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1 Table of Contents Chapter One: Mortgages... 3 Important Terms... 3 Mortgage Markets Defined... 4 Lenders / Loan Originators... 4 Types of Real Estate Loans... 5 Federally Regulated... 5 Types of Federally Regulated Loans... 5 Conventional Loans... 5 Conforming and Non-Conforming Loans... 6 Non-Conforming... 6 Fixed Mortgages and ARMs... 6 Reverse Mortgages... 7 Loan Package... 7 Mortgage... 7 Deeds of Trust... 8 The Lending Process... 8 Borrower Qualifications... 8 Underwriting... 9 Closing... 9 Title Agents and Settlement Attorneys RESPA Loan Payments Chapter Two: FHA Mortgage Programs FHA Programs Section 203(b) Loans Adjustable Rate Mortgages Graduated Program Mortgages Growing Equity Program Energy Efficient Mortgage Program Condominium Mortgage Program Special Rehabilitation Loan Programs Qualifying for FHA Loans Chapter Three: VA Guaranteed Loans Eligibility...16 Military Service Requirements for VA Loan Eligibility: Maximum Guaranty for VA Loans VA Loan Requirements Value Application Maximum Loan Length Location of Property Maximum Loan Amount Moseley Flint Schools of Real Estate 1

2 Chapter Four: Virginia Housing Development Authority Loans First-Time Homebuyer Programs Conventional Fixed FHA Insured Loans FHA Plus st Choice Interest Only Loan VA Guarantee Loans Rural Housing Services (RHS) Guarantee Loans Step Rate Loans VHDA Home Loan Requirements First-Time Homebuyers Maximum Net Worth Occupancy Other General Eligibility Requirements Flexible Alternative Programs Flex/Alt Flex/Alt Advantage Flex/Alt Home Enhancer Flex/Alt Home Access Flex/Alt Condominium Program Special Programs Chapter Five: Calculating Mortgage Payments How Much is The Payment? How Much Can I Qualify For? Online Calculators Moseley Flint Schools of Real Estate 2

3 Chapter One: Mortgages Important Terms Let s first look at the terms you will need to understand as you study this course: Amortization. The liquidating of a mortgage by making periodic payments. ARM. An adjustable rate mortgage. An ARM has an amortization schedule that provides for changes in the amount of the monthly payments, generally based on annual adjustments to the interest rate. Discount Points Points are fees charged by a lender to reduce the initial interest rate. One point is equal to one percentage of the loan amount. The borrower pays points to reduce the interest rate on the loan, and points are considered prepaid interest for tax purposes. Due-on-Sale Clause. A mortgage clause that prohibits the borrower from selling or transferring the property without prior written consent from the mortgagee. Escrow Account. Any checking, demand, passbook or statement account insured by an agency of the United States government maintained in an authorized depository for money that belongs to others. Funds to be distributed in a real estate transaction are generally held in an escrow account until the real estate transaction is completed. Hazard Insurance: Insurance that pays for physical damage to the property. Mortgagee. The party (lender) to whom property is conveyed under a mortgage as security for the repayment of a loan or fulfillment of some obligation. Mortgagor. The party who gives a mortgage (borrower) conveying interest in the property to the lender as security for the obligation to repay a loan or fulfill some obligation. Note. A written instrument acknowledging a debt and promising payment. Recording. Entering an instrument in a book of public record in the office of the county clerk and recorder. Recording constitutes constructive notice to all persons of the rights or claims contained in the instrument. Title. In real property, the right or evidence of the right, to ownership. Moseley Flint Schools of Real Estate 3

4 Title Insurance. Indemnification of a policyholder from loss due to a title defect, provided the loss does not result from a defect excluded by the policy provisions. Mortgage Markets Defined The primary mortgage market consists of any financial institution that loans mortgage money to the public. The secondary market purchases mortgage loans from the primary mortgage market. This provides funding to the primary market players so that there is money to lend. In the secondary market, loans are packaged and sometimes divided into interest and principal segments, and sold to investors. Lenders / Loan Originators There are many different types of real estate lenders/loan originators in the primary mortgage market today. Most of them are direct lenders or work with direct lenders. Savings and loans and commercial banks are examples of direct lenders. Direct lenders fund the loans they offer themselves, and do not always rely on selling their loans in order to obtain funds. Direct lenders generally fall into three categories. A direct lender may perform in all three categories, or may specialize in one area. Portfolio lender These lenders originate loans themselves and keep them for their own investment portfolio, so they do not have to worry about selling them on the secondary market. Because of this, the loans they offer are not subject to Fannie Mae or Freddie Mac rules. However, once a loan from a portfolio lender has been paid off for a year with no late payments, it is seasoned. A seasoned loan can then be sold on the secondary market. Wholesale Lender Often a wholesale lender is a branch of a mortgage banker or a portfolio lender. They offer loans to mortgage brokers at lower prices then would be offered to the public. Mortgage Bankers A mortgage banker can create loans and sells them directly on the secondary market. They can fund their own loans, but generally do not. So, some mortgage bankers are direct lenders, and some are not. Companies that work with direct lenders in offering loans are generally one of the following types: Mortgage Brokers A broker originates loans with different wholesale mortgage companies. They may essentially buy the loan, and add their own fee to the price of the wholesale lender. However, once the loan has been decided upon, the customer loan file gets turned over to Moseley Flint Schools of Real Estate 4

5 the wholesale lender. Therefore, the broker does not fund or underwrite loans. Correspondent A correspondent is a lender that creates and closes its own loans. But, instead of selling them in pools on the secondary market, they sell the loans to a bigger lender who then sells them on the secondary market. This type of entity is very similar to a mortgage broker but there is a strong relationship with one lender. Credit unions most often fall into this category. Types of Real Estate Loans There are several ways to classify real estate residential loans. They can be classified by what entity funds the loan, by to whom they are sold and by what sort of payment plan is offered. Federally Regulated Federally guaranteed or insured loans are either funded by the government, or by certain government chartered corporations, such as Fannie Mae and Freddie Mac. Federally regulated loans are generally not as hard to obtain as nongovernment (conventional) loans. Some of the benefits of federally regulated loans is that they offer lower interest rates then conventional loans and they have more liberal down payment requirements than conventional loans. Types of Federally Regulated Loans Veterans Affairs (VA) loans are guaranteed by the U.S. Dept. of Veteran Affairs; the VA does not directly offer the loans. However, once a borrower is guaranteed through the VA loan program, they are able to obtain a loan with a lower interest rate than generally found in a conventional loan issued in the same market, and a down payment may not be required. Federal Housing Administration (FHA) loans are offered in many forms. These loans are fairly easy to qualify for, as compared with conventional loans, and there is generally a low down payment. Rural Housing Service (RHS) loans require no down payment, along with low closing costs. Many states, counties and large cities offer their own housing programs. These programs are generally similar to the ones above, and are also geared towards the first- time house buyer. We will look at the Virginia Housing Development Authority s programs later in this course. Conventional Loans Conventional loans are real estate loans that are not offered or guaranteed by the federal government. Moseley Flint Schools of Real Estate 5

6 Conforming and Non-Conforming Loans Conventional loans can be either conforming or non-conforming loans. A conforming loan is one that meets Fannie Mae/Freddie Mac s standards for loans. Each year, Fannie Mae and Freddie Mac determine the standards for conforming loans by defining the terms of the following criteria: Loan Amounts Borrower Credit Ratings and Profile Income Requirements Down Payment Requirements Suitable Property Types Many conventional loans are tailored to meet Fannie Mae and Freddie Mac s guidelines because they buy a large chunk of home loans in the secondary market. Non-Conforming If a loan does not meet Fannie Mae and Freddie Mac s standards, it is called a non-conforming loan. Non-conforming loans are offered by banks not wanting to sell them to Fannie Mae or Freddie Mac. Or, they can fall into one of two categories: jumbo loans, or B/C loans. A jumbo loan is where the loan amount is too high for a conforming loan. As a result these loans generally have a higher interest rate. (B/C loans) are for people whose credit history does not qualify them for an A or a normal loan. These loans are often considered to be shortterm until the time the borrower can qualify for an A loan. Fixed Mortgages and ARMs Fixed mortgage loans and Adjustable Rate Mortgages (ARMs) are two different types of loans with different interest rate structures. A fixed loan is a loan that has an interest rate that never changes (or is fixed) over the life of the loan. An Adjustable Rate Mortgage s interest rate does change over time. There are several different kinds of ARMs. The most common type has a rate that changes in relation to a money index that the mortgage company has chosen. To entice customers, the first year rate of an ARM will generally be lower than the rate in fixed mortgages, but after the first year (or after a time period specified in the loan), the mortgage rate will fluctuate, and may be higher than fixed mortgages issued at the same time. There is generally a cap on the adjustable loan s rate. This cap limits how much the interest rate can rise, regardless of the result of the rate index calculation. There is generally both an annual cap and a lifetime cap. For example, an ARM may offer a first year rate of 4%. Thereafter, the rate can Moseley Flint Schools of Real Estate 6

7 change annually, but can never increase by more than 1% per year, and the maximum rate on the loan may never be higher than 9%. Reverse Mortgages Reverse mortgages are becoming more popular today. This special type of mortgage is for people over the age of 62 who would like to supplement their income. The mortgage company buys the house, and then pays the former owner the payments in a lump sum, or in installments. Loan Package The home loan package is made up of several important documents. First, it always contains a Note. The Note specifies the terms of the loans and the legal responsibilities to pay it. The Note includes: The identity of the parties involved in the transaction A promise to pay on the part of the borrower The date signed The due dates of the payments The amount of the payments The interest rate The term of the loan The security that is attached to the loan Signatures of parties, including co-signers, if any Also included is a mortgage document or a Deed of Trust. Whether a mortgage or a Deed of Trust is used is determined by state law and the wishes of the lender and borrower. Some states do not recognize both types of instruments. Mortgage A mortgage is recorded at the office of the recorder in the county where the property is located. A mortgage is a conditional conveyance of property as security for the payment of a debt or the fulfillment of some obligation. Upon payment of the debt or performance of the obligation, a mortgage automatically becomes void. The mortgage document includes: The identities of the borrower (or mortgagor) and the lender (or mortgagee) The granting clause that gives the borrower s rights and the lender s interest in the property The description of the property A reference to the Note An acceleration clause that allows the mortgagee to demand payment in full if the borrower is in default Moseley Flint Schools of Real Estate 7

8 The covenant of seisin that gives the mortgagor title to the property and the ability to use it as collateral A due on sale clause that prohibits the mortgagor from selling or transferring the property without written consent from the mortgagee A requirement to pay property taxes and insurance as part of the mortgage payment is found in some mortgages Signatures of the parties Deeds of Trust A Deed of Trust is used in a situation when a trust is set up to hold the collateralized property and a third-party trustee is named to administer the collection of payment and other transactions related to the loan. The lender is the beneficiary of the trust. If the borrower defaults on payment, the trustee may foreclose on the property, for the benefit of the lender. When the loan is paid in full, the trustee reconveys the property to the borrower, through the provisions of the release clause in the Deed of Trust. The Lending Process The first step in the lending process is when a potential borrower contacts a lender. This may be done by visiting the offices of a direct lender, by using a mortgage broker, or even via the Internet. Borrower Qualifications To obtain a home or real estate loan, the borrower must first qualify for the loan. The lender or broker gathers information relating to the borrower s revenue and expenses. A common form used to collect this information is the Uniform Residential Loan Application. This application includes information such as the type of mortgage, terms of the loan, property information, personal information, employment information, the borrower s assets and liabilities, monthly revenue and expenses, and other details and declarations pertinent to the mortgage. The information in this application is evaluated and it is determined if the borrower meets the lender s requirements. The first thing that the lender generally checks is the ratio of the borrower s monthly expenses to his or her monthly revenue. Generally, to qualify for a conventional loan, housing expenses, i.e., principal, insurance and taxes, cannot be more than 28% of revenue. The company then adds any other debt expenses of the borrower. If the resulting ratio totals 36% or less, the borrower s file can move onto the next step. Moseley Flint Schools of Real Estate 8

9 The borrower s credit history report is an important part of the qualification process. This report shows how regularly payments are made and what type and amounts of credit is outstanding. The lender also looks at: Equity Credit history Liquid assets Debt-to-income ratio Work status Loan term Rate and payment structure Housing status of property Funds from other people Loan purpose Number of borrowers Prior bankruptcies Prior mortgage delinquencies Of these elements, according to Fannie Mae, equity, credit history, and liquid assets are the most important. However, if one borrowing criteria does not look favorable, other areas of strength can make up for it. Underwriting A loan goes to underwriting for approval. The underwriters examine the information provided and determine whether or not the borrower qualifies. In the last several years, the underwriting process has begun relying more and more on computer technology. For example, it is now possible for lenders and brokers to send applications for loans to underwriting through Fannie Mae or Freddie Mac s underwriting programs. The computerized programs refer the loan to the underwriters with a rating of approval, approval with caution, or refer to someone else. The underwriter can then examine the application and determine whether the applicant qualifies. Conventional lenders also are relying more and more on computerized exchange of loan applications and files, greatly speeding up the underwriting process. Closing If the loan is approved, the loan moves into the closing process. During closing, the following steps occur: Legal documents are prepared An escrow account is normally established to hold transaction funds until distributed Closing statements are prepared Evidence of marketable title is established Moseley Flint Schools of Real Estate 9

10 Evidence of in force hazard insurance is established Parties are notified of the closing date and place Documents are signed The Deed is transferred The Loan is recorded Money is distributed Title Agents and Settlement Attorneys The person who makes sure all the loan and closing documents are signed and delivered to the appropriate parties may be a settlement attorney, an agent for the title insurance company, in some states, a real estate broker, an employee of the lender, or other designated individual. In some states, this individual must be licensed. The individual is generally also a notary public. RESPA The Real Estate Settlement Procedures Act (RESPA) requires that lenders provide borrowers with certain statements and disclosures. Lenders who are involved with a federally related mortgage loan must comply with the requirements of RESPA. A federally related mortgage loan is not limited to loans insured or guaranteed by the federal government, but also to loans offered by any financial institution with federally insured or regulated deposits. Among the requirements of RESPA are that the lender must provide the borrower with a Settlement Costs Booklet, prepared by HUD. This booklet provides the borrower with information about the real estate loan process. RESPA also requires the lender to provide the borrower with a good-faith estimate of the settlement charges related to the loan, at the time of application. Such charges may include items such as the loan origination fee, appraisal fee, credit report generation fee, title search fees, legal fees, and documentation preparation fees. RESPA also gives the borrower the right to examine the Uniform Settlement Statement, which gives the final breakdown of the loan proceeds, closing charges, taxes due, and amounts to and from the borrower and seller. For more information about RESPA, see HUD s website: Loan Payments Mortgage loan payments can include more than just the payment for the dwelling and property. All mortgage loan payments includes the principal amount plus interest. At the outset, most of the payment amount goes toward interest, but as time goes on, more of the payment pays for the principal amount. Moseley Flint Schools of Real Estate 10

11 Also added into many real estate loan payments is PMI, or Principal Mortgage Insurance. This is added if the principal amount is more than 80% of the property s value. If the down payment was less then 20% of the buying price, PMI is normally required. PMI is generally.5% of the yearly loan balance. Once the equity in the collateral is greater than 20% of the buying price, PMI no longer has to be paid. It is also common to have property taxes and hazard insurance payments included in the mortgage payments. This allows the borrower to pay these housing related expenses all in one lump sum, and not have to worry about making several different payments each month. 1. FHA loans include: a. strict qualification requirements b. high down payment requirements c. lower down payment requirements than conventional loans d. higher interest rates than conventional loans Answer C 2. What is the definition of a conventional loan? a. A loan controlled by the government. b. A loan regulated by Fannie Mae c. A loan with a fixed rate d. A loan not offered or guaranteed by the government Answer D 3. A conventional loan that does not meet Fannie Mae or Freddie Mac standards is known as a: a. conforming loan b. non-conforming loan c. government loan d. fixed mortgage loan Answer B 4. What does ARM stand for? a. Adjustable Rate Mortgage b. Annual Rate Mortgage c. Adjustable Refinancing Money d. Administrative Replacement Math Answer A Moseley Flint Schools of Real Estate 11

12 5. A form commonly used to collect borrower information for a loan is: a. the Good Faith Estimate b. the Uniform Residential Loan Application c. the Fannie Mae Underwriting Application d. the HUD-1A Form Answer B 6. The step in the lending process that includes preparation of legal documents, establishing an escrow account, transferring the property Deed and recording the loan is: a. underwriting b. foreclosure c. application d. closing Answer D 7. The federal Act that requires lenders to provide borrowers with certain statements and disclosures, such as the Uniform Settlement Statement, is: a. RESPA b. The Homestead Act of 1862 c. The GI Bill d. CRA of 1977 Answer A 8. When does PMI generally have to be paid? a. When the borrower pays less than 80% in down payment. b. When the borrower pays more than 20% in down payment. c. When the borrower pays less than 20% in down payment. d. When the borrower pays more than 80% in down payment. Answer C Moseley Flint Schools of Real Estate 12

13 Chapter Two: FHA Mortgage Programs The Federal Housing Administration, or FHA, is a federal entity under the authority of the Department of Housing and Urban Development (HUD). FHA insures certain mortgages to enable low-to-moderate income individuals to purchase homes. The credit rules used to determine who qualifies for an FHA insurance mortgage are not as strict as those for other federally sponsored loan programs, such as those from the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. The FHA does not make loans, but rather provides insurance to lenders that protects the lenders against the risk of default on loans made that qualify under an FHA mortgage program. FHA insured loans are made only for family residences from one to four units. They may be single-family residences, condominiums or town homes. Certain homes, such as manufactured homes, have additional FHA requirements in order to be eligible for insurance. FHA Programs FHA provides insurance under a variety of programs. Let s take a look at them. Section 203(b) Loans Sections in the Federal Housing Act provide for various FHA mortgage insurance programs. Loans based on the Section 203(b) program are the most common type of FHA insured loan. These loans are for the purchase or refinancing of one-to-four unit family housing. The down payment may be as low as 3% of the price of the home, and some closing costs may be financed as part of the loan. These payment conditions can make it easier for an individual who doesn t have the traditional 10% down payment plus closing costs that other loans require, to purchase a home. The borrower must pay an up-front mortgage insurance premium, which also may be financed as part of the loan, and must pay monthly insurance premiums. Fees charged by the lender may be limited in order for the loan to qualify for FHA mortgage insurance. These limits also help reduce the amount of cash the borrower must provide to qualify for the loan. The amount of the loan that may be insured is limited under HUD regulations. The maximum amounts, which may vary by state and county within a state, can be found at HUD s website, but are generally from about $81,000 to $161,000. Adjustable Rate Mortgages Section 251 provides insurance for adjustable rate mortgages (ARMs). ARMs allow borrowers to obtain loans at a low initial rate, and then the rate adjusts up Moseley Flint Schools of Real Estate 13

14 or down after the initial rate expires. This type of program is generally most attractive when interest rates are high. The rates on such loans may only adjust by up to one percentage point in any one year. The rate may only increase by 5 percentage points from the initial rate over the life of the loan. The down payment for this type of loan may be as little as 3% and some of the closing costs may be financed into the loan, as can be done with the fixed fate Section 203(b) program. Graduated Program Mortgages Another insurance program offered through FHA is the Section 245 program. Under this program, payments for the mortgage are lower in the early years of the mortgage and increase each year for the first five or ten years of the mortgage. This type of program is for borrowers who expect their incomes to increase significantly during the early part of the mortgage period. As with other FHA programs discussed, down payments can be as low as 3% and closing costs may be financed into the loan. Growing Equity Program The Section 245(a) program is similar to the Section 245 program, where payments are lower during the early years of the mortgage. However, under this program, insurance is provided for mortgages where the schedule increases in the mortgage payment may be applied to principal, so that the loan term may be shortened. Energy Efficient Mortgage Program Under the Energy Efficient Mortgage (EEM) program, the borrower can finance the cost of adding energy efficient features to the home into the mortgage. The addition of the energy efficient features leads to savings on utility bills for the borrower. Condominium Mortgage Program FHA mortgage insurance is also available for certain loans for the purchase of a condominium unit. The condominium must meet certain requirements in order for FHA mortgage insurance to be available. For example, the condominium unit must be in a condominium building that contains at least four dwelling units. If it is in a building that was converted from rental housing, the conversion must have occurred more than one year before the application for FHA insurance, the borrower must have been a tenant of the rental housing, or the conversion must be sponsored by a tenant s organization that represents a majority of the households in the project. Moseley Flint Schools of Real Estate 14

15 Special Rehabilitation Loan Programs FHA also offers mortgage insurance for homes that need significant repairs or remodeling. The Section 203(k) program provides for the rehabilitation of homes over 1 year old, and homes damaged by a natural disaster and located in a Presidential declared disaster area. Section 203(h) programs are available for homeowners and renters whose homes have been destroyed or are uninhabitable due to a natural disaster. The home must be within a Presidential declared disaster area to qualify for this loan. This program does not require a down payment. Qualifying for FHA Loans Following are the basic FHA loan qualification guidelines: Two Years of steady employment, preferably with same employer. Last two years of income should be the same or increasing. Credit report should typically have less than two thirty-day lates in the last two years. Bankruptcies must be at least two years old, with good credit since. Foreclosures must be at least three years old, with good credit since. 7. FHA insured loans are made for family residences: a. from two to four units b. from one to four units c. that are comprised of one unit only d. that are comprised of any number of units Answer B 8. The maximum amount of an FHA 203(b) insured loan: a. is $250,000 b. is $1,000,000 c. is $100,000 d. may vary by state and county and is from about $81,000 to $161,000 Answer D 9. The FHA program that allows the borrower to finance the cost of adding energy efficient features to the home into the mortgage is the: a. Graduated Program Mortgage b. Adjustable Rate Mortgage Program c. Energy Efficient Mortgage Program d. Rehabilitation Loan Program Answer C Moseley Flint Schools of Real Estate 15

16 Chapter Three: VA Guaranteed Loans The Department of Veterans Affairs, or VA, provides a mortgage guaranty program to help veterans, reservists and those in the National Guard purchase homes. This program protects lenders from the risk of default by guaranteeing that a portion of the loan will be repaid, even if the borrower defaults. VA guaranteed loans can be used: to buy a home or a condominium unit in a VA-approved project. to build a home to purchase and improve a home to improve a home by installing energy-related features, such as solar or heating/cooling systems, water heaters, insulation, weather-stripping/caulking, storm windows/doors or other energy efficient improvements approved by the lender and VA. These features may be added with the purchase of an existing dwelling or by refinancing a home owned and occupied by the veteran. A loan can be increased up to $3,000 based on documented costs or up to $6,000 if the increase in the mortgage payment is offset by the expected reduction in utility costs. A refinancing loan may not exceed 90 percent of the appraised value plus the cost of the improvements. to finance an existing home loan up to 90 percent of the VA-established reasonable value or to refinance an existing VA loan to reduce the interest rate. to buy a manufactured home and/or lot. Eligibility There are military service requirements for VA loan eligibility: Military Service Requirements for VA Loan Eligibility: *NOTE: Applications involving other than honorable discharges will usually require further development by VA. This is necessary to determine if the service was under other than dishonorable conditions. Wartime - Service during: WWII 09/16/40 to 07/25/47 Korean 06/27/50 to 01/31/55 Vietnam 08/05/64 to 05/07/75 The individual must have at least 90 days on active duty and been discharged under other than dishonorable conditions. If the individual served less than 90 days, he may be eligible if discharged for a service connected disability. Moseley Flint Schools of Real Estate 16

17 Peacetime - Service during periods: 07/26/47 to 06/26/50 02/01/55 to 08/04/64 05/08/75 to 09/07/80 (enlisted) to 10/16/81 (officer) The individual must have served at least 181 days of continuous active duty and been discharged under other than dishonorable conditions. If the individual served less than 181 days, he may be eligible if discharged for a service connected disability. Service after 09/07/80 (enlisted) or 10/16/81 (officer) If the individual was separated from service which began after these dates, he must have: (a) Completed 24 months of continuous active duty or the full period (at least 181 days) for which the individual was ordered or called to active duty and been discharged under conditions other than dishonorable, or (b) Completed at least 181 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship), or 10 USC 1171 (Early out), or have been determined to have a compensable service-connected disability; (c) Been discharged with less than 181 days of service for a serviceconnected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances for the convenience of the Government. Gulf War - Service during period 08/02/90 to date yet to be determined If the individual served on active duty during the Gulf War, he must have: (a) completed 24 months of continuous active duty or the full period (at least 90 days) for which the individual was called or ordered to active duty, and been discharged under conditions other than dishonorable; or (b) completed at least 90 days of active duty and been discharged under the specific authority of 10 USC 1173 (Hardship), or 10 USC 1173 (Early out), or have been determined to have a compensable service-connected disability, or (c) been discharged with less than 90 days of service for a serviceconnected disability. Individuals may also be eligible if they were released from active duty due to an involuntary reduction in force, certain medical conditions, or, in some instances, for the convenience of the Government. Moseley Flint Schools of Real Estate 17

18 Active Duty Service Personnel If the individual is now on regular active duty (not active duty for training), the he is eligible after having served 181 days (90 days during the Gulf War) unless discharged or separated from a previous qualifying period of active duty service. Selected Reserves or National Guard If the individual is not otherwise eligible and the individual has completed a total of 6 years in the Selected Reserves or National Guard (member of an active unit, attended required weekend drills and 2-week active duty for training) and (a) were discharged with an honorable discharge; or (b) were placed on the retired list; or (c) were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable service; or (d) continue to serve in the Selected Reserves. Individuals who completed less than 6 years may be eligible if discharged for a service- connected disability. The individual may also be determined eligible if he: (a) is an unremarried spouse of a veteran who died while in service or from a service connected disability, or (b) is a spouse of a serviceperson missing in action or a prisoner or war. [NOTE: Also, a surviving spouse who remarries on or after attaining age 57, and on or after December 16, 2003, may be eligible for the home loan benefit. However, a surviving spouse who remarried before December 16, 2003, and on or after attaining age 57, must apply no later than December 15, 2004, to establish home loan eligibility. VA must deny applications from surviving spouses who remarried before December 16, 2003 that are received after December 15, 2004.] Eligibility may also be established for: (a) certain United States citizens who served in the armed forces of a government allied with the United States in WWII. (b) individuals with service as members in certain organizations, such as Public Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with WW II service, and others. Moseley Flint Schools of Real Estate 18

19 Maximum Guaranty for VA Loans The total amount of the loan is not guaranteed by the VA. Only the top portion of the loan is guaranteed. The VA guaranty can be used as the down payment on a loan. The maximum amount for which VA will guaranty a loan is based on the eligible individual s entitlement. The basic entitlement is $36,000. For loans in excess of $144,000 to purchase or construct a home, additional entitlement up to an amount equal to 25 percent of the Freddie Mac conforming loan limit for a single family home may be available. This loan limit changes yearly. Qualified veterans could get a no down payment purchase loan of up to $359,650 effective January 1, The maximum guaranty on a VA loan is the lesser of, the veteran s available entitlement (plus $24,000 for purchase or construction loans or Interest Rate Reduction Refinancing Loans (IRRRL) greater than $144,000), or the maximum potential guaranty amount indicated below: Loan Amount Loan Type(s) Maximum Potential Guaranty Up to $45,000 All 50 percent of the loan amount $45,001 to $56,250 All $22,500 $56,251 to $144,000 All 40 percent of the loan amount, with a maximum of $36,000 Greater than $144,000 Must be for: Purchase or construction of a home, or Purchase of a condominium unit, or Refinancing with an IRRRL 25 percent of the loan amount, with a maximum of $60,000 The percentage and amount of guaranty is based on the loan amount including the funding fee portion when the fee is paid from loan proceeds. Moseley Flint Schools of Real Estate 19

20 VA Loan Requirements In order to qualify for loan guarantees, a loan must meet certain requirements. Value VA will not guarantee loans that exceed the property s value. There is a VA appraisal required for the guaranteed loan program, which is normally requested by the lender. The purpose of the appraisal is to ensure that the amount the borrower agrees to pay for the property is not over VA s estimate of the property s value. After the appraisal is complete, the appraiser issues a Certificate Of Reasonable Value (CRV), or a Lender s Notification of Value (NOV). Application The VA application form is the same as that used for FHA, HUD and conventional loans. The lender reviews the application to see that the applicant meets VA eligibility requirements, verifies the applicant s income and assets, and obtains a credit report. The applicant must be an eligible veteran, and the veteran must occupy or intend to occupy the property as a home within a reasonable period of time after closing the loan. The veteran must also be a satisfactory credit risk, and the income of the veteran and spouse, if any, must be stable and sufficient to meet mortgage payments, as well as other obligations and expenses. Assuming the appraisal value and the applicant s finances and credit history are satisfactory, most lenders can close the loan under VA s automatic processing. Only about 1% of loans have to go to VA before closing for further consideration of the application. Maximum Loan Length The maximum loan length allowed for VA amortized loans is 30 years, 32 days. For non-amortized loans, the maximum length is 5 years. Location of Property The real property securing a VA guaranteed loan must be located in the US, its territories or possessions (Puerto Rico, Guam, Virgin Islands, American Samoa, and the Northern Mariana Islands). Maximum Loan Amount There are no prescribed maximum loan amounts for VA guaranteed loans. For more information, see the VA website at Moseley Flint Schools of Real Estate 20

21 10. The Department of Veterans Affairs: a. issues loans to eligible veterans b. provides a mortgage guaranty program c. gives direct payments to eligible veterans for the purpose of making a down payment on a home d. offers FHA loans Answer B 11. Which of the following are elements of the VA guaranty loan program? a. the whole loan is guaranteed b. the top portion of the loan is guaranteed c. any veteran is eligible, regardless of length of service or reasons for discharge d. there are length of service requirements that must be met in order for a veteran to be eligible. Answers B & D 12. An appraisal: a. is not required for VA guaranteed loans b. for VA property may not have an estimated value that exceeds $300,000 c. must be performed by a federal employee for VA guarantee loans d. is required for VA guaranteed loans Answer D Moseley Flint Schools of Real Estate 21

22 Chapter Four: Virginia Housing Development Authority Loans The Virginia Housing Development Authority (VHDA) has Homeownership Loan Programs available to help low- to moderate-income Virginians attain quality, affordable housing. There are programs for first-time homebuyers and those who have purchased homes before. These programs are funded by taxable and tax-exempt bonds issued by VHDA. First-Time Homebuyer Programs VDHA offers the following programs for first-time homebuyers: Conventional Fixed The conventional fixed program offers the lowest fixed payment for eligible applicants with good credit and employment history. Conventional private mortgage insurance can be used to allow loans up to 103% of the sales price. The program offers a fixed, below-market rate, along with fixed payments. Loans with zero down payment can be made through this program, and closing costs may be financed into the loan. FHA Insured Loans The VHDA includes FHA loans in its programs for first-time homebuyers. FHA loans have more liberal credit qualifying rules than do conventional loans. FHA loans require a low down payment. FHA Plus An FHA Plus is an FHA loan with a second loan to help the applicant pay for the down payment. This VDHA program can include a zero down payment and financed closing costs. 1 st Choice Interest Only Loan Under this VHDA program, the borrower can obtain a loan that offers low payments for the early part of the loan. The loan requires interest payments only for the first seven years, although additional principal can be paid anytime, throughout the life of the loan. VA Guarantee Loans VHDA also provides VA guarantee loans for eligible veterans. These loans follow VA rules for eligibility and qualifications. Moseley Flint Schools of Real Estate 22

23 Rural Housing Services (RHS) Guarantee Loans RHS loans are federally insured loans that do not include a down payment, and are available in certain rural areas. Step Rate Loans VHDA offers a variety of loans that begin with low payments the first two years, and increase gradually in the second and third years. FHA, VA and conventional loans can be used. The rate is slightly higher than a non-step rate loan in years three through thirty of the loan. The loan also requires the payment of 1 additional discount point. There are zero down payment step rate loans available. VHDA Home Loan Requirements General eligibility requirements for VHDA home loans include the following: First-Time Homebuyers Under VHDA programs, a first-time homebuyer is one who has not owned a home for the previous three years. Maximum Net Worth An applicant s net worth cannot exceed 50% of the sales price of the property. Occupancy The applicant or applicants must intend to occupy the property as their primary residence and it cannot be used in a trade or business. Other General Eligibility Requirements Applicants must demonstrate credit worthiness, sufficient stable income and adequate funds for the down payment and closing costs. Flexible Alternative Programs VHDA offers other homebuying programs for those with net worth or other factors that exceed the requirements for the first-time homebuyer programs. Flex/Alt 100 Homebuyers who exceed the requirements for the first-time homebuyers programs can apply for the Flex/Alt 100 loans. These loans require no down payment and no mortgage insurance. Moseley Flint Schools of Real Estate 23

24 Flex/Alt Advantage This loan requires a zero down payment, includes financing of closing costs and does not require mortgage insurance. Flex/Alt Home Enhancer The Flex/Alt Home Enhancer allows the borrower to include the costs of minor improvements to be completed after closing the loan. Flex/Alt Home Access This program allows costs for modifying a home for handicapped access and minor home improvement to be included in the loan. Flex/Alt Condominium Program This program provides affordable financing for the purchase of a condominium unit in a project that falls slightly outside of standard owner-to-investor occupancy. The loan requires a 3% down payment, and payment of an additional 1% discount point. No mortgage insurance is required. The unit can have up to 60% investor ownership. Special Programs Through a program called SPARC, Sponsoring Partnerships and Revitalizing Communities, reduced rates are made available in all first-time homebuyer programs to address critical housing needs within communities. These reduced rates are ½% to 1% below VHDA s published First-Time Homebuyer Program Rates. These rates can be found at the VHDA website, AME=currentrates Another special program available through VHDA is through the Regional Loan Fund. It is a financing program whose funds are allocated to regional administrators who work with local non-profits, lenders and Realtors to assist low-income applicants. A third VHDA special program is the Home Stride program. It provides low rate second mortgages to assist homebuyers to afford homes in high cost Northern Virginia markets. These second mortgages can be up to $20,000, require no payments for the first three years, and are charged no interest the first three years. A low rate is then charged from years four through thirty. Moseley Flint Schools of Real Estate 24

25 13. Funding for VHDA programs comes from: a. the federal government b. tax dollars c. taxable and tax-exempt bonds issued by VHDA d. HUD Answer C 14. A 1 st Choice Interest Only Loan: a. is a VA guarantee loan b. is an FHA loan c. is a RHA loan d. requires interest payments only for the first 7 years of the loan Answer D 15. Under VHDA programs, a first-time homebuyer has not owned a home for: a. 1 year b. 3 years c. 5 years d. 10 years Answer B Moseley Flint Schools of Real Estate 25

26 Chapter Five: Calculating Mortgage Payments Buyers typically want to know two things concerning mortgage payments: How much will the payment be for this home? and How much can I qualify for? How Much is The Payment? Mortgage payments are based on the amount of the loan, the interest rate, and the length of the loan. Most mortgage loans are amortized, meaning that if the interest rate and payment amount stay the same over the loan term, the loan will liquidate. The amortization is the length of time it takes a loan to amortize, or to be paid off. Today, there are a wide variety of mortgage calculators available on the Internet, and borrowers can plug in the loan amount, interest rate and loan term into these calculators, and find out how much their payment will be. Some calculators are more sophisticated than others, and allow the user to plug in the total home cost, the down payment, whether additional principal will be paid during the term of the loan, the interest rate and the term. A simple table can be used to calculate a mortgage payment as well. Using the following table, a mortgage payment can be calculated by multiplying the cost per $1000 by the size of the mortgage in thousands. For example, if the mortgage rate is 5%, the term of the mortgage is 15 years, and the mortgage amount is $105,000, the payment can be calculated by finding the cost per thousand in the 15 year column and 5% row (7.91), and then multiplying 7.91 x $105 = $ Mortgage Table Monthly Principal and Interest per $1000 of Mortgage Mortgage % 5 yrs. 10 yrs. 15 yrs. 20 yrs. 25 yrs. 30 yrs. Cost/ thousand Cost/ thousand Cost/ thousand Cost/ thousand Cost/ thousand Cost/ thousand 3% % % % % % % Moseley Flint Schools of Real Estate 26

27 4.75% % % % % % % % % % % % % % % % % % % % % % % % % % Moseley Flint Schools of Real Estate 27

28 11.25% % % % % % % % % % % % % % % The mortgage amounts that can be calculated by this table do not include payments for mortgage insurance or property taxes. Here are some of the Internet sites that can be used to calculate mortgage payments: How Much Can I Qualify For? Whether or not a borrower can qualify for a loan at all depends on the type of loan and the lender s standards, but generally, lenders generally have two qualifying percentages: the percentage of income the house payment represents and the percentage of income all debt expenses, including the house payment, represents. For conventional loans, the first percentage should be no more than Moseley Flint Schools of Real Estate 28

29 28%, and the second percentage should be no more than 36%. FHA loans allow the housing percentage to be as high as 29%, and VA guarantee loans allow it to reach 41%. FHA and VA allow the total debt percentage of income to be 41%, as well. There are many different loan types available today, so debt ratio requirements can vary greatly. Online Calculators Online mortgage calculators can be used to find out how much payment or how large a mortgage for which a borrower may qualify. These calculators generally ask for the following information: Prospective loan information, including mortgage amount, rate and term Income, including salaries, bonuses, commissions and other income Expenses, including auto payments, revolving payments and other loans Some calculators include the ability to input homeowners insurance and property taxes, if these items are to be paid through the mortgage payment. Internet sites that provide calculators to determine the amount a for which a buyer can qualify include: Amortization is: a. the rate of the loan b. the amount of the loan multiplied by the rate of the loan c. the length of time it takes a loan to amortize, or to be paid off d. the percentage of income the lender requires the house payment to meet Answer C Moseley Flint Schools of Real Estate 29

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