Chapter 13 - Types of Mortgages and Sources of Financing
Government National Mortgage Market Association (GNMA)
- a government owned corporation that operates under the HUD that provides a secondary market for VA and FHA loans - Ginnie mae was established in 1968 to promote home ownership. - all loans from ginnie mae carry the full faith and credit guarentee of the US government meaning that investors will be paid in full and on time when dealing with loans from GNMA. - this level of certainty comes with a fee to it but is still attractive to investors, allowing them to offer more mortgages at lower interest rates.
conventional mortgage
- a mortgage loan that is not guaranteed or insured by the government - the lender assumes all risk of default -the buyer is required to make a downpayent to help offset the risk taken on by the lender - typically a 20% down payment is required, leaving an 80% loan-to-value ratio
characteristics of FHA loans
- an appraisal is required to receive an FHA loan - FHA loans allow for assumption because they do not contain a Due-on-sale clause. however, this is not open to investors because the new home buyer must actually live in the home. - FHA loans also include a prepayment clause allowing the home buyers to pay the home off early.
FHA interest rates
- as with conventional mortgages, the interest rate for an FHA loan is not set by the FHA or the government. the interest rates are negotiated between a borrower and a lender.
Total obligation Ratio (TOR)
- cannot exceed 36% for a conventional conforming mortgage. *Total monthly obligations / monthly gross income = TOR.* Ex: waldo wants to purchase a home. the total PITI on the home is $1,000. he is also paying $800 per month in other long term debt obligations (car payment, credit cards). waldos gross monthly income is $3,200. will he qualify for this home? ($1,000 + $800) / $3,200 = .5625 or 56%, therefore he does NOT qualify for the home since his TOR is 56% which is above the 36% max limit.
Qualifying for a loan
- lenders use the Uniform Residential Loan Application to qualify buyers for a home loan. - this takes into account a buyers: employment, credit, assets, and liabilities information. - a property appraisal must also be done to qualify the buyer for a loan. if the loan exceeds what the property is worth, the lender will not loan the money. Information required by lenders for a loan: income, assets, credit verification. all of this info is used with the property appraisal amount to determine if a buyer is eligible to purchase a home.
Equal Credit Opportunity Act (ECOA)
A federal act, which prohibits discrimination by lenders on the basis of sex, marital status, race, religion, age, or national origin in any aspect of a credit transaction.
Truth in Lending Act (TILA)
A federal law requiring lenders to provide residential loan applicants with estimates of the total finance charges and the annual percentage rate (APR). - its goal is to inform borrowers of the true cost of a loan. helps consumers shop loans more fairly by easily being able to compare one loan to another. TILA also requires that a disclosure be made to consumers of credit that they have a 3 day right of recision. this applies to home equity lines of credit, second mortgages, and refinance loans.
partially amortized mortgage
A method of loan repayment in which the balance of the outstanding loan is not zero at maturity, and thus a balloon payment is due at that time paying off the rest of the balance remaining. this loan option is attractive because it results in a much lower monthly payment with one large payment at the end of the loan term.
mortgage brokers
A mortgage broker acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses. they do not lend their own money or service loans. Mortgage loan originators help negotiate the conditions of a loan between a borrower and a lender.
qualifying ratios of FHA loans
FHA loans allow for more long term debt than conventional loans. up to a 43% TOR (total obligations ratio) is allowed for FHA loans compared to just 36% TOR on conventional loans. - Housing Expense Ratio (HER) can not exceed 31% with FHA loans. there is no HER requirement on conventional mortgages *there is a maximum mortgage limit with FHA loans*
Freddie Mac
Federal Home Loan Mortgage Corporation - created by congress to help expand the secondary mortgage market. similar to fannie mae, Freddie mac buys conventional mortgages, pools them all together, and sells them to investors on the open market. - shares of freddie mac are sold publicly
Housing Expense Ratio (HER)
Monthly housing expense = Principal + interest + property taxes + house insurance + FHA Mortgage insurance premium Monthly housing expense / gross monthly income = HER *(PITI + MIP) / monthly gross income = HER*
Real Estate Settlement Procedures Act (RESPA)
The federal law that requires certain disclosures to consumers about mortgage loan settlements. The law also prohibits the payment or receipt of kickbacks and certain kinds of referral fees. - it applies to most any closing involving a standard home mortgage loan from a financial institution or mortgage banker. - *it requires that a borrower be provided with a booklet of information regarding closing costs at the time a written application is submitted or no later than 3 business days after the application is received.* - a closing disclosure form must be provided to the buyer within 3 business days before the loan closing. this form details all of the costs associated with the closing including lender fees, real estate agent commission, title closing fees, and APR. *RESPA also prohibits kickbacks*!
FHA mortgage insurance
Up front mortgage insurance premiums (UFMIP) is charged to borrowers of an FHA loan as a closing fee at the time of closing. this money goes into a fund incase the buyer defaults. - Mortgage insurace premium (MIP) is another yearly mortgage fee that is charged to borrowers but is paid in monthly installments. this money also goes into a fund incase the buyer defaults.
characteristics of a VA loan
VA loans include a prepayment clause which allows the loan to be paid off early. - they also do not have a due-on-sale clause which means the loans can be assumed by a buyer - a loan origination fee up to 1% may be charged by the lender to cover administration costs of the loan.
Qualifying VA ratios
VA's must have a TOR below 41% to qualify for a mortgage. there is no HER % requirement. - unlike FHA loans, there is no lending limit with VA loans. as long as the applicant meets their TOR ratio and the home is priced at a reasonable amount, they can qualify for the loan.
home equity loan
a loan based on the difference between the current market value of a home and the amount the borrower owes on the mortgage. i.e. you use the portion of your home thats paid for to back the loan. because a Home equity loan is secured by the value of your home, failure to make payments on it means you could lose your property to foreclosure. - if there is already a mortgage on the property, a home equity loan is a type of second mortgage. its a junior lien secured by the equity in your home.
package mortgage
a mortgage agreement that included home financing including real property, property improvements, and movable equipment. a popular type of mortgage for businesses who wish to purchase a turn-key business opportunity; the mortgage includes extra funds to cover the tables, chairs, registers, etc. that the business may need.
amortized mortgage
a mortgage option with a constant monthly payment amount for the entire duration of the loan, also known as a level-payment plan. the loans are typically for either 15 or 30 year durations but can be paid off early. the information needed to calculate an amortized loan schedule is: outstanding debt (the principal balance owed), interest rate, and monthly payment. 1. beginning principal amount x interest rate = annual interest 2. annual interest / 12 = monthly interest due 3. scheduled monthly payment - monthly interest due = $ paid on principal 4. beginning principal balance - $ paid on principal = new balance
Fannie Mae
a private corporation that trades on the NYSE, it is NOT a government agency. - Fannie Mae is the secondary market for VA, FHA and Conventional mortgages. - all three of these loan types are bought and sold by fannie mae
Reverse annuity mortgage (RAM)
also called a Reverse Mortgage, or Home Equity Conversion Mortgage (HECM); it is a special mortgage for homeowners who are 62 years and older who have a large amount of equity built up in their home. they can borrow against that equity - taking the cash in a lump sum, as a monthly income stream or as a line of credit that they can tap when needed. *the money does not have to be repaid until the owner moves, sells the house, or dies. HUD's Federal Housing Administration insures most reverse mortgages.
purchase money mortgage
also known as "seller financing" or "owner financing" it is a home financing technique in which the new home buyer borrows money from the seller instead of, or in addition to, a bank. this is done when a buyer can not quality for a bank loan for the full amount. - title is still transferred to the buyer just like in a regular closing - the seller then files a lien on the property in case the buyer defaults on payment.
FHA Down Payment
buyers financing a home with an FHA loan must put down 3.5 % of the purchase price or the appraised value, whichever is less. - this leaves a 96.5% LTV ratio - must be paid by a relative with an approved gift lender - cannot be paid by the seller
primary sources of home financing
buyers obtain a loan in what is referred to as the Primary Mortgage Market. - buyers can obtain a loan from a mortgage lender which is an institution specifically in the business of loaning money. - buyers may also obtain a loan from banks, credit unions, or savings associations. - sellers may also finance their homes to aid buyers in the purchase
the secondary mortgage market
buyers obtain loans in the primary mortgage market. lenders then have the option to hold the loan or sell it on the secondary mortgage market. when a lender makes a loan, that loan becomes the personal property of the lender.
Private mortgage insurance (PMI)
charged to a borrower when he has less than a 20% down payment on a property. this protects the lender incase the buyer defaults on the loan. to avoid this fee, a buyer must make at least a 20% down payment on the home.
mortgage assumption
conventional mortgages can not be taken over by a new home buyer. conventional mortgages contain a due-on-sale clause meaning that the entire amount of remaining funds must be paid at the time the home is sold.
VA down payment
homes with a purchase price of up to $417,000 do not require a down payment. Entitlement is the amount of money that the VA is willing to put down as a down payment on the home and it is up to 25% of the price of the home. so 417,000 x 25% = $104,250 max entitlement. home values must be appraised by a VA approved appraiser.
nonconventional loans
loans that are created or financed with the help of a government source. FHA/VA loans require smaller down payments than conventional loans.
Federal Housing Administration (FHA)
provides mortgage insurance to help people who have smaller down payments qualify for home mortgages by insuring lenders against losses on the mortgage loan. - it is the largest insurer of mortgages in the world *FHA is not the actual mortgage lender for homebuyers, it is only an insurer in the case that a home buyer defaults on payments*
the federal reserve and interest rates
the Fed conducts monetary policy through one of three ways: 1. open-market operations 2. discount rate 3. reserve requirements the Fed also has regulatory and supervisory responsibilities over banks and this is done through TILA and the Equal Credit Opportunity act
reserve requirements
the amount of money that the federal reserve require that a bank has in on-hand funds each night. a small increase in reserve requirements causes a large reduction in money supply. a small decrease in reserve requirements causes a large increase in money supply
discount rate
the interest rate charged to banks for loans received from the federal reserve - greatest impact on cost of short-term interest rate
open-market operations
the sale and purchase of US securities is the main method and most effective tool for influencing the supply of available money. - purchase of securities increases money supply and decreases interest rates - sale of securities decreases money supply and increases the interest rates
types of home equity loans
there are two types of home equity loans 1. the standard home equity loan - you borrow a certain amount of money and repay it over a period of time 2. Home equity line of credit; HELOC - allows you to borrow up to a certain limit as you see fit, in whatever amounts and at whatever times you wish. its like a credit card that lets you borrow money instead of charging purchases to it. - the interest paid on a mortgage is tax deductible so people may prefer to use these types of loans over other types of loans
Qualifying ratios for a home loan
to obtain a loan, a buyer must meet these qualifying ratios: Conventional Loan: TOR < 36% FHA Loan: HER < 31%, TOR < 43% VA Loan: TOR < 41%
Qualifications for a VA loan
to qualify, you must be either: a veteran, un-remarried surviving spouse of a veteran, or active military personnel. - real estate licensees should rely on the specific VA lenders to determine each buyers eligibility