Chapter 5 Government Financing FHA
True
1 in 5 borrowers finance with an FHA loan True or False
True!
A mortgage insurance premium MIP is required for all FHA loans, regardless of down payment size. True or False
Yes like 620 or higher but some lenders do actually go lower
A mortgage lender overlay is qualification requirement applied by a lender that exceeds the standard qualification guidelines for a loan program. Borrowers should think of lender overlays as an extra layer of guidelines they must meet to qualify for a mortgage. Do some lenders unfortunately put their own overlays on FHA loans and their less stringent FHA credit score requirements?
Yes
After the 2008 meltdown, we're homebuyers having a hard time qualifying for PSI because mortgage insurance became more stringent and therefor buyers turned to FHA insured loans?
True For Example If the initial interest rate for the loan is 6%, the buyer must qualify at 7%. This is because the maximum interest rate for the loan in the second year is the initial interest rate (6%), plus a maximum 1% increase FHA cap
All loan requirements, conditions, and criteria for standard 203(b) loans also apply to Section 251 ARM loans. Maximum loan amounts are the same as for 203(b) loans. & No buydowns are permitted to help the buyer qualify, who also must qualify for the loan at the second year's interest rate. True or False
203: statute section (b): paragraph
All of the rules and regulations we've discussed so far apply to the standard Section 203(b) loan now we're going to talk about some other FHA loan programs you may come across in your real estate career. Most of these loan programs are referred to by the section number of the federal statute that describes them for a standard 203(b) loan, what does 203 represent and what does (b) represent?
True
Any U.S. citizen, permanent resident, or non-permanent resident with a work visa may apply for mortgage insurance provided by the Federal Housing Administration FHA True or False
Freestanding ranges
Appliances that feature finished sides that allow them to be installed between cabinets or on their own, making them a flexible choice for most kitchens
Yes
Appraisals are to give an estimate of value. but does FHA require appraisers to identify potential problems and deficiencies as part of the appraisal?
No
Are Closing costs added when figuring the maximum mortgage amount for an FHA loan?
Yes!
Are FHA insured ARMS loans more popular when interest rates are high?
Yes
Are most FHA loans currently processed through the direct endorsement program?
full Thus, any offers by buyers involving mortgage assumptions must be investigated thoroughly with the lender and perhaps even with legal counsel--ask about your broker's policy One great thing about FHA loans is that they are assumable. This could be a great selling feature if your seller has an FHA loan with 4% interest rate that's assumable and current interest rates are 6%⭐️😉 they would still have to come up with the difference of what you owe on your house vs what your selling it for but still! they could finance the majority of that at 4%
Assumability of FHA loans FHA requires the buyer to sign a statement saying that if the property is transferred to another person whose credit has not been approved by the FHA, the entire mortgage balance is immediately due in ____
1
At least _ borrower must occuy the home
Yes A temporary interest rate buydown involves having a lower interest rate for a period of time at the beginning of your mortgage. For example, although your permanent interest rate might be 6%, your interest rate for the first couple of years of your loan might be 5%.
Buydown Additional funds in the form of points paid to a lender at the beginning of a loan to lower the interest rate and monthly payments. Buydown, Permanent When points are paid to a lender to reduce the interest rate and loan payments for the entire life of the loan. Buydown, Temporary When points are paid to a lender to reduce the interest rate and payments early in a loan, with interest rate and payments rising later. The difference between the interest you would pay under the full rate and what you're actually paying for the first year or two of your mortgage is placed in an escrow account. The escrow account can be covered by your lender, a seller or real estate agent in the transaction. Each month, the investor gets a payment from the escrow account in order to make up the difference between what you're paying during the buydown and what's owed based on your interest rate. Can you have a fixed rate loan with a temporary buydown?
Yes
Can a buyer finance the initial MIP with a FHA loan?
Yes
Can closing costs be financed with a FHA loan?
Yes
Can the initial MIP be financed w FHA loans?
Call Provision Also referred to as call a note.
Clause that lets lenders demand full payment of a loan immediately.
Yes!!!!!
Do FHA rules and regulations change all the time?
Yes! Current rules can be obtained from a lender, or by visiting http://www.hud.gov
Does FHA allow ARM loans?
Yes
Does the FHA establish underwriting guidelines for approving borrowers and property, sets other loan regulations & FHA regulations have the force and effect of law?
No Instead, the FHA sets a maximum mortgage amount it will insure.
Does the FHA have income limits to determine who is eligible for assistance?
the seller agrees to pay all or some of the buyer's closing costs up to the FHA's limits:6% of sale price or appraised value whichever is less) and then simply raises the contract price. . In fact, some home sellers plan to use this as a strategy to get buyers to pay full price for the home. Of course, the buyer can still pay closing costs separately in cash to avoid paying interest for 30 years on the higher sale price
Estimated closing costs ARE NOT added in when figuring the maximum amount the buyer can finance as part of the loan. if the buyer doesn't pay cash for the closing costs, what usually happens?
T However, the borrower must have sufficient income to service the debt on the home mortgage and all other credit obligations.
FHA Loan Borrower Guidelines: Amount of Income There is no minimum or maximum income a borrower must have to get an FHA loan. T or F
outstanding court ordered judgments
FHA Loan Borrower Guidelines: Credit History More flexibility is allowed in trying to "understand" a borrower's past situation and difficulties. Even with this philosophy, a borrower may have open collections, but ___________ _____ _______ __________: unless they are medically related or a payment arrangement is in effect with a creditor:must be paid before closing.
Section 234(c) rowhouse is generally less fancy than a townhouse. Walkup: allowing access to the upper floors by stairs only; having no elevator.
FHA loan program that insures a loan for 30 years to purchase a unit in a condominium building. The building must contain at least four dwelling units and can be comprised of detached and semidetached units, row houses, walkups, or an elevator structure. & any creditworthy potential owner-occupant who meets FHA underwriting criteria and makes the condominium unit her principal residence is eligible for a mortgage insured under this program
the Department of Housing and Urban Development- HUD
FHA-insured loans are insured by the federal government through what federal government agency?
True For example If a 6% FHA loan had a temporary buydown of two percentage points: making the loan 4%, a buyer must still qualify for the loan as if it were a 6% loan. Temporary buydowns may still be used to make a house payment more affordable, but there is no ability to qualify for the loan based on the lower initial loan rate
For FHA fixed rate loans with temporary buydowns, a buyer must qualify at the notes interest rate. True or false
1.75% Just make sure when you multiply 1.75% by loan amount you change it to .0175
For most FHA programs, the MIP has an initial/upfront premium and an annual premium broken down into 12 monthly payments. The initial/upfront MIP is _.__% of the loan amount for 30-year loans.
true For example, the FHA will not allow a buyer to pay for a tax service fee. This type of non-allowable fee is often collectively referred to as a "junk fee." From HUD's perspective, these fees do not directly benefit the buyer, so buyers are not permitted to pay them.
HUD regulations dictate that some lender fees may not be paid by the buyer and must be paid by the seller or the lender must absorb these fees true or false
the excess amount is applied dollar for dollar to reduce the sale price when calculating the maximum loan amount
If a seller pays more than 6%, what happens?
Yes but ONLY by the MIP amount
If the initial MIP is financed, its added to the loan so the total loan amount may then exceed the FHA maximum, but only by the MIP amount. Is it ok to exceed the FHA maximum loan amount?
True Monthly payments are calculated with the annual MIP, according to the chosen loan program.
If the initial MIP premium for 15-year or 30-year loans is paid in cash at closing, it may be paid by the buyer, seller, or any third party such as a relative. True or False
Gift Letter Bank Statement
If the minimum downpayment is a gift the donor has to sign what stating that it is a bonafide gift and doesn't have to be repaid & the doner also has to provide what showing that they have the funds
alternative tradelines Generally it is easier if a person has at least 3 open trade lines on their credit report for qualifying for any type of loan
If you don't have a lot of established credit, FHA does allow you to use what they call _________ ________ where you can actually build credit by showing your track record of monthly payments on say your auto insurance or cellphone bill or other monthly payments that don't usually show up on a credit report
true
Installment Period the time between Consumer scheduled payments as provided in their loan agreement. normal installment due dates are usually the first of the month true or false
True
MIP will not fall off automatically & is for the life of your loan. To remove it, you'll have to refinance into a conventional loan once you have enough equity. true or false
No
Other FHA regulations Can a borrower use secondary financing for the minimum FHA down payment: as low as 3.5%
No the loan can be paid off at any time Current FHA rules do not allow lenders to require 30 days' written notice in advance of a payoff even if the mortgage or note gives the lender that right. This FHA rule supersedes any agreement in the private loan documents. but if prepayment is offered on a day other than the normal payment due date, the lender may 1. refuse to accept payment until the next due date or 2. charge interest until that date. With secondary financing that's not government provided, no prepayment penalty is aloud as long as the lender is given 30 days notice When the borrower might have to pay an extra months interest if a house is sold or refinanced after the first day of the installment period: may require an entire month's interest be paid. if lender requires prepayment be made on normal installment due date and it's not: may have to pay interest that would be due from the prepayment date up to the next installment due date since the entire month's interest may become due as noted above, people with FHA mortgages try to sell, pay off, or refinance the mortgage close to the end of the month to be sure it's closed before the first of the month or first day of the installment period. normal installment due dates are usually the first of the month.
Prepayment Penalties Each lender is required to give borrowers a written disclosure of its prepayment policy. Do FHA regulations allow provisions for prepayment penalties?
You can expect your FHA closing costs to be anywhere from 2%-4% of the loan amount. If you would like to see a detailed breakdown of all FHA closing costs that you may incur, then read our article on FHA closing costs.⬇️ https://fhalenders.com/fha-closing-costs/ Another option⬇️ If you are trying to finance the FHA closing costs, the home will need to appraise for the purchase price plus the closing cost amount that you are trying to finance. For example, if the purchase price is $200k and you expect to have closing costs of $6k, then the home will need to appraise for $206k. Many people are asking whether there are FHA closing cost assistance programs. A program like this is not common and if available, would be found locally. Most assistance programs are down payment assistance programs. In theory, you could find a down payment assistance program and then use the money that you do have to help offset some of your closing costs. The most realistic way to have your FHA closing costs paid for is to negotiate that with the seller. You have options to close on an FHA loan without paying closing costs. These are the most effective ways to eliminate having to pay for closing costs at closing. Seller Closing Cost Contribution - The seller is allowed to contribute up to 6% of the purchase price towards your closing costs. This is the best way to have your closing costs covered. Lender Closing Cost Credit - The lender can cover your closing costs, but this would be in exchange for a higher interest rate. It is important to do the math to see whether this makes sense financially. Closing Cost Assistance - There are programs which can help with closing costs and they are similar to the down payment assistance programs. Read our article on FHA closing cost assistance. https://fhalenders.com/fha-closing-cost-assistance/ If the gift from the relative for the DP is large enough, it can cover the down payment plus the closing costs. FHA gifting rules that apply to the down payment is the same with closing costs If you speak to a lender who is offering no closing costs (or very little), then make sure the interest rate is still competitive. Some lenders may offset the low closing costs with higher rates. FHAlenders.com can help you find an FHA lender
Quoted by FHA In situations where the seller will pay some of the closing costs, another set of FHA loan rules comes into play. According to the FHA official site: "The seller and/or third party may contribute up to six percent of the lesser of the property's sales price or the appraised value toward the buyer's closing costs, prepaid expenses, discount points and other financing concessions." FHA loan rules say there's one thing a borrower cannot do with closing costs, regardless of how they are paid. Closing costs can never be included as part of your minimum FHA loan down payment. Closing costs do NOT count towards the minimum 3.5% down payment and are considered separate from the down payment. The rules for this are found in HUD 4155.1 Chapter Two Section A which clearly states: "Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower's minimum required investment." (Unless the seller pays and adds it to the sales price)
lower This option becomes more popular as interest rates rise.
Second mortgages with FHA loans are most beneficial to the buyer if the second mortgage is at an interest rate ______ than the prevailing rate.
Yes, but only if the seller will pay for them and increase contract price closing costs just are not accounted for when FHA is calculating the maximum mortgage amount the buyer may be loaned
So, can a buyer finance the closing costs with an FHA loan
annual
The 15-year mortgage has the added benefit of a lower ______ MIP. The initial MIP premium is 1.75% of the loan amount, but the annual premium is only 0.70% of the outstanding loan balance divided into 12 equal monthly payments
Less Obviously if the seller pays for the closing costs and increases the sale price, the 3.5% downpayment is (3.5% of the sale price+closing costs=3.5% bc the closing costs have now become apart of the sale price
The 3.5% downpayment is based on the sale price or appraised value, whichever is ____
31% 43% Sometimes, these guidelines are stretched even farther if a borrower is buying a new construction or energy-efficient home.
The FHA allows lenders to approve borrowers with a higher debt service ratio than traditional conventional lenders allow. Borrowers can qualify for an FHA loan with: • A mortgage payment (FHA requires a borrower's property taxes, insurance, and homeowners association dues/condo fees to be included as part of the proposed mortgage payment AKA PITI+homeowners association dues/condo fees) up to __% of their gross monthly income. • Total payments for all debts (including the proposed mortgage payment) up to __% of their gross income.
secondary financing The following second mortgage restrictions do not apply if the mortgage is held by the federal, state, or local government: Secondary financing other than for part of the down payment/closing costs is permitted for FHA loans if: 1. Borrowers income must qualify for the total combined payments of the FHA & nonFHA loan 2. Payments on the second mortgage, if any, must be monthly, & substantially the same amount. 3. Second mortgage may not have a balloon due sooner than ten years unless approved by the FHA Commissioner 4. Second mortgage cannot allow prepayment penalties as long as the lender is given 30 days notice
The FHA does not permit _____________ __________ for the minimum downpayment or closing costs, such as credit cards or second mortgage
1. Since many FHA buyers have lower incomes and not much surplus cash, often borrowers cannot afford the repairs necessary to make the home habitable. 2.lower down payment, higher risk of default. Lender doesn't want to be left w house that needs repair and can't be easily resold
The FHA is more strict than other lenders about condition of the property. There are two reasons for this:
Mutual Mortgage Insurance Plan: MMIP
The FHA's ______ ________ __________ ____: ____-provides a function similar to private mortgage insurance companies, insuring private lenders against losses caused by borrower defaults on loans insured by FHA
True
The FHA/VA prohibits prepayment penalties. True or False
National Housing Act
The _______ _______ ___ of 1934 established the Federal Housing Administration - FHA
Disintermediation
The loss of deposits to competing investments that offer higher returns.
The borrowers • Credit history • Amount of income The FHA is more lenient in both areas than traditional conventional lenders. there is no minimum or maximum income for approval 3. Condition of the property 4. Maximum mortgage amount permitted in the county where the property is located more stringent on condition of property and requires appraisers to report needed repairs or bad conditions Maximum mortgage amount permitted in the county where the property is located (is reevaluated every year) loan limits are higher in areas of higher-cost housing
The main criteria for FHA loan approval are 4 the borrower's: 2
County ⭐️In Ohio, the maximum loan amounts vary by county.
The maximum loan amount depends on the median range of housing costs in a particular community. In most cases, the "community" is defined as the _______ in which the property is located. loan limits are higher in areas of higher-cost housing
True
Under FHA's MMIP plan, lenders approved by the FHA to make insured loans either submit applications from prospective borrowers to the local FHA office for approval on their behalf or may act as direct endorsers automatically submitting the application for FHA insurance when the loan closes True or False
Section 251 FHA ARMS Loans ok so you have 203(b) standard 203(k) limited 203(k) 234C Condo 251 think Area51:ARMS
What FHA Loan Program insures Adjustable Rate Mortgages ARMS & is limited to one-four family dwellings and condominium units
Federal Housing Administration
What does FHA stand for?
Home Equity Conversion Mortgage
What does HECM stand for?
Mortgage Insurance Premium MIP-is not to be confused with PMI for conventional loans
What does MIP stand for?
Mutual Mortgage Insurance Plan
What does MMIP stand for?
Lender demands full payment of a loan immediately
What does calling a note mean?
as low as 3.5%
What is FHAs minimum down payment?
Negative Amortization
When a loan balance grows because of deferred interest.
⭐️upfront, or when the original offer is presented.
When should you negotiate closing costs?
Always consult with a lender or lawyer on loan assumptions.
When trying to assume a loan: 1. Lender can accept assumption and leave terms intact 2. Lender can accept assumption and charge fee or increase interest rate 3. Lender will not allow assumption and call the note. Prepayment penalties can be charged for paying a loan early.
Standard Section 203(b)
Which FHA Loan Program Ordinary, owner-occupant buyers are most suited for & All the points discussed regarding FHA loans so far apply to this loan
Limited 203(K) Streamlined 203(k) Streamlined (K) Limited Repair Program
Which FHA Loan Program insures loans that permit homebuyers to finance, into their mortgage, up to an additional $35,000 -with no dollar minimum-for repairs such as improvements for disability accessibility & basement waterproofing & unlike the standard 203(K) program, any FHA-approved lender may originate this loan
Standard 203(K)
Which FHA Loan Program insures mortgages covering the purchase or refinancing and rehabilitation of a home of at least one year old. & a portion of the loan proceeds is used to pay the seller or, in a refinance, to pay off the existing mortgage. & the remaining funds are placed in an escrow account and released as rehabilitation is completed.
The Government
Who insures FHA loans?
The FHA Prior to the FHA, most home loans were for three to five years and required a 50% or greater down payment
Who was the first to issue long-term loans, up to 30 years, with lower down payments, sometimes as low as $0 down.
Hybrid Hybrid ARMs The FHA offers a standard one-year ARM and four "hybrid" ARM products.
_______ ARMs Offer an initial interest rate that is constant for the first three, five, seven, or ten years. After the initial period, the interest rate adjusts annually.
Federal Housing Administration FHA
a government agency under HUD that actually insures the loans. & main purpose is to assist in providing housing opportunities for low- and moderate-income families. a federal mortgage insurance agency.
Yes, closing costs can be included in a mortgage loan. This is also known as "rolling" closing costs into a loan. The downside of rolling closing costs into a loan is that you will be paying interest on the closing fees, so you'll pay more for your mortgage in the long run.
can closing costs be financed with conventional loans?
Yes
can the minimum down payment be cash from the buyer, a non-repayable gift or loan from a relative a grant from a non-profit home buying type of organization, or from a downpayment assistance program?
insured guaranteed
government programs that provide financing options for homebuyers, include FHA-_______ loans and VA-___________ loans. these programs are less stringent than conventional loans in terms of qualifying
Junk fees
lender charges that do not show up as points on the loan, but are set dollar amounts rather than a percentage of the loan amount. Some lenders charge these fees to improve their profit or yield on a loan.
Direct endorsers When a direct endorser has approved and closed a loan, the application for mortgage insurance is submitted to the FHA.
lenders authorized to underwrite their own FHA loan applications. are responsible for the entire mortgage process through closing, and perform underwriting functions themselves such as credit examination & appraisal review.
Assumption
means one party:buyer: takes over primary liability for the loan of another party-seller.
Government financing Government programs include FHA-insured, VA-guaranteed, and USDA Rural Development loans.
means real estate loans are insured or guaranteed by government programs. This occurs at the federal level and should not be confused with government involvement in secondary markets.
FHA 203(b) loans keep in mind that all of the items we are about to discuss generally apply to standard FHA 203(b) loans. Other FHA loan types may have different guidelines or additional criteria.
standard ___ ____ _____, are considered by most to be "regular" FHA loans on one- to four-family homes.
tax service fee This can lead to stress at the closing table if the seller has not thoroughly examined the closing statement beforehand, and is not prepared to have these fees taken out of the proceeds the seller receives from the closing.
the FHA will not allow a buyer to pay for a ___ ________ ___. This type of non-allowable fee is often collectively referred to as a "junk fee."
Home Equity Conversion Mortgage HECM certain requirements such as must be 62 years or older and must not have a mortgage or a very small one that can be paid off with the HECM Keywords for test 62 or older Own & occupy Counceling Certificate of occupancy Residence is 100% complete
the Federal Housing Administration's (FHA) reverse mortgage program which enables borrowers to withdraw some of the equity in their home. The borrower chooses how to withdraw their funds, whether in a fixed monthly amount or a line of credit or a combination of both.
6 points : 6% of the purchase price or appraisal value, whichever is less seller-paid contribution includes: •discount points •prepaid interest closing costs normally paid by the buyer such as: •The initial MIP •Escrows for taxes and insurance, since these are now open to negotiation between the buyer and seller. Loan origination fee
the maximum amount of points the seller can pay for the buyer is _
