washington real estate fundamentals lesson 11: applying for a residential loan © 2011 rockwell...
TRANSCRIPT
Washington Real Estate Fundamentals
Lesson 11:
Applying for a Residential Loan
© 2011 Rockwell Publishing
Applying for a Residential Loan
This lesson will cover five main topics:Choosing a lenderLoan application processBasic loan featuresResidential financing programsPredatory lending
© 2011 Rockwell Publishing
Choosing a LenderTypes of lenders
Major sources of residential financing:Commercial banksThrift institutionsCredit unionsMortgage companies
Many of the original distinctions between these types of lenders have been lost.
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Types of LendersCommercial banks
Commercial banks are either national banks (federally chartered) or state banks (state-chartered).
Traditionally:accepted only short-term (demand) depositsmade primarily short-term business loans
Later diversified their business, and now have significant share of residential mortgage market.
© 2011 Rockwell Publishing
Types of LendersThrift institutions
Savings and loans and savings banks are grouped together as thrifts.
Have either federal or state charter.Emphasize home purchase loans.
Once dominated mortgage market.No longer dominant, because of
greater involvement of commercial banks and mortgage companies.
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Types of LendersCredit unions
Credit unions often serve only members of a particular group.
Examples: members of union or other association, employees of large company.
Traditionally specialized in small personal loans.
Now also make home loans (home equity and home purchase loans).
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Types of LendersMortgage companies
Unlike other lenders, mortgage companies aren’t depository institutions.
Therefore can’t use depositors’ funds to make loans.
Instead, mortgage companies:act as loan correspondents, and/orengage in warehousing.
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Types of LendersMortgage companies
Loan correspondent: Local intermediary between large investors and home buyers.Makes and services home loans on behalf of
insurance companies, pension funds.
Warehousing: Borrowing from banks on short-term basis, using funds to originate loans to buyers.Loans then sold on secondary market, not
kept in portfolio.© 2011 Rockwell Publishing
Types of LendersMortgage companies
Mortgage companies are sometimes called mortgage bankers. Traditional distinction:
Mortgage banker: Lender that originates and services loans.
Mortgage broker: Not a lender; only negotiates or arranges loans.
Distinction no longer clear-cut. Mortgage company may play either role.
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Types of LendersMortgage companies
Number of mortgage companies increased sharply in 1990s.
Companies played major role in subprime lending boom.
Subprime foreclosures have affected them more than other types of lenders.
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Types of LendersSeller financing
In addition to institutional lenders, private sources of residential financing. Most important is seller financing.
Seller financing: When property seller extends credit to buyer.
Seller financing especially important when:institutional loans scarcemarket interest rates high
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Types of LendersSeller financing
Buyer makes downpayment and gives seller mortgage, deed of trust, or land contract for rest of price.
Alternatively, seller may provide secondary financing:Buyer finances most of purchase price
through institutional lender, finances rest through seller.
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SummaryTypes of Lenders
• Commercial bank• Thrift institution• Credit union• Mortgage company• Loan correspondent• Warehousing• Mortgage banker• Mortgage broker• Seller financing
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Choosing a LenderLoan costs
For most buyers, cost of loan is primary consideration when choosing a lender.
Loan costs include:interest chargesorigination feesdiscount pointsmiscellaneous other charges, such as
document preparation fees
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Loan CostsOrigination fees
Loan origination: Processing loan applications and making loans.
Origination fee: Charge to cover lender’s administrative costs in making loan. Also called loan fee.
Percentage of loan amount (1% to 3%).Charged for almost every institutional loan.Paid by buyer unless otherwise agreed.
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Loan CostsPoints
Origination fee may be grouped together with discount points under general term points.
One point = 1% of loan amountExample:
On $200,000 loan, one point = $2,000When someone quotes points for a loan,
clarify whether both origination fee and discount points included, or just discount points.
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Loan CostsDiscount points
Discount points: Fee paid to lender at closing to increase lender’s upfront yield (profit) on loan.
Percentage of loan amount.Generally, the more discount points paid,
the lower the buyer’s interest rate will be.
Buydown: Seller agrees to pay discount points to lower buyer’s interest rate, make loan more affordable.
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Loan CostsTruth in Lending Act
Truth in Lending Act (TILA): Federal consumer protection law that requires lenders to disclose full cost of obtaining a loan to borrowers.
Helps borrowers compare loans offered by competing lenders.
Implemented through Fed’s Regulation Z.
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Truth in Lending ActConsumer loans
TILA applies to consumer loans.
Consumer loan: Loan used for personal, family, or household purposes that:
has more than four installments or is subject to finance charges, and
is for $51,800 or less, or is secured by real property.
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Truth in Lending ActExemptions
TILA does NOT apply to:loans made to corporations or
organizationsloans made for business, commercial, or
agricultural purposesloans over maximum amount, unless
secured by real propertyseller-financed transactions
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Truth in Lending ActDisclosure requirements
If loan covered by TILA, lender must disclose detailed information about loan costs.
Includes two key disclosures:total finance chargeannual percentage rate (APR)
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TILA Disclosure RequirementsTotal finance charge
Total finance charge: Sum of all loan-related charges borrower will have to pay, including:
interestorigination feediscount points (if paid by borrower)finder’s feemortgage broker’s feeservice feesmortgage insurance premiums
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TILA Disclosure RequirementsTotal finance charge
In real estate loan transaction, these costs are NOT included in total finance charge:
appraisal feecredit report feeinspection feestitle feescosts paid by someone other than
borrower (such as points paid by seller)
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TILA Disclosure RequirementsAnnual percentage rate
Annual percentage rate (APR): Total cost of loan expressed as annual percentage of loan amount. Also called effective interest rate.
Comparing APRs shows relative cost of loans more accurately than comparing nominal interest rates.Nominal rate: Interest rate stated in
promissory note.
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TILA Disclosure RequirementsOther disclosures
In addition to total finance charge and APR, lender must disclose:
amount financedtotal of all paymentsnumber of paymentspayment amount(s)any prepayment penalty
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TILA Disclosure RequirementsTiming of disclosures
For loan secured by borrower’s dwelling, disclosure statement with estimated costs:
delivered or sent within 3 days after loan application
received at least 7 business days before closing
Lender may not charge any fees before borrower receives disclosure statement.
Exception: Credit report fee© 2011 Rockwell Publishing
TILA Disclosure RequirementsTiming of disclosures: amendments
If significant changes to original estimates: Lender must give borrower amended
disclosures at least 3 business days before closing.
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Truth in Lending ActRight of rescission
For loan secured by existing principal residence, borrower may rescind loan agreement within 3 days after:
signing agreementreceiving disclosure statementreceiving notice of right to rescind
(whichever comes latest)
If notice or disclosure statement never given, right of rescission lasts for 3 years.
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Truth in Lending ActRight of rescission
Right of rescission generally applies only to:home equity loanrefinancing with new lender
Does not apply to:home purchase loanconstruction loanrefinancing with same lender, unless
lender advancing additional funds
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Truth in Lending ActAdvertising rules
TILA also has rules concerning advertising.Apply not just to lenders, but to anyone
who advertises consumer credit.Example: Real estate agent
advertising financing terms for listed home.
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Truth in Lending ActAdvertising rules
Ad can always state cash price or APR.If APR stated, interest rate also OK.
But other specific information triggers full disclosure requirement.
Triggering terms:downpayment amount or percentageloan term or number of paymentsamount of any paymentamount of any finance charge
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Truth in Lending ActAdvertising rules
If ad states triggering term, then it must also include:
APRany required downpaymentrepayment schedule, with number, timing,
and amount of payments
General statements (“easy terms”) do not trigger full disclosure requirement.
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Loan CostsLocking in the interest rate
Borrower may ask lender to lock in quoted interest rate for certain period.
Otherwise lender can change rate at any time until transaction closes.If rate increases, borrower might no
longer qualify for loan.Lender usually charges lock-in fee.
Applied to borrower’s closing costs if transaction closes.
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SummaryChoosing a Lender: Loan Costs
• Origination fee• Discount points• Truth in Lending Act• Regulation Z• Total finance charge• Annual percentage rate• Right of rescission• Advertising requirements• Locking in interest rate
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Applying for a Residential LoanLoan application process
After comparing loan costs and choosing lender, buyer fills out loan application.
Traditionally, buyers would find house first and then apply for loan.
Now getting preapproved (before house-hunting) is standard practice.Lender approves buyer for up to
specified maximum loan amount.
© 2011 Rockwell Publishing
Loan Application ProcessRequired information
Fannie Mae/Freddie Mac residential loan application requires buyer to provide:
personal information (age, education, etc.)current monthly housing expenseemployment informationincome from various sourcesassets and liabilities
Lender verifies information provided.
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Loan Application ProcessUnderwriting
Loan underwriting: Evaluating application to decide if loan should be approved.
Underwriter applies qualifying standards to assess whether loan is acceptable investment risk.Lender may apply own standards.But most lenders use standards set by
Fannie Mae or Freddie Mac (or FHA or VA, for those loans).
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UnderwritingQualifying the buyer
Underwriters focus on three main considerations to qualify buyer:
Credit historyIncomeNet worth
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Qualifying the Buyer Credit history
Underwriter evaluates applicant’s credit history based on credit reports and credit scores from reporting agencies.
Late payments on debtsBankruptcyForeclosure
Applicant should explain any extenuating circumstances (such as divorce) to lender.
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Qualifying the BuyerIncome
Underwriter checks whether applicant has enough stable monthly income to make payments on proposed loan.
Considers quality and durability of income as well as quantity.Quality – dependability of source
Established company vs. new oneDurability – how long it’s expected to last
Permanent job vs. temporary job
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Qualifying the Buyer Income
Underwriter uses income ratios to determine if applicant’s stable monthly income is enough.
Two main types of ratios:housing expense to income ratiodebt to income ratio
Housing expense includes principal, interest, taxes, and insurance (PITI).
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Qualifying the Buyer Net worth
Net worth: Total assets minus total liabilities.
Evidence of financial management skills.
Applicant also needs enough cash for:downpaymentclosing costs
May be required to have cash reserves sufficient to meet mortgage payments for several months.
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Underwriting Qualifying the property
Underwriter also evaluates property that applicant plans to buy.
Is it worth enough to provide adequate collateral for loan amount?Otherwise, foreclosure could result in
financial loss for lender.
Underwriter relies on appraisal report for estimate of property’s value.
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Underwriting Automated underwriting
Automated underwriting (AU): Computer program performs preliminary analysis of loan application and makes recommendation for or against approval.
Human underwriter evaluates AU recommendation.
AU analysis based on performance statistics from millions of loans.
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Underwriting Subprime lending
Subprime lending: Making riskier loans than standard lenders, including loans to buyers who:
have poor creditcan’t or don’t want to meet
documentation requirementswant to buy nonstandard properties
More flexible underwriting standards.Higher interest rates and fees.
© 2011 Rockwell Publishing
Underwriting Subprime lending
Subprime boom enabled many to buy homes who otherwise could not have.
But many loans turned out to be bad risks, causing foreclosure crisis.
Subprime lending now much less common.Recent federal and state legislation
intended to curb abuses.
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Underwriting Mortgage fraud
Examples of mortgage fraud:loan applicants lying about employment,
assets, or liabilitiesinvestors falsely claiming to be buying
property as principal residencelenders overstating quality of loans when
selling them to secondary market
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Underwriting Mortgage fraud
Recent laws aimed at mortgage fraud:Fraud Enforcement and Recovery Act
(federal)Mortgage Lending and Homeownership
statute (Washington)
Both laws provide significant jail time and fines for violation.
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SummaryLoan Application Process
• Preapproval• Underwriting• Qualifying standards• Credit reports and credit scores• Stable monthly income• Income ratios• Net worth• Cash reserves• Automated underwriting• Subprime lending
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Applying for a Residential LoanBasic loan features
Basic features of mortgage loan include:loan termamortizationloan-to-value ratiosecondary financingfixed or adjustable interest rate
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Basic Loan FeaturesLoan term
Loan term: Period of time borrower has for repaying loan. Also called repayment period.
The longer the loan term:the lower the monthly paymentthe more interest paid over life of loan
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Basic Loan FeaturesLoan term
30-year term:standard term for home purchase loanlow monthly payment
15-year term:larger monthly paymentlower interest rateloan paid off in half the timemuch less interest paid overall
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Basic Loan FeaturesLoan term
Larger payment for 15-year loan generally means buyer can’t buy nearly as expensive a home as 30-year loan would allow.
Buyer may consider 20-year loan instead, as compromise.
Some programs allow 40-year term, to maximize purchasing power.
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Basic Loan FeaturesAmortization
Amortized loan: Installment payments include both principal and interest.
Fully amortized loan: Monthly payments will pay off entire debt by end of term.
Partially amortized loan: Monthly payments not enough to pay off entire debt, so balloon payment required at end of term.
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Basic Loan FeaturesAmortization
Interest-only loan:payments during loan term cover only
interest accruing, so entire principal amount is due at end of term; or
payments are interest-only for specified number of years at beginning of term, with amortized payments after that.
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Basic Loan FeaturesLoan-to-value ratio
Loan-to-value ratio (LTV): Relationship between loan amount and value of security property, expressed as percentage.
Example: $80,000 loan on $100,000 property. LTV = 80%
LTV calculated using sales price or appraised value, whichever is less.
The lower the LTV, the greater the buyer’s equity in the property.
© 2011 Rockwell Publishing
Basic Loan FeaturesLoan-to-value ratio
Lenders prefer a lower LTV for two reasons:Borrower who makes larger investment
will try harder to avoid foreclosure.If there is a foreclosure, lender more
likely to recover full amount owed.
Lenders use loan-to-value ratios in setting maximum loan amount for a transaction.
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Basic Loan FeaturesSecondary financing
Secondary financing: Second mortgage loan to pay for part of downpayment and closing costs required for first loan.
Source of secondary financing may be:institutional lenderproperty sellerprivate investor
© 2011 Rockwell Publishing
Basic Loan FeaturesSecondary financing
Primary lender usually places restrictions on terms of secondary financing. For example:
Borrower must qualify for combined payment for both loans.
Borrower may still have to make a minimum downpayment out of own funds.
Second loan may have to be payable at any time without penalty.
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Basic Loan FeaturesInterest rates
Interest rate for mortgage loan may be either fixed or adjustable.
Fixed-rate: Rate remains same throughout loan term.
Adjustable-rate: Rate adjusted periodically throughout loan term to reflect current market interest rates.
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Interest RatesAdjustable-rate mortgages
Adjustable-rate mortgage (ARM): Initial interest rate set at current market rate, with possibility of future rate increases or decreases.
Rate tied to a market index.Also called variable-rate loan.May have lower rate than fixed-rate loan.
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Adjustable-rate MortgagesHow an ARM works
Key elements of an ARM:indexmarginadjustment periodscapspossibility of negative amortization
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How an ARM WorksIndex
Index: Published statistical report that indicates changes in cost of money.
ARM’s interest rate tied to index selected by lender when loan made.After ARM’s initial rate set, rate
adjusted periodically, up or down, based on changes in selected index.
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How an ARM Works Margin
Margin: Difference between index rate and interest rate charged to ARM borrower.
Lender adds margin to index rate to cover lender’s expenses and profit.For example, margin might be 2
percentage points.
Margin stays same throughout loan term.
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How an ARM Works Adjustment periods
ARM has two adjustment periods.Rate adjustment period: How often loan’s
interest rate may change.Not changed every time index changes.Most common: one-year intervals.
Payment adjustment period: How often monthly payment amount may change.Usually matches rate adjustment period.
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How an ARM WorksCaps
ARM may have rate cap and/or payment cap.Interest rate cap: Limits how much lender
may increase loan’s interest rate.Payment cap: Limits how much lender
may increase monthly payment amount.
Caps help prevent payment shock: sudden increase in payment so large that borrower defaults.
© 2011 Rockwell Publishing
How an ARM Works Potential for negative amortization
Negative amortization: When unpaid interest is added to principal, so loan balance goes up.
Occurs if increases in ARM’s monthly payment amount don’t keep up with increases in its interest rate.
Most ARMs now structured to prevent negative amortization.
© 2011 Rockwell Publishing
Adjustable-rate MortgagesHybrid ARMs
Hybrid ARMs: Interest rate is fixed for certain number of years at beginning of loan term, then becomes adjustable.
Example: 5/1 ARM has five-year fixed rate, then annual adjustments.
Generally, longer fixed period = higher initial interest rate.
© 2011 Rockwell Publishing
SummaryBasic Loan Features
• Loan term• Amortization• Loan-to-value ratio• Secondary financing • Fixed-rate mortgage• Adjustable-rate mortgage• Index and margin• Rate and payment adjustment periods• Rate and payment caps• Negative amortization
© 2011 Rockwell Publishing
Applying for a Residential LoanResidential financing programs
Major types of residential financing include:conventional loansFHA-insured loansVA-guaranteed loansRural Housing Service loans
© 2011 Rockwell Publishing
Residential Financing Programs Conventional loans
Conventional loan: Any institutional mortgage not backed by a government program.
Lenders can make conventional loans according to their own rules.
But most follow Fannie Mae and Freddie Mac qualifying standards so the loans can easily be sold on the secondary market.
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Residential Financing Programs Conventional loans
Nonconforming loan: A conventional loan that doesn’t meet Fannie Mae or Freddie Mac standards.
Not as easy to sell nonconforming loan on secondary market, so lender may keep loan in its own portfolio.
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Conventional LoansLoan-to-value ratios
Traditional LTV for conventional loan is 80%, but conventional loans often have higher LTVs.
Lenders generally allow LTV up to 95%.97% LTV sometimes available, though
no longer common.
Lenders tend to have stricter rules for higher-LTV loans, especially if LTV is over 90%.
© 2011 Rockwell Publishing
Conventional LoansOwner-occupancy
Owner-occupancy not required for conventional loan.
But lenders tend to impose stricter requirements on borrowers who are investors.Investor will be renting out house
instead of living in it.Owner-occupants considered less likely
to default.
© 2011 Rockwell Publishing
Conventional LoansPrivate mortgage insurance
Private mortgage insurance (PMI): Designed to protect lenders from greater risk of high-LTV loans.
Insurance provided by private companies (not federal government).
PMI generally required for any conventional loan with LTV over 80%.
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Conventional LoansPrivate mortgage insurance
PMI typically covers only top 20% to 25% of loan amount.
If borrower defaults on loan with PMI, lender can:
sell the property or relinquish it to insurerfile claim for covered losses suffered, up
to policy amount
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Conventional LoansPrivate mortgage insurance
As borrower pays off loan, LTV decreases, and eventually PMI has fulfilled its purpose.
Federal Homeowner’s Protection Act requires lenders to cancel PMI once loan paid down to 80% of property’s original value, if requested by borrower.
Once balance reaches 78%, lender must cancel PMI even without formal request.
© 2011 Rockwell Publishing
Conventional LoansQualifying standards
Fannie Mae and Freddie Mac have detailed standards regarding credit history, income, and net worth.
Depending on lender, underwriter may apply:both housing expense to income ratio
and debt to income ratio, oronly debt to income ratio
Borrower may be required to have reserves to cover two or three months of payments.
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Conventional LoansAssumption
Most conventional loans have an alienation clause.
Prevents borrower from selling property and arranging assumption of loan without lender’s permission.
Buyer in assumption usually must meet same qualifying standards lender uses for ordinary loan approval.
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SummaryConventional Loans
• Conventional loan• Nonconforming loan• Loan-to-value ratio• Owner-occupant• Investor• Private mortgage insurance• Qualifying standards• Assumption
© 2011 Rockwell Publishing
Residential Financing Programs FHA-insured loans
Federal Housing Administration (FHA) created in 1934 to promote home sales and financing for low- and middle-income buyers.
FHA’s main function: insuring mortgages.Mutual Mortgage Insurance Plan
FHA is agency within Department of Housing and Urban Development (HUD).
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Residential Financing Programs FHA-insured loans
Buyers apply to FHA-approved lender.FHA does not accept loan applications
from buyers.Lender must comply with FHA qualifying
standards and other rules to have loans insured.
If borrower defaults, FHA covers lender’s losses.
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FHA-Insured LoansCharacteristics
Term typically 30 years, but can be shorter. Property must be borrower’s primary
residence, but may have up to 4 units. FHA must have first lien position. Required downpayment less than for
conventional loan. Mortgage insurance always required. No prepayment penalty allowed.
© 2011 Rockwell Publishing
FHA-Insured LoansLoan amount
Every area has local maximum FHA loan amount based on median housing prices.
There’s also a ceiling that applies nationwide.
Local limit can’t exceed ceiling, no matter how high local prices are.
© 2011 Rockwell Publishing
FHA-Insured LoansLoan amount
In addition, loan amount for transaction limited by FHA loan-to-value rules.
Maximum LTV for FHA loan: 96.5% (90% for borrower with low credit score).
If LTV is 96.5%, borrower must make minimum cash investment of 3.5%.
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FHA-Insured LoansQualifying standards
FHA qualifying standards less strict than conventional standards.
For example, FHA has higher maximum income ratios.So FHA borrower’s mortgage payment
can be higher percentage of income than conventional borrower’s payment.
Easier to qualify for FHA loan.
© 2011 Rockwell Publishing
FHA-Insured LoansQualifying standards
No maximum income limits.Buyer at any income level could qualify,
as long as loan amount didn’t exceed local maximum.
FHA borrower needs sufficient funds for minimum cash investment and closing costs, but not required to have reserves.
Secondary financing generally can’t be used for minimum cash investment.
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FHA-Insured Loans Mortgage insurance premiums
Most FHA loans require both:one-time mortgage insurance premium
paid at closing or financedannual mortgage insurance premiums
paid in monthly installments
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FHA-Insured LoansAssumption
FHA loans closed before 1990 may be assumed without lender’s approval, if seller does not need release of liability.
Newer loans may be assumed only if buyer:meets FHA underwriting standardsintends to occupy the home as primary
residence
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SummaryFHA-Insured Loans
• Federal Housing Administration• Mutual Mortgage Insurance Plan• Primary residence• Local maximum loan amount• Minimum cash investment• FHA qualifying standards• One-time premium and annual premiums• Assumption
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Residential Financing Programs VA-guaranteed loans
VA-guaranteed loan: Home loan made to U.S. military veteran and guaranteed by federal government.
If borrower defaults, U.S. Department of Veterans Affairs (the VA) will reimburse lender for all or part of its loss.
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VA-Guaranteed Loans Eligibility
To be eligible for VA loan, borrower must have served period of active duty in the U.S. armed forces.
Also eligible:spouses of deceased or missing
veteranslong-term members of National Guard or
reserves
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VA-Guaranteed LoansApplication process
Veteran applies to lender for loan, not to VA.VA issues Certificate of Eligibility to
eligible veteran.Property must be appraised according to
VA guidelines.Appraised value set forth in Notice of
Value (also called Certificate of Reasonable Value).
© 2011 Rockwell Publishing
VA-Guaranteed LoansCharacteristics
No downpayment required (100% LTV). VA doesn’t set a maximum loan amount. VA qualifying standards much less strict
than conventional standards. No mortgage insurance required; instead,
veteran pays funding fee. Applicant must intend to occupy property,
which may have up to 4 units. No prepayment penalty allowed.
© 2011 Rockwell Publishing
VA-Guaranteed LoansVA guaranty
Although VA doesn’t set a maximum loan amount, there is a maximum guaranty amount.
So if loan amount very large, lender typically requires small downpayment.
Usual limit for no-downpayment loan: loan amount no more than four times guaranty amount.
© 2011 Rockwell Publishing
VA-Guaranteed LoansRestoration of entitlement
If a veteran pays off a VA loan:veteran’s full guaranty entitlement is
restoredveteran can obtain another VA loan with
maximum guaranty
Restoration of entitlement is also called reinstatement.
© 2011 Rockwell Publishing
VA-Guaranteed LoansSubstitution of entitlement
If VA loan assumed, seller’s entitlement restored only if buyer is eligible veteran willing to substitute her entitlement for seller’s
VA loan can be assumed by non-veteran, but seller’s entitlement won’t be restored.
With or without substitution of entitlement, buyer must be creditworthy to assume VA loan.
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VA-Guaranteed LoansQualifying standards
Only one income ratio (total debt to income ratio) applied in underwriting VA loan.
Acceptable ratio much higher than conventional debt to income ratio.
Underwriter also considers VA’s residual income requirements.
Borrower must have at least minimum income left over after paying all monthly tax and debt obligations.
© 2011 Rockwell Publishing
Residential Financing ProgramsRural Housing Service Loans
Rural Housing Service: Federal agency within Department of Agriculture that makes and guarantees loans used to buy, build, or rehabilitate homes in rural areas.
Aka RD (rural development) loans.RHS:
makes direct loansguarantees loans made by approved
lenders© 2011 Rockwell Publishing
Residential Financing ProgramsRural Housing Service Loans
For RHS financing, borrower must:not currently have adequate housingbe able to afford the mortgage paymentshave a reasonable credit historychoose a house that is modest in size
and design
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SummaryVA Loans and RHS
• VA-guaranteed loan• Certificate of Eligibility• Notice of Value• VA guaranty• Restoration of entitlement• Substitution of entitlement• Total debt to income ratio• Minimum residual income requirements• Rural Housing Service loans
© 2011 Rockwell Publishing
Applying for a Residential LoanPredatory lending
Predatory lending: Making loans that take advantage of unsophisticated borrowers.
Often targets the elderly, the poor, or people with limited English.
Especially common in subprime market.May involve:
unscrupulous lender, mortgage broker, appraiser, and/or real estate agent
buyer or seller (deceiving other party)© 2011 Rockwell Publishing
Predatory LendingPredatory practices
Examples of predatory lending practices:predatory steeringfee packingloan flippingdisregarding borrower’s ability to repayballoon payment abusesexcessive or unfair prepayment penaltiesfraud regarding fees, loan terms, etc.
© 2011 Rockwell Publishing
SummaryPredatory Lending
• Predatory lending• Targeted borrowers• Predatory steering• Fee packing• Loan flipping• Disregarding ability to repay• Balloon payment abuses• Excessive prepayment penalties
© 2011 Rockwell Publishing