Section 13: Types of Mortgages and Sources of Financing

VA Funding Fee

A fee based on the percentage of loan amount; varies based on type of loan and military category; and can be financed into loan or paid at closing.

Private Mortgage Insurance (PMI) covers the lender in the event that the borrower defaults on the loan.

A fee charged to a borrower with less than 20% equity or down payment in property and is added to the borrower's payments.

FHA Mortgage Insurance Premium (MIP)

A fee charged to borrowers based on a yearly rate, divided into monthly payments. Goes into a fund in case the borrower defaults. This monthly payment increases the total loan payment, so it must be factored in calculating qualifying ratios. The MIP is paid in addition to UMIP.

FHA Upfront Mortgage Insurance Premium (UMIP)

A fee that FHA charges borrowers at closing as a closing fee, which goes into a fund in the event that a borrow defaults. Fee varies based on new or resale of home, and terms of loan. The Upfront Mortgage Insurance Premium is paid in addition to the Mortgage Insurance Premium.

VA Loan Guarantee Program

A non-conventional loan program for low-cost no downpayment mortgages for veterans and eligible surviving spouses, and provides a partial guarantee of the loan, enabling the lender to provide favorable terms.

Section 203(b) is a FHA mortgage program

A single-family FHA loan insurance program used to purchase or refinance a new or existing one-to-four person home in both urban and rural areas including manufactured homes on permanent foundations. Promotes homeownership for families, providing a fixed-rate amortized mortgage that can be assumed.

TILA regulates advertisement for credit for real estate and trigger terms.

All of these trigger terms MUST be included in the advertisement: Amount of down payment as a percentage or dollar amount, amount of any payment, and period of repayment.

Prepayment Penalty Clause

Allows a fee to be charged when a loan is paid off early.

Federal Reserve System requirements

Amount of funds that a bank must have on hand each night, either through cash in a vault or in deposits with a local Federal bank. This has the most important impact on money supply.

Adjustable Rate Mortgage (ARM)

An amortized mortgage using a fixed or adjustable interest rate. Components include: index, margin or spread, adjustment interval, interest rate caps, payment cap, teaser rate.

Bi-weekly Mortgage pays off the mortgage in 22.6 years instead of 30 years.

Based on a regular amortized mortgage but paid every two weeks or 26 payments per year instead of once per month or 12 payments per year. Not the same as paying twice per month, or 24 payments per year.

A Mortgage Broker's role is to find a bank or direct lender, conduct loan origination activities, act as intermediaries who brokers mortgage loans on behalf of individuals or businesses, and do not lend their own money.

Borrowers can go directly to banks, but mortgage brokers find the right loan for the right person to meet the borrower's needs.

Home Equity Loans are second mortgages.

Borrowing money by using the equity in your home as collateral. Property could be lost in foreclosure if you fail to pay your regular first mortgage. This is a junior lien secured by the equity in your home. Interest paid on mortgages can be deducted on taxes.

Purchase Money Mortgage or Seller/Owner Financing

Buyer borrows from seller instead of, or in addition to, a bank. Title is transferred to the buyer; seller files a lien on the property.

FHA mortgagors must put down 3.5% of purchase price or appraised value, whichever is less, creating a 96.5% loan-to-value ratio.

Buyers financing with a FHA loan may be charged discount points, paid by buyer or seller. Down payment of 3.5% can be paid by a relative with an approved gift letter, but cannot be paid for by the seller. Seller can pay up to 6% of sales price towards buyer's closing costs.

Freddie Mac was created by Congress in 1970, which shares are sold publicly and buys conventional loans.

Buys conventional loans on the secondary market, pools them and sells them as mortgage-backed securities on the open market. In 2008, came under conservatorship by the Federal government.

Closing Costs for FHA-insured mortgage does not include the required 3.5% down payment.

Closing costs include appraisal fee, inspection fee, actual costs of credit reports, lender origination fee, deposit verification fees, home inspection service fees up to $200, cost of title examination and title insurance, documentation prep, property survey, attorney's fees, recording fees, transfer stamps and taxes, tests and cert fees, water tests, etc. Seller can pay up to 6% of sales price towards buyer's closing costs.

Commercial banks are chartered with state or federal government with N.A. in their name, and are insured by FDIC the same as Savings Associations.

Commercial banks are in business to provide "on-demand" credit accounts, but also have savings accounts and make loans. Commercial banks mostly make commercial loans and single family home loans, providing conventional and VA, FHA loans.

FHA insure commitment for developers

Conditional commitment to insure the mortgage loans on finished homes, as long as completed per FHA standards. Developer seeks an FHA commitment to insure the mortgage even though the project is in the planning stage.

Purchasing condos with FHA-insured mortgages

Condo must be on a FHA-approved condominiums projects list - declared and in full compliance with State law requirements and all other applicable laws and regs. Lenders have a list of approved condo projects.

Credit Unions is a not-for-profit financial institution owned by its members and chartered with state or federal government; insured by National Credit Union Administration of up to $250,000 in deposit.

Credit Unions operate to serve members rather than maximize their profits and typically offer high savings rates, lower fees, and lower rates on loans. Credit Unions provide savings and "on-demand" checking accounts offering single family home loans home equity loans as conventional loans, or non-conventional FHA and VA.

Mortgage Fraud is a 2nd degree felony when loan documents exceed $100,000 and result in loss of licensure.

Deliberately falsifying information to obtain a mortgage is titled Fraud for Housing or Property, Fraud for Profit, or Fraud for Criminal Enterprise.

Disintermediation

Depositors take their money out of financial institutions because they can earn money through other investments.

Seller Financing or Contract for Deed

Direct source of home financing for buyers; a land contract where seller holds the legal title and buyer holds the equitable title. The deed is conveyed to buyer at closing and the seller files a lien against the property.

No-Doc Mortgage or Loan

Does not require mortgage lenders to document borrowers income or assets, and are ILLEGAL.

Prepayment Clause on FHA mortgage

Does not require the borrower to pay a prepayment penalty clause.

USDA Guaranteed Rural Housing Loan is a government loan program for homes purchased in qualifying rural areas offering 100% financing without monthly mortgage insurance premiums.

Does require an Upfront Mortgage Insurance Premium to protect the lender in case of borrower default, and can be financed into the loan.

FHA is regulated by HUD and insures single-family, multi-family, manufactured homes, and hospitals.

FHA is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.

Appraisals for properties purchased with FHA-insured loan

FHA loans require a housing appraisal and inspection by a HUD-approved home appraiser to determine the current market value and inspect to ensure that it meets HUD's minimum property standards.

Assumption of FHA mortgages

FHA mortgages have no Due-on-Sale clause; therefore assumption of FHA mortgage is allowed if buyer qualifies and is approved by the existing lender. Investors do not qualify; must be owner-occupied.

Section 203(k) is a FHA mortgage program for rehabilitation and repair of single-family homes.

FHA's Section 203(k) is used in community and neighborhood revitalization programs, and to expand homeownership opportunities. Rehab and repair monies are factored into the loan, and allows for the mortgage to be assumed.

Fannie Mae was created by Congress in 1938 to stimulate the economy after the Great Depression and create more opportunity for homeownership. After the 2008 mortgage market crisis, Fannie Mae is under strict government oversight.

Fannie Mae is a private, non-government agency corporation that trades on the NYSE and serves as a secondary market for conventional, and non-conventional loans such as VA, FHA. Fannie Mae issues mortgage-backed securities to investors and is the largest single private mortgage purchaser.

Federal Housing Administration (FHA)loans are government insured non-conventional loans, which still require a down payment.

Government insured non-conventional loan program that provides some risk protection to the lender. Provides mortgage insurance on loans made by FHA-approved lenders, which requires a smaller down payment than a conventional loan.

Adjustable Rate Mortgage for FHA-insured mortgages (AKA Section 251)

HUD mortgage designed for low-and moderate-income families making transition to homeownership. Can be combined with other FHA programs, and can keep interest rates and mortgage payments to a minimum.

Reverse Annuity Mortgage, Reverse Mortgage or Home Equity Conversion Mortgage

Homeowners 62+ who have a significant amount of equity built up in their home. Can borrow against the equity by taking out cash in a lump sum as a monthly income stream, or line of credit when needed. Must have enough income to keep up with property taxes and homeowner's insurance. Repaid when house is sold or owner dies.

Teaser Rates or Discounted Rates or Start Rates

Initial rate is lower than fully indexed rate. Lender charges a higher rate after the discounted rate period passes.

Interest rates are set by the supply and demand for money in capital markets and are determined by the Federal Reserve.

Interest rates are negotiable between lender and borrower. Interest rates go up when there are more borrowers competing for loans. A surge in money supply forces down interest rates.

Intermediation is the normal flow of money into institutions from the public in the form of deposits.

Intermediation deposits are combined and loaned out to earn more money for the institution.

Conventional loan is a mortgage loan that is not guarenteed or insured by the government.

Lender assumes all risk. Buyer is required to make a down payment of typically 20% to offset the risk to the lender and has a Due-on-Sale clause; conventional loan mortgages are not assumable.

VA Loan Origination Fee

Lender fee to offset administrative costs of the loan; max 1% of the loan

There are Standardized Loan Requirements for selling loans on the secondary market.

Lenders planning to sell loans on the secondary market follow standard guidelines established by government sponsored enterprises such as Fannie Mae and Freddie Mac. By meeting these guidelines, lenders can ensure investors that it is a good risk. Loans that meet these standards are said to be conforming loans.

Portfolio Lenders

Lenders that hold non-conforming loans as an asset instead of selling them. Non-conforming loans are difficult to sell but typically done through Broker or Correspondent loans.

Housing Expense Ratio (HER) is PITI + MIP, or Principal, Interest, Taxes, Insurance + Mortgage Insurance Premium

Limits the amount of housing debt that a borrower can take on for housing expense. FHA borrowers cannot exceed 31% for monthly housing expense (PITI + MIP). Monthly housing expense divided by monthly gross income = Housing Expense Ratio

Partially Amortized Mortgage

Loan balance is unpaid after the loan term period, requiring the balance to be paid in-full also known as a balloon payment.

Primary Market

Loans are made in the Primary Market. The primary market requires qualifying borrowers by standards set by the Secondary Market. Following the execution of a loan, Lenders typically sell their loans in the Secondary Market.

Non-conventional loan

Loans guaranteed by the government, such as FHA and VA loans.

Qualifying Ratios of a VA loan

Maximum Total Obligation Ratio cannot exceed 41%. There is no Housing Expense Ratio required.

Amortized Mortgage or Level Payment Plan

Monthly payment is constant for the term of the mortgage. As the loan is paid off, the amount paid to principal increases. A schedule is based on a 30 year or 15 year term.

Mortgage Bond Financing through state bond loans or Mortgage Revenue Bond that are obtained though the Housing Finance Agency.

Mortgage Bond Financing is suitable for qualified first-time homebuyers, offering below market interest rates for owner-occupied homes. Not every mortgage lender offers this program.

Mortgage Loan Originator (MLO) works with the buyer to process loan applicants and negotiate terms and conditions between the borrower and lender. They are not employed by Federally chartered and regulated institutions, but must be licensed by state.

Mortgage Loan Originators are regulated by the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act of 2008, creating minimum standards for licensing and registering with the Nationwide Mortgage Licensing System.

Package Mortgage

Mortgage agreement that provides home financing for purchasing real property, property improvements, and movable equipment or personal property, such as tables and chairs. Popular for businesses purchasing a turnkey business opportunity.

Loan limits of VA loans

No maximum limit of loan amount or home price as long as buyer meets TOR requirement, but the value of property must match the Certificate of Reasonable Value AKA appraisal.

Hard Money Lenders - Private Money Bankers or Real Estate Bankers groups, individuals, companies or funds that pool private money and lend those pools for a profit.

Not well publicized, predominately small highly-specialized mortgage brokers familiar with commercial real estate lending. Mortgage pools are structured and operate similar to commercial banks.

Amortizing a mortgage

Outstanding principal balance x Interest Rate = Annual Interest Rate. Divide this number by 12 months = interest paid monthly, with remainder being paid towards principal. Subtract principal payment from Beginning Principal Balance for new loan amount to calculate next month's interest payment.

Negative Amortization

Payment made by the borrower is less than the interest due, and balance is added to the loan balance; therefore, the mortgage balance increases, instead of decreases.

Straw Borrowers

People who consent to use their information to qualify for a mortgage but do not intend to live in the home. Usually offered money for this "favor" or doesn't know that his/her name and details have been used on the loan application.

Adjustment interval

Period for which payment rate can be adjusted. The period between is called adjustment period, and can be months, quarters, or years.

Index

Points at which fluctuation of interest rates can occur, usually outside of lender's control.

Primary Market Lenders do not hold the loan once loan is made. They bundle loans together, package, and sell on the Secondary Market.

Primary sources of home financing is through mortgage lenders such as savings associations, commercial banks, credit unions and loan money from company's personal funds from investors or borrowed capital.

Equal Credit Opportunity Act is regulated by Consumer Financial Protection Bureau

Prohibits discrimination on the underwriting of loans on the basis of sex, marital status, race, religion, age, or national origin. A lender cannot require an applicant's spouse join the application. Prohibits discriminatory treatment of income, child support, alimony, public assistance or part time employment. Prohibits inquiry of child-bearing plans.

Types of appraisal required for VA loan.

Properties purchased using a VA loan require property appraisal by a VA-approved appraiser.

VA Home Loans

Provided by VA approved private lenders, such as banks and mortgage companies. Eligible properties include single family homes or owner-occupied multi-family dwellings of 4 or less and can be new or existing construction or refinancing. Lenders may charge discount points.

Characteristics of FHA-insured mortgage loans

Qualifying ratios, interest rate, appraisal, closing costs, assumption, prepayment

Characteristics of a VA loan

Qualifying ratios, loan limits, loan guarantee, amount of down payment, entitlement, reusing the entitlement, appraisal, VA funding fee, loan origination fee, prepayment, assumption, interest rate

Real Estate Settlement Procedures Act (RESPA) was passed by Congress in 1974

RESPA requires lenders to provide borrowers with a booklet of information regarding closing costs and provides advance estimates of costs; provided no later than 3 days the application was submitted to the lender. Closing disclosure provided 3 days before loan closing.

Savings Associations are chartered with state or federal government using F.A. in their name and are authorized, regulated, and insured by FDIC for up to $250,000 per depositor per account.

Savings Associations are Institutions that accept savings and interest, and make home mortgage loans for single-family homes and home equity loans or lines of credit. Savings Associations primarily make conventional loans, but will make VA and FHA loans.

Secondary Market and Conforming Loans

Secondary Market sets standards for qualifying borrowers whose loans are eligible for purchase by the secondary market. The criteria screened include: down payment of 20%, LTV ratio not to exceed 36%, Private Mortgage Insurance, and qualifying ratios of buyer's income to debt.

VA Closing Costs

Seller's concessions cannot exceed 4% of the loan; buyer is not allowed to pay termite fees; borrowers not allowed to pay commission or brokerage fees, or buyer-broker fees. No Upfront Mortgage Insurance Premium is required.

Secondary Markets circulate the mortgage money supply

Selling loans provides the lender with the proceeds that the banks use to make new mortgage loans, which drive down rates through competition as lenders compete for the same buyers.

VA Loan Guarantee Program / G.I. Bill of Rights

Servicemen's Readjustment Act of 1944 (G.I. Bill of Rights) signed into law by President Roosevelt, revised in 1966 for veteran who served during times of war and peace.

Consumer Credit Protection Act AKA Truth in Lending Act was passed in 1968 and is regulated by Federal Reserve Regulation Z informing borrowers about the true cost of the loan.

TILA promotes the informed use of consumer credit requiring disclosures about its terms and costs to include finance charge, total amount financed, total amount of payments, APR, discount points, servicing fees, origination fees.

Right of Rescission through the Truth in Lending Act

TILA requires disclosure of Right of Rescission be made to consumers of credit. Consumer has 3 days to exercise the right to rescind credit transaction and applies only to equity lines of credit or secondary mortgages - do not apply to new loans or construction loans.

Discount Rate is interest charged to commercial banks and depositories for loans received from the Federal Reserve Bank. Not to be confused with borrower's discount points.

The 2nd most common method of controlling the supply of money is through discount rates.

Federal Reserve System is the central banking authority, provides a safer and more stable monetary system, and influences the availability and cost of money and credit.

The Federal Reserve System conducts monetary policy through open market operations, discount rates, and Reserve requirements. The Federal Reserve System regulates and supervises the banking industry through the Truth in Lending Act and Equal Credit Opportunity Act.

The VA does have established loan guarantee limits, which varies by county depending on housing prices in the region.

The VA does have establish loan guarantee limits which limits the purchase price that can be bought with a down payment, meaning how much liability the VA will assume.

Margin

The amount the lender adds to the index to make the loan profitable. Margin is based on credit. The higher the credit, the lower the margin added. Index + Margin = Full Indexed Rated

Open Market Operations

The sale and purchase of U.S. Securities on the Open Market is the principal method and most effective tool to influence the supply of available money.

Qualifying Ratios for FHA-insured mortgage loans

There are two measures that look at a buyer's financing to gross income: 1) Total Obligation Ratio and 2) Housing Expense Ratio. FHA non-conventional loans allow for more long-term debt than conventional loans. Allows up to 43% TOR and 31% for HER (PITI + MIP).

VA Prepayment Clause

There is no prepayment penalty clause on VA loans.

Total Obligation Ratio cannot exceed a maximum of 36% for conventional conforming loans.

To qualify for a conforming conventional loan, a borrower cannot exceed a MAX total monthly obligation ratio of 36%. TOR protects the borrower from capping out long term debt a borrow can take on as a monthly payment. Monthly long term debt is anything that gets reported on credit, including credit cards, auto payments, student loans, child support.

Calculating Total Obligation Ratio

Total monthly cost of home + total monthly long term debt obligations = total monthly obligations. Divide this total by the borrows total monthly gross income = TOR (should be <36%)

Qualifying for a loan and qualifying a buyer

Uniform Residential Loan Application (employment, credits, assets, liabilities); Credit evaluation and credit scoring (FICO); Qualifying ratios (HER and TOR); Qualifying the property (appraisal); information required by lender (landlord, charge off, judgements, liens, bankruptcy > pre-qual (verbal) or pre-approval (written).

Entitlement is the amount that the VA will guarantee.

VA Entitlement is 25% of the home's value. The max guarantee loan amount in most of the country is $417,000, with 25% or $104,250 being the max entitlement. A down payment or Private Mortgage Insurance is required for surpassing the max. Once VA loan is paid off, the full entitlement is available.

VA loan assumption

VA loans do not have a Due-on-Sale clause, so VA loans may be assumed. Buyers after 1988 must be approved by the VA and a Novation Agreement is required so that original buyer is not liable if new buyer defaults. VA mortgagors prior to 1988 assume liability for new buyer mortgage is assumed.

Buyers obtain loans in the Primary Market. Lenders have the option to hold or sell the loan in the Secondary Market.

When a lender makes a loan, it becomes personal property of the borrower, so the loans can be bought or sold as "chattel." Loans are packaged together and sold as mortgage-backed securities meaning the real estate or liquid asset can be "liquidated."

Government National Mortgage Association (GNMA) such as Ginnie Mae, established by the U.S. in 1968 to promote homeownership, guarantees payment of interest and principal in full and on time.

Wholly owned government organization under HUD which serves as a secondary market for VA and FHA loans and is a mortgage-backed securities program. Charges a fee for government guarantee but adds value which enables them to be sold at a higher profit for investors.