Real Estate Finance-Chapter 8

What is the minimum down payment that Robert and Amy can use for their VA loan?

$0.00

Mike is interested in purchasing a home priced at $180,000. He is making an offer showing a down payment of the FHA minimum requirement. The loan amount before the MIP would be

$173,700.

If Andrew's down payment is the smallest allowed by FHA, what is Andrew's initial loan balance?

$221,950

If Robert and Amy's down payment is the smallest allowed by the VA, what is Robert and Amy's initial loan balance?

$320,000

What is the minimum dollar amount that Robert and Amy would see on his VA Entitlement form issued by the VA?

$320,000

A borrower interested in purchasing a home priced at $150,000 with an FHA-insured mortgage loan would be required to make a down payment of

$5,250.

Julie is considering purchasing a home listed at $180,000 and has decided to make an offer of $175,000 using FHA financing. The amount of Julie's down payment would be

$6,125.

What is the minimum down payment that Andrew can use for his FHA loan?

$8,050

Closing Costs

100% of reasonable closing costs may be financed. Discount points can be paid by the buyer, the seller, or split between the two. Any amount that the seller contributes should be stated in the sales contract between buyer and seller.

What is Andrew's front-end ratio?

16%

What is Andrew's back-end ratio if he gets the FHA loan described above?

23%

Interest Rate Reduction Refinance Loan (IRRRL)

Also called the Streamline Refinance Loan can help veterans obtain a lower interest rate by refinancing an existing VA loan. On a no-down-payment loan, the veteran can borrow up to the Fannie Mae/Freddie Mac conforming loan limit in most areas, and more in some high-cost counties. With a down payment, the veteran can borrow more than this amount.

Appraisal

An appraisal by an FHA-approved appraiser must be made. The property must also meet minimum property requirements (MPR).

Appraisal 2

An appraisal by an VA-approved appraiser must be made. A Certificate of Reasonable Value (CRV) must also be provided. The CRV sets the maximum amount of the loan that the VA will guarantee and it is based on the appraisal. If the CRV is lower than the sales price, causing the buyer to come up with a cash down payment, then the borrower is not obligated to move forward with the purchase of the house.

Property Standards

Property must meet the following requirements or be repaired to these standards prior to closing: • Undamaged exterior, foundation and roof • Safe and reasonable property access; no interior or exterior safety hazards • Cannot contain loose wiring and exposed electrical systems • Cannot have damaged underground storage tanks and soil contaminants • Must have a working, permanent heating system that can adequately heat the property • Cannot have surfaces with chipping or peeling lead-based paint • Must have adequate access to attic spaces and natural ventilation in crawl spaces • Must have access to clean water and working utilities. • Must be free from wood destroying insect infestations • Must be a marketable property

Interest Rate

Rates are not set by FHA. Interest rates are negotiated between the borrower and the lender.

Interest Rate 2

Rates are not set by the VA. Interest rates are negotiated between the borrower and the lender. They are, however, generally lower than the rate of a conventional loan.

Borrower

The underwriter will evaluate the borrower based on the information provided by the lender. This information will be based on credit reports, income verification, cash on hand via bank statements, and employment stability. These factors must prove to the underwriter that the borrower will be able to make the monthly payments of the mortgage loan. An underwriter will use ratios to help determine a borrower's ability to pay. There are two ratios that a lender and/or underwriter will consider before approving a borrower.

Property

The underwriter will verify the quality of the property being financed based mostly on the report issued by the appraiser. The value of the property must be sufficient to cover any losses that may occur if the borrower defaults. The property must also satisfy property condition standards which include safety, habitability, and marketability. Even if borrower and property qualify, a lender may, under certain circumstances, seek further protection against risk by requiring the borrower to obtain private mortgage insurance. This is frequently the case with loans requiring a relatively small down payment, leading to a high loan-to-value ratio.

FHA - Insured Loan Program

There are two types of loan programs insured by FHA: • Title I Loans - For home improvement loans. • Title II Loans - For the purchase of residential property.

Maximum Loan Amount 2

There is no set maximum dollar loan amount but it may limited by the Certificate of Reasonable Value (CRV) and any excess down payment that the buyer can afford. Borrowers are not allowed to get secondary financing to make up any difference.

Streamline Refinance

This gives a borrower the ability to refinance an existing FHA loan with limited borrower credit documentation and underwriting. The basic requirements of a streamline refinance are: • The mortgage to be refinanced must already be FHA insured. • The mortgage to be refinanced must be current (not delinquent). • The refinance results in a net tangible benefit to the borrower. The definition of net tangible benefit varies based on the type of loan being refinanced, and the interest rate and/or term of the new loan. • Cash in excess of $500 may not be taken out on mortgages refinanced using the streamline refinance process. • Investment Properties are only eligible for FHA insurance if the borrower is a HUD- approved Nonprofit Borrower, or a state and local government agency, or an Instrumentality of Government.

Basic Home Mortgage Loan 203(B)

This program offers the borrower the opportunity to purchase or refinance a personal residence. The borrower must meet standard FHA credit qualifications and can finance up to 96.5% of the purchase price. The borrower is responsible for paying the annual premium for mortgage insurance (MIP). Eligible properties are limited to one-to-four unit dwellings.

Underwriting Guidelines

Underwriting is the process of reviewing the creditworthiness of a borrower and the value of the property being financed in order to determine the level of risk that the lender will be taking on in the event that the lender provides financing. The underwriter will consider: • the borrower's ability to repay the loan based on the borrower's financial condition; • the value of the property based on the appraiser's opinion of value; and • the terms of the loan being considered.

VA Loan Guarantee

VA Loan Guarantee The Veterans Administration (Department of Veterans Affairs) assists veterans, members of the military service, and surviving spouses in the purchase of a home. The VA guarantees loans. They do not make loans. The loans are made by lenders such as banks, mortgage companies, etc. The VA loan guarantee is not always 100% of the loan. It may only be a partial guarantee. A VA home loan may be used to buy, build, improve, or repair a home or to refinance a mortgage. Housing loans are limited to one-to-four residential units and must be owner-occupied.

Assumable Criteria 2

VA loans are assumable if the new borrower is qualified. Lender approval is required.

Eligibility

Veterans who are eligible for a VA loan have a VA entitlement which is the dollar amount that the Department of Veterans Affairs agrees to pay back to a lender if the veteran defaults on a mortgage. Calculating the amount of a veteran's entitlement can be a complicated computation so it's best to always consult with the lender to fully understand what is involved. A veteran may be able to "restore" an entitlement that was used in the past to buy another home with a VA direct or VA-backed loan under certain conditions. The VA home loan guarantee is a lifetime benefit and may be used multiple times. To be eligible, the veteran or surviving spouse must have satisfactory credit, sufficient income to meet the expected monthly obligations, and a valid Certificate of Eligibility (COE). The COE is a document provided by the VA that shows that the borrower meets the necessary eligibility requirements to obtain a VA loan.

Risk of Lending

Whether it's a financial institution or an individual, there is inherent risk in making a loan for the purchase of real estate. The borrower could default due to inability to make the mortgage payments and that could cost the lender money in repossession and legal fees. The borrower could destroy the property making it inhabitable or unsellable. And in a foreclosure situation, there may not be enough proceeds from the sale to cover the lender's investment in the property. The risk factor makes it very important that the lender, or FHA insurer, have strict guidelines when evaluating both the borrower and the property before issuing a loan.

Will Andrew be required to pay a mortgage insurance premium (MIP)?

Yes. FHA loans require the borrower to pay a one-time mortgage insurance premium (MIP) based on a percentage of the loan amount.

Will Andrew be required to pay taxes and insurance (T&I) into an escrow account as part of his monthly payment?

Yes. His loan to value (LTV) will be greater than 80%.

Before a VA loan will be approved, there must be a formal estimate of the value of the property, which is called

a certificate of reasonable value.

The VA funding fee may be added to the loan amount but must not exceed the

maximum loan based on the loan guarantee.

An FHA section 203(k) loan would provide a loan for

the purchase and rehabilitation of a property.

A veteran is no longer liable for a VA loan in any of the following situations EXCEPT

the veteran is active duty.

All of the following statements regarding FHA mortgage insurance are true EXCEPT

there is no up-front mortgage insurance premium for condominiums.

The direct endorsement program allows a lender to

underwrite FHA loans without sending them to FHA.

Borrower Qualifications

• Minimum FICO score of 580. • Debt-to-Income Ratio less than 43% • Mortgage payments cannot exceed 31% of monthly income. • Minimum down payment of 3.5%. • Must use the property as a primary residence. • Must provide proof of employment and employment history for the previous 2 years. • Verifiable income supported by pay stubs, tax returns, and bank statements.

Lender Qualifications

• Must submit an application to HUD. • Lender may be a Non-Supervised Mortgagee or a Supervised Mortgagee o Non-Supervised - Lending institutions that have as their principal activity the lending or investing of funds in real estate mortgages, consumer installment notes, or similar advances of credit or the purchase of consumer installment contracts or from a directly related field. o Supervised - Banks, savings banks and credit unions that are members of the Federal Reserve System, or regulated by the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) or the National Credit Union Administration (NCUA). o Government Mortgagee - Federal, state, or municipal government agencies, a Federal Reserve Bank, a Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac), or the Federal National Mortgage Association (FNMA, or Fannie Mae). o Investing Mortgagee - Organizations that invest funds under their own control may apply for this approval if they want to purchase, hold, or sell FHA-insured Mortgages. An Investing Mortgagee may not originate, underwrite, or close FHA-insured Mortgages in its own name or submit applications for FHA mortgage insurance.

FHA-Insured Loans

In order for a borrower to obtain an FHA loan, three criteria must be met: • The borrower must meet certain qualifications required by FHA. • The lender must be an FHA approved lender • The property being financed must meet FHA standards.

Default by Borrower

In the event that the borrower defaults on the loan, the lender is protected. The insurance is for the benefit of the lender. Lender reimbursement may also include foreclosure expenses.

Maximum Loan Amount

Loan limits are set by the FHA and vary according to region. Secondary financing is not allowed. Loan-to-value ratios will also affect the maximum amount of financing the borrower can receive.

Maximum Term of Loan 2

Loan terms are 30 years for home loans and 40 years for farms. The loan cannot have a balloon payment at the end of the term. There is no prepayment penalty for an early payoff.

Maximum Term of Loan

Loan terms cannot exceed 30 years. There is no prepayment penalty so the borrower can pay off the loan early if he/she wants to. Loans are fully amortized loans so no balloon payments are allowed.

Assumable Criteria

Loans are assumable provided that the new borrower is qualified and is to occupy the property. They are not assumable by an investor.

Will Robert and Amy be required to pay a mortgage insurance premium (MIP)?

No, VA loans do not have a mortgage insurance premium.

Will Robert and Amy be required to pay a VA funding fee?

No. The funding fee may be waived by the VA for disabled veterans.

Hazard Insurance 2

Payments include taxes and insurance. Like all financed loans, homeowner's insurance is required.

Down Payment Requirement

Down payment amount can be as low as 3.5% which is far less than most conventional loans. The down payment is based on the purchase price of the property or the appraised value, whichever is lower.

Rehabilitation Mortgage 203(k)

Enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home. The house must be at least one year old. A portion of the loan is used to purchase the property and the remaining funds are held in an escrow account and released as funds are needed for the renovation of the property. The types of improvements that borrowers may make using Section 203(k) financing include: • structural alterations and reconstruction • modernization and improvements to the home's function • elimination of health and safety hazards • changes that improve appearance and eliminate obsolescence • reconditioning or replacing plumbing; installing a well and/or septic system • adding or replacing roofing, gutters, and downspouts • adding or replacing floors and/or floor treatments • major landscape work and site improvements • enhancing accessibility for a disabled person • making energy conservation improvements HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.

Leonard is purchasing a home using FHA financing. Because the home requires repairs and the seller is not willing to fix the home before closing, the Leonard should apply for an

FHA 203(k).

Adapted Housing Grants

Help Veterans with a permanent and total service-connected disability purchase or build an adapted home or to modify an existing home to account for their disability.

Native American Direct Loan (NADL) Program

Helps eligible Native American Veterans finance the purchase, construction, or improvement of homes on Federal Trust Land, or reduce the interest rate on a VA loan. The veteran's tribal government must have an agreement or Memorandum of Understanding (MOU) with the VA detailing how the program will work on its trust lands.

Direct Endorsement

FHA grants lenders the authority to underwrite and close mortgage loans without prior FHA review and approval in accordance with the terms and conditions of HUD's regulations in 24 CFR 203.3. This is known as Direct Endorsement program. The purpose of the program is to speed up the approval process for FHA loans. To obtain Direct Endorsement approval, a lender must demonstrate it has the qualifications, experience, and expertise to underwrite mortgage loans that satisfy FHA requirements. In order to be granted unconditional Direct Endorsement authority, the lender will submit a specific number of loan files that will be reviewed by FHA as prescribed by 24 CFR 203.3(b)(4). When, and if, FHA finds an acceptable number of files among those submitted, either at the pre-closing or pre-endorsement review, and if the lender has met the other requirements for Direct Endorsement approval, then the lender will be eligible for unconditional Direct Endorsement authority. A Direct Endorsement lender must conduct its business operations in accordance with acceptable sound mortgage lending practices, adhere to ethics and standards required by FHA, and follow all federal and state laws applicable to mortgage lending. To maintain approval, a lender must consistently underwrite and close loans that meet all FHA requirements.

FHA Contributions to Real Estate Finance

FHA has influenced real estate finance in a tremendous way. It has made it possible for otherwise disadvantaged "home seekers" to make home ownership possible. With lower down payment options for borrowers, and decreased risk to lenders through the insurance program, both sides of the lending process wins. Borrowers are able to get financing for a first step toward the American dream of home ownership. This is good for society as well as economic stability. Among the many achievements of the FHA is the modernization of the American mortgage system that prevented millions of Americans from losing their homes and offered millions more the ability to purchase their first home. It has strengthened the country's residential construction business and related employment by creating the ability for Americans to purchase single-family homes. Because FHA prohibits discrimination based upon race, color, national origin, religion, gender, disability or familial status in the housing arena, the doors of opportunity have been opened to everyone. This housing arena includes renting, purchasing (sales), getting a mortgage (lending), appraisals and homeowner's insurance. This is effective in building strong, vibrant communities across the nation.

Condominium

FHA insures condominium loans for up to 30-year terms to purchase or refinance a unit in an FHA-approved condominium project or in a project that is not FHA-approved but meets the Single-Unit Approval requirements. To be eligible for Single-Unit Approval, the unit must be • complete and ready for occupancy; • in a project that has at least five dwelling units; and • is not a manufactured home. The project must also meet a subset of the requirements set forth for project approval, including FHA insurance concentration, owner-occupancy percentage, and financial condition of the project.

Adjustable Rate Mortgage (ARM)

FHA offers a standard 1-year ARM and four "hybrid" ARM products. Hybrid ARMs offer an initial interest rate that is constant for the first 3-, 5-, 7-, or 10 years. After the initial period, the interest rate will adjust annually. The different interest rate cap structures for the various ARM products are: • 1-and 3-year ARMs. May increase by one percentage point annually after the initial fixed interest rate period, and five percentage points over the life of the mortgage. • 5-year ARMs. 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. • 7- and 10-year ARMs. 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.

If Andrew decides to add a covered patio to the house after closing, and he wants to roll that cost into the mortgage, what type of FHA loan would Andrew get from Bluebonnet Bank?

Rehabilitation Mortgage 203(k)

Back-End Ratio

Represents the percentage of a borrower's income that will be applied to all outstanding debt. Includes all housing expense, credit card debt, car payments, child support, student loans, etc. Also known as Debt-to-Income Ratio. Should not exceed 43%. o Example: Jill has monthly income of $7,500. Her total outstanding debt is $2,400. Jill's back-end ratio is 32%. ($2,400 ÷ $7,500 = 0.32 or 32%)

Front-End Ratio

Represents the percentage of a borrower's income that will be applied to housing expense. Includes the mortgage payment, property taxes, hazard insurance, and association fees if applicable. Should not exceed 31%. o Example: Jack has monthly income of $6,000. His monthly housing expenses amount to $1,500. His front-end ratio is 25% ($1,500 ÷ $6,000 = 0.25 or 25%)

Federal Housing Administration (FHA)

The Federal Housing Administration (FHA) is one of the largest mortgage insurers in the world according to HUD's Office of Housing. It was created in 1934 by Congress. At that time, the housing industry was depressed and suffering great losses. Job loss was high and mortgages were difficult to obtain. Borrowers were able to obtain only 50% of the value of the property they wished to purchase and the payments were spread over three to five years, ending in a large balloon payment. Only about 10% of homes were owned by the occupants, creating a mostly tenant occupied houses. FHA does not make loans, but rather it insures loans by providing mortgage insurance to its approved lenders. FHA insures mortgages for single-family, multifamily, residential care facilities, and hospitals throughout the United States and its territories. FHA protects lenders by insuring the full outstanding balance of an FHA insured loan. If the buyer defaults, FHA will pay off the loan balance to the lender. This allows the lender the ability to finance to individuals who might not otherwise qualify for a conventional loan. Borrowers who obtain an FHA insured loan pay an insurance premium that is collected by the lender. The lender then remits the insurance to the FHA. The FHA is able to fund its operations through the collection of the premiums.

Down Payment Requirement 2

The VA does not require a down payment from the borrower. However, the lender may require a down payment since the VA may not guarantee the full amount of the loan.

Default by Borrower 2

The VA reimburses the lender for losses up to the guaranteed amount if foreclosure sale proceeds fail to cover the loan balance.

Closing Costs 2

The borrower does not pay any premium for the loan guarantee, but does pay a VA funding fee at closing. This is a one-time fee and there are exceptions to having to pay the fee. The funding fee is calculated as a percentage of the loan amount and may vary according to type of loan, amount of loan, and down payment amount if applicable. The fee may be paid at closing or rolled into the loan. The funding fee may be waived by the VA for disabled veterans or for a widow/widower of a spouse whose death was related to his/her service. The lender may charge discount points, origination fees, and other reasonable costs. These may be paid by seller (with some limits) or buyer, but may not be financed.

Hazard Insurance

The borrower must obtain hazard insurance (home owner's insurance) and name the lender as "Loss Payee" on the policy. If the property is located in a flood prone area, or an area designated as being in a flood plain, then the borrower must obtain flood insurance for the entire term of the loan.

FHA Mortgage Insurance

The borrower will pay a one-time mortgage insurance premium (MIP) based on a percentage of the loan amount. The premium can either be paid by the borrower as part of the closing costs, or it can be added to the loan balance. The borrower will also pay a monthly premium as part of the monthly mortgage payment. The premium amount varies according to the term of the loan and the loan-to-value ratio. It is set by FHA.

Home Equity Conversion Mortgages (HECM) for Seniors

The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is only available through an FHA-approved lender. The amount that will be available for withdrawal varies by borrower and depends on: • Age of the youngest borrower or eligible non-borrowing spouse; • Current interest rate; and • Lesser of appraised value or the HECM FHA mortgage limit or the sales price.