Government Loans

Question 1

FHA and VA loans differ from conventional loans in what important way?

Answer 1

FHA and VA do not loan funds directly. FHA insures loans and VA guarantees loans, but the loans themselves are made by approved, qualified lenders.

Question 2

What kind of insurance does FHA require borrowers to pay?

Answer 2

As of 2006, the borrower must pay two insurance premiums. The first is the “upfront” Mortgage Insurance Premium (MIP) which is a percentage of the loan amount. The borrower can pay this one-time premium at closing or the charge could be financed with the loan. The second premium, called Mutual Mortgage Insurance (MMI) is a monthly premium that is paid with the monthly principal, interest, taxes and insurance payment. MMI premiums may be dropped when the remaining loan balance is 80 percent loan-to-value ratio or less.

Question 3

Name four popular FHA loan programs.

Answer 3

Section 203(b)-Mortgage Insurance for One-Family to Four-Family Homes 
Section 234(c)-Mortgage Insurance for Condominium Units 
Section 245(a)-Growing Equity Mortgage 
Section 203(k)-Rehabilitation Home Loan

Question 4

What is a Certificate of Reasonable Value and what is it used for?

Answer 4

A Certificate of Reasonable Value (CRV) shows the value of a property in relation to its sales price. It is issued by an approved VA appraiser when a veteran is seeking a DVA loan.

Question 5

What three loan programs are offered by the Texas Veterans Land Board?

Answer 5

Veterans Housing Assistance Program
Veterans Home Improvement Program
Veterans Land Loan Program

Question 6

What is the difference between the “assisted” and “unassisted” loans made available through the Texas Department of Housing and Community Affairs?

Answer 6

Assisted loans are first lien mortgage loans made available at an interest rate slightly above the current market interest rate and provide down payment and closing cost assistance.
Unassisted loans are available at an interest rate slightly below the current market interest rate and do not include funds for down payment and closing cost assistance.

Question 7

What is the relationship of a junior loan to a senior or first loan?

Answer 7

A junior loan is “subordinate in right or lien priority” to an existing mortgage on the same property.

Question 8

What are two ways a junior lender can protect itself from default? (See other correct answers on screen 30.)

Answer 8

By adding clauses to the financing instrument, such as:

A provision that grants the junior lender the right to pay property taxes, insurance premiums and other charges if the borrower is not making these payments.
A clause that allows the junior lender to pay funds for taxes and insurance into an escrow account and make any payments on the first loan to offset a possible default.

Question 9

There are basically two categories of loans available to buyers in the marketplace

Answer 9

conventional loans and government-backed loans.

Question 10

Government-backed loans include those loans offered by

Answer 10

The Federal Housing Administration (FHA)
The Department of Veterans Affairs (DVA) – sometimes simply referred to as VA
Texas Veterans Land Board Program (TVLB)
Other state, county or city-backed subsidized loan programs

Question 11

Conventional loans have several advantages over government-backed loans.

Answer 11

Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days.
Conventional loans typically have fewer forms, and processing can be more flexible than government-backed loans.
There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency.
In the event of a loan refusal, borrowers have other lenders that they can make application to. There is only one of each government agency type, so if the loan is refused by a particular agency, there are no alternative lenders available.
Conventional lenders are much more flexible. Many offer a variety of loans with attractive provisions.

Question 12

Conventional loans also have their disadvantages

Answer 12

Typically conventional loans require higher down payments than government-backed loans require.
Some conventional loans carry prepayment penalties, while government-backed loans do not.

Question 13

The conventional loan is the most common type of loan and is generally viewed as the most secure

Answer 13

Most conventional loans require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property’s sale price. Conventional loans are typically uninsured. The mortgage itself provides the only security for the loan. To protect its interests, the lender relies on the appraisal of the property and the borrower’s ability to repay the loan, as indicated by the borrower’s credit reports.

Question 14

Most conventional loans have traditionally been designed as fixed-rate loans

Answer 14

With this common type of mortgage program, the monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally the monthly payments will be very stable. Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years.

Question 15

Even though most conventional loans require the borrower to make a down payment of 20% or more,

Answer 15

a borrower can get a conventional loan with a lower down payment by insuring the loan through a private mortgage insurance program (PMI).

Question 16

A popular way to avoid having to pay private mortgage insurance is through the use of what’s known as 80-10-10 financing

Answer 16

What this means is that the institutional lender provides the traditional 80-percent first mortgage. Then the borrower gets a 10-percent second mortgage and makes a 10-percent cash down payment.

Question 17

The FHA provides low-down-payment loans to qualified buyers

Answer 17

The Department of Housing and Urban Development (HUD) oversees the FHA. The loans FHA provides are high loan-to-value ratio loans, so FHA insures the loans in order to make them available to higher risk individuals.

Question 18

Although there are many different programs available under FHA insured financing, the most popular is the

Answer 18

FHA 203(b) that covers loans on one-to-four-unit owner-occupied dwellings.

Other popular FHA programs include:

Section 234(c)-Mortgage Insurance for Condominium Units
Section 245(a)-Growing Equity Mortgage
Section 203(k)-Rehabilitation Home Loan

Question 19

The Section 251 - Adjustable Rate Mortgage program

Answer 19

provides insurance for adjustable rate mortgages. This program works well with the other widely-used FHA single-family products: 203(b), 203(k) and 234(c).

Question 20

In an effort to make it possible for veterans returning from World War II to purchase a home

Answer 20

the Veterans Administration (VA), now the Department of Veteran’s Affairs (DVA), offered the opportunity for veterans to purchase a home with no money down. In order to make this loan acceptable to lenders, the DVA agreed to guarantee the top portion of the loan. Since lenders were now protected in the event of a default by the borrower, lenders agreed to loan four times the current DVA Entitlement.

Question 21

The veteran must provide a Certificate of Eligibility showing

Answer 21

the amount of entitlement available. The entitlement is the maximum number of dollars that DVA will pay if the lender suffers a loss.

Question 22

The DVA also requires the veteran to pay

Answer 22

a funding fee, which is a percentage of the loan amount charged for the privilege of obtaining a VA loan.

Question 23

An approved VA appraiser must issue a Certificate of Reasonable Value (CRV)

Answer 23

showing the value of the property to be equal to or greater than the sales price.

Question 24

VA loans were freely assumable prior to March 1988. Since then, a purchaser who desires to assume an existing VA loan must

Answer 24

qualify with the original lender. The veteran should request a release of liability from the purchaser that will relieve the veteran from any further liability for the loan. The veteran would remain personally liable for any deficiency if he or she does not obtain the release.

Question 25

Texas provides another alternative in the form of special assistance programs for home and land purchases. The Texas Veterans Land Board (VLB) administers the programs.

Answer 25

Veterans Housing Assistance Program
Texas Veterans Home Improvement Program
Veterans Land Loan Program

Question 26

The Texas Department of Housing and Community Affairs (TDHCA) offers mortgage loan funds and down payment assistance to eligible first-time homebuyers in the form of two types of loans.

Answer 26

Assisted and unassisted

Question 27

Assisted Loans

Answer 27

are first lien mortgage loans made available at an interest rate slightly above the current market interest rate and provide down payment and closing cost assistance.

Question 28

Unassisted Loans

Answer 28

are available at an interest rate slightly below the current market interest rate and do not include funds for down payment and closing cost assistance.

Question 29

A Junior Loan

Answer 29

is a mortgage (second mortgage or second trust deed) that is “subordinate in right or lien priority” to an existing mortgage on the same property. Junior loans contain more risk that first loans. For this reason, they will typically carry a higher interest rate.

Question 30

Most junior loans are used in low-down-payment situations.

Answer 30

Sometimes after a period of three to five years, a borrower will merge the junior note with the existing first note by increasing the first loan by an amount that will allow the junior loan to be paid off.

Question 31

Another and probably more common type of junior loan is the home equity loan

Answer 31

The Tax reform Act of 1986 eliminated the interest deduction for consumer finance, but kept the interest deduction on home loans. So many homeowners choose to take out home equity loans and earmark the funds for a myriad of uses, from home improvements to automobile purchases to vacations to education to medical expenses.
Most of these home equity loans have a term of five years.