© 2016 OnCourse Learning California Real Estate Finance Fesler & Brady 10th Edition Chapter 5 Conventional Loans

Objectives After completing this chapter, you should be able to: – Define a conventional loan. – List several advantages and disadvantages of a conventional loan. – Describe what to look for when choosing a lender. – Demonstrate how the Community Home Buyers Program assists first-time buyers. – Give an example of a buy-down loan. – Outline the basic features of the California Financial Discrimination Act. – Explain how private mortgage insurance (PMI) works.

Outline What is a Conventional Loan? Keeping Up with Lender Policies Buy-Down Loans Low Down Payment Conventional Loans California Fair Lending Regulations Private Mortgage Insurance (PMI)

Conventional vs. Government-Backed (Slide 1 of 3) Conventional – Financial institutions Government-backed – FHA – DVA – Cal-Vet

Conventional Loan vs. Government Backed (Slide 2 of 3) Advantages – Shorter processing time – Less red tape – No limit on loan amount if LTV <80% – Many lenders – Only one DVA, FHA or Cal-Vet – If lender keeps loan (portfolio loan), then very easy to qualify No Income-No Asset (NINA) documentation Stated Income-Stated Assets (SISA) loan Not around due to abuses Disadvantages – Higher down payments – Prepayment penalties (but rare)

What is a Conventional Loan? (Slide 3 of 3) Loan to value ratio (usually <90%) Type of property (varies with lender) Maximum loan amounts – Conforming (meet Fannie Mae/Freddie Mac max) – Jumbo (do not meet) – Conforming “high balance” loans Interest rates Loan fees (traded for interest rates) Prepayment penalties – Could be six month’s interest on amount exceeding 20% of original loan Borrower qualifications Types of loans – Fixed rate – Adjustable

Keeping Up with Lender Policies Communicate with lenders Talk to representatives Talk to other sales people Use Internet services Read newsletters and flyers Attend Multiple Listing Service meetings

Buy-Down Loans Interest rate is initially very small But rises over term Seller usually pays lender points But increases price of property However, needs to be reflected in appraisal Differentiates property Increase buyer’s ability to qualify Less than price reduction

Low Down Payment Conventional Loans 96.5% loan to value Income qualifying is easier Borrowers can have “less than perfect” credit history (but still 620 FICO) Borrowers attend home buyer educational seminar Might have maximum income reqs Single family, owner occupied

Community Home Buyer’s Program For low and moderate income home buyers Allows for 3% down and 2% from family gifts or government loans Emphasis on stable job history Steady rent and utility payments Ceiling on qualifying income level Must purchase private mortgage insurance Scaled back in 2009 due to 90% LTV loans

California Fair Lending Regulations (Housing Financial Discrimination Act) (aka Anti-Redlining Law) Financial institutions cannot deny or discriminate – Amount – Interest rate – Length of loan Based on – Neighborhood – Race, color, religion, sex, marital status or registered domestic partnership, sexual orientation, national origin, handicap, ancestry, family size or other – Racial, ethnic, religious, national origin, or income level composition of neighborhood No discrimination by effect

California Fair Lending Regulations (continued) Document factors that are likely to cause value of property to decrease in next five years Natural or other hazardous conditions Physical condition of property creates an imminent threat to health or safety Decisions based on individual property unless neighborhood conditions exist. Pending or recent zoning

California Fair Lending Regulations (continued) Supplemental income must be considered if stable Husband and wife income together No favoritism if previous homeowner Payment-to-income ratios should be flexible No corrective work because of code violations – Unless >10% of value No rigid list of onsite characteristics Written loan standards available Give applicant fair lending notice

Mortgage Insurance Usually for >80% loan to value Sold by Private Mortgage Insurance (PMI) companies Guarantees payment if lender forecloses – But only 12 – 30% of loan depending on loan to value Does not insure borrower’s life like credit life insurance Not usually tax deductible unless increased interest rate Can cancel after two years or when LTV < 80% or 20% equity Qualify very fast (usually one day) Sometimes PMI pays off lender and takes property title Sometimes PMI pays insurance and lender keeps property

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