Prelim-Quiz-26

FHA-INSURED loans
FHA, which operates under HUD, does not lend money itself. Rather, it
INSURES mortgage loans made by approved lending institutions. It does
not insure the property, but it does insure the lender against loss.
These loans allow for very low down payments, usually at 3%.
- FHAs also do high balanced loans but they don't do Jumbos

FHA 203(b)
The most widely used FHA mortgage is known as 203(b) and may be
placed on one- to four-family residences. The following are among the
requirements set up by the FHA before it will insure a loan.
1.) Owner/occupants-
The loan is available only to an owner/occupant, someone who intends
to live in the property as a primary residence. (Investors may
sometimes buy HUD foreclosures with 25 percent down.)
2.) Mortgage insurance premium-
In addition to paying interest, the borrower is charged a lump sum of
1.5 percent of the loan as a mortgage insurance premium (MIP). This
amount is payable in cash at the closing or may be financed for the
term of the loan. If the loan is subsequently paid off within the
early years of the loan, some refund of unused premium is due the
borrower from HUD.
-For an FHA loan placed after 2000, the FHA will drop MIP payments
when the principal balance has been reduced to 78 percent of original
purchase price, but only after the first five years.
-On FHA loans made since July 1991, borrowers are charged the initial
lump-sum premium at closing and also 0.05 percent MIP (mortgage
insurance premium) per month as interest for a number of years,
depending on the size of the down payment.

FHA loans cont'd

3.) Estimate of value-
The real estate must be evaluated by an FHA-approved appraiser. The
maximum loan will be a percentage of the appraised value. If the
purchase price is higher than the FHA appraisal, the buyer must pay
the difference in a higher cash down payment or may decide not to
purchase. On Section 203(b) loans, minimum down payment requirements
are less than 3 percent.
-FHA borrowers are allowed to finance a portion of their closing
costs. The amount is added to the base loan amount.
4.) Repairs-
The FHA requires its borrowers to be notified, before a purchase
contract becomes binding, that its appraisers estimate value rather
than condition in detail, and that use of a home inspector is
recommended. The FHA may, however, stipulate repair requirements that
must be completed before it will issue mortgage insurance on a
specific property. Certain energy-saving improvements may be financed
along with an FHA mortgage.
5.) Assumability-
Older FHA loans may be assumed by the next owner of the property with
no change in interest rate, no credit check on the buyer, and only a
small charge for paperwork. The assumer could be a
nonoccupant/investor. The original borrower is not released from
liability, however, unless the new borrower is willing to go through
a formal assumption, which involves the lender's approval of credit
and income.

For FHA loans made after December 15, 1989, the buyer wishing to
assume the mortgage must be a prospective owner/occupant and prove
financial qualification; the original borrower is then relieved of
liability. Optionally, the new borrower may pass a simple credit
check and the property a new appraisal, with the original borrower
sharing joint liability for five years after the assumption.

FHA loans cont'd

6.) Refinancing
The FHA offers a "streamline" refinancing for its loans, with minimal
closing costs.
7.) Other FHA programs-
Among other FHA programs, which may or may not be handled by a
particular local lender at any given time, are ARMs and special plans
intended for veterans, for rehabilitation of housing being purchased,
and for no-down-payment purchase of modest homes. Other FHA programs
are sometimes available to finance mobile homes, manufactured
housing, and condominiums. For first-time purchasers, the FHA offers
special discounts for teachers, firefighters, and police officers
buying HUD-foreclosed houses in "revitalization zones," and for
first-time buyers who complete a course in financial management.

The program known as FHA 203(k) allows money to be borrowed to cover

both the purchase and the rehabilitation of a house in need of
substantial repair.

VA GUARANTEED loans
The VA can GUARANTEE lending institutions against loss on mortgage
loans to eligible veterans. Because the VA guarantees part of the
loan, no down payment is required (though individual lenders may
sometimes ask for a small down payment). The primary difference
between the FHA and VA programs is that the VA can loan an eligible
borrower 100 percent financing. Even an FHA loan requires the
borrower to make an initial investment/down payment. It is used to
guarantee the top 25 percent of the loan, so in practice that amount
could cover a loan of up to $417,000. VA loans are intended only for
owner-occupied property that is owned by veterans, or veterans and
their spouses, and may be placed on one- to four-family residences.
While the guarantee comes from the federal government, the loan
itself is made by a local lending institution. The veteran pays a
funding fee directly to the VA at closing. The amount of the funding
fee depends on the size of the down payment:

-Nothing down or less than 5 percent: 2 percent

-Down payment between 5 and 10 percent: 1.5 percent
-10 percent or more down payment: 1.25 percent
-Assumptions of VA loans: 0.5 percent
Those eligible through national guard/reservist service pay an extra
0.75 percent in funding fee.

VA loans cont'd
Eligibility-
To qualify, a veteran must have a discharge that is "other than
dishonorable" and the required length of service:

-For those in the National Guard or the reserves, six years' service
-For those who enlisted before September 7, 1980, at least 90 days'
continuous active service since September 16, 1940 (or 90 days'
service during a war)
-For those who first enlisted after September 7, 1980, two years'
active duty
-Reservists called up for at least 90 days during the Persian Gulf
War, whether or not they went overseas

The veteran who applies for a VA loan must furnish a certificate of

eligibility

VA loans cont'd
Eligibility cont'd-
Veterans who have used some or all of their eligibility to guarantee
one loan sometimes can place another VA mortgage. Eligibility may
still be available if

-the first loan used only part of the guarantee;

-the original VA loan has been paid off and the home sold;
-the original VA loan was formally assumed by another veteran; or
-the applicant is the widow or widower of a veteran who died of a
service-connected disability and has not remarried.
Qualified veterans' home loan entitlement will be restored one time
only if the veteran has repaid the prior VA loan in full but has not
disposed of the property securing that loan. If veterans wish to use
their VA entitlement again, they must dispose of all property
previously financed with a VA loan, including the property not
disposed of under the "one time only" provision.