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16. Section 251 Adjustable Rate Mortgages (ARMs)
Contents:
- a. Description of the Section 251 Program
- b. Section 251 Property Eligibility Policy
- c. Limitation on the Number of ARMs That FHA May Insure Under Section 251
- d. Section 251 Maximum Insurable Mortgage
- e. Section 251 Minimum Borrower Investment Policy
- f. Section 251 Mortgage Term
- g. Section 251 Interest Rate Governing Index
- h. Allowable Interest Rate Adjustments and Caps Under Section 251
- i. Section 251 Interest Rate Adjustment Frequency
- j. Section 251 Required Disclosures
- k. Section 251 MIP Payment
- l. Section 251 Refinancing Policy
Change Date
Back to top1.C.16.aa. Description of the Section 251 Program
The Section 251 ARMs program insures lenders against losses on variable rate mortgages. Mortgages are insured under Section 203(b), 203(h), 203(k) or 234(c), pursuant to Section 251.
Note: Requirements of the appropriate section must be met.
1.C.16.bb. Section 251 Property Eligibility Policy
To be eligible under Section 251, properties must be one- to four-family dwellings or condominium units.
1.C.16.cc. Limitation on the Number of ARMs That FHA May Insure Under Section 251
The number of ARMs that FHA may insure in a year is limited to 30 percent of the total number of mortgages insured under Title II during the preceding fiscal year.
1.C.16.dd. Section 251 Maximum Insurable Mortgage
The maximum insurable mortgage on a Section 251 mortgage loan is the same as that of the appropriate section under which the loan is insured.
1.C.16.ee. Section 251 Minimum Borrower Investment Policy
The minimum borrower investment on a Section 251 mortgage loan is the same as that of the appropriate section under which the loan is insured.
1.C.16.ff. Section 251 Mortgage Term
Under Section 251, only 30-year mortgages are permitted.
1.C.16.gg. Section 251 Interest Rate Governing Index
The interest rate governing index is the weekly average yield on U.S. Treasury Securities, adjusted to a constant maturity of one year (published in the Federal Reserve Board's Statistical Release H.15(519)), which is available on the Federal Reserve System Web site at www.federalreserve.gov
. The rate must be the one effective 30 calendar days before the Change Date.
Reference: For more information on the governing index, see HUD 4155.1 6.B.4.
1.C.16.hh. Allowable Interest Rate Adjustments and Caps Under Section 251
The allowable interest rate adjustments and caps under the Section 251 program are as follows:
- the 1, 3, and 5 year ARMs allow
- a one percentage point annual interest rate adjustment after the initial fixed interest rate period, and
- a five percentage point interest rate cap over the life of the loan, and
- the 7 and 10 year ARMs allow
- a two percentage point annual interest rate adjustment after the initial fixed interest rate period, and
- a six percentage point interest rate cap over the life of the loan.
1.C.16.ii. Section 251 Interest Rate Adjustment Frequency
Interest rate adjustments occur on an annual basis. However, there are restrictions regarding the time frame during which the first adjustment must occur.
The table below indicates the time period within which the first adjustment must occur.
| ARM Type | Required Time Frame for First Adjustment |
|---|---|
|
1-year ARM |
No sooner than 12 months nor later than 18 months |
|
3-year ARM |
No sooner than 36 months nor later than 42 months |
|
5-year ARM |
No sooner than 60 months nor later than 66 months |
|
7-year ARM |
No sooner than 84 months nor later than 90 months |
|
10-year ARM |
No sooner than 120 months nor later than 126 months |
Note: The date of the first adjustment to the interest rate and the frequency of adjustments must be specified in the mortgage documents.
1.C.16.jj. Section 251 Required Disclosures
The table below lists the various required disclosures for Section 251 mortgages.
| Timing/Frequency of Disclosure | Requirement |
|---|---|
|
At Application |
Before signing the application, the borrower must receive and sign an ARM disclosure statement prescribed by the Federal Reserve Board. |
|
Annually |
The lender must send the borrower a notice at least 25 days before the change date (that is, 25 days before the new payment amount is due). The notice must include
|
1.C.16.kk. Section 251 MIP Payment
The MIP payment policy on a Section 251 loan is the same as that of the appropriate section under which the loan is insured.
1.C.16.ll. Section 251 Refinancing Policy
Owner-occupants may refinance any loan to an FHA ARM.
Reference: For more information on ARM underwriting details, see HUD 4155.1 6.B.3.
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