©2011 Cengage Learning

California Real Estate Principles Chapter 8 Part II: FHA, VA, and CAL- VET Loans and the Secondary Mortgage Market ©2011 Cengage Learning

Chapter 8 Part II Discuss the main characteristics of FHA insured, VA guaranteed, Cal-Vet loans and Cal HFA. Define the secondary money market. List the 3 agencies that play a major role in the secondary money market. ©2011 Cengage Learning

Loan Types Conventional loans FHA DVA Cal-Vet Private mortgage insurance FHA Government insures loan DVA Government guarantees loan Cal-Vet California state buys the property and sells it to the Vet on a land contract and long term lease ©2011 Cengage Learning

Federal Housing Administration (FHA) Government insures NOT makes loan Loan made from lender Requires up-front mortgage insurance premium UFMIP Requires annual premium fee paid monthly of ½ of 1% of unpaid balance Program Payments = PITI (insurance) No secondary financing with NEW loan No maximum price but a maximum loan amount 1-4 unit residential dwellings Discount points are negotiable & paid by either party ©2011 Cengage Learning

FHA Advantages of FHA Disadvantages of FHA Lower down payment (approx. 3.5%) No prepayment penalty Minimum property standards Disadvantages of FHA Increased processing time Property requirements may discourage sellers Cost of mortgage insurance decreases amount of home loan ©2011 Cengage Learning

FHA 203b Acquisition cost (appraisal + some closing cost) 96.5% of acquisition cost to maximum loan allowed Maximum loan is 95% of median home or 75% of FNMA whichever is less Current maximum in our area is $ ©2011 Cengage Learning

Department of Veteran’s Administration (DVA) DVA guarantees the loan to protect lender Loan information Interest rate negotiable between borrower & lender Value determined by Certificate of Reasonable Value (CRV) Zero down payment allowed Vet must have Certificate of Eligibility (DD214) Vet must occupy the property ©2011 Cengage Learning

DVA Advantages of a DVA loan Disadvantages of a DVA loan No down payment on loans up to the current maximum amount. (Instructor: Give students current amount) Lower interest rate due to government guarantee No prepayment penalty on loan payoff May be used more than once if old VA loan paid off and veteran released Disadvantages of a DVA loan Only a Veteran qualifies May be discount points to entice lender to greater yield Loans not assumable without credit check and assumption fee Red tape with government may take longer for approval ©2011 Cengage Learning

SUMMARY VA PROGRAM Loans to owner-occupied qualified veterans for homes No money down on maximum home loan amount equal to Fannie Mae loan amount; the current maximum is $________ Interest is determined in the current marketplace Vet is charged loan and funding fees Vet may use more than once as long as the former VA loan is paid off or assumed ©2011 Cengage Learning

CAL-VET Calif. Farm/Home Purchase Program All vets residing in California Title is in the name of the State of California Title passes to vet when state paid off Vet gets a long-term lease and land contract Loan brokers may now process the loan Variable rate loan Funds received from sale of bonds ©2011 Cengage Learning

Cal-Vet Program Loans to owner-occupied qualified veterans for homes and farms Maximum loan amounts vary each year; current maximum for: Home is $ ___________ Farms is $ ___________ Cal-Vet loans guaranteed by VA are no money down to maximum VA approved loans amount; regular Cal- Vet loans require 2-3% down payment On regular Cal-Vet loans the interest rates are variable with the current rate set at ________ % ©2011 Cengage Learning

Loan Limits - Maximum VA – www.va.gov $________ FHA – www.HUD.gov 1 Unit $__________ 2 Units $__________ 3 Units $__________ 4 Units $__________ Cal-Vet(1-800-952-LOAN) $__________ FNMA/FHLMC Single Family $__________ Two Units $__________ Three Units $__________ Four Units $__________ ©2011 Cengage Learning

Note Note Flow of funds Existing loans are bought and sold Borrower Primary Lender in Primary Market Note Secondary Market Investors ©2011 Cengage Learning Supply & Demand of mortgage credit

Secondary Mortgage Market Federal National Mortgage Association Fannie Mae (FNMA) Issues stock to general public Provides blended rate mortgages Issues mortgage-backed securities FHA/VA/Conventional 1-4 units ©2011 Cengage Learning

Secondary Mortgage Market Federal Home Loan Mortgage Corporation Freddie Mac (FHLMC) Issues stock to general public Buys and resells residential conventional mortgage loans Requires loan insurance if loan over 80% of appraisal Government National Mortgage Association Ginnie Mae (GNMA) Guarantees securities issued by FHA-approved home mortgage lenders ©2011 Cengage Learning

Review Quiz Chapter 8 All of the following are non-institutional lenders, except: a. credit union b. Mortgage company c. life insurance company d. Pension fund A seller’s financial disclosure statement must be signed by the: a. buyer b. seller c. broker d. all of the above ©2011 Cengage Learning

Review Quiz Chapter 8 The ultimate source of all loan funds is: a. taxes b. government spending c. transfer payments d. savings A secondary mortgage market is where: a. existing lenders sell to other lenders and investors b. a seller carries a junior trust deed c. the supply of funds available for real estate loans is decreased d. the Federal Reserve tightens mortgage interest rates ©2011 Cengage Learning

Review Quiz Chapter 8 Using the ratio 1/6 difference = 1 point, if the lender wants a VA rate of 8% and the veteran only qualifies for 7.5%, how much would a seller have to pay up front to get the lender to grant a $3,000 loan? a. $4,000 b. $3,700 c. $2,800 d. $3,600 ©2011 Cengage Learning

Review Quiz Chapter 8 For gross income purposes, most lenders want the borrower to have at least a work history of at least: a. 1 year b. 2 years c. 3 years d. 4 years Private mortgage insurance (PMI): a. makes the payments if the borrower gets disabled b. is paid for by the lender c. pays the loan off if the borrower dies d. insures the lender for the top portion of the loan ©2011 Cengage Learning

Review Quiz Chapter 8 Which of the following types of loans are made only to individuals who are intending to occupy the property as a personal residence? a. VA b. conventional c. purchase money d. jumbo ©2011 Cengage Learning

Review Quiz Chapter 8 Which government program carries a prepayment penalty if the loan is paid off in less than 5 years? a. VA b. Cal-Vet c. FHA d. none of the above A loan made by a lender who intends to keep the loan until paid: a. conforming loan b. jumbo loan c. portfolio loan d. domestic loan ©2011 Cengage Learning

Answers to Review Quiz Chapter 8 C 6. B D 7. D D 8. A A 9. B A 10. D ©2011 Cengage Learning