The federal government has two major home financing programs:
-FHA-Insured loan program
-VA-guaranteed loan program
The Federal Housing Administration (FHA) was created by Congress in ____, during the Great Depression, with the passage of the National Housing Act. What is the FHA's primary purpose?
-primary function was to insure mortgage loans; to allow lenders more ease with taking riskier loans.
-to generate new jobs through increased construction activity, to exert a stabilizing influence on the mortgage market, and to promote the financing, repair, improvement, and sale of residential real estate nationwide.
The FHA does not build homes or make loans.
FHA insurance program aka the Mutual Mortgage Insurance Plan is funded with
premiums paid by FHA borrowers.
FHA usually does underwriting themselves, but for lenders who are authorized to underwrite their own FHA loan applications are called:
direct endorsement lenders; are responsible for the entire loan origination process, from application processing through loan approval.
FHA is liable to the lender for the full amount of any losses resulting from default and foreclosures. How is the FHA paid back?
-the borrower must reimburse the federal government for the amount paid. This liability is considered a delinquent federal debt, which means that the government can collect it out of any federal income tax refund owed to the borrower, or garnish any pay the borrower receives from the federal government
The FHA requires lenders to follow certain procedures and dictates many of the terms and conditions on which the loans are made.
true; a lender may pay back or face prosecution for fraud if they don't follower FHA procedures
FHA-insured loans are designed to help people with low or moderate incomes buy homes. But is not restricted to borrowers whose incomes are under a certain limit, but there are restrictions on the loan amounts.
FHA-insured loans allow for a low downpayment and lenient underwriting.
What are the 5 FHA loan programs that are of the most interest to the average home buyer or owner?
-Section 203(b): Standard FHA Loans; basic and mostly used. Used to purchase or refinance a residential property, up to four dwelling units, as a primary residence.
-Section 203(k): Rehabilitation Loans; used to insure loans that are used to purchase or refinance and rehabilitate "fixer upper".
-Section 234(c): Condominium Units; purchase or refinance of condos; FHA rules for condo complex; ex: 50% of occupates must be owners.
-Section 251: ARMs; used to purchase, refinance, or rehabilitate a principal residents up to four units; loan must have a 30yr term; annual and life-of-the-loan interest rate caps are required.
-Section 255: Reverse Mortgage (HECMs); insures for home equity conversion mortgages aka reverse mortgages.
As a general rule, the FHA-insured property must be used as the borrower's principal residence. Exemptions to that rule regarding secondary residences and Investor loans is...
-secondary; if denial of loan causes hardship; needed for employment reasons; not for vacation home
-Investor: if investor purchases a property that HUD owns as a result of foreclosure.
A secondary residence is a home that the borrower occupies less than __% of the time.
Maximum FHA loan amounts are based on what, and are subject to annual adjustments
-one, two, three or four units residences
-EX:2015 median was $271,050, in high cost areas, $625,500
What are 4 most expenses places to live?
-Alaska, Hawaii, Guam, and the Virgin Islands; FHA loan $938,250 in 2015
HUD usually sets maximum loan amounts on a county-to-county basis.
How do you find out the current FHA maximum loan amount for a county?
ask a lender
The maximum loan amount for a particular transaction is determined not just by the FHA loan limit for the local area, but also by the FHA's rules concerning...
The maximum loan-to-value ratio for an FHA loan depends on the borrower's credit score. If the borrowers credit score is 580 or above the maximum LTV is ___%. If the score is 500 to 579, the maximum LTV is ___%. If the score is below 500 the loan is not eligible for FHA.
The borrower's minimum cash investment is...
the required downpayment for an FHA loan.
Certain closing costs paid by the borrower can be used to count towards the minimum cash investment.
-false; use to but now the borrower must come up with the minimum cash investment in addtion to the funds needed for the closing costs and other fees.
The borrower is not allowed to use secondary financing from the seller or a lender for the minimum cash investment (downpayment), but may be allowed to use funds provided by a family member or certain other sources.
Prepayment penalties are prohibited for FHA insured loans.
FHA borrowers may be customary and reasonable closing costs.
true; lenders do not charge a lot.
The FHA limits interested party contributions to __% of the sales price for the borrower. It's an interested party contribution if the seller or another interested party pays for...
-the origination fee
-any discount points
-a temporary or permanent buydown
-the buyer's mortgage interest
-the upfront premium for the FHA mortgage insurance
-other closing costs customarily paid by the buyer
Interested party contributions that exceed the 6% limit are treated as __________ to the purchase, which are subtracted from the sales price BEFORE maximum LTV is applied.
What are some examples of inducements from an interested party?
-gives the buyer a decorating or repair allowance
-pays for the buyer's moving expenses
-pays the real estate agent's commission on the sale of the buyer's current home
-gives the buyer items of personal property other than those that are customarily included in the sale of a home.
-exceeds the 6% of contributions for closing costs
Secondary financing refers to
a second mortgage against the same property that is being purchased with a first mortgage.
Secondary financing from the seller or a lender cannot be used for the FHA minimum cash investment (downpayment), but from a ____________ or _______________ can help with financing the minimum cash investment.
The FHA loan and secondary financing can't exceed the borrowers ability to pay, borrower must qualify based on the total of both payments. The secondary financing cannot require a balloon payment within ten years or impose a prepayment penalty.
FHA borrowers are permitted to use secondary financing to make up part of the maximum loan amount. This type of secondary financing can come from anyone. What are the 5 rules for this kind of financing to happen?
-the combined loan amount cannot exceed the local FHA loan limit or the maximum LTV ratio for the transaction
-The combined payments may not exceed the borrower's ability to pay.
-if the second loan has periodic installment payments, the payments must be collected on a monthly basis.
-The second loan can't have a balloon payment due sooner than 10 years after closing
-The second loan may not include a prepayment penalty.
What is one good reason a seller or lender may help with secondary financing on the maximum loan amount?
-to help the buyer qualify for the loan during high interest rate times
Property flipping refers to reselling a property for a substantial profit shortly after purchasing it. What are the two main rules for FHA property flipping and what are the exemptions to the rules?
1. seller must own property for at least 90 days before resale
2. Second appraisal required if home resold within 180 days for double the price the seller paid.
-if the home is being sold by an employer or a relocation company that acquired it when the previous owner relocated for employment reasons.
-sales of inherited property
-sales of newly built homes
-sales of homes in federal disaster areas
-sales of bank-owned property (REO)
-certain other types of transactions
With an assumption of FHA loans, the lender still must check to see if the new buyer is creditworthy and intends to occupy the property as a primary residence. The evaluation is very similar to the process of qualifying a buyer for a new FHA loan, except that _______________ is not required.
minimum cash investment
**if the buyer assuming the loan is creditworthy, the lender is required to release the original borrower from liability
Mortgage insurance is required on every FHA loan, regardless of the LTV ratio. However after __ yrs the annual MIP can be canceled for LTVs of 90% or less.
11; over 90% they have to keep paying entire loan term.
***Even if the annual premium is canceled, the mortgage insurance policy remains in force for the full term of the loan.
The premiums for FHA mortgage insurance are referred to as MMI or MIP. What do these abbreviations stand for?
MMI (mutual mortgage insurance) or MIP (mortgage insurance primiums)
For most FHA programs, the borrower must pay both an _______ premium and ________ premiums.
upfront premium and annual premiums
The upfront mortgage insurance premium (UFMIP) is also called _______________ and the UFMIP is currently ____% of the loan amount.
one-time mortgage insurance premium (OTMIP)
John is buying a house with a $350,280 FHA loan. His upfront premium will be what?
$350,280 x .0175 (1.75%) = $6,129.90
The UFMIP can be paid upfront or can be financed over the loan term.
true: the amount of the premium is added to the base loan amount.
**The total amount financed is rounded down to the next dollar. EX; $356,409.09 is rounded to $356,409.
The UFMIP does not affect the maximum loan amount.
true; FHA buyer may borrow maximum loan amount plus UFMIP
In addition to the upfront premium, most FHA borrowers are required to pay _______ premiums. One-twelfth of each year's premium is added to the borrower's monthly payment (plus the UPMIP, if financed). This premium can range from ___% to ___%, depending on the loan amount, loan term, and the LTV ratio.
0.45% to 1.05%
**higher premiums are charged for larger loan amounts
The FHA's underwriting standards are more strict than the Fannie Mae or Freddie Mac standards for conventional loans.
False; FHA underwriting standards are less strict; make it easier for low- and moderate-income home buyers to qualify for a mortgage.
Applicants for a FHA loan, whose credit score is below ___ are not eligible for FHA loan.
true; 500-579 max loan is 90%, 580 and above 96.5%
FHA has same the same rules as Fannie Mae and Freddie Mac regarding decision credit score. How is the credit score pick?
-middle of the three, lower of the two
FHA borrowers who do not have established credit, can still qualify for loan due to the lender...
manually underwriting the loan with FHA rules
What is the FHA's term for stable monthly income?
What is effective income?
gross income that's reasonably likely to continue for three years
The underwriter applies two income ratios to determine the adequacy of the applicant's effective income, what are they?
-debt to income ratio (total fixed payment to effective income ratio)
-housing expense to income ratio
**same as stable monthly income, but with different percentages
The FHA borrower's debt to income ratio should not exceed __% and the housing expense to income ratio should not exceed __%. The limits increase to 45% and 33% if the house qualifies as an energy-efficient home (EEH).
If an applicant with a credit score of 580 or above falls short in the debt to income ratio or housing expense ratio, the FHA allows for possible compensating factors to qualify for the FHA loan. What are some compensating factors?
-no discretionary debt: the only installment debt with an outstanding balance is the applicant's current housing expense, and the balance on any revolving credit accounts has been paid in full each month for the past six months.
-reserves: the applicant will have at least three months' mortgage payments
-Minimal increase in housing expense: proposed monthly mortgage payment exceeds the applicant's current housing expense by no more than $100 or 5% and has had no more than one late payment within the previous 12 months.
-Residual income: after paying monthly obligations, the applicant will have at least the amount of residual income that would be required for a VA loan.
-Significant additional income: income that was not counted as effective income
Temporary buydowns are allowed in connection with fixed FHA loans, but the buyer must qualify at the not rate.
List the expenses that the borrower will need to have enough cash for at closing: