Finance 6

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federl housing administration (FHA)

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established in 1934 to improve construction and financing of housing

three major goals:

1. provide affordable financing

2. create increased homeownership

3. upgrade property standards

to accomplish these goals, following were introduced:

•fully amortized loans

•low down payment loans

•low interest rates

•mandatory collection of taxes and fire insurance premiums

•minimum property standards

•standards for qualifying owner-occupant borrowers

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what does FHA do?

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it not a lender, doesn't make loans; it insures lenders against loss in event of foreclosure

there is a risk-based pricing model using credit scores, LTV ratio, and term of loan to determine amount of premiums:

1. UFMIP: upfront, nonrefundable fee from 1.25-2% of loan amount; may be paid in cash through escrow or it can be financed by adding it to loan amount; it borrower attends education class it can be lowered further

2. monthly MIP: 0.50 or 0.55 times base loan amount (purchase price less 3.5% down payment); divided by 12 and paid monthly; MMIP may be discontinued when loan balance is 78% LTV or less, when paid for at least 5 years

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advantages of FHA loans

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1. low down payment (3.5%)

2. max loan fee is 1% of loan amount (buyer normally pays)

3. secondary financing is allowed with new FHA loan (when not exceed FHA max)

4. max loan term is 30 years or 75% of remaining economic life of property

5. requires that monthly payments include principal and interest, taxes, fire insurance, and monthly mortgage insurance (MMI)

6. no max purchase price but max loan amount

7. interest rates and discount points are negotiable between lender and borrower

8. new owner can take over loan without change in interest rate

9. FHA appraisal (= conditional commitments) are good for 6 months on existing property and 1 year on new construction

10. rules don't require pest control reports

11. FHA no longer prescribes what are allowable or unallowable closing costs

12. direct endorsement

13. the 3.5% down payment may be acquired via gift funds from appropriate sources; gifting party (eg family) isn't required to be on the loan

14. no prepayment penalty

15. borrowers with lower credit scores may still be able to acquire FHA loan

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calculating FHA loans

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using lower of property's sale price or appraised value;

cash investment (down payment) of at least 3.5%;

loan amount cannot exceed limit for county

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FHA programs

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national housing act of 1934 created FHA

section 203(b):

1. anyone 18 and over is eligible

2. loans are available on owner-occupied properties from 1-4 units

3. US citizenship isn't required

4. there is a max loan amount

houses less than 1 year old: cannot obtain standard max FHA loan, FHAs max loan on these properties is reduced to 90% LTV

section 245(a) FHA adjustable rate loan:

available on single-family dwellings; max LTV ratio is the same as 203(b); there are 5 adjustable rate options but one plan; down payment is greater;

section 203k rehabilitation mortgage:

used for properties that need repairs, its like construction/take-out loan

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department of veteran affairs (DVA)

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its a government program (like the FHA) with these differences:

1. DVA guarantees loan, whereas FHA insures loan

2. DVA guarantees only part of loan, whereas FHA insures entire loan

DVA-guaranteed loan amount is 25% of freddie mac confirming loan amount and can be paid to lender in event of foreclosure

DVA approved lenders grant a no-money down payment loan to veterans that is 4 times the DVA guarantee

if foreclosure occurs, DVA has two options:

1. it can pay lender principal balance and take back property

2. it can give lender property and pay amount of any deficiency

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DVA loans

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1. no down payment

2. other costs: in some situations seller pays closing costs ("no-no" loan (=no down payment, no closing costs))

3. qualification requirements: unusual that buyer qualifies via both a "ratio" calculation and a "residual" requirement

ratio: total amount of monthly housing debt plus total monthly consumer debt shouldn't exceed 41% of buyers monthly income

residual: required amount left over from monthly income after all taxes, debts (amount depends on family size)

4. funding fee: can be added to loan amount, as long as max loan limits are not exceeded; 2.15% if buyer is first-time user of VA and 3.3% if he is multiple user

5. rating factor worksheet: needs to be completed with satisfactory ratings on job stability, credit history, debt ratio, balance available for support (residual), liquid assets (reserves)

6. possible assumability: DVA loans before march 1, 1988 are full assumable, without rate increase, no alienation clause; loans after can be assumed only if new borrower meets DVA qualifications; veteran who obtained original loan remains personally liable, veteran can be released from liability by obtaining a release of liability from DVA

7. certificate of reasonable value (CRV): DVA issues CRV to veteran buyer, identifying reasonable value of property

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who is eligible for a DVA-guaranteed loan?

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anybody who is currently serving or if he has served in past, discharge must be for other than dishonorable reasons

to establish eligibility for loan, veteran must obtain certificate of eligibility, which indicates amount of veterans entitlement (=max $ DVA will pay)

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DVA: reinstatement of full/partial entitlement

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full: full entitlement reinstatement and veteran purchases another home if original property has been refinanced (can only be done once)

partial: entitlement amount has been increased, so veterans who have used their entitlement may have unused partial entitlement; only way in which veteran can have two or more DVA loans

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DVA: general guidelines

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only one program, either fixed or adjustable interest rates and one set of guidelines that apply to all its loans

1. type of property: 1-4 units, PUD, condos; DVA approves new properties only if they were built under FHA or DVA inspections (or wait 1 year)

2. interest rate: interest rate and discount points are negotiable between lender and veteran-borrower

3. loan origination and funding fees: loan fee cannot exceed 1% of loan amount (goes to lender), veteran is charged funding fee (changes always)

4. term of loan: max 30 years

5. down payment: no

6. max loan: no max loan amount, lenders don't limit amount they will lend on DVA loans

7. occupying the property: veteran must occupy

8. monthly installments: DVA requires only monthly principal and interest payments, doesn't require property taxes and insurance to be included, DVA recommends that these be included

9. appraisal and CRV: DVA never issues a certificate showing value greater than sales price

10. secondary financing: can be approved on case-to-case basis; second should carry same interest rate and terms, first and second cannot be more than CRV

11. pet inspections, reports, and clearances: pest control must be obtained from inspection company; all detached buildings must be inspected

12. closing costs: veterans are not allowed to pay nonrecurring closing costs,

13. internet underwriting: todays lenders are LAPP (lender appraisal processing program) approved and processing time is reduced

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cal-vet loans

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administered by CA department of veteran affairs; money that funds cal-vet loans is from sale of general obligation bonds and revenue bonds

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who is eligible for cal-vet loans?

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more liberal than DVA; veteran with required income, credit rating, and currently on active duty, honorable discharge, and served for min 90 days

members of US military and national guard (who don't qualify) become eligible after they served min of 1 year of a 6 year obligation, when first-time home buyer

if veteran in currently in military, family member must occupy home until loan is paid off

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cal-vet loans: general information

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1. property: same property standards as FHA and DVA

2. max loan: varies each year

3. down payment and loan fees: loan can be submitted by adhering to regular VA guidelines or to cal-vet guidelines; no money down; on straight cal-vet loans without DVA guarantee, loan amount is greater but requires down payment of 3% of purchase price or appraised value (lesser); 1% loan origination fee, plus loan guarantee fee (1.25-2%) of loan amount; if 20% or more down payment is made, loan guarantee fee is waived

4. term of loan: 30 years, no prepayment penalty

5. interest rate: variable, cap is only a half % over start rate

6. secondary financing: permitted, the two loans together cannot exceed 98% of cal-vet appraisal

7. occupancy: must occupy

8. insurance: properties covered by cal-vet's disaster indemnity program (floods, earthquakes); veterans under 62 must carry life insurance; buyers with substandard health risks will have payments made for only 36 months, those with highly substandard health risks for only 12 months

9. monthly payments: in addition to payments of principal and interest, property taxes, fire, disability, and life insurance premiums are also collected

10. title to property: first conveyed to department of veteran affairs by seller, department then sells property to veteran under land contract of sale, after veteran has paid loan in full, he receives grant deed

11. application fee: small fee is paid by department

12. construction loan: qualification remain the same

13. refinancing: if old loan is paid off, new cal-vet loan is available

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advantages and disadvantages of cal-vet loans

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low in interest rate, inexpensive life, fire, and disaster insurance, low closing costs

disadvantages: lack of refinancing, occasional shortage of available funds

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CA housing finance agency program (CalHFA)

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designed to help first-time home buyers, by allowing buyer to borrow 3.5% down payment afforded through FHA; sells mortgage revenue bonds to investors, then uses the funds to buy loans from approved lenders, who make loans under CalHFA guidelines;

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CalHFA: two main programs

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30-year fixed rate conventional loan program:

for 30 years with LTV of 100%, loan origination fee cannot exceed 1.5% of loan amount, mortgage insurance required; property and borrower eligibility requirement sS 163

interest-only plus program:

conventional loans with below-market fixed interest rate, 35-year term, and interest-only payments for first 5 years; interest rate fixed for entire 35 years; LTV ratio 100%; mortgage insurance required; same property and borrower eligibility requirement