FHA Loan Financing Technique

FHA loan, Section 203(b) of the National Housing Act provides a source for loans, made by local lenders and insured by the Department of Housing and Urban Development (HUD). 

The purpose of the program is to help people obtain loans so they can buy homes.

The government insures the loans so local lenders will not bear the loss if the borrower defaults. The insurance is funded by a special insurance premium paid by the borrower in the amount of one-half of 1% of the outstanding balance of the loan. Until 1984, the premium was paid on a monthly basis. Since then, FHA borrowers have to pay the entire mortgage insurance premium up front, either with a lump sum cash payment or by financing the cost as part of their mortgage payment.

In some high cost areas, these amounts may be increased by the Secretary of HUD. The required down payment is usually 5%, and rates are about 1% below the market rate for conventional mortgages. Loans are made for 30 years, and if they were made prior to December 15, 1989, they are fully assumable without qualifying, by paying a $45.00 assumption fee. The original mortgagor (borrower), however remains liable on the mortgage for five years from the date of assumption. Effective December 15, 1989, purchasers of FHA financed property may only assume the mortgage by qualifying as if they were the original borrower. By qualifying they release the original mortgagor (the seller of the property) from any liability.

In the past, once the loan was paid off, the borrower was entitled to a refund of a portion of the insurance premiums that had been paid over the years. The size of the refund depended on the number of years the loan had been outstanding –the longer the time, the greater the refund. Section 203(b) and Section 245 (Graduated Payment Mortgage) Loans were entitled to this refund. If the mortgage was a pre-1984 loan where the Mortgage Insurance Premium (MIP) was payable monthly, the refund was known as a Distributive Share. If it was a 1984 or later mortgage and the MIP was paid up front, it was known as an unearned One Time Mortgage Insurance Premium (O.T.M.I.P.) refund. 

Under the National Affordable Housing Act of 1990, however. Congress mandated that no further Distributive Share payments could be issued for mortgages with a termination date of November 5, 1990 or later, until the actuarial soundness of the FHA Fund is restored. This decision was made after an independent audit showed the MIP Fund was not actuarially sound. This decision does not effect the refund of an O.T.M.I.P. 

In the case of O.T.M.I.P. refunds and, at some time in the future, MIP Distributive Shares, the person who owns the property is entitled to the refund even if that person was not the original borrower, provided the mortgage was assumed. The property must be owned at least 90 days before the insurance is terminated. The insurance can be terminated several ways: by paying the loan off completely to its maturity; by paying the loan off early; or by asking the lender to cancel the policy when the loan percentage of the value of the property.

If the FHA loan is paid off at its maturity, HUD will automatically issue a refund. Since this seldom happens, you need to know that if you sell your house (or buy a house) and pay off the loan before maturity, you should submit a request for a refund. Requests should include your FHA case number and date of mortgage payoff. For information call: 

HUD Customer Service Support Center
(703)235-8117

FHA Loan To Discounted Bonds