PDF IntroductIon - Allied Schools

Introduction

Although many state and local government programs help consumers purchase homes, this chapter covers the two federal agencies that participate in real estate financing--the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). Together, they make it possible for people to buy homes they would never be able to afford to purchase. The main differences between the two government programs are that only an eligible veteran may obtain a VA loan and that the VA does not require a down payment, up to a certain loan amount. Both programs were created to assist people in buying homes when conventional loan programs do not fit their needs. Regulations change from time to time. Current information on loan programs is available for FHA requirements at and for VA programs at homeloans..

115

116 Real Estate Finance

Learning Objectives

After reading this unit, you should be able to:

? specify the FHA's role in real estate financing. ? identify FHA financing guidelines. ? recognize FHA loan programs. ? specify the VA's role in real estate financing. ? identify VA financing guidelines. ? recognize VA loan programs.

Federal Housing Administration

The Federal Housing Administration (FHA) is a federal government agency that insures private home loans for financing homes and/or home repairs. Created by Congress in 1934, the FHA became part of the Department of Housing and Urban Development (HUD) in 1965. The FHA is not a tax burden on taxpayers because it operates from its own income. In fact, the FHA stimulates economic growth by its participation in the development of homes and communities.

FHA Contributions to Real Estate Finance

Originally created to stabilize the mortgage market, the FHA caused some of the greatest changes in the housing industry in the 20th century. It forever changed home mortgage lending by insuring long-term, amortized loans; creating standards for qualifying borrowers; and by establishing minimum property and construction standards for residential properties. Its efforts have been so influential that homeownership has increased from 40% in the 1930s to over 70% today. Backed by the full faith and credit of the Federal government, FHA-insured mortgages are some of the safest loans for lenders and are some of the most affordable types of loans available to homebuyers.

Unit 6: Loans: Government-Backed 117

Long-Term, Amortized Loans

Today, we take long-term, fully amortized mortgages for granted. However, prior to the creation of the FHA, most home loans were short-term (3-5 years) with balloon payments and loan-to-value ratios (LTVs) of 50% or more. Many homeowners were unable to make the balloon payment and lost their homes through foreclosure.

In the 1930s, 25-year fixed-rate, fully amortized, FHA-insured loans were available for the first time. In addition, borrowers could get financing with only a 10% down payment. The FHA implemented standardized loan instruments and established standards lenders could use to qualify borrowers. These new standards combined with the FHA mortgage encouraged financial institutions to make affordable financing available. Now, borrowers can get 30-year amortized loans with 3.5% down.

Mutual Mortgage Insurance

The FHA does not make loans. It insures loans to protect the lenders who make the loans. On loans with less than a 20% down payment, the lender is protected in case of foreclosure by mutual mortgage insurance (MMI). The borrower pays the mutual mortgage insurance premiums to the FHA Mutual Mortgage Insurance Fund. Money placed into the fund is used to pay lenders in the event of loss resulting from foreclosure. As long as FHA guidelines are used when the loan is financed, the FHA will pay the lender up to the established limit of the insurance upon default and foreclosure.

In most of the FHA mortgage insurance programs, the FHA collects two types of mortgage insurance premiums--upfront and annual.

Effective April 9, 2012, the FHA charges an upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount. The UFMIP must be either paid in cash at closing or financed in the mortgage amount. If financed, the UFMIP is added to the base loan amount to arrive at a greater "total" loan amount. The total FHA-insured first mortgage on a property is limited to 100% of the appraised value, and the UFMIP is required to be included within that limit. Any UFMIP amounts paid in cash are added to the total cash settlement amount.

In addition to the UFMIP, the FHA collects an annual insurance premium, on certain mortgages, which the borrower usually pays monthly. The percentage amount of the annual premium is based on the LTV and the term of the mortgage. Currently, on a less than 95% LTV, 30-year loan, the FHA would

118 Real Estate Finance

charge 1.30% per year of the loan amount. For LTVs equal to or greater than 95%, annual premiums are 1.35%.

Example: Pat plans to buy a new 3-bedroom, 2-bath home with a $250,000 purchase price. With a 3.5% down payment, she hopes to qualify for the $241,250 FHA loan, for which the FHA charges 1.75% UFMIP. If Pat decides to include the amount in the mortgage so that she can have some extra money for landscaping the front yard, the amount of the loan, including the $4,221.88 UFMIP, will be $245,471.88.

Because this is a 96.5% loan, Pat must pay the monthly MMI charge, which is 1.35% (0.0135) for this loan. In addition to the principal, interest, taxes, and insurance (PITI), Pat will pay an additional $276.16 per month for the MMI ($245,471.88 x 1.35% = $3,313.87 ? 12 months).

Refunds of UFMIP The Consolidated Appropriations Act of 2005 eliminated refunds of the FHA's upfront mortgage insurance premiums for those mortgages endorsed for insurance on or after December 8, 2004, except when the borrower refinances to another mortgage to be insured by FHA.

MIP Cancellation Policy After April 1, 2013 Effective April 1, 2013, the FHA will remove annual MIP after 11 years provided that a homeowners' beginning LTV was 90% or less. For everyone else, including those making a 3.5 percent FHA down payment, the agency will assess MIP fees for so long as the loan is active.

For loans closed prior to April 1, 2013, the FHA will cancel the annual mortgage insurance requirement for homeowners who have paid mortgage insurance for at least 5 years, and whose loan size is less than 78% of the lower of a home's original purchase price or appraised value.

Minimum Property and Construction Standards

The FHA developed minimum property standards (MPS) and standards for new construction to reduce their mortgage risk and to improve housing standards and conditions. The MPS assured that the housing used as collateral for FHA-insured mortgages met minimum requirements for construction quality, safety, and durability.

Eventually, the MPS gained influence far beyond its originally intended role of reducing risks for FHA-insured properties. In fact, they served as a default standard if local building codes were of a lower standard or were nonexistent. The minimum property standards have been a significant factor in

Unit 6: Loans: Government-Backed 119

the development of national building codes and their subsequent adoption by thousands of local communities. VA lenders rely on the VA's Minimum Property Requirements, which are based on an early version of the MPS. Inclusion of the MPS in national and local building codes has been so successful that conventional lenders currently rely on local codes instead of the MPS.

Benefits of FHA-Insured Loans

FHA-insured loans allow low to moderate-income people to buy a home with lower initial costs. FHA-insured loans feature low down payments, competitive interest rates, easy qualifying requirements, and low closing costs. In addition, FHA loans are assumable and have no prepayment penalties.

Low Down Payment

The down payment on FHA loans varies with the amount of the loan. Typically, it is 3.5% of the sales price. The FHA guidelines encourage home ownership by allowing 100% of the down payment to be a gift from family or friends and by allowing closing costs to be financed to reduce the up-front cost of buying a home. The FHA currently allows the seller, or a third party, to contribute up to 6% of a home's sales price. In this way, a purchaser with limited cash resources can purchase a new or pre-owned home.

Competitive Interest Rates

Since the FHA does not loan money, it does not set interest rates. Interest rates are negotiated between the borrower and the FHA-approved lender. However, FHA loans have competitive interest rates because the Federal Government insures the loans. This reduces the lender's risk.

Easy Qualifying Requirements

Because the FHA provides mortgage insurance, lenders are more willing to give loans with lower qualifying requirements. Even with less-than-perfect credit, it is easier to qualify for an FHA loan than a conventional loan.

Currently, borrowers must have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.

Reasonable Loan Fees

HUD regulates the closing costs associated with FHA-insured loans. The FHA has reasonable and customary closing costs so that the FHA loan program remains affordable to home buyers.

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download