Chapter 12 Closing and Insurance

Learning Objectives 12-1 List the information required to complete a standard settlement statement Name and describe the four principal types of mortgage default insurance that protect lenders against losses that result from borrower default and subsequent foreclosure Describe the similarities and differences of the FHA and VA insurance programs

12-1 Objectives Con’t Compare private mortgage insurance programs to the government programs Define title insurance and indicate what losses it is intended to cover

Closing Analysis of the borrower’s financial position 12-2 Closing Analysis of the borrower’s financial position Disclosure of information required by RESPA, Regulation Z, and ECOA Lender is concerned with borrower’s ability to make the down payment and the monthly payments

Submission for Insurance 12-3 Submission for Insurance Most loans have default insurance FHA/VA have a common form FHA Direct Endorsement Program Lender performs the underwriting process Insurer (e.g. FHA) issues a mortgage insurance certificate

Transforming Title Promissory note is borrower’s promise to repay 12-4 Transforming Title Promissory note is borrower’s promise to repay Mortgage or Deed of Trust is the security instrument Deed conveys title Settlement statement is a record of actions and costs Recording of the deed Payment of mortgage insurance

Mortgage Default Insurance 12-5 Mortgage Default Insurance Partial versus full coverage Co-insurance: loans up to a certain portion are covered Self-insurance: lenders absorb the default risk themselves Cost is borne by the borrower (FHA or PMI) or by the federal government (VA)

VA Insurance Created by Serviceman’s Readjustment Act of 1944 12-6 Created by Serviceman’s Readjustment Act of 1944 Guarantee program for eligible veterans and their immediate families Must by primary residence VA guarantees a portion of the loan to the lender No protection for borrower Eligibility Funding fee various with down payment VA offers fixed-rate, adjustable rate, and graduated payment loans

FHA Insurance FHA created in 1934 to provide mortgage insurance 12-7 FHA created in 1934 to provide mortgage insurance FHA insures full amount of loan for one-to-four family properties Interest rate and discount points are negotiable Loan limits vary depending on housing cost for a given area Credit Check is required for a loan assumption

FHA Insurance Con’t Loan-to-value ratios can be up to 97 to 98 percent 12-7 FHA Insurance Con’t Loan-to-value ratios can be up to 97 to 98 percent Mortgage Insurance Premium is an up front premium plus an annual premium paid monthly Premium can be canceled at some future date in some cases

Private Mortgage Insurance(PMI) 12-8 Provided by private companies to protect lenders Insures conventional loans against default Insures a portion of the loan Co-insurance factor provides incentives to lenders to minimize losses Premium is an up front fee plus an annual fee

PMI Con’t Borrower can cancel PMI when LTV reaches 80% 12-8 PMI Con’t Borrower can cancel PMI when LTV reaches 80% PMI is automatically cancelled when LTV ratio reaches 78%

12-9 Title Insurance Insures against the risk that clear title may not be transferred Title abstract shows the title history of a property Title search reviews each title transfer of the property Title company conducts a title search and issues a title insurance policy Lender’s policy versus an owner’s policy