Government

Chapter 4

GOVERNMENT MORTGAGE LOANS

I – FEDERAL HOUSING ADMINISTRATION LOANS – FHA

The Federal Housing Administration Loan was designed by the Government to aid buyers in obtaining a mortgage with a lower down payment and no credit score consideration that is typically required on most conventional loans.

To implement this idea, the FHA collects insurance premiums on each FHA loan. This insurance provides protection in the event of default by the homebuyer to insure the lender would not incur a loss in lending at the acceptable interest rate due to lower equity on the part of the purchaser.

It is also important to understand that FHA does not lend money. FHA insures the loans made by lenders. If the loan is insured by FHA and the loan goes into foreclosure, FHA will reimburse the lender for losses incurred.

There are several types of FHA programs.

FHA FIXED RATE LOANS

The fixed rate loan is the most commonly used FHA loan program. The fixed rate mortgage loan program is amortized over a specified term (15, 20, 25, or 30 years) at a constant payment. This program provides the borrower with level principal and interest payments over the term of the loan and at the end of the term; the loan is extinguished (i.e. brought to a zero balance).

FHA ADJUSTABLE RATE MORTGAGE LOAN

The FHA adjustable rate mortgage is amortized over a thirty (30) year term. FHA offers a 1 year, 3/1, 5/1 or 7/1 adjustable rate. The interest rate adjustments will occur after the 1^st, 3^rd, 5^th or 7^th year depending on the adjustable rate program the borrower would choose. At the time of the adjustment period the rate on the loan could adjust either up or down. The rate can not adjust by more than 1% annually and no more than 5% over the life of the loan.

FHA BUYDOWN PROGRAM (“Stair Step” Program)

This program is identical to the fixed rate program, except that payments are subsidized for a limited term by the buyer, seller or third party. The buydown funds are placed into an escrow account from which the monthly payments are made to the servicing lender to subsidize the borrower’s regular bought-down payment. The monthly payment received by the Bank usually for the first two (2) years, will actually be equal to the regular payment, commencing typically in the third loan year. For Example: The reduced or bought down monthly (P & I) payment plus the monthly escrowed payment equals the regular monthly (P&I) payment (which will take place in the 3rd loan year and continue to the end of the loan period)

Example: 5%/6%/7% thirty (30) year Buydown $200,000 Loan

Borrower

Loan Rate Period (mos.) (P&I) Paid + Escrow Payment = Regular Payment/Mo.

5% 1 - 12 $1,073.60 + $257.00 = $1,330.60

6% 13 - 24 1,199.20 + 131.40 = 1,330.60

7% 25 - 360 1,330.60 + NONE = 1,330.60

GENERAL PROGRAM GUIDELINES:

A. TERM. The term of the mortgage is the number of years at which the loan is paid back in equal installments of principal and interest. The minimum term is fifteen (15) years and the maximum term is thirty (30) years.

B. DOWN PAYMENT. The down payment for an FHA loan is typically 3.5% of the sales price of the property that is being purchased. (Example: $100,000 sales price X 3.50%- $3,500.00. This is the minimum down payment required.)

C. INTEREST RATE. Rates are determined by the lending institution and vary between lenders.

D. LOAN AMOUNTS. FHA regulates the maximum allowable loan amounts. The maximum allowable loan amount is set by FHA for each County/District within each state. The current maximum loan amount for a single family residence in Carroll County and neighboring Counties is $362,790.00.

E. MORTGAGE INSURANCE. The purpose of the mortgage insurance is to protect the lender from loss in the event of default by the borrower. The upfront mortgage insurance is 1.50% of the base loan amount. The upfront mortgage insurance can either be financed into the loan or be paid in a lump sum of cash at the time of the closing. In addition to the upfront mortgage insurance, the borrower will pay a monthly mortgage insurance premium as part of the scheduled monthly payment.

F. PREPAYMENT PENALTY. There is no prepayment penalty charged when a borrower pays off the loan before the expiration of the term.

G. OWNER OCCUPANCY. A borrower must occupy the property as his/her primary residence.

H. ESCROW/IMPOUNDS. Escrow/Impounds for real estate taxes, hazard insurance, flood insurance (if necessary) and monthly mortgage insurance is required in all cases. This is part of the total monthly PITI payment.

I. SELLER CONTRIBUTIONS. The seller contribution can not exceed 6% of the sales price.

J. FHA QUALIFING – RATIO METHOD. FHA requires that the borrower be qualified using a ratio method based on the borrowers gross monthly income and monthly liabilities. The new housing payment can not exceed 29%-31% of the borrower’s gross monthly income. The housing payment and recurring liabilities can not exceed 41%-43% of the borrower’s gross monthly income. There can be compensating factors that would allow the qualifying ratios to exceed the published limits.

Example:

1. Gross monthly income + $5,000

Max. Percent _x .31

Max. FHA Housing Payment = $ 1,550/Mo.

2. Max. FHA Housing Payment = $1,550

+ Monthly Debt = 650

Housing Payment + Debt = $2,200/Mo.

3. Check Max. Allowable Housing Payment + Debt:

Gross monthly income = $5,000

Max Percent _x_.43_

Buyer Exceeds Max Allowable $2,150/Mo

Housing Payment + Debt RATIO of 43% @ $2,200/Mo.

Be sure to check with your lender on this client!

The borrower must also prove that he or she has sufficient funds to close on the loan. This includes the down payment, closing costs, prepaid items and any additional fees which are allowed and charged by the lender.

To assist you in computing the maximum allowable loan amounts, qualifying the borrower, and computing the required cash for closing, it is recommended that you consult with your lender of choice to make sure this is completed in an honest and professional manner.

II VETERANS ADMINISTRATION LOANS - VA

Veterans Administration came into being in 1944, with the objective to assist veterans to transition from military to civilian life. Today VA assists veterans and active duty members with the purchase of housing with the potential of no money down. To learn more about the VA, visit www.va.gov

The veteran need not be released from active duty to obtain a VA Loan;

However, if he or she has been discharged it must be under conditions other than dishonorable, and the Veteran must have served a specified number of continuous day’s active duty other than training.

It is important to understand that the VA does not lend money. The VA guarantees loans made by lenders. These lenders in turn sell the loan on the secondary market. The primary purchaser of 99% of all VA loans is the Government National Mortgage Association (GNMA or Ginnie Mae).

Benefits of VA’s Home Loan Program:

The VA’s Home Loan program offers veterans several advantages relative to conventional mortgage loans. Theses benefits include:

No Down payment

· Limitations of the closing costs allowed to be paid by the borrower

· No mortgage insurance requirements

· No prepayment penalties

· Easier credit standards to qualify for the loan

· No limitations on maximum financing in declining markets

· Ability to finance the funding fee, and funding fee waiver for disabled veterans

· For homes inspected by the VA during construction, a warranty from the builder and assistance from the VA to obtain cooperation of the builder

· Default assistance to avoid foreclosure

Veteran and Service Member Eligibility:

ERA: DATES TIME REQUIRED

W W II 9/16/40 – 7/25/47 90 days

Post W W II 7/26/47 – 6/26/50 181 days

Korean 6/27/50 – 1/31/55 90 days

Post-Korean 2/01/55 – 8/04/64 181 days

Vietnam 8/05/64 – 5/07/75 90 days

Post-Vietnam 5/08/75 – 9/07/80 Enlisted - 181 days

5/08/75 – 10/16/81 Officers - 181 days

9/08/80 – 8/01/90 Enlisted - 2 years ** 10/17/81 – 8/01/90 Officers - 2 years**

Persian Gulf 8/02/90 – present 2 years

**Note: The veteran must have served two (2) years or the full period for which veterans were called or ordered to active duty (at least 90 days during wartime and 181 days during peacetime).

Other Eligible Persons: Time Required

Active Duty Member 90 days (181 days

During peacetime)

Reserve/Guard 6 years in Selected

Reserves

Unmarried Surviving Spouse No time requirement

Veteran must have died on active duty or from a service

connected disability

POW/MIA Spouse Veteran must have

Been POW or MIA

90 days

Certificate of Eligibility or Automated Certificate of Eligibility (ACE):

The veteran’s eligibility may be determined in most cases from the VA Internet site, ACE (“Automated Certificate of Eligibility”). Approved VA lenders can access this ACE for the Veteran.

If eligibility cannot be established, a refer message will instruct the lender to submit a completed form to VA.

Loan Limits – Maximum Loan Amount $417,000, includes the Finance Funding Fee (VA Funding Fee Guarantees the VA loan in case of default).

“Do Better Business…. The Carroll Way!”

The information provided in this manual reflects current mortgage information which may be subject to change
without notice/or which may have already been eliminated. Your transaction may involve updates periodically.
Consult with your mortgage loan officer for updated information.

Amended March 19, 2009