General Mortgage Knowledge

USDA Guarantee Fee

Government "mortgage insurance" or guarantee fee required for the life of the loan. The guarantee fee on a USDA has two parts. There is the monthly and the initial guarantee fee. - On USDA loans, the initial guarantee fee is 1 percent. - The monthly guarantee fee is .35 percent. The initial guarantee fee can be added into the loan amount and push the LTV over 100 percent

Characteristics of a subprime mortgage

- Manually underwritten. - little or no amortization or included negative amortization features - Low credit requirements (credit scores in the 500's). - May not require private mortgage insurance or escrow features. - little verification of what the borrower was presenting as their income, assets, or employment. The lack of verification made them incredibly risky for lenders. These loans usually came with much higher interest rates, and usually, the borrower could not afford the loan. The rates are higher because the risk of default is greater when credit scores are lower.

A few examples of subprime loans include:

- NINA - No Income/No Asset Mortgages - Often referred to as "No Doc" mortgages. The borrower is not required to provide any financial information regarding their income or their assets. - SISA- State Income/Stated Asset - SISSA loans only require the borrower to state their income and asset situation but do not require the verification of the income or asset information - SIFA or SIVA - Stated Income/Full Asset or Stated Income/Verified Asset - SIFA or SIVA loans only require the borrower to state their income but provide asset information. - No Doc - No additional income documents are required. - Low-Doc - Minimal income documents are required.

Features of a non-qualified mortgage

- Therefore, a non-qualified mortgage might have risky features like balloon payments, interest only, or negative amortization. These types of features are not allowed with a qualified mortgage. - The borrower's debt-to-income would be higher than 43 percent (the ceiling set by CFPB guidelines for a qualified mortgage). - With non-qualified mortgages, the points and fees would exceed 3 percent of the loan amount, the limit for a loan to be considered qualified. - For a qualified mortgage, lenders use tax returns, pay stubs, and W-2s to assess the borrower's income. For a non-qualified mortgage, a lender might rely on bank statements or other alternative documents. Because non-qualified loans tend to be riskier, they are not sold on the secondary market.

Examples of credit risk characteristics

-credit history -late payment -little credit -foreclosure -repossessions -bankruptcy within the last 5 years the five Cs: character, capacity, capital, collateral, and conditions. A lender can discern a lot about a borrower by looking at his or her credit report. An indication of good character is a person who honors his or her obligations. A good payment history and history of paying off debts with no liens, bankruptcies, or judgements all indicate good character. Capacity is the debt-to-income scenario. Capital is the down payment. Borrowers who are willing to put their own money down up front are better risks. Collateral is the home being purchased. Whether the home is primary, a vacation, or investment affects risk. Conditions are the terms of the loan: the number of years to repay, the type of mortgage, the size of the loan.

Types of non-qualified mortgages

-interest only loans -stated income and alt-doc loans -loans with DTI ratios above 43% -40-year mortgages -negative amortization -balloon payments

Minimum down payment on VA loans

0% Down payment is determined by obtaining the DD214 from the veteran, which tells you they have benefits, the information is loaded into the VA website and then the Certificate of Entitlement or Eligibility (COE) is issued. The higher the benefits, the higher the loan to value.

Limits on closing cost concessions

3% Allow for the seller to only pay a set percentage of seller concessions, limiting the number of contributions paid to help cover the borrower's closing costs.

Non-qualified mortgage (Non-QM)

A Non-Qualified Mortgage or Non-QM loan is a loan that does not conform with the Consumer Financial Protection Bureau's (CFPB's) Qualified Mortgage rule; it also means that the loan is not accepted by government-sponsored entities like Fannie Mae or Freddie Mac. Non-QM loans cater to the not-so-perfect borrower. Are Non-QM loans the new subprime loans? Maybe, but non-QM loans are still required to follow Ability to Repay requirements, so the past risk of low documentation or some of the subprime products coming back is slim, but it doesn't mean that Non-QM loans are not potentially risky. Responsible non-QM programs can help millions of creditworthy borrowers who don't fit the traditional credit box - and help lenders find growth even as traditional lending slows. Non-QM products can open the doors for a mortgage lender to lend to the less than perfect borrower.

Categories of qualified mortgages

A Qualified Mortgage is a mortgage that has complied with the Ability to Repay requirements. There are four types of qualified mortgages: General QM. Temporary QM. Small Lender; and Balloon-Payment QM. Any lender can originate from the first two, while the other two are only allowed to be originated by small lenders.

Scenarios to determine when a balloon loan may be appropriate for a borrower

A balloon mortgage is a mortgage that requires a larger than usual one-time payment at the end of the term The type of borrower that this might work for is someone who intends to sell their home after a short period. An example would be someone who often relocates for work, they purchase their new home with a smaller monthly payment and then immediately pay it off when they sell it and move onto the next home. Another borrower who this might work for is someone who gets a large amount of money yearly but does not have as steady of an income during the rest of the year—for example, a farmer. A farmer has some income during the year but makes the bulk of their money after a harvest. At harvest time, they put a large chunk of money on their balloon mortgage, and by the time the fixed period is up, and the balloon payment is due, they likely have already paid off that mortgage or have the funds to make that balloon payment. Someone who is expecting his or her income to increase significantly over time It could also work for someone with low credit scores now who wants to refinance again when his or her credit scores improve.

What's the difference between PMI and MMI?

A borrower purchased Private Mortgage Insurance for a conventional loan through a third -party company. Mortgage Insurance Premium and Upfront Mortgage Insurance Premiums are paid directly to the FHA. Mortgage Insurance Premium on FHA loans can sometimes be less expensive than PMI, so it's important to compare both options when comparing loan scenarios

Conventional/conforming (e.g., Fannie Mae, Freddie Mac)

A conforming mortgage is a mortgage that conforms with Fannie Mae and Freddie Mac guidelines. A conventional loan can be either non-conforming or conforming Conventional loans can be a fixed-rate mortgage, adjustable-rate mortgages, balloon mortgages, or hybrid mortgages, as long as the loan meets Fannie or Freddie requirements. The most common loan types used in conforming lending are 30 year and 15-year fixed-rate mortgages.

Scenarios reflecting payments increasing/decreasing on "change date"

A drop in interest rates does not always lead to a drop in your monthly payments. With some ARMs that have interest-rate caps, the cap may hold your rate and payment below what it would have been if the change in the index rate had been fully applied. The increase in the interest that was not imposed because of the rate cap might carry over to future rate adjustments. This is called carryover. So at the next adjustment date your payment might increase even though the index rate has stayed the same or decreased. In general, the rate on your loan can go up on any scheduled adjustment date when the lender's standard ARM rate (the index plus margin) is higher than the rate you are paying before the adjustment

Facts on "jumbo loans"

A jumbo loan is a single-family mortgage loan in a principal amount that exceeds Fannie Mae and Freddie Mac's dollar loan limits (remember the loan limits change yearly). Jumbo loans are conventional, but non-conforming loans. Not government back and ineligible for purchase and resale on the secondary market. For banks, more money means more risk, so qualifying for a jumbo loan is harder. Loan amount over $510,400

Definition of "nonconforming loan"

A non-conforming loan is any loan that does not conform to Fannie Mae and Freddie Mac guidelines. Fannie Mae and Freddie Mac's guidelines are typically more stringent than other loan programs; therefore, not all borrowers will qualify for a Fannie Mae or Freddie Mac loan.

Characteristics of a non-traditional mortgage loan

A nontraditional mortgage loan is any mortgage that is not a fixed-rate, fully amortizing mortgage. Examples are balloon mortgages, adjustable rate mortgages (ARMs), or interest-only mortgages. Subprime borrowers willing to pay higher interest rates are good candidates for nontraditional mortgages as are borrowers who want a mortgage with more flexibility. A payment option ARM is a good example of a nontraditional mortgage. This type of mortgage follows the ARM framework but allows the borrower to choose each month what type of payment he or she wants to make. Payment options can be interest only, 15-year or 30-year amortization payments, or negative amortization payments.

Purchase Money Second Mortgages

A purchase money mortgage is a mortgage offered by the seller of a home. As part of the deal, the seller takes the place of the bank, setting the terms of the mortgage. This type of loan is often referred to as seller financing. A purchase money second mortgage is often used in conjunction with traditional mortgages to help buyers avoid paying mortgage insurance. The loan basically takes the place of a down payment when the borrower chooses to pay less down or cannot afford a larger down payment. Sometimes referred to as a piggyback loan, the financing in this scenario looks something like this: a primary mortgage covering 80 percent of the purchase price, a second mortgage covering 10 percent of the purchase price, along with a 10 percent down payment. Technically, having the first mortgage at 80 percent allows the homeowner to get to the 20 percent equity threshold needed to avoid paying mortgage insurance. The main reason for this type of loan so MI does not have to be on the loan i.e. 80/15/5 or 80/10/10 - 80 means the LTV on the first lien, thus no MI - 15 or 10 = the amount of the second mortgage - 10 or 5 = the amount of the verified assets for down payment

Characteristics of subprime borrowers

A subprime borrower is someone whose credit history is dinged up. Lenders will loan to subprime borrowers but at higher rates than those with good credit histories. FICO refers to dings on a credit history as derogatory information—anything from missed payments to bankruptcy. A subprime borrower typically has a low credit score, in the 600 range or lower. A subprime borrower usually has a history of delinquencies, two or more 30-day delinquencies in the last 12 months, or one 60-day delinquency in the last 24 months. Subprime borrowers will often have loans that have been charged off A borrower would fall into the subprime category with a foreclosure in the past 24 months or a bankruptcy in the last 60 months. Subprime borrowers usually have debt-toincome ratios in the 50s and show a history of troubles with budgeting for everyday expenses.

Certificate of eligibility requirement

A veteran borrower must have suitable credit, income, and a valid Certificate of Eligibility (COE) to be eligible for a VA loan. Borrowers applying for a Veterans Administration (VA) mortgage must prove they are eligible for the loan. The proof required is called a certificate of eligibility (COE). The borrower must have been honorably discharged or meet certain service requirements to obtain a valid COE. Documentation of service is required and depends on a borrower's type of service. For veterans, a DD214 form will suffice as long as it shows type of service and reason for leaving. If a borrower does not meet the minimum service requirements, they may still be eligible if they were discharged due to - Hardship, - The convenience of the government, - Reduction-in-force, - Certain medical conditions, or - A service-connected disability.

Facts on ARM loans

ARMs start with an initial rate and payment. The initial rate and payment amount on an ARM remain in effect for a limited period. That limited period can range from one (1) month to several years. With most ARMs, the interest rate and monthly payment can change every month, quarter, year, three (3) years, or five (5) years. The period between rate changes is called the adjustment period. Some examples include: an ARM that has an adjustment period of one (1) year is called a one-year ARM, and the interest rate and payment can change once every year. An ARM with a three-year adjustment period is called a three-year ARM, and the interest rate can adjust every three (3) years. There are many types of adjustable rate mortgages (ARMs). The most common are 3/1, 5/1, or 7/1 ARMs. The first number refers to the number of years the rate initially remains locked. The second number refers to how often the rate can reset after the initial locked period. For a 3/1 ARM, the rate remains locked for the first three years then resets every year thereafter.

Timeline for notifying a customer of a rate change

Adjustable rate mortgages typically have a period of time in the beginning when the rate and payment are fixed, usually for the first 3, 5, or 7 years. After this initial period the rate will normally adjust annually. The first time the rate changes, the lender must notify the borrower seven to eight months (at least 210 days, but not more than 240 days) before the first payment at the new rate is due. All subsequent rate change notices must be provided to the borrower two to four months (at least 60 days, but no more than 120 days) before the payment at the new rate is due. The advance notice is designed to give borrowers a chance to adjust to the new payment or refinance their mortgages. The first notice must include options to explore if the borrower cannot afford the new payment and information on how to contact a Housing and Urban Development (HUD)approved mortgage counselor. The subsequent notices must show the current rate and the new rate, the current payment and the new payment, and the date the new payment is due.

Scenarios resulting in a change in monthly payments

All ARMs have an introductory rate period during which the rate is fixed. After this stage, the rate begins to adjust, and the payment will change as well. ex. Program - 3/1 ARM, monthly payment/interest rate fixed for 3 years and then adjusts every year thereafter

Hazard insurance requirements

All homes purchased with a conventional mortgage must be insured for the life of the loan. The minimum coverage of the hazard insurance must be equal to the replacement cost of the improvements on the property (the term improvement is synonymous with the home on the property). Lenders and servicers cannot require hazard insurance in any amount greater than the insurable value of the home on the property. The minimum insurance amount is 100 percent of a single family home's value and 90 percent of a multifamily home's value. There must be proof of insurance before a mortgage closes.

Definition of "FHA mortgage"

An FHA mortgage is a government-backed mortgage insured by the Federal Housing Administration. The Department of Housing and Urban Development (HUD) insures FHA (Federal Housing Administration) Loans. The FHA does not actually lend the money for a mortgage. The loans are originated by FHA-approved lenders, and the FHA insures the mortgages. A lender is approved through FHA to originate FHA loans. If approved as an unconditional Direct Endorser (DE), the lender can underwrite and close mortgage loans without prior FHA review or approval. FHA is the largest insurer of mortgages in the world.

Characteristics of ARMs

An adjustable rate mortgage (ARM) is a mortgage in which the rate periodically adjusts. The index, margin, and adjustment caps on the ARM determine the amount of each adjustment. ARMs start with an initial rate and payment. The initial rate and payment amount on an ARM remain in effect for a limited period. That limited period can range from one (1) month to several years. With most ARMs, the interest rate and monthly payment can change every month, quarter, year, three (3) years, or five (5) years. The period between rate changes is called the adjustment period. Some examples include: an ARM that has an adjustment period of one (1) year is called a one-year ARM, and the interest rate and payment can change once every year. An ARM with a three-year adjustment period is called a three-year ARM, and the interest rate can adjust every three (3) years. An interest rate on an ARM has two parts: the index and the margin (fully indexed rate). The index is a measure of market interest rates and the margin is the profit the lender adds. The index fluctuates with the market. The margin is assigned at the loan origination and always stays the same

Adjustable Rate Mortgage (ARM)

An adjustable-rate mortgage or ARM, also sometimes referred to as a variable rate mortgage, is a mortgage loan where the interest rate periodically adjusts. The index, margin, and adjustment caps on the ARM determine the amount of each adjustment. ARMs are the second most common product in the mortgage industry. They differ from fixed- rate mortgages in many ways. The most important difference from a fixed rate is the interest rate on an ARM fluctuates. For this reason, a lender will often charge lower interest rates on ARMs than on a fixed rate product. At first, the ARM has less expensive payments because of that lower interest rate; it can also be less expensive over a more extended period than a fixed-rate mortgage if interest rates remain steady or move lower. However, there is a downside to ARMs because if interest rates increase and that ARM adjusts its interest rate, then the borrower's payment will increase along with the rate.

Re-payment capacity of a borrower

An analysis of the borrower's repayment capacity should be conducted, including an evaluation of the borrower's ability to repay the debt at the loans fully indexed rate, while avoiding an over-reliance on credit scores. The Guidance also indicates that a lender should not rely solely on the amount of collateral (equity) the borrower has in the property when making the loan. This practice is not safe or sound underwriting. The Guidance encourages that mortgage loan underwriting standards should address a substantial payment increase when determining whether a borrower can repay a nontraditional mortgage loan. A good example is an interest-only loan; if a borrower's loan initially has no interest but eventually begins to amortize, the underwriter should take into consideration whether the borrower can repay the loan at the HIGHEST possible interest rate that the loan allows.

Upfront mortgage insurance premiums

An insurance policy used in FHA loans, ensuring the lender if the borrower goes into default and is not allowed to be cancelled during the life of the loan. The FHA assesses either an "upfront" MIP at the time of closing, or an annual MIP that is calculated every year and paid in 12 installments. Mortgage insurance premium paid in a lump sum upfront on an FHA loan. A borrower pays UFMIP in a one-time payment at closing, or the cost is financed into the loan amount. The UFMIP is currently at 1.75 percent of the base loan amount. UFMIP is a requirement that applies regardless of the term or LTV ratio on the FHA loan.

Definition of "fully indexed rate"

An interest rate charged on loans to borrowers that is calculated by taking the sum of a benchmark index and a specified margin. The indexed rate is used to calculate the interest rate on an ARM. Addition of the Index and the Margin (index + margin = interest rate) At the time of an adjustment, the lender will add the current index number (this depends on the loans assigned index) plus the margin. The borrower is underwritten at the higher of the starting interest rate or the Fully Indexed Rate. The MLO must show that the borrower has the ability to repay the loan at the highest possible interest rate. If the initial rate on the loan is less than the fully indexed rate, it is called a discounted index rate (must qualify for the higher rate still).

Facts on the index with respect to ARMs

An interest rate on an ARM has two parts: the index and the margin (fully indexed rate). The index is a measure of market interest rates. The index fluctuates with the market (changes throughout the day). The four most common indexes in the mortgage industry are: The LIBOR (London Interbank Offered Rate) The COFI (FHLBB 11th District Cost of Funds Index) The CMT (Constant Maturity Treasury) The SOFR (Secured Overnight Financing Rate)

Facts on margin with respect to ARMs

An interest rate on an ARM has two parts: the index and the margin (fully indexed rate). The margin is the profit the lender adds. The margin is assigned at the loan origination and always stays the same. The only number on an ARM that cannot change. It is also the floor, meaning the interest rate cannot go below the margin.

Examples of "nontraditional loans"

Any loan that is not 30-year fixed i.e. 15 year fixed, ARM, etc. Nontraditional loans are mortgages that do not follow standard amortization schedules or do not follow standard payment schedules. Examples are loans with balloon payments, interest-only loans, and adjustable rate mortgages (ARM). Because these loans are out of the norm, they carry heavier risks and the associated higher interest rates and fees.

Alta-A loans

Are used for borrowers who do not represent the credit risk of subprime but who do not meet the underwriting requirements for conforming prime rate loans.

Definition of "subprime"

Below the qualifications set for prime borrowers. Loans for borrowers who have poor credit, an unstable income history, or high debt to income ratios The rates are higher because the risk of default is greater when credit scores are lower. These loans are available on a limited basis. They are one of the main causes of the mortgage meltdown in 2008 and 2009. They have been replaced in some form by Non-Qualified Mortgages (Non-QM loans).

Responsibilities of Fannie Mae and Freddie Mac

Both Fannie Mae (FNMA) and Freddie Mac (FHLMC) are government-sponsored entities or GSE's. They provide liquidity to the market by purchasing mortgages and mortgage-backed securities and selling them on the secondary market. Fannie Mae and Freddie Mac purchase conventional loans only. Secondary market! Government sponsored entities that buy only Conventional Conforming Loans and are overseen by Federal Housing Finance Agency (FHFA). Fannie & Freddie place the loans into a Mortgage Backed Security (MBS) and is sold into the Secondary Market.

Definition of a debt-to-income ratio assessment

Debt to Income (DTI) is a calculation made to determine whether the borrower can repay the loan they are attempting to receive. The Debt to Income ratio or Qualifying Ratio vary from program to program. There are two parts to the Debt to Income ratios: - The Front-End Debt to Income Ratio/Housing Expense Ratio: This ratio simply takes the amount that the borrower will be paying for their mortgage and divides it by their gross monthly income - The Back-End Debt to Income Ratio/ Total Expense Ratio: This ratio takes all of the borrower's monthly liabilities and divides it by their gross monthly income. A loan program and Truth-in-Lending Act (TILA) have maximum DTI ratios allowed for the loan program and mortgage rules. When determining a loan program, the borrower qualifies for, one of the first steps is to determine if the borrower has sufficient income to support the DTI requirements for the loan amount requested. DTI is debt divided by income DTI does not take into account everyday expenses (utilities, phone bill, etc.)

Fully indexed rate scenarios

Ex. on a 1-year ARM with a margin of 1.25 percent and at the time of adjustment, it's index (the LIBOR) is at .50 percent. If you add the two together, the new interest rate on the ARM is 1.75 percent. This percent is called the fully indexed rate. Ex. For example, a borrower has an initial interest rate of 2.25 percent. The margin is 1.25 percent, and the index is the COFI. The ARM has 2/2/8 interest rate caps. The COFI, at its first adjustment, is at .50 per- cent. The COFI, at its second adjustment, is .75 percent. The margin is always going to be 1.25 percent, but the COFI is showing at the first adjustment that it is at .50 percent. The two numbers then need to be added together. 1.25 percent + .50 percent = 1.75 percent. - 1.75 is the fully indexed rate at the first adjustment. On the first adjustment, the interest rate cannot go up more than 2 percent. In this situation, we are good; the interest rate only adjusted .50 percent and is now lower than the initial interest rate. If the new fully indexed rate had exceeded 4.25 percent, then we would have run into the cap. In that situation, the interest rate would stay at 4.25 percent and not go over that capped amount. - On the second adjustment, we know the fully indexed rate is 2 percent (index + margin). The subsequent adjustment cap is still 2 percent. (Present interest of 2% plus the 2% adjustment cap of 2% = 4.0 cap) Meaning that if the interest rate had exceeded 4.00 percent, then the cap would have kicked in, and the interest rate on the ARM would have been 4.00 percent. - The lifetime cap would only come into play if the new fully indexed rate on any adjustment exceeded the initial interest rate plus the lifetime cap in this situation that would be 2.25%+8% = 10.25%, is the highest the interest rate can go over the life of the loan.

FHA Streamline

FHA Streamlines are a standard FHA refinance product. Streamlines are utilized by borrowers with current FHA mortgages when they would like to reduce their mortgage insurance, interest rate, or their payment. The term "streamline" is used as they require less documentation and underwriting, and in some instances, may not require an appraisal.

FHA loan limits

FHA has a maximum loan amount that they will insure (known as the lending limit). These limits are updated annually and based upon the location of the property. FHA loan limits vary from county to county across the country. Limits depend on home prices in a specific area.

FHA interest rate calculation scenarios

FHA's most popular home loan is the Fixed-Rate 203(b) loan but there are also many other programs available based on the 203(b) that have additional features. One of these is the Section 251 Adjustable Rate Mortgage program which provides insurance for Adjustable Rate Mortgages. When interest rates are high, Adjustable Rate Mortgages keep the initial interest rate on a mortgage low which allows borrowers to qualify for the financing they need. While the Section 251 program helps to keep mortgage interest rates and payments low they may change over the life of the loan. The maximum amount of fluctuation in your interest rate in any given year cannot exceed 1 percentage point. And over the life of your loan, the interest rate cannot increase more than 5 percent from your initial rate. (5/1 ARM) FHA 2-1 Buy Downs - require borrowers to qualify at the note rate. - However, funds placed in an escrow account will allow them to pay a discounted monthly payment based on a lower interest rate for two years - 2% in the first year and 1% the second year. Pay the note rate from the third year o.

Required documentation

FHA: All institutions have basic documentation requirements, but for Federal Housing Administration (FHA) mortgages, certain documents need to be collected regardless of the lender's internal policies. - the Form 1003 Universal Residential Loan Application - sign an addendum to this application known as the HUD-92900A (The addendum certifies that all of the information the borrower has provided in the application is true. The lender also signs this addendum, certifying that the loan is eligible for federal backing) - Proof of social security (Usually a photocopy of the borrower's social security card suffices) - A credit report - proof of employment, which can be as simple as showing a pay stub with the employer's name, address, and phone number - Two year's tax returns are required - A sales or purchase agreement is mandatory, signed by both the buyer and the seller - The FHA Amendatory Clause form must be included, which gives the buyer the right to cancel the purchase without losing the deposit if the house appraises for less than the sale price - The Real Estate Certification form is required, whereby all parties attest to the terms and conditions of the sales contract. - Appraisal VA: - COE

Acceptable funds for a down payment/closing costs

FHA: A borrower can use gift funds received from a relative or employer for the entire amount of the down payment. To be considered a gift, the relative or employer cannot require repayment of the funds from the borrower. A gift letter must be signed by the donor listing their name and contact information, as well as the specific dollar amount of the gift. Down payments cannot come from borrowed funds. Acceptable down payment sources can be checking and savings balances, cash saved at home, savings bonds, IRA and 401k accounts, investments, gifts, and the sale of personal property. Gifts are limited to those that come from family, the borrower's employer or union, a close friend, and charitable or government organizations. It is prohibited to receive a gift from the seller, a real estate agent, or the home builder. Down payment money is considered separately from and in addition to closing cost funds but can come from the same list of acceptable sources. FHA: 6% maximum seller concessions VA: no down payment required; 4% seller concessions USDA: no down payment required; unrestricted seller concessions

Fannie Mae's automated underwriting system

Fannie Mae's AUS is Desktop Underwriter or DU

Definition of "FHA"

Federal Housing Administration An agency in the U.S. Department of Housing and Urban Development responsible for facilitating FHA mortgage lending by insuring mortgage loans on houses meeting the agency's standards. The FHA was created in 1934. The Federal Government Agency that oversees the US Housing Market. FHA mortgages are guaranteed by the Federal Government and offered by banks/lenders. The FHA was one of the first government agencies created to help more Americans become homeowners. The FHA also made it easier for borrowers to qualify for loans. With lenders confident they would be protected in the event of default, rates of homeownership steadily increased

Guidance on nontraditional mortgage product risk

Federal financial regulatory agencies published the Interagency Guidance on Nontraditional Mortgage Product Risks in 2006. The Guidance provides guidelines to lenders regarding nontraditional mortgage products. The Guidance defines nontraditional mortgage products as products that allow borrowers to defer principal and, in some cases, interest. These include products with interest-only features and products that have the potential for negative amortization, including products with flexible payment options. The Guidance is concerned about payment shock, competitive pressures, and ceding underwriting standards to third-party organizations. The guidance does not precisely pertain to subprime mortgage lending, but it does outline acceptable underwriting practices and consumer protection principles that all institutions should consider. If a lender is setting an introductory interest rate, they should consider ways to minimize the probability of disruptive early recastings or extraordinary payment shock.

Fee charges on loans with certain risk characteristics

For loans with certain risk characteristics, Fannie Mae charges increased fees that are called Loan level price adjustment

Freddie Mac's automated underwriting system

Freddie Mac's AUS is Loan Product Advisor or LP (formerly known as Loan Prospector).

Characteristics of a fixed-rate mortgage

Has fixed terms of 10 years, 15 years, 20 years, 25 years, or 30 years. These mortgages have rates and payments that are fixed for the life of the loan. The most common fixed-rate loans are for terms of 15, 20, and 30 years. The loans are amortized over the life of the loan, which means the payment is calculated so that each month, the payment is the same and includes principal and interest. With each payment, the portion that goes toward paying down the principal gradually increases. If the borrower does not make any additional payments during the life of the loan, the mortgage is completely paid off with the last monthly payment in the last year of the loan.

Identifying the right non-traditional mortgage product for borrowers

If a lender is going to allow no or low document loans or simultaneous seconds, the lender should document risk-mitigating features such as high credit scores, lower LTVs, lower DTIs, credit enhancements, and mortgage insurance. This practice is called risk layering. The Guidance indicates that a loan with minimum owner equity, like a simultaneous second-lien loan, should generally not have a payment structure that allows for delayed or negative amortization.

Interest-rate caps

Interest-rate caps are put into place to make sure that the borrower's interest rate never goes up more than a certain percentage every time it adjusts. - The first adjustment cap: The first adjustment cap allows the loan's interest rate to adjust up or down by only a certain amount at the first adjustment. - The subsequent adjustment cap: This only allows the interest rate to adjust by a specific percentage on any other adjustments after the first adjustment - The lifetime adjustment cap: This limits the number of total upward-adjustments for the life of the loan. (starting interest rate + the lifetime cap = the lifetime maximum interest rate) - if the starting rate was 4% and the lifetime cap was 5%, the highest the rate can go over the life of the loan is 9% Caps - x/y/z

Conventional/nonconforming (e.g., Jumbo, Alt-A)

Jumbo loans or any loans using non-verified income. Examples of borrowers who would fall into conventional/non-conforming borrowers include borrowers with less than perfect credit, borrowers with less than two years of job history or who have non- traditional types of income, higher DTI's, or loan amounts that exceed the loan limits.

Fixed-rate mortgage with escrow

Many borrowers choose to escrow their taxes and insurance. To escrow, the lender divides the amount of the borrower's taxes and insurance by 12 and adds it to the monthly payment. The lender pays the taxes and insurance when they become due.

Qualifications for USDA loans

Maximum Debt to Income: 29%/41% Minimum Down Payment: 0% (100% financing available) on purchase transactions Minimum Credit Score: N/A Monthly Mortgage Insurance: No - they have a guarantee fee Upfront Mortgage Insurance: No- they have a guarantee fee Income Limits: 115% max of area median Appraisal: Required Gift Funds Allowed for Down Payment?: No Down Payment Required Borrower's with Bankruptcy?: 3 years from Chapter 7 discharge, 1 year from Chapter 13 filing Reserves: No reserve requirement Seller Concessions: Unrestricted amount

Qualifications for FHA loans

Maximum Debt to Income: 31%/43% Minimum Down Payment: Minimum Down Payment is 3.5% (Up to 96.5% LTV). Minimum Credit Score: 580 with 3.5% down or 500-579 if the borrower puts down 10% or more. Monthly Mortgage Insurance: Yes - required. (.8% on most transactions) Upfront Mortgage Insurance: Yes - required. (1.75%) Appraisal: Required. Gift Funds Allowed for Down Payment? Yes Borrowers with Bankruptcy? 2 years after Chapter 7 discharge - 1 year after Chapter 13 filing Borrowers after Foreclosure? 3 years from foreclosure. LTV requirements on Cash-Out Refinances: 85% maximum LTV Reserves: No reserve requirement. Seller Concessions: 6% maximum Non-Occupying Co-Borrower: Allowed Assumable? Yes, with an FHA creditworthiness check. Employment History: FHA loans are less strict on employment history. FHA loans are for people who have less than perfect credit and income qualifications. Owner Occupancy: Yes (must move in within 60 days) and continue occupancy for one year.

Qualifications for VA loans

Maximum Debt to Income: 41% with Residual Income Minimum Down Payment: 0% (100% financing available dependent on Veterans available benefits) on purchase transactions - maximum LTV = 100% Minimum Credit Score: N/A Monthly Mortgage Insurance: No - they have a funding fee Upfront Mortgage Insurance: No - they have a funding fee Appraisal: Required Gift Funds Allowed for Down Payment?: No Down Payment Required Borrowers with Bankruptcy? 2 years after Chapter 7 discharge - 1 year after Chapter 13 filing Borrowers after Foreclosure? 2 years after a foreclosure LTV requirements on cash-out refinance: 90% cash out with a 2.3% funding fee Reserves: No reserve requirement Seller Concessions: 4% Assumable: Yes - with VA/lender approval Owner Occupancy: Yes (move into the property within 60 days)

Qualifications for Conventional Loans

Maximum Debt to Income: Manually Underwritten - 28%/36% Minimum Credit Score: Depends, but a general rule of thumb is 640 FICO (though it can go lower) Loan Limit: $510,400 conforming (Adjusted annually), over 510,400 = a non-conforming conventional loan Private Mortgage Insurance (PMI): Required on conventional loans with less than 20% down (or LTVs over 80%) Appraisal: Required unless Fannie Or Freddie give an Appraisal Waiver when the loan goes through the automated Underwriting system, then it is not required. Gift Funds Allowed for Down Payment: Yes Borrowers with Bankruptcy? 2 years from Chapter 13 discharge, 4 years from dismissal Chapter 7 filing - 4 years, or 2 years with extenuating circumstances Borrowers after Foreclosure? 7 years from foreclosure, 4 years for short sale LTV requirements on cash-out refinance: 85% Maximum LTV Reserves: Usually 2 to 4 months Non-Occupying Co-Borrower: Not allowed Assumable? No Employment History: 2 years

Acceptable down payment amounts

Minimum Down Payment is 3% (Up to 97% LTV) - with PMI 20% down without PMI Down payments may be made through gifts. Also, a mortgage can be structured into two separate loans when a borrower pays 10 percent down and borrows 10 percent for a second mortgage and 80 percent for a conventional mortgage. This eliminates the PMI requirement.

Monthly mortgage insurance payment scenarios

Mortgage insurance charged monthly on an FHA loan. Calculated based on the borrower's down payment, loan amount, and the term of the loan. MIP is required for the life of the loan if over 90% LTV When a borrower takes out a mortgage with a term of 15 years or more, the annual mortgage insurance premium will be as follows: Term, LTV, Time Period for the MMI • ≤ 15 years, ≤ 78%, 11 years ≤ 15 years, 78.01% to 90%, 11 years ≤ 15 years, > 90%, loan term > 15 years, ≤ 78%, 11 years > 15 years, 78.01% to 90%, 11 years > 15 years, > 90%, loan term FHA loans with mortgage insurance may have the mortgage insurance removed once term and LTV criteria are met. Most FHA borrowers pay down the minimum of 3.5 percent on a 30-year mortgage, which means their monthly mortgage insurance premium would be 0.85 per cent of the loan amount divided by 12. Ex. a $250,000, 30-year mortgage with a 10 percent down payment: $250,000 x 0.85 = $2,125. The monthly premium comes to: $2,125 / 12 = $177.08.

Government Loans

Mortgage insured by a government entity, such as Federal Housing Administration (FHA), Veteran's Administration (VA) or Rural Housing Service (RHS - USDA loans).

Comparisons of types of loans (scenarios)

Most lenders predominantly issue fixed-rate mortgages with terms of varying lengths, that is, 30, 20, or 15 years. During the life of the loan, the rate remains fixed, and the payments are amortized into equal monthly installments so that the loan is paid off with the final payment. Another way to think of a fixed-rate loan is one that is not amortized; that is, it does not have equal monthly payments for the life of the loan. For example, a balloon loan can have a fixed rate with equal monthly payments for some set time initially, say, 3, 5, or 7 years, then the remainder of the loan is due in one large final payment. An interest-only loan might be based on a fixed rate, but at least initially the monthly payment due is interest only. Borrowers do not begin to pay down loan principal until some later specified time from months to years.

Pre-payment requirements

No pre-payment penalties

Definition of "payment shock"

Payment shock is what occurs when a borrower's payment suddenly increases. Payment shock happens in situations where the interest rate is variable, or there is an introductory interest rate. The change in the interest rate causes the borrower's payment to increase, and in some situations, the borrower can no longer afford to pay their mortgage because the interest rate is so high. This situation causes the borrower to then default on the loan. Many lenders try to prevent payment shock by calculating the risk that a borrower might default. One way to do this is to measure debt to income and set limits on what is acceptable.

Safe Harbor and Rebuttable Presumption

QMs that are not higher-priced have safe harbor (they are presumed to comply with ATR requirement) QMs that are higher-priced have a rebuttable presumption that they comply with ATR requirements but a consumer can rebut that presumption

Payment caps

Some ARMS have payment caps instead of or in addition to interest-rate caps. These payment caps limit the amount a borrower's payment can increase on any given adjustment. Those caps take the form of a percentage of the borrower's monthly payment. For example, if there is a payment cap of 7.5 percent, that means that a borrower's payment cannot increase more than 7.5 percent of their last payment on any adjustment even if the increase in interest drives the payment higher than that amount. If the payment cap comes into play, the borrower doesn't pay all of the interest on the loan. That interest is added to the balance of the loan; this is called negative amortization.

Closing Costs on VA loans

Some fees are acceptable, and some fees are not acceptable on VA loans. The VA maintains a 1 percent maximum origination charge. Reasonable and customary fees include: Appraisal fee, Recording fees, Credit report fee, Prepaid items, Flood determination, Survey, Title examination, Title insurance, and Other fees authorized by the VA It is unacceptable for a lender to charge any fees other than the 1 percent origination fee. The lender may not charge the Veteran for any attorney's fees or escrow service fees associated with the settlement of the loan.

a) Stated income loans b) Non-income verifying loans

Stated income loans, also knowns as non-income verification or alternative document loans, are loans provided to borrowers with little or no proof of income. These loans are rare and usually approved for borrowers who have trouble documenting their income, for example, people who work on commission, business owners who keep all their assets in the business, seasonal workers, and freelancers Instead of using traditional methods to verify income, like W-2s and income tax returns, lenders use bank statements, both personal and business, to verify income. Stated income loans are often considered subprime because they are more risky and therefore have higher interest rates and fees.

APRs that make a mortgage qualified

The APR does not exceed the APOR by more than the sum of the annual MIP plus 1.5percentage points The loan does not exceed the QM Rule's points and fees limitation (3%, in most cases)

Qualified and Non-qualified Mortgage Programs

The Qualified Mortgage (QM) is a section of TILA that went into effect in 2014. It was mandated by the Dodd-Frank Wall Street Reform Act of 2010 and enforced by the CFPB. The QM Rule works hand in hand with the Ability to Repay Rule (ATR). The QM requirements generally focus on prohibiting certain risky features and practices such as negative amortization and interest-only periods and loan terms longer than 30 years.

Facts about USDA loans

The USDA loan or U.S. Department of Agriculture loan is a type of mortgage that is available in rural areas of less than 35,000 people. USDA loans offer many benefits to borrowers, including no down payment, 100 percent financing, lower-than-market interest rates, and a lower PMI rate than any other loan program. USDA approved lenders can only offer 30-year loans for USDA borrowers; however, the USDA can offer a Direct Loan to low to very low-income applicants. Direct Loans are not an option for any borrower who doesn't go directly through the USDA. (Sources of funds for USDA loans come mostly from banks, but the USDA will also lend directly to borrowers who qualify, usually for very low-income borrowers.) The USDA guarantees USDA loans. The USDA program provides a 90 percent loan note guarantee to approved lenders to reduce the risk of extending a 100 percent loan to eligible rural homebuyers.

VA IRRLs

The VA IRRRL or VA Interest Rate Reduction Refinance Loan is similar to the FHA streamline but is offered as a VA to VA no-cash out refinance loan. IRRRL's do require an additional funding fee, and the veteran cannot receive any additional funds out of their property. These loans often do not require an appraisal, much like the FHA streamline. The funding fee on an IRRRL is 0.50 percent for everyone. IRRRLs do not require an appraisal or a credit underwriting package. IRRRL's can also be done with no money out of pocket by including all costs in the new loan or by funding the new loan at an interest rate high enough to enable the lender to pay the costs. With this type of loan, the borrower cannot receive any cashback from the loan proceeds.

Residual income qualification test

The VA only uses the back end or total debt to income ratio when calculating debt to income. The maximum back-end debt to income ratio is 41 percent. Underwriters will also look at a veteran's residual income. Residual income is the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses such as food, health care, closing, and gasoline. The acceptable thresholds for residual income are based on the region that the Veteran lives. These thresholds are based on the information supplied by the Consumer Expenditures Survey that is published by the Department of Labor. When determining a borrower's residual income, the underwriter will have to take into consideration all members of the household, including the veteran's dependents.

Definition of "entitlement"

The entitlement is the amount of a loan that the Veterans Administration (VA) guarantees to repay to a lender should a borrower default on a VA mortgage. The basic entitlement on a VA loan is $36,000. Eligible service personnel are allowed to borrow up to four times the basic entitlement for a loan amount of $144,000 ($36,000 x 4 = $144,000). Entitlement is a confusing topic for some borrowers who mistakenly believe it is their maximum loan amount or a lump sum payment the VA provides to buy a home. It is neither of these things. The VA has a second tier, called bonus entitlement, the veteran may want to buy a home that costs more than $144,000. To help veterans do this, the VA offers what's called bonus (or Tier 2) entitlement. To determine a veteran's bonus entitlement, the VA will look at the Federal Housing Finance Agency's (FHFA's) current national conventional financing confirming limit and the veteran's state's county loan limits. We'll guarantee 25% of their loan amount, based on these loan limits. Some eligible service members can qualify for a bonus entitlement of up to $70,025 for loans over $144,000. This makes for a maximum loan size of $424,100 ($144,000 + $70,025 x 4 = $424,100).

Requirements for an escrow account associated with a "high-priced loan" or "high-cost loan"

The escrow account is required for at least five (5) years. Federal Truth in Lending Act (TILA) regulations require certain escrow account terms. First, an escrow account is mandatory for at least the first five years of the loan. Escrow accounts must be established for the collection of property taxes, homeowners insurance, and mortgage insurance for the first five years. The escrow account can be canceled after five years if the loan is paid off or the borrower requests the escrow account to be canceled. However, the borrower must be current on the mortgage and have at least 20 percent equity in the home to cancel. Some predominantly rural areas are exempt from the TILA escrow rules.

Fixed Rate Mortgage

The fixed-rate mortgage is the most common type of mortgage available. Simply, it is a mortgage with a fixed interest rate over the entire term of the loan.

Minimum down payment for an FHA loan

The minimum down payment on an FHA loan is 3.5 percent (Up to 96.5% LTV). A borrower needs a credit score of at least 580 to be eligible to make the minimum down payment. Borrowers with credit scores between 500 and 579 can still qualify for an FHA mortgage but will have to pay down a minimum of 10 percent.

Percentage of pay down required to lessen monthly payments

The more a borrower pays down, the less he or she will have to borrow, and the more it will reduce the potential monthly payment. In an ideal world, the borrower would pay down at least 20 percent. A 20 percent down payment reduces the need to pay monthly expenses for mortgage insurance Paying extra will not lower a borrower's monthly payment, but it will pay down the loan sooner. For example, making one extra payment each year on a 30year mortgage would satisfy the loan in about 25 years.

Mortgage Loan Products

The mortgage market has many different loan products available to suit a variety of borrower's needs. There are two major types of mortgages - fixed-rate and adjustable-rate. On top of these two most common types of loan products, there are some other options like construction loans, bridge loans, and graduated payment loans.

FHA Program: Home Equity Conversion Mortgages (HECM)

The most common type of reverse mortgage is the FHA Home Equity Conversion Mortgage or HECM. A HECM is a particular type of mortgage/home equity loan developed and insured by the Federal Housing Administration (FHA) that enables older homeowners to convert the equity they have in their homes into cash, using a variety of payment options to address their specific financial needs There are only some costs that are allowable on a HECM transaction. The costs include mortgage insurance premiums - because this is an FHA program, there are mortgage insurance premiums. There are third-party charges like appraisals that are acceptable. The lender can charge an origination fee. The lender will take care of the loan if the loan amount exceeds the value of the property

Situations that affect a fixed-rate mortgage payment

The only time a payment changes on a fixed- rate mortgage is in the event of the borrower's taxes and insurance increasing (if the borrower is escrowing) or when the mortgage insurance is removed. Inflation of taxes or insurance is the only way that fixed-rate mortgage payments can go up. An example is if a borrower's taxes go up, the lender must then divide the new amount of taxes by 12 and add that back into the payment.

Payment options for an ARM

The payment option ARM allows the borrower to choose from several payment options. The options typically include: - An interest-only payment - the borrower pays only the interest on the loan each month - A minimum payment - the borrower pays a payment that can be less than the interest due that month, which may increase the amount the borrower owes on the mortgage (known as negative amortization) - A combined PMT includes the interest payment and a payment towards the principal (30-year amortizing payment or 15-year amortizing payment)

Factors when determining interest rates

To set the interest rate on an ARM, lenders add a few percentage points to the index rate, called the margin. The amount of the margin may differ from one lender to another, but it is constant over the life of the loan. Some lenders base the amount of the margin on your credit score, the better your credit the lower the margin they add, and the lower the interest you will have to pay on your mortgage.

Statement on Subprime Lending

The purpose of the statement was to promote consumer protection standards as well as encourage lenders to ensure that borrowers only obtain loans that they can afford to repay. The Statement includes guidelines for defining predatory lending, underwriting standards, establishing control systems, and consumer protection. The standards are concerned explicitly with certain ARM products, that typically have these characteristics: - Low initial payments based on a fixed introductory rate that expires after a short period and then adjusts to a variable index rate plus a margin for the remaining term of the loan. - Very high or no limits on how much the payment amount or the interest rate may increase ("payment or rate caps") on the reset date. - Limited or no documentation of borrowers' income. - Product features likely to result in frequent refinancing to maintain an affordable monthly payment. - Substantial prepayment penalties or prepayment penalties that extend beyond the initial fixed interest rate period.

Features of a qualified mortgage

There are different requirements for the different types of QM, but over the four types of QM, there are a few things that remain the same: - A loan cannot be QM if they have negative amortization or interest-only payments. - A loan cannot have a term longer than 30 years. - There is a threshold on points and fees for QM loans - generally, three (3) percent of the loan balance. - No neg am - No interest only - No balloon payments - Cannot exceed 30 year terms

Information used to determine whether a loan is qualified

There are four types of QM loans, but the most common and the one that most MLOs will come across is the General QM. To be considered a General QM, the lender must: - Underwrite based on fully amortizing schedule using the maximum rate permitted during the first three (3) years after the date of the first payment. For loans with initial term of five (5) years or longer, the borrower is qualified a the higher of the initial interest rate or the fully indexed rate (margin and index). - Consider and verify the consumer's income, assets, debt obligations, alimony and child support obligations. - Determine that the consumer's total monthly debt-to-income is no more than 43 percent. Two options to meet QM requirements and give Safe Harbor to the mortgage company and MLO, showing they proved the Ability to Repay: 1. 43% max debt to income and no more than 3% in fees 2. Approved eligible from Fannie Mae or Freddie Mac and must meet High Priced Lending Limits

Types of government guarantors

There are several government agencies that guarantee mortgages for the purchase of a primary residence. Federal Housing Administration (FHA) and Veterans Administration (VA) loans, two of the largest providers of government-backed mortgages. Ginnie Mae, a government agency that backs mortgage securities, and Fannie Mae and Freddie Mac, two quasi-government entities that also back mortgage securities. The U.S. Department of Agriculture (USDA) runs another popular government-backed loan program.

Examples of ARMs

There are three common types of ARMs, the hybrid ARM, the interest-only ARM, and the payment option ARM. - The Hybrid ARM: Hybrid ARMs are advertised as 3/1, 5/1, 7/1, or 10/1 ARMs. These types of ARMs are a mix between fixed-rate and adjustable-rate mortgages, hence the term hybrid. The ARMs are fixed for a specific amount of time before they begin adjusting. For example, the 3/1 for an example, the interest rate is fixed for three (3) years and then adjusts every one (1) year after that fixed period ends. - The Interest-Only ARM: An interest-only (I/O) ARM payment plan allows the borrower to pay only the interest on their loan for a specified number of years. Typically, interest-only ARMs allow for interest-only payment for 3 to 10 years. This option allows the borrower to have smaller monthly payments for that period. After the interest-only period, the monthly payment increases, and the borrower pays both principal and interest. Some I/O ARMs allow for the interest rate to adjust during the I/O period, some do not.

Communications with consumers regarding non-traditional mortgage products

These types of loans can be complicated, and it is important that the borrower fully understands all of the payment options. For example, with negative amortization, because the unpaid interest and/or principal is added onto the outstanding balance, the borrower will pay more interest over time. Encourages lenders to give borrowers the necessary facts to understand the terms, costs, and risks associated with subprime products. MLOs should inform consumers of: -payment shock when amortizing payments begin -loss of equity in the home used to secure the mortgage if the payment agreement allows negative amortization occurs - the inclusion of prepayment penalty terms in the agreement -additional costs associated with reduced documentation loans

Facts about FHA loans

They are popular among first-time homebuyers because they require smaller down payments and lower credit scores. FHA home loans are generally easier to obtain as their underwriting guidelines are more lenient than conventional guidelines. FHA loans are more lenient on credit and employment history than conventional guidelines. They even allow for non-traditional credit and no credit score loans. FHA loans are more picky on the property/ less picky on the credit and income.

Allowable points and fees for qualified mortgages

To be considered a qualified mortgage, points and fees cannot exceed the following thresholds (as of January 1, 2020): - 3% of the total loan amount for a loan greater than or equal to $109,898. - $3,297 for a loan greater than or equal to $65,939 but less than $109,898. - 5% of the total loan amount for a loan greater than or equal to $21,980 but less than $65,939. - $1,099 for a loan greater than or equal to $13,737 but less than $21,980. - 8% of the total loan amount for a loan less than $13,737. Points and fees include: - Finance charges - Loan originator compensation - Real estate related fees - Insurance premiums - Maximum prepayment penalties - Prepayment penalties paid in a refinance

Use of Fannie Mae/Freddie Mac's automated underwriting systems

To determine whether a loan is going to conform with Fannie Mae or Freddie Mac guidelines, an underwriter will submit the loan file through an automated underwriting system or AUS.

Underwriting Standards for FHA Loans

Underwriters or lenders use FHA's "4 C's of Underwriting" when evaluating FHA applications: - Credit history of the borrower - Capacity to repay the loan - Cash assets available to close the mortgage - Collateral, which evaluates the value of the home When evaluating an FHA file, some prior credit issues may not be a problem. The borrower must pay off all court-ordered judgments before an FHA loan can close. Also, if the borrower can never have defaulted on a student loan or be delinquent or in default on any other type of federal debt. An underwriter will use the Credit Alert Verification Reporting System (CAIVRS) to determine whether a borrower has ever failed to repay their federal debts or obligations. The CAIVRS system is a database created by the federal government and used for this specific purpose.

Prohibition on mortgage insurance

Unlike Federal Housing Administration (FHA) loans that require mortgage insurance, often for the life of the loan, and conventional loans that require mortgage insurance with down payments of less than 20 percent, Veterans Administration (VA) loans do not require mortgage insurance. Although mortgage insurance ends when a homeowner obtains 20 percent equity, not paying mortgage insurance at all can be a huge savings and a big selling point for VA mortgages. For VA loans, the money saved on mortgage insurance can go toward other things like paying off other debts, paying down mortgage principal, or for homeowner costs and maintenance.

Requirements when purchasing a non-owner occupied rental property

Unlike other government-backed mortgages, investors can use conventional mortgages to buy rental properties. Basically, all of the requirements are the same as buying a primary residence, except the investor will have to pay more down (from 20 to 30 percent) and the interest rates will be higher. For investment properties, higher cash reserves are also required.

VA funding fees

VA funding fees vary for different situations. Veterans using their benefits for their first home purchase will pay a different funding fee than the Veterans using their benefits for a second transaction. Funding fees may also vary for different branches of the military (i.e., National Guard or Reservists) or for Veteran borrowers who also make a down payment. - 2.3% funding fee for FIRST time use and less than 5% down - 3.6% funding fee for SUBSEQUENT use and less than 5% down - 1.65% for 5% or more down on any use - 1.4% for 10% or more down on any use - Veterans disabled during their service and surviving spouses of military killed in action or who died from a service-related disability do not have to pay the fee. - 90% Cash out refinance: 2.3% first time use, 3.6% subsequent use Funding fees do not have to be paid out of pocket by the veteran at closing. The borrowers can finance the funding fee directly into the loan amount.

Facts about VA loans

VA loans or Veterans Affairs Loans are loans specifically for veterans of the United States armed forces. VA loans simplify the process of buying or refinancing a home, particularly during a service member's time in service or after they are honorably discharged. A surviving spouse can also use the Veteran's benefit if the surviving spouse had a Veteran spouse die while in active duty, or the Veteran spouse died from a service-connected disability. The VA (Department of Veteran's Affairs) guarantees all VA loans. The VA GUARANTEES a certain portion of a VA loan, meaning that the VA will pay the lender up to 25 percent of the loan value should a borrower default on their loan. A guarantee is different than insurance. Maximum guarantee authorized by the VA is 25% of the loan amount, up to $113,275. The maximum VA home loan is Fannie or Freddie loan limits. A borrower can only use a VA loan for primary residences.

Restoration of Entitlement

Veterans can have a previously used entitlement restored to purchase another home with a VA loan if: - The property purchased with the prior VA loan has been sold and the loan paid in full, or - A qualified Veteran-transferee (buyer) agrees to assume the VA loan and substitute his or her entitlement for the same amount of entitlement originally used by the Veteran seller. The entitlement may also be restored one time only if the Veteran has repaid the prior VA loan in full but has not disposed of the property purchased with the prior VA loan. Remaining entitlement and restoration of entitlement can be requested through the VA Eligibility Center by completing VA Form 26-1880

HUD insurance of FHA loan

When HUD insures a loan, it protects the lender from incurring damages due to a borrower defaulting on an FHA loan. For example, if a borrower had a $100,000 FHA loan and the balance is down to $80,000, and they default on the loan (resulting in foreclosure), the lender can submit a claim to FHA. The FHA insurance would cover the unpaid balance, interest that is due, unpaid real estate taxes and the costs for the foreclosure. FHA can also opt to take over the property and attempt to recover as much as possible.

Properties eligible for FHA purchase transactions

While FHA is less stringent on the profile of the borrower, they are stricter on the property conditions. If a property has significant defects or needs significant renovations or updating, an FHA loan will not be the best route for that borrower. FHA will not insure a loan collateralized by a dilapidated property. FHA loans are available only for primary residences - FHA security instruments require a borrower to establish occupancy in a home as the borrower's principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year (borrower must live there, even if it has multiple units, they must live in one of the units)

Risks of non-traditional mortgage products

While implementing qualifying standards for nontraditional mortgage products, institutions should take into consideration the impact of payment shock. Nontraditional products are not appropriate for borrowers that have a high loan to value, high debt to income ratios, and low credit scores. Nontraditional ARMs are risky when they include: - No rate caps - A low introductory rate that expires after a short period - Limited documentation for loan approval - Prepayment penalties