September 17, 2020
Does FHA offer adjustable rate mortgages? When you shop around for a participating FHA lender, be sure to ask about this type of FHA loan, sometimes known as an FHA ARM.
Not all participating lenders may offer an FHA adjustable rate mortgage, but for those working with a lender that does, it is important to know some basics about the mortgage and how FHA loan rules govern the adjustments in the interest rates.
Borrowers who apply for an FHA ARM loan must sign a disclosure statement that outlines the terms and conditions of the mortgage. The rules that govern FHA ARM loans are found in HUD 4000.1, and those rules begin with a definition of what the FHA considers to be an ARM loan.
“An Adjustable Rate Mortgage (ARM) refers to a Mortgage in which the interest rate can change annually based on an index plus a margin”.
That information is found on page 428 of HUD 4000.1, which also explains that the lender is responsible for establishing the initial rate, as well as the margin.
The FHA does not set or regulate interest rates on these or any other FHA mortgage loan except as specifically defined for programs like FHA ARM loans (see below).
Those regulations include the following as found in HUD 4000.1:
“The interest rate must remain constant for an initial period of 1, 3, 5, 7, or 10 years, depending on the ARM program chosen by the Borrower, and then may change annually for the remainder of the mortgage term”.
FHA rules say that one and three year ARM loans can increase “by one percentage point annually” following the expiration of the initial rate, sometimes called a “teaser rate”. For these one and three year ARM loans, the interest rate adjustment is limited to five percentage points over the life of the FHA ARM loan.
Five year ARM loans “may either allow for increases of one percentage point annually, and five percentage points over the life of the Mortgage; or increases of two percentage points annually, and six points over the life of the Mortgage” according to HUD 4000.1.
For seven and 10-year ARMS, there is a restriction-they can increase only by “two percentage points annually after the initial fixed interest rate period, and six percentage points over the life of the Mortgage”.
FHA ARM loans must fully amortize for a loan term of no more than 30 years.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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