Summary:
Section 245 enables a household with a limited
income that is expected to rise to buy a home sooner by making mortgage
payments that start small and increase gradually over time.
Purpose:
HUD’s Federal Housing Administration (FHA)
administers mortgage insurance programs that help low- and
moderate-income families become homeowners by lowering some of the
initial costs of their mortgage loans. FHA mortgage insurance also
encourages lenders to make loans to otherwise creditworthy borrowers who
might not be able to meet conventional underwriting requirements by
protecting the lender against loan default. Section 245 contributes to
these goals by helping first-time buyers and others with limited
incomes--particularly young families, who expect their income to rise
but may not yet be able to handle all of the upfront and monthly costs
involved in homebuying--to tailor their mortgage payments to their
expanding incomes and buy a home sooner than they could with regular
financing.
Type of Assistance:
Section 245 insures mortgages for
first-time (and other) buyers who have low and moderate incomes--and who
thus cannot meet standard mortgage payments--but who expect that their
income will increase substantially in the next 5-10 years. Potential
homeowners who are considering using a graduated-payment mortgage to
purchase a home must remember that their monthly payments to principal
and interest will increase each year for up to 10 years, depending on
which of five available plans they select.
Three of the five plans permit mortgage payments to increase at a
rate of 2.5, 5, or 7.5 percent during the first 5 years of the loan. The
other two plans permit payments to increase 2 and 3 percent annually
over 10 years. Starting at the sixth year of the 5-year plans and the
eleventh-year of the 10-year plans, payments will stay the same for the
remaining term of the mortgage. The greater the rate of increase and the
longer the period of increase, the lower the mortgage payments in the
early years.
Before using this type of financing, would-be homebuyers need to
assess their potential for increased income to offset mortgage payment
increases. Also, they need to be aware that over the life of the
mortgage they will pay more interest than if they had a mortgage with
payments that stayed the same.
In most other respects, Section 245 loans are similar to basic
FHA-insured single-family mortgage loans. Downpayment requirements can
be low--3 percent or less--because FHA insurance allows homebuyers to
finance about 97 percent of the home’s cost through their mortgage. In
addition, some closing costs can be financed, reducing up-front costs.
FHA also limits some fees that lenders charge--for example, the loan
origination charge. Finally, FHA sets
limits on the size of the mortgage loan that vary with the location
and the number of units in the property.
Eligible Grantees:
FHA-approved lending institutions,
such as banks, mortgage companies, and savings and loan associations,
can make loans protected by Section 245 insurance.
Eligible Customers:
Anyone who intends to use the
mortgaged property as their primary residence and who expects to have a
rising income is eligible to apply for Section 245 mortgage insurance.
However, the program is not open to investors.
Application:
Any person can apply who is able to meet
the cash investment and credit requirements and to make the mortgage
payments. The program is limited to owner-occupants. Applications are
made through an FHA-approved lending institution. Borrowers can
find FHA-approved lenders in a searchable list on HUD’s homepage.
Technical Guidance:
This program is authorized under
Section 245, National Housing Act (12 U.S.C. 1715z-10); by Public Law
73-479; Housing and Community Development Act of 1974, Section 308; and
by Public Law 93-383, as amended. Program regulations are in 24 CFR Part
203.45. These regulations, as well as handbooks, notices, and letters
relevant to this program, are available through
HUDCLIPS. Section 245 insurance is administered by HUD’s Office of
Housing-Federal Housing Administration. Prospective lenders should
contact the
Director of Single Family Programs at the nearest
HUD Field Office about participating in this program. Loan
processing and administration for this and other FHA single-family
mortgage insurance products are handled through one of four consolidated
Single Family Homeownership Centers.
For More Information:
To learn more about this program
and other financing options, homebuyers should
contact a HUD-approved lender for a searchable listing of approved
lenders nationwide, a
HUD-approved housing counseling agency, or the toll-free FHA
Mortgage Hotline, 1-800-HUDSFHA.
