California Real Estate Finance
Fesler & Brady
10th Edition
Chapter 6
Government-Backed
Financing
© 2016 OnCourse Learning
Objectives
• After completing this chapter, you should be able to:
– List the main advantages and disadvantages of FHAinsured loans.
– Identify the guidelines governing FHA loans.
– Explain the key features of DVA-guaranteed loans.
– List the main characteristics of the Cal-Vet loan system.
– Outline the CalHFA first-time home buyer program.
Outline
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Federal Housing Administration
Department of Veterans Affairs
Cal-Vet Loans
California Housing Finance Agency Program
(CalHFA)
Federal Housing Administration
• Part of Department of Housing and Urban
Development (HUD)
• Goals
– Provide affordable financing
– Create increased homeownership
– Upgrade property standards
• Introduced
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Fully amortized loans
Low down payment loans
Low interest rates
Mandatory collection of taxes and fire insurance premiums
Minimum property standards
Standards for qualifying owner-occupant borrowers
What Does the FHA Do?
• Does not make loans
• Insures lenders in event of foreclosure
• Introduced risk-based pricing model using
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Credit scores
LTV ratios
Terms of the loan
UFMIP
• Approves property
• Approves qualifications of borrower
• Charges borrower Mortgage Insurance Premium (MIP)
– Lump sum
– Monthly payments (.5 or.55 X loan amount)
– Monthly Mortgage Insurance (MMI)
• Pays lender if foreclosure
• Takes title
Advantages of FHA Loan
(Slide 1 of 2)
• Low down payment
• Loan fee is 1%
• Secondary financing is allowed if total does not
exceed FHA max
• Max term is 30 years or 75% of remaining life of
property
• Monthly payments must include PITI & MMI
(principal, interest, taxes, insurance & Monthly
Mortgage insurance)
Advantages of FHA Loan
(Slide 2 of 2)
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No maximum purchase price, but loan based on appraisal
Interest and discount rates are negotiable
Borrower must occupy property
Appraisals (“conditional commitments”) good for six months
Sellers may pay up to 3% of loan closing costs for buyer
Direct Endorsement (fast qualifying)
3.5% down payment may be a gift
No prepayment penalty
640 minimum FICO
Maximum loan amounts
• Based on lower of sales price or appraised value
• Borrower must have 3.5% investment in property
– Includes down payment
– Nonrecurring closing costs
• Loan origination fee
• Appraisal fee
• Credit report fee
• Title
• Escrow fees
• Max loan varies by county, but could be
$729,750
FHA Programs
Section 203(b)
• Over 18
• 1 – 4 units
• U.S. citizen (not required)
or resident alien
• Max for single family varies
by county
• Owner occupied
• Property >1 year old or
restrictions
Section 245(a)
• Adjustable Rate Loan
• Five different options
FHA Programs
Section 203K
Rehabilitation Mortgage
• Construction/take-out loan
• Add together “as-is” value
plus rehabilitation cost
plus 10% reserve
Department of Veterans Affairs
• Guarantees Loans (www.homeloans.VA.gov)
• But only a part
– 25% of Freddie Mac conforming loan
• As of December 2009, $417,000
• So lender guarantee equals $104,250
• So most lenders will loan $417,000
– For a Maximum No Down Payment DVA-Guaranteed
Loan
• If foreclosure
– Pay lender and take back property
– Pay max on guarantee and leave property with lender
Department of Veterans Affairs
Loan Advantages
• No down payment
• No-No loan
– Seller pays closing costs
• Qualify based on
– Ratio
– Residual
• “PMI” premium can be
included in loan
• Possible assumability
– But vet is still liable
• Rating factor worksheet
Job stability
Credit history
Debt ratio
Balance available for
support (residual)
– Liquid assets (reserves)
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• Appraisals (Certificates of
Reasonable Value (CRVs))
protect veteran
Dispelling Some Myths
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Red tape and processing time reduced
Habitability standard
Some seller paid closing costs
Discount points paid by buyer
DVA Eligibility
• Discharge not dishonorable
• Service
– During a time period
– For a length of time
Unremarried spouses
On active duty
Fill out DVA Form 26-1880 to get Certificate of Eligibility
Shows entitlement (max $$$)
Full entitlement restored if original loan paid and property
sold
• But could purchase another home if the original property
has been refinanced, but only once
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DVA General Info (Slide 1 of 2)
• Type of property
– 1 to 4 units
• Interest rates
– Negotiable
• Loan origination fee
– <1% of loan
• Term of loan
– 30 years max or remaining life
• Down payment
– None
• Maximum loan
– Related to Fannie Mae or Freddie Mac
• Owner occupied
DVA General Info (Slide 2 of 2)
• Monthly payments include PI only
• Appraisal (Certificate of Reasonable Value (CRV))
usually at sales price
• Secondary financing allowed
– If interest and terms similar to first
• Termite, wet rot, dry rot, and fungus report needed on
all buildings
• Closing costs
– Seller pays
• Use Internet (Lender Appraisal Processing Program) for
underwriting
Cal-Vet Loans (Slide 1 of 3)
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Similar to DVA with slight variations
Ninety days active duty
Honorable discharge
Various service periods
Cal-Vet Loans (Slide 2 of 3)
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Owner occupied, single family dwelling
Max loan as of March 2010, $521,250
No down payment if guaranteed by DVA
3% down if straight Cal-Vet loan
30 year terms
Interest rate varies, but lifetime cap of ½% over starting rate
Secondary financing permitted
Covered by Disaster Indemnity (floods & earthquakes)
<62 years old must carry life insurance which terminates at
age 70
Monthly payments are PITI including disability & life
Receive title under land contract of sale (DVA of CA holds title
until loan paid in full)
No refinancing available
Pay off old, eligible for new
Cal-Vet Loans (Slide 3 of 3)
• Advantages
– Low interest rates
– Inexpensive insurance
– Low closing costs
• Disadvantages
– Lack of refinancing
– Shortage of funds
– If unmarried, no joint
tenancy
California Housing Finance
Agency Program (CalHFA)
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First time homebuyers
Agency sells mortgage revenue bonds to investors
Uses proceeds to buy loans from lenders
30 year Fixed Rate
Interest Only Plus
30 Year Fixed Rate Conventional
Loan Program
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LTV 100%
Origination fee <1.5%
Mortgage insurance required
Max loan depends on county
Owner occupied single family
Manufactured homes allowed
U.S. citizen, permanent resident, qualified alien
First time homebuyer
Income max depends on county
Interest Only PLUS Program
(temporarily discontinued in 2009)
Below market fixed interest rate
35 year term
Interest only for first five years
Remainder amortized over 30
Mortgage insurance required
Property and borrower eligibility identical to
30 year Fixed Rate Program
• See www.calhfa.ca.gov
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Questions and Comments?