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 lender
 Loan application process
 Basic loan features
 Residential financing programs
 Predatory lending
© 2011 Rockwell Publishing
Choosing a Lender
Types of lenders
Major sources of residential financing:
 Commercial banks
 Thrift institutions
 Credit unions
 Mortgage companies
Many of the original distinctions between
these types of lenders have been lost.
© 2011 Rockwell Publishing
Types of Lenders
Commercial banks
Commercial banks are either national banks
(federally chartered) or state banks (statechartered).
Traditionally:
 accepted only short-term (demand) deposits
 made primarily short-term business loans
Later diversified their business, and now have
significant share of residential mortgage market.
© 2011 Rockwell Publishing
Types of Lenders
Thrift 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.
© 2011 Rockwell Publishing
Types of Lenders
Credit unions
Credit unions are non-profit cooperatives that
are controlled by their members.
Traditionally specialized in small personal
loans.
 Now also make home loans (home equity
and home purchase loans).
© 2011 Rockwell Publishing
Types of Lenders
Mortgage 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/or
 engage in warehousing.
© 2011 Rockwell Publishing
Types of Lenders
Mortgage 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 shortterm basis, using funds to originate loans to
buyers.
 Loans then sold on secondary market, not
kept in portfolio.
© 2011 Rockwell Publishing
Types of Lenders
Mortgage 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.
© 2011 Rockwell Publishing
Types of Lenders
Mortgage 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.
© 2011 Rockwell Publishing
Types of Lenders
Seller 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 scarce
 market interest rates high
© 2011 Rockwell Publishing
Types of Lenders
Seller 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.
© 2011 Rockwell Publishing
Summary
Types of Lenders
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Commercial bank
Thrift institution
Credit union
Mortgage company
Loan correspondent
Warehousing
Mortgage banker
Mortgage broker
Seller financing
© 2011 Rockwell Publishing
Choosing a Lender
Loan costs
For most buyers, cost of loan is primary
consideration when choosing a lender.

Loan costs include:
 interest charges
 origination fees
 discount points
 miscellaneous other charges, such as
document preparation fees
© 2011 Rockwell Publishing
Loan Costs
Origination 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 most institutional loans.
 Paid by buyer unless otherwise agreed.
© 2011 Rockwell Publishing
Loan Costs
Points
Origination fee may be grouped together with
discount points under general term points.

One point = 1% of loan amount
 Example:
On $200,000 loan, one point = $2,000

When someone quotes points for a loan,
clarify whether both origination fee and
discount points included, or just discount
points.
© 2011 Rockwell Publishing
Loan Costs
Discount 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.
© 2011 Rockwell Publishing
Loan Costs
Truth 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.
© 2011 Rockwell Publishing
Truth in Lending Act
Consumer 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 $54,600 or less, or is secured by
real property.
© 2011 Rockwell Publishing
Truth in Lending Act
Exemptions
TILA does NOT apply to:
 loans made to corporations or
organizations
 loans made for business, commercial, or
agricultural purposes
 loans over maximum amount, unless
secured by real property
 seller-financed transactions
© 2011 Rockwell Publishing
Truth in Lending Act
Disclosure requirements
If loan covered by TILA, lender must disclose
detailed information about loan costs.
Includes two key disclosures:
 total finance charge
 annual percentage rate (APR)
© 2011 Rockwell Publishing
TILA Disclosure Requirements
Total finance charge
Total finance charge: Sum of all loan-related
charges borrower will have to pay, including:
 interest
 origination fee
 discount points (if paid by borrower)
 finder’s fee
 mortgage broker’s fee
 service fees
 mortgage insurance premiums
© 2011 Rockwell Publishing
TILA Disclosure Requirements
Total finance charge
In real estate loan transaction, these costs
are NOT included in total finance charge:
 appraisal fee
 credit report fee
 inspection fees
 title fees
 costs paid by someone other than
borrower (such as points paid by seller)
© 2011 Rockwell Publishing
TILA Disclosure Requirements
Annual 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.
© 2011 Rockwell Publishing
TILA Disclosure Requirements
Other disclosures
In addition to total finance charge and APR,
lender must disclose:
 amount financed
 total of all payments
 number of payments
 payment amount(s)
 any prepayment penalty
© 2011 Rockwell Publishing
TILA Disclosure Requirements
Timing 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 Requirements
Timing of disclosures: amendments
If significant changes to original estimates:
 Lender must give borrower amended
disclosures at least 3 business days
before closing.
© 2011 Rockwell Publishing
Truth in Lending Act
Right of rescission
For loan secured by existing principal
residence, borrower may rescind loan
agreement within 3 days after:
 signing agreement
 receiving disclosure statement
 receiving notice of right to rescind
(whichever comes latest)
If notice or disclosure statement never given,
right of rescission lasts for 3 years.
© 2011 Rockwell Publishing
Truth in Lending Act
Right of rescission
Right of rescission generally applies only to:
 home equity loan
 refinancing with new lender
Does not apply to:
 home purchase loan
 construction loan
 refinancing with same lender, unless
lender advancing additional funds
© 2011 Rockwell Publishing
Truth in Lending Act
Advertising 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.
© 2011 Rockwell Publishing
Truth in Lending Act
Advertising 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 percentage
 loan term or number of payments
 amount of any payment
 amount of any finance charge
© 2011 Rockwell Publishing
Truth in Lending Act
Advertising rules
If ad states triggering term, then it must also
include:
 APR
 any required downpayment
 repayment schedule, with number, timing,
and amount of payments
General statements (“easy terms”) do not
trigger full disclosure requirement.
© 2011 Rockwell Publishing
Loan Costs
Locking 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.
© 2011 Rockwell Publishing
Summary
Choosing a Lender: Loan Costs
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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
© 2011 Rockwell Publishing
Applying for a Residential Loan
Loan 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 househunting) is standard practice.
 Lender
approves buyer for up to
specified maximum loan amount.
© 2011 Rockwell Publishing
Loan Application Process
Required information
Fannie Mae/Freddie Mac residential loan
application requires buyer to provide:
 personal information (age, education, etc.)
 current monthly housing expense
 employment information
 income from various sources
 assets and liabilities
Lender verifies information provided.
© 2011 Rockwell Publishing
Loan Application Process
Underwriting
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).
© 2011 Rockwell Publishing
Underwriting
Qualifying the buyer
Underwriters focus on three main
considerations to qualify buyer:
 Credit history
 Income
 Net worth
© 2011 Rockwell Publishing
Qualifying the Buyer
Credit history
Underwriter evaluates applicant’s credit
history based on credit reports and credit
scores from reporting agencies.
 Late payments on debts
 Bankruptcy
 Foreclosure
Applicant should explain any extenuating
circumstances (such as divorce) to lender.
© 2011 Rockwell Publishing
Qualifying the Buyer
Credit history
If a lender denies application because of
information in credit report, Fair Credit
Reporting Act requires lender to notify
applicant in writing.
FCRA requires credit reporting agencies to
investigate and, if necessary, correct
information that consumers dispute.
© 2011 Rockwell Publishing
Qualifying the Buyer
Income
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 one
 Durability – how long it’s expected to last
 Permanent job vs. temporary job
© 2011 Rockwell Publishing
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 ratio
 debt to income ratio

Housing expense includes principal,
interest, taxes, and insurance (PITI).
© 2011 Rockwell Publishing
Qualifying the Buyer
Net worth
Net worth: Total assets minus total liabilities.

Evidence of financial management skills.

Applicant also needs enough cash for:
 downpayment
 closing costs

May be required to have cash reserves
sufficient to meet mortgage payments for
several months.
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
Underwriting
Subprime lending
Subprime lending: Making riskier loans than
standard lenders, including loans to buyers who:
 have poor credit
 can’t or don’t want to meet
documentation requirements
 want 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.
© 2011 Rockwell Publishing
Underwriting
Mortgage fraud
Examples of mortgage fraud:

loan applicants lying about employment,
assets, or liabilities

investors falsely claiming to be buying
property as principal residence

lenders overstating quality of loans when
selling them to secondary market
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
Summary
Loan Application Process
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Preapproval
Underwriting
Qualifying standards
Credit reports and credit scores
Stable monthly income
Income ratios
Net worth
Cash reserves
Automated underwriting
Subprime lending
© 2011 Rockwell Publishing
Applying for a Residential Loan
Basic loan features
Basic features of mortgage loan include:
 loan term
 amortization
 loan-to-value ratio
 secondary financing
 fixed or adjustable interest rate
© 2011 Rockwell Publishing
Basic Loan Features
Loan term
Loan term: Period of time borrower has for
repaying loan. Also called repayment period.
The longer the loan term:
 the lower the monthly payment
 the more interest paid over life of loan
© 2011 Rockwell Publishing
Basic Loan Features
Loan term
30-year term:
 standard term for home purchase loan
 low monthly payment
15-year term:
 larger monthly payment
 lower interest rate
 loan paid off in half the time
 much less interest paid overall
© 2011 Rockwell Publishing
Basic Loan Features
Loan 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.
© 2011 Rockwell Publishing
Basic Loan Features
Amortization
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.
© 2011 Rockwell Publishing
Basic Loan Features
Amortization
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.
© 2011 Rockwell Publishing
Basic Loan Features
Loan-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 Features
Loan-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.
© 2011 Rockwell Publishing
Basic Loan Features
Secondary 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 lender
 property seller
 private investor
© 2011 Rockwell Publishing
Basic Loan Features
Secondary 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.
© 2011 Rockwell Publishing
Basic Loan Features
Interest 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.
© 2011 Rockwell Publishing
Interest Rates
Adjustable-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.
© 2011 Rockwell Publishing
Adjustable-rate Mortgages
How an ARM works
Key elements of an ARM:
 index
 margin
 adjustment periods
 caps
 possibility of negative amortization
© 2011 Rockwell Publishing
How an ARM Works
Index
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.
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
How an ARM Works
Caps
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 Mortgages
Hybrid 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
Summary
Basic Loan Features
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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 Loan
Residential financing programs
Major types of residential financing include:
 conventional loans
 FHA-insured loans
 VA-guaranteed loans
 Rural 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.
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
Conventional Loans
Loan-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 higherLTV loans, especially if LTV is over 90%.
© 2011 Rockwell Publishing
Conventional Loans
Owner-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 Loans
Private mortgage insurance
Private mortgage insurance (PMI): Designed
to protect lenders from greater risk of highLTV loans.
 Insurance provided by private companies
(not federal government).
 PMI generally required for any
conventional loan with LTV over 80%.
© 2011 Rockwell Publishing
Conventional Loans
Private 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 insurer
 file claim for covered losses suffered, up
to policy amount
© 2011 Rockwell Publishing
Conventional Loans
Private 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 Loans
Qualifying 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, or
 only debt to income ratio
Borrower may be required to have reserves to
cover two or three months of payments.
© 2011 Rockwell Publishing
Conventional Loans
Assumption
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.
© 2011 Rockwell Publishing
Summary
Conventional Loans
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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).
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
FHA-Insured Loans
Characteristics






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 Loans
Loan 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 Loans
Loan 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%.
© 2011 Rockwell Publishing
FHA-Insured Loans
Qualifying 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 Loans
Qualifying 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.
© 2011 Rockwell Publishing
FHA-Insured Loans
Mortgage insurance premiums
Most FHA loans require both:
 one-time mortgage insurance premium
 paid at closing or financed
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annual mortgage insurance premiums
 paid in monthly installments
As of mid-2013, FHA annual MIP will be
collected for 11 years, or for duration of loan,
depending on loan’s original LTV.
© 2011 Rockwell Publishing
FHA-Insured Loans
Assumption
FHA loans made since 1990 may be
assumed only if buyer:
 meets FHA underwriting standards
 intends to occupy the home as primary
residence
© 2011 Rockwell Publishing
Summary
FHA-Insured Loans
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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
© 2011 Rockwell Publishing
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.
© 2011 Rockwell Publishing
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
veterans
 long-term members of National Guard or
reserves
© 2011 Rockwell Publishing
VA-Guaranteed Loans
Application 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 Loans
Characteristics
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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 Loans
VA 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.
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Usual limit for no-downpayment loan: loan
amount no more than four times guaranty
amount.
© 2011 Rockwell Publishing
VA-Guaranteed Loans
Restoration of entitlement
If a veteran pays off a VA loan:
 veteran’s full guaranty entitlement is
restored
 veteran can obtain another VA loan with
maximum guaranty
Restoration of entitlement is also called
reinstatement.
© 2011 Rockwell Publishing
VA-Guaranteed Loans
Substitution 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.
© 2011 Rockwell Publishing
VA-Guaranteed Loans
Default
If VA borrower defaults and foreclosure sale
results in a loss, borrower may be liable to VA
for guaranty amount.
 Borrower’s guaranty entitlement won’t be
restored until he reimburses VA for full
amount of guaranty.
© 2011 Rockwell Publishing
VA-Guaranteed Loans
Qualifying 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 Programs
Rural 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.
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RHS:
 makes direct loans
 guarantees loans made by approved
lenders
© 2011 Rockwell Publishing
Residential Financing Programs
Rural Housing Service Loans
For RHS financing, borrower must:
 not currently have adequate housing
 be able to afford the mortgage payments
 have a reasonable credit history
 choose a house that is modest in size
and design
© 2011 Rockwell Publishing
Summary
VA Loans and RHS
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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 Loan
Predatory 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 Lending
Predatory practices
Examples of predatory lending practices:
 predatory steering
 fee packing
 loan flipping
 disregarding borrower’s ability to repay
 balloon payment abuses
 excessive or unfair prepayment penalties
 fraud regarding fees, loan terms, etc.
© 2011 Rockwell Publishing
Summary
Predatory Lending
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Predatory lending
Targeted borrowers
Predatory steering
Fee packing
Loan flipping
Disregarding ability to repay
Balloon payment abuses
Excessive prepayment penalties
© 2011 Rockwell Publishing