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The SAFE Act requires states to establish minimum standards for licensing of state-licensed MLO & encourages them to participate in NMLS. This includes:
- -20 hours of prelicense education
- -testing
- -background checks
- -bonding of MLOs
- The Act Mandates states include a minimum net worth requirement or surety bond requirement for applicants or pay into a recovery fund.
- The responsibility for interpretation, implementation, & compliance with the SAFE Act rests with the U.S. Dept. of Urban Development.
- SAFE Act Notes
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What happends in a PRIMARY MORTGAGE MARKET?
Lenders originate mortgage loans by lending funds to borrowers.
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This is a lender (eg., bank, savings bank, credit union, mortgage lender) that interacts directly with the borrower & actually makes that loan.
- Can also offer loans as a wholesale lender through mortgage brokers
- Retail lender
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IF a lender holds its loans rather than selling what is that called?
Portfolio lender
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What does a Correspondent lender do?
This is generally a smaller lender that takes applications & UW & funds loans either with its own money or from a line of credit with a larger lender & immediately upon closing, sells the loans to wholesale lender under previously agreed-upon terms.
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What does a Wholesale lender do?
- This is a mortgage investor that prices & funds loans applied for through mortgage brokers.
- After a broker processes an app, the wholesale lender has it UW & funded.
- After the loan is made, the wholesale lender will either service or sell or assign servicing to another entity.
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To collect the loan payments from the borrower
Service the loan
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Mortgage Lender (Banker)
Makes mortgage loans with its own funds, through mortgage brokers, MLOs & processors who obtain and process apps from borrowers
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Mortgage Broker
- Does not fund loans.
- Typically does not service the loans originated.
- Individual or firm that obtains app info from borrower & attempt to match with a lender willing to make loan based on qualification.
- May work with a few specific lenders
- May offer borrower's app to a number of lenders.
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What happends in table funding arrangements?
A mortgage broker will originate, process & close a loan UW & funded by a secondary lender in his own name, then assign the loan to that lender at the closing table.
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RESPA defines a MLO as
Any person who originates the loan, including a lender or mortgage broker, & the term mortgage broker applies to a mortgage broker or the individuals who transact loans for the mortgage brokers
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How does the SAFE Act define an MLO?
An individual who takes a residential mortgage loan application and/or offers or negotiates terms of a residential mortgage loan for compensation or gain, on behalf of a mortgage lender or mortgage broker, or who may, as an individual, also be licensed as a mortgage broker or mortgage lender. LOs employed by dipository institutions regulated by federal agencies must be registered w/ NMLS. LOs working for other lenders must be licensed by the state & registered with NMLS
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NMLS defines and MLO
Takes or receives mortgage applications, assembles info, & prepares paperwork & docs necessary for obtaining a mortgage loan. In the process, he may interview the borrower to determine his needs, & counsel & prequalify the borrower. He works & communicates with the processors, UW, title, escrow & lenders to ensure that the loan is processed smoothly & closes on time.
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SECONDARY MARKETS
- After making a loan a lender can:
- Hold it & bear the risk until the entire debt is repaid
- Warehouse it, using it as collateral for loans it needs from other lenders
- Sell it to another lender or investor
- Use it to back securities sold to investors
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Mortgages may be sold individually or bundled w/ other mortgages with similar features into mortgage-backed securities & sold on the equity market. It is comprised of investors & lenders that buy & sell real estate mortgages from primary lenders
Secondary Mortgage Market
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What are the 3 agencies created by Congress that play major roles in the secondary mortgage market?
- -FNMA - Fannie Mae - Federal National Mortgage Association created in 1938
- -FHLMC - Freddie Mac - Federal Home Loan Mortgage Corporation created in 1970
- -GNMA - Ginnie Mae - Government National Mortgage Association created in 1968
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None of these entities make loans directly to homebuyers or have any direct contact w/ the public. Instead, their function is to provide a source of funds for lenders in the primary mortgage market by buying & selling mortgage loans & offering securities, representing interests in pools of mortgages, is termed securitization
FNMA, FHLMC & GNMA
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Who are the largest entities in the secondary market?
- Both will buy conforming conventional loans, FHA insured loans, VA guaranteed loans & USDA guaranteed loans.
- These entities have reduced the need for lenders to hold substantial funds for mortgage loans. They have simplified & expedited the mortgage loan process by developing standardized loan forms.
- They also developed criteria that make mortgage loans available to greater number of prime credit borrowers.
- Freddie Mac & Fannie Mae
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On a conforming conventional loan the seller contribution towards the buyers closing costs can be up to ___% if the LTV is no more than 75%
9%
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On a conforming conventional loan the seller contribution towards the buyers closing costs can be__% if the LTV is above 75%-90%.
6%
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On a convention conforming loan the seller contribution can be __% if the LTV is 90% or higher
3%
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What's the max seller contribution on an investment loan?
2%
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FNMA & FHLMC were considered GSEs until middle of 2008. They were created by Congress & received government assistance, but were only quasi-governmental entities.
FNMA & FHLMC are not considered GSEs. They were taken over by the government.
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This fee is charged to lenders to compensate for certain loan features that increase the risk. The fee is passed on to borrowers in the form of an additional finance charge. A borrower with a lower down payment or lower credit score, or one not using the property as his primary residence or wanting a cash-out refinance would have to pay this fee as a percentage of the loan at closing. Each feature adding risk increases the amount of the fee
LLPA - Loan Level Price Adjustment
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This entity is a gov corp within the US Dept of HUD.
- It's purpose is to increase the supply of credit available for housing by directing funds from the securities market into the mortgage market. It does this by guaranteeing, with full faith & credit of the US gov, mortgage backed securities composed of mortgage loans insured by the FHA or guaranteed by the VA or the USDA that are issued by private lenders.
- Ginnie Mae - GNMA
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Interest rates on long-term debt instruments, such as residential mortgages, are influenced by changes in such economic indicators as the ______, which measures the amount of goods & services produced in the US
- & the _____, which measures the average change in prices of consumer goods & services.
- Gross Domestic Product (GDP)
- & Consumer Price Index (CPI)
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Who controls the country's monetary policy?
The Fed - Federal Reserve
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When the Fed believes there is danger that economic growth is likely to result in inflation, it may:
- -raise its asset reserve requirements for members
- -raise its target for the federal funds rate at wich members borrow from each ohter.
- -raise the discount rate it charges member to borrow money from the Federal Reserve Bank
- -sell gov securities through its open market operations. The Fed's Federal Open Market Committee decides when the Fed will either buy gov securities or sell them.
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What could the Fed do to stimulate the economy?
Lower reserves & rates & buy government securities
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A land contract/ Purchase contract
The sellor finances the purchase of his property for the buyer. The buyer makes payments to the seller in installments until he can pay off the ownership of the property to the buyer. The transfer of property & the deed itself may be called a conveyance.
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Until the contract is paid off, the seller keeps ________ to the property, even though the contract may give the buyer possession & equitable title as soon as it is signed.
Legal title
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Equitable title means
the buyer is entitled to a deed conveying the legal title when the contract is fully paid & performed. If the vendee defaults, the vendor may foreclose or, depending on state statute, declare forfeiture to regain his property.
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In a typical real estate sales transaction, the seller gives the buyer a ____ at closing, & the buyer gives the lender a ____ & a ___ creating a lien on the property
deed, promissory note, security instrument
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When the seller finances the purchase, & does not actually give the buyer any cash, the loan may be called a
Soft money loan
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When a third-party lender provides actual funds for the loan, its called a
Hard money loan
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A promise to repay the money borrowed with interest & evidence of the debt.
- -the payor or payee
- -amount owed
- -rate of interest, fixed or adjusted
- -due date for payment
- -terms which may include:
- -prepayment privilege
- -prepayment penalty
- -lock-in-clause, prohibits prepayment
- -acceleration clause, declares the entire balance of loan due at once & allows lender to foreclose if borrower defaults
- -late payment penalty, which imposes a charge if the borrower's payment is late.
- Promissory Note
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Secures repayment of the note
Mortgage or trust deed
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Lien theory states, this instrument hypothecates the property, meaning the property is pledged as security, or collateral, buy the borrower does not actually give up legal title or possession.
Mortgage or trust deed
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Due-on-sale clause
- Alienation clause - allows lender to
- -declare the entire balance of the loan due at once or
- -refuse to allow another person to assume the loan, if the title is transferred.
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defeasance clause
- provides for release of the lien when the borrower pays off the debt.
- -Satisfaction or release is recorded to clear a mortgage lien
- -deed of reconveyance is recorded to clear a trust deed lien/mortgage
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Security instrument typically provides that monthly payments are applied in the following order.
- -Interest
- -Principal due
- -taxes & insurance, if paid to lender
- -late charges
- -any other amounts due
- -additional principal reduction
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A loan that has priority over all other unsatisfied mortgages secured by the same property, generally because it was recorded before them.
Primary (first) mortgage
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Secures a loan which is secondary to 1 or more other loans on the property.
Subordinate (junior/second) mortgage
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A mortgage is a 2nd mortgage when:
- -it's recorded after another mortgage that is still outstanding on the same property
- or
- -subordination clause, specifying that:
- -has lower priority even though it may have had priority based on its date of recording
- -will remain subordinate in the event that the 1st mortgage is refinanced.
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Subordinate financing can be obtained
- -At the same time as a primary mortgage to finance a down payment or closing costs (as a piggyback mortgage)
- -After closing, as either a closed-end second mortgage or as a HELOC
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Any financing that provides a fixed amount of money repayable over a fixed period.
Closed-end financing
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Financing that allows the borrower to borrow, repay and reborrow up to a credit limit, whenever he wants. A form of revolving credit in which the borrower's home serves as collateral. Credit limit is established based on a percentage of the home's appraised value less that balance owing on any existing mortgage & the borrowe's creditworthiness.
- Most HELOCs have adjustable rates, based on publicly available indexes.
- Open-end financing
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If a borrower defaults on his mortgage or trust deed loan, the lender can ask the court for a judicial foreclosure & a court-ordered sheriff's sale of the property to repay the debt. After the sale, the sheriff will issue a sheriff's deed conveying title to the purchaser.
Foreclosure
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If included in a trust deed or mortgage, a power-of-sale provision allows a trustee to foreclose & sell the property on behalf of the lender without court order, & issue a trustee's deed conveying title to the purchaser.
Power-of-sale
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When sale proceeds are insufficient to satisfy the debt
Deficiency judgment
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Prior to the sale, to prevent a foreclosure sale
Equitable right of redemption
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following a foreclosure, to reclaim the property. If there is a statutory right of redemption, the sheriff's deed or trustee's deed will not be issued until the redmption period expires.
Statutory right of redemption
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A defaulted borrower has a period after default to stop a foreclosure by paying all past-due payments & penalties & bringing the loan current, instead of having to pay off the entire debt.
If a mortgage or trust deed has the right of reinstatement
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Often, the high bidder at a foreclosure sale is the lender holding the note. Property that the lender has acquired through foreclosure is called ___
REO Real Estate Owned
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A lender can prevent foreclosure by accepting the deed in lieu of forclosure or estoppel deed from a borrower facing foreclosure, in return for releasing him from his debt.
Estoppel deed/ Deed in lieu of foreclosure
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A forbearance allowing a borrower experiencing temporary financial difficulty to delay his monthly mortgage payments for a short period of time. It is often combined with other progams designed to help bring the monthly mortgage payments currents after a negotiated period of time.
Forbearance
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Loans made by private parties and nongovernmental lending institutions without any gov insurance or gov guarantee against loss for the lender.
- Loans that are not FHA, VA or USDA (RHS)
- May be conforming & non conforming
- Conventional loans
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Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae or Freddie Mac are considered
Conforming loans
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Fannie Mae & Freddie Mac have a maximum loan limit for loans they will purchase, when is this adjusted?
Annually
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Loans to persons with satisfactory credit but exceed this loan limit are called___ or ___. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have higher interest rate than conforming loans
Jumbo loans or Nonconforming loans
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Conventional loan 80% & up LTV. Need PMI?
No, only less than 80% LTV need PMI
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Insurance policy issued to provide protection to the lender in the event of financial loss due to default. In event of default, insurance company will either pay off the loan or let the lender foreclose and pay lender for much of its losses.
Private mortgage insurance
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Mortgage insurance premium
pays either at closing as lump sum or first years premium & paying annual premiums as part of payment. The amount of the premium is a percentage of the loan amount based on the borrower's down payment. Annual premiums & the insurance stop once the loan is paid down to 78% or 80% of the value of property at the time the loan was taken
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A-paper loans
Loans made to borrowers meeting FNMA & FHLMC credit requirements
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Alt-A, B, C, D paper loans
Subprime loans treated as A- loans because of less that prime credit or lack of supporting docs
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Factors causing a borrower to seek a loan from subprime lender include:
- -past credit performance
- -high monthly debt payment relative to income
- -lack of assets other than current income to support loan payments.
- -self-employment, variable income, or a desire to limit disclosure of his financial situation
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Used for subprime loans, upfront fees & interest rates were based on the degree of risk posed by the subprime borrower: the poorer the risk, the higher a borrower's rate & costs
risk-based pricing
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The FHA is a division of
HUD
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FHA loans are loans meeting FHA program criteria made by
approved lenders
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FHA insures those lenders against loss in the event of
default
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FHA funds the insurance from a ___ charged to the borrower
Mortgage insurance premium
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Most FHA mortgages required payment of an UFMIP upfront mortgage insurance premium. Payable at closing or added to the loan amount & financed the premium is __% of the loan amount.
1%
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The UFMIP is nonrefundable EXCEPT
To the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within 3 years
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Most popular FHA loan program
203b
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FHA some or all of the cash investment can come from a gift from
- -immediate relative
- -labor union or employer
- -government agency or public entity
- -nonprofit charitable organization
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An inducement to purchase is
A gift from a person with an interest in the sale of the property. It would have to be deducted from the sales price.
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FHA will allow a seller to contribute __% of the purchase price toward the buyer's actual closing costs, prepaid taxes, insurance, discount points, buydown fees, mortgage insurance premiums & other financing concessions, but nothing toward the down payment
6%
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HECM
- Home Equity Conversion Mortgage
- loan enabling homeowner 62 years or older to convert some of the equity in his home to cash to pay living expenses. Monthly advances for a fixed period or until he no longer qualifies. Each month's interest is added to the principal loan balance, causing interest to be compounded
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Key factors of HECM
- -must be 62+ years old, significant equity in the property, occupy the property as his principal residence & participate in a consumer information session given by approved HECM counselor.
- -Loan amount is based on the age of the youngest borrower, current interest rate & lesser of the appraised value or the HECM FHA mortgage limit, & may include closing costs.
- -Borrower can select a fixed interest rate or adustable rate, & choose whether the rate will adjust monthly or annually
- -No specified term, penalties or qualifications, no repayment until the property is sold, owner dies or moves perminently, fails to live in house for 12months, fails to pay taxes, insurance coverage or maintain property
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HECM
2% UFMIP, 1.25% annual MIP,origination limit of 2% of the first $200,000 plus 1% over $200,000 of value up to cap of $6,000
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FHA fees & loan limits. Prohibit the borrower from being charged a tax service fee & limits:
- -loan origination fee on its HECM & 203k loans
- -appraisal & credit report charges to their actual cost
- -other closing costs to those customary & reasonable.
- The maximum insurable mortgage amount is the lesser of:
- -a statutory loan limit for the area (based on housing costs), typically a county or metropolitan statistical area (MSA),
- -Applicable LTV limit
- Neither limit includes the UFMIP even if its added to the base loan amount
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Substitute or supplement to a traditional credit report
rental housing payments, utility payments & other bill payments (insurance, child care, phone, auto leases, etc)
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FHA qualifications
- -Income & employment must be verified
- -Credit history will be analyzed (FHA also accepts nontraditional mortgage credit reports
- -PITI of up to 31% of his gross monthly income & total monthly debt up to 43%
- -certain disablility & public assistance & ss income & gov allowances) & child support can be grossed up 25%
- -Gross rental income be reduced 25%
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Prior to agreeing to insure the loan, if the home requires flood insurance & is not located in an area where the NFIP is in force, its not eligible for FHA financing. FHA can also required repairs necessary to preserve the continued marketability of the property & protect the health & safety of the occupants.
FHA property info
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FHA requires that a "for your protection: get a home inspection" notice be given to a prospective homebuyer at first contact (whether prequal, preapproval, or initial app), but never later than at time of the initial application.
- It informs the buyer of the importance of a home inspection prior to purchasing a home. It also makes clear that:
- -FHA does not insure the condition of the property
- -the appraisal is intended only to assist the lender.
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FHA also requires the use of an Amendatory Clause.
Provides that the buyer is not obligated to conclude the transaction & is entitled to full refund of his EMD, if the property is appraised at less than the purchase price.
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Most FHA loans are assumable, subject to the person assuming the loan qualifying. However, a loan insured after 1989 can be assumed only by an owner-occupant. A lender cannot approve the sale or other transfer of a property to a person who will not be using property as primary residence or secondary residence
Resale of FHA loan
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VA loans are made by approved lenders, but are guaranteed by the federal department of Veterans Affairs. Veteran is charged a nonrefundable upfront funding fee, which can be financed for the guarantee. A vet receiving VA comp for a service-connected disability is exempt from funding fee.
VA funding fee
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fee for a first time VA borrower who is a veteran of the regular military
2.15% of the loan amount
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The VA funding fee is higher if vet qualifies as a reservist or has obtained a VA loan previously
- -Is lower if he makes at least 5% down payment.
- VA funding fee
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VA loan down payment required
0%
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On a VA loan the seller can pay:
- -all of the borrower's nonrecurring closing costs & discount points, with no limit.
- -up to 4% of the sales price in seller concessions. Include prepaid taxes & insurance, VA funding fee, payoff of the borrower's existing debts, temporary buydown fees, & gifts
- Perks of VA
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VA uses 2 methods for qualifying borrowers
- -41% debt to income ratio
- -residual income method, vet has enough income after paying his fixed debts to cover his daily living expense. It can qualify a borrower whose ratio might exceed the 41% limit.
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A VA loan is available to
veterans of the armed services, those currently on active duty, & their spouses; however the loan is assumable by nonveterans
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In order to obtain a VA loan the applicant must obtain
Certificate of Eligibility from the VA
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VA's max loan guarantee varies depending on the location of the property. While the VA does not have a max loan amount, it will guarantee the lesser of 25% of the loan balance or of the FHMLC limit.
- High cost countries, guarantee is lesser of 25% of the loan balance or
- -VA county loan limit, county's median home price & FHLMC conforming loan limit
- The VA guarantee enables the lender to avoid losing money if he could recoup 75% of the loan balance from a sale of the borrower's property at or after foreclosure.
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FHLMC limit is $417,000, a veteran with full eligibility can get a loan of up to $417,000 without a down payment.
- The VA will guarantee the lender $104,250 (25%) against his loss in the event of default.
- If a borrower wanted a house for 450k they would still only guarantee the 417k limit so $104,250.
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