adjustable rate mortgage (you can read this post in which I describe regular ARMs). To get an FHA loan, you must apply for an ARM through a and FHA authorized lender. The interest rates of the mortgage will reflect current interest rate market conditions, and depending on your credit history, down payment, and the geographic location of the property you want to buy, you will have to negotiate the rate with the lender. However, contrary non FHA loans, the maximum rate change per year, and maximum rate change per the life of the loan will be limited as per the Agency regulations.
As of now, FHA offers these ARMs terms:
Interest Rates Fixed for the first 1, 3, 5, 7, and 10 years of the mortgage:
the 1-year and 3-year insured ARMs may not be increased or decreased by more than one percentage point per year after this period is over, with a maximum change of 5% points for the life of the loan
the 5-year, 7-year, and 10-year ARMs, the interest rate may change a maximum of 2% points annually and 6% points for the life of the loan
The FHA effectively helps thousands of people to become homeowners. If you are a first time home buyer, or if you represent a higher risk to lenders, you may consider applying for an FHA ARM. The adjustable rate feature of these programs, allows people who cannot afford larger down payments to own a home. If you are looking to buy a home, but have limited resources, you may also qualify for a Local Homebuying Program within your state.
Here, you can find state by state programs: http://www.hud.gov/buying/localbuying.cfm
You can read the general definition of the FHA ARM here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/203armt
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