BOOK CH 8 - 3
Terms in this set (55)
8.5 GOVERNMENT ROLE IN REAL ESTATE
The government has become heavily involved in helping consumers
acquire decent housing. There are many government housing
programs, but in this text, only FHA-insured, VA-guaranteed,
Cal-Vet loan, and Cal HFA programs are discussed.
The Federal Housing Administration (FHA), a part of the
Department of Housing and Urban Development (HUD), was
established in 1934 to improve the construction and financing of
Since its creation, the FHA has had a major influence on real estate financing. Some of today's loan features that are taken
for granted were initiated by the FHA.
The FHA is not a lender; it does not make loans. Approved
lenders such as mortgage companies, insurance companies, and
banks make the loans.
However, the loans must be granted
under FHA guidelines. Once the loan is granted, if the borrower
defaults on the loan, the FHA insures the lender against
The FHA collects a fee for this insurance, which is called the
Mortgage Insurance Premium aka MIP. The MIP fees are paid up front in cash or financed as part of the loan.
This insurance should not be confused with credit life insurance.
An FHA mortgage insurance policy does not insure the borrower's
A mortgage insurance policy is used by the FHA to
reimburse a lender if the borrower defaults on mortgage payments
and the foreclosure results in a loss for the insured lender.
Advantages of FHA Loans
Advantages of FHA Loans
1. Low down payment. The main advantage of an FHA-insured loan
is the low down payment. It used to be that FHA interest rates
were set below the conventional rates.
But deregulation now
allows the FHA interest rate to float with the market. Therefore,
sellers are no longer required to pay discount points to increase the lender's yield.
Any loan fees or points charged by the lender
are an item of negotiation and can be paid by the buyer or the
2. No prepayment penalty. An FHA-insured loan does not allow a
3. Under some circumstances, FHA-insured loans are assumable.
FHA-insured loans do not allow alienation clauses aka due-on-sale
Thismakes it possible to buy property and, with FHA
approval, take over the seller's existing FHA-insured loan.At one
time, all FHA-insured loans were assumable without requiring a
credit and/or income check.
But beginning with FHA-insured
loans originating as of December 15, 1989, all assumptions must
be approved by the FHA. In addition, non-owner-occupied
assumptions are prohibited on FHA-insured loans as of the
4. All cash to the seller.New FHA-insured loans cash out the seller.
In a down real estate market,many sellers may need to carry a
second, also known as a piggyback loan which is a combination of
two loans that close at the same time to purchase a home to help finance a conventional loan for a buyer.
Under FHA terms, the
high loan-to-value ratio gives the seller all cash.
5. Minimum property standards. FHA will not allow a lender to
grant a loan unless the property meets FHA housing standards,
which, in some cases, are more stringent than what some
conventional lenders allow.
Disadvantages of FHA Loans
1. Low loan amounts. As a result of high home prices in many areas
of California, the FHA program is often not practical because
of the cap the FHA sets on its maximum loan amount allowed.
2. Red tape and processing time. The FHA is a large federal agency;
therefore, the problem of dealing with a bureaucracy becomes an
However, some FHA-insured lenders have pre-approval
rights that can speed up the FHA process.
3. Repairs on existing property. The FHA-appointed appraiser also
checks for repairs that he or she believes are necessary.
then requires that these repairs be made before the property is
approved. Sellers may not wish to make these repairs and may
refuse to sell to an FHA-insured buyer.
Here are some general rules that apply to all FHA homeowner
1. FHA will approve loans on owner-occupied 1 to 4-residential
dwellings, units in planned unit developments aka PUDs, condominiums,
and mobile homes.
2. The maximum loan fee is 1 percent of the loan amount, and the
buyer normally pays this fee.
3. The Mortgage Insurance Premium up front fee (as of 2010) is 2 1/4 percent of the loan amount.
4. The maximum loan term is 30 years or three-quarters of the
remaining economic life of the property, whichever is less.
5. The FHA requires that monthly payments include principal, interest, and 1/12 of the annual property taxes, hazard insurance
premium, and Mortgage Insurance Premium.
6. There is no maximum purchase price. The buyer can pay more
than the FHA appraisal.
However, the loan is based on the FHA appraisal if it is lower than the sales price.
7. The interest rates on FHA-backed loans now float with the market
instead of being fixed by the FHA.
8. FHA appraisals are good for six months on existing property and
one year on new construction.
How to Calculate FHA-Insured Loan Amounts as of Feb 2010
FHA calculates the loan amount based on the home's sales price or
the FHA-approved appraisal, whichever is less.
As of 2009, the maximum loan amount was set at 96.5 percent
or a 3.5 percent down payment
The FHA then sets a ceiling on
the maximum loan allowed based on the median home prices in
various geographic areas.
The dollar amounts can change each
year depending on the trend in home prices.
58 counties, the following 15 counties are considered especially
high-cost areas and are allowed the largest FHA loan amounts
in the continental United States:
Alameda, Contra Costa, Los
Angeles, Marin, Monterey, Orange, San Diego, San Francisco, San
Joaquin, San Mateo,
Santa Barbara, Santa Clara, Santa Cruz, Sonoma,
and Ventura counties. In the remaining 43 California counties,
the maximum FHA loan amounts are less.
Dollar amounts are
not quoted here, because they vary among California counties.
For the maximum FHA-approved loan amount for your area, contact
any local FHA-approved lender.
You can also access HUD's website at www.hud.gov and get the latest quote for your county.
The FHA requires a minimum 3.5 percent cash investment based
on the sales price or appraisal, whichever is less.
This 3.5 percent
cash investment can come from an approved gift and need not be
the FHA buyer's own personal money larger down payments may
be required for borrowers with low credit scores.
Therefore, with a 3.5 percent required cash investment, the
buyer will be paying for some of the closing costs.
If the buyer
pays no more than the required 3.5 percent cash investment, the
remaining closing costs, after applying the 3.5 percent rule, must
be paid by the seller or some other party.
The buyer can finance
the required MIP by increasing the loan amount.
Under previous FHA rules, only the seller, not the buyer, must
pay for the following closing costs: tax service fee, loan document
fee, processing fee, flood certification fee, and termite costs, if any.
Currently, the payment of nonrecurring closing costs is negotiable
between the seller and the buyer.
See Chapter 10, "The Role of
Escrow and Title Insurance Companies," for a complete discussion of the difference between recurring and nonrecurring closing costs.
However, in 2010 the FHA limited seller's concessions to buyers
to 3 percent of the sales price.
The National Housing Act of 1934 created the Federal Housing Administration. The act has 11 subdivisions, or "Titles," with further subdivisions called "Sections."
This chapter deals only with
Section 203b because this is the most important section for the
average home buyer or real estate agent.
Under the FHA 203b program:
1. Anyone who is financially qualified is eligible.
2. Loans are available on properties from one to four units.
3. The maximum FHA loan amounts vary from region to region,
with high-cost areas of California allowed larger loan amounts
than lower-cost areas within the state.
4. Although a buyer's credit history is important, it does not need
to be perfect.
5. The buyer must make a minimum cash investment of
3.5 percent, but this can come from an approved gift from
family members and certain nonprofit groups.
6. The mortgage insurance premium aka MIP must be obtained
and can be purchased up front or financed as part of the loan.
The MIP added to the loan is allowed to exceed maximum
FHA loan limits.
7. The FHA permits a borrower to carry more debt than most
conventional lenders will allow.
Example: A buyer wishes to purchase a small condo under the FHA
203b program. The buyer agrees to pay $230,000, and
the FHA-approved appraisal comes in at $232,000. What
is the maximum FHA loan amount? What is the minimum
cash the buyer must invest?
Step 1: The lesser of the price or appraisal is $230,000 times 96.5% equals $221,950, or the maximum loan for the area, whichever is less, plus any amount for the MIP.
Step 2: The lesser of the price or appraisal is $230,000 times 3.5 % equals $8,050 minimum cash investment required from the buyer. If more cash is needed to pay for closing costs,
the buyer can add more money or the seller or some
other party can agree to pay the remaining costs. This
will be determined on a case-by-case basis.
Department of Veterans Affairs
(VA or G.I.) Loans
In 1944, Congress passed the G.I. Bill of Rights to provide benefits
to veterans, including provisions for making real estate loans.
Like the FHA, the VA is not a lender. However, if no approved
private lender is located in the area, the VA will make direct loans
under certain conditions.
One difference between the FHA and
the VA is that the Department of Veterans Affairs guarantees a
portion of the loan, while the Federal Housing Administration insures
The VA guaranteed amount is calculated as 25 percent of the
current Federal Home Loan Mortgage Corporation (Freddie Mac)
conforming loan amount.
Each year, if the Freddie Mac conforming
loan amount increases, the VA guarantee to an approved
lender also increases.
For example, as of January 2006, the maximum
Freddie Mac conforming loan was $417,000; thus, 25%
417,000 $104,250 was the maximum VA lender guarantee.
Then, most VA-approved lenders simply reverse the process and
will grant a no-money-down loan to qualified veterans that is four
times the VA guarantee.
For 2006 this would be the $104,250
25% $417,000 maximum no-down-payment VAguaranteed
loan. The bottom line is that the maximum VA nomoney-down
loan amount is usually the same as the maximum
Freddie Mac conforming loan amount.
In 2010, VA limits were increased based on property values in the
county where the property is located. Since these limits change, you
are encouraged to go to the Department of Veterans Affairs website
at www.homeloans.va.gov to get the latest quote for your county.
Whether a loan is insured or guaranteed is important only if a foreclosure
occurs. If a foreclosure does occur, the VA has two options:
1. It can pay the lender the loan balance and take over the property.
2. It can give the lender the property and pay it the amount of the
deficiency, if any, up to the maximumamount of the VA guarantee
However, if a foreclosure occurs under the FHA program, the
lender is paid off and the property is taken over by the FHA.
Advantages and Disadvantages of VA (G.I.) Loans
Advantages of VA Loans - 1. No down payment. The VA does not require a borrower to make
any down payment on loans up to the current maximum loan
amount if the borrower pays the VA-appraised value for the
Caution: VA no-down loan amounts can change.
Access the VA's website at www.homeloans.va.gov for the latest loan amounts.
2. No mortgage insurance payment.
3. No prepayment penalty.
Disadvantages of VA Loans
1. Creditworthiness qualification for assumptions. Effective
March 1, 1988, VA loans are no longer automatically assumable.
The VA requires a creditworthiness qualification before an
existing loan can be taken over by a new buyer. A fee is charged
for a VA loan assumption.
2. Seller may need to pay discount points. The VA point system is
3. Red tape and processing time. Processing time, inflexibility, and
paperwork occasionally are problems in dealing with a large
4. Loans can only be obtained by qualified veterans.
Who is Eligible for VA Loans? To be eligible, a veteran must have a discharge or release that is
not dishonorable and must have served a minimum number of
days depending on the time period in the service.
The usual minimum
is 181 days of active duty. National Guard and other military
reserves who served at least six years are also eligible.
Those who served less than the required time but were released or
discharged because of a service-connected disability are also eligible
for VA loans.
In addition, many other classifications of veterans are
eligible for a VA-guaranteed loan depending on the circumstances.
Also, a veteran can use his or her VA loan more than once.
General Information on VA Loans 1. Type of property. The VA will guarantee loans on properties of one
to four units and on units in planned unit developments aka PUDs, condominiums, and mobile homes.
2. Interest rate. Within VA guidelines, the interest rate is negotiable
between the veteran and the lender.
3. Loan fee. The amount of the loan origination fee paid by the
borrower is negotiable. Prior to a 1993 law change, the loan
fee could be only 1 percent of the loan amount.
4. Funding fee. A separate fee on top of the loan fee is paid by the
borrower for granting the loan. This fund fee usually varies from
2 to 3 percent of the loan amount. The funding fee can be
financed by adding it to the loan amount.
5. Term of loan. The maximum term is 30 years. 6. Down payment. The VA does not require a down payment on
loans up to current designed amounts. The veteran is frequently
allowed to borrow the full amount of the purchase price. What
happens if the VA appraisal is less than the purchase price?
loan amount cannot exceed the appraisal. The difference
between the purchase price and the appraisal must be paid by
the borrower in cash.
7. Maximum loan. There is no maximum loan amount on a VA
loan. This does not mean you can obtain a no-down-payment
VA loan in any amount.
Since the VA guarantees only a portion
of the loan, lenders limit the amount they will lend on VA loans.
Many lenders will not lend more than four times the guarantee.
8. Occupying the property. The veteran must occupy the property.
The VA does not have a program for veterans who do not intend
to occupy the property.
9. Monthly payments. Included are principal, interest, and 1/12 the
annual property taxes and hazard insurance premiums.
10. Appraisal. The VA appraisal is called the certificate of reasonable
value aka CRV. To the VA, reasonable value means current market
11. Structural pest control report. The VA requires that a report be
obtained from a licensed structural pest control company. Any
required work must be done, and the veteran must certify that the
work has been done satisfactorily.
Calculating Discount Points for VA Loans Under VA terms, a lender and the veteran negotiate the interest
rate. If this negotiated rate is not sufficient to cope with today's
cost of overhead and profit, a lender simply refuses to grant a
loan under VA terms.
This may cause the sale to fall through.
Under these circumstances, a motivated seller might be willing to
pay a discount fee to increase the lender's yield, thereby encouraging
the lender to grant a VA loan and allow the sale to close.
Example: Assume the home sales price and appraisal both are $333,700 and the maximum VA-guaranteed loan available is $333,700.
Also assume the negotiated VA interest rate the veteran qualifies for is 6 percent, but
lenders can get 7 percent interest on government backed
real estate loans. To entice the lender to make
the VA-backed loan at 6 percent, the seller agrees
to pay the 1 percent difference. This fee is called a
mortgage discount, or points.
As a rule of thumb, points are calculated as follows based on current
interest rates for 2010: each 1 percent of discount or 1 point is
equal to one-sixth of 1 percent interest.
For a lender to increase the
yield on a loan by 1 percent, the lender must charge 6 percent, or
6 points, of the loan amount, which is deducted from the seller's
net proceeds from the sale. Again, the seller is made aware of this
before accepting the buyer's offer to purchase the home.
Thus, in the following example: 7% - 6% = 1% = 6/6 = 6 points or .06 of the loan amount. Therefore:
$333,700 loan amount times 0.06 equals $20,022, which is the discount fee the
seller must pay the lender up front from the seller's sale proceeds
The 1 percent difference in the previous example is used for
simplicity's sake to explain VA discount points. In the real world,
the interest rate spread between the VA and conventional rate may
percent to percent, resulting in only 1 to 2 discount
points to be paid by the seller.
In an active market where there are numerous buyers, sellers
tend not to sell to VA buyers who require the payment of discount
points. But in a slow market, a seller may be more than willing to
pay discount points just to get rid of the property.
from page 271 Cal-Vet Loans
The Cal-Vet loans program is administered by the State of..