CHAPTER 4 - GOVERNMENT LOANS - FHA/VA/USDA Study Guide
If legally married, spouse's income may also be considered for qualification purposes:
- A non-married co-borrower is not allowed on a VA loan unless he or she is an eligible veteran who will occupy the home. - Two eligible veterans may combine their VA Benefits to qualify for a larger loan.
VA Eligibility - There are two documents needed for VA Eligibility
- Certificate of Eligibility (COE), which determinations of eligibility are based on the length of service and are issued - The DD214 (discharge paperwork for those who have been discharged) or NGB22/23 (General Orders) or Statement of Service.
TOTAL evaluates the overall creditworthiness of the applicants. The program evaluates the following:
- Credit score - Monthly housing expense - Number of monthly payments in reserve - Loan-to-value ratio - Loan term
VA Qualification - VA loans require the originator to perform two different qualification calculations: one on debt-to-income ratio and one on residual income.
- Debt Ratio - PITI plus all other debt must be no more than 41% of their gross monthly income and he/she must also meet the residual income requirements. - Residual income - In addition to the debt-to-income ratio, an underwriter must ensure that an eligible borrower has sufficient residual income remaining for family support. - VA Occupancy - The borrower must occupy the property within 60 days after closing and plan to occupy the property for at least one (1) year. - No mortgage insurance. Instead of mortgage insurance, there is a one-time non-refundable variable VA funding fee that can be included in the loan. - The typical funding fee is 2.15 percent of the purchase price of the home. - This fee may be waived for veterans with disabilities or surviving spouses. - The lender can charge up to 1% of the loan amount to cover the cost. If the loan does not close for any reason, the lender must refund this 1% flat fee. - VA Appraisal - The reasonable value of the property is obtained through a VA appraisal, which is also called a Certificate of Reasonable Value (CRV) or Notice of Reasonable Value (NOV). - Seller Concessions: Loans are permitted to contain up to 4% seller concessions. - The maximum term for a VA loan is 30 years. - The late fee is 4% of the monthly P&I.
A mortgage insurance premium (MIP)-not to be confused with PMI for conventional loans-is required for all FHA loans, regardless of the down payment.
- In addition, FHA requires an initial premium called the upfront mortgage insurance premium (UFMIP). - FHA mortgage insurance protects the lender against default by the borrower for the life of theloan. - The UFMIP is calculated by multiplying the loan amount by a factor and then collecting that amount at closing. - It can be paid by the borrower or the seller (for the borrower). The FHA UFMIP is currently1.75%. - Monthly MIP is calculated by multiplying the base loan amount by a factor, then dividing by 12. - If the UFMIP for a 15-year or 30-year loan is paid in cash at closing, it may be paid by the borrower or by the seller, however, it must all be paid in cash or all of the premium must befinanced. - For loans made after January 1, 2001, MIP is automatically canceled when the LTV reaches 78% of the original value (for 30-year mortgages, the annual MIP must have also been paid for at least fiveyears). - Financed MIP cannot be canceled. (See HUD Handbook 4000.1.111.A.1.l.B)
VA-Guaranteed Loans - are guaranteed by the federal government through the Veterans Benefits Administration, which is part of the Department of Veterans Affairs (VA).
- The VA's main purpose in guaranteeing loans is to help meet the housing needs of eligible veterans who have served or are currently serving on active duty in the U.S. Armed Forces, which includes the Army, Navy, Air Force, Marine Corps, Coast Guard, Reserves, or National Guard. - VA loans are available to eligible veterans for the purchase of owner-occupied single-family homes and for multi-family dwellings up to four units if the veteran intends to occupy one of the units as the primary residence. - It is important to note that the VA doesn't make loans; rather, it provides a guarantee for a specific portion of the loan amount made by approved lenders. - Max guarantee is 25% of the purchase price or sales value. - Available for the purchase of Owner-occupied single-family homes or Multifamily dwellings up to four units if veteran occupied. - The VA Loan Program provides veterans with an opportunity to receive a mortgage with no down payment and no prepayment penalty. - The lender, not VA, sets the interest rate, discount points, and closing costs.
Restoring Entitlement: It is possible for a veteran to use some entitlement on a previous purchase, and have partial entitlement available for another purchase if:
- The property, securing the VA loan, has been sold and that loan has been paid in full. - An eligible veteran (not disabled/not dishonored) has agreed to assume the outstanding balance on a VA loan and substitute his entitlement for the same amount originally used on the loan.
FHA's "5" Cs of Underwriting":
1. Credit - evaluated by looking at the borrower's credit report. 2. Capacity - refers to the borrower's 'ability" to repay the debt based on sufficientincome. 3. Cash - refers to the borrower's ability to make the required down payment, pay for closing cost, required reserves, etc. 4. Collateral - the property being mortgaged as security for the loan. 5. Character - borrows willingness to repay the debt (different than the borrower's "ability" to repay the loan.
There are three types of government-related loans that are integral parts of the mortgage industry:
1. Federal Housing Administration (FHA) loans 2. Veterans Affairs (VA) loans 3. United States Department of Agriculture (USDA) loans FHA loans insure lenders in the event of borrower default, and VA and USDA loans provide a guarantee to lenders in the event of borrower default. - The Federal Housing Administration (FHA) does not make, buy or sell loans. It insures loans. - Advantages of FHA loans include low down payments and no prepayment penalties. - Down payment - FHA requires the borrower to invest in the loan transaction by making a 3.5% down payment based on sales price or appraisal (whichever is less). - The entire down payment can be a gift. - FHA-Eligible Properties - the property must be one-to-four-unit owner-occupied residence. - FHA Occupancy - The borrower must occupy the property within 60 days after closing and plan to occupy the property for at least one (1) year. - FHA Qualifying Ratios - 31/43. - Sales concessions (closing cost) are limited to 6% of the sales price. - The maximum late charge is 4% of the P&I Only. - The maximum allowable term on FHA/VA loans is 30 years. - The lenders set the interest rates, not the FHA or HUD. - An underwriter will use the Credit Alert Verification Reporting System (CAVRS) to determine whether a borrower has ever failed to repay their federal debts or obligations.
USDA Guaranteed LOANS: Section 502
The following is a broad overview of some of the USDA program guidelines: ● Income requirements is 115% of area median income (AMI) ● 30-Year Fixed: The USDA loan program offers 30-year fixed-rate loans only, and there is no required down payment. However, the lender must use debt ratios to ensure the borrower is adequately able to repay the loan. ● Insurance - USDA Mortgages do not have PMI, but instead have an upfront premium/funding fee that is meant to cover any losses incurred by borrowers who may default. This fee is much less than the PMI required on FHA mortgages or mortgages where the borrower pays less than 20 percent of the down payment and is 2 percent of the purchase. ● Debt Ratios: USDA utilizes debt-to-income ratios of 29% for housing and 41% for total debt. ● 100% Financing: USDA loans do not require a down payment. Borrowers are also permitted to finance the required funding fee, allowing financing up to 102%. ● "Rural" can include small towns up to 35,000 people. ● It is funded by the Department of Agriculture. ● There is no prepay penalty. ● The late fee is 4 % of the monthly P&I only.
A Veterans Entitlement Amount
• An entitlement is the maximum amount that the VA will "guarantee" on behalf of a Veteran. • Veterans entitlement is based on 25% of the purchase price (or appraised value) or of the County Limit ($510,400 in most counties) up to a maximum of $127,600. • If an entitlement is insufficient, a cash down payment may be allowed for the balance. • For example - if a home is selling for $350,000 - the MAX amount the VA will guarantee is $87,500 ($350,000 x 25%). Assume each veteran is buying a home in a county where the current loan limit for a single-family home is $510,400, making the maximum guaranty $127,600 ($510,400 x .25). Example 1: Veteran Steve full entitlement available and is purchasing a home for $350,000. Since Steve has his entire entitlement of $121,088 available, he can purchase this house without a down payment. Even though he still has $33,588 in available entitlement, the loan-to-value on this purchase cannot exceed 100%.
Property Conditions
• At minimum, must be free of health and safety hazards. • Lender determines which repairs must be made to make property eligible for financing • Required repairs for existing properties include those that: - Protect the health and safety of the occupants - Protect the security of the property - Correct physical deficiencies or conditions affecting structural integrity