1. Residential Financing
Lecture 14
Residential Financing

2. Items To Consider When Shopping Home Loans
Size of Down Payment
Mortgage Interest Rate
Rate-Lock Period
Length of Grace Period
Late Charge for Overdue Payments
Prepayment Clauses/Penalties
Due-on-Sale Clause
Financing Costs/Points

3. Types of Home Loans Conventional Financing
Federal Housing Administration (FHA)
Department of Veterans Affairs (VA)

4. Residential Mortgage Loans
APPLICATION PROCEDURE
1. Complete and Submit Loan Application
2. Within 3 business days, Lender provides the borrower:
- Good Faith Estimate of Settlement Costs
- Truth-In-Lending disclosure statement, demonstrating costs of mortgage financing considering all financing costs
- U.S. HUD booklet explaining RESPA protections to the borrower

5. Residential Mortgage Loans
APPLICATION PROCEDURE
3. Lender obtains credit reports of borrower from three sources
4. Borrower provides to the lender W-2 tax information, income statements, verification of employment and history, proof of assets (bank statements), etc.
5. Loan goes through “underwriting”
-Borrower’s current and expected debt obligations, credit review

6. Conventional Mortgage Loans: Private Mortgage Insurance (PMI)
Insures lenders against deficiency losses on mortgages that are considered risky because they are loans with low down payments
Required for LTV ratios over 80% (20% equity capital, 80% debt capital)
Typically insures top 20% to 25% of the debt capital (NOT sales price)

7. Federal Housing Administration (FHA)
Loans made by supervised lending institutions
which are partially insured by the U.S. Government
MAXIMUM LOAN LIMITS - JACKSONVILLE MSA (2006)
One Family: $209,000
Two Family: $256,248
Three Family: $309,744
Four Family: $384,936

8. Federal Housing Administration (FHA)
INSURANCE PREMIUM
1. Funding Fee: 2.25% of loan for 30-year, 2.00% for 15-year.
(can be financed into the loan)
2. Mortgage Insurance Premium (MIP): Annual premium of 0.5% of the loan amount (paid monthly) for 30-year loans, 0.25% for 15-year loans.

9. Department of Veterans Affairs (VA)
Loans made by supervised lending institutions
which are partially guaranteed by the U.S. Government
Primary Benefit: Zero-Down Payment Financing
Loan applicant must be active for 181 days if currently listed in armed forces
Discharged Personnel: Must have served at least two years to apply
Application for a VA loan the same as conventional or FHA financing, but further requires a Certificate of Eligibility

10. Department of Veterans Affairs (VA)
INSURANCE PREMIUM
1. Funding Fee (based on amount of down payment):
First Use: 1.25% to 2%
Additional Uses: 1.25% to 3%
National Guard Duty: 2% to 2.75%
(can be financed into loan or paid up-front)
2. NO MIP REQUIRED

11. Other Types of Residential Financing
Lecture 14
Other Types of Residential Financing

12. Types of Residential Financing
15-Year Loan
Faster loan maturity
Lower interest rates than 30-year term
Lower total interest due than 30-year term
7-Year Balloon (Interest-Only Financing)
Lower monthly payment; larger “balloon” payment due at end of term
Borrower anticipates selling before balloon due, or makes arrangements for refinancing balloon amount (loan balance).

13. Types of Residential Financing
Adjustable Rate Mortgage (ARM)
May be able to obtain a lower interest rate than a FRM mortgage because a lender is not locked-down in a high-rate market
Borrower accepts risk of floating interest rates
Buyer somewhat protected by interest rate caps
Interest rates marked by indices such as LIBOR, U.S. Treasury Securities, etc.
Offer “teaser rates” at the beginning

14. Types of Residential Financing
80 / 20 Loans
80% 1st Mortgage, 20% 2nd Mortgage
No MIP/PMI
Some Loans allow 2nd Mortgage to be open-ended, similar to a credit card

15. Borrower Competition for Mortgage Money
Lecture 14
Borrower Competition for Mortgage Money

16. Competition For Mortgage Money
Government
Business
Households

17. Types of Mortgage Lenders
Lecture 14
Types of Mortgage Lenders

18. Mortgage Lenders Mortgage Companies Commercial Bank
Mortgage Bankers, Mortgage Brokers
Commercial Bank
Thrift Institutions
Savings & Loan Associations, Savings Banks, Mutual Savings Banks, Credit Unions
Individuals