Chapter 14 Mortgage Default Insurance, Foreclosure, and Title Insurance

Chapter 14 Learning Objectives Understand how each of the three different default insurance plans - VA,FHA, and private mortgage insurance - operate Understand how each of the three different default insurance plans - VA,FHA, and private mortgage insurance - operate Understand how state foreclosure laws differ Understand how state foreclosure laws differ Understand the risk that is insured by title insurance Understand the risk that is insured by title insurance 14-1

Mortgage Default Insurance Partial Coverage Partial Coverage Full Coverage Full Coverage Self-Insurance Self-Insurance FHA Insurance FHA Insurance VA Insurance VA Insurance Private Mortgage Insurance (PMI) Private Mortgage Insurance (PMI) 14-2

HUD Insured Energy Efficient Loans Insured Energy Efficient Loans Insured Loans for Rehabs Insured Loans for Rehabs Insured Loans for Condos Insured Loans for Condos Insured Loans for Disaster Victims Insured Loans for Disaster Victims Reverse Mortgages Reverse Mortgages FHA Loans FHA Loans Sells Foreclosed Homes With FHA Loans Sells Foreclosed Homes With FHA Loans

FHA Loans Analyze Credit Risk to Minimize Foreclosure Analyze Credit Risk to Minimize Foreclosure Factors Analyzed Include Factors Analyzed Include Loan Amount Loan Amount Settlement Costs Settlement Costs Credit History Credit History Income Income Housing Expense Housing Expense

FHA Loans U.S. citizenship not required. House must be in the U.S. and must be principal residence U.S. citizenship not required. House must be in the U.S. and must be principal residence High-cost limit for one-family residence is $290,319 High-cost limit for one-family residence is $290,319 For-non-high-cost areas, the limit is 48% of the FHLMC conforming loan limits For-non-high-cost areas, the limit is 48% of the FHLMC conforming loan limits

FHA Loan Limits $160,176One Unit $160,176One Unit $205,032Two Unit $205,032Two Unit $247,824Three Unit $247,824Three Unit $307,992Four Unit $307,992Four Unit

FHA Loans MIP MIP Up-front payment plus an annual premium paid monthly Up-front payment plus an annual premium paid monthly Starting January 1, 2001 the up-front premium Is 1.50% and the annual premium Is 0.5% of the outstanding balance Starting January 1, 2001 the up-front premium Is 1.50% and the annual premium Is 0.5% of the outstanding balance Borrower can suspend the premium payment when the loan-to-value ratio reaches 78% of the original purchase price Borrower can suspend the premium payment when the loan-to-value ratio reaches 78% of the original purchase price

FHA Loans HUD does not regulate the contract interest rate or the amount of discount points paid by the borrower HUD does not regulate the contract interest rate or the amount of discount points paid by the borrower A discharged veteran with a certificate of veteran status can finance 100% of the purchase price A discharged veteran with a certificate of veteran status can finance 100% of the purchase price

FHA Loans: Determining The Loan Amount Price $50,000 or Less: 98.75% of the appraised value or sale price whichever is less Price $50,000 or Less: 98.75% of the appraised value or sale price whichever is less Price > $50,000: 97.75% of lesser of appraised value or sale price Price > $50,000: 97.75% of lesser of appraised value or sale price

FHA Loans Loan-to-Value ratio is limited to 85% with family relationship Loan-to-Value ratio is limited to 85% with family relationship House goes from principal residence to rental, L/V must be reduced to 75% based on current appraisal House goes from principal residence to rental, L/V must be reduced to 75% based on current appraisal Payment/Income Ratios Payment/Income Ratios PITI 29% PITI 29% PITI + Other Expenses 41% PITI + Other Expenses 41%

FHA Loans No mortgage assumptions after December, 1989 No mortgage assumptions after December, 1989 Non-Qualifying assumptions before December 1986 Non-Qualifying assumptions before December 1986 Will finance mobile homes Will finance mobile homes Offers RAMs Offers RAMs 62 years old 62 years old Own home Own home Principal residence Principal residence

FHA Loans Offers ARMs Offers ARMs TB Yield, 1/5 Caps, 2.00 Margin TB Yield, 1/5 Caps, 2.00 Margin In foreclosure, get an appraisal then decide whether to take title In foreclosure, get an appraisal then decide whether to take title Also offers graduated payment loans Also offers graduated payment loans

FHA Loans 3% equity investment required, does not have to be down payment 3% equity investment required, does not have to be down payment Can refinance up to 97% of the value Can refinance up to 97% of the value No credit history required No credit history required Mortgage refund- MIP is paid in full at closing. Refund time limit is 6 years from loan payoff Mortgage refund- MIP is paid in full at closing. Refund time limit is 6 years from loan payoff With a foreclosure, borrower must wait 3 years from date of claims payment With a foreclosure, borrower must wait 3 years from date of claims payment

FHA Loans With Chapter 7 bankruptcy, borrower must wait two years With Chapter 7 bankruptcy, borrower must wait two years With Chapter 13 bankruptcy, borrower must be paying for one year and be in good standing With Chapter 13 bankruptcy, borrower must be paying for one year and be in good standing

FHA Loans FHA Streamline Refinancing FHA Streamline Refinancing Less documentation Less documentation Existing FHA loan Existing FHA loan Not delinquent Not delinquent No equity cash out No equity cash out W/O appraisal if new loan amount is not more than old loan and no costs are added in W/O appraisal if new loan amount is not more than old loan and no costs are added in

FHA Loans FHA RAM FHA RAM Age 62 or older Age 62 or older No repayment as long as you occupy the house No repayment as long as you occupy the house Borrower pays insurance premium Borrower pays insurance premium 2% MIP instead of 1.50% 2% MIP instead of 1.50% Loan amount Loan amount AgeBorrow AgeBorrow 6526% of Value 6526% of Value 7539% of Value 7539% of Value 8556% of Value 8556% of Value

VA Loans Started in 1944 Started in 1944 Provides mortgage loan guarantees for principal residences Provides mortgage loan guarantees for principal residences Guarantees only a portion of the loan Guarantees only a portion of the loan No down payment may be required No down payment may be required Funding fee varies with down payment Funding fee varies with down payment >95%- 100%Loan2% >95%- 100%Loan2% >90%- 95%Loan1.50% >90%- 95%Loan1.50% 90% or LessLoan1.25% 90% or LessLoan1.25% Fee is waived for service related disability Fee is waived for service related disability

VA Loans Must have eligibility and entitlement Must have eligibility and entitlement Eligibility- Minimum active duty, 90 days for “ Hot War” Eligibility- Minimum active duty, 90 days for “ Hot War” Maximum Entitlement- $60,000 Maximum Entitlement- $60,000 Ginnie Mae requires a 25% guaranty Ginnie Mae requires a 25% guaranty Non-assumable since 1988 Non-assumable since 1988 Release of liability versus entitlement restoration Release of liability versus entitlement restoration

VA Loans Follows HUD/FHA foreclosure procedure Follows HUD/FHA foreclosure procedure Contract interest rate is not regulated Contract interest rate is not regulated Offers ARMs Offers ARMs TB Yield, 1/5 Caps, 2.00 Margin TB Yield, 1/5 Caps, 2.00 Margin VA will finance mobile homes VA will finance mobile homes

Private Mortgage Insurance (PMI) Private insurers Private insurers Insures top portion of loan Insures top portion of loan Pay claim and take title or just pay losses Pay claim and take title or just pay losses Homeowners Protection Act Of 1998 requires lenders to cancel PMI automatically when L/V is 78% Homeowners Protection Act Of 1998 requires lenders to cancel PMI automatically when L/V is 78% After July 29, 1999 can be cancelled at 80% L/V of original property value After July 29, 1999 can be cancelled at 80% L/V of original property value

PMI Other requirements for cancellation: Other requirements for cancellation: No payment more than 30 days late in last 12 months No payment more than 30 days late in last 12 months No payment more than 60 days late in last 24 months No payment more than 60 days late in last 24 months Property value has not declined Property value has not declined Protects conventional mortgages and cannot be required with 80% or less L/V ratio Protects conventional mortgages and cannot be required with 80% or less L/V ratio

PMI Some borrowers do “ Piggyback” loans called s to avoid PMI Some borrowers do “ Piggyback” loans called s to avoid PMI 80%First Mortgage 80%First Mortgage 10%Second Mortgage 10%Second Mortgage 10%Down Payment 10%Down Payment

Foreclosure Laws Judicial Foreclosure Judicial Foreclosure Court judgment against borrower allowed in all states Court judgment against borrower allowed in all states Power of Sale Power of Sale Foreclosure proceeds without a court order Usually with the deed-of-trust Foreclosure proceeds without a court order Usually with the deed-of-trust Equitable Right of Redemption Equitable Right of Redemption Redeem the property before the sale Redeem the property before the sale Statutory Right of Redemption Statutory Right of Redemption Redeem the property after the sale Redeem the property after the sale Deficiency Judgement Deficiency Judgement 14-3

Title Insurance Insures Good Title Insures Good Title Title Search Title Search 14-4