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Principles of California Real Estate. Lesson 10: Applying for a Residential Loan. Applying for a Residential Loan. This lesson will cover four topics: choosing a lender the loan application process basic loan features residential financing programs. Choosing a Lender Types of lenders. - PowerPoint PPT Presentation
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Lesson 10: Lesson 10:
Applying for a Applying for a Residential LoanResidential Loan
Principles of California Real Estate
Applying for a Residential Loan
This lesson will cover four topics:choosing a lenderthe loan application processbasic loan featuresresidential financing programs
Choosing a LenderTypes of lenders
Buyers may choose the type of lender they want, although most distinctions between mortgage lenders no longer exist.
Choosing a LenderTypes of lenders
Buyers may choose the type of lender they want, although most distinctions between mortgage lenders no longer exist.
The types of lenders include:savings and loanscommercial bankssavings bankscredit unionsmortgage companies
Types of LendersSavings and loans
Savings and loans: emphasize home purchase loans
Types of LendersSavings and loans
Savings and loans: emphasize home purchase loansget most of their loan funds from the
savings of individuals
Types of LendersCommercial banks
Commercial banks:traditionally made short-term business
loans
Types of LendersCommercial banks
Commercial banks:traditionally made short-term business
loansnow accept more long-term deposits and
offer more long-term loans
Types of LendersSavings banks
Savings banks:are owned by small depositors rather than
stockholders
Types of LendersSavings banks
Savings banks:are owned by small depositors rather than
stockholdersare relatively rare today
Types of lendersCredit unions
Credit unions:serve only members of a particular group
Types of lendersCredit unions
Credit unions:serve only members of a particular groupspecialize in small personal loans
Types of lendersMortgage companies
Mortgage companies:are not depository institutions
Types of lendersMortgage companies
Mortgage companies:are not depository institutionsact as loan correspondents (an
intermediary between an investor with money to lend and a home buyer looking for financing)
Types of lendersMortgage companies
Mortgage companies:are not depository institutionsact as loan correspondents (an
intermediary between an investor with money to lend and a home buyer looking for financing)
act on behalf of large investors
Types of lendersMortgage companies
Mortgage companies:are not depository institutionsact as loan correspondents (an
intermediary between an investor with money to lend and a home buyer looking for financing)
act on behalf of large investorsmake the most mortgage loans
Types of lendersMortgage companies
Mortgage companies:sell their loans to investors on the
secondary market
Types of lendersMortgage companies
Mortgage companies:sell their loans to investors on the
secondary marketoften service the loan for a fee
Mortgage company ≠ Mortgage broker
Types of lendersMortgage companies
Mortgage company ≠ Mortgage broker
A mortgage broker simply arranges loans, bringing borrowers and lenders together for a commission.
Types of lendersMortgage companies
Types of LendersSeller financing
Seller financing: When the seller extends credit to the buyer. (Most important source of private financing.)
Types of LendersSeller financing
Seller financing: When the seller extends credit to the buyer. (Most important source of private financing.)
Seller financing is important when:buyer’s income is inadequate interest rates are highbuyer has poor credit history
The buyer makes a downpayment and then gives the seller a mortgage, deed of trust, or land contract for the rest of the price.
Types of LendersSeller financing
The buyer makes a downpayment and then gives the seller a mortgage, deed of trust, or land contract for the rest of the price.
Alternately, the buyer may finance much of the purchase price through an institutional lender and finance the rest through the seller (this is called secondary financing).
Types of LendersSeller financing
SummaryChoosing a Lender: Types of Lenders
Savings and loans Commercial banks Savings banks Credit unions Mortgage companies Mortgage brokers Seller financing
Choosing a LenderLoan costs
Buyers also want to compare loan costs when choosing a lender.
Choosing a LenderLoan costs
Buyers also want to compare loan costs when choosing a lender.
Loan costs include:interest chargesorigination feesdiscount pointslock-in fees
Loan CostsOrigination fees
Origination fee: An administrative charge for processing the loan.
Loan CostsOrigination fees
Origination fee: An administrative charge for processing the loan. The fee is paid at closing.
Loan CostsOrigination fees
Origination fee: An administrative charge for processing the loan. The fee is paid at closing. Also known as a loan fee, service fee, or
administrative charge.
Loan CostsDiscount points
Discount points: A fee paid to the lender at closing to increase the lender’s yield (or profit) on the loan.
Loan CostsDiscount points
Discount points: A fee paid to the lender at closing to increase the lender’s yield (or profit) on the loan.
One point is equal to 1% of the loan amount. Two points are equal to 2% of the loan amount.
The more discount points a borrower pays, the lower the interest rate will be.
Loan CostsDiscount points
The more discount points a borrower pays, the lower the interest rate will be.
The seller may choose to pay the buyer’s discount points to lower the buyer’s interest and make the loan more affordable.
Loan CostsDiscount points
The more discount points a borrower pays, the lower the interest rate will be.
The seller may choose to pay the buyer’s discount points to lower the buyer’s interest and make the loan more affordable.This is known as a buydown.
Loan CostsDiscount points
Loan CostsLock-ins
Lock-in fee: A fee paid to the lender by the buyer to ensure that the interest rate will be guaranteed for a certain period.
Loan CostsLock-ins
Lock-in fee: A fee paid to the lender by the buyer to ensure that the interest rate will be guaranteed for a certain period.Without a lock-in, the lender may change
the loan’s interest rate at any point before closing.
Loan CostsTruth in Lending Act
The Truth in Lending Act (TILA) is a federal consumer protection law that requires lenders to disclose the total cost of obtaining a loan.
Loan CostsTruth in Lending Act
The Truth in Lending Act (TILA) is a federal consumer protection law that requires lenders to disclose the total cost of obtaining a loan.
TILA is implemented through Regulation Z, a Federal Reserve regulation.
TILA applies to consumer loans: used for personal, family, or household
purposes
Loan CostsTruth in Lending Act
TILA applies to consumer loans: used for personal, family, or household
purposespaid off in more than four installments or
involving finance charges
Loan CostsTruth in Lending Act
TILA applies to consumer loans: used for personal, family, or household
purposespaid off in more than four installments or
involving finance chargesfor $25,000 or less or secured by real
property
Loan CostsTruth in Lending Act
Loan CostsTruth in Lending Act
TILA does NOT apply to:loans made to corporations or
organizations
Loan CostsTruth in Lending Act
TILA does NOT apply to:loans made to corporations or
organizationsloans made for business, commercial, or
agricultural purposes
Loan CostsTruth in Lending Act
TILA does NOT apply to:loans made to corporations or
organizationsloans made for business, commercial, or
agricultural purposesseller-financed transactions
Loan CostsTruth in Lending Act
If a loan is covered by TILA, the lender must disclose the loan’s:total finance charge
Loan CostsTruth in Lending Act
If a loan is covered by TILA, the lender must disclose the loan’s:total finance chargeannual percentage rate (APR)
Loan CostsTruth in Lending Act
Total finance charge: The sum of all fees the borrower will have to pay, including interest, origination fees, discount points, service fees, mortgage insurance premiums.
Loan CostsTruth in Lending Act
Total finance charge: The sum of all fees the borrower will have to pay, including interest, origination fees, discount points, service fees, mortgage insurance premiums.
The finance charge does NOT include seller-paid points, appraiser fees, or credit report fees.
Loan CostsTruth in Lending Act
Annual percentage rate (APR): The cost of the loan expressed as an annual percentage of the loan amount.
Loan CostsTruth in Lending Act
Annual percentage rate (APR): The cost of the loan expressed as an annual percentage of the loan amount.
The APR (also called the effective interest rate) is a more accurate way to compare loan costs than by comparing nominal rates (the interest rates stated on the promissory notes).
Loan CostsTruth in Lending Act
TILA advertising rules:an advertisement can list the cash price or
APR without triggering full disclosure requirements
Loan CostsTruth in Lending Act
TILA advertising rules:an advertisement can list the cash price or
APR without triggering full disclosure requirements
if an ad goes beyond those terms, it must also disclose: the required downpayment
Loan CostsTruth in Lending Act
TILA advertising rules:an advertisement can list the cash price or
APR without triggering full disclosure requirements
if an ad goes beyond those terms, it must also disclose: the required downpayment the points
Loan CostsTruth in Lending Act
TILA advertising rules:an advertisement can list the cash price or
APR without triggering full disclosure requirements
if an ad goes beyond those terms, it must also disclose: the required downpayment the points terms of repayment (i.e., loan balance
and total number of payments)
Loan CostsTruth in Lending Act
TILA also: requires a good faith estimate of closing
costs to be given to the borrower within three days of the loan application date
Loan CostsTruth in Lending Act
TILA also: requires a good faith estimate of closing
costs to be given to the borrower within three days of the loan application date
gives home equity borrowers a right of rescission
Loan CostsTruth in Lending Act
TILA also: requires a good faith estimate of closing
costs to be given to the borrower within three days of the loan application date
gives home equity borrowers a right of rescissionThe borrower has three days to change
her mind after signing the loan agreement.
Loan Costs Mortgage Loan Broker Law
California’s Mortgage Loan Broker Law requires real estate agents who act as loan brokers to give borrowers a disclosure statement.
Loan Costs Mortgage Loan Broker Law
The disclosure statement must list:all costs involved in obtaining the loan
Loan Costs Mortgage Loan Broker Law
The disclosure statement must list:all costs involved in obtaining the loanthe amount the borrower will actually
receive after all costs have been deducted
Loan Costs Mortgage Loan Broker Law
The disclosure statement must be given to the borrower:before the borrower signs the loan papers,
or
Loan Costs Mortgage Loan Broker Law
The disclosure statement must be given to the borrower:before the borrower signs the loan papers,
orwithin three days of receiving the loan
application, whichever is earlier.
Loan Costs Mortgage Loan Broker Law
The disclosure statement must be given to the borrower:before the borrower signs the loan papers,
orwithin three days of receiving the loan
application, whichever is earlier.
The agent must keep a copy of the statement for three years.
Loan Costs Mortgage Loan Broker Law
The law also:prohibits balloon payments for certain
loans
Loan Costs Mortgage Loan Broker Law
The law also:prohibits balloon payments for certain
loans
limits the size of commissions and fees that can be charged for: first deeds of trust for less than $30,000 junior deeds of trust for less than
$20,000
Loan Costs Seller Financing Disclosure Law
California’s Seller Financing Disclosure Law applies to seller-financed loans if:the loan is for a residential property of up
to four units
Loan Costs Seller Financing Disclosure Law
California’s Seller Financing Disclosure Law applies to seller-financed loans if:the loan is for a residential property of up
to four unitsthe financing calls for a finance charge or
more than three payments
Loan Costs Seller Financing Disclosure Law
California’s Seller Financing Disclosure Law applies to seller-financed loans if:the loan is for a residential property of up
to four unitsthe financing calls for a finance charge or
more than three paymentsan arranger of credit is involved in the
transaction
Loan Costs Seller Financing Disclosure Law
Arranger of credit: A person who is involved in negotiating a credit agreement, such as a real estate agent who helps arrange seller financing.
Loan Costs Seller Financing Disclosure Law
The law requires the following disclosures to be made to the borrower:the terms of the note and security
instrument
Loan Costs Seller Financing Disclosure Law
The law requires the following disclosures to be made to the borrower:the terms of the note and security
instrumenta description of any senior encumbrances
Loan Costs Seller Financing Disclosure Law
The law requires the following disclosures to be made to the borrower:the terms of the note and security
instrumenta description of any senior encumbranceswhether a balloon payment is required
Loan Costs Seller Financing Disclosure Law
The law requires the following disclosures to be made to the borrower:the terms of the note and security
instrumenta description of any senior encumbranceswhether a balloon payment is requiredemployment, income, and credit
information about the buyer
SummaryChoosing a Lender: Loan Costs
Origination fee Discount points Lock-in Truth in Lending Act Total finance charge Annual percentage rate Mortgage Loan Broker Law Seller Financing Disclosure Law
Applying for a Residential LoanLoan application process
This lesson will cover four topics:choosing a lenderthe loan application processbasic loan featuresresidential financing programs
Loan Application Process
Once a lender is chosen, the buyer fills out the loan application. This may be done:after a property has been chosen
Loan Application Process
Once a lender is chosen, the buyer fills out the loan application. This may be done:after a property has been chosenbefore the buyer begins looking for a home
(called prequalification)
Loan Application ProcessRequired information
The buyer will need to give the lender the following:personal information (such as age and
education)current monthly housing expensesemployment information
Loan Application ProcessRequired information
The buyer will need to give the lender the following:personal information (such as age and
education)current monthly housing expensesemployment informationcurrent incomeassets and liabilitiestype of loan sought
Loan Application ProcessUnderwriting
The lender will evaluate the completed application according to the lender’s qualifying standards (called underwriting the loan).
Loan Application ProcessUnderwriting
The lender will evaluate the completed application according to the lender’s qualifying standards (called underwriting the loan).
The loan underwriter will assess the degree of risk the loan would create and decide whether the loan should be approved.
Loan Application ProcessUnderwriting
Underwriters focus on three main considerations about the borrower:incomenet worthcredit history
UnderwritingIncome
The underwriter checks to see if the applicant has enough stable monthly income to make the loan payments.
UnderwritingIncome
The underwriter checks to see if the applicant has enough stable monthly income to make the loan payments.
She will consider the:qualityquantity anddurability of the applicant’s income
Quality and durability of income:income from a permanent job, or regular
benefits such as Social Security, will be considered stable income
Underwriting Income
Quality and durability of income:income from a permanent job, or regular
benefits such as Social Security, will be considered stable income
earnings from a temporary job are not stable income
Underwriting Income
Quantity of income:The underwriter uses income ratios to
determine whether the applicant’s income is enough.
Underwriting Income
Quantity of income:The underwriter uses income ratios to
determine whether the applicant’s income is enough.
There are two ratios:a housing expense to income ratioa debt service to income ratio
Underwriting Income
Underwriting Net worth
The borrower’s net worth is determined by subtracting her total liabilities from total assets.
Underwriting Net worth
The borrower’s net worth is determined by subtracting her total liabilities from total assets.An applicant must have enough funds to
pay for the downpayment and closing costs while retaining at least several months’ reserves.
Underwriting Credit history
The underwriter will also consider the applicant’s credit history, including factors such as:late payments on debtsbankruptciesforeclosures
Underwriters typically use credit scores to evaluate the borrower’s likelihood of defaulting on a loan.
Underwriting Credit history
Underwriters typically use credit scores to evaluate the borrower’s likelihood of defaulting on a loan.Credit scores are issued by credit
reporting agencies.
Underwriting Credit history
Underwriters typically use credit scores to evaluate the borrower’s likelihood of defaulting on a loan.Credit scores are issued by credit
reporting agencies.California law entitles consumers to
receive a copy of their credit information upon request.
Underwriting Credit history
Underwriting Qualifying the property
The underwriter also evaluates the property, to make sure it provides adequate security for the loan amount.
Underwriting Qualifying the property
The underwriter also evaluates the property, to make sure it provides adequate security for the loan amount.The underwriter does this with an
appraisal report.
SummaryLoan Application Process
Prequalifying Loan application Stable monthly income Income ratios Net worth Credit history
Applying for a Residential LoanBasic loan features
This lesson will cover four topics:choosing a lenderthe loan application processbasic loan featuresresidential financing programs
Basic Loan Features
Basic loan features include:the loan termamortizationloan-to-value ratiossecondary financingfixed or adjustable interest rates
Basic Loan FeaturesLoan term
Loan term: How long a borrower has to repay a loan (also called repayment period).
Basic Loan FeaturesLoan term
Loan term: How long a borrower has to repay a loan (also called repayment period).
The loan term affects the amount of the monthly payment and the amount of interest paid over the life of the loan.
Basic Loan FeaturesLoan term
Common loan terms:30-year: Main advantage is smaller
monthly payment. (Most loans have a 30-year term.)
Basic Loan FeaturesLoan term
Common loan terms:30-year: Main advantage is smaller
monthly payment. (Most loans have a 30-year term.)
15-year: Bigger monthly payment, but borrowers get a lower interest rate, pay off the loan in half the time, and pay much less interest overall.
Basic Loan FeaturesAmortization
Amortized loan: A loan that requires regular installment payments of both principal and interest.
Basic Loan FeaturesAmortization
Amortized loan: A loan that requires regular installment payments of both principal and interest. Fully amortized loan: The monthly
payments will pay off the entire debt at the end of the loan term.
Basic Loan FeaturesAmortization
Amortized loan: A loan that requires regular installment payments of both principal and interest. Fully amortized loan: The monthly
payments will pay off the entire debt at the end of the loan term.
Partially amortized loan: The monthly payments won’t be enough to pay off the entire debt; the borrower will owe a balloon payment at the end of the term.
Basic Loan FeaturesLoan-to-value ratios
Loan-to-value ratio (LTV): The relationship between the loan amount and the value of the security property, expressed as a percentage.
Basic Loan FeaturesLoan-to-value ratios
Loan-to-value ratio (LTV): The relationship between the loan amount and the value of the security property, expressed as a percentage.
An $80,000 loan on a property worth $100,000 would have an 80% LTV.
The lower the LTV, the greater the buyer’s equity in the property.
Basic Loan FeaturesLoan-to-value ratios
The lower the LTV, the greater the buyer’s equity in the property.
Equity is the difference between the property’s value and any liens against it.
Basic Loan FeaturesLoan-to-value ratios
Lenders prefer a lower loan-to-value ratio because:the borrower makes a larger investment
and will try harder to avoid foreclosure
Basic Loan FeaturesLoan-to-value ratios
Lenders prefer a lower loan-to-value ratio because:the borrower makes a larger investment
and will try harder to avoid foreclosurein there is a foreclosure sale, the lender is
likelier to be able to recover the entire debt
Basic Loan FeaturesLoan-to-value ratios
Basic Loan FeaturesSecondary financing
Buyer may take out a second mortgage loan to pay for part of the downpayment and closing costs.
Basic Loan FeaturesSecondary financing
Buyer may take out a second mortgage loan to pay for part of the downpayment and closing costs.
The source of secondary financing can be:an institutional lenderthe property sellera private investor
Basic Loan FeaturesInterest rates
The interest rate for a loan can be either fixed or adjustable.
Basic Loan FeaturesInterest rates
The interest rate for a loan can be either fixed or adjustable.Fixed-rate: the interest rate remains the
same throughout the loan term.
Basic Loan FeaturesInterest rates
The interest rate for a loan can be either fixed or adjustable.Fixed-rate: the interest rate remains the
same throughout the loan term.Adjustable-rate: the interest rate is
adjusted periodically throughout the loan term to reflect current market interest rates.
With ARMs, the borrower rather than the lender bears the risk of market rate fluctuations.
Interest RatesAdjustable-rate Mortgages (ARMs)
With ARMs, the borrower rather than the lender bears the risk of market rate fluctuations.Because of this risk, ARMs have lower
initial interest rates than fixed-rate loans.
Interest RatesAdjustable-rate Mortgages (ARMs)
ARMsElements
Elements of an ARM include the:indexmarginadjustment periodscapspossibility of negative amortization
Elements of an ARMIndex
Index: A published statistical report that indicates changes in the cost of money.
Elements of an ARMIndex
Index: A published statistical report that indicates changes in the cost of money.An ARM’s interest rate is initially set
according to market rates at the time the loan begins.
Elements of an ARMIndex
Index: A published statistical report that indicates changes in the cost of money.An ARM’s interest rate is initially set
according to market rates at the time the loan begins.
The rate is then adjusted periodically according to the selected index.
Elements of an ARM Margin
Margin: The difference between the index rate and the interest rate charged to the borrower.
Elements of an ARM Margin
Margin: The difference between the index rate and the interest rate charged to the borrower.The lender adds a margin (i.e., 2
percentage points) to the index rate to cover the lender’s expenses and profit.
Elements of an ARM Margin
Margin: The difference between the index rate and the interest rate charged to the borrower.The lender adds a margin (i.e., 2
percentage points) to the index rate to cover the lender’s expenses and profit.
The margin stays the same throughout the loan term.
Elements of an ARM Adjustment periods
ARMs have two adjustment periods.
Rate adjustment period: This determines how often the interest rate of an ARM can change.
Elements of an ARM Adjustment periods
ARMs have two adjustment periods.
Rate adjustment period: This determines how often the interest rate of an ARM can change.
Payment adjustment period: This determines how often the monthly payment may change.
Elements of an ARM Caps
Lenders use caps to avoid large payment increases that might force a borrower into default.
Elements of an ARM Caps
Lenders use caps to avoid large payment increases that might force a borrower into default.Interest rate cap: Limits the amount the
interest rate may go up over a year, or over the loan term.
Elements of an ARM Caps
Lenders use caps to avoid large payment increases that might force a borrower into default.Interest rate cap: Limits the amount the
interest rate may go up over a year, or over the loan term.
Payment cap: Limits the amount the lender can raise the monthly payment amount.
Elements of an ARM Negative amortization
Some ARMs (not many) permit negative amortization:causes a loan’s principal balance to go up
rather than down, as unpaid interest is added to the balance
Elements of an ARM Negative amortization
Some ARMs (not many) permit negative amortization:causes a loan’s principal balance to go up
rather than down, as unpaid interest is added to the balance
occurs if increases in the monthly payment amount don’t keep up with increases in the loan’s interest rate
SummaryBasic Loan Features
Loan term Amortization Loan-to-value ratio Secondary financing Fixed-rate mortgage Adjustable-rate
mortgage
Index Margin Rate and payment
adjustment periods Rate and payment
caps Negative
amortization
Applying for a Residential LoanBasic loan features
This lesson will cover four topics:choosing a lenderthe loan application processbasic loan featuresresidential financing programs
Residential Financing Programs
The major types of residential financing include:conventional loansFHA-insured loansVA-guaranteed loansCal-Vet loans
Residential Financing Programs Conventional loans
Conventional loan: Any institutional mortgage not backed by a government program.
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 standards so the loans can be sold on the secondary market.
Residential Financing Programs Conventional loans
Nonconforming loan: A loan that doesn’t meet Fannie Mae or Freddie Mac standards.
Residential Financing Programs Conventional loans
Nonconforming loan: A loan that doesn’t meet Fannie Mae or Freddie Mac standards.
A lender can make a nonconforming loan, but will have to keep it in its own portfolio.
Conventional LoansLoan-to-value ratios
Conventional loans are divided into 80%, 90%, and 95% loans.
Conventional LoansLoan-to-value ratios
Conventional loans are divided into 80%, 90%, and 95% loans.
If a loan falls between these percentages, round up to determine which kind it is.
Conventional LoansLoan-to-value ratios
Conventional loans are divided into 80%, 90%, and 95% loans.
If a loan falls between these percentages, round up to determine which kind it is.A loan with an 81% LTV, for instance, is
a 90% loan.
Conventional LoansLoan-to-value ratios
The standard LTV is 80% for conventional loans.
Conventional LoansLoan-to-value ratios
The standard LTV is 80% for conventional loans.Loans with 90% or 95% LTVs represent
added risk for the lender, and will require the borrower to pay private mortgage insurance.
Private mortgage insurance covers only a portion of the loan, typically 20% to 25% of the loan amount.
Conventional LoansPrivate mortgage insurance
Private mortgage insurance covers only a portion of the loan, typically 20% to 25% of the loan amount.
If a borrower defaults on a loan with PMI, the lender can:sell the property, or
Conventional LoansPrivate mortgage insurance
Private mortgage insurance covers only a portion of the loan, typically 20% to 25% of the loan amount.
If a borrower defaults on a loan with PMI, the lender can:sell the property, or relinquish the property to the insurer and file
a claim for any losses suffered, up to the policy amount
Conventional LoansPrivate mortgage insurance
Conventional LoansOwner-occupancy
A conventional lender usually requires the borrower to live in the house rather than renting it to others.
Conventional LoansOwner-occupancy
A conventional lender usually requires the borrower to live in the house rather than renting it to others.Exception: when the downpayment is 25%
or more.
Conventional LoansQualifying standards
Fannie Mae and Freddie Mac set underwriting standards for conventional loans.
Conventional LoansQualifying standards
Fannie Mae and Freddie Mac set underwriting standards for conventional loans.
Their standards include both a maximum housing expense to income ratio and a maximum total debt service ratio.
Conventional LoansQualifying standards
Fannie Mae and Freddie Mac set underwriting standards for conventional loans.
Their standards include both a maximum housing expense to income ratio and a maximum total debt service ratio.The applicant must meet standards under
both these tests.
Conventional LoansAssumption
Most conventional loans contain an alienation clause.
Conventional LoansAssumption
Most conventional loans contain an alienation clause.This prevents the borrower from selling the
loan and having the buyer assume the loan without lender’s permission.
SummaryConventional Loans
Conventional loan Nonconforming loan Conventional LTVs Owner-occupancy Private mortgage insurance Qualifying standards
Residential Financing Programs FHA-insured loans
The Federal Housing Administration (FHA) was created in 1934 to promote home sales and financing for low- and middle-income homebuyers.
Residential Financing Programs FHA-insured loans
The Federal Housing Administration (FHA) was created in 1934 to promote home sales and financing for low- and middle-income homebuyers. The FHA’s main activity is insuring
mortgage loans through the Mutual Mortgage Insurance Plan.
Residential Financing Programs FHA-insured Loans
The FHA does not accept loan applications directly from borrowers.
Residential Financing Programs FHA-insured Loans
The FHA does not accept loan applications directly from borrowers.Borrowers should apply to a lender that
has been approved to make FHA-insured loans.
FHA-insured LoansKey characteristics
Key characteristics of FHA loans:Typically 30-year loans, although they may
be shorter.
FHA-insured LoansKey characteristics
Key characteristics of FHA loans:Typically 30-year loans, although they may
be shorter.Property must be owner-occupied, with 1-
4 units.Lender will charge a 1% origination fee.
FHA-insured LoansKey characteristics
Key characteristics of FHA loans:Typically 30-year loans, although they may
be shorter.Property must be owner-occupied, with 1-
4 units.Lender will charge a 1% origination fee. Qualifying standards are less stringent
than conventional loans.FHA loan may have a lower interest rate
than a conventional loan.
FHA-insured LoansKey characteristics
FHA loans require a low downpayment, often less than 3% of the loan amount.
Mortgage insurance is required for every FHA loan for the duration of the loan term.
FHA-insured LoansKey characteristics
FHA loans require a low downpayment, often less than 3% of the loan amount.
Mortgage insurance is required for every FHA loan for the duration of the loan term.
Maximum FHA loan amount varies from area to area.
Loan limits in areas with expensive housing are higher than those in areas of inexpensive housing.
FHA-insured LoansQualifying standards
The maximum income ratios are higher for FHA borrowers than conventional borrowers.
FHA-insured LoansQualifying standards
The maximum income ratios are higher for FHA borrowers than conventional borrowers.
An FHA borrower’s mortgage payments can be a higher percentage of his income than a conventional borrower.
The FHA program doesn’t have maximum income limits.
FHA-insured LoansQualifying standards
The FHA program doesn’t have maximum income limits.
A buyer at any income level could qualify for an FHA loan so long as the loan amount didn’t exceed the maximum allowed for the area.
FHA-insured LoansQualifying standards
FHA loans require both:a one-time mortgage insurance premium
(paid at closing), and
FHA-insured LoansQualifying standards
FHA loans require both:a one-time mortgage insurance premium
(paid at closing), andannual mortgage insurance premiums
(usually paid each month).
FHA-insured LoansQualifying standards
FHA-insured LoansAssumption
FHA loans that closed before 1990 may be freely assumed.
FHA-insured LoansAssumption
FHA loans that closed before 1990 may be freely assumed.
Newer loans may be assumed only if the buyer:meets FHA underwriting standards
FHA-insured LoansAssumption
FHA loans that closed before 1990 may be freely assumed.
Newer loans may be assumed only if the buyer:meets FHA underwriting standardsintends to occupy the home as a primary
residence
SummaryFHA-insured Loans
Federal Housing Administration Owner-occupancy Maximum loan amount Minimum cash investment FHA qualifying standards
Residential Financing Programs VA-guaranteed loans
VA loans: Loans guaranteed by the government, meaning that if the borrower defaults, the Department of Veterans Affairs will reimburse the lender for all or part of its loss.
To be eligible for a VA loan, a borrower must have served a period of active duty in the U.S. armed forces.
VA-Guaranteed Loans Eligibility
To be eligible for a VA loan, a borrower must have served a period of active duty in the U.S. armed forces.Spouses of deceased or missing veterans,
and long-term national guard or reserves members, are also eligible.
VA-Guaranteed Loans Eligibility
VA-guaranteed LoansLoan process
An eligible veteran will be issued a Certificate of Eligibility by the VA.
VA-guaranteed LoansLoan process
An eligible veteran will be issued a Certificate of Eligibility by the VA.
The veteran will apply to a lender, not the VA.
VA-guaranteed LoansLoan process
An eligible veteran will be issued a Certificate of Eligibility by the VA.
The veteran will apply to a lender, not the VA.
The property must be appraised according to VA guidelines. The appraised value will be set forth on a Certificate of Reasonable Value.
VA-guaranteed LoansCharacteristics
Key characteristics of VA loans:VA loans don’t require a downpayment or
have a maximum loan amount.
VA-guaranteed LoansCharacteristics
Key characteristics of VA loans:VA loans don’t require a downpayment or
have a maximum loan amount.VA qualifying standards are even less
strict than FHA standards.
VA-guaranteed LoansCharacteristics
Key characteristics of VA loans:VA loans don’t require a downpayment or
have a maximum loan amount.VA qualifying standards are even less
strict than FHA standards.VA loans do not require mortgage
insurance.
VA-guaranteed Loans Characteristics
A VA loan applicant must intend to occupy the property being purchased.
VA-guaranteed Loans Characteristics
A VA loan applicant must intend to occupy the property being purchased.
VA loans are usually fixed-rate 30-year loans.
VA-guaranteed Loans Characteristics
A VA loan applicant must intend to occupy the property being purchased.
VA loans are usually fixed-rate 30-year loans. VA borrowers may opt to pay discount points
on a loan.
VA-guaranteed LoansVA guaranty
Although there is no maximum VA loan amount, the VA sets a maximum guaranty amount.
VA-guaranteed LoansVA guaranty
Although there is no maximum VA loan amount, the VA sets a maximum guaranty amount.
For a large loan, the lender may require a downpayment if the purchase price exceeds the maximum guaranty amount.
VA-guaranteed LoansRestoration of entitlement
If a veteran pays off a VA loan:his or her full guarantee entitlement is
restored
VA-guaranteed LoansRestoration of entitlement
If a veteran pays off a VA loan:his or her full guarantee entitlement is
restoredhe or she can obtain another VA loan with
the maximum guaranty
VA-guaranteed LoansRestoration of entitlement
If a VA loan is assumed, in order for the seller’s entitlement to be restored, the buyer must be an eligible veteran willing to substitute his entitlement.
VA-guaranteed LoansQualifying standards
A VA loan underwriter will apply only one ratio, a total debt to income ratio.
VA-guaranteed LoansQualifying standards
A VA loan underwriter will apply only one ratio, a total debt to income ratio.
The underwriter must also consider minimum residual income requirements.
VA-guaranteed LoansQualifying standards
A VA loan underwriter will apply only one ratio, a total debt to income ratio.
The underwriter must also consider minimum residual income requirements.The borrower must have a certain amount
of income left after meeting all monthly debt obligations.
Residential Financing Programs Cal-Vet Loans
Veterans in California may also obtain a home loan through the California Veterans Farm and Home Purchase Program. These are called Cal-Vet loans.
Residential Financing Programs Cal-Vet Loans
The state Department of Veterans Affairs processes, originates, and services the loans.
Residential Financing Programs Cal-Vet Loans
The state Department of Veterans Affairs processes, originates, and services the loans.
The state purchases and takes title to the property, and then sells it to the veteran through a land contract.
Residential Financing Programs Cal-Vet Loans
Key characteristics of Cal-Vet loans.To be eligible, a veteran must have
served on active duty during a wartime period.
Residential Financing Programs Cal-Vet Loans
Key characteristics of Cal-Vet loans.To be eligible, a veteran must have
served on active duty during a wartime period.
Maximum loan amounts vary from county to county.
Residential Financing Programs Cal-Vet Loans
Key characteristics of Cal-Vet loans.To be eligible, a veteran must have
served on active duty during a wartime period.
Maximum loan amounts vary from county to county.
A small downpayment is required, but LTVs of 95% to 97% are common.
Residential Financing Programs Cal-Vet Loans
A Cal-Vet borrower pays a funding fee and application fee, but cannot pay discount points.
Residential Financing Programs Cal-Vet Loans
A Cal-Vet borrower pays a funding fee and application fee, but cannot pay discount points.
The home or farm must be owner-occupied.
Residential Financing Programs Cal-Vet Loans
A Cal-Vet borrower pays a funding fee and application fee, but cannot pay discount points.
The home or farm must be owner-occupied. New Cal-Vet borrowers must purchase life
insurance through the Cal-Vet program.
SummaryVA-guaranteed and Cal-Vet Loans
VA-guaranteed loan VA eligibility Certificate of Reasonable Value VA guaranty Restoration of entitlement VA qualifying standards Cal-Vet loan Cal-Vet eligibility