FHA Single Family Housing Policy Handbook 4000.1, Part II — f. Section 251 Adjustable Rate Mortgages (05/02/2023)

FHA Single Family Housing Policy Handbook 4000.1, Part II — f. Section 251 Adjustable Rate Mortgages (05/02/2023)

f. Section 251 Adjustable Rate Mortgages (05/02/2023) 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: If the ARM is initially at a fixed interest rate for ... Then the first adjustment rate change may occur no sooner than ... And no later than ... 1 year 12 months 18 months. 3 years 36 months 42 months. 5 years 60 months 66 months. 7 years 84 months 90 months. 10 years 120 months 126 months. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 8. Programs and Products - Section 251 Adjustable Rate Mortgages (05/02/2023) Handbook 4000.1 462 Last Revised: 11/26/2025 v. Indices The interest rate governing index may be the 1-Year Constant Maturity Treasury (CMT) or 30-day average Secured Overnight Financing Rate (SOFR). The 1-Year CMT is the weekly average yield on U.S. Treasury Securities, adjusted to a constant maturity of one year, as published by the Board of Governors of the Federal Reserve System in its statistical release on Selected Interest Rates (H.15) at https://www.federalreserve.gov/releases/h15/default.htm. The 30-day average SOFR is the compounded average of the SOFR over a rolling 30-day period, as administered and published daily by the Federal Reserve Bank of New York and available at: https://www.newyorkfed.org\markets\reference-rates\sofr-averages-and- index. 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 Note The 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. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages 8. Programs and Products - Section 251 Adjustable Rate Mortgages (05/02/2023) Handbook 4000.1 463 Last Revised: 11/26/2025 (B) Mortgage Document The 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. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT A. Title II Insured Housing Programs Forward Mortgages

Source: FHA Single Family Housing Policy Handbook 4000.1, Part II — f. Section 251 Adjustable Rate Mortgages (05/02/2023) · source URL · snapshot 8c03836f77f317e1