Chapter 3 Unit 4

What percent of a VA-guaranteed loan may a veteran borrow with no down payment?

100%

Define a conventional mortgage loan and explain the risk to the lender.

A conventional mortgage loan is a permanent long-term loan that is not FHA- insured or VA-guaranteed with interest rates usually determined by market rates. It has a greater risk to the lender because of the lack of insurance or guarantee by a government agency.

Veteran Eligibility

A veteran must apply for a Certificate of Eligibility to find out how much the VA will guarantee in a particular situation.

Name five situations where a veteran may use a VA-guaranteed loan. (Additional answers can be found on Page #14)

Buying a home Building a home Refinancing an existing home loan Repairing a home Installing solar heating and/or cooling system

List the three things the lender and/or investor is concerned about with a conventional loan.

Current and future value of propertyIncome and income potential of applicantAttractiveness of other investments that could be made for a better return

FHA and VA Comparison: Types of Properties

FHA & VA : 1-4 family, owner-occupied.

FHA and VA Comparison

FHA and VA both allow buyer to pay more than appraised value, if they pay the excess above appraisal in CASH. Neither FHA nor VA allows prepayment penalties. Therefore, there cannot be an alienation (due on sale) clause in the promissory note, mortgage or deed of trust. The difference between VA & FHA is FHA insures & VA guarantees repayments of loans.

FHA and VA Comparison:: Assumptions

FHA: Allowable under some conditions. Must have FHA approval for all loans after 1987. VA: Allowable but must be 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.

FHA and VA Comparison: 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.

FHA and VA Comparison: Who?

FHA: Anyone with qualified income VA: Eligible Veterans only, or widows of veterans who have not remarried

FHA and VA Comparison: Down payment

FHA: As low as 3.5% down. Down payment is subtracted and closing cost added to establish and ACQUISITION COST. VA: NO DOWN PAYMENT REQUIRED.

FHA and VA Comparison: 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.

FHA and VA Comparison: 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.

FHA and VA Comparison: 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.

FHA and VA Comparison: Govt. Support

FHA: is a Federal Agency under HUD. It insures the lender against loss due to small down payment. Veterans Administration: VA guarantees loans by making the veteran personally liable.

Name five FHA loan programs besides the basic program referred to in question #1. (Additional answers can be found on Page #11)

Home improvement loans (FHA 203K)Condominium loans (FHA 234)Graduated-payment loans (FHA 245)Adjustable-rate loans (FHA 251)Reverse mortgage for owners over 62 years old

With conventional loans, as with any other, the lender and/or investor:

Is concerned with the current and future value of the property. Is concerned with the income and income potential of the loan applicant. Is concerned with the attractiveness of other investments that could be made for a better return. A lender or investor is really not interested or concerned with the loan applicant's need of financial assistance.

What does the VA issued Certificate of Reasonable Value do?

It creates a maximum value on which the VA-guaranteed portion of the loan will be based.

VA Loan Interest rate

Lender and borrower negotiate the interest rate for all VA-insured loans.

VA Loan Assumability

Loans originated before March 1, 1988, are freely assumable. Loans originated after that date are assumable with the buyer's approval and assumption agreement, but the original borrower remains liable for the debt unless the VA agrees to grant a release.

The largest private insurer is

M.G.I.C. (MORTGAGE GUARANTEE INSURANCE CORPORATION).

How are maximum loan amounts set for FHA loans?

Maximum loan amounts are set by region and are restricted by the loan-to-value ratios in effect.

Name five advantages to a conventional loan.

Processing takes less timeTypically have fewer formsUsually no legal limit on loan amountsBorrowers have other lenders to go to if they are refused by one lenderLenders are more flexible

Conventional loans have several advantages over government-backed loans:

Processing usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. Conventional loans typically have fewer forms, and processing is more flexible. There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency. In the event of a loan refusal, borrowers have other lenders that they can make application to. There is only one of each government agency type, so if the loan is refused by a particular agency, there are no alternative lenders available. Conventional lenders are much more flexible. Many offer a variety of loans with attractive provisions.

Assumability

Rules for assumability vary according to when the FHA-insured loan was originated and whether the original loan was for an investment property or an owner-occupied principal residence. Loans originated before December 1, 1986, are generally assumable without restriction. Loans originated after December 1, 1986, require that the assumer show creditworthiness. Loans originated after December 15, 1989, may not be assumed unless the borrower fully qualifies. No loans for investment or non-owner-occupied properties originated after the latter date are assumable.

FHA mortgage insurance

The FHA determines how much mortgage insurance must be provided and charges the borrower an appropriate mortgage insurance premium (MIP). The initial premium is payable at closing or is added to the borrower's loan balance and financed. Further annual premiums, called Mutual Mortgage Insurance (MMI), are charged monthly. The amount of the premium varies according to the loan term and the applicable loan-to-value ratio. Licensees should always check with lenders or with the FHA to remain current, as the FHA frequently changes standards and regulations.

Maximum loan amount

The FHA has set maximum loan amounts for over 80 regions. Borrowers within a region are limited to the loan ceiling amount in effect for the region. In addition, the maximum loan amount is restricted by the loan-to-value ratios in effect. The maximum FHA-backed loan a borrower can obtain will be the lesser of the regional ceiling amount or the amount dictated by the loan-to- value standard. The FHA includes closing costs with sales price or appraised value in the acquisition cost used in the loan-to-value calculation. The ratios that FHA uses are different than that of conventional lenders. FHA uses a Housing Expense ratio (HER) to determine if a buyer is qualified for the loan. The gross monthly income times 29% is for the housing payment and 41% is for all obligations. Because this a federal program, the ratios, rules and interest rates change often. The real estate professional is advised to check with local lenders on the ratios and the maximum sale price.

Borrower default

The FHA reimburses the lender for losses due to default by the borrower, including costs of foreclosure.

VA Loan Points, fees and costs

The lender may charge discount points, origination fees of up to 1%, and other reasonable costs. These may be paid by seller or buyer, but may not be financed. The VA funding fee, however, may be included in the loan amount.

VA Loan Prepayment privilege

The loan may be paid off early without penalty. VA does not allow prepayment penalties to be charged if a veteran pays off a loan early.

The Veterans Administration offers insured loans to veterans even when other loan options are available. What is wrong with this statement?

The VA does not lend money unless there is no other financing available. Also, the VA does not insure loans; it guarantees them.

VA Maximum loan amount

The VA does not limit the loan amount, but does limit the amount it will guarantee.

VA Loans Borrower default

The VA reimburses the lender for losses up to the guaranteed amount if foreclosure sale proceeds fail to cover the loan balance.

VA Down payment requirement

The VA usually requires no down payment although the lender may require one.

VA-guaranteed loans

The Veterans Administration (Department of Veterans Affairs) offers loan guarantees to qualified veterans. The VA, like the FHA, does not lend money except in certain areas where other financing is not generally available. Instead, the VA partially guarantees permanent long-term loans originated by VA-approved lenders on properties that meet VA standards. The VA's guarantee enables lenders to issue loans with higher loan-to-value ratios than would otherwise be possible. The interest rate on a VA-guaranteed loan is usually lower than one on a conventional loan. The borrower does not pay any premium for the loan guarantee but does pay a VA funding fee at closing. In addition to insuring loans to veterans, the VA may insure loans for lenders who set up a special account with the VA. The VA may also actually lend money directly when an eligible veteran cannot find other mortgage money locally.

FHA Loan Prepayment privilege

The borrower has the right to pay off the loan at any time without penalty, provided the lender is given prior notice. The lender may charge up to 30 days' interest if the borrower provides less than 30 days' notice.

Interest rate

The lender and borrower negotiate the interest rate on an FHA-loan without any involvement by FHA.

Points, fees and costs

The lender may charge discount points, a 1% loan origination fee, and other such charges. These may be paid by buyer or seller. However, if the seller pays more than 6% of the costs normally paid by a buyer, the FHA may regard these as sales concessions and lower the sales price on which the loan insurance amount is based.

VA Loan loan term

The maximum loan term for one- to four-family residences is 30 years. For loans secured by farms, the maximum loan term is 40 years.

FHA Down payment requirement

The minimum down payment for an FHA-loan is based on the lower of the appraised value or the sales price. The formula used is: 3% of the first $25,000 of the acquisition cost, plus 5% of the balance of the acquisition cost up to $125,000, plus 10% of the remainder of the acquisition cost up to the regional loan ceiling 100% of any acquisition cost over the regional loan ceiling

VA Appraisal

The property must be appraised by a VA-approved appraiser. The VA issues a Certificate of Reasonable Value (CRV), which creates a maximum value on which the VA-guaranteed portion of the loan will be based. The property must meet certain VA specifications. An approved VA appraiser must issue a CRV showing the value of the property to be equal to or greater than the sales price. The CRV is valid for six months on existing property and 12 months on new construction.The veteran may proceed with the purchase if the sales price exceeds the CRV but will be required to pay the difference in cash. The source of the cash must be approved by the VA. If the CRV is not equal to or greater than the sales price, the veteran may withdraw from the contract.

Appraisal

The property must be appraised by an FHA approved appraiser. The property must also meet the FHA's standards for type and quality of construction, neighborhood quality, and other features.

VA Loan Additional features and requirements

The veteran must have served 181 days active service in the military since 1940. The VA requires that a veteran assumes 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. Loans may be assumed by non-veterans, but veterans may still liable. VA will lend money in rural areas where there is no financial institution available. 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 is given a novation because he/she will still be liable for the loan. Once a VA loan is paid in full or the member sells the property and frees the loan, they may re-apply for another VA loan.

FHA Loan Maximum loan term

Thirty years is the maximum length of the repayment period.

What is the basic FHA-insured loan program and what type of properties does it cover?

Title II, Section 203(b) covers loans for 1 - 4 family residential properties.

Veterans may use VA-guaranteed financing for any of the following situations.

To buy a home. To buy a townhouse or condominium unit in a project that has been approved by VA. To build a home. To repair, alter or improve a home. To simultaneously purchase and improve a home. To improve a home through installment of a solar heating and/or cooling system or other energy efficient improvements. To refinance an existing home loan. To refinance an existing VA loan to reduce the interest rate and add energy efficiency improvements. To buy a manufactured (mobile) home and/or lot. To buy and improve a lot on which to place a manufactured home which you already own and occupy. To refinance a manufactured home loan in order to acquire a lot.

Conventional loans also have their disadvantages:

Typically, conventional loans require higher down payments than government-backed loans. Some conventional loans carry prepayment penalties, while government-backed loans do not.

A conventional mortgage loan is

a permanent long-term loan that is not FHA- insured or VA-guaranteed. Market rates usually determine the interest rate on the loan. Because of the lack of insurance or guarantee by a government agency, the risk to a lender is greater for a conventional loan than for a non-conventional loan. This risk is usually reflected in higher interest rates and stricter requirements for the down payment and the borrower's income qualification. At the same time, conventional loans allow greater flexibility in fees, rates, and terms than do insured and guaranteed loans. The primary sources of conventional loans are banks and savings and loan associations. Other conventional lenders include credit unions, life insurance companies, pension funds, mortgage bankers, and private individuals. Various types of lenders specialize in mortgage lending for specific purposes and type of borrower, such as commercial, construction, or single-family residential loans.

there are basically two categories of loans available to buyers in the marketplace

conventional loans and government-backed loans

Government-backed loans are

guaranteed, insured, or funded by a government agency.

The PMI payments terminate once the loan has been repaid to a certain level. A federal law called the Homeowners Protection Act requires that, on any loans originated after July of 1999, PMI must terminate when the borrower:

has accumulated 22% of equity in the property (loan-to-value ratio is 78%), and is current with all loan payments. The law allows a borrower whose equity equals 20% of the purchase price or appraised value to request that the lender cancel the PMI. The lender must grant the request if the borrowers' payment history is good, the home has not decreased in value, and the borrowers have not taken out any other loans on the property.

In addition to Section 203(b) loan programs, FHA offers insurance coverage for other loan products. These include:

home improvement loans (FHA 203K program will be retired in 2015) subsidized loans for low- and middle-income families loans for condominiums (FHA 234) loans for multi-family projects graduated-payment loans (FHA 245) adjustable-rate loans (FHA 251 ARM) reverse mortgage for owners 62 years of age or older

FHA-insured loans

is an agency of the Department of Housing and Urban Development (HUD). It does not lend money, but insures permanent long-term loans made by others. The lender must be approved by the FHA, and the borrower must meet certain FHA qualifications. In addition, the property used to secure the loan must meet FHA standards. The FHA insures that the lender will not suffer significant loss in the case of borrower default. To provide this security, FHA provides insurance and charges the borrower an insurance premium. FHA loans typically have a higher loan-to-value ratio than conventional loans, enabling a borrower to make a smaller down payment.

Conventional loans do not have

the backing of any federal government agency.

private mortgage insurance program (PMI).

usually insures the top 30% of a loan, protecting the lender in case the borrower defaults on the loan. Since a lower down payment means a higher loan-to-value ratio, lenders need to minimize their risk with additional security in the form of insurance. The lender purchases the insurance from a private mortgage insurance company. The lender passes the cost to the borrower by charging a fee at closing plus an additional monthly fee while the insurance is in force. Using this process, a borrower may be able to get a loan for up to 97% (or even 100%) of the appraised value of the property.