Government Financing Programs and Regulations Flashcards
Federal Housing Administration (FHA)
Under the 203(b)-program, anyone qualifies for FHA financing so long as they are purchasing a primary residence (the home they will live in for at least 2 years) that meets the FHA’s requirements. Generally, these loans are for 1-4 family owner occupied homes (though they will also approve some condos and co-ops) that are under the FHA’s purchase price limit. This limit is determined by the county the home is based in. Also, note that any FHA loans originated before 1989 are assumable.
Remember, the FHA only insures the loan (and charges the borrower for the insurance); they do not make the loan. Qualified lenders make the loan, and market conditions dictate the interest rate on the loan. The insurance for FHA loans is called Mortgage Insurance or MI.
Veterans Affairs (VA)
financing is like FHA financing for honorably discharged veterans. It was established in 1944 as part of the GI Bill, and is provided by the Department of Veterans Affairs. The rules work more or less the same as FHA, except that no down payment is required. There can be a financing fee, but veterans are allowed to roll the fee into their loan. For the purposes of the exam, VA financing is the only no down payment loan available to borrowers.
Private Mortgage Insurance (PMI)
PMI is the private market version of FHA or VA financing. It is insurance for the lender provided by a private insurer, rather than the government. With PMI, buyers can make a down payment of less than 20%, but they must pay a monthly insurance premium on behalf of the lender until their LTV dips below 78%. At 78% the PMI will automatically discharge per the Homeowners Protection Act of 1998. PMI is sometimes referred to as MGIC financing, since MGIC is one of the largest PMI providers.
Monetary policy
Monetary policy has a real impact on the pricing and availability of credit, and consumer purchasing power. Since credit and purchasing power directly affect consumer demand, and thus home prices, a basic understanding of monetary policy is critically important to understanding why real estate values change.
The Federal Reserve
Created in 1913 in response to the panic of 1907, the Federal Reserve was established with the goal of maximizing employment, stabilizing prices, and moderating interest rates. It has over time further expanded to regulate banks, and conduct much of the nation’s monetary policy. It is, very basically, the banks’ bank; when a bank needs a loan, it can turn to the Fed. It is private, but has Congressional oversight.
The Federal Funds Rate (and the Discount Rate)
the rate for interbank lending (short term loans made between banks). The Discount Rate is the rate that the Fed loans to the banks at. Since these rates are effectively the cost of money for banks, it has the effect of setting the floor on interest rates.
The Reserve Requirement
How much banks must maintain on hand as “cash” (reserves) against their deposits and other liabilities. The higher the reserve requirement, the less lenders can lend; the lower the reserve, the more they can lend. This impacts the availability of credit. Also note that borrowing at the Federal Funds Rate can be used to maintain reserve requirements, which is part of why it’s so important.
The Federal Open Market Committee (FOMC)
The buying and selling of US debt to and from member banks of the Fed. The more it buys, the more money is available for banks to lend out, and vice-verse. This also stabilizes the cost of borrowing for the US government.
The Real Estate Settlement Procedures Act (RESPA)
is a federal law that requires lenders to provide borrowers with information on closing costs for financing for 1-4 family residential homes (any fees, points, or other costs charged at closing, along with proration, commission payments, etc.). It also prohibits certain kickbacks, referral fees, and unearned fees. Under RESPA the lender is responsible for reporting the transaction to the IRS.
Affiliated Business Arrangements (ABAs)
where brokerages and mortgage companies, title companies, home inspectors, or other service providers package services together, are permitted under RESPA if the firms share at least 1% common ownership, and the consumer is fully informed, the consumer is not required to participate in the ABA, other providers are made available to the consumer, and the only thing of value returned is payment for services and a return on the 1% or greater ownership interest.
TILA-RESPA Integrated Disclosure (TRID)
forms, which combine many of the Truth in Lending and Real Estate Settlement Procedures Act rules. A Loan Estimate Form (previously the Good Faith Estimate) detailing estimated settlement costs must be given to consumers no later than 3 working days after the loan application. Consumers must also receive a Closing Statement (which replaces the HUD-1) detailing the actual costs of closing no later than 3 days before the date of closing. If the Closing Statement is not available 3 days before closing, the closing usually must be delayed. Changes to the loan or changes to the interest rate of more than 1/8% trigger a new 3-day waiting period.
Proration
If there is an expense prepaid or unpaid at closing, or income that must be divided among the buyer and seller, it will be prorated and reflected on the Closing Statement. The math for proration is fairly straightforward. However, you should note that the exam will specify if the date of closing belongs to the buyer or the seller (if no one is specified it belongs to the seller), and the exam assumes a 360-day year unless otherwise specified. Also note that property taxes run on a fiscal year from July 1st – June 30th.
Example:
A landlord is selling their property on June 20th. Their tenant paid the rent of $3000 on the first of the month. How much does the seller owe the buyer?
Answer
$3,000 / 30 days = $100 per day
Seller keeps: 20 days x $100 = $2000
Buyer receives: 10 days x $100 = $1,000 (Answer)
The Truth in Lending Act (also known as Regulation Z or TILA)
is a law enforced by the Consumer Financial Protection Bureau (CFPB). Its purpose is to provide consumers with a full disclosure of the costs of credit. This gives the public a way of comparing various lenders. To achieve this, TILA requires lenders to calculate their costs of credit and express them as an annual percentage rate (APR) if they advertise specific loan terms. It also allows rescission by a consumer within 3 business days for certain loans (but not on first mortgages for homes).
The Equal Credit Opportunity Act (ECOA)
Passed in 1974, the ECOA prohibits discrimination in lending similar to the Fair Housing Act’s protections for real estate, and requires that credit applications only be considered on the basis of income, the stability and source of that income, net worth, and credit rating. Protects against discrimination based on race, color, religion, national origin, gender, age, marital status, and public assistance status. The term redlining is used to refer to any type of credit discrimination.
Predatory Lending
is unfair, deceptive, or abusive lending. It occurs when lenders fail to disclose loan costs and risks, steer borrowers towards unfairly high interest rates, frequently refinance loans to generate fees (loan flipping), or bait and switch borrowers. Laws like TILA are meant to prevent predatory lending.
