203(b) Mortgage Insurance Program

FHA | TITLE II PROGRAMS

Affordable low down payment lending traditionally for rst-time

homebuyers and underserved communities

BACKGROUND AND PURPOSE

The 203(b) mortgage insurance program, or the Basic

Home Mortgage Loan, is the centerpiece of all FHA

mortgage insurance programs for one- to four-unit

residential properties, including individual condo-

minium units or manufactured homes on real estate.

The purpose of the Section 203(b) program is to

provide approved lenders with mortgage insurance

to protect them against the risk of default on mort-

gages that are made to qualied buyers who may not

otherwise qualify for conventional loans or who live in

underserved areas. Insured mortgages can be used to

nance the purchase of new or existing one- to four-

unit structures and can be used to renance both FHA

and non-FHA mortgages.

Down payments may be lower than conventional mort-

gages because the federally backed insurance allows

lenders to nance up to 96.5 percent of the value of

the home. This results in down payments as low as 3.5

percent. Out-of-pocket costs to borrowers in some

cases can be lowered through a variety of sources

including loans, grants, and employer assistance.

FHA sets the limits on the maximum mortgage amount

that may be insured through the program and can vary

by geographic location.

BORROWER CRITERIA

Income limits: There is no income limit to participate

in the program. Lenders must analyze the income of

each borrower who is obligated for the mortgage debt

to determine whether the borrower’s income level can

be reasonably expected to continue through at least

the rst three years of the mortgage loan. This includes

salaries and wages, as well as income from other

non-employment sources, such as disability benets,

PROGRAM NAME

203(b) Mortgage Insurance Program including Special Feature Programs (251, 203(n), 203(h),

247, and 248)

AGENCY

Federal Housing Administration

EXPIRATION DATE

Not Applicable

APPLICATIONS

To participate, lenders must be FHA-approved for the Title II loan program. Lenders may access

FHA’s Lender Requirements and the online lender application at:

https://www.hud.gov/program_ofces/housing/sfh/lender/lendappr

WEB LINK

https://www.hud.gov/program_ofces/housing/sfh/ins/203b--df

CONTACT

INFORMATION

Lenders that want to apply for FHA approval may contact the FHA Resource Center at

[email protected] or (800) 225-5342. Include the words “New Applicant” in the subject line,

include a contact person, and phone number in the email body so that a Lender Approval

representative may contact you.

APPLICATION PERIOD

Continuous

GEOGRAPHIC SCOPE

National

21 | FDIC | Affordable Mortgage Lending Guide

alimony, or pension benets, all of which may be considered if properly

veried and documented by the lender.

Credit: FHA uses a borrower’s credit score to help determine the maxi-

mum amount of nancing the borrower is eligible to receive. If the credit

score is less than 500, then the borrower is not eligible for FHA-insured

nancing. If the borrower’s credit score is at or above 580, then the

borrower is eligible for maximum nancing with a loan-to-value ratio

(LTV) of 96.5 percent. If the credit score is between 500 and 579, then

the borrower is limited to a maximum LTV of 90 percent.

First-time homebuyers: The program is often used to assist rst-time

homebuyers but is not restricted to this population; there are no addi-

tional or special terms for rst-time homebuyers.

Occupancy and ownership of other properties: The program is lim-

ited to owner-occupied primary residences. The program can be used

to nance the purchase of proposed, under construction, or existing

one- to four-unit family dwellings, manufactured homes, or to renance

indebtedness on existing housing. In general, the program does not

allow borrowers to have a secondary residence. If they do, the borrower

may have only one secondary residence at any time to be eligible for

the 203(b) program and it is only permitted in one circumstance.

A secondary residence is only permitted if the Homeownership Center

assisting the borrower determines that undue hardship exists, meaning

that there is no affordable rental housing for lease that meets the needs

of the family within a reasonable commuting distance of work; and if the

maximum loan amount is 85 percent of the lesser of the appraised value

or sales price.

Special populations: This program does not provide special benets for

members of certain populations.

Property criteria: The home must meet HUD’s minimum property stan-

dards, such as durability and safety and soundness, which are frequently

more stringent than local building codes because of the importance of

having standardized collateral backing the loan. Sellers are expected

to correct any safety and soundness deciencies as a condition of

accepting the loan. All repairs must be completed before closing. If the

seller refuses, the buyer may create an escrow account for repairs and

nance it into the loan through FHA’s Limited Section 203(k) program

(no minimum amount, non-structural repairs not exceeding $35,000) or

Standard Section 203(k) program (repairs of at least $5,000, which may

include structural repairs and additions).

POTENTIAL BENEFITS

The Section 203(b) Mortgage

Insurance Program may help

community banks access the sec

ondary market, providing greater

liquidity to enhance their lend

ing volume.

Special feature programs are

responsive to different mort

gage types (e.g., adjustable-rate

mortgages) and populations

(e.g., disaster victims, Native

Americans, Native Hawaiians).

The Section 203(b) Mortgage

Insurance Program may allow

community banks to expand their

customer base in

low- and moderate-income

communities and to a broader

range of borrowers.

Loans originated through the

Section 203(b) Mortgage Insurance

Program may receive favorable

consideration under the CRA,

depending on the geography

or income of the participat

ing borrowers.

POTENTIAL CHALLENGES

Lenders must have a way to

access the program, whether

through direct sales or a cor

respondent arrangement, as

discussed in the introduction to

this section. Depending on the

arrangement, community banks

may need to acquire or develop

new expertise and infrastructure

in order to participate.

FDIC | Affordable Mortgage Lending Guide | 22

LOAN CRITERIA

Loan limits: FHA mortgage limits vary by the number of

units and by the county or Metropolitan Statistical Area

in which the property resides. HUD issues a Mortgagee

Letter announcing the new mortgage limits every year.

Loan-to-value limits: For purchases of existing proper-

ties, the maximum LTV is 96.5 percent and for renance

transactions (no cash-out), the maximum LTV is 97.75

percent. There are special requirements for maximum

LTV for properties that do not yet exist or are under

construction. The maximum LTV ratio for a property

depends upon the stage of construction (proposed,

under construction, or existing), the appraised value

and sales price (for a purchase), and the borrower’s

credit score.

Adjustable-rate mortgages: Adjustable-rate mortgages

are allowed through the sub-program Section 251

Mortgage Insurance for Adjustable-Rate Mortgages,

described in more detail later in this summary. FHA

permits either one-year Treasury Constant Maturities

Index or one-year London Interbank Offered Rate

(LIBOR) to determine interest rate changes. The annual

and lifetime interest rate changes permitted vary based

upon the initial xed period of the mortgage.

In addi-

tion, borrowers must be informed at least 25 days in

advance of any adjustment to the monthly payment. In

most other respects, Section 251 loans are similar to

basic FHA-insured single-family loans.

Down payment sources: FHA allows for various

acceptable sources of funds to cover down payment

costs. The acceptable sources fall into six categories,

including cash and savings/checking account funds;

investment funds; gifts; funds resulting from the sale

of personal or real property; loans and grants; and

employer assistance.

Homeownership counseling: Counseling is not

required, but it is encouraged that borrowers contact

a HUD-approved housing counseling agency to learn

more about the program.

Mortgage insurance: Mortgage insurance premiums

(MIP) are used to protect lenders against loss in the

event of a foreclosure. Under Section 203(b), premiums

are paid up front and monthly. For all mortgages, the

upfront mortgage insurance premium (UFMIP) is 175

basis points (1.75 percent) of the base loan amount

and is due within 10 calendar days of the mortgage

closing or disbursement date, whichever is later.

Lenders also collect from the borrower and remit an

annual mortgage insurance premium monthly to HUD.

The MIP rates vary based on the LTV and mortgage

term and mortgage amount. For 30-year mortgages

greater than 95 percent LTV with a loan amount less

than or equal to $625,500, the annual premium is 85

basis points.

Debt-to-income ratio: HUD utilizes two ratios to deter-

mine if a borrower can reasonably meet the expected

expenses. First, the mortgage payment expense-to-

effective income ratio (or front-end DTI) should not

exceed 31 percent.

Second, the total xed payment-to-effective income

ratio (or back-end DTI) should not exceed 43 percent.

Manually underwritten loans with ratios that exceed

31 percent or 43 percent may be acceptable only if

the lender documents qualied signicant compen-

sating factors. Loans receiving an “accept” scoring

recommendation from the TOTAL Mortgage Scorecard

are not subject to these restrictions. In the event the

borrower has student loan debt, regardless of the pay-

ment status, FHA’s policy is to include either the actual

documented payment, provided the payment will fully

amortize the loan over its term or the greater of 1 per-

cent of the total student loan balance or the monthly

payment reported on the borrower’s credit report in

the debt-to-income calculation.

Temporary interest rate buy downs: A third party may

contribute up to 6 percent of either the lesser of the

property’s sales price or the appraised value toward

closing costs. Any payment for permanent or tempo-

rary interest rate buy downs must be included in the

6 percent. Any temporary interest rate buy down is

prohibited on all FHA-insured ARM products.

A 1- and 3-year ARM may increase by one percentage point annually after

the initial xed interest rate period, and ve percentage points over the life of

the mortgage. A 5-year ARM may either allow for increases of one percentage

point annually, and ve percentage points over the life of the mortgage; or

increases of two percentage points annually, and six points over the life of the

mortgage. A 7- and 10-year ARM may only increase by two percentage points

annually after the initial xed interest rate period, and six percentage points

over the life of the mortgage.

23 | FDIC | Affordable Mortgage Lending Guide

Renance: Renance is an allowed use of this product.

SPECIAL FEATURE PROGRAMS

FHA operates a number of programs that have the

same basic requirements as the 203(b) program, but

include certain special features.

251 Adjustable-Rate Mortgage (ARM): The program

provides lenders with insurance on ARMs that have

built-in safeguards for borrowers and lenders that mini-

mize the effect of a rapid rise in interest rates.

• Lenders must use either the one-year Treasury

Constant Maturities Index or the one-year London

Interbank Offered Rate (LIBOR) to calculate inter-

est rates and annual adjustments. The rate must be

constant for the initial period (1, 3, 5, 7, or 10 years)

and then can change annually. ARMs with initial

periods longer than one year are called “Hybrid

ARMs.” The annual and lifetime interest rate

changes permitted vary based upon the initial xed

period of the mortgage.

• The annual mortgage insurance premium is based

on the initial interest rate.

• The loan term must fully amortize over a period of

not more than 30 years.

• Owner-occupants may renance any loan to an

FHA ARM.

• Properties must be one- to four-unit dwellings or

condominium units.

FHA sets a cap on the total number of ARMs it will

insure each scal year and noties lenders when it is

close to reaching the cap. The cap is set at 30 percent

of the total number of mortgages insured in the prior

scal year.

203(h) Mortgage Insurance for Disaster Victims:

The program insures lenders for loans to nance

the purchase or reconstruction of a one-family, pri-

mary residence where the borrower is a victim of a

Presidentially Declared Major Disaster Area. The one

difference from the 203(b) program is that borrowers

are not required to make a down payment. Borrowers

must still have a minimum credit score of 500 to be

eligible and are responsible for closing costs and

prepaid expenses. The borrower’s previous residence

must have been located in the disaster area and either

destroyed or damaged in such a way that the borrower

requires a new property or total reconstruction.

247 Insured Mortgages on Hawaiian Home Lands:

The FHA provides lenders with insurance to make

mortgage loans to Native Hawaiians. Eligible borrow-

ers must purchase a one- to four-unit property located

on Hawaiian homeland and use it as their primary

residence. The lender must certify that the property is

located on eligible land through the Department of

Hawaiian Home Lands. The program operates with the

same parameters as the 203(b) program, except that

the typical minimum credit score requirement of 500

does not apply and only an upfront mortgage insur-

ance premium is required and not the annual premium.

Loans are eligible for renancing under the Section

247 program.

248 Insured Mortgages on Indian Land: The program

is very similar to the Section 247 special feature, except

insurable loans must be made to Native Americans to

buy, build, or rehabilitate a one- to four-unit property

on Indian land that they intend to use as a primary

residence. The minimum credit score requirement of

the 203(b) program does not apply to Section 248

loans, and instead of an upfront mortgage insur-

ance premium, the program only requires monthly

MIP payments.

FDIC | Affordable Mortgage Lending Guide | 24

Potential Benets

• The Section 203(b) Mortgage Insurance Program

may help community banks access the secondary

market, providing greater liquidity to enhance their

lending volume.

• Special feature programs are responsive to dif-

ferent mortgage types (e.g., adjustable-rate

mortgages) and populations (e.g., disaster victims,

Native Americans, Native Hawaiians).

• The Section 203(b) Mortgage Insurance Program

may allow community banks to expand their

customer base in low– and moderate-income

communities and to a broader range of borrowers.

• The Section 203(b) Mortgage Insurance Program

offers competitive pricing and terms.

• Loans originated through the Section 203(b)

Mortgage Insurance Program may receive favor-

able consideration under the CRA, depending

on the geography or income of the participat-

ing borrowers.

Potential Challenges

• Lenders must have a way to access the program,

whether through direct sales or a correspondent

arrangement, as discussed in the introduction to

this section. Depending on the arrangement, com-

munity banks may need to acquire or develop new

expertise and infrastructure in order to participate.

SIMILAR PROGRAMS

• Fannie Mae HomeReady™

• Freddie Mac HomePossible®

• Freddie Mac HomeOne

• VA Home Purchase Loan Program

• USDA Single Family Housing Guaranteed

Loan Program

25 | FDIC | Affordable Mortgage Lending Guide

RESOURCES

Direct access to the following web links can be found at https://www.fdic.gov/mortgagelending.

General information

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/203b--df

Applications

http://portal.hud.gov/hudportal/HUD?src=/program_ofces/housing/sfh/lender/lendappr

FHA mortgage limits

https://entp.hud.gov/idapp/html/hicostlook.cfm

HUD Handbook 4000.1 (contains all 203(b) program requirements; sections of particular importance

are identied below)

https://www.hud.gov/sites/documents/40001HSGH.PDF

• See section I.A.3 for lender application and approval requirements

• See section II.A.5.c.viii. for Approvable Ratio Requirements for manual underwriting

• See section II.A.8.f. for Section 251 Adjustable-Rate Mortgage program requirements

• See section II.A.8.b. for Section 203(h) Mortgage Insurance for Disaster Victims program requirements

• See section II.A.8.h. for Section 247 Single Family Mortgage Insurance on Hawaiian Home Lands pro-

gram requirements

• See section II.A.8.g. for Section 248 Mortgages on Indian Land program requirements

• See Appendix 1.0 for Mortgage Insurance Premiums

Mortgage insurance premium rate calculation procedures

http://portal.hud.gov/hudportal/HUD?src=/program_ofces/housing/comp/premiums/sfpcalc

HUD-approved housing counseling agencies

http://www.hud.gov/ofces/hsg/sfh/hcc/hcs.cfm

HUD’s minimum property standards

https://www.hud.gov/program_ofces/administration/hudclips/handbooks/hsgh/4910.1

FDIC | Affordable Mortgage Lending Guide | 26