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1 Key Points: Conventional Loans: Less regulation and more discretion than government loans. Can be cheaper than FHA and VA because FHA requires 2 mortgage insurances and VA requires VA funding fee. Sometimes Requires Private Mortgage Insurance - (PMI) a) Reduces risk of conventional loans for lender b) Not required on loans where borrowers make a 20% or more down payment c) Makes insurance company liable for a percentage if borrower defaults d) Can be paid up front or monthly - usually monthly e) Amount depends on term, length, risk and type of loan; state rules, lender, and cancellation policy. f) Monthly insurance premium (MIP) can be eliminated when borrower has 20% equity proven by appraisal Private Mortgage Insurance - (PMI) reduces riskiness of conventional loans for lender not required on loans where borrowers make a 20% or more down payment makes insurance company liable for a percentage if borrower defaults can be paid up front or monthly - usually monthly Amount depends on terms, length, riskiness, type of loan, state, lender, cancellation. monthly can be eliminated when borrower has 20% equity proven by appraisal example 90-95% LTV 30-year fixed (.0078 X loan amt 12) $100,000 X = $65 per month added to payment ABC Real Estate School 3 st ed National Workbook August 2010 Page 414

2 Farm Loan Programs As loans become more difficult to secure, it is important to become aware of all sources of real property loans. Farmers Home Administration was an agency of the United States Department of Agriculture from 1946 to The agency coordinated a nationwide rural development program and promoted cooperation between the federal government and state and local rural development projects. It offered loans to small-farm owners for agricultural supplies, land purchases, living needs, and disaster relief. It also provided financing for business and industrial development, community facilities, and housing in rural areas. Community loans were made for fire protection, medical facilities, and waste disposal systems. The agency was dissolved in 1994, and its farm loan programs were transferred to the Agriculture Department's Farm Service Agency. The rural housing programs became part of the department's Rural Housing and 83 Community Development Service. FSA makes direct and guaranteed farm ownership (FO) and operating loans (OL) to family-size farmers and ranchers who cannot obtain commercial credit from a bank, Farm Credit System institution, or other lender. FSA loans can be used to purchase land, livestock, equipment, feed, seed, and supplies. The loans can also be used to construct buildings or make farm improvements. FSA loans are often provided to beginning farmers who cannot qualify for conventional loans because they have insufficient financial resources. FSA also helps established farmers who have suffered financial setbacks from natural disasters, or whose resources are too limited to maintain profitable farming operations nd Mortgages v Refinancing for borrowers n When a borrower take out a 2 d mortgage or home equity loan, the Truth in Lending Act gives them 3 days from the day the account was opened to cancel the credit line. This right allows them to change their mind for any reason Accessed January 30, Accessed January 30, ABC Real Estate School 3 st ed National Workbook August 2010 Page 415

3 Reverse Mortgages What is a Reverse Mortgage? A reverse mortgage provides homeowners that are 62 years of age or older a way to borrow against the equity in their home. The income is tax-free and there are no loan payments due until the loan ends. There are five payment options: 1. Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. 2. Term - equal monthly payments for a fixed period of months selected. 3. Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted. 4. Modified Tenure - combination of line of credit with monthly payments for as long as the borrower remains in the home. 5. Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower. 85 Reverse mortgages are available only to homeowners 62 years of age and older. They are designed to provide a line of credit and/or monthly income without the requirement of making monthly payments, hence the term reverse mortgage. A reverse mortgage can allow senior citizens to stay in their home when it may otherwise be unaffordable. Interest rates for reverse mortgages are typically adjustable and, because no payments are required, the interest that accrues is added to the principal amount of the loan. Because of the usually high initial costs of these loans and because the terms can be more complex than an ordinary mortgage, it is critical that a borrower understand all of the terms and make the correct decision before entering into a loan contract. For this reason, some programs require that the potential borrower speak to an independent reverse mortgage counselor before getting the loan. He/she may also want to speak to family members or others that they trust. A reverse mortgage must be repaid when the last surviving borrower dies or moves away. The loan can be refinanced; the property can be sold by the borrower or heirs, or other assets can be used to pay it off. Any remaining equity in the home would belong to the borrower or heirs. Since senior citizens can be prime targets of predatory lenders and other scammers, seniors should wary of mail or telephone solicitations or offers by estate planners to put them in touch with a reverse mortgage lender and asking them to pay substantial fees for that service. 86 Whether seeking money to finance a home improvement, pay off a current mortgage, 85 Accessed January 23, Accessed January 23, ABC Real Estate School 3 st ed National Workbook August 2010 Page 416

4 supplement their retirement income, or pay for healthcare expenses, many older Americans are turning to reverse mortgages. They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. In a regular mortgage, you make monthly payments to the lender. But in a reverse mortgage, you receive money from the lender and generally don t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence. Reverse mortgages can help homeowners who are houserich but cash-poor stay in their homes and still meet their financial obligations. To qualify for most reverse mortgages, you must be at least 62 and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions. Reverse Mortgage Borrower Requirements You must: Be 62 years of age or older Own the property outright or have a small mortgage balance Occupy the property as your principal residence Not be delinquent on any federal debt Participate in a consumer information session given by an approved HECM counselor Mortgage Amount Based On Age of the youngest borrower Current interest rate Lesser of appraised value or the HECM FHA mortgage limit Financial Requirements No income or credit qualifications are required of the borrower No repayment as long as the property is your principal residence Closing costs may be financed in the mortgage Property Requirements The following eligible property types must meet all FHA property standards and flood requirements: Single family home or 1-4 unit home with one unit occupied by the borrower HUD-approved condominium Manufactured home that meets FHA requirements ABC Real Estate School 3 st ed National Workbook August 2010 Page 417

5 What is Predatory Lending? Loan Fraud In communities across America, people are losing their homes and their investments because of predatory lenders, appraisers, mortgage brokers and home improvement contractors who: Sell properties for much more than they are worth using false appraisals. Encourage borrowers to lie about their income, expenses, or cash available for downpayments in order to get a loan. Knowingly lend more money than a borrower can afford to repay. Charge high interest rates to borrowers based on their race or national origin and not on their credit history. Charge fees for unnecessary or nonexistent products and services. Pressure borrowers to accept higher-risk loans such as balloon loans, interest only payments, and steep pre-payment penalties. Target vulnerable borrowers to cash-out refinances offers when they know borrowers are in need of cash due to medical, unemployment or debt problems. "Strip" homeowners' equity from their homes by convincing them to refinance again and again when there is no benefit to the borrower. Use high pressure sales tactics to sell home improvements and then finance them at high interest rates. Failure to disclose payers of costs associated with the transaction. What Tactics Do Predators Use? A lender or investor tells you that they are your only chance of getting a loan or owning a home. You should be able to take your time to shop around and compare prices and houses. The house you are buying costs a lot more than other homes in the neighborhood, but isn't any bigger or better. You are asked to sign a sales contract or loan documents that are blank or that contain information which is not true. You are told that the Federal Housing Administration insurance protects you against property defects or loan fraud - it does not. The cost or loan terms at closing are not what you agreed to. You are told that refinancing can solve your credit or money problems. You are told that you can only get a good deal on a home improvement if you finance it with a particular lender. ABC Real Estate School 3 st ed National Workbook August 2010 Page 418

6 Applicable Case: Loan Fraud Warren v. Merrill, 143 Cal.App.4th 96 (2006) Court of Appeal of California Facts: A prospective purchaser with poor credit attended an open house at a condominium and met the listing broker. The broker suggested that the purchaser could get a loan if the broker s daughter also applied as a co-borrower. Although the purchaser paid the down payment into escrow, the broker obtained a loan in her daughter s name alone. The broker then instructed the purchaser to sign an amendment to remove his name from title, telling him that the document was just a formality. After closing, the broker s daughter did not execute a quitclaim deed to transfer title to the purchaser as the promised. After several months, the broker evicted the buyer from the condo. The purchaser won a judgment in trial court, which quieted title to the condominium in the purchaser s favor, awarded the purchaser damages for fraud, breach of fiduciary duty, and ejectment, and punitive damages. The broker appealed, arguing, that the purchaser had been a participant in misleading the lender and that punitive damages should not have been awarded. Issue: Whether a plaintiff with unclean hands is entitled to equitable relief and whether punitive damages were appropriate. Deciion. The court held that although the purchaser s behavior was not exemplary, it did not equal the misconduct of the broker, and that the doctrine of unclean hands did not automatically rule out financial charges against the broker who had committed fraud. As to the issue of punitive damages, the appellate court found that there also was sufficient support for both actual and punitive damages Accessed January 27, ABC Real Estate School 3 st ed National Workbook August 2010 Page 419

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