LESSON 8: GOVERNMENT LOANS Flashcards
What is the role of the Federal Housing Administration (FHA)?
The FHA is part of HUD, charged with increasing homeownership and building healthy neighborhoods by insuring private loans made to consumers.
Who qualifies for an FHA loan?
Anyone who is a legal resident of the United States can qualify for an FHA loan.
What are the benefits of FHA loans?
FHA loans have benefits like higher Loan-To-Value (LTV) ratios, lower down payments, longer terms, and no prepayment penalties. It is easier to qualify for than an uninsured mortgage.
Who actually lends money for an FHA loan?
A bank or other financial institution approved by the FHA issues the loan, and the FHA guarantees it.
What are the mortgage insurance requirements for FHA loans?
Borrowers must purchase mortgage insurance, with the premiums going to the FHA.
When was the FHA created and why?
The FHA was created in 1934 during the Great Depression to reduce risks for lenders and help borrowers qualify for home loans.
What is the current U.S. homeownership rate?
As of the first quarter of 2022, the homeownership rate in the U.S. stood at 65.4%.
What is the only absolute qualification for an FHA loan?
The borrower must be a U.S. citizen or hold a green card.
What is the Limited Denial of Participation (LDP) list?
The LDP list includes borrowers who are suspended, disqualified, or excluded from FHA programs, typically for reasons like default on an FHA loan or intentional fraud.
What is the CAIVRS system used for?
CAIVRS identifies applicants with claims, defaults, foreclosures, or other legal judgments that may affect their eligibility for an FHA loan.
How does the FHA handle applicants with issues on the CAIVRS list?
Applicants with issues on the CAIVRS list may still be eligible if the issue was not their fault, and the lender must get specific permission from the FHA to approve the loan.
What is the Section 203(b) program?
Section 203(b) is the most common FHA program, allowing individuals to purchase a one- to four-family home with a down payment of 3.5%.
What are the terms of repayment for Section 203(b) loans?
Loans can be repaid in monthly payments over 10, 15, 20, 25, or 30 years.
What is Section 234(c) for?
Section 234(c) provides mortgage insurance for buying a condominium unit in a project that is approved by HUD.
What is required for a condominium project to be eligible for FHA insurance under Section 234(c)?
At least 51% of the units must be owner-occupied.
What is Section 203(k) used for?
Section 203(k) provides mortgage insurance for non-investors who need a loan to rehabilitate or repair a one- to four-family residence.
What is the minimum down payment for Section 203(k) loans?
The minimum down payment is 3.5%.
What is a major advantage of Section 203(k) loans?
The loan amount can be based on the home’s value after renovations, and only one loan is needed to both purchase and improve the property.
What are the minimum investment requirements for FHA loans?
Borrowers must make a 3.5% down payment, and the investment cannot consist of discount points or prepaid expenses.
What is the FHA appraisal process?
The FHA requires a property to be inspected by an FHA-approved appraiser. The appraisal costs about $375 for a house of around 2,000 square feet. The sale price can be higher than the appraised value, but the borrower must pay the difference in cash.
What are the allowable closing costs for FHA loans?
The allowable closing costs include appraisal fees, credit reports, home inspection fees, title insurance, and origination fees limited to 1%.
What are non-allowable costs for FHA loans?
Non-allowable costs include buydowns, document preparation fees, flood certification fees, processing fees, tax service fees, and underwriting fees.
What are the current qualifying ratios for FHA-insured loans?
The FHA qualifying ratios are 31% for the housing expense ratio and 43% for the total debt service ratio.
Can an individual hold more than one FHA loan?
Yes, an individual can hold more than one FHA loan, but the previous loan must be current if assumed, and the buyer must be an owner-occupant or the loan must be reduced to 75% of the maximum loan amount.
What happens if non-realty items are included in the FHA loan contract?
If non-realty items are included, the FHA will assign a value to each item and reduce the appraised value of the property accordingly.
What does FHA require for assumption of loans?
FHA allows the release of liability for sellers if the buyer is pre-approved and the transaction meets FHA standards.
Does FHA require escrow of taxes and insurance?
Yes, the FHA requires escrow of taxes and insurance.
Who pays discount points on FHA loans?
Discount points can be paid by either the buyer or the seller.
How does the FHA down payment requirement compare to VA loans?
The FHA requires a larger down payment than VA loans, which require no down payment.
Can a non-citizen apply for an FHA loan?
Yes, non-citizens with a green card can apply for an FHA loan.
Who can give gifts for an FHA loan?
Gifts can come from anyone, not just immediate family members, as long as there is no direct business relationship with the borrower.
What is the Direct Endorsement program for FHA loans?
The Direct Endorsement program allows lenders to underwrite and close FHA loans without prior FHA review, after meeting HUD regulations and passing “test case” loans.
Who are the typical borrowers for FHA loans?
FHA loans are typically for first-time buyers or individuals in lower to moderate income brackets, including those with past credit issues.
What are the advantages of FHA loans regarding down payments?
FHA loans generally require lower down payments compared to conventional loans, and the process is usually less expensive due to lower closing costs.
When was the FHA program created and what were its contributions?
The FHA program was created in 1934 and helped modernize the mortgage system, improve housing quality, prevent home loss, and finance affordable rental units.
What is the FHA’s role in stabilizing the housing market?
The FHA has helped stabilize housing and credit markets during economic recessions and has been instrumental during times of disaster recovery.
What is the main purpose of the VA home loan program?
The VA loan program helps veterans finance homes with favorable terms, often with no down payment and lower interest rates.
What is required for a VA loan?
To get a VA loan, the borrower must be an eligible veteran with available home loan entitlement, must intend to occupy the property, have enough income, and have a good credit record.
Are VA loans assumable?
Yes, VA loans are assumable, but loans closed after March 1, 1988, require the lender or VA’s prior approval for assumption.
Can the buyer prepay a VA loan?
Yes, VA loans can be prepaid without penalty, though partial prepayments must be at least one monthly installment of principal or $100.
What warranties are provided for houses inspected by the VA?
For VA-inspected homes, the builder provides a warranty, and the VA assists in obtaining the builder’s cooperation to fix any justified construction issues.
What is forbearance for VA loan borrowers?
Forbearance is extended to VA homeowners who experience temporary financial difficulties.
What is the VA’s cap on lender compensation for VA loans?
The VA caps the lender’s compensation to 1% of the loan amount.
What is the purpose of the origination fee in a VA loan?
The origination fee compensates the lender in full. Fees for processing and underwriting cannot be charged if the 1% fee is applied.
Can discount points be charged in a VA loan?
Yes, discount points can be paid by the veteran, provided they go directly to reducing the interest rate.
What types of fees are not allowed to be charged to the veteran on a VA loan?
Attorney fees, escrow fees, settlement fees, and closing fees are not allowed to be charged to the veteran.
What are VA Purchase Loans designed for?
VA Purchase Loans help veterans purchase a home at a competitive interest rate, often without requiring a down payment or private mortgage insurance.
What is the purpose of Cash Out Refinance loans offered by the VA?
Cash Out Refinance loans allow veterans to take cash out of their home equity for purposes like paying off debt, funding school, or making home improvements.
What is an Interest Rate Reduction Refinance Loan (IRRRL)?
The IRRRL, also called the Streamline Refinance Loan, helps veterans obtain a lower interest rate by refinancing an existing VA loan.
What does the Native American Direct Loan (NADL) Program do?
The NADL Program helps eligible Native American veterans finance the purchase, construction, or improvement of homes on Federal Trust Land or reduce the interest rate on a VA loan.
What are Adapted Housing Grants for veterans?
Adapted Housing Grants help veterans with permanent and total service-connected disabilities purchase or modify homes to accommodate their disability.
What does the Equal Credit Opportunity Act (ECOA) ensure regarding income?
The ECOA ensures that only verified income is considered in total effective income, and it restricts asking about a spouse’s income unless certain conditions apply.
What is the Fannie Mae reverse mortgage called?
Fannie Mae’s reverse mortgage is called the Home Keeper Mortgage.
What types of properties are eligible for a Home Keeper Mortgage?
Only single-family owner-occupied residences, including condominiums and townhouses, are eligible for a Home Keeper Mortgage.
What are the three payment plans offered by Fannie Mae for reverse mortgages?
The three payment plans are Tenure, Line of Credit, and Modified Tenure.
What is the Tenure payment plan under the Home Keeper Mortgage?
Under the Tenure plan, the borrower receives equal monthly payments for as long as they live in the property as a primary residence.
How does the Line of Credit payment plan work in the Home Keeper Mortgage?
The borrower can receive mortgage proceeds as a lump sum, in unscheduled payments, or installments of their choosing until the line of credit is exhausted.
What is the Modified Tenure payment plan?
The borrower can combine a line of credit or single cash payment with monthly payments for life, setting aside money for a line of credit for future use.
What is the loan limit for the Home Keeper Mortgage?
The loan limit is $510,400, or the appraised value of the property, whichever is lower.
Does Fannie Mae charge mortgage insurance for the Home Keeper Mortgage?
No, Fannie Mae does not charge mortgage insurance for the Home Keeper Mortgage.
What is the maximum interest rate change allowed on the Home Keeper Mortgage?
The maximum interest rate change is 12%, with a lifetime cap of 19.5%.
What is the monthly servicing fee for Fannie Mae’s Home Keeper Mortgage?
The monthly servicing fee ranges from $15.00 to $35.00 and is added to the loan balance.
What is the Purchase Option for a Home Keeper Mortgage?
The Purchase Option allows the borrower to use a reverse mortgage to purchase a property, with the maximum claim amount being the lower of the purchase price, appraised value, or statutory limit.
What underwriting requirements are there for Fannie Mae’s reverse mortgage?
Fannie Mae does not require income or asset verification or a credit report for underwriting.
What fees can be included in a reverse mortgage as an advance?
Appraisal and credit report fees can be included as an advance against the reverse mortgage.
How much can the origination fee be for FHA and Fannie Mae reverse mortgages?
The origination fee can be 2% of the maximum claim amount or $2,000, whichever is greater.
Does Fannie Mae charge discount points on reverse mortgages?
Fannie Mae does not have a specific policy on discount points, while FHA prohibits charging them.
What is the appraisal fee for reverse mortgages?
The appraisal fee determines the maximum claim amount available for the mortgage and may be collected at the time of application.
What does FHA require for credit reports?
FHA requires a credit report to check for judgments or liens that could affect the property after closing.
What are the standard title fees for reverse mortgages?
Standard title fees apply, including premiums, required endorsements, and closing fees.
What is the role of the survey in reverse mortgage transactions?
A survey or Improvement Location Certificate (ILC) may be required by the title company for title commitment.
What are the recording fees in reverse mortgage transactions?
Standard fees are required to record documents related to the loan.
Does FHA charge mortgage insurance for reverse mortgages?
FHA charges a 2% Upfront Mortgage Insurance Premium (UFMIP) for reverse mortgages, but Fannie Mae does not charge mortgage insurance.
What is the monthly mortgage insurance fee for FHA reverse mortgages?
FHA charges a monthly mortgage insurance premium of one-twelfth of one-half percent of the current loan balance.
What servicing fee is typically charged for reverse mortgages?
The monthly servicing fee is usually between $15.00 and $50.00.
How are tax and insurance payments handled in reverse mortgages?
If the borrower has chosen to escrow, taxes and insurance are paid from the monthly payment or home equity line; otherwise, the borrower must pay them separately.
What is the lender’s right regarding property repairs?
The lender can inspect the property periodically and require repairs, with costs deducted from the monthly payment or equity line if not completed by the borrower.
What is the note in reverse mortgage transactions?
The note is a promise to pay the loan balance at the end of the loan term, typically written for the maximum claim amount.
What is the Deed of Trust in reverse mortgage transactions?
The Deed of Trust allows the lender to use the property to satisfy the note or mortgage.
What is the purpose of the Adjustable Rate Rider?
The Adjustable Rate Rider allows the lender to adjust the terms of the deed of trust based on changes in the mortgage rate.
What is the Negative Amortization Rider?
This rider allows the lender to increase the loan balance based on interest rates and the loan’s duration, as reverse mortgages involve negative amortization.
What is the Shared Appreciation Rider?
The Shared Appreciation Rider, required for FHA reverse mortgages, allows the lender to share in the appreciation of the property from the original closing to the loan payoff date.
What is the Title Commitment in reverse mortgage transactions?
The Title Commitment is proof of ownership and lists all encumbrances or liens against the property.
What is the Occupancy Affidavit in reverse mortgage transactions?
The Occupancy Affidavit certifies that the property is being used as the borrower’s primary residence.
What is the Right to Rescind in reverse mortgage transactions?
The Right to Rescind allows the borrower to cancel the reverse mortgage within three days of closing, except for the FNMA purchase option.
What happens if the last owner of a reverse mortgage dies?
The loan becomes due upon the death of the last owner.
What is the impact of non-occupancy on a reverse mortgage?
If at least one of the borrowers does not occupy the property as their primary residence for 12 consecutive months, the lender can call the loan due and force a sale.
What is required for payment of taxes and insurance in a reverse mortgage?
The borrower must pay taxes and insurance, including flood insurance. If not paid, the lender may pay them using loan proceeds, but this reduces the monthly payment or calls the loan due if the borrower fails to make payments.
What condition must the property be in for the reverse mortgage to remain valid?
The property must be kept in a reasonable state of repair. If the borrower fails to make necessary repairs, the lender can call the loan due and force a sale.
How can the owners pay off a reverse mortgage if they want to keep the property?
The owners or the estate can pay the entire loan balance, including principal, interest charges, mortgage insurance, and servicing fees.
What happens if the property is sold for less than the reverse mortgage balance?
If the house sells for less than the loan balance, the lender receives all the proceeds, and the loan is considered paid in full.
What is the title policy requirement for reverse mortgages?
The property must be free and clear, or any existing loan must be paid off at or before closing. The title company must search for any judgments, tax liens, or other encumbrances.
What is required for owner occupancy in reverse mortgages?
The property must be owner-occupied. If the owner moves into an assisted living facility or is absent for more than 12 months, the loan becomes due.
What is negative amortization in reverse mortgages?
Negative amortization means that the loan balance can increase over time, as no monthly payments are required, and monthly charges are added to the principal.
How are reverse mortgage funds taxed?
The funds received from a reverse mortgage are considered loan proceeds, not income, so they are not subject to income taxes.
Can a borrower deduct interest on a reverse mortgage?
Interest on a reverse mortgage is only deductible in the year the loan is paid off since the interest is accrued and added to the loan balance.
What happens if the borrower does not pay property taxes or insurance?
If the borrower chooses the monthly stipend option, the lender may pay taxes or insurance from the loan proceeds and reduce the monthly payment. If the borrower chooses a lump sum or line of credit option, and does not have available funds, the lender may call the loan due.
What is the impact of purchasing an annuity with reverse mortgage proceeds?
Purchasing an annuity may provide larger guaranteed payments, but the annuity payments may be considered income, potentially affecting eligibility for programs like Medicare.
What types of properties are eligible for FHA reverse mortgages?
Eligible properties include single-family homes, certain townhouses and condominiums, and manufactured homes that meet certain criteria. Timeshares and cooperative housing units are not eligible.
What are the payment options for a reverse mortgage?
The payment options include Tenure, Term, Line of Credit, Modified Tenure, and Modified Term. The borrower can also change plans with a fee.
What is the tenure payment option for reverse mortgages?
The tenure option provides equal monthly payments for as long as one borrower is alive and occupies the property as a primary residence.
What is the term payment option for reverse mortgages?
The term option provides equal monthly payments for a fixed period chosen by the borrower.
What is the line of credit payment option for reverse mortgages?
The line of credit option allows the borrower to withdraw funds as needed until the limit is exhausted. The credit limit increases each month based on the expected interest rate.
What is the modified tenure payment option for reverse mortgages?
The modified tenure option combines a line of credit or lump sum with monthly payments for life or as long as the borrower continues to occupy the home.
What is the modified term payment option for reverse mortgages?
The modified term option is similar to the modified tenure option but offers fixed monthly payments for a specific term.
Can a borrower change the payment plan during the loan term?
Yes, borrowers can change the payment plan at any time, with a fee of up to $50.
Is it possible to prepay a reverse mortgage?
Yes, the borrower can pay off all or part of the reverse mortgage at any time. If the entire balance is paid off, the loan is considered closed.
What is the Maximum Claim Amount (Loan Amount) in FHA?
The Maximum Claim Amount is the expected maximum principal balance for the loan duration. FHA uses the lower of the appraised value or the current FHA loan limit for the 203b program, which varies by county.
How is the Principal Limit at Origination determined?
The Principal Limit is determined by the age of the youngest borrower, the expected average interest rate, and the Maximum Claim Amount. It varies with lump sum or HELOC options, with interest and fees added monthly.
What is the Expected Average Interest Rate?
The Expected Average Interest Rate is used to calculate interest costs over the life of the loan. It’s the actual rate for fixed loans, or a combination of the U.S. Treasury Security rate and lender’s margin for adjustable loans.
What are the Fixed Rate and Adjustable Rate Loan Options in FHA?
Fixed Rate Loan: The rate is set at closing and never changes. Adjustable Rate Loans: Annual Adjustable Loan (rate based on 1-year U.S. Treasury rate + FHA margin, with annual and lifetime caps), and Monthly Adjustable Loan (lower interest but no annual cap).
Can borrowers change the interest rate plan after closing?
No, the interest rate plan chosen at closing remains in effect for the life of the loan, though borrowers can change payment options.
What is the Shared Appreciation program in FHA?
FHA allows lenders to offer lower interest rates in exchange for a portion of the home’s appreciation. Lenders can claim up to 25% of the appreciation increase.
How are Mortgage Insurance Premiums (MIP) structured?
FHA charges an upfront MIP of 2.00% of the Maximum Claim Amount at closing, and a monthly MIP of 0.5% of the outstanding balance. MIP is non-deductible.
What are the Underwriting Requirements for FHA loans?
Includes an appraisal to determine property value and condition, title policy to verify ownership, a credit report to check for delinquencies, and photo ID and Certificate of Counseling for borrowers.
What is required for the appraisal in FHA loans?
The appraiser certifies that the property meets FHA standards. Repairs under 15% of the value can be paid with HECM proceeds, while repairs over 30% need FHA review.
What is required for the Title Policy in FHA loans?
It determines ownership and lists any mortgages or liens that must be settled before closing.
What are the Verification of Deposit requirements for FHA loans?
Funds for closing, repairs, or loan payoff must be verified, except when the proceeds are used for these purposes.
What are the Lender Requirements for FHA loans?
Lenders must provide the borrower with a Good Faith Estimate, Truth-in-Lending Disclosure, loan cost disclosures, and any necessary disclosures for shared equity or adjustable loans.
What are the main challenges with Reverse Mortgages?
Reverse mortgages are expensive and complex, with fees like MIP and origination fees, and can lead to using most or all of a home’s equity. Unscrupulous lenders may exploit seniors in this market.
What is the Equal Credit Opportunity Act (ECOA)?
The ECOA, enacted in 1974, makes it unlawful for creditors to discriminate in credit transactions based on sex, marital status, race, color, religion, national origin, age, and other factors.
How does the Fair Housing Act (FHA) affect lending?
The FHA prohibits discrimination in residential transactions based on race, color, religion, sex, national origin, handicaps, or familial status.
