RP:14-Loans, FHA, VA, calvet, recd,qualifying title, Qual prop and buyer,title, fed reserve, secondary mtge market

Loan Sources

1) Savings and Loans - Specialize in long term residential loans. They are one of the largest lenders of residential funds. Commercial Banks in the last several years have made more loans than Savings and Loans. Deposits must be insured up to $250,000. 2) Banks - Make short-term loans. They are becoming more active in home mortgage loans, FHA, and VA. Examples of short-term loans are: Automobile, mobile home, and household loans. 3) Insurance companies - Prefer large commercial projects, but will make residential loans. They like to have an equity position. They are sometimes partners with developers. This type of lending is called: a) Participation financing - A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate. 4)) Mortgage Broker - A person, corporation, or firm--not otherwise in banking and finance--that either provides its own funds for loans or negotiates, sells, or arranges loans for compensation. Sometimes this person or firm continues to service the loan(s). 5) Mutual savings banks are also lenders in the primary market, but they are primarily in the Eastern states.

What Is a Qualified Buyer?

A qualified buyer is one who has demonstrated the financial capacity and credit worthiness required to afford the asking (or agreed upon) price. Before submitting an offer to buy, some buyers become pre-qualified or pre-approved with a lender for a loan up to a certain amount. Assessing the buyer's price range depends on three basic factors: stable income, net worth, and credit history. On the next few screens, you will review the issues that are important to a lender when considering making a loan to a buyer. Qualifying the Buyer Ability to repay the loan Income Employment history Mortgage to income ratio - The ratio between the monthly housing expense and stable monthly income. Assets Liquid savings, checking, CDs, etc. Other (personal property, real estate) Liabilities Revolving and installment accounts Child support and alimony payments Pledged assets, unsecured loans Debt Coverage ratio - The ratio of annual net income to annual debt service. For example, a lender may require that a qualified corporate borrower have net income of 1.5 times the debt service of the loan being approved.

Qualifying the Buyer and the Property

Attitude - Buyer has demonstrated the financial capacity and creditworthiness required to afford the asking price. Credit report Explanation of derogatory items (judgments, late payments, tax liens, etc.) Mortgage history rating Besides the buyer needing to be qualified to purchase real estate, the property also has to qualify. Qualifying the Property Type of property (residential, commercial, agricultural) Location Area zoning Value range Neighborhood Actual age/Effective age/Remaining economic life Condition (repairs and predications) Special clearances (code compliance, well and septic certifications etc.) Overall marketability

More About the Fed

Buying/Selling Securities -"The Fed" is buying or selling securities or bonds. When they are buying bonds, there is more money in the market, interest rates lower, and the economy is stimulated. When they are selling bonds, there is less money available in the market, interest rates rise, and the economy is slowed. This could take from six months to a year to have an effect on the economy. If there is an increase in the availability of money, interest rates would go down. To tighten the economy, the Federal Reserve would: Increase discount rates. Sell securities. Raise reserve requirements. Lending Laws - Laws that are for consumer protection in lending. (Equal Credit Opportunity Law, Truth in Lending--Regulation Z, and the Real Estate Settlement Procedures Act, which we will discuss in an upcoming unit.) The purpose of the secondary mortgage market is to provide liquidity (funds) for the primary market (institutional lenders). The promissory note is considered to be PERSONAL PROPERTY (readily negotiable) that can be bought and sold. Lenders sell their "Paper" or notes in the secondary mortgage market to free up money so they can make more loans. The Secondary Mortgage Market is the market in which these notes are exchanged and funds are provided directly to institutional lenders. They are holding warehouse agencies, which purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors.

FHA Loans

FHA does NOT build homes nor does it lend money itself. The term "FHA Loan" refers to a loan that is insured by the agency. Just to be sure you've got it, following are important issues to remember concerning FHA lending policies: The Federal Housing Administration (FHA) insures loans on real property made by qualified or approved lending institutions. The Department of Housing and Urban Development (HUD) oversees the FHA. If a buyer wants to obtain an FHA loan, a licensee should send him/her to a qualified lender, such as a savings and loan, mortgage broker or banker, and/or a bank. Following are requirements to receive an FHA loan: The borrower is charged a one-time insurance premium, which provides security to the lender in addition to the real estate in case of borrower default. The one-time charge is paid at closing by the borrower or some other party (seller). The lender can charge points, and either the borrower or the seller can pay them.

Loan Definitions

Following are ten (10) definitions that you need to be able to recognize for the examination. 1) NON-RECOURSE LOAN - A loan in which the borrower is not held personally liable on the note. The lender of a non-recourse loan generally feels confident that the property used as collateral will be adequate security for the loan. 2) NON-RECOURSE CLAUSE - Real estate loans are often sold in the financial market. When a non-recourse clause is included in the sale's agreement, the seller of the security is not liable if the borrower defaults. 3) DEFAULT - The non-performance of a duty or obligation that is part of a contract. The most common occurrence of default on the part of a buyer or lessee is nonpayment of money when due. A default is normally a breach of contract, and the non-defaulting party can seek legal remedies to recover any loss. A buyer's good faith inability to obtain financing under a contingency provision of a purchase agreement is not considered a default (The performance of the contract depends on the buyer getting the property financed.), and in this case the seller must return the buyer's deposit. 4) CONDITIONAL APPROVAL (conditional or qualified commitment) - A written pledge by a lender to lend a certain amount of money to a qualified borrower on a particular piece of real estate for a specified time under specific terms. It is more formal than a preliminary loan approval. After reviewing the borrower's loan application, the lender usually decides whether to make a commitment to lend the requested funds. This application contains such information as the name and address of the borrower, place of employment, salary, bank accounts, credit references, and the like. 5) UNDERWRITING - The analysis of the extent of risk assumed in connection with a loan. Underwriting a loan includes the entire process of preparing the conditions of the loan, determining the borrower's ability to repay and subsequently deciding whether to give loan approval. 6) APPRAISAL FEES - An appraiser's fees are typically based on time and expenses; fees are never based on a percentage of the appraised value. 7) ESTOPPEL CERTIFICATE - A legal doctrine by which a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct, or silence. For example, a mortgagor/trustor who certifies that he or she has no defense against the mortgagee/beneficiary would be estopped to later assert any defenses against a person who purchases the mortgage in reliance on the mortgagor's certificate of no defense. 8) EXCULPATORY CLAUSE - A clause sometimes inserted in a mortgage note in which the lender waives the right to a deficiency judgment. As used in a lease, a clause that intends to clear or relieve the landlord from liability for tenants' personal injury and property damage. It may not, however, protect the landlord from injuries to third parties. 9) IMPOUNDS - A fund of the buyer's money that the lender sets aside for future needs relating to the parcel of property. Most lenders require an impound account to cover future payments of insurance and taxes. Sometimes this is referred to as the buyer's escrow (not the broker's). 10) DISINTERMEDIATION - The process of individuals investing their funds directly instead of placing money with banks, savings and loans, and other savings institutions. Disintermediation has a direct influence on the scarcity of money or surplus of money available for mortgages.

HA vs. VA Loans

Following is a chart that will help you determine the similarities and the differences between Federal Housing Administration Loans (FHA) and The Department of Veterans Affairs Loans (VA). Who? FHA: Anyone with qualified income VA: Eligible Veterans only or widows of veterans who have not remarried. Govt. Support: FHA is a Federal Agency under HUD. It insures the lender against loss due to small down payment. VA guarantees loans by making the veteran personally liable. Who lends the money? FHA:Any lending institution approved by FHA. VA:Any lending institution approved by VA or, on rare occasions, VA itself will lend directly. Interest rates FHA:Negotiable between lender and borrower. Free-flowing in the market place. VA:Negotiable between lender and borrower. Free-flowing in the market place. Points FHA:Prepaid interest payable by either buyer or seller or both. Points vary in the market by lender. VA:Prepaid interest payable by either buyer or seller or both. Points vary in the market by lender. Types of Properties FHA:1-4 family, owner-occupied. VA:1-4 family, owner occupied. Down payment FHA:Can be as low as 3.5% down. Down payment is subtracted and closing cost added to establish an ACQUISITION COST. VA:NO DOWN PAYMENT REQUIRED. Appraisal FHA:House must appraise at Acquisition Cost or sale price whichever is lower. VA:House must appraise at either the sale price or the CERTIFICATE OF REASONABLE VALUE, whichever is lower. Assumptions FHA:Allowable under some conditions. Must have FHA approval for all loans after 1987. VA:Allowable but must be a QUALIFIED VETERAN for the seller to be relieved of liability. Requires substitution of eligibility of new veteran. If non-veteran or non-approved veteran assumes, the original veteran is still liable. If a veteran sells and pays off a VA loan his/her eligibility may be used again without restriction.

Eye on California: The Mortgage Market

In the California mortgage market, the traditional loan sources are savings and loans, savings or commercial banks, thrift and loans, and credit unions; these are known collectively as "depository institutions." California real estate lenders are divided into 3 major categories: Institutional lenders - In California, the 3 MAJOR types of institutional lenders are commercial banks, savings banks (formerly known as savings and loan associations), and life insurance companies. Noninstitutional lenders - Mortgage lenders, REITs, credit unions, private lenders, and pension funds. Government-backed programs - FHA, VA, and CalVet The California mortgage market has the following characteristics: Usually a high demand, depending on the economy. Financial institutions - A large amount of the country's biggest commercial banks and savings banks Loan companies - Many mortgage companies from out-of-state lenders that can be anxious to invest in California real estate loans. Population growth - More people mean more homes are needed. Title and escrow companies - Many originated in California, and are the largest in the U.S. Deeds of Trust used rather than mortgages, which allows lenders greater flexibility and protection. A very active secondary mortgage market, in which existing loans are sold to other, out-of-state lenders.

More VA Loans

Loans may be assumed by non-veterans, but veteran still liable. VA will lend money in rural areas where there is no financial institution available (200-acre residence for example). Points can be paid by either the seller or the buyer. VA does not allow prepayment penalties to be charged if a veteran pays off a loan early. If a veteran has died, his/her widow or widower may be eligible for a VA loan. In order to be eligible for a VA loan, the widow or widower may not be married again at the time of application. If a loan is assumed by another veteran and the seller has used all of his/her eligibility, the seller cannot use his/her eligibility again, unless he/she is given a novation because he/she will still be liable for the loan. FHA and VA will allow buyer to pay more than appraised value, if he pays the difference in CASH. Remember: FHA and VA do not allow prepayment penalties. The difference between VA and FHA is FHA insures and VA guarantees repayments of loans.

The Secondary Mortgage Market

Major warehousing agencies in the Secondary Mortgage Market are: Federal National Mortgage Association or Fannie Mae - (FNMA) - Sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor. Fannie Mae was established in 1938 for the purpose of purchasing FHA loans from loan originators to provide some liquidity for government insured loans. Please note the following about the Federal National Mortgage Association: Quasi Government Corp - Was government when originally formed, but is now a private corporation. Buys FHA loans, VA loans, and conventional loans. FNMA is referred to "Fannie Mae." Largest purchaser in secondary market. Government National Mortgage Association or Ginnie Mae (GNMA) Buys FHA loans or VA loans. "Ginnie Mae" "Ginnie Mae is controlled by an agency of the Department of Housing and Urban Development. When "Ginnie" and "Fannie" work together, it is called the Tandem Plan. It is a mortgage subsidy program offered by Congress from time to time through the Government National Mortgage Association. When assistance is needed, GNMA is authorized to purchase certain mortgages at below market interest rates so that borrowers can be granted low interest loans. GNMA then sells these loans in the secondary market at deep discounts, the discount loss being the amount of the subsidy. When these programs are available, they are offered through, or "in tandem" with, local mortgage lenders, generally administered under a contract with the Federal National Mortgage Association (FNMA). Federal Home Loan Mortgage Corporation or Freddie Mac (FHLMC) BUYS CONVENTIONAL LOANS. "Freddie Mac" HUD (Department of Housing and Urban Development) is the regulator for Fannie Mae, Ginnie Mae and Freddie Mac. You must be able to recognize these three major players in the secondary market by their full names, nicknames, and initials. Property appreciates in value due to inflation and due to an increase in the intrinsic value of the property. Selling shares (securities) of FNMA, GNMA and FHLMC requires a securities license.

Qualifying the Title

Qualifying the Title Abstract and opinion - A full summary of all consecutive grants, conveyances, wills, records, and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The abstract of title does not guarantee or ensure the validity of the title of the property. It is a condensed history that merely discloses those items about the property that are of public record. It does not reveal such things as encroachments and forgeries. Therefore, the abstracter is usually liable only for damages caused by his or her negligence in searching the public records. Chain of Title - The recorded history of matters that affect the title to a specific parcel of real estate, such as ownership, encumbrances, and liens, usually beginning with the original recorded source of the title. The chain of title shows the successive changes of ownership, each one linked to the next so that a "chain" is formed. Title insurance - A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Title insurance protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title. All of these above issues must be to the satisfaction of the lender. In other words, for the title to qualify the abstract, chain of title, and the title insurance policy must meet the standards of the lender. Other Terms: Once a buyer and seller are "in contract," the buyer must obtain a loan for that specific property. A loan underwriter evaluates a loan application to determine the desirability of the loan. An underwriter is a person working for a lender who reviews a loan application and makes recommendations to the loan committee based on all of the issues we have discussed in this unit of the course.

California Veterans Farm and Home Purchase Program

The CalVet loan program has been a great success, and the demand for loans has usually been found to exceed the supply of available loans. This is due, primarily, to the low interest rate offered to California veterans. The CalVet program is administered by the State of California, Department of Veteran Affairs, Division of Farms and Home Purchases. There is no other lender involved in the program, and the veteran/buyer deals directly with the agency. (However, note that recent rules now allow a mortgage loan broker to begin the loan process on the vet/buyer's behalf.) The money loaned is obtained from the sale of State Veteran Bonds. The loan itself is made directly from the State to the veteran. For a veteran to qualify, he must meet the following requirements: He must have had a minimum of 90 days' active duty. He must have been given an honorable discharge from the military OR, if he is still on active duty, he must have a Statement of Service to verify his status; AND He must be willing to buy a California home or farm. Either peacetime or wartime veterans are eligible for a CalVet loan. HOWEVER, if the funds are limited, then wartime veterans are given priority. The very highest priority is always given to a service-connected disabled war veteran. Additional information about the CalVet loan: The maximum loan amounts vary depending on whether a home or farm is purchased, and these rates CHANGE FREQUENTLY. The current maximum amount for a home loan is $521,250.00. The current interest rate ranges from 3.9% to 5.5%, is variable, and changes as needed. For the most recent maximum loan amount, or for current interest rates, check the website at http://www.cdva.ca.gov/. The CalVet loan property standards are generally the same as those of the FHA or VA, which means the property must be a single-family dwelling or a unit in a planned development, condo, or mobile home. In some cases, farms are approved. CalVet requires a structural pest control report and a roof inspection on properties it finances. A CalVet can borrow the entire down payment, or put up to 20% of the sale price or appraisal value down, whichever is LOWER. The terms are usually 30 years. A veteran must occupy the financed property. This loan may be assumed by ANOTHER California veteran who meets the CalVet loan requirements. There is no prepayment penalty. Monthly payments include principal and interest; 1/12 of the annual property taxes; hazard insurance; disability; and life insurance premium

FHA Loans

The Federal Housing Administration (FHA) insures loans on real property made by qualified or approved lending institutions. The Department of Housing and Urban Development oversees the FHA. If a buyer wants to obtain an FHA loan, a licensee should send them to a qualified lender, such as a savings & loan or a bank. Following are the requirements to receive an FHA loan: The borrower must have cash for a down payment and closing costs. The borrower is charged a one-time insurance premium, which provides security to the lender in addition to the real estate in case of borrower default. The one time charge is paid at closing by the borrower or some other party (seller). Lender can charge points and the borrower or the seller or both can pay them. There are no prepayment penalties allowed on FHA loans. Loans are assumable with certain qualifying conditions depending upon when the original loan was obtained. (You just need to know that FHA loans are assumable.) The mortgaged real estate must be appraised by an approved FHA appraiser. FHA regulations set minimum standards for the type and construction of buildings and credit-worthiness of borrowers.

Federal Reserve System

The Federal Reserve System: ("The Fed") is a central banking system designed to manage the nation's economy. Each of the 12 Districts is served by a Federal Reserve Bank. The "Fed" has a great impact on real estate investment through its various functions. 1) Reserves - are the amounts of money (assets) banks are required to keep on hand. Takes 30 to 60 days to have an effect on the market. Reserve Requirements Interest Rates Effect on Economy INCREASED - Lender is required to keep more money in reserve. Will go up - Less money available to loan Decrease in available loan funds DECREASED - Lender is allowed to keep less money in reserve. Down - More money available to loan Increase in available loan funds 2) Discount rates are the rate at which the "Fed" charges banks for money. This influences the economy much more quickly--almost overnight in some areas of the country. Disc Rate Pd by Banks/ Int Rt Charged to Consumers/Effect on Economy INCREASED - Lenders pay more to borrow money. The lender pays more--so the consumer will be charged more. This will slow down the economy because fewer consumers will be able to qualify for loans. DECREASED If the lender pays less to borrow funds they will charge the consumer less and interest rates will go down. This will speed up the economy because more consumers will be able to qualify for lower interest rate loans.

Rural Economic and Community Development

The Rural Economic and Community Development (RECD), formerly known as Farmers Home Administration (FmHA) is a federal lender with the U.S. Department of Agriculture that makes loans for home purchases or construction in rural areas and small communities outside metropolitan areas. (If you see the letters FmHA on your state examination, it is always a detractor.) These areas for direct loans from RECD are defined as having a population of 20,000 or less. In addition to the property location, RECD requires that borrowers demonstrate a limited income record and a need for housing. Loans are either made directly by RECD or made by a private lender with RECD guaranteeing a certain percentage. Remember: RECD does not make direct loans to the public in areas with a population of more than 20,000. FHA never makes direct loans. VA will make a direct loan if there are no lenders in the area where a veteran wants to buy property. FHA insures loans only for one-to four-family housing. The FHA section 203 B program requires a minimum down payment with the maximum loan based on local market conditions, which vary across the nation. This is the "standard" and most popular type of FHA loan. Don't forget that the FHA has other programs: FHA 234 - for loans on condominiums FHA 245 - Graduated Payment Plan Mortgage FHA 203K - Allows the purchaser to borrow enough money to rehabilitate a property. FHA also has an Adjustable Rate Mortgage Program (ARM).

More about the Cal-Vet Loan

There are two basic differences between the CalVet Home Loans and other financing. According to the California Department of Veterans Affairs, these differences are as follows: "The State of California has chosen to provide CalVet Home Loans as a benefit to veterans who want to live in our state. Because it is a veteran's benefit we make every effort to make the loan available to all veterans. We qualify you for the loan using the same criteria as other lenders, but because we are a direct lender and we service the loans we make, we are able to give every veteran extra consideration, and if we can qualify you for a loan you get the same rate as everyone else. We will not classify you as a higher risk and increase the interest rate. CalVet uses a Contract of Sale as the financing instrument for our loans. What that means is that CalVet purchases the home you selected and takes legal title to the property at close of escrow, and then sells the property to you using a contract of sale. When the loan is paid in full, either when the last payment is made or if you refinance or sell, we issue a grant deed to transfer legal title to you. A document called a Memorandum Agreement of Sale is recorded to show that the contract exists, and you hold what is referred to as the equitable title to the property which gives you all the rights of ownership. One of the major advantages of a Contract of Sale is that CalVet is able to obtain Fire and Hazard Insurance, and Disaster Insurance and provide superior insurance coverage at group rates. The technicality of holding legal title also assists us in obtaining the best possible bond ratings for the bonds that we sell to finance the program. For the very small number of veterans who default on their CalVet Home Loan, the Contract of Sale makes it easier for us to recover the property and minimize losses to the program." For additional information, you may visit the California Department of Veterans Affairs at http://www.cdva.ca.gov/.

VA Loans

VA Loans (Veterans Administration) = Guaranteed Loans - Authorized to guarantee repayment of loans up to a specific amount. 1) The Veterans Administration (VA) will guarantee that a loan made by an approved lending institution will be paid. The veteran must have served 181 days active service in the military since 1940. A veteran's basic entitlement is $104,250 in counties where the loan limit is $417,000. Lenders will generally lend up to 4 times the veteran's available entitlement without requiring a down payment, provided the veteran's income and credit qualify and the property appraises for the asking price. There is no maximum VA loan, but lenders will generally limit VA loans to $417,000. This is because lenders sell VA loans in the secondary market, which currently places a $417,000 limit on the loans. For loans up to $417,000, it is usually possible for qualified veterans to obtain no down payment financing. (These numbers change from time to time and there are counties that are considered "High-Cost Counties" and their loan limits are higher.) VA will guarantee real property, mobile homes, and plots for the mobile home. The VA requires that a veteran assume liability for the loan. If a veteran does not pay the mortgage as agreed there will be a foreclosure. The property must be owner-occupied for at least one year. A qualified veteran may borrow up to 100% of the loan with no down payment. Veteran must first apply for a Certificate of Eligibility in order to obtain a VA loan. The amount of the loan is limited to the amount shown on the Certificate of Reasonable Value. The house must qualify with an appraisal and is issued a Certificate of Reasonable Value.