Ch. 4 - Available Loans

What is the relationship of a junior loan to a senior or first loan?

A junior loan is "subordinate in right or lien priority" to an existing mortgage on the same property.

Mark gets a home loan and the lender will charge him 3 points at closing. If the loan is for $68,000, what will Mark be assessed in points?

$2,040

What is a Certificate of Reasonable Value and what is it used for?

A Certificate of Reasonable Value (CRV) shows the value of a property in relation to its sales price. It is issued by an approved VA appraiser when a veteran is seeking a DVA loan.

Which statement is true?

A borrower can request the cancellation of PMI payments when the equity reaches 20% of the purchase price.

What kind of insurance does FHA require borrowers to pay?

As of 2006, the borrower must pay two insurance premiums. The first is the "upfront" Mortgage Insurance Premium (MIP) which is a percentage of the loan amount. The borrower can pay this one-time premium at closing or the charge could be financed with the loan. The second premium, called Mutual Mortgage Insurance (MMI) is a monthly premium that is paid with the monthly principal, interest, taxes and insurance payment. MMI premiums may be dropped when the remaining loan balance is 80 percent loan-to-value ratio or less.

What are two ways a junior lender can protect itself from default? (See other correct answers on screen 29.)

By adding clauses to the financing instrument, such as: A provision that grants the junior lender the right to pay property taxes, insurance premiums and other charges if the borrower is not making these payments. A clause that allows the junior lender to pay funds for taxes and insurance into an escrow account and make any payments on the first loan to offset a possible default.

Although there are many different programs available under FHA-insured financing, which popular one covers loans on one-to-four-unit owner-occupied dwellings?

FHA 203(b) loan

FHA and VA loans differ from conventional loans in what important way?

FHA and VA do not loan funds directly. FHA insures loans and VA guarantees loans, but the loans themselves are made by approved, qualified lenders.

What does federal law say about the termination of private mortgage insurance?

Federal law requires that any loans originated after July 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments. However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI.

Which of the following would not be considered a junior loan?

First deed of trust

What are four ways that fixed-rate loans can be structured?

Fully amortized loan Term loan Growing equity mortgage Graduated payment mortgage

There are basically two categories of loans available to buyers in the marketplace - conventional loans and government-backed loans.

Government-backed loans include those loans offered by: The Federal Housing Administration (FHA) The Department of Veterans Affairs (DVA) - sometimes simply referred to as VA The California Department of Veterans Affairs (Cal-Vet) Other state, county or city-backed subsidized loan programs Conventional loans have several advantages over government-backed loans. Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. Conventional loans typically have fewer forms, and processing can be more flexible than government-backed loans. There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency. In the event of a loan refusal, borrowers have other lenders that they can make application to. There is only one of each government agency type, so if the loan is refused by a particular agency, there are no alternative lenders available. Conventional lenders are much more flexible. Many offer a variety of loans with attractive provisions. Conventional loans also have their disadvantages. Typically conventional loans require higher down payments than government-backed loans require. Some conventional loans carry prepayment penalties, while government-backed loans do not.

Which of these statements is true about a CalVet loan?

If the loan is VA guaranteed, no down payment is required.

By definition, a junior loan is a mortgage (second mortgage or second trust deed) that is "subordinate in right or lien priority" to an existing mortgage on the same property. Junior loans contain more risk that first loans. For this reason, they will typically carry a higher interest rate.

Just like first trust deeds, junior loans require the execution of a promissory note that spells out the terms and conditions of the loan. The property description for a junior loan will be the same as the description contained in the existing first note. The subordinate position of the secondary loan puts the lien holder of the junior loan in a high-risk position. If a foreclosure on the first note results, the first note holder may sell the property to recover as much as he can, leaving the junior lien holder "holding the bag" with effectively no compensation, since the allocation of any proceeds from the sale would be to the "senior" lien holder first, followed by any junior lien holders. Most junior loans are used in low-down-payment situations. Sometimes after a period of three to five years, a borrower will merge the junior note with the existing first note by increasing the first loan by an amount that will allow the junior loan to be paid off. Another and probably more common type of junior loan is the home equity loan. The Tax reform Act of 1986 eliminated the interest deduction for consumer finance, but kept the interest deduction on home loans. So many homeowners choose to take out home equity loans and earmark the funds for a myriad of uses, from home improvements to automobile purchases to vacations to education to medical expenses. Most of these home equity loans have a term of five years. When the loans come due, the borrowers typically choose to refinance their property, obtaining a new first deed of trust to pay off the junior loan. Click here if you would like to open this summary as a pdf, which you can then print or save to your device: Chapter 4 Summary

The conventional loan is the most common type of loan and is generally viewed as the most secure. Most conventional loans require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property's sale price. Conventional loans are typically uninsured. The mortgage itself provides the only security for the loan. To protect its interests, the lender relies on the appraisal of the property and the borrower's ability to repay the loan, as indicated by the borrower's credit reports.

Most conventional loans have traditionally been designed as fixed-rate loans. With this common type of mortgage program, the monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally the monthly payments will be very stable. Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. Even though most conventional loans require the borrower to make a down payment of 20% or more, a borrower can get a conventional loan with a lower down payment by insuring the loan through a private mortgage insurance program (PMI). A popular way to avoid having to pay private mortgage insurance is through the use of what's known as 80-10-10 financing. What this means is that the institutional lender provides the traditional 80-percent first mortgage. Then the borrower gets a 10-percent second mortgage and makes a 10-percent cash down payment.

In an effort to make it possible for veterans returning from World War II to purchase a home, the Veterans Administration offered the opportunity for veterans to purchase a home with what amount of down payment?

No money down

Explain the difference between "points" and "discount points" on a loan.

Points are a one-time service charge to the borrower for making the loan. Points represent prepaid interest, and the lender charges them to get additional income on the loan. Points are paid at closing and are usually equal to 1 percent of the loan amount. Discount points are designed to offset any losses the lender might suffer when selling the loan to the secondary mortgage market. Discount points are a means of raising the effective interest rate of the loan. The rule of thumb is 1/8 percent for each discount point.

List two advantages of conventional loans over government-backed loans. (See other correct answers on Screen 3.)

Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency.

Which of the following is a low loan-to-value ratio?

Sandy and Bill are putting 30% down on their home purchase.

Name four popular FHA loan programs.

Section 203(b)-Mortgage Insurance for One-Family to Four-Family Homes Section 234(c)-Mortgage Insurance for Condominium Units Section 245(a)-Growing Equity Mortgage Section 203(k)-Rehabilitation Home Loan

Which of the following does not meet the property eligibility criteria for a CalHFA loan?

Six acre parcel

Lenders can charge all of the following except which fee when a borrower gets a loan?

Survey fee

What kinds of programs are offered by the California Housing Finance Agency?

The California Housing Finance Agency program offers below-market interest rate first mortgage programs and a variety of down payment assistance programs to eligible first-time homebuyers.

A growing equity mortgage

allows quick repayment of the loan through accelerated payments.

Government-backed loans include those loans offered by: The Federal Housing Administration (FHA) The Department of Veterans Affairs (DVA) - sometimes simply referred to as VA The California Department of Veterans Affairs (Cal-Vet) Other state, county or city-backed subsidized loan programs

The FHA provides low-down-payment loans to qualified buyers. The Department of Housing and Urban Development (HUD) oversees the FHA. The loans FHA provides are high loan-to-value ratio loans, so FHA insures the loans in order to make them available to higher risk individuals. Although there are many different programs available under FHA insured financing, the most popular is the FHA 203(b) that covers loans on one-to-four-unit owner-occupied dwellings. This fixed-rate loan often works well for first time home buyers because it allows individuals to finance up to 97 percent of their home loan, which helps to keep down payments and closing costs at a minimum. The 203(b) home loan is also the only loan in which 100 percent of the closing costs can be a gift from a relative, non-profit, or government agency. Other popular FHA programs include: Section 234(c)-Mortgage Insurance for Condominium Units Section 245(a)-Growing Equity Mortgage Section 203(k)-Rehabilitation Home Loan The Section 251 - Adjustable Rate Mortgage program provides insurance for adjustable rate mortgages. This program works well with the other widely-used FHA single-family products: 203(b), 203(k) and 234(c).

In an effort to make it possible for veterans returning from World War II to purchase a home, the Veterans Administration (VA), now the Department of Veterans Affairs (DVA), offered the opportunity for veterans to purchase a home with no money down. In order to make this loan acceptable to lenders, the DVA agreed to guarantee the top portion of the loan. Since lenders were now protected in the event of a default by the borrower, lenders agreed to loan four times the current DVA Entitlement.

The veteran must provide a Certificate of Eligibility showing the amount of entitlement available. The entitlement is the maximum number of dollars that DVA will pay if the lender suffers a loss. The DVA also requires the veteran to pay a funding fee, which is a percentage of the loan amount charged for the privilege of obtaining a VA loan. This fund is used for administrative costs and to offset losses incurred in cases of default by the borrower. It is very similar in function to FHA mortgage insurance premiums. An approved VA appraiser must issue a Certificate of Reasonable Value (CRV) showing the value of the property to be equal to or greater than the sales price. VA loans were freely assumable prior to March 1988. Since then, a purchaser who desires to assume an existing VA loan must qualify with the original lender. The veteran should request a release of liability from the purchaser that will relieve the veteran from any further liability for the loan. The veteran would remain personally liable for any deficiency if he or she does not obtain the release.

How is a Cal-Vet loan different from an FHA or VA loan, and how is the loan handled?

Unlike the insured FHA loan or the guaranteed VA loan, the Cal-Vet loan is actually a land contract. When a veteran is approved for a Cal-Vet loan, the state purchases the property and resells it to the veteran using a contract of sale. The state retains the title to the property until the loan is paid off, after which California will issue a grant deed to transfer legal title to the veteran.

California provides another alternative in the form of a special assistance program for farm and home purchases. The California Department of Veterans Affairs (CDVA), Division of Farm and Home Loans administers the program and the loans are referred to as Cal-Vet loans.

Unlike the insured FHA loan or the guaranteed VA loan, the Cal-Vet loan is actually a land contract. When a veteran is approved for a Cal-Vet loan, the state purchases the property and resells it to the veteran using a contract of sale. The state retains the title to the property until the loan is paid off, after which California will issue a grant deed to transfer legal title to the veteran. CDVA will purchase only approved single-family residences (including condominiums, units in planned unit developments, and mobile homes) in California which meet the needs of the veteran as a dwelling place for his or her family. The property must be structurally sound and provide safe and sanitary living conditions. The main advantages of the Cal-Vet loan are its relatively low interest rate; the availability of inexpensive life, fire and hazard insurance; and low closing costs. The biggest disadvantages are few, if any, chances to refinance and potential shortage of funds to make the loans. The California Housing Finance Agency (CalHFA) program offers below-market interest rate first mortgage programs and a variety of down payment assistance programs to eligible first-time homebuyers. In order to qualify for a CalHFA loan, a borrower must meet certain requirements. Eligible properties must be priced at or below the county-by-county limits established by CalHFA for new or existing homes.