Adjustable-rate mortgage insurance is available for aspiring homeowners looking for affordable home buying options. The Federal Housing Association (FHA) provides a slew of affordable mortgage programs for low and middle-income families and individuals.
FHA loans are insured by the federal government but provided by individual mortgage lenders. The FHA does not directly lend money to homeowners. Instead, it guarantees protection for mortgage lenders in case borrowers stop making payments toward their mortgages.
This mortgage insurance allows lenders to have more confidence when extending home loan options to potential homeowners. FHA loans are known for their more lenient qualification criteria compared with conventional loans.
Section 251 adjustable-rate mortgages (ARMs) share these lenient requirements. For example, low-income borrowers interested in securing financing through an FHA loan can finance up to 96.5% of the purchase price of the home. The government will ensure this same amount, providing financial protection to lenders.
To secure a Section 251 ARM, you must meet the qualifications set by the mortgage lender. Most lenders who issue FHA loans require borrowers to meet the following criteria:
- Intend to live in the home they are purchasing.
- Have enough money for a down payment of at least 3.5% of the price of the home.
- Have a credit score of at least 580.
- Agree to an appraisal by an FHA-approved appraiser.
- Purchase mortgage insurance.
You cannot take out an FHA adjustable-rate mortgage to finance an investment property or vacation home. It must be your primary place of residence. Similarly, you must plan to move into the home you finance with an FHA loan within 60 days of closing.
Although the down payment percentage for FHA loans is typically 3.5%, it could be higher depending on your credit score. Most lenders require borrowers to have scores of 580 or higher. However, some borrowers may qualify with scores as low as 500 if they can make a down payment of at least 10%.
In addition to the down payment requirement, borrowers are typically responsible for closing costs as well. Like other FHA loans, Section 251 home loans may permit borrowers to finance a portion of the closing costs into the home loan if they cannot afford to pay them upfront. An FHA adjustable-rate mortgage also has a maximum loan length of 30 years. This means that if you secure financing through an ARM, you have a maximum of 30 years to repay the loan (plus interest) in full.
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