Real Estate Finance Unit 6

Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) Two federal agencies that participate in real estate financing
Only an eligible veteran may obtain a VA loan and that the VA does not require a down payment, up to a certain loan amount The main differences between the two government programs are:
Federal Housing Administration (FHA) A federal government agency that insures private home loans for financing homes and/or home repairs. Created by Congress in 1934, the FHA became part of the Department of Housing and Urban Development (HUD) in 1965
Mutual mortgage insurance (MMI) The FHA does not make loans. It insures loans to protect the lenders who make the loans. On loans with less than a 20% down payment, the lender is protected in case of foreclosure by
Upfront and annual In most of the FHA mortgage insurance programs, the FHA collects two types of mortgage insurance premiums:
Upfront mortgage insurance premium (UFMIP) Effective April 9, 2012, the FHA charges an upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount. The MIP must be either paid in cash at closing or financed in the mortgage amount. If financed, the UFMIP is added to the base loan amount to arrive at a greater “total” loan amount. The total FHA-insured first mortgage on a property is limited to 100% of the appraised value, and the UFMIP is required to be included within that limit. Any UFMIP amounts paid in cash are added to the total cash settlement amount
Minimum property standards (MPS Standards for new construction to reduce their mortgage risk and to improve housing standards and conditions. Assured that the housing used as collateral for FHA-insured mortgages met minimum requirements for construction quality, safety, and durability
Benefits of FHA-Insured Loans FHA-insured loans allow low to moderate-income people to buy a home with lower initial costs. FHA-insured loans feature low down payments, competitive interest rates, easy qualifying requirements, and low closing costs. In addition, FHA loans are assumable and have no prepayment penalties
Competitive Interest Rates Since the FHA does not loan money, it does not set interest rates. Interest rates are negotiated between the borrower and the FHA-approved lender. However, FHA loans have competitive interest rates because the Federal Government insures the loans. This reduces the lender’s risk
Easy Qualifying Requirements Because the FHA provides mortgage insurance, lenders are more willing to give loans with lower qualifying requirements. Even with less-than-perfect credit, it is easier to qualify for an FHA loan than a conventional loan.nCurrently, new borrowers must have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%
Loan discount (also called points or discount points) A one-time charge imposed by the lender to lower the rate at which the lender would otherwise offer the loan. This fee varies from lender to lender
Appraisal report fee Ranges from $300 to $500 and pays for an appraisal report made by an independent FHA appraiser
Credit report fee Ranges from $40 to $55 and pays for the credit report of the borrower’s credit history
Mortgage insurance application fee Covers the processing of an application for mortgage insurance
Assumption Fee Charged when a buyer assumes the seller’s existing real estate loan. FHA loans are fully assumable. Buyers must qualify under the FHA 203b income rules to assume the loan and release the seller from all liability
Loan Processing Fee Not the same as the loan origination fee. This fee pays for preparing the paperwork in the loan files
Flood Certification Mortgagees are required to obtain life-of-loan flood zone determination services for all properties that will be collateral for FHA-insured mortgages. If property is in a flood zone, the borrower must obtain flood insurance as a condition of closing. Any property located within in designated Coastal Barrier Resource System unit is not eligible for an FHA-insured mortgage
FHA Loan Limits The FHA sets the maximum loan amounts. The loan limits are determined by the type of property—one-unit, two-unit, three-unit, and four-unit properties. The FHA national loan limit “floor” is $271,050, which is 65% of the national conforming loan limit (currently $417,000 for a 1-unit property). The FHA national “ceiling” loan limit is $625,000. The FHA maximum loan amounts vary from region to region and change annually. In addition, the FHA maximum loan limits may be changed according to market conditions. The loan cap figure is derived from the median cost of a home in any given Metropolitan Statistical Area (MSA). Typically, loan limits for FHA-insured loans are less than the loan limits for conventional financing in most parts of the country. Borrowers who need a loan that exceeds the FHA loan limits for the area will have to put additional money down on the property or finance under a conventional mortgage
Uniform Residential Appraisal Report (Form 1004) This report form is designed to report an appraisal of a one-unit property or a one-unit property with an accessory unit, including a unit in a planned development (PD)
Individual Condominium Unit Appraisal Report (Form 1073) This report form is designed to report an appraisal of a unit in a condominium project or a condominium unit in a planned development (PD)
Manufactured Home Appraisal Report (Form 1004C) This report form is designed to report an appraisal of a one-unit manufactured home, including a manufactured home in a planned development (PD)
Small Residential Income Property Appraisal (Form 1025) This report form is designed to report an appraisal of a two-to-four unit property, including a two-to-four unit property in a planned development (PD)
Direct Endorsement (DE) lenders A borrower does not apply to the FHA for a home loan. Instead, the borrower applies for an FHA-insured loan through an approved lender, who processes the application and submits it for FHA approval.nOnly an approved FHA lender can originate an FHA loan. Lenders who have met FHA standards are called:
Borrower Eligibility FHA-insured loans are available for individuals only, not partnerships or corporations. Therefore, almost anyone with decent (not perfect) credit who is a legal resident of the United States can qualify for an FHA-insured loan. U.S. citizenship is not a requirement, but the person must have a valid social security number
Property Eligibility The property must be the borrower’s principal residence and located in the United States. The following property types are eligible for the FHA program.nTypes of Eligible Property:n-1-4 family owner-occupied residencesn-Row housesn-Multiplex and individual condominiumsn-Eligible manufactured homes (must be real property)
Income The FHA uses gross income when qualifying a borrower for a loan. Income includes salary, overtime, commissions, dividends, and any other source of income if the borrower can show a stable income for a minimum of 2 years.nnThe FHA does not require borrowers to have savings or checking accounts. Since the FHA allows the down payment for the purchase to be a gift, the money used for the down payment does not have to be seasoned like conventional loans. In this instance, seasoned means that the money has been in the bank for the previous 3 months. The FHA does not require the buyer to have any reserves or available cash on hand during the closing
Employment FHA underwriting guidelines do not impose a minimum length of time a borrower must have held a position of employment to be eligible. Typically, the lender must verify the borrower’s employment for the most recent 2 full years. A borrower with a 25% or greater ownership interest in a business is considered self-employed for loan underwriting purposes.nnIf a borrower indicates that he or she was in school or in the military during any of this time, the borrower must provide evidence supporting this claim, such as college transcripts or discharge papers. Because of this rule, a new college graduate or recently discharged veteran can purchase a house immediately without first developing a 2-year job history as long as he or she meets the other underwriting requirements
Credit History Unlike Fannie Mae/Freddie Mac loans, FHA underwriting looks at the stability of income and the borrower’s ability to make timely payments. An important aspect of FHA underwriting is that FHA loans are more flexible with credit scores. For example, to qualify for a 3.5% loan, a borrower must have at least a 580 FICO® score. Borrowers with less than a 580 FICO® score must have a down payment of at least 10%.nnFor those borrowers who do not use traditional credit, the lender may develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means of direct access from the credit provider.nnHowever, the FHA has certain credit history guidelines that generally play a role in qualifying for a loan. The FHA will allow for minor past credit issues as long as there is a reasonable explanation for the issue. A satisfactory reason can be the loss of a job, a serious illness, or a job transfer.nnA person with a bankruptcy or foreclosure must re
Debt-to-Income Ratios As with conventional loans, FHA lenders look at the borrower’s debt-to-income (DTI) ratios to determine the maximum loan amount. The FHA uses a 31% front ratio and a 43% back ratio, written 31/43
FHA 203(b) Loan Offers financing on the purchase or construction of owner-occupied residences of one-to-four units. This program offers 30-year, fixed-rate, fully amortized loans with minimum upfront cash requirements. The loan is funded by a lending institution and insured by the FHA. The borrower must meet standard FHA credit qualifications and may be eligible for 96.5% financing. The borrower is also able to finance the upfront mortgage insurance premium into the loan and is responsible for paying an annual mortgage insurance premium that is included with the monthly loan payment. The majority of FHA loans made are:
FHA 203(b)(2) Loan Available to honorably discharged veterans. In certain circumstances, veterans are not required to make the 3.5% cash down payment required for the standard FHA 203(b) loans. This FHA program supplements but does not replace the VA entitlement programs
FHA 251 Adjustable-Rate Mortgage The FHA adjustable-rate mortgage provides a viable alternative to the Fannie Mae/Freddie Mac ARMs. The FHA administers a number of programs, based on FHA Section 203(b) loans, with special loan features. One of these programs, Section 251, insures ARMs. This type of program enables borrowers to obtain home loan financing that is more affordable because of its lower interest rate. The interest rate is adjusted annually based on market indices approved by FHA, and, therefore, may increase or decrease over the term of the loan. For adjustable-rate mortgages, the only index acceptable to the FHA is the 1-year Treasury bill interest rate. Annual increases are capped at 1% and the maximum interest rate can be no more than 5% greater than the original interest rate
FHA 245(a) Graduated Payment Mortgage A graduated payment mortgage (GPM) loan has a monthly payment that starts low and increases gradually at a specific rate. Payments for the initial years only cover part of the interest due. The unpaid interest amount is added to the principal balance. After a specified time, the loan is recalculated and the new payments stay the same from that point on. With this loan type, the interest rate is not adjustable and does not change during the term of the loan. What actually changes is the amount of the monthly loan payment. The FHA offers a GPM to borrowers who might have trouble qualifying for regular loan payments but who expect their income to increase. This loan is structured for buyers who expect to be earning substantially more after a few years and can commit to higher future payments
FHA 255 Home Equity Conversion Mortgage Reverse mortgages are becoming popular in America. They can supplement retirement income and give older Americans greater financial security. A reverse mortgage is a loan that enables elderly homeowners to borrow against the equity in their homes and receive monthly payments and/or a line of credit from a lender. A retired couple can draw on their home’s equity by increasing their loan balance each month.nnThe FHA-insured reverse mortgage, Home Equity Conversion Mortgage (HECM), is a loan program for homeowners who are 62 or older and who have paid off their existing home loan or have only a small balance remaining. The maximum loan amount depends on the age of the borrower, the expected interest rate, and the appraised value of the property. The older a borrower, the larger the percentage of the home’s value that can be borrowed
FHA 203(k) Rehabilitation Loan A rehabilitation loan is a great option for buyers who are planning to improve their property immediately upon purchase. This home loan provides the funds to purchase a residential property and to complete an improvement project all in one loan, one application, one set of fees, one closing, and one convenient monthly payment. A rehabilitation loan can be used for a variety of improvements, such as adding a family room or bedroom, remodeling a kitchen or bathroom, performing general upgrades to an older property, or even completing a total teardown and rebuild. Minor or cosmetic repairs are unacceptable
Title 1 Home Improvement Loan Title 1 loans on single-family homes may be used for alterations, repairs, and for site improvements. The loan is available for single-family homes, manufactured homes, and multifamily structures. Title 1 loans may be used in connection with a 203(k) Rehabilitation Mortgage and are only available through an approved FHA Title 1 lender
Energy Efficient Mortgages Program (EEM) Helps homebuyers or homeowners save money on utility bills by enabling them to finance the cost for adding energy-efficient features to new or existing housing. The program provides mortgage insurance for the purchase or refinance of a principal residence that incorporates the cost of energy efficient improvements into the loan. Due to the anticipated energy conservation savings, lenders can be more flexible with underwriting guidelines
Department of Veterans Affairs (VA) Created in 1989 to replace its predecessor, the Veterans Administration, which was established in 1930. It is a government-run military veteran benefit system with the responsibility of administering programs of veterans’ benefits for veterans, their families, and survivors. In addition to home loan programs, the benefits provided include disability compensation, pension, education, life insurance, vocational rehabilitation, survivors’ benefits, medical benefits, and burial benefits
GI Bill of Rights The GI Bill of Rights, which is officially called the Servicemen’s Readjustment Act of 1944, was referred to as “a bill that made modern America” by historian Steve Ambrose. It was passed for two main reasons. The first was to compensate veterans of World War II for their services and sacrifices. The second was to reintegrate military personnel into the civilian economy. This helped the economy by preventing a flood of workers from creating a post-war depression as had happened after World War I.nnThe GI Bill of Rights helped elevate a generation of working-class veterans to the middle class. It opened the doors to higher education, fueled a housing boom, and turned renters into homeowners through low-interest, no-money-down home loans.nnA better-educated population not only supplied the economy with skilled workers, but it also helped create a larger middle class that had a higher income. This led to a housing boom, as more and more Americans moved out of the cities and purchase
Entitlement The maximum guaranty that the VA will provide for the veteran’s home loan. With the current maximum guaranty, a veteran who has not previously used the benefit may be able to obtain a maximum VA loan with no down payment depending on the borrower’s income level and the appraised value of the property. The VA’s guaranty on the loan protects the lender against loss if payments are not made. This guaranty is intended to encourage lenders to offer veterans loans with more favorable terms.nThe amount of guaranty on the loan depends on the amount of the loan and if the veteran previously used some of his or her:
Certificate of Reasonable Value (CRV) The lender orders an appraisal using the Request for Determination of Reasonable Value form. The appraisal for VA loans is known as a ___________ and must be issued by a certified VA appraiser. A loan cannot exceed the value established by the CRV. If the value on the CRV is less than the purchase price, the veteran can make up the difference in cash, the seller may reduce the selling price of the home, or the transaction can be cancelled. The seller cannot carry back a second loan for the difference between the sales price and the value indicated on the CRV
VA Requirements The Department of Veterans Affairs (VA) does not make loans. It guarantees loans made by approved lenders, much like the FHA. Only lenders who are VA-approved lenders can make VA loans. These lenders may underwrite and close home loans without prior VA review or approval. This includes all aspects of the loan application, the property analysis, and borrower underwriting. The loan process is not much different than any other type of real estate loan except that the borrower or the lender must obtain the veteran’s Certificate of Eligibility
Automatic authority The authority of a lender to close VA-guaranteed loans without the prior approval of the VA. VA-approved Lender Appraisal Processing Program (LAPP) lenders can process loans faster than other lenders. LAPP lenders do not need to send any paperwork to the VA until after the home sale is closed
Certificate of Eligibility (COE) A document issued by the VA that provides evidence of an applicant’s eligibility to obtain a VA loan. The applicant submits VA Form 26-1880 (Request for a Certificate of Eligibility) along with proof of service (DD Form 214) to a local VA Eligibility Center
Minimum property requirements (MPRs) Provide a basis for determining that the property is safe, structurally sound, sanitary, and meets the standards considered acceptable in a permanent home in its locality. The VA wants to make sure the home being purchased by the veteran is suitable and sanitary for living. In existing and new construction, the VA has minimum property requirements to determine the eligibility of the property
Employment and Income Stability The borrower’s employment and income stability are central to underwriting a loan. He or she must show stable, reliable income over the most recent 2-year period even if he or she has worked for a variety of employers. In addition, the borrower’s present and anticipated income should be sufficient to meet the repayment terms of the loan
Residual income The amount of net income remaining after deducting debts, obligations, and monthly shelter expenses that is used to cover family living expenses, such as food, health care, clothing, and gasoline
Take-home pay The gross income less federal and state income taxes and any Social Security or retirement contributions. Housing expenses include the principal and interest on the loan (or rent), property taxes, homeowners’ insurance, maintenance, and utilities. The amount used for maintenance and utilities varies with the type and location of the property
Debt-to-Income Ratio The VA uses one debt-to-income ratio to qualify borrowers. The qualifying ratio is 41% and is calculated by dividing the monthly housing expense plus long-term debt by the gross monthly income
VA Loan Programs Traditional 30-year Fixed-Rate LoannVA Adjustable-Rate MortgagenVA Graduated Payment MortgagenConstruction/Permanent Home LoannInterest Rate Reduction Refinancing LoannManufactured Home Loan
Traditional 30-year Fixed-Rate Loan With a fixed-rate VA-guaranteed loan, a qualified veteran can purchase a home with no down payment depending on the appraised value of the property. The seller may give seller concessions of up to 4% of the reasonable value of the home. That 4% does not include the buyer’s closing costs, which, when paid by the seller, can take the seller credits to the buyer for concessions and closing costs up to a maximum of 6% of the purchase price
VA Adjustable-Rate Mortgage The VA will guarantee an adjustable-rate mortgage. The VA offers various types of ARM products that are competitive with Fannie Mae and Freddie Mac products. The veteran must qualify at the initial note rate
VA Graduated Payment Mortgage A VA graduated payment mortgage (GPM) may only be used to acquire a single-family dwelling unit (not a manufactured home) and the loan can include funds for energy efficiency improvements. Since the principal balance increases during the initial years of a GPM, a down payment is required
Construction/Permanent Home Loan The VA will guarantee a construction/permanent home loan, which is a loan to finance the construction and/or purchase of a residence. The loan is closed prior to the start of construction, at which time proceeds are disbursed to cover the cost of the land or the balance owed on the land. The remaining balance is placed into escrow. The escrowed monies are paid out to the builder during construction. The permanent loan interest rate is established at closing. The veteran begins making payments on this loan only after construction is complete. Therefore, the initial payment on principal may be postponed up to one year, if necessary. The loan must be amortized to achieve full repayment within its remaining term
Interest Rate Reduction Refinancing Loan A veteran with an existing VA loan may use an Interest Rate Reduction Refinancing Loan (IRRRL), which may also be referred to as a streamlined loan, to lower his or her interest rate. Except when refinancing an existing VA-guaranteed ARM to a fixed-rate, the refinance must result in a lower interest rate. When refinancing from an existing VA ARM to a fixed-rate, the interest rate is allowed to increase. The VA does not require an appraisal or credit-underwriting package. However, the lenders may require an appraisal and a credit report
Manufactured Home Loan Private lenders such as finance companies make VA-guaranteed manufactured home loans. The VA will guarantee 40% of the loan amount or the veteran’s available entitlement, up to a maximum amount of $20,000

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