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Washington Real Estate Fundamentals Lesson 11: Applying for a Residential Loan © 2011 Rockwell Publishing.

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Presentation on theme: "Washington Real Estate Fundamentals Lesson 11: Applying for a Residential Loan © 2011 Rockwell Publishing."— Presentation transcript:

1 Washington Real Estate Fundamentals Lesson 11: Applying for a Residential Loan © 2011 Rockwell Publishing

2 Applying for a Residential Loan This lesson will cover five main topics: Choosing a lender Loan application process Basic loan features Residential financing programs Predatory lending © 2011 Rockwell Publishing

3 Choosing a Lender Types of lenders Major sources of residential financing: Commercial banks Thrift institutions Credit unions Mortgage companies Many of the original distinctions between these types of lenders have been lost. © 2011 Rockwell Publishing

4 Types of Lenders Commercial banks Commercial banks are either national banks (federally chartered) or state banks (state- chartered). Traditionally: accepted only short-term (demand) deposits made primarily short-term business loans Later diversified their business, and now have significant share of residential mortgage market. © 2011 Rockwell Publishing

5 Types of Lenders Thrift institutions Savings and loans and savings banks are grouped together as thrifts. Have either federal or state charter. Emphasize home purchase loans. Once dominated mortgage market. No longer dominant, because of greater involvement of commercial banks and mortgage companies. © 2011 Rockwell Publishing

6 Types of Lenders Credit unions Credit unions often serve only members of a particular group. Examples: members of union or other association, employees of large company. Traditionally specialized in small personal loans. Now also make home loans (home equity and home purchase loans). © 2011 Rockwell Publishing

7 Types of Lenders Mortgage companies Unlike other lenders, mortgage companies arent depository institutions. Therefore cant use depositors funds to make loans. Instead, mortgage companies: act as loan correspondents, and/or engage in warehousing. © 2011 Rockwell Publishing

8 Types of Lenders Mortgage companies Loan correspondent: Local intermediary between large investors and home buyers. Makes and services home loans on behalf of insurance companies, pension funds. Warehousing: Borrowing from banks on short- term basis, using funds to originate loans to buyers. Loans then sold on secondary market, not kept in portfolio. © 2011 Rockwell Publishing

9 Types of Lenders Mortgage companies Mortgage companies are sometimes called mortgage bankers. Traditional distinction: Mortgage banker: Lender that originates and services loans. Mortgage broker: Not a lender; only negotiates or arranges loans. Distinction no longer clear-cut. Mortgage company may play either role. © 2011 Rockwell Publishing

10 Types of Lenders Mortgage companies Number of mortgage companies increased sharply in 1990s. Companies played major role in subprime lending boom. Subprime foreclosures have affected them more than other types of lenders. © 2011 Rockwell Publishing

11 Types of Lenders Seller financing In addition to institutional lenders, private sources of residential financing. Most important is seller financing. Seller financing: When property seller extends credit to buyer. Seller financing especially important when: institutional loans scarce market interest rates high © 2011 Rockwell Publishing

12 Types of Lenders Seller financing Buyer makes downpayment and gives seller mortgage, deed of trust, or land contract for rest of price. Alternatively, seller may provide secondary financing: Buyer finances most of purchase price through institutional lender, finances rest through seller. © 2011 Rockwell Publishing

13 Summary Types of Lenders Commercial bank Thrift institution Credit union Mortgage company Loan correspondent Warehousing Mortgage banker Mortgage broker Seller financing © 2011 Rockwell Publishing

14 Choosing a Lender Loan costs For most buyers, cost of loan is primary consideration when choosing a lender. Loan costs include: interest charges origination fees discount points miscellaneous other charges, such as document preparation fees © 2011 Rockwell Publishing

15 Loan Costs Origination fees Loan origination: Processing loan applications and making loans. Origination fee: Charge to cover lenders administrative costs in making loan. Also called loan fee. Percentage of loan amount (1% to 3%). Charged for almost every institutional loan. Paid by buyer unless otherwise agreed. © 2011 Rockwell Publishing

16 Loan Costs Points Origination fee may be grouped together with discount points under general term points. One point = 1% of loan amount Example: On $200,000 loan, one point = $2,000 When someone quotes points for a loan, clarify whether both origination fee and discount points included, or just discount points. © 2011 Rockwell Publishing

17 Loan Costs Discount points Discount points: Fee paid to lender at closing to increase lenders upfront yield (profit) on loan. Percentage of loan amount. Generally, the more discount points paid, the lower the buyers interest rate will be. Buydown: Seller agrees to pay discount points to lower buyers interest rate, make loan more affordable. © 2011 Rockwell Publishing

18 Loan Costs Truth in Lending Act Truth in Lending Act (TILA): Federal consumer protection law that requires lenders to disclose full cost of obtaining a loan to borrowers. Helps borrowers compare loans offered by competing lenders. Implemented through Feds Regulation Z. © 2011 Rockwell Publishing

19 Truth in Lending Act Consumer loans TILA applies to consumer loans. Consumer loan: Loan used for personal, family, or household purposes that: has more than four installments or is subject to finance charges, and is for $51,800 or less, or is secured by real property. © 2011 Rockwell Publishing

20 Truth in Lending Act Exemptions TILA does NOT apply to: loans made to corporations or organizations loans made for business, commercial, or agricultural purposes loans over maximum amount, unless secured by real property seller-financed transactions © 2011 Rockwell Publishing

21 Truth in Lending Act Disclosure requirements If loan covered by TILA, lender must disclose detailed information about loan costs. Includes two key disclosures: total finance charge annual percentage rate (APR) © 2011 Rockwell Publishing

22 TILA Disclosure Requirements Total finance charge Total finance charge: Sum of all loan-related charges borrower will have to pay, including: interest origination fee discount points (if paid by borrower) finders fee mortgage brokers fee service fees mortgage insurance premiums © 2011 Rockwell Publishing

23 TILA Disclosure Requirements Total finance charge In real estate loan transaction, these costs are NOT included in total finance charge: appraisal fee credit report fee inspection fees title fees costs paid by someone other than borrower (such as points paid by seller) © 2011 Rockwell Publishing

24 TILA Disclosure Requirements Annual percentage rate Annual percentage rate (APR): Total cost of loan expressed as annual percentage of loan amount. Also called effective interest rate. Comparing APRs shows relative cost of loans more accurately than comparing nominal interest rates. Nominal rate: Interest rate stated in promissory note. © 2011 Rockwell Publishing

25 TILA Disclosure Requirements Other disclosures In addition to total finance charge and APR, lender must disclose: amount financed total of all payments number of payments payment amount(s) any prepayment penalty © 2011 Rockwell Publishing

26 TILA Disclosure Requirements Timing of disclosures For loan secured by borrowers dwelling, disclosure statement with estimated costs: delivered or sent within 3 days after loan application received at least 7 business days before closing Lender may not charge any fees before borrower receives disclosure statement. Exception: Credit report fee © 2011 Rockwell Publishing

27 TILA Disclosure Requirements Timing of disclosures: amendments If significant changes to original estimates: Lender must give borrower amended disclosures at least 3 business days before closing. © 2011 Rockwell Publishing

28 Truth in Lending Act Right of rescission For loan secured by existing principal residence, borrower may rescind loan agreement within 3 days after: signing agreement receiving disclosure statement receiving notice of right to rescind (whichever comes latest) If notice or disclosure statement never given, right of rescission lasts for 3 years. © 2011 Rockwell Publishing

29 Truth in Lending Act Right of rescission Right of rescission generally applies only to: home equity loan refinancing with new lender Does not apply to: home purchase loan construction loan refinancing with same lender, unless lender advancing additional funds © 2011 Rockwell Publishing

30 Truth in Lending Act Advertising rules TILA also has rules concerning advertising. Apply not just to lenders, but to anyone who advertises consumer credit. Example: Real estate agent advertising financing terms for listed home. © 2011 Rockwell Publishing

31 Truth in Lending Act Advertising rules Ad can always state cash price or APR. If APR stated, interest rate also OK. But other specific information triggers full disclosure requirement. Triggering terms: downpayment amount or percentage loan term or number of payments amount of any payment amount of any finance charge © 2011 Rockwell Publishing

32 Truth in Lending Act Advertising rules If ad states triggering term, then it must also include: APR any required downpayment repayment schedule, with number, timing, and amount of payments General statements (easy terms) do not trigger full disclosure requirement. © 2011 Rockwell Publishing

33 Loan Costs Locking in the interest rate Borrower may ask lender to lock in quoted interest rate for certain period. Otherwise lender can change rate at any time until transaction closes. If rate increases, borrower might no longer qualify for loan. Lender usually charges lock-in fee. Applied to borrowers closing costs if transaction closes. © 2011 Rockwell Publishing

34 Summary Choosing a Lender: Loan Costs Origination fee Discount points Truth in Lending Act Regulation Z Total finance charge Annual percentage rate Right of rescission Advertising requirements Locking in interest rate © 2011 Rockwell Publishing

35 Applying for a Residential Loan Loan application process After comparing loan costs and choosing lender, buyer fills out loan application. Traditionally, buyers would find house first and then apply for loan. Now getting preapproved (before house- hunting) is standard practice. Lender approves buyer for up to specified maximum loan amount. © 2011 Rockwell Publishing

36 Loan Application Process Required information Fannie Mae/Freddie Mac residential loan application requires buyer to provide: personal information (age, education, etc.) current monthly housing expense employment information income from various sources assets and liabilities Lender verifies information provided. © 2011 Rockwell Publishing

37 Loan Application Process Underwriting Loan underwriting: Evaluating application to decide if loan should be approved. Underwriter applies qualifying standards to assess whether loan is acceptable investment risk. Lender may apply own standards. But most lenders use standards set by Fannie Mae or Freddie Mac (or FHA or VA, for those loans). © 2011 Rockwell Publishing

38 Underwriting Qualifying the buyer Underwriters focus on three main considerations to qualify buyer: Credit history Income Net worth © 2011 Rockwell Publishing

39 Qualifying the Buyer Credit history Underwriter evaluates applicants credit history based on credit reports and credit scores from reporting agencies. Late payments on debts Bankruptcy Foreclosure Applicant should explain any extenuating circumstances (such as divorce) to lender. © 2011 Rockwell Publishing

40 Qualifying the Buyer Income Underwriter checks whether applicant has enough stable monthly income to make payments on proposed loan. Considers quality and durability of income as well as quantity. Quality – dependability of source Established company vs. new one Durability – how long its expected to last Permanent job vs. temporary job © 2011 Rockwell Publishing

41 Qualifying the Buyer Income Underwriter uses income ratios to determine if applicants stable monthly income is enough. Two main types of ratios: housing expense to income ratio debt to income ratio Housing expense includes principal, interest, taxes, and insurance (PITI). © 2011 Rockwell Publishing

42 Qualifying the Buyer Net worth Net worth: Total assets minus total liabilities. Evidence of financial management skills. Applicant also needs enough cash for: downpayment closing costs May be required to have cash reserves sufficient to meet mortgage payments for several months. © 2011 Rockwell Publishing

43 Underwriting Qualifying the property Underwriter also evaluates property that applicant plans to buy. Is it worth enough to provide adequate collateral for loan amount? Otherwise, foreclosure could result in financial loss for lender. Underwriter relies on appraisal report for estimate of propertys value. © 2011 Rockwell Publishing

44 Underwriting Automated underwriting Automated underwriting (AU): Computer program performs preliminary analysis of loan application and makes recommendation for or against approval. Human underwriter evaluates AU recommendation. AU analysis based on performance statistics from millions of loans. © 2011 Rockwell Publishing

45 Underwriting Subprime lending Subprime lending: Making riskier loans than standard lenders, including loans to buyers who: have poor credit cant or dont want to meet documentation requirements want to buy nonstandard properties More flexible underwriting standards. Higher interest rates and fees. © 2011 Rockwell Publishing

46 Underwriting Subprime lending Subprime boom enabled many to buy homes who otherwise could not have. But many loans turned out to be bad risks, causing foreclosure crisis. Subprime lending now much less common. Recent federal and state legislation intended to curb abuses. © 2011 Rockwell Publishing

47 Underwriting Mortgage fraud Examples of mortgage fraud: loan applicants lying about employment, assets, or liabilities investors falsely claiming to be buying property as principal residence lenders overstating quality of loans when selling them to secondary market © 2011 Rockwell Publishing

48 Underwriting Mortgage fraud Recent laws aimed at mortgage fraud: Fraud Enforcement and Recovery Act (federal) Mortgage Lending and Homeownership statute (Washington) Both laws provide significant jail time and fines for violation. © 2011 Rockwell Publishing

49 Summary Loan Application Process Preapproval Underwriting Qualifying standards Credit reports and credit scores Stable monthly income Income ratios Net worth Cash reserves Automated underwriting Subprime lending © 2011 Rockwell Publishing

50 Applying for a Residential Loan Basic loan features Basic features of mortgage loan include: loan term amortization loan-to-value ratio secondary financing fixed or adjustable interest rate © 2011 Rockwell Publishing

51 Basic Loan Features Loan term Loan term: Period of time borrower has for repaying loan. Also called repayment period. The longer the loan term: the lower the monthly payment the more interest paid over life of loan © 2011 Rockwell Publishing

52 Basic Loan Features Loan term 30-year term: standard term for home purchase loan low monthly payment 15-year term: larger monthly payment lower interest rate loan paid off in half the time much less interest paid overall © 2011 Rockwell Publishing

53 Basic Loan Features Loan term Larger payment for 15-year loan generally means buyer cant buy nearly as expensive a home as 30-year loan would allow. Buyer may consider 20-year loan instead, as compromise. Some programs allow 40-year term, to maximize purchasing power. © 2011 Rockwell Publishing

54 Basic Loan Features Amortization Amortized loan: Installment payments include both principal and interest. Fully amortized loan: Monthly payments will pay off entire debt by end of term. Partially amortized loan: Monthly payments not enough to pay off entire debt, so balloon payment required at end of term. © 2011 Rockwell Publishing

55 Basic Loan Features Amortization Interest-only loan: payments during loan term cover only interest accruing, so entire principal amount is due at end of term; or payments are interest-only for specified number of years at beginning of term, with amortized payments after that. © 2011 Rockwell Publishing

56 Basic Loan Features Loan-to-value ratio Loan-to-value ratio (LTV): Relationship between loan amount and value of security property, expressed as percentage. Example: $80,000 loan on $100,000 property. LTV = 80% LTV calculated using sales price or appraised value, whichever is less. The lower the LTV, the greater the buyers equity in the property. © 2011 Rockwell Publishing

57 Basic Loan Features Loan-to-value ratio Lenders prefer a lower LTV for two reasons: Borrower who makes larger investment will try harder to avoid foreclosure. If there is a foreclosure, lender more likely to recover full amount owed. Lenders use loan-to-value ratios in setting maximum loan amount for a transaction. © 2011 Rockwell Publishing

58 Basic Loan Features Secondary financing Secondary financing: Second mortgage loan to pay for part of downpayment and closing costs required for first loan. Source of secondary financing may be: institutional lender property seller private investor © 2011 Rockwell Publishing

59 Basic Loan Features Secondary financing Primary lender usually places restrictions on terms of secondary financing. For example: Borrower must qualify for combined payment for both loans. Borrower may still have to make a minimum downpayment out of own funds. Second loan may have to be payable at any time without penalty. © 2011 Rockwell Publishing

60 Basic Loan Features Interest rates Interest rate for mortgage loan may be either fixed or adjustable. Fixed-rate: Rate remains same throughout loan term. Adjustable-rate: Rate adjusted periodically throughout loan term to reflect current market interest rates. © 2011 Rockwell Publishing

61 Interest Rates Adjustable-rate mortgages Adjustable-rate mortgage (ARM): Initial interest rate set at current market rate, with possibility of future rate increases or decreases. Rate tied to a market index. Also called variable-rate loan. May have lower rate than fixed-rate loan. © 2011 Rockwell Publishing

62 Adjustable-rate Mortgages How an ARM works Key elements of an ARM: index margin adjustment periods caps possibility of negative amortization © 2011 Rockwell Publishing

63 How an ARM Works Index Index: Published statistical report that indicates changes in cost of money. ARMs interest rate tied to index selected by lender when loan made. After ARMs initial rate set, rate adjusted periodically, up or down, based on changes in selected index. © 2011 Rockwell Publishing

64 How an ARM Works Margin Margin: Difference between index rate and interest rate charged to ARM borrower. Lender adds margin to index rate to cover lenders expenses and profit. For example, margin might be 2 percentage points. Margin stays same throughout loan term. © 2011 Rockwell Publishing

65 How an ARM Works Adjustment periods ARM has two adjustment periods. Rate adjustment period: How often loans interest rate may change. Not changed every time index changes. Most common: one-year intervals. Payment adjustment period: How often monthly payment amount may change. Usually matches rate adjustment period. © 2011 Rockwell Publishing

66 How an ARM Works Caps ARM may have rate cap and/or payment cap. Interest rate cap: Limits how much lender may increase loans interest rate. Payment cap: Limits how much lender may increase monthly payment amount. Caps help prevent payment shock: sudden increase in payment so large that borrower defaults. © 2011 Rockwell Publishing

67 How an ARM Works Potential for negative amortization Negative amortization: When unpaid interest is added to principal, so loan balance goes up. Occurs if increases in ARMs monthly payment amount dont keep up with increases in its interest rate. Most ARMs now structured to prevent negative amortization. © 2011 Rockwell Publishing

68 Adjustable-rate Mortgages Hybrid ARMs Hybrid ARMs: Interest rate is fixed for certain number of years at beginning of loan term, then becomes adjustable. Example: 5/1 ARM has five-year fixed rate, then annual adjustments. Generally, longer fixed period = higher initial interest rate. © 2011 Rockwell Publishing

69 Summary Basic Loan Features Loan term Amortization Loan-to-value ratio Secondary financing Fixed-rate mortgage Adjustable-rate mortgage Index and margin Rate and payment adjustment periods Rate and payment caps Negative amortization © 2011 Rockwell Publishing

70 Applying for a Residential Loan Residential financing programs Major types of residential financing include: conventional loans FHA-insured loans VA-guaranteed loans Rural Housing Service loans © 2011 Rockwell Publishing

71 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 qualifying standards so the loans can easily be sold on the secondary market. © 2011 Rockwell Publishing

72 Residential Financing Programs Conventional loans Nonconforming loan: A conventional loan that doesnt meet Fannie Mae or Freddie Mac standards. Not as easy to sell nonconforming loan on secondary market, so lender may keep loan in its own portfolio. © 2011 Rockwell Publishing

73 Conventional Loans Loan-to-value ratios Traditional LTV for conventional loan is 80%, but conventional loans often have higher LTVs. Lenders generally allow LTV up to 95%. 97% LTV sometimes available, though no longer common. Lenders tend to have stricter rules for higher- LTV loans, especially if LTV is over 90%. © 2011 Rockwell Publishing

74 Conventional Loans Owner-occupancy Owner-occupancy not required for conventional loan. But lenders tend to impose stricter requirements on borrowers who are investors. Investor will be renting out house instead of living in it. Owner-occupants considered less likely to default. © 2011 Rockwell Publishing

75 Conventional Loans Private mortgage insurance Private mortgage insurance (PMI): Designed to protect lenders from greater risk of high- LTV loans. Insurance provided by private companies (not federal government). PMI generally required for any conventional loan with LTV over 80%. © 2011 Rockwell Publishing

76 Conventional Loans Private mortgage insurance PMI typically covers only top 20% to 25% of loan amount. If borrower defaults on loan with PMI, lender can: sell the property or relinquish it to insurer file claim for covered losses suffered, up to policy amount © 2011 Rockwell Publishing

77 Conventional Loans Private mortgage insurance As borrower pays off loan, LTV decreases, and eventually PMI has fulfilled its purpose. Federal Homeowners Protection Act requires lenders to cancel PMI once loan paid down to 80% of propertys original value, if requested by borrower. Once balance reaches 78%, lender must cancel PMI even without formal request. © 2011 Rockwell Publishing

78 Conventional Loans Qualifying standards Fannie Mae and Freddie Mac have detailed standards regarding credit history, income, and net worth. Depending on lender, underwriter may apply: both housing expense to income ratio and debt to income ratio, or only debt to income ratio Borrower may be required to have reserves to cover two or three months of payments. © 2011 Rockwell Publishing

79 Conventional Loans Assumption Most conventional loans have an alienation clause. Prevents borrower from selling property and arranging assumption of loan without lenders permission. Buyer in assumption usually must meet same qualifying standards lender uses for ordinary loan approval. © 2011 Rockwell Publishing

80 Summary Conventional Loans Conventional loan Nonconforming loan Loan-to-value ratio Owner-occupant Investor Private mortgage insurance Qualifying standards Assumption © 2011 Rockwell Publishing

81 Residential Financing Programs FHA-insured loans Federal Housing Administration (FHA) created in 1934 to promote home sales and financing for low- and middle-income buyers. FHAs main function: insuring mortgages. Mutual Mortgage Insurance Plan FHA is agency within Department of Housing and Urban Development (HUD). © 2011 Rockwell Publishing

82 Residential Financing Programs FHA-insured loans Buyers apply to FHA-approved lender. FHA does not accept loan applications from buyers. Lender must comply with FHA qualifying standards and other rules to have loans insured. If borrower defaults, FHA covers lenders losses. © 2011 Rockwell Publishing

83 FHA-Insured Loans Characteristics Term typically 30 years, but can be shorter. Property must be borrowers primary residence, but may have up to 4 units. FHA must have first lien position. Required downpayment less than for conventional loan. Mortgage insurance always required. No prepayment penalty allowed. © 2011 Rockwell Publishing

84 FHA-Insured Loans Loan amount Every area has local maximum FHA loan amount based on median housing prices. Theres also a ceiling that applies nationwide. Local limit cant exceed ceiling, no matter how high local prices are. © 2011 Rockwell Publishing

85 FHA-Insured Loans Loan amount In addition, loan amount for transaction limited by FHA loan-to-value rules. Maximum LTV for FHA loan: 96.5% (90% for borrower with low credit score). If LTV is 96.5%, borrower must make minimum cash investment of 3.5%. © 2011 Rockwell Publishing

86 FHA-Insured Loans Qualifying standards FHA qualifying standards less strict than conventional standards. For example, FHA has higher maximum income ratios. So FHA borrowers mortgage payment can be higher percentage of income than conventional borrowers payment. Easier to qualify for FHA loan. © 2011 Rockwell Publishing

87 FHA-Insured Loans Qualifying standards No maximum income limits. Buyer at any income level could qualify, as long as loan amount didnt exceed local maximum. FHA borrower needs sufficient funds for minimum cash investment and closing costs, but not required to have reserves. Secondary financing generally cant be used for minimum cash investment. © 2011 Rockwell Publishing

88 FHA-Insured Loans Mortgage insurance premiums Most FHA loans require both: one-time mortgage insurance premium paid at closing or financed annual mortgage insurance premiums paid in monthly installments © 2011 Rockwell Publishing

89 FHA-Insured Loans Assumption FHA loans closed before 1990 may be assumed without lenders approval, if seller does not need release of liability. Newer loans may be assumed only if buyer: meets FHA underwriting standards intends to occupy the home as primary residence © 2011 Rockwell Publishing

90 Summary FHA-Insured Loans Federal Housing Administration Mutual Mortgage Insurance Plan Primary residence Local maximum loan amount Minimum cash investment FHA qualifying standards One-time premium and annual premiums Assumption © 2011 Rockwell Publishing

91 Residential Financing Programs VA-guaranteed loans VA-guaranteed loan: Home loan made to U.S. military veteran and guaranteed by federal government. If borrower defaults, U.S. Department of Veterans Affairs (the VA) will reimburse lender for all or part of its loss. © 2011 Rockwell Publishing

92 VA-Guaranteed Loans Eligibility To be eligible for VA loan, borrower must have served period of active duty in the U.S. armed forces. Also eligible: spouses of deceased or missing veterans long-term members of National Guard or reserves © 2011 Rockwell Publishing

93 VA-Guaranteed Loans Application process Veteran applies to lender for loan, not to VA. VA issues Certificate of Eligibility to eligible veteran. Property must be appraised according to VA guidelines. Appraised value set forth in Notice of Value (also called Certificate of Reasonable Value). © 2011 Rockwell Publishing

94 VA-Guaranteed Loans Characteristics No downpayment required (100% LTV). VA doesnt set a maximum loan amount. VA qualifying standards much less strict than conventional standards. No mortgage insurance required; instead, veteran pays funding fee. Applicant must intend to occupy property, which may have up to 4 units. No prepayment penalty allowed. © 2011 Rockwell Publishing

95 VA-Guaranteed Loans VA guaranty Although VA doesnt set a maximum loan amount, there is a maximum guaranty amount. So if loan amount very large, lender typically requires small downpayment. Usual limit for no-downpayment loan: loan amount no more than four times guaranty amount. © 2011 Rockwell Publishing

96 VA-Guaranteed Loans Restoration of entitlement If a veteran pays off a VA loan: veterans full guaranty entitlement is restored veteran can obtain another VA loan with maximum guaranty Restoration of entitlement is also called reinstatement. © 2011 Rockwell Publishing

97 VA-Guaranteed Loans Substitution of entitlement If VA loan assumed, sellers entitlement restored only if buyer is eligible veteran willing to substitute her entitlement for sellers VA loan can be assumed by non-veteran, but sellers entitlement wont be restored. With or without substitution of entitlement, buyer must be creditworthy to assume VA loan. © 2011 Rockwell Publishing

98 VA-Guaranteed Loans Qualifying standards Only one income ratio (total debt to income ratio) applied in underwriting VA loan. Acceptable ratio much higher than conventional debt to income ratio. Underwriter also considers VAs residual income requirements. Borrower must have at least minimum income left over after paying all monthly tax and debt obligations. © 2011 Rockwell Publishing

99 Residential Financing Programs Rural Housing Service Loans Rural Housing Service: Federal agency within Department of Agriculture that makes and guarantees loans used to buy, build, or rehabilitate homes in rural areas. Aka RD (rural development) loans. RHS: makes direct loans guarantees loans made by approved lenders © 2011 Rockwell Publishing

100 Residential Financing Programs Rural Housing Service Loans For RHS financing, borrower must: not currently have adequate housing be able to afford the mortgage payments have a reasonable credit history choose a house that is modest in size and design © 2011 Rockwell Publishing

101 Summary VA Loans and RHS VA-guaranteed loan Certificate of Eligibility Notice of Value VA guaranty Restoration of entitlement Substitution of entitlement Total debt to income ratio Minimum residual income requirements Rural Housing Service loans © 2011 Rockwell Publishing

102 Applying for a Residential Loan Predatory lending Predatory lending: Making loans that take advantage of unsophisticated borrowers. Often targets the elderly, the poor, or people with limited English. Especially common in subprime market. May involve: unscrupulous lender, mortgage broker, appraiser, and/or real estate agent buyer or seller (deceiving other party) © 2011 Rockwell Publishing

103 Predatory Lending Predatory practices Examples of predatory lending practices: predatory steering fee packing loan flipping disregarding borrowers ability to repay balloon payment abuses excessive or unfair prepayment penalties fraud regarding fees, loan terms, etc. © 2011 Rockwell Publishing

104 Summary Predatory Lending Predatory lending Targeted borrowers Predatory steering Fee packing Loan flipping Disregarding ability to repay Balloon payment abuses Excessive prepayment penalties © 2011 Rockwell Publishing

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