Chapter 4: LOANS: GOVERNMENT

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Chapter 4 LOANS GOVERNMENT

• FHA, VA, Cal Vet And other loans that use Real
  property as collateral

By Dr. D. Grogan M.C. Buzz Chambers
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• The purpose of this unit is to familiarize the
  learner with common types of government financing
  loan programs where agency administration of the
  loan is a federal or state entity.
• Some lenders specialize in only some particular
  loan programs (Conventional only, see Ch 3)
  other lenders offer broader varieties
  (Conventional, government private).
• Federal programs FHA and DVA
• State program Cal Vet
• Others Refinance, Energy Efficient, Small
  Business Administration (SBA), first time home
  buyer (FTHB).
• The mortgage loan broker needs to know as many
  types of loans as possible to offer the potential
  borrower the best choices and to match the right
  borrower with the right investors loan funds.

PREVIEW
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Ch 4 STUDENT LEARNING OUTCOMES

1. Differentiate between the government loans DVA,
   FHA, and Cal Vet.
2. List the components of the various government
   loans.
3. Identify which loan criteria would be required
   for a government loan.
4. Explain the nature of the various loan programs.
5. Describe SBA loan information.

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4.1 FHA Loans

• www.fha.gov www.hud.com
• Created by Congress in 1934
• An insurance agency
• FHA is NOT a lender
• Both borrower property must meet qualification
  criteria.
• Buyer must place 3.5 of the sales price into the
  transaction, either down payment or closing
  costs.

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FHA LOAN CHARACTERISTICS

• Less stringent qualifying standards
• Low down payment
• No secondary financing for the down payment
• Financed closing costs
• Mortgage insurance always required
• No Prepayment penalties
• Owner-occupancy required
• Interest rate freely negotiable

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Statutory FHA Loan Amount Limits

• Specified by the National Housing Act
• Prior to 1996, loan limits established by Freddie
  Mac http//www.freddiemac.com
• 2009 Stimulus bill raised loan limit for reverse
  mortgages from 417,000 to 625,500.
• High cost areas limit is set at lesser of 95 of
  area median sales price, or the statutory
  ceiling, which is equal to an amount not to
  exceed 87 of Freddie Macs conforming loan
  limit. www.FNMA.com

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FHA LOANS

• Statutory Maximum Loan Amounts
• Vary from one area to another
• Single family
• Duplex
• Triplex
• Fourplex

www.hud.gov
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FHA LOAN TYPES

• FHA 202
• Supportive Housing for the Elderly
• Enacted in 1959 amended in 1990
• Based on development cost limits published in the
  Federal Registry.
• Property must be NEW construction, or
• Rehab of existing building.
• Property for low-income, elderly persons for at
  least 40 years.

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FHA LOAN TYPES

• FHA 203 B
• Standard Program established in 1934
• Minimum investment of 3.5 of sales price
• 15 or 30 year loans
• 1-4 unit, owner-occupied loan
• Buy downs may be used
• May finance non-recurring closing costs, up-front
  MIP (UPMIP) up to 96.5 of appraised value.

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FHA 203 b

• Qualifying ratios
• Front end 31
• Back end 43
• FHA rounds down to nearest 50 in whole dollars
  for the loan amount.

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FHA LOAN TYPES

• 203 H
• Disaster victim program
• Fixed rate loan for single family property
• 203 K
• No up-front MIP
• Slighter higher interest rate than 203B
• Up to six months payment may be financed
• Must be owner occupied

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FHA 207

• Designed to facilitate the contraction or rehab
  of manufactured home parks when spaces are
  available for rent, not purchase.
• 40 year maximum loan term.
• Repayment is a level annuity monthly plan with
  equal monthly payments of principle with
  interest.
• Loan limit per home space.

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FHA Loan Programs

• FHA 221 (d) (2)
• Established in 1954
• Allows the Dept of Transportation Commerce to
  pay the HUD MIP for service members on active
  duty.
• FHA 221 (d) (3)
• Designed to assist in financing projects for low-
  moderate-income families, by nonprofit
  mortgagors.
• New construction or substantial rehab
• Five or more residential units with dining
  facilities
• FHA 221 (d) (4)
• Designed to provide rental housing for moderate
  income families.

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FHA loan programs

• FHA 223 (e)
• Enacted in 1968 to purchase or rehab housing in
  older, declining urban areas for low-
  moderate-income families.
• FHA 223 (f)
• Authorized by the National Housing Act, amended
  by the Housing Community Development Act of
  1994.
• Helps secure financing for existing multi-family
  rental housing projects of 8 or more units, at
  least 3 yrs old. 85 LTV.

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FHA loan programs

• FHA 234
• Established in 1961 to finance construction or
  rehab of multi-family housing by sponsors who
  intend to sell individual units and, to finance
  acquisition costs of individual units in proposed
  or existing condominiums.
• The project must have 4 or more units.
• FHA 237
• Enacted in 1968 for borrowers with marginal
  credit.
• FHA 238
• For housing in areas affected by military
  installations.

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FHA 244

• Established in 1974
• A federal mortgage program for graduated payment
  loans.
• Made to those expected to have incomes that rise
  substantially (recent college grad in high-paying
  fields).
• May have negative amortization 5-10 yrs
• Graduated equity mortgages (GEM)
• Must be owner occupied

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FHA LOAN TYPES

• 245 Plan II
• A graduated payment loan
• Increases 5 annually for 5 years
• Rate usually ¼ above FHA 203B
• Borrower qualified 2 below note rate
• Must be owner-occupied, single family
• 245 Plan III
• Note rate ¼ above FHA 203B
• Must be single-family property

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FHA ARM LOANS

• FHA 251 ARM
• An adjustable rate loan
• Limited to 1 per year annual cap
• Limit increase or decrease for life of loan
• Five year lifetime cap
• Requires being owner occupied
• No negative amortization
• Lender must disclose worst case scenario

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FHA 255 (HECM)

• Home equity conversion mortgage
• Established in 1987 allows older homeowners to
  convert their home equity into spendable dollars.
  
• Being eligible for social security income at age
  62 qualifies a homeowner for HECM. ALL borrowers
  must be 62 or more.

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FHA 255 (HECM) loan features

• No credit qualification
• No income restriction
• Pays off all existing loans
• No monthly payment
• Receive monthly cash flow
• No prepayment penalty
• No change in title for home ownership
• Increased equity may provide additional income
• The income is tax free
• The income does not reduce any Social Security
  payments
• May be used for a home purchase
• Current investment of the home does not have to
  be disturbed

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FHA LOAN TYPES

• Title I
• Home improvement loan
• No appraisal fee required
• No Equity required
• Fixed rate loan
• No prepayment penalty

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Energy-Efficient Mortgage (EEM)

• Intended to make the existing home stock more
  efficient through installation of energy-saving
  improvements.
• The maximum amount of the portion of the EEM for
  energy improvements is the lesser of 5 of
• The appraised value of the property, or
• 115 of the median area price for a single family
  dwelling, or
• 150 of the conforming Freddie Mac limit

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Mutual Mortgage Insurance

• MMI is paid
• Monthly at 1 / 2 of loan 12
• MIP is paid at loan origination
• One time fee
• An up-front fee
• Rate of 1.50 of the loan amount

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ASSUMING FHA LOANS

• Loan Closed Before 12/15/89
• Assumable by any Buyer
• No Credit Check
• (unless seller wants release for liability)
• No Owner-Occupancy Requirement

• Loan Closed On or After 12/15/89
• Due on Sale Clause
• Borrower must meet qualifications
• Credit Check Required
• Buyer Must Occupy Property

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FHA INSURANCE ONE-TIME MIP

• 1.5 of Base Loan Amount
• Paid in Cash at Closing, or
• Financed Over the Loan Term

Loan Amount
Loan Amount
X RATE
One-Time MIP
One-Time MIP
Total Amount Financed
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FHA LOANS

• Minimum 3.5 cash investment
• Low cost and High-cost area differences
• Maximum loan amount
• Closing Costs
• C redit report
• A ppraisal report\
• S ettlement or escrow fee
• T itle insurance (ALTA)
• R ecording fees
• O rigination fee

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Borrower Non-Allowables

1. Sub-escrow fee
2. Loan tie-in fee
3. Processing fee
4. Underwriting fee
5. Document preparation fee

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GNMA

• Government National Mortgage Assn.
• HUD agency
• Borrower pays the mortgage insurance premium
• Enables buyers with less than 20 down payment to
  purchase

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Cancellation of FHA MIP

• FHA loan term must be gt 15 years
• LTV must be 78 of original loan value if
  borrower paid MIP for at least 5 years
• Cannot cancel the MIP on condo or 203k loan,
  regardless of LTV
• http//www.hud/gov/offices/hsg/comp/refunds

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FHA Streamline loan (Rate Reduction)

• Must be on an existing FHA loan.
• Purpose is to lower the interest rate monthly
  payment without the costs of obtaining a
  completely new loan.
• Does not allow for any cash out
• Costs may be paid in cash or added to the unpaid
  loan balance.
• No appraisal required unless financing the
  closing costs.

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Secondary Residence Housing Ownership Center (HOC)

• The secondary residence must NOT be a vacation
  home or otherwise used primarily for recreational
  purposes.
• The borrower must obtain the secondary residence
  because of seasonal employment, employment
  relocation, or other circumstances not related to
  recreational use of the residence.
• There must be a demonstrated lack of affordable
  rental housing meeting the needs of the borrower
  in the area or within a reasonable commuting
  distance of the borrowers employment.

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FHA Housing loan programs

• Hope for Homeowners (HOPE) www.hopeforhomeownerspr
  ogram
• 30-year, fixed rate program for people at risk of
  losing their home due to default and foreclosure.
• Indian Home Loan Guarantee Program
• Guaranteed loan for Native Americans, tribes,
  Tribally Designed Housing Entities (TDHEs)
  Indian Housing Authorities on Indian Land.

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DVA GUARANTEED LOANS

• One to Four Units
• Vet Must be in Owner-Occupied unit
• No Down payment Required
• No Prepayment Penalties
• Maximum Interest Rate
• Fixed rate on 1-4 units
• Graduated payment on single-family unit
• No Mortgage Insurance
• Seller Pays Discount Points
• Buyer Pays 1 Loan Fee, 1.875 VA Funding Fee
• Secondary Financing Permitted

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DVA GUARANTEED LOANS

• Buyer Pays 1 Loan Fee, 1.875 VA Funding Fee
• This fee varies based on down payment, etc. as
  follows
• 0down 5down 10down
• 1st Time User 2 1.5 1.25
• 2nd Time User 3 1.5 1.25

May be paid by 1. Seller 2. the veteran 3.
adding the fee to the DVA loan amount
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ASSUMPTION on DVA LOAN RELEASE FROM LIABILITY

• Loan must be current
• Purchaser must have acceptable credit
• Purchaser assumes the obligations in writing

RESTORATION OF ENTITLEMENT

• Loan must have been paid off
• Assumption may be made by a vet
• Substitutes Entitlement

Closing costs Allowable or Non-allowable
(settlement/escrow fee)
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Veterans Regulated Closing Costs

1. Credit report
2. Appraisal fee for VA-approved appraisal report
3. Recording fees
4. Insurance Title policy and hazard policy and
   prorations for an impound account.
5. VA funding fee
6. Survey, inspection report, or similar
   veteran-requested items.
7. Federal Express, Express Mail, or similar service
   when the saved per diem interest cost to the
   veteran exceeds the cost of the special handling.

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DVA ELIGIBILITY REQUIREMENTS

• Continuous and Active Service

90 Days Dates WWII 9/16/40 - 7/25/47 Korean
War 6/27/50 1/31/55 Vietnam War 8/5/64
5/7/75 Persian Gulf War 8/2/90 -
181 Days Dates Peacetime era 7/26/47
6/26/50 Peacetime era 2/1/55 8/4/64 Peacetime
era 5/8/75 9/7/80
24 Months Dates Peacetime era after 9/7/80
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DVA GUARANTY AMOUNTS

• Sliding Scale www.va.gov

Loan Amount Guaranty Up to 45,000
? 50 of loan amount 45,001 - 56,250
? 22,500 56,251 - 90,000 ? 40 90,001 -
144,000 ? 36,000 Over 144,000 ? 36,000
plus 25 of amount over 144,000 up to
a maximum of 46,000
No Maximum Loan Amount, But Loan may not exceed
sales price or Certificate of Reasonable Value
CRV (appraisal) Most lenders require the
guaranty to cover at least 25 of the loan (so
a VA loan over 184,000 is rare)
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Other DVA loans

• Rate reduction refinance
• Limited to current unpaid balance plus allowable
  closing costs for the new loan
• Standard refinance
• Limited to 90 of CRV
• Equity must equal at least 25 of CRV
• DVA jumbo loan
• Zero down thru Dec 2011
• Up to 1,000,000 using VALoans.com Super Max
  program
• DVA EEM loan
• Increases loan amount. (CRVx90cost of
  improvements)

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Credit Alert Interactive Voice Response System
(CAIVRS)

• All FHA DVA loans must be cleared thru CAIVRS
  system before loan approval.
• Purpose is to ensure that borrower does not have
  more debt.
• A federal government database of delinquent
  federal debtors.

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CAL-VET FARM AND HOME PURCHASE PROGRAM

• State offers Cal Vet Bonds to investors
• State purchases the property with bond funds
• Vet gets a long-term lease and land Contract
• Low, variable interest rate
• Maximum loan amounts
• High loan-to-value (LTV) ratios
• Prepayment penalties during first years
• Secondary financing permitted
• Home must be owner-occupied single-family
• Mortgage loan broker may originate
• http//www.cdva.ca.gov or [phone]

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Small Business Administration (SBA)

• http//www.sba.gov
• Qualifications focus on applicants character,
  credit and reliability.
• Primary consideration prompt payments
• Co-signer is allowed
• Significant factor likelihood that expected
  earnings of the business will be sufficient to
  pay the loan obligation.
• Rate is usually Prime plus 2-5
• Term is usually 7 years