Real Estate Finance: Module 3 (Chapter 5: Government Financing)

EQUATION: MIP Financing A 30-year loan on a house will be $80,000, after down payment. This is also the maximum LTV amount. Determine the: - (A) initial MIP premium - (B) maximum FHA mortgage if the MIP is financed. DO THE MATH.

(A) $80K: 30 Yr. Loan Amount x 0.0175 MIP Factor = $1,400 Initial MIP Premium (B) $80K Loan w/out MIP + $1,400 Initial MIP Premium = $81,400 Maximum FHA Mortgage So, even though the maximum FHA loan is $80,000 based on the LTV, the total amount financed may exceed the $80,000 maximum by the $1,400 MIP, resulting in a total maximum FHA mortgage amount of $81,400 for the FHA loan.

REPAIRS: Limited 203(k) Loan - The following repairs can be financed with a Streamlined 203(k) loan:

- Repair/replacement of roofs, gutters, and downspouts - Repair/replacement/upgrade of existing HVAC systems - Repair/replacement/upgrade of plumbing and electrical systems - Repair/replacement of existing flooring - Minor remodeling (e.g., kitchen with no structural repairs) - Exterior and interior painting - Weatherization, including storm windows & doors, insulation, weather-stripping, etc. - Purchase & installation of appliances, including freestanding ranges, refrigerators, washers/dryers, dishwashers, & microwaves - Improvements for disability accessibility - Lead-based paint stabilization or abatement of lead-based paint hazards - Repair, replacement, or addition of exterior decks, patios, or porches - Basement remodeling with no structural repairs - Basement waterproofing - Window and door replacement and exterior siding replacement - Well or septic system repair or replacement

Funding Fee

A fee charged on VA-guaranteed loans in place of mortgage insurance.

Rural Development

A government agency under the Department of Agriculture that guarantees or makes loans to help buyers of homes and farms in rural areas or small towns. Formerly the Farmer's Home Administration (FmHA).

Mortgage Insurance (Property Guidelines for FHA Loans)

A mortgage insurance premium (MIP—not to be confused with PMI for conventional loans) is required for all FHA loans, regardless of down payment size. For most FHA programs, the MIP has an initial premium and an annual premium based on a percentage of the outstanding loan balance (divided into 12 monthly payments). Generally speaking, a 15-year mortgage has the added benefit of a lower annual MIP. Note: - Initial and annual MIP rates change often, responding to varied economic conditions. - The chart below is used simply to illustrate the effects of MIP rates on an FHA insured loan. - Consult with an FHA lender for current MIP rates. FHA MIP FACTORs: 30 Yr LTV Greater than 95% - Initial MIP = 1.75% - Renewal = .85% LTV Less than 95% - Initial MIP = 1.75% - Renewal = .80% FHA MIP FACTORs: 15 Yr LTV Greater than 90% - Initial MIP = 1.75% - Renewal = .75% LTV Less than 90% - Initial MIP = 1.75% - Renewal = .45%

** A borrower wants an FHA loan for a home that costs $103,500 and appraised for $107,000. Estimated closing costs are $1,500. The borrower also wants to finance the initial MIP premium. The borrower has good credit, a six-figure income, and meets all other FHA standards. How much is the minimum investment the buyer must make to buy this home? a. $3,622.50 b. $3,667.78 c. $3,745.00 d. $5,122.50

A. FHA requires a minimum investment of 3.5% of the sale price or the appraised value, whichever is lower. In this case, the borrower must pay a minimum of 3.5% of the sales price of $103,500, or $3,622.50.

INTEREST RATE CAP STRUCTURE: Section 251 FHA ARM Loans - Following are the interest rate cap structures for various ARM products:

ARM LOAN: 1 Year & 3 Year Hybrid - Annual Cap = 1% Point ARM LOAN: 5, 7, & 10 Year Hybrid - Annual Cap = 2% Point

Hybrid ARMs

An offer an initial interest rate that is constant for the first three, five, seven, or ten years.

FHA-Insured Loans

Are insured by the federal government through the Department of Housing and Urban Development (HUD). The National Housing Act of 1934 established the Federal Housing Administration (FHA). Prior to the FHA, most home loans were for three to five years and required a 50% or greater down payment, resulting in a home ownership rate of 40% or less. The FHA was the first to issue long-term loans, up to 30 years, with lower down payments, sometimes as low as $0 down. The Federal Housing Administration is a government agency under HUD that actually insures the loans. The FHA's main purpose is to assist in providing housing opportunities for low- and moderate-income families. However, the FHA does not have income limits to determine who is eligible for assistance. Any U.S. citizen, permanent resident, or non-permanent resident with a work visa may apply. Instead, the FHA sets a maximum mortgage amount it will insure. The FHA does not provide mortgage funds to borrowers, and does not build houses. Rather, the FHA is a federal mortgage insurance agency. The FHA's Mutual Mortgage Insurance Plan (MMIP) provides a function similar to private mortgage insurance companies, insuring private lenders against losses caused by borrower defaults on FHA-insured loans. Under the plan, lenders approved by the FHA to make insured loans either submit applications from prospective borrowers to the local FHA office for approval or may act as direct endorsers. Direct endorsers are lenders authorized to underwrite their own FHA loan applications. These lenders are responsible for the entire mortgage process through closing, and perform underwriting functions themselves (credit examination, appraisal review). When a direct endorser has approved and closed a loan, the application for mortgage insurance is submitted to the FHA. Most FHA loans are currently processed through the direct endorsement program. Best Practices: It is important to note that lenders who make FHA loans must be approved by HUD. Real estate professionals need to know what loan programs different lenders do or do not provide. You can find approved lenders by asking your broker or consulting the HUD website (www.hud.gov).

Junk Fees

Are lender charges that do not show up as points on the loan, but are set dollar amounts rather than a percentage of the loan amount.

Direct Endorsers

Are lenders authorized to underwrite their own FHA loan applications. These lenders are responsible for the entire mortgage process through closing, and perform underwriting functions themselves (credit examination, appraisal review). When a direct endorser has approved and closed a loan, the application for mortgage insurance is submitted to the FHA. Most FHA loans are currently processed through the direct endorsement program.

FHA Regulations (Additional Regulations)

As you review the regulations we've discussed or as you encounter others in your real estate practice, be aware that FHA rules and regulations change all the time. Example, at one time, the FHA: - Made investor loans (it no longer does). - Set maximum interest rates (now rates are market driven, FHA loans can still be lower due to perceived lower risk of government-insured mortgages). - Allowed the use of temporary buydowns to qualify for a larger mortgage. - Didn't allow sellers to pay escrows or points for buyers (now these are a matter of negotiation between the parties). As the needs of borrowers changed, the FHA began allowing ARM loans and secondary financing with FHA loans.

** With the loan described above, what is the most that the seller can pay to the buyer? a. $1,500 b. $6,210 c. $6,420 d. $7,710

B. Assuming that the FHA's limit on seller contributions is 6%, the seller could pay the buyer up to $6,210 for an FHA loan: $103,500 x .06 = $6,210

** FHA programs are directed primarily at a. investors looking to generate high-return government subsidized housing. b. low- to middle-income homebuyers. c. luxury homebuyers. d. middle- to high-income homebuyers buying second homes.

B. FHA loans have less stringent qualifying standards, which provides more opportunities for low- to middle-income homebuyers.

**What is the minimum down payment requirement for an FHA-insured loan? a. 2.5% b. 3.5% c. 5% d. There is no down payment required.

B. FHA will insure loans with a loan-to-value of up to 96.5%, meaning, they require a down payment of at least 3.5%.

** Which is an advantage of FHA financing? a. less stringent qualifying standards b. long-term loans c. low down payments d. all of the above

D. Each of these is an advantage of FHA-insured loans.

**The FHA requires mortgage insurance (MIP) when the a. buyer cannot pay the required down payment in cash. b. LTV exceeds 80%. c. LTV exceeds 90%. d. All FHA loans must have MIP.

D. Every FHA-insured loan requires a mortgage insurance premium.

Down Payment - Closing Costs Are Not Added (Property Guidelines for FHA Loans)

Estimated closing costs may not be added in when figuring the maximum amount the buyer can finance as part of the loan. What often happens, though, is the seller agrees to pay all or some of the buyer's closing costs (up to the FHA's limits), & then simply raises the contract price. Of course, the buyer can still pay closing costs separately in cash (to avoid paying interest for 30 years on the higher sale price) or finance the initial MIP (mortgage insurance premium).

Payment of Costs (FHA Loan Regulations)

FHA & HUD regulations govern some items the seller may or may not pay for the buyer. For example, the seller cannot pay for the buyer's minimum down payment. HUD regulations dictate that some lender fees may not be paid by the buyer and must be paid by the seller (or the lender must absorb these fees). For example, the FHA will not allow a buyer to pay for a tax service fee. This type of non-allowable fee is often collectively referred to as a "junk fee." "Junk Fees" are lender charges that do not show up as points on the loan, but are set dollar amounts rather than a percentage of the loan amount. Some lenders charge these fees to improve their profit or yield on a loan. From HUD's perspective, though, these fees do not directly benefit the buyer, so buyers are not permitted to pay them. In this instance, it may fall on the seller to pay these fees if the seller wants the loan to close. This can lead to stress at the closing table if the seller has not thoroughly examined the closing statement beforehand, and is not prepared to have these fees taken out of the proceeds the seller receives from the closing. The seller can also pay for: - The buyer's initial MIP premium. - Escrows for taxes & insurance (these are now open to negotiation between the buyer & seller) Keep in mind that as of January 2017, the maximum number of points or other forms of seller contributions the seller can pay is limited to six (6%).

Prepayment Penalties (FHA Loan Regulations)

FHA regulations do not allow provisions for prepayment penalties to be included in FHA loans. FHA loans may be paid off at any time without additional charges or penalties of any kind. However, if a house is sold or refinanced after the first day of the installment period, then a lender may require an entire month's interest be paid. Current FHA rules do not allow lenders to require 30 days' written notice in advance of a payoff—even if the mortgage or note gives the lender that right. This FHA rule supersedes any agreement in the private loan documents. However, there is a scenario in which borrowers can end up paying an extra month of interest on FHA loans. The lender may require that the prepayment be made on the normal installment due date (usually the first (1st) of the month). If prepayment is made after the normal installment due date, the lender can require the borrower to pay the interest that would be due from the prepayment date up until the next installment due date. Thus, since the entire month's interest may become due as noted above, people with FHA mortgages try to sell, pay off, or refinance the mortgage close to the end of the month to be sure it's closed before the first (1st) of the month (or first (1st) day of the installment period). The borrower may prepay without giving the lender advance notice, but if prepayment is offered on any day other than the normal payment due date, the lender may refuse to accept payment until the next due date or charge interest until that date. Each lender is required to give borrowers a written disclosure of its prepayment policy.

Seller Contribution Limits (FHA Loan Regulations)

FHA regulations limit the amount of seller contributions that may be paid in connection with FHA-insured loans. As of January 2017, the maximum amount of points the seller can pay for the buyer is six (6). If a seller pays more than 6%, the excess is applied, dollar for dollar, to reduce the sale price in calculating the maximum loan amount. For this rule, a seller-paid contribution includes discount points, prepaid interest, & closing costs normally paid by the buyer (such as initial MIP, escrows, loan origination fee). Note: - As of this writing, the FHA is considering lowering the seller contribution from 6% to 3%. - It is important for real estate professionals to stay up-to-date on laws, regulations, & guidelines relating to their industry. - For FHA fixed rate loans with temporary buydowns, a buyer must qualify at the note interest rate. Example: - If a 6% FHA loan had a temporary buydown of two (2) percentage points (making the loan 4%), a buyer must still qualify for the loan as if it were a 6% loan. - Temporary buydowns may still be used to make a house payment more affordable, but there is no ability to qualify for the loan based on the lower initial loan rate.

Mortgage Insurance Cancellation (Property Guidelines for FHA Loans)

For loans made after January 1, 2001, the MIP is automatically canceled when the LTV reaches 78% of the original value (for 30-year mortgages, the annual MIP must be current for at least five (5) years). For loans made after June 3, 2013, the FHA will collect the annual MIP for the maximum duration permitted under statute. See 12 U.S.C. § 1709(c)(2)(B). - For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90% LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first. - For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first.

Assumability of Loans (FHA Loan Regulations)

For loans that are FHA insured or endorsed after December 15, 1989, the FHA has the right to perform a credit check of the borrower. FHA requires the buyer to sign a statement saying that if the property is transferred to another person whose credit has not been approved by the FHA, the entire mortgage balance is immediately due in full. Thus, any offers involving mortgage assumptions must be investigated thoroughly with the lender (and perhaps even with legal counsel—ask about your broker's policy).

Federal Housing Administration (FHA)

Government agency that insures mortgage loans.

Veterans Administration (VA)

Government agency, part of the U.S. Department of Veteran's Affairs, that guarantees mortgage loans for eligible veterans.

FHA Loan Programs: Limited 203(k) Loan

HUD developed the Limited 203(k), or "Streamlined 203(k)" Limited Repair Program, that permits homebuyers to finance, into their mortgage, up to an additional $35,000 (with no dollar minimum) for repairs. The money can be used to purchase and improve or upgrade the home before move in or to refinance an existing mortgage and add up to $35,000 in repairs or improvements. With this product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser. Unlike the standard 203(k) program, any FHA-approved lender may originate a Streamlined 203(k) mortgage.

MIP Financing (Property Guidelines for FHA Loans)

If the initial MIP premium for 15-year or 30-year loans is paid in cash at closing, it may be paid by the buyer, seller, or any third party (e.g., relative). If the MIP is financed, the initial premium is added to the loan so the total loan amount may then exceed the FHA maximum, but only by the MIP amount. Monthly payments are calculated with the annual MIP, according to the chosen loan program.

Secondary Financing (FHA Loan Regulations)

In addition to those criteria for borrowers and properties already mentioned, there are other important rules for FHA loans: Secondary financing, down payment, LTV calculations, mortgage insurance, buydown limits, assumability of loans, prepayment penalties, and items paid by the seller. The FHA does not permit secondary financing, such as credit cards or second mortgages, to meet its minimum down payment requirement (which can be as low as 3.5%). Nor can secondary financing be used to pay for closing costs. The minimum down payment must be paid by the buyer in cash, or it may be a gift from a relative, or grant from a non-profit group. Secondary financing (other than for part of the down payment) is permitted for FHA loans if the following conditions are met: 1. Borrower's income must be sufficient to qualify for the combined total of both payments on the FHA and non-FHA mortgages. 2. Paymentson the second mortgage, if any, must be monthly, with all payments being substantially the same amount. 3. Second mortgage may not have a balloon due sooner than ten years (unless approved by the FHA Commissioner). 4. Second mortgage must permit prepayment without penalty after giving the lender 30 days' notice. 5. Second mortgages with FHA loans are most beneficial to the buyer if the second mortgage is at an interest rate lower than the prevailing rate. This option becomes more popular as interest rates rise. Note: - These second mortgage restrictions do not apply if the mortgage is held by the federal, state, or local government.

Maximum Mortgage Amount (Property Guidelines for FHA Loans)

Is a key requirement as it determines FHA loan eligibility. Remember, borrowers can have any income level to qualify, but they may not borrow more than the FHA maximum mortgage amount. The maximum loan amount depends on the median range of housing costs in a particular community. In most cases, the "community" is defined as the county in which the property is loacted. This results in varying mortgage amounts from one community to another (e.g., loan limits are higher in areas of higher-cost housing). As of May 9, 2017, the maximum loan amount for standard 203(b) loans for single-family homes in Ohio ranges from $275,665-$326,600 and up to $628,050 for a four (4) family building, as long as the homeowner occupies the building. In Ohio, the maximum loan amounts vary by county. Note: - Loan amounts are evaluated once a year. - For a current schedule of FHA mortgage limits, visit the HUD FHA Mortgage Limits website. In higher-cost areas of the country where the median price of homes significantly exceeds listed amounts, HUD has increased the maximum allowable loan amount. Areas determined to be "high cost" have loan limits ranging from $636,150 for a single-family home to $1,223,475 for a four (4) family home. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the maximum is 150% of the high cost limit: - $954,225 for a single-family home to $1,835,200 for a four (4) family home. Although HUD loan limits are reviewed annually, a petition to review a high-cost area can be made anytime.

Mutual Mortgage Insurance Plan (MMIP)

It provides a function similar to private mortgage insurance companies, insuring private lenders against losses caused by borrower defaults on FHA-insured loans. Under the plan, lenders approved by the FHA to make insured loans either submit applications from prospective borrowers to the local FHA office for approval or may act as direct endorsers.

Direct Endorser

Lender authorized to underwrite their FHA loan applications and who is responsible for the entire loan process through closing.

VA Automatic Endorser

Lender authorized to underwrite their VA loan applications and who is responsible for the entire mortgage process through closing.

Down Payment (FHA Loan Regulations)

Minimum down payments are calculated differently for FHA loans. The FHA requires that: 1. Closing costs are not added when figuring the maximum mortgage amount. 2. The borrower must make a minimum 3.5% cash investment (down payment). Both of these FHA policies can have an impact on the buyer's out-of-pocket expenses, and may also affect contract negotiations between buyer and seller.

Credit History (FHA Loan Borrower Guidelines)

More flexibility is allowed in trying to "understand" a borrower's past situation and difficulties. Even with this philosophy, a borrower may have open collections, but outstanding court ordered judgments must be paid before closing. There is an exception to this if the judgments are medical related or a payment arrangement is in effect with a creditor.

FHA Closing Costs (Best Practices)

Never assume closing costs are, or aren't, automatically included in the purchase contract. Always negotiate closing costs upfront, or when the original offer is presented. Example: - A seller agrees to pay $1,000 in closing costs. What does this include? - If the buyer assumes that particular fees are covered by the $1,000, you may experience some trouble at closing. - The buyer may not come to the closing with the necessary funds and/or the seller may end up with less than anticipated.

FHA Loan Programs: Section 203(b) (Standard/Common FHA Program)

Ordinary, owner-occupant buyers are most suited for 203(b) loans. All the points discussed regarding FHA loans apply to the Standard FHA Program.

Other FHA Regulations (FHA Loan Borrower Guidelines)

Other FHA regulations include the following: - Borrower may not use secondary financing for minimum FHA down payment (can be as low as 3.5%). - Minimum down payment can be a non-repayable gift or loan from a relative. - Minimum down payment can be a grant from a non-profit home buying type of organization. - At least one borrower must occupy the home.

Escrows (Impounds)

Pre-payable expenses the lender requires a borrower to set aside prior to closing (e.g., property taxes, insurance).

Government Financing

Real estate loans that are insured, guaranteed, or sponsored by government programs on the federal level. Traditionally, this does not refer to involvement of the government in the secondary markets.

FHA Loan Programs: Section 203(k) - Standard 203(k)

Section 203(k) insures mortgages covering the purchase or refinancing and rehabilitation of a home of at least one (1) year old. A portion of the loan proceeds is used to pay the seller or, in a refinance, to pay off the existing mortgage. The remaining funds are placed in an escrow account and released as rehabilitation is completed. The cost of the rehabilitation must be at least $5,000, but the total value of the property must still fall within the FHA mortgage limit for the area. The value of the property is determined by the lesser of: - Value of the property before rehabilitation plus the cost of rehabilitation. - 110% of the appraised value of the property after rehabilitation. Many of the rules and restrictions that make the FHA's basic single-family mortgage insurance product (Section 203(b)) relatively convenient for borrowers also apply here. But lenders may charge additional fees, such as a supplemental origination fee, fees to cover the preparation of architectural documents and review of the rehabilitation plan, and a higher appraisal fee.

FHA Loan Borrower Guidelines

Since the government insures FHA loans, it's only natural the FHA establishes underwriting guidelines for approving borrowers & property, and sets other loan regulations. FHA regulations have the force & effect of law. As we discuss these items, keep in mind that all generally apply to standard FHA 203(b) loans, considered by most to be "regular" FHA loans on one (1) to four (4) family homes. Other FHA loan types may have different guidelines or additional criteria. The main criteria for FHA loan approval are the borrower's: - Credit history - Amount of income The FHA is more lenient in both areas than traditional conventional lenders.

FHA Loan Programs: Section 234(c) Condominiums

The 234(c) program insures lenders against foreclosure losses for purchases of a condominium unit with mortgage terms of up to 30 years. The condominium project must be approved for participation under general approval guidelines or under Federal Housing Administration (FHA) procedures. Generally, projects eligible for approval must contain at least four dwelling units; they can be detached or semi-detached, a row house, a walk-up, or an elevator structure. The loan is made by an approved FHA lender, such as a mortgage company, bank, or savings and loan association, and is insured by the FHA. Starting in November 2009, the FHA allowed lenders to determine project eligibility under several "approval processing options." Two of the many conditions for condominium FHA financing approval are: - How much investor concentration is there as a percentage of total units? - What is the condition of the condominium homeowners association related to a percentage of delinquent homeowners on their association dues? Any creditworthy potential owner-occupant who meets FHA underwriting criteria and makes the condominium unit her principal residence is eligible for a mortgage insured under this program. Most of the features of Section 234(c) mortgage insurance are the same as those governing HUD's basic FHA mortgage insurance program, Section 203(b); however, there are additional owner-occupancy restrictions.

Down Payment-Minimum 3.5% Cash Investment (Property Guidelines for FHA Loans)

The 3.5% investment figure is based on the property's sale price or appraised value, whichever is lower. Closing costs paid by the seller are not included (unless they end up increasing the contract price of a home). Since FHA borrower investment calculations use the sale price but allow the money to be applied toward down payment or closing costs, it can be tricky to figure out how much the borrower needs to bring to the closing. Check with an FHA-approved lender for the exact calculation of the down payment.

Mortgage Insurance Premium (MIP)

The fee charged for FHA mortgage insurance coverage. Initial premium can be financed, and there is a monthly premium. Also called Upfront Mortgage Insurance Premium (UFMIP).

Condition (Property Guidelines for FHA Loans)

The main criteria for FHA loan approval are condition of the property and the maximum mortgage amount permitted in the community in which the property is located. The FHA is more strict than other lenders about condition of the property. There are two reasons for this: 1. Since many FHA buyers have lower incomes and not much surplus cash, often borrowers cannot afford the repairs necessary to make the home habitable. 2. With lower down payments, there's theoretically a higher risk of default, so the FHA does not want to be left with houses in need of repair that can't easily be resold. 2A. The FHA now requires appraisers to identify potential problems and deficiencies as part of the appraisal for FHA loans.

Acquisition Cost

The purchase price of a property, plus allowable buyer paid closing costs.

Amount of Income (FHA Loan Borrower Guidelines)

There is no minimum or maximum income a borrower must have to get an FHA loan. However, the borrower must have iLenders multiply the potential borrower's income by debt service ratios to determine how much debt the borrower should be able to afford. The FHA allows lenders to approve borrowers with a higher debt service ratio than traditional conventional lenders allow. Borrowers can qualify for an FHA loan with: - A mortgage payment up to 31% of their gross monthly income. - Total payments for all debts (including proposed mortgage payment) up-to 43% of gross income. Sometimes, these guidelines are stretched even farther if a borrower is buying a new construction or energy-efficient home. The FHA requires a borrower's property taxes, insurance, and homeowners association dues (e.g., condo fees) to be included as part of the proposed mortgage payment when qualifying, but the higher ratios make it easier to qualify for an FHA loan than a traditional conventional loan.

FHA Loan Programs: Home Equity Conversion Mortgage

To be eligible for a federally insured Home Equity Conversion Mortgage (HECM), or reverse mortgage, all borrowers: - Must be at least 62 years or older. - Own and occupy the property. - Should have either no mortgage or one small enough to be paid off with the proceeds of the HECM loan. Life estates & living trusts may also qualify. - Must have attended counseling from a HUD-approved counseling agency. The property may be an existing single-family home, condominium unit, manufactured home, or a two (2) to four (4) family residential unit, as long as the borrower occupies one of the units. Newly constructed residences are also eligible provided: - A certificate of occupancy (or equivalent) has been issued for the new home by the local authority. - The residence is 100% complete, and the owner is occupying it. Both existing and new units must meet HUD eligibility standards.

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