Real Estate Finance: Chapter 5 Conventional, Insured, & Guaranteed Loans

3 General Types of Real Estate Loans in California
1. Conventional
2. Government insured (FHA)
3. Government guaranteed (DVA)
*Conventional Loan
Has no third-party guarantor unless it is insured by a private mortgage insurance company.

Most of the real estate loans made today are conventional loans.

Most originators of conventional loans don’t keep them for their own portfolios but sell them in the secondary market.

They keep the collection responsibilities and the commensurate fees.

To sell these loans, the lenders adhere to the guidelines established by Fannie Mae and Freddie Mac.

Government Insured
(FHA)

FHA ensures lenders that they will receive the balance of monies owed them in the event of a foreclosure.

Government Guaranteed
(DVA)

DVA guarantees lenders a sum of money if their loans are foreclosed.

-Fixed-Rate Loans
Conventional loan have traditionally been designed as fixed-rate loans in which the interest rate remains constant over the term of the loan (although other variable features can be included in the loan contract).

May be amortized over a specific number of years in equal monthly payments, including principal and interest.

The favorite fixed-rate loans is the 30-year mortgage where the payment is predictable, and the opportunity always exists to pay the balance of the loan down or off, depending on the borrower’s financial circumstances and the opportunity to refinance at a lower rate.

Fixed-rate loans for 15 years are becoming increasingly popular.

Lenders like them because of their relatively short amortization time, and they market these loans on the basis of the borrower’s being able to save significant amounts of interest, compared with the 30-year loan.

15-year loans are usually offered at 25 to 50 basis points below market rates.

(There are 100 basis points in 1%, so 25 basis points equal one-fourth of 1%, and 50 basis points equal one-half of 1%.)

The monthly payment required on the 15-year loan is approximately 20% higher than the payment on the 30-year loan, which inhibits many borrowers.

-Interest-Only Loans
With residential real estate prices reaching new highs, qualifying borrowers for higher mortgage payments on larger loans has become a serious problem.

In order to reduce monthly payments, the use of interest-only loans has emerged as a viable alternative to solve these problems.

To reduce payments, the only portion that can logically be waived is the principal amount, reducing the payment to interest only.

To reduce this payment any further would be paying less than interest only, and that would result in the loan balance increasing each month by the difference, resulting in negative amortization.

When establishing an interest-only loan, the participants must decide how and when the principal owed will be paid.

One alternative is to establish a 5-year stop date when the entire balance will be due as a balloon payment.

These monies can be received from refinancing the property which will have retained or increased its value over time.

Another plan might be to establish a series of smaller balloon payments over time to gradually whittle the balance down to zero.

The interest-only loan is being employed as a financing device on loans that equal or exceed the purchase price of the collateral property, creating risky portfolios.

As long as the housing market enjoys an inflationary movement, these lenders can be safe. Any significant downturn will result in many loan defaults.

Lenders with portfolios of interest-only loans are experiencing difficulty in remaining viable as their collateral properties values drop below the balance amounts of their existing loans.

Inters-only are not currently available in the real estate finance market.

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Negative Amortization
Loan balance increases as a result of less-than-interest-only payments.
-Private Mortgage Insurance
(PMI)

Required on conventional loans when the loan-to value (LTV) ratio is in excess of 80% percent as stated in the Fannie Mae and Freddie Mac guidelines.

The insurance covers the amount of the loan in excess of the 80% LTV ratio.

Some private mortgages insurance companies require first-time home buyers to pursue a course of education on the responsibilities of home ownership prior to securing their loan.

Private mortgage insurance programs can vary in the need for coverage and amount of coverage required.

Rates can also vary depending on the private mortgage insurance carrier.

Loan-To-Value Ratio
(LTV)

The relationship between the amount of a mortgage loan and the value of the collateral property; expressed as a percentage.

Mortgage Insurance
Issued to protect the lender in case the borrower defaults on the loan payments.

If a property is foreclosed, the insurance company either pays the lender in full and acquires the property or pays the lenders in accordance with the terms of the insurance plan plus expenses and the lender acquires the property.

Some borrowers may choose to pay part or all of the private mortgage insurance at closing, it is more common for the annual renewal fee to be paid monthly and added to the PITI payment.

The annual premium is calculated as a percentage of the loan amount (generally ranging from 0.65 to 0.90 percent depending on the amount of the down payment) divided by 12 and added to the monthly mortgage payment.

Ex. $100,000 fixed rate, 30-year loan w/10% down (90%LTV)
Premium: 0.75% of loan amount
Calculation: $100,000 x 0.75 = $750 annual premium
$750 ÷ 12 = $62.50 added to monthly PITI payment

There are also PMI payment plans in which the costs are financed. This is accomplished by adding the lump sum premium amount to the loan balance to be repaid over the life of the loan.

There is also a plan where the lender pays the PMI, but the borrower pays a higher interest rate on the PMI portion of the loan.

The advantage to the borrower is that all of the interest is deductible.

The disadvantage is that the higher interest rate remains for the life of the loan.

PMI premiums continue until the lender releases the coverage, which depends not only on the increased equity position of the borrower, but on the payment history as well.

Once the LTV ratio reaches 80%, the insurance company is no longer liable for any losses due to default by the borrower and the insurance premium payments should stop.

Usually the borrower must initiate the release.

Under current tax laws, the PMI premiums are deductible for person earning $100,000 adjusted gross income or less annually.

Under the Home Owners Protection Act of 1999, PMI premiums must be terminated automatically when the LTV ratio is scheduled to reach 78% of the property’s original value, not its current market value.

Termination is required only if the loan payments are current.

Borrowers may also request to have the PMI canceled when the LTV ratio reaches 80%, if their recent payment history is unblemished and there is no other debt on the property.

If the borrower is current, under no circumstances can PMI be required beyond the midpoint of a loan’s amortization period.

Fannie Mae and Freddie Mac require that mortgages lenders and servicers doing business with them automatically terminate PMI premiums all existing loans that are halfway through their term.

They also require lenders to drop the PMI once a homeowner reaches 20% equity.

They calculate this figure by including the value of the home improvements and market appreciation. This approach is not automatic.

The borrower must have a record of timely payments and formally request such an action.

Because of the high values of California real estate, one way for a borrower to totally avoid paying a PMI premium is to create a split loan or a piggy-back loan, involving a first and second mortgage executed simultaneously.

An arrangement can include an 80/10/10 split, or an 80/15/15 split, or even an 80/20/20 split. In each case the first mortgage remains at 80% LTV, which requires no PMI. The second number represents a second mortgage that is held by the same lender but at a slightly higher rate and shorter term. The last number represents the down payment. The actual monthly payment is usually less than it would have been with a 95% or 97% LTV, and all of the interest is deductible.

Piggy-back loans have become difficult to obtain under present market conditions.

PMI companies have expanded their coverage from basic residential insurance, which is presently the bulk of their business, into commercial and industrial mortgage and lease guarantee insurance.

Ex. One corporation insures the top portion of loans on multifamily, commercial, and industrial properties. That same corporation also owns a subsidiary company which insures commercial tenants’ lease payments and loans issued for leasehold improvements.

These special policies are normally written for 5-years, and the insurance premiums can be either a percentage of the loan as a one-time charge or an agreed-upon annual premium.

A renewal fee is charged a the end of the 5-year term if the insurance is extended.

Split Loan
In construction financing, covers the lot and building separately.
Piggy-Back Loan
A second mortgage created simultaneously with a first mortgage.
-Permanent/Temporary (Escrow) Buydown Plan
A buydown is money paid by someone (seller, builder, employer, buyer) to a lender in return for a lower interest rate and monthly payment.

This buydown payment may lower the borrower’s payments for the entire loan term (a permanent buydown) or for a lesser period of time, usually one year to three years (temporary or escrow buydown).

Ex. $100,000 loan for 30-years at 8% interest. To PERMANENTLY buy down this interest rate to 7.75% would cost approximately 6 point, or 6% of the loan amount ($6,246).

$100,000 @ 8% for 30-yrs $733.77 PI per month
$100,000 @ 7.75% for 30-yrs 716.42 PI per month
Difference =$17.35 per month x 360 months
Buydown Costs $6,246

Depending on market conditions for a particular area, it might be possible to lower an interest rate from 8 to 7.75% by paying as little as one and one-half to two points, which would be much less than the calculated buydown cost.

Ex. $100,000 loan for 30-years at 8%. To apply a TEMPORARY buydown of 2-1-0 would cost $2,432.04, or approximately two and one-half points. Rate 8%, Reg. & P&I $733.77

Yr.1 Effective Rate 6% P&I $599.56 Difference $134.21
Yr.2 7% 665.31 68.46
Yr.3 8% 733.77 0.00

Buydown Cost Yr.1 $134.21 x 12 = $1,610.52
Buydown Cost Yr.2 $66.46 x 12 = 821.52
Total Buydown Costs $2,432.04

Buydown
Money paid by someone (seller, builder, employer, buyer) to a lender in return for a lower interest rate and monthly payment.
-Borrower’s Qualifications
Four Fannie Mae and Freddie Mac guidelines are generally used to qualify borrowers for conventional loans.

(It’s important to know that loan underwriters have flexibility in applying these guidelines in specific cases and that the rules can be changed from time to time.)

Rule 1: Principal, interest, taxes, property insurance, private mortgage insurance, and any applicable condominium or homeowner association fees shall not exceed 28% of the borrower’s gross monthly income.

Rule 2: All of the above plus monthly debts shall not exceed 36% of the borrower’s gross monthly income.

Rule 3: The borrower must have good credit.

Rule 4: The borrower must have stable employment.

Ex.1
Combined Monthly Gross Income $8,500
Payment P&I $1,651
Property Taxes 387
Hazard Insurance 129
PMI Premium 115
Association Fee 90
Total = 2,372

Rule 1 ratio: 2,372 / 8,500 = 28%

Installment Payment 70
Child Care 400
Revolving Charges 25
Auto Loan Payments 175
Total = 670
Plus Housing Expenses 2,372
Grand Total = 3,042

Rule 2 ratio: 3,042 / 8,500 = 36%

The borrowers meet both requirements.

Ex.2
Monthly Gross Income $4,000
Housing Expenses 765
Property Taxes 133
Hazard Insurance 53
PMI 50
Total = 1,001

Rule 1 ratio: 1,001 / 4,000 = 25% O.K.

Installment Payment 150
Auto Loan 195
Child Care 250
Total = 595
Plus Housing Expenses 1,001
Grand Total = 1,596

Rule 2 ratio: 1,596 / 4,000 = 40%

The borrowers meet requirement 1 but not requirement 2.

-Jumbo Loans
Anything exceeding the current Fannie Mae/Freddie Mac conforming loan limits is considered a jumbo loan.

Each lender is free to set its own qualifying standards although the Fannie Mae/Freddie Mac guidelines are often used.

Jumbo loans may be up to $1 million with as little as 5% down or more depending on the particular lender.

-Home Equity Loans
When the Tax Reform Act of 1986 eliminated the tax deduction for interest paid on everything except home mortgages, the home equity loan became an important financing tool for many Americans.

The interest paid is tax deductible and the funds may be used for any purpose.

A home equity loan is usually made at a lower rate of interest than credit card or other short-term financing and can be either a fixed-rate or adjustable-rate loan.

The amount that can be received is based on a percentage of the equity in the home and is currently limited to a combined-loan-to-value (CLTV) ratio of the first mortgage plus the equity loan of usually 80%.

The home equity loan is a second mortgage and closing costs can be included in the loan.

An obvious disadvantage of the home equity loan is that the borrower is using up the equity established in the home which will reduce the amount to be received upon a future sale of the property.

Many lenders have suspended issuing home equity loans until the economy improves.

-Automatic Rate Reduction
(ARR)

The loan provides the borrowers with the option to lower their interest rate when the adjustment rate (based on the Fannie Mae index) drops as little 1/4% plus the guarantee that the new lower rate will never go back up.

The borrower must have excellent credit and not late payments in the previous 12 months.

Closing costs are minimal, ranging from nothing to an amount to buy new title insurance and record the new mortgage or deed of trust.

The APR may be a good option when considering refinancing.

The APR may start at a rate slightly higher than the current market rate.

-Subprime Loans
In the financial world, mortgage loans are designated as A,B,C, or D paper.

Ideally, all borrowers would be rated “A”.

There are cases where the loan is considered “B” quality — showing definite credit problems; “C” quality — indicating borrowers with very marginal or poor credit, or even “D” quality — indicating a very high risk on the loan.

Lenders who provided loans or even specialized in the B,C, or D paper are called subprime lenders.

Subprime loans were credited with making home ownership possible for many immigrants, first-time homebuyers, and those suffering from temporary financial setbacks and were a contributing factor to the current financing crisis.

The terms subprime and predatory are sometimes considered to be synonymous, in fact they are NOT.

Subprime loans are made to persons with less-than-perfect credit ratings and usually carry higher interest rates and fees than the prime loan offered to applicants with no credit problems.

Subprime loans are now identified as “higher priced” loans which are:

-first trust deeds having rates which are 1.5% or higher than the prevailing market rate

-second trust deeds having rates which are 3.5% or higher than the prevailing market rate

The guidelines covering this new class of loans require the lender to have the borrower fully document and verify income and assets.

The lender must underwrite the loan based on the borrower’s ability to make the monthly payments from income sources only.

Another provision became effective April 2010, which requires borrowers obtaining these higher-rate loans to have property taxes and insurance premiums impounded for the first 12 months.

Subprime Lenders
Lenders who provided loans or even specialized in the B,C, or D paper are called subprime lenders.
Predatory Loan
Describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process.
Predatory Lending
In California the term predatory lending encompasses a variety of home mortgage lending practices.

Predatory lenders often try to pressure consumers into signing loan agreements they can’t afford or simply are not in the consumers’ best interest.

Through the use of false promises and deceptive sales tactics, borrowers are convinced to sign a loan contract before they have had a chance to review the paperwork and do the math to determine whether they can truly afford the loan.

Predatory loans carry high up-front fees that are added to the balance, decreasing the owner’s equity.

Loan amount are usually based on the borrower’s home equity without consideration of the borrower’s ability to make the scheduled payments.

When borrowers have trouble repaying the debt, they are often encouraged to refinance the loan into another unaffordable, high-fee loan that rarely provides economic benefit to the consumer.

This cycle of high-cost loan refinancing can ultimately deplete the borrower’s equity and result in foreclosure.

Predatory lending practices specifically prohibited by law include:

-Flipping– the frequent making of new loans to refinance existing loans

-Packing– the selling of additional products without the borrower’s informed consent

-Charging excessive fees

Homeowners in certain communities, particularly the elderly and minorities, are especially likely to be targets of predatory lending but almost anyone can fall prey to abusive lending practices.

You can protect yourself by knowing what you can afford; choosing a reputable, licensed broker/lender; understanding the loan application and contract; and being aware of commonly used predatory lending tactics.

The Center for Responsible Lending states more than $25 billion is lost by consumers every year due to predatory mortgages, payday loans, and other lending abuses, such as overdraft loans, excessive credit card debt, and tax refund loans.

HUD, DVA, Fannie Mae, Freddie Mac, the Mortgage Bankers Association, the National Association of Mortgage Brokers, and the major subprime lenders in this country are all working very hard to combat the prevalence of predatory lending.

The predatory lender may be someone well-known and trusted by the potential borrower.

It is suggested that a borrower check out any lender being considered with the local chamber of commerce, the Better Business Bureau, or either the Mortgage Bankers Association or the Association of Mortgage Brokers.

The problem is especially difficult when the borrowers don’t speak English and are literally being preyed upon by a lender of their particular ethnic group.

Borrowers have lost their homes because of the actions of predatory lenders, appraisers, mortgage brokers, and home improvement contractors.

Other predatory lending practices include:
-Lending on properties for more than they are worth using inflated appraisals

-Encouraging borrowers to lie about their income, expenses, or cash available for down payment

-Knowingly lending more money than a borrower can afford to repay

-Charging high interest rates to borrowers based on their race or national origin

-Charging fees for unnecessary or non existent products and services

-Pressuring borrowers to accept higher risk balloon or interest-only loans, or loans with steep prepayment penalties or possible negative amortization

-Stripping homeowners’ equity from their homes by convincing them to refinance again and again when there is no benefit to the borrower

-Using high pressure sales tactics to sell homes improvements and single-premium mortgage insurance

-Steering the borrower into a subprime mortgage when they could have qualified for a mainstream loan: Fannie Mae has estimated that up to one-half of borrowers with subprime mortgages could have qualified for loans with better terms

Two types of loans that are not necessarily predatory but could be if the borrower doesn’t understand the implications of the loan are:

-Balloon loan requiring full payment at the end of the initial term

-Interest-only loan with balance of principal plus interest due at the end of term

-Home Ownership and Equity Protection Act of 1994
Protection against predatory lending exists under the Home Ownership and Equity Protection Act of 1994 (HOEPA).

This law addresses certain deceptive and unfair practices in home equity lending.

The law was recently strengthened by the Federal Reserve with an amendment to the Truth in Lending Act (TILA) in Section 32 of Regulation Z, the implementing regulation of TILA.

Under this amendment, home loans are covered if the annual percentage rate exceeds the rate of Treasury securities of comparable maturity by more than 8% points (10% for second mortgages) or the fees and points paid by the borrower exceed $510 including the cost of credit insurance and other debt protection products paid at closing.

($510 figure is for year 2005; this amount is adjusted annually by the Federal Reserve Board, based on the Consumer Price Index.)

This rules also tighten the prohibition against extending credit without regard to the borrower’s repayment ability.

-Refinancing Existing Conventional Loans
Mortgage interest rates at relatively low levels, many homeowners have considered refinancing their existing loans as a method for saving money by lowering their monthly payments.

The amount of this saving may not be cost-effective for everyone.

The costs of refinancing are unregulated and vary dramatically among lenders.

A new loan may require an application fee, title insurance, an appraisal, an attorney, and probably some discount charges in the form of points where one point equal 1% of the loan amount.

It’s important to determine the total costs before making a decision to refinance.

Ex. $100,000 @ 8% on 30-yr amortizing loan with $733.77 monthly payment including principal and interest.

$100,000 @ 7% on 30-yr with monthly $665.31=$68.46 savings. The cost of securing new financing total is $3,500 and it will take 51 months to recover the costs ($3,500 ÷ $68.46 = 51.12 months).
It’s generally accepted that a rule to use in analyzing the advisability of refinancing is the at the costs of the new loan should be recovered over a 2-yr to 3-yr period. When the owner continues to occupy the property for a longer period of time, a savings will be achieved.

Some persons are better off not refinancing their home loans.

Before making the decision, it’s important to discuss a loan modification with the existing lender.

Although some lenders may not be willing to modify their existing loan structures, many large mortgage companies have created customer retention programs to keep their best customers on the books.

They may offer a lower interest rate with minimal transaction fees eliminating the need for refinancing.

-Electronic Real Estate Loan Services
There are sites on the World Wide Web offering real estate loans and related services.

A borrower can arrange for a loan on the computer without the necessity of the face-to-face interview with the lender.

It still requires the filing of a loan application and the probable submission of ancillary documents such as bank statements and annual income tax reports.

Applicants should be aware that the companies offering loans on the Internet are not regulated, and it’s possible for some scam artists to offer loans for a fee and then disappear.

It’s also difficult for federal agencies to enforce their rule of disclosure under various settlement requirements.

The Home Affordable Refinance Program (HARP) may be of help to those who remain employed and are not behind on mortgage payments but can’t obtain traditional refinancing because of the home’s decline in value.

HARP refinancing may be available for loan held by Fannie Mae or Freddie Mac.

Offering a loan modification, the Home Affordable Modification Program (HAMP) may assist a borrower who is employed but struggling to make the mortgage payments.

*Federal Housing Administration
(FHA)

Established under the provisions of the National Housing Act of 1934, the Federal Housing Administration (FHA) was organized to stimulate new jobs by increasing activities in the construction industry.

It was designed to stabilize the real estate mortgage market and to facilitate the financing of repairs, additions, and sales of existing homes and other properties.

A system of mortgage loan insurance is used to accomplish these goals.

This system the credit of the U.S. government is placed squarely behind the credit of an individual borrower.

The FHA insures against losses on real estate loans made by private lending institutions.

Since its inception, the FHA has enlarged and expanded its scope of operations to include rent programs, interest subsidy programs, and a myriad of other mortgage lending activities that have a special social emphasis.

It has insured millions of home loans since it began.

FHA operates entirely from its self-generated income through the proceeds of mortgage insurance premiums paid by borrowers.

The variety of attractive conventional loan programs available today have lowered the FHA share of the mortgage market substantially, it’s still important for first-time homebuyers, borrowers with credit issues who may have trouble qualifying for a conventional loan, and for the purchase of manufactured housing.

-Organization and Requirements
Since 1965, the FHA has operated under the direction of the Department of Housing and Urban Development (HUD) with headquarters in Washington DC, and regional centers located throughout the country.

Each region is divided into area offices located in almost every major city.

The FHA closely supervises the issuance of mortgage loans bearing its insurance.

Any lender participating in the FHA insurance program must grant long-term, self-amortizing loans at interest rates established in the marketplace.

There is no limit on the number of points that may be paid by the borrower, although they must be reasonable.

The FHA designates qualified lenders to underwrite loans directly without submitting applications to the FHA.

These lenders participate in the direct endorsement program.

Every loan application is reviewed to determine the borrower’s financial credit and ability to make payments.

A comprehensive written appraisal report is made on the condition and value of the property to be pledged as collateral for the loan.

All property must meet certain minimum standards of acceptability.

After qualifying the borrower and the property, the FHA issues a conditional commitment for mortgage insurance to the lender reflecting the value of the property.

This commitment is valid for 6-months on existing property and for 9-months on new construction.

Since September 1999, FHA requires appraiser evaluating property for FHA-insured loans to be state licensed or certified and to pay detailed attention to the physical defects of homes they examine.

A 7-page valuation condition disclosure form must be completed to reveal any defects that don’t meet minimum standards.

This report is to be delivered to the borrower prior to the close of escrow.

It must include the statement that “this review is not a physical inspection of the house and there is no guarantee that the property is free of any defects.”

The report also advises that the borrower may wish to have the house inspected by a professional inspector.

The disclosure form also requires appraisers to indicate whether they recommend inspections on the home’s structural features, heating, and cooling systems, plumbing, roofing, electrical, environmental factors, and pest control success.

Under the FHA rules, any obvious property defects must be corrected before the mortgage closing.

Every FHA borrower is required to receive and sign a from entitled, “For Your Protection: Get a Home Inspection.”

(This is HUD form 92543-CN)

-Program Summary
The FHA is designed as a program of mortgage insurance so it doesn’t make direct loans to borrowers, except in very special circumstances involving the resale of properties acquired by the FHA as a result of foreclosure.

Even under these circumstances, the FHA usually expects a buyer of a foreclosed property to secure financing elsewhere and pay the FHA cash for the property.

FHA lenders are required to make every effort to offset a possible foreclosure, in the event of a default and subsequent foreclosure, an insured lender will look to the FHA to recover the unpaid balance of the mortgage and any costs involved in the foreclosure action.

By designing a program of mortgage insurance funded by mortgage insurance premiums, the FHA has reduced the down payment obstacle for cash-short buyers.

By insuring 100% of the loan amount, the insurance program eliminates lenders’ risks by ensuring that lenders will not lose any money on loans they make to eligible borrowers.

This insurance helps stabilize the mortgage market and develops an active national secondary market for FHA insured mortgage loans.

-Existing FHA Programs
The National Housing Act of 1934 provided for Title I and Title II insurance programs that are still in use today, along with additional sections that have been added to reflect consumer needs and market conditions.
Title I
Title I, Section 2 provides insurance for loans to finance light or moderate rehabilitation of properties, including the construction of nonresidential buildings.

Loans on single-family homes may be used for alterations, repairs, and site improvements.

Loans on multifamily structures may only be used for building alteration and repairs.

Maximum Loan Term:

-Single-family house–20 years
-Manufactured house on permanent foundation–$17,500
-Manufactured house (classified as personal property–$7,500
-Multifamily structure–average of $12,000 per unit up to $60,000

Maximum Loan Term:

-Single-family house–20 years
-Manufactured house on permanent foundation–15 years
-Manufactured house (classified as personal property)– 12-years
-Multifamily structure –15 years

The interest rate is based on the common market rate and is negotiable between lender and borrower.

Any loan over $7,500 must be secured by a mortgage or deed of trust on the property. The structure must have been completed and occupied for at least 90-days.

Since 1969, Title I, Section 2 has provided insurance loans used for the purchase or refinancing of a manufactured home, a developed lot on which to place a manufactured home, or a combination of lot and home.

Under the FHA Manufactured Housing Loan Modernization Act of 2008, maximum loan limits have been increased as:

-Repairs/improvements–$25,090
-Manufactured home only–$69,678 (20-year term)
-Manufactured home lot–$23,226 (15-year term)
-Manufactured home and lot $92,904 (20-year term)
-Multi-section manufactured home and lot (25-year term)

MIP upfront premiums may not exceed 2.25%; annual premiums no to exceed 1.0%.

Manufactured homes must comply with the National Manufactured Home Construction and Safety Standards and have a suitable homesite that meets local standards and has adequate water supply and sewage disposal facilities.

Borrowers must provide a 5% down payment, be able to demonstrate adequate income to make the payments, and use the home as a principal residence.

Built-in appliance, equipment, and carpeting may also be financed.

Title II
Title II originally established two basic mortgage insurance programs: Section 203 for one-family to four-family homes, and Section 207 for multifamily projects such as rental housing, manufactured home parks, and multifamily housing projects.

Many additional programs have been added over the years.

Changes to FHA programs under H.R.3221 (Housing and Economic Recovery Act of 2008) are reflected in the:

-Section 203(b)–Mortgage Insurance for One-Family to Four-Family Homes
-Section 203(h)–Mortgage Insurance for Disaster Victims (100% financing available; must file within 1-year after declaration of disaster)
-Section 203(k)–Rehabilitation Mortgage Insurance
-Section 221(d)(2)–Mortgage Insurance for Low- and Moderate-Income Buyers
-Section 223(e)–Mortgage Insurance for Older, Declining Areas
-Section 234(c)–Mortgage Insurance for Condominium Projects (Individual condominium units are insured under the 203(b) program.)
-Section 251–Insurance for Adjustable-Rate Mortgages
-Section 811–Supportive Housing for Persons with Disabilities (provides direct funding to nonprofit organizations to support housing for low-income adults with disabilities)
-Section 255–Home Equity Conversion Mortgage (reverse mortgage)
-Section 257–Pilot program to establish a process for providing alternative credit rating information for borrowers with insufficient credit history

-Special HUD/FHA Programs
Special programs to assist buyers and homeowners are available through HUD/FHA and:

-Energy Efficient Mortgage (EEM)
-Home Equity Conversion Mortgage (HECM)
-Good Neighbor Next Door
-Homeownership Vouchers
-Native American Housing

Energy Efficient Mortgage
(EEM)

The EEM can be used to finance the cost of adding energy-efficient features to new or existing houses in conjunction with a Section 203(b) or 203(k) loan.

It can also be used with the Section 203(h) program for victims of presidential-declared disasters.

The cost of the energy-efficient improvements that are eligible for financing is the greater of 5% of the property’s value (not to exceed $8,000) or $4,000.

The money for the improvements is placed in an escrow account at closing and released after an inspection verifying that the improvements are installed and that energy savings will be achieved.

Home Equity Conversion Mortgage
(HECM)

FHA’s mortgage insurance makes this HUD reverse mortgage program less expensive and more attractive for homeowners 62 and older who wish to borrow against the equity in their home.

No monthly payments are required, and there are no asset of income requirements or limitations.

Homeowners may receive a percentage of the value of the equity in the home in a lump sum, on a monthly basis (either for life or for a fixed term), or as a line-of-credit.

No repayment of the loan plus interest and other fees is due until the surviving homeowner leaves the home.

The FHA insurance provides the assurance that the funds will continue as long as one surviving member remains in the home–in the event that the eventual sale doesn’t cover the balance due the lender, there will be no debt carried over to the estate or heirs.

In 2008, provisions were added that provide for:

-Seniors to purchase and obtain a HECM as long as the home is to be a primary residence
-Applicants for a HECM loan to receive adequate counseling from an independent third party not related to the transaction. FHA uses a portion of the mortgage insurance premiums to fund such counseling
-Lenders being prohibited from requiring the borrower to purchase insurance, an annuity, or other additional product as a requirement or condition of eligibility for a HECM loan. (Exception are title insurance, hazard, flood, or other peril insurance)
-HECM origination fees to be limited to 2% of the total claim amount up to $6,000
-Cooperatives to be insured under the HECM program (condominiums were already allowed)
-Single loan limits of $417,000 applied nationwide up to $625,500 in high-cost areas

Good Neighbor Next Door
The Officer Next Door program has been expanded to include law enforcement officers, pre-kindergarten through 12th grade teachers, firefighters, and emergency medical technicians.

Under this program, HUD offers a discount of 50% from the list price of the home with a down payment of $100.

The borrower must commit to live in the property for at least 36 months.

Available homes are listed by state on the internet.

If more than one person makes an offer on a property, selection is made by a random lottery.

If the property needs repairs, a 203(k) mortgage may be used.

Homeownership Vouchers
The Housing Choice Voucher program, formerly known as Section 8, has expanded its rental assistance program to allow participants to use Homeownership Voucher funds to assist in meeting monthly homeownership expenses such as mortgage payments, real estate taxes and insurance premiums, utilities, maintenance costs, and repairs.

Applicants must be first-time homeowners, have at least one member of the family employed, and meet minimum income requirements.

Interested applicants should contact their local public housing authority for more information.

Native American Housing
Under Section 184 Indian Housing Loan Guarantee Program, HUD offers homeownership and housing rehabilitation opportunities for Native American individuals, families, and tribes.
-Underwriting Guidelines
Like Fannie Mae and Freddie Mac, the FHA has its own set of guidelines to qualify eligible borrowers for acceptable loans. These requirements include all of the following elements.
Maximum Loan Limitations
The FHA establishes maximum limitations on mortgages it will insure.

These limitations vary by geographic area and are adjusted each October as a calculation of a percentage of the Fannie Mae and Freddie Mac conforming loan limits.

Maximum FHA loan limits are set at 95% of the median house price for a metropolitan statistical area up to the limits.

Down Payment Requirements
FHA has greatly simplified its formula for calculating the down payment required on its insured loans.

As of January 1, 2009, the purchaser must provide 3.5% of either the sales price or appraised value (whichever is less) either from their own funds, a family gift, or a grant from local, state, or nonprofit down payment assistance program that doesn’t receive any financial benefit from the transaction.

In most cases this is applied as the down payment.

For some special programs that allow for a higher LTV (loan to value) ratio, a part of the 3.5% ma go towards approved closing costs.

Borrowers’ Income Qualifications
The FHA qualifies borrowers based on 2 ratios (the borrowers must qualify under both ratios):

1. Housing ratio
2. Total obligations ratio

Housing Ratio
The housing ratio of 31%.

A borrower’s total monthly housing expenses may not exceed 31% of the total gross monthly income.

Included in these expenses are mortgage principal and interest, property taxes, home insurance premiums, mortgage insurance premiums, and homeowners or condominium association fee, if applicable.

The housing ratio may be raised if the borrowers have certain compensating factors, such as:

1. Low long-term debt
2. Large down payment
3. Minimal credit use
4. Excellent job history
5. Excellent payment history for amounts equal to or higher than new loan payment
6. Additional income potential

Total Obligations Ratio
The total obligations ratio of 43%.

A borrower’s total monthly obligations may not exceed 43% of the total monthly gross income.

Included in these obligations are monthly housing expenses plus monthly debt payments.

Debts that will be paid in full within ten months generally are not included.

Alimony and child support payments are deducted from monthly gross income before calculating the qualifying ratio.

For borrowers who qualify under FHA’s Energy Efficient Homes, the ratios may be stretched to 33% for housing and 45% for total obligations.

Ex. $200,000 FHA loan @ 6% for 30-years.
1.75% MIP added upfront.

$1,220 Principal & Interest+MIP
($200,000 + $3,350 = $203,350 @6% = $1,220)
$300 Property Taxes
$30 Hazard Insurance
+$83 Monthly MIP
=$1,633 Housing Costs divided by 0.31 = $5,268
+$600 Other Debts
=$2,233 Total Obligations divided by 0.43 = $5,193

To qualify for this loan, the borrowers would need to earn at least $5,268 in combined gross monthly income.

Non-Traditional Credit
FHA allows a lender to develop a non-traditional mortgage credit report (NTMCR) to document a borrower’s payment history in cases where a credit bureau score can’t be derived.

A 12-month history of timely payments for rent, utilities, telephone and cellular phone services, and cable television is preferred.

Sources that may be given consideration include insurance coverage (medical, auto, or life insurance), childcare payments, and other documented history of payments or savings.

Mortgage Insurance Premiums
(MIP)

When the FHA issues an insurance commitment to a lender, it promises to repay the balance of the loan in full if the borrower defaults.

This guaranty is funded by imposing a mortgage insurance premium (MIP) that must be paid by the borrower when obtaining an FHA-insured loan.

It can be paid in cash or financed even if the loan plus the MIP exceeds the maximum loan limit.

For a brief period in 2008, FHA implemented a risk-based premium for mortgage insurance.

This was placed in a 1-year moratorium by the Economic and Housing Recovery Act effective through September 30, 2009.

The upfront MIP premium is:
-Purchase Money Mortgages and Qualifying Refinances=1.75%
-Streamline Refinances (all types)=1.50%
-FHASecure (Delinquent Mortgagors)=3.00%
-There is no upfront MIP charged on condominium loans

FHA borrowers must also pay an annual premium of 0.5% for a 30-year loan or 0.25% for a 15-year loan, payable monthly and included in the regular PITI payment.

This MIP premium applies to all types of FHA loans and is subject to periodic change.

The upfront MIP premium is:
-LTV less than 95% 30-year loan 0.5%
-LTV greater than 95% 30-year loan 0.55%
-LTV less than 90% 15-year loan none
-LTV greater than 90% 15-year loan 0.25%

FHA monthly insurance payments will be automatically terminated under the following conditions:

-For mortgage terms of more than 15-years, the annual MIP premium will be canceled when the loan-to-value ratio reaches 78%, provided the mortgagor has paid the annual premium for at least 5-years.

-For mortgage terms of 15-years or less and with original loan-to-value ratios of 90% or greater, annual premiums will be canceled when the loan-to-value ratio reaches 78%, regardless of the amount of time the mortgagor has paid premiums.

-Mortgages with terms of 15-years or less and with loan-to-value ratio of 89.99% and less will not be charged any annual premiums.

Allowable Closing Costs
The FHA has strict guidelines defining allowable closing costs that may be charged to a borrower.

The amounts may differ by geographic area but must be considered to be reasonable and customary.

All other costs in the transaction are generally paid by the seller when purchasing a new home or by the lender in the case of a refinance.

The seller may contribute for the borrower up to 6% of the sales price to cover discount points and other allowable closing costs.

The allowable closing costs are:
1. Appraisal fee and any inspection fees
2. Actual costs of credit reports
3. Lender’s origination fee
4. Deposit verification fee
5. Home inspection service fees up to $200
6. Cost of title examination and title insurance
7. Document preparation (by a third party not controlled by the lender)
8. Property survey
9. Attorney’s fees
10. Recording fees, transfer stamps, and taxes
11. Test and certification fees, water tests, and so on

The allowable costs in a refinance are:
1. Courier fees
2. Wire transfer fees
3. Fees to pay off bills
4. Reconveyance fees

Second Mortgage/Buydowns
The FHA will allow a second mortgage to be acquired on the collateral property.

There are certain conditions, including:
1. The total of the first and second mortgages must not exceed the allowable maximum LTV ratio.
2. The borrower must qualify to make both payments.
3. There can be no balloon payment on the second mortgage if it matures before 5-years.
4. The payments on the second mortgage must not vary to any large degree.
5. The second mortgage must not contain a prepayment penalty.

The FHA allows mortgage buydowns when the borrower or seller can make an advance cash payment to lower the interest rate for a period of time.

This effectively reduces the corresponding monthly payments.

The FHA also allows the borrower the advantage of qualifying for the loan at the brought-down interest rate, not the contract interest rate.

Assumptions
FHA loans originated prior to December 1989 are generally assumable without qualifying, but the original borrower retains some responsibility in the event of a default.

For FHA loans originated after December 1989, all sellers are released from liability under an assumption.

Buyers have to qualify under the current 31% and 43% rule and must occupy the property.

The FHA currently prohibits the assumption of loans by investors.

Frequently Used FHA Loans
The most frequently used FHA loan are:

-Section 203(b) One-Family to Four-Family Mortgage Insurance

-Section 234(c) Mortgage Insurance for Condominium Units

-Section 251 Insurance for Adjustable-Rate Mortgage

-Section 203(k) Rehabilitation Mortgage Insurance

-Streamline Refinance

Section 203(b) One-Family to Four-Family Mortgage Insurance
This mainstay of the FHA single-family insurance programs remains an important financing option for first-time homebuyers, persons who may have trouble qualifying for a conventional loan, or those living in underserved areas.

The low down payment, higher total debt ratio, and consideration of compensating factors may make it possible for owner-occupants to achieve their dream of homeownership.

Section 234(c) Mortgage Insurance for Condominium Units
Similar to the 203(b) program, the 234(c) is specifically for the purchase of a unit in a condominium building that must contain at least four dwelling units and can be detached, semidetached, row house, walk-up, or elevator structure.

Down payment, loan limits, and borrower qualifying are the same as for the 203(b), but there is no up-front mortgage insurance premium required for condominiums.

Section 251 Insurance for Adjustable-Rate Mortgage
The FHA adjustable-rates mortgage (ARMs) are available to owner-occupants of one-family to four-family dwelling units.

The down payment, maximum loan amount, and qualifying standard are the same as for 203(b) and may be written for 30-years.

Hybrid 5-year adjustable-rate loans that carry popular 2% annual rate-increase limits and 6% life-of-the-loan limits are available with a 3% down payment.

They allow first-time buyers to lock in a relatively low fixed rate for the initial 5-years of the mortgage.

The FHA ARMs are fully assumable and buydowns are permitted.

When qualifying at the buydown rate of interest, it is possible for the borrower to afford a larger loan amount.

Section 203(k) Rehabilitation Mortgage Insurance
The Section 203(k) loan makes it possible for the purchaser to obtain a single long-term loan (either fixed or adjustable rate) to cover both the acquisition and rehabilitation of a property.

The 203(k) is also available for refinancing a property that is at least one year old.

The value of the property is limited by the FHA mortgage loan limits for the area and is determined by:

1. The value before rehabilitation plus the cost of rehabilitation
2. 110% of the appraised value after rehabilitation, whichever is less

Other features of the rehabilitation loan FHA 203(k) including:

1. Rehab costs must be at least $5,000
2. Prospective buyers can add $5,000 to $15,000 to the loan amount for renovations to meet FHA minimum standards
3. The borrower pay only taxes and insurance during the first six months
4. The rehab funds are paid to the borrower in draws
5. The rehab costs and installation time must be approved by the lender before the loan can be granted
6. Basic energy efficiency and structural standards must be met
7. The FHA 203(k) program is not available to investors

A list of the types of improvements that may be under 203(k) financing and other information regarding eligible properties and applicants may be found on the HUD Web site.

Streamline Refinance
Since 1980, FHA has permitted insured mortgage to be streamline refinanced.

The amount of documentation and underwriting is greatly reduced, although closing costs will still apply.

These costs can be including in the new mortgage amount with sufficient equity in the property as determined by an appraisal.

The basic requirements for a streamline refinance are:
1. The mortgage must already by FHA insured.
2. The mortgage must be current, not delinquent.
3. The refinance must result in lowering of monthly principal and interest payment.
4. No cash may be taken out.

-Direct Endorsement and Coinsurance
Under the direct endorsement program, applications for FHA’s single-family mortgage insurance programs can be underwritten by an approved lender that certifies the mortgage complies with applicable FHA requirements.

The lender performs all appraisal duties and analyzes the borrower’s credit.

Direct endorsement leaves FHA with the risk of loss from default but gives it control through its ability to remove the lender from the program.

Direct endorsement has become increasingly popular with lenders.

The majority of all FHA mortgage insurance applications are now being processed under its format.

Lenders who avoided FHA insurance because of the delays and red tape now use direct endorsement as an alternative to private insurance.

Under coinsurance, an approved lender both processes and underwrites qualified mortgages.

The coinsuring lender shares losses with the FHA in the event of a default.

Coinsurance
An FHA program that allows loan originators to directly underwrite housing project loans, shortening processing time considerably.
-Advantages of the FHA Mortgage
Using the FHA mortgage provides the following advantages:

1. The loan-to-value (LTV) ratio is high. In many cases an FHA mortgage may be obtained with as little as 1.25% down payment.

2. Different types of loans are available. THe FHA has loan structures to meet a variety of borrowers’ needs. There are fixed-rate or adjustable-rate loans. The FHA also insures loans for low-income housing, subsidized interest loans, and manufactured home purchases.

3. There is no due-on-sale clause. The original terms of the loan can remain the same and can’t be changed because of a sale. Most FHA loans are fully assumable with qualification.

4. There is no prepayment penalty. The absence of a prepayment penalty allows the borrower to increase the monthly payment or prepay the loan.

-FHA Contributions to Real Estate Finance
Every financier recognizes the significance of the FHA’s major contributions to the stabilization of the real estate mortgage market.

These contributions are summarized as:

1. The FHA instituted basic standards for qualifying borrowers. Because credit applications and borrower credit ability criteria are standardized, all lenders, who issue FHA-insured loans use the same basic language and tools.

2. The FHA instituted standards for appraising property. Minimum construction standards are established that must be met before a property can qualify for an FHA-insured loan. The standards apply to both new and used buildings, and they are measured by an FHA appraisal of the potential collateral.

3. The long-term amortized loan was devised. Prior to the FHA’s long-term amortization design, in which a borrower has from 15-years to 30-years to repay a loan in equal monthly payments, most mortgage loans had to be paid in full or refinanced approximately every 5-years. This created hardships for both borrowers and sellers, and contributed to the many foreclosures during the Depression years. Currently the FHA monthly payments include an amount for principal, interest, property taxes, hazard insurance, and, if required, property improvement assessments and FHA mortgage insurance premiums.

4. The FHA lending standards and amortization design provided the foundation for a national market in mortgage securities. By developing reliability and safety in mortgage loan investments, the FHA enables financial investors from all over the world to trade in these securities.

*The U.S. Department of Veterans Affairs Real Estate Loan Guarantee Program
Veterans and their dependents receive special consideration in terms of educational opportunities, medical care, and housing allowances.

The U.S. Department of Veterans Affairs (DVA) supervises a network of programs designed to aid U.S. war veterans.

Special finance programs have been established to provide funds to eligible veterans, reservists, and members of the National Guard to enable them to purchase homes, farms or ranches, and to improve these properties.

In 1944, shortly before the end of WW2, Congress passed the Serviceman’s Readjustment Act, more commonly known as the GI Bill of Rights.

This program was designed to provide returning veterans medical benefits, bonuses, and low-interest loans to help them readjust more easily to civilian life.

This act is divided into six parts, or titles.

Title III concerns guarantees to the lenders making real estate loans to eligible veterans that these loans will be repaid regardless of any borrower default.

Originally the guarantee was for 50% of the loan’s balance, not to exceed $2,000.

In 1945, Congress increased the guarantee to 60% against $4,000 and has gradually increased these limits.

The conforming loan limit is adjusted each year by the Federal Housing Finance Agency (FHFA).

In 2006 the VA-guarantee is $104,250, or 25% of the current Freddie Mac loan limit of $417,000.

Because the lender regards this guaranteed amount the same as a 25% down payment, the lender will loan four times the guaranty for a single-family home.

A lender would be willing to loan a qualified veteran borrower up to $417,000, four times the entitlement.

-Program Application
The DVA is concerned with guaranteeing loans made by institutional lenders, such as commercial banks, thrift organizations, life insurance companies, and mortgage bankers and brokers.

It tries to eliminate any risks taken by these lenders when they make loans on real estate to eligible veterans.

If a veteran can’t continue to meet the required payments, the lender is compensated by the DVA for any losses incurred in the foreclosure and subsequent sale of the property, up to the limit of the guarantee.

The operations of the DVA real estate loan guarantee program are managed by 11 regional centers located throughout the country.

The programs is not designed to be used indiscriminately.

Each loan application is reviewed carefully to determine the veteran’s eligibility, credit history, and ability to pay.

The value of the property is firmly established by an appraisal, and assurances are secured that the veteran will occupy the premises as the major residence.

Poor risks are denied loans and are referred to other programs.

The DVA guarantees about 200,000 loans per year.

Several veterans, related or not, may purchase one-family to four-family homes as partners, as long as they intend to occupy the property.

A veteran and a nonveteran who are not married may purchase a home together as coborrowers, although the DVA will not guarantee the nonveteran’s portion of the loan.

The DVA does qualify common-law marriages without reduction of the loan guarantee for the nonveteran, as long as proper documentation has been supplied.

Eligibility / Entitlement
A veteran’s eligibility or entitlement to participate in the program is derived from the following active-duty criteria:

1. More than 90 days of continuous active duty; or discharge because of a service-connected disability; or separation under other than dishonorable conditions during any of the following wartime periods:

WW2: September 116, 1940 to July 25, 1947
Korean Conflict: June 27, 1950 to January 31, 1955
Vietnam War: August 5, 1964 to May 7, 1975
Persian Gulf War: August 2, 1990 to undetermined date

2. More than 180 days of continuous active duty for other than training purposes; or discharge because of a service-connected disability; or separation under other than dishonorable conditions during the following peacetime periods:

Post-WW2: July 26, 1947 to June 26, 1950
Post-Korean Conflict: February 1, 1955 to August 4, 1964
Post-Vietnam War: May 8, 1975 to August 1, 1990

3. For enlisted personnel, 2-years of continuous active duty or separation under other than dishonorable conditions during the peacetime period from 1980 to the present. For officers, 2-years of continuous active duty or separation other than dishonorable discharge during the peacetime period from 1981 to the present.

4. At least 6-years of continuous active-duty as a reservist in the Army, Navy, Air Force, Marine Corps, or Coast Guard, or as a member of the Army Air National Guard (in effect until September, 2009).

Active duty service personnel are eligible after serving 90-days of continuous activity.

When an ending date is established for Persian Gulf War service, a minimum of 181 days of continuous active duty will be required.

Unremarried spouses of veterans may be eligible for DVA loans if the veteran died of a service-connected injury or illness or is listed as missing in action.

Entitlement
The amount of guarantee a veteran is eligible to secure on a DVA loan.
Certificate of Eligibility
One of the most important documents needed for a loan application by a veteran is a certificate of eligibility.

To receive this certificate, the veteran must secure forms to determine eligibility as well as an available loan guarantee entitlement.

These forms must be accompanied by evidence of military service.

At present, veterans receive their certificate of eligibility with their discharge from service.

There is no time limit on the entitlement, and it remains in effect until completely used up.

This loan guarantee must be used in the United States, its territories, and its protectorates.

A certificate may be requested on DVA Form 26-1880 and submitted along with the DD Form 214 (Certificate of Release or Discharge) through the local DVA office.

After using the DVA guarantee for a real estate loan, the veteran may gain the restoration of eligibility when the loan is paid in full and the property has been conveyed to another owner.

(There is a one-time exemption of the conveyance requirement.)

Partial Entitlement
Veterans who have used their benefits in the past may be eligible for another DVA loan if they have any remaining entitlement.

With a partial entitlement, a veteran may pay cash down to the maximum loan amount and still benefit accordingly.

To determine any remaining entitlement, subtract the amount used previously from the amount currently in effect. This is the amount available for the guarantee.

Finally, to determine the maximum DVA loan allowed under partial entitlement, take 75% of the appraised value and add the remaining entitlement amount.

Ex. Veteran purchases a house in 1989 using $46,000. In 1999 he wants to buy a new home and want to keep his current home as a income property. New house appraised for $150,000, new VA loan is $117,250 used after calibrated:

$50,750 Maximum 1999 entitlement
-46,000 1989 entitlement
=4,750 Remaining entitlement
+112,500 75% of $150,000
=$117,250

To complete the transaction, the veteran paid $32,750 as a cash down payment.

Certificate of Reasonable Value (CRV)
The DVA requires a certified real estate appraiser to submit a formal estimate of the value of the property to be financed.

The appraiser issues a certificate of reasonable value (CRV), stating the amount of the appraisal.

The CRV is valid for 6 months for existing properties and 12 months for new construction.

It may not be extended.

If a sale is made subject to a CRV and the appraisal comes in at less than the sale price, the following may occur:

1. The buyer can make up the difference in cash
2.The seller can accept the lower amount as the sale price
3. The buyer and seller can compromise
4. The transaction can be canceled

In the purchase of a home in excess of the maximum guaranteed DVA loan amount with no money down, the difference is required to be paid in cash.

The DVA reserves the right to approve the source of the cash.

This is to ensure that the veteran is not borrowing an additional amount that would adversely affect the total debt ratio.

Interest
In the past, the DVA specified the interest rate the lender could charge the veteran.

Now the DVA allows the borrower the opportunity to shop the marketplace and negotiate the best rate available.

All types of mortgage loans are competitive as to interest rates, leveling the financing market.

Income Qualifying Requirements
The DVA utilizes only one ratio to analyze a borrower’s ability to qualify for the loan payment.

This ratio is 41% of the borrower’s gross monthly income and includes principal, interest, taxes, insurance, utilities, maintenance, repairs, and other monthly obligations.

The DVA publishes information pertinent to maintenance, repair, and utility estimates for various regions in the U.S.

This information is based on a property’s square footage and age, and whether the property has a pool, air-conditioning, or evaporative cooling.

Ex.
One regional office allocates $76 per month for maintenance and repairs to a house more than 3-years old, consisting of 1,600 square feet, including a pool and air-conditioning. Furthermore, it allocates $214 per month for the utilities at this property.

Ex. A veteran applies for a DVA loan of $100,000 at 7% interest for 30-years. The monthly principal and interest payment is $665. Other monthly costs include $70 for taxes, $15 for insurance, $214 for utilities, $76 for maintenance, and $200 for other obligations. The veteran’s total gross monthly income will have to be at least $3,024, or $36,288 per year, to qualify for this loan.

$665 Principal and Interest
70 Property Taxes
15 Hazard Insurance
214 Utilities
76 Maintenance
200 Other Payments
1,240 Total Obligations
÷ 0.41 VA Income Ratio
=3,024 Gross Monthly Income Required
x 12
=$36,288 Gross Annual Income Required

Closing Costs
May not be included in DVA loans and must be paid in cash at closing.

The only costs that may be charged to the veteran include:
1. 1% of the loan amount charged by the lender as a loan origination fee

2. Discount points as determined by the market

3.DVA funding fee

4. Reasonable and customary charges for: appraisal; credit report; recording fees; taxes and/or assessments chargeable to borrower; initial deposit for tax and insurance escrow account; hazard insurance including flood insurance, survey is required; and title examination and title insurance.

The seller may pay all of the borrower’s closing costs plus an additional 4% of the loan amount to be used for the funding fee or to pay off borrower’s debt to allow borrower to qualify for the loan.

Funding Fee
The DVA charges a funding fee, which may be paid in cash or included in the loan amount, even in excess of the CRV.

The addition of the funding fee to the original loan amount may not exceed the maximum allowable loan.

The funding fee is required on all DVA loan except: from veterans receiving compensation for service-connected disabilities; from veterans receiving retirement pay n lieu of disability compensation; from spouses of veterans who died in service or died from service-connected disabilities; and in some transactions in which a large down payment is made.

Ex. The funding fee charged on a $100,000 DVA loan where the veteran makes no down payment is $2,150:

$100,000
x 0.0215
=$2,150

Ex. The funding fee charged on a $100,000 DVA loan where the veteran makes a 10% down payment is $1,250:

$100,000
x 0.0125
=$1,250

Ex. The funding fee charged on a $100,000 DVA loan secured for refinancing is $500:

$100,000
x 0.005
=$500

Second Mortgages
The DVA will allow second mortgages to be placed on the collateral property under the following conditions:

1. The second mortgage document must be approved by the DVA legal department prior to loan closing.

2. The total of the first and second mortgage liens may not exceed the value of the property.

3. The interest rate on the second mortgage may not exceed the interest rate on the first.

4. The second mortgage may not have a prepayment penalty or a balloon payment.

5. The second mortgage must be amortized for at least 5-years.

Buydowns
Are allowed only on DVA loans issued with level payments.

A buydown is an amount of money paid in advance, accepted by the lender, to reduce the interest rate on the loan.

The buydown fee may be paid by the seller, the buyer, or family members.

The borrower must qualify at the first year’s payment rate.

Assumptions.2
Prior to March 1988, DVA loans were fully assumable without prior lender approval of the buyer’s credit.

For DVA loans made after this date, the buyer’s credit must be approved by the lender prior to the assumption of an existing loan.

Any unauthorized assumption may trigger a technical default and the loan balance can be called in full.

In any approved assumption, the loan interest rate will not be changed.

Release of Liability/Novation
The original makers of a DVA loan remain liable until it is paid in full or the veteran receives a release of liability or a substitution of entitlement form a cooperating buyer.

The release of liability relieves the veteran-seller of the responsibility for repayment and any deficiencies resulting from a default on the loan.

Although it is unusual for a veteran to have more than one DVA loan in effect at any one time, it’s not unusual for a veteran to secure a complete release from the liability of a previous DVA loan and a restoration of eligibility for a new maximum guarantee.

General requirements for restoration of entitlement by the DVA call for the veteran to sell the property and repay the debt in full.

A recent change allows for a one-time only provision for restoration of entitlement with repayment of the debt without having to dispose of the property.

A veteran can qualify to ask the DVA for a substitution of entitlement if the home is sold to another qualified veteran willing to assume the loan.

In cases in which a veteran’s loan is assumed by a purchaser who is not a veteran, the DVA will not allow the seller-veteran to regain maximum entitlement.

The purchaser can agree to assume the veteran’s liability to reimburse the DVA in case of default, and the buyer and seller can then petition the DVA to release the veteran from all obligations.

This full substitution technique is called novation.

If the new buyers meet the credit requirements of the old lender, the DVA may accept them in lieu of the veteran and release the veteran’s liability on the loan.

Note that release of a veteran’s liability doesn’t restore eligibility for the maximum guarantee amount.

It will not be restored until the loan is finally paid off by the purchaser.

Substitution of Entitlement
Replaces one eligible veteran with another on an existing DVA loan and restores entitlement to the original veteran.
Novation
Full substitution of the original borrower by a new, qualified borrower; releases the original maker of the loan from all liability.
DVA Adjustable-Rate Mortgage (ARM)
The Veteran’s Benefits Act of 2004 reinstated the adjustable-rate mortgage (ARM).

Following are the key features of this program:

1. Annually adjusted interest rate
2. Interest rate adjustments limited to increase o decrease of 1% per year.
3. Interest rate adjustment not to exceed 5 percentage points over life of the loan
4. Requirement that ARM loan be underwritten at 1% above initial rate

The Act authorized the DVA to guarantee hybrid ARM loans through September 30, 2008.

The Veteran’s Benefits Improvement Act of 2008 extended the DVA’s authority to guarantee new hybrid ARM loans through September 20, 2012.

If the initial contract interest rate is fixed for less than 5-years, the initial adjustment is limited to a maximum increase or decrease of 1%, and 5% for the life of the loan.

If the initial contract interest rate is for more than 5-years, the adjustment is limited to 2% and 6% over the life of the loan.

The provisions of the 2004 and 2008 act do not affect existing DVA ARMs, which remain subject to the terms in affect at the time of origination.

Adjustable-Rate Mortgage
(ARM)

A variable-interest-rate loan.

Additional DVA Loan Guarantee Programs
The DVA also guarantees loans for condominiums, cooperatives, manufactured housing, and mobile homes.

Three types of refinance programs are available to veterans:

1. DVA Streamline Refinance–Interest Rate Reduction Refinancing Loan (IRRRL): refinance for a lower interest rate with no out-of-pocket closing costs, no appraisal required, and no income or credit check needed. There is a 0.5% funding fee.

2. Cash Out Refinance–Refinance using existing equity to take out cash or pay off debts up to 90% of the value of the property. Funding fee is required.

3. Conventional to DVA Mortgage–Refinance into a DVA mortgage from a conventional loan. Funding fee is required but may be financed. There is no private mortgage insurance required, no out-of-pocket closing costs, and new interest rate may be lower.

*California Veterans Home and Farm Purchase Program (Cal-Vet)
Originated in 1921, the California Veterans Home and Farm Purchase Program, also known as Cal-Vet, was created by the state legislature to assist qualified veterans to acquire California home or farm properties at low financing costs.

The state Department of Veterans Affairs provides the funds and administers the loans until they are paid.

State laws governing the program are contained in Division 4, Chapter 6 of the Military and Veterans’ Code.

-Funding and Title
Monies for the program are secured primarily through the sale of revenue bonds collateralized by the Cal-Vet loan portfolio.

Funds are also raised through the sale of general obligation bonds, the issuance of which must be approved by both the legislature and the voting public.

Both types of bonds are tax-exempt bonds at both the federal and state level.

The amount loaned to each borrower is repaid at a low interest rate sufficient to cover the costs of the bond issue and the costs of the program’s administration, involving no expense to taxpayers.

The department purchases the subject property from the sellers, takes legal title, and then resells it to the veteran who acquires an equitable interest in the real estate under a land contract.

The veteran has full use of the property, as long as it is a personal residence, and secures full legal title when the Cal-Vet loan is repaid.

Tax-Exempt Bonds
Issued to finance public or private improvements for community benefit, interest from which may be exempt from federal, state, and local income taxes.

Limited application under TRA’86.

-Eligibility Requirements
To qualify for the Cal-Vet program, all veterans are eligible and must meet the following criteria:

1. At least 90-days active service or prior discharge due to service-connected disability, or eligible to receive a U.S. campaign or expeditionary medal, or were called to active duty from the Reserves or National Guard due to a Presidential Executive Order.

2. Honorable discharge

3. Active service within these periods:

WW1: April 6, 1917 – November 11, 1918
WW2: December 7, 1941 – December 31, 1946
Korean Conflict: June 27, 1950 – January 31, 1955
Vietnam War: August 5, 1964 – May 7, 1975
Gulf War: August 2, 1990 – Present

4. A veteran receiving approved medals during peacetime may also qualify.

Unremarried spouses of veterans killed in active duty or missing in action may qualify.

Veterans with more than one qualifying period may be eligible for more than one loan, but only one loan may be active at any time.

Proof of eligibility lies with the veteran.

Further information may be found online at www.cdva.ca.gov or by calling 1-800-952-5626.

-Qualifying Procedures
Properties that qualify for Cal-Vet financing are:

1. Single-family homes, condos, townhouses, and mobile homes on owned lots to $521,250

2. Manufactured homes in approved parks up to $175,000

3. Self-supporting farms and ranches up to $625,500

There may be additional loan amounts available for homes equipped with solar heating devices, based on Cal-Vet’s requirements.

The down payment for a Cal-Vet loan differs depending on the type of loan.

Ex. Qualified borrowers, the Cal-Vet/DVA loan requires no down payment.

The Cal-Vet 97 programs requires 3% down.

The Cal-Vet 80/20 program requires 20% down.

The funding fees ranges from 1.25 to 3.3%.

There is a 1% origination fee on all Cal-Vet loans.

Most loans are established on a 30-year amortization schedule except for manufactured homes in a park, which run from 15 to 20 years.

The interest rates on Cal-Vet loans fluctuate as new bond issues are created.

The existing and new loans acquire a weighted average rate over time; the interest rates are usually below market.

Cal-Vet also provides adjustable-rate loans.

A Cal-Vet loan may be satisfied at any time with any prepayment penalty.

A minimal application fee is required. Prorations of property taxes and insurance premiums will be paid at closing.

Borrowers must meet normal credit requirements, including an acceptable credit history.

Borrowers are required to purchase special hazard insurance against floods and earthquakes.

They also must purchase life and disability insurance to provide for full repayment of the loan in the event of death or disability.

-Special Conditions
-New Construction
-Funds for Refinancing
-Junior Financing
-Occupancy
-Others
New Construction
The Department does make construction loans and offers permanent financing for eligible properties.

Prior approval must be secured before entering into a contract for a new building.

Funds for Refinancing
The Department doesn’t make provide funds for refinancing existing loans except: to provide permanent financing for an approved construction loan of if money is not available at the time of commitment and the veteran has to secure an interim loan for not more than 2-years.
Junior Financing
The Department may consent to additional financing that would be in junior position to the Cal-Vet loan if the combined total does not exceed 90% of the appraised value of the property.
Occupancy
The veteran must occupy the property within 60-days of closing a Cal-Vet contract and must maintain residency until the loan is satisfied.

An exception is made for farm and ranch properties if the veteran personally cultivates the land and harvests the crops or tends the livestock.

The subject property may be rented under prior approved circumstances, but not longer than a total of 4-years throughout the contract.

Others
The rental, sale, assignment, or encumbrance of Cal-Vet property is prohibited without the prior consent of the Department.

The veteran may borrow against equity with approval.

Veterans who must move may qualify to have their Cal-Vet loan transferred or may qualify for a second loan contract.

Some veterans may be eligible for special Cal-Vet loans.

These include a deferred principal payment loan for low-income applicants and a conditional commitment loan for property in need of rehabilitation.

Graduated Payment Mortgage
(GPM)

Payments are adjustable.