1. Chapter 11 Government Programs: FHA and VA Loans

2. I. Federal Housing Administration

3. Federal Housing Administration The Federal Housing Administration (FHA) was created by Congress in 1934 as part of the NATIONAL HOUSING ACT. The FHA’s primary function is to insure loans. FHA approved lenders are insured against losses caused by borrower default. As the insurer, the FHA incurs full liability for losses resulting from default and property foreclosure. As the insurer, the FHA incurs full liability for losses resulting from default and property foreclosure. The FHA insurance program is called the Mutual Mortgage Insurance Plan ( MMI).

4. Housing and Economic Recovery Act of 2008 Enacted July 30,2008, this act was passed by the U.S. Congress to primarily address the subprime mortgage crisis. The law is in effect until September 30, 2011. Summary of Act: Increases the FHA loan limit from 95% to 110% of area median home price up to 150% of the GSE conforming loan limit, or $625,000 Requires a down payment of at least 3.5% Places a 12 month moratorium on HUD implementation of risk- based premiums Prohibits seller-financed down payments Allows down payment assistance from family members

5. A. FHA LOAN FEATURES Any loan intended for submission for FHA insurance has a number of features that distinguishes it from a conventional loan. The most significant of these features are: 1. Less stringent qualifying standards. 2. Low down payment. 3. No secondary financing is allowed for the down payment. 4. Some closing costs may cover down payment. 5. FHA mortgage insurance is required for the loan regardless of the amount of the down payment. 6. No prepayment penalties are allowed. 7. The property must be owner-occupied.

6. B. OTHER CHARACTERISTICS OF FHA LOANS The typical FHA loan has a 15 and 30-year terms. The FHA requires their loans to have a first lien position. A lender may only charge a 1% origination fee on an FHA loan, but is allowed to charge discount points. The lender is required to obtain an appraisal of the property from an FHA approved appraiser. Unlike many conventional loans, FHA loans are fully assumable without any increase in interest rates. A lender is also prohibited from exercising any “due on sale” clause on an FHA transfer. FHA loans are not assumable by investors.

7. C. INCOME QUALIFICATIONS AND MAXIMUM LOAN AMOUNTS There is no minimum income requirement for an FHA loan. There is no minimum income requirement for an FHA loan. Borrowers must show two years of steady employment and demonstrate that they have consistently paid their bills on time. The FHA has a ratio of 29% and 41%. This means that the payments for a home loan may not exceed 29% of the borrower’s gross monthly income and all installment debt, including the home loan payment, may not exceed 41%. The FHA has a ratio of 29% and 41%. This means that the payments for a home loan may not exceed 29% of the borrower’s gross monthly income and all installment debt, including the home loan payment, may not exceed 41%. These amounts, which vary by state as well as location within a state, are adjusted yearly.

8. D. MUTUAL MORTGAGE INSURANCE (MMI) All FHA loans require a mortgage insurance premium. All FHA loans require a mortgage insurance premium. The mortgage insurance is referred to as MUTUAL MORTGAGE INSURANCE (MMI). FHA charges an up front premium of 1.25 – 2.25% of the loan amount. FHA charges an up front premium of 1.25 – 2.25% of the loan amount. In addition, FHA charges a monthly premium equal to.05% of the loan amount annually. When the loan balance drops below 78% of the original purchase price, the monthly payment will automatically be cancelled, provided the borrower has made monthly payments for five years on a thirty-year mortgage. When the loan balance drops below 78% of the original purchase price, the monthly payment will automatically be cancelled, provided the borrower has made monthly payments for five years on a thirty-year mortgage.

9. II. FHA Programs

10. HOPE for Homeowners When the subprime mortgage crisis reached its peak in the fall of 2008, the federal government took steps to help stabilize the American housing market. The Emergency Economic Stabilization Act of 2008 was signed into law on October 3,2008. Named the HOPE for Homeowners Act, this new law is designed to prevent qualified home owners from defaulting on their loans and avert foreclosures. This is done through refinancing into affordable, fixed-rate mortgages.

11. A. FHA 203b FIXED RATE PROGRAM With a 203b FIXED RATE PROGRAM, a down payment of 3.5% of the sales price is required. Gifts from family members are allowed, as are payments from government or non-profit agencies that are designed to help first time or low income buyers. FHA does not require the borrower to have cash reserves. 2 years of employment prior to application is required. All owner occupied one-to-four unit family residences are eligible.

12. B. FHA 251 ADJUSTABLE PROGRAM The FHA 251 ADJUSTABLE PROGRAM is a thirty-year adjustable rate mortgage. It is indexed to the one-year Treasury Bill rate and is adjusted annually. The adjusted rate may not move higher or lower than 1% per year. The rate is capped at 5%. Eligible property types, mortgage insurance premiums, closing costs rules, down payment requirements, and qualifying ratios are the same as for the 203b program.

13. C. FHA 203k PURCHASE AND REHABILITATION PROGRAM The FHA 203k PURCHASE AND REHABILITATION PROGRAM was developed to help revitalize communities and neighborhoods. The FHA 203k PURCHASE AND REHABILITATION PROGRAM was developed to help revitalize communities and neighborhoods. Normally, in conventional practice, a homebuyer must first purchase the home and then obtain construction financing to rehabilitate the home. The 203k program permits a borrower to obtain a property in need of rehabilitation with just one loan. The 203k program permits a borrower to obtain a property in need of rehabilitation with just one loan. The program allows loans on one-to-four unit family dwellings that are at least one- year old. The 203k program also allows loans on mixed use properties. A MIXED USE PROPERTY combines a single-family residence with a commercial building. The 203k program also allows loans on mixed use properties. A MIXED USE PROPERTY combines a single-family residence with a commercial building. A 203k loan has a minimum requirement of $5,000 in needed repairs that cover the health and safety of the occupants.

14. 1. Steps in the 203k Program First, after locating a prospective property, the buyer and his or her real estate agent make a preliminary analysis of the extent of repairs necessary and a rough estimate of the cost of the work to be carried out. First, after locating a prospective property, the buyer and his or her real estate agent make a preliminary analysis of the extent of repairs necessary and a rough estimate of the cost of the work to be carried out. Then a sales contract is executed, including provisions that the borrower has applied for 203k financing and that the contract is contingent upon approval of this financing. The buyer then contacts an approved FHA lender. The buyer then contacts an approved FHA lender. The lender will, at this stage, recommend an FHA-approved 203k consultant (generally a contractor) to help the buyer draw up the necessary work write-ups and cost estimates. The appraiser will then carry out an appraisal of the property.

15. 203k (cont.) FHA then issues a mortgage insurance certificate to the lender. Repair work may begin at the time of closing and must be completed within six months. The repair funds are disbursed as each stage of rehabilitation is completed. The repair funds are disbursed as each stage of rehabilitation is completed. Upon overall completion, a final inspection is carried out by the FHA-approved inspector. Upon overall completion, a final inspection is carried out by the FHA-approved inspector. The mortgage will then close and the lender will submit the closing documents to FHA. The lender will review the application and issue a conditional commitment and statement of appraised value.

16. D. FHA TITLE I PROGRAM The FHA TITLE I PROGRAM is designed to allow homeowners to finance light repairs or permanent improvements to their homes. Loans of up to $25,000.00 will be insured for a maximum of twenty-five years. The borrower also pays a mortgage insurance premium for a Title I loan.

17. III. VA Loan Guaranties

18. VA Loan Guaranties In 1944, a grateful U.S. Congress passed the Serviceman’s Readjustment Act to provide returning World War II veterans with education, medical, and home loan benefits to help them readjust to civilian life. In 1944, a grateful U.S. Congress passed the Serviceman’s Readjustment Act to provide returning World War II veterans with education, medical, and home loan benefits to help them readjust to civilian life. This law is often referred to as the G.I. BILL. Veteran’s benefits are managed by the DEPARTMENT OF VETERANS AFFAIRS (VA). Veteran’s benefits are managed by the DEPARTMENT OF VETERANS AFFAIRS (VA). One very important benefit is the VA home loan guaranty.

19. A. VA LOAN GUARANTY CHARACTERISTICS The VA program has a number of features that are attractive to borrowers who qualify: The VA program has a number of features that are attractive to borrowers who qualify: 1. A VA loan may not have prepayment penalties. 2. A VA loan may be assumed by anyone; the new buyer does not have to be a veteran. 3. No mortgage insurance is required. 4. Funding fees may be financed. 5. Builder warranty is required on new homes. 6. Closing costs may be paid by seller. Current closing cost items include: 1. A maximum 1% origination fee. 2. Appraisal fees are set by Regional VA offices. The fee may not be more than is reasonable and customary for the area. 3. Credit report fees may not exceed the cost charged to the lender. Credit research fees of $50.00 charged by Loan Prospector® are allowed. 4. The veteran may pay for hazard and flood insurance, if required. 5. The veteran may pay for title insurance. 6. The veteran must pay the VA funding fee. 7. The veteran may pay for recording fees. 8. The veteran is responsible for prorated interest and property taxes.

20. 1. Sale by Assumption Veterans who obtain loans guaranteed by the VA are legally obligated to indemnify (pay back) the United States government for any claim paid out by the VA under the loan guaranty. To facilitate a veteran’s release from liability on a loan a new buyer intends to assume, it is best to include in the sales contract a provision to that effect. The sales agreement should provide that the buyer will assume all the seller’s loan obligations, including the liability for indemnity on the VA loan, and that the sale will not be closed unless and until the VA approves the credit and income of the purchaser. The seller must apply to the VA for a formal release of liability. The seller must apply to the VA for a formal release of liability. If the sale closes without first obtaining the release from the VA, the veteran will find that he or she is fully liable in the case of a default.

21. 2. Restoration of Entitlement A veteran who has paid off his or her loan, and sold the house on which the loan was secured, may have all his or her entitlement restored. ENTITLEMENT is the maximum insurance amount that the VA will provide for the veteran’s home loan. By act of Congress, the veteran is entitled to the amount by virtue of his or her service in the armed forces. Entitlement may also be restored if the property is sold to another veteran who substitutes his or her entitlement for the seller’s. To restore entitlement, the veteran must apply to the VA and fill out the necessary forms. To restore entitlement, the veteran must apply to the VA and fill out the necessary forms.

22. 3. Eligibility Eligibility requirements for a VA loan vary depending on when and where a veteran served and the length of the service. Eligibility requirements for a VA loan vary depending on when and where a veteran served and the length of the service. In general, the periods for active wartime service are:  WWII 09/16/40 - 07/25/47  Korean Conflict 06/27/50 - 01/31/55  Vietnam Era 08/05/64 - 05/07/75  Persian Gulf War 08/02/90-TBD Peacetime veterans are also eligible for the periods:  07/26/47 to 06/26/50  02/01/55 to 08/04/64  05/08/75 to 09/07/80 (enlisted) 10/16/81 (officer)

23. Eligibility (cont.) Selected reserves and National Guard are eligible after six years of service. Members of the military who have served in Iraq and Afghanistan or are currently serving are eligible for all benefits. Members of the military who have served in Iraq and Afghanistan or are currently serving are eligible for all benefits. The spouse of a serviceperson who died while in service. Lastly, Public Health Service officers, cadets at the service academies, some merchant seamen of WWII, and officers of the National Oceanic and Atmospheric Administration may be eligible as well. Lastly, Public Health Service officers, cadets at the service academies, some merchant seamen of WWII, and officers of the National Oceanic and Atmospheric Administration may be eligible as well.

24. 4. VA Loan Guaranty Amounts The VA does not guarantee the entire amount of a loan. The VA does not guarantee the entire amount of a loan. A veteran’s maximum entitlement is currently $36,000. This may be adjusted upwards on certain loans. On October 10, 2008 the President signed the VETERANS BENEFITS IMPROVEMENT ACT OF 2008 The following are highlights of the changes to the program: 1. Authority to guarantee adjustable rate mortgages and hybrid ARMs has been extended through 9-30-2012 2. Refinance loans are available for up to 100% of the appraised value of a home rather than the previous 89% 3. Guaranty amounts for loans of $417,000 or less are unaffected 4. On loans for more than $417,000, the VA will guarantee 25% of the original loan amount up to a maximum guaranty

25. 5. Partial Entitlement A veteran who used his entitlement to purchase a home in the past may use that portion of his remaining entitlement to purchase a second home. Example: A veteran used the maximum entitlement of $25,000 that was available in 1978 to purchase a home. Today, he wishes to purchase a second vacation home. The home is priced at $100,000. The veteran has $11,000 remaining in entitlement ($36,000 - $25,000 = $11,000).

26. B. THE VA LOAN PROCESS The first step in the process is to determine if the veteran has a Certificate of Eligibility which was given to him/her as part of their discharge papers. A CERTIFICATE OF ELIGIBILITY notifies the lender that the veteran is eligible for a VA loan and what his or her entitlement will be. All lenders are responsible for conforming in full to VA requirements. This includes the use of VA-approved appraisers and underwriters.

27. IV. CHAPTER SUMMARY The FHA and VA loan programs are huge federal insurance programs that are backed by the full faith and credit of the U.S. Government. The FHA has been a boon to the lending, construction, and real estate markets since its beginning. MMI Additional Programs (203b, 251, 203k) Title I The VA programs are designed to provide veterans returning to civilian life an opportunity to enjoy the benefits of home ownership. No prepayment penalties No prepayment penalties No mortgage insurance No mortgage insurance Liable to U.S. Gov’t (Indemnity) Liable to U.S. Gov’t (Indemnity) Assumable Assumable Entitlement/Partial Entitlement Entitlement/Partial Entitlement