II.A.8.f. Section 251 Adjustable Rate Mortgages (09/14/15)

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. Definition
ii. Required Disclosures
iii. ARM Types
iv. Initial Interest Rate Adjustments
v. Indices
vi. Temporary Interest Rate Buydowns
vii. Underwriting Requirements
viii. Mortgage Term
ix. Required Documentation

i. Definition

An Adjustable Rate Mortgage (ARM) refers to a Mortgage in which the interest rate can change annually based on an index plus a margin.

ii. Required Disclosures

The Borrower must sign a disclosure that explains the terms of the ARM at mortgage application.

iii. ARM Types

The Mortgagee must establish the initial interest rate and the margin. The margin must be constant for the entire term of the Mortgage.

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.

A 1- and 3-year ARM may increase by one percentage point annually after the initial fixed interest rate period, and five percentage points over the life of the Mortgage.

A 5-year ARM 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.

A 7- and 10-year ARM may only increase by two percentage points annually after the initial fixed interest rate period, and six percentage points over the life of the Mortgage.

iv. Initial Interest Rate Adjustments

The first interest rate adjustment must occur in accordance with the following chart:

v. Indices

The interest rate governing index may be the 1-Year Constant Maturity Treasury (CMT) or 1-Year London Interbank Offered Rate (LIBOR).

The 1-Year CMT 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).

The 1-Year LIBOR is the London Interbank Offered Rate as published in the Wall Street Journal on the first business day of each week.

vi. Temporary Interest Rate Buydowns

Temporary interest rate buydowns are not permitted with ARM transactions.

vii. Underwriting Requirements

The Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate.

1-year ARMs

If the Loan-to-Value (LTV) is 95 percent or more, the Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate plus one percent.

If the Mortgage is less than 95 percent, the Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate.

viii. Mortgage Term

The ARM must be fully amortizing over a period of no more than 30 years.

ix. Required Documentation

(A) Model NoteThe Mortgagee must use the Model ARM Note for all ARMs. Paragraph 1 of this form must be adapted or additional paragraphs may be added to provide a full description of the adjustable rate feature of the Mortgage to the extent required by state or local law to create an enforceable agreement.The Mortgagee must ensure that the ARM Note contains amortization provisions that allow for annual adjustments in the rate of interest charged.

(B) Mortgage DocumentThe mortgage documents for an ARM must specify the:

• initial interest rate;
• margin;
• date of the first adjustment to the interest rate; and
• frequency of adjustments.