FHA Mortgage Types

Although most people are familiar with the 30-year fixed rate FHA mortgage, the FHA actually offers several types of loans, including adjustable-rate loans, rehabilitation loans, and loans for buying a home on an Indian Reservation.

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Fixed Rate FHA Mortgages
Fixed-rate loans have returned to popularity. The FHA loans are typically 30 year loans with a stable interest rate and stable payments for the entire term. They're highly recommended for people who plan to stay in the home for the long-term.

Adjustable-Rate FHA Mortgages
The FHA also offers five adjustable-rate mortgages. With these loans, the initial interest rate and payments are low, but change annually. The rate may go up or down depending on whether the 1-year Constant Maturity Treasury Index has risen or fallen. The five loan products are:

1-Year ARM: the rate adjusts annually, beginning in year 2. The annual rate change is capped at 1%, with a lifetime adjustment cap of 5% above or below the initial rate.
3-Year Hybrid ARM: The rate is fixed for the first three years and then adjusts annually thereafter. Like the 1-year ARM, it has a 1% annual cap and a 5% lifetime cap.
5-Year Hybrid ARM: The rate is fixed for the first five years and then adjusts annually thereafter. The annual interest rate change is capped at 2%, with a 6% lifetime cap.
7-Year Hybrid ARM: The rate is fixed for the first seven years and then adjusts annually thereafter. The annual interest rate change is capped at 2%, with a 6% lifetime cap.
10-Year Hybrid ARM: The rate is fixed for the first ten years and then adjusts annually thereafter. The annual interest rate change is capped at 2%, with a 6% lifetime cap.

ARM loans are recommended for families who are stretching to buy a slightly more expensive home, but who expect to see their incomes increase in the coming years. They're also recommended for families buying starter homes and who plan to move before the fixed period ends.

203(k) Rehabilitation Loan
Buyers of distressed properties may qualify for a rehabilitation loan that includes both the mortgage and the repair costs. The application must include a detailed proposal showing the scope of the work, and a detailed cost estimate for each repair. The appraisal estimates the value of the home after the repairs, rather than the current value.

The required down payment is 3% of the total loan, not 3% of the current value. The loan then covers the purchase cost, closing costs, and remodeling costs, plus a 10-20% reserve for additional repairs added later or cost overruns. Funds are paid into an escrow account, which is then used to pay the contractor and includes a 10% holdback. Payments on the loan begin immediately after the purchase is complete, although the first six payments may be made toward repairs if the home won't be occupied during renovations.

Loans for Homes on Indian Reservations and Other Restricted Land
Indian tribe members may qualify for a special loan for homes on tribal land. Although some requirements vary, all applicants must meet the FHA's basic underwriting standards for all home loans. Loans are capped at 97% and the 3% down payment may be a gift, a grant, a second loan, or paid by the seller. You may buy an existing building or build a new home.

When you apply, you must show proof of a land lease from the tribe, using the prescribed lease form. The home must meet the FHA's standards for water, sewer, and electrical and be appraised. If the home is not yet built, the plans are subject to FHA approval.

The tribe must also agree to:

Certify that it has adopted and enforces eviction procedures, and name the court with jurisdiction
Permit an FHA representative access to tribal lands in case of eviction
Ensure that the FHA mortgage is the first lien, or allow state law to determine loan priority
Approve the next buyer if the home is sold
Agree to buy the back the home, suggest a renter, or approve the eligible buyer found by the FHA in case of foreclosure

FHA mortgage loans offer several loan alternatives to help buyers become owners. Contact your lender to see which loan is best for you.