FHA 251 Adjustable Rate Loan

Designed to assist first time home buyers, the FHA 251 is a 30 year adjustable rate mortgage. This ARM is tied into the 1 year Treasury Bill with adjustments annually (determined by the index and the interest rate margin that is set at the time the loan is originated). There is a 1% annual interest rate cap (that could increase or decrease) and a 5% cap over the life of the loan. Translation: The adjusted interest rate cannot move higher or lower than 1% per year and no more than 5% over the life of the loan. Furthermore, the borrower must qualify at an interest rate 1% greater than the initial mortgage rate. 

The following are highlights of this program:

Down payment requirements: Since this mortgage is insured by HUD, the minimum down payment required is 3% of the sales price. Furthermore, the down payment can be a gift from a family member, the government, or a non-profit agency designed to help first-time and low/moderate income home buyers.

Eligible properties and occupancy requirements: FHA loans are restricted to 1 to 4 unit single family residences that are new, under construction, or existing (i.e. resale properties), condominiums, and townhomes. Homes located in a PUD (planned urban development) must be approved by FHA or VA. Also, mobile homes with a permanent foundation, taxed as real property, and built after June 16, 1976 are eligible. All FHA insured properties must be owner-occupied.

Closing Costs: HUD has created a list of allowable and non-allowable closing costs that may be charged to the home buyer. Non-allowable closing costs generally are referred to as "garbage fees" or "junk fees" and include costs such as the lender's tax service or document preparation fees.

Qualifying ratios: HUD limits a borrower's monthly payment not to exceed 29% of their gross monthly income. A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 41% of their gross monthly income.

Mortgage Insurance Premium: There is a 2.25% fee assessed at the time of originating a FHA mortgage that is paid to HUD that can be wrapped into the loan. This fee goes towards maintaining the FHA insurance program. Furthermore, the borrower will pay 0.5% per year MIP renewal premium for the life of the loan. This is paid monthly. It is important to note that condominiums are exempt from the upfront mortgage insurance premium, but a borrower would still be required to pay the monthly renewal premium.