Download Lecture / Chapter 3

Lecture 14
Residential
Financing
Items To Consider When Shopping
Home Loans








Size of Down Payment
Mortgage Interest Rate
Rate-Lock Period
Length of Grace Period
Late Charge for Overdue Payments
Prepayment Clauses/Penalties
Due-on-Sale Clause
Financing Costs/Points
Types of Home Loans

Conventional Financing

Federal Housing Administration (FHA)

Department of Veterans Affairs (VA)
Residential Mortgage Loans
APPLICATION PROCEDURE
1. Complete and Submit Loan Application
2. Within 3 business days, Lender provides the borrower:
- Good Faith Estimate of Settlement Costs
- Truth-In-Lending disclosure statement, demonstrating costs of mortgage
financing considering all financing costs
- U.S. HUD booklet explaining RESPA protections to the borrower
Residential Mortgage Loans
APPLICATION PROCEDURE
3. Lender obtains credit reports of borrower from three sources
4. Borrower provides to the lender W-2 tax information, income statements,
verification of employment and history, proof of assets (bank
statements), etc.
5. Loan goes through “underwriting”
-Borrower’s current and expected debt obligations, credit review
Conventional Mortgage Loans:
Private Mortgage Insurance (PMI)
Insures lenders against deficiency losses on mortgages that are considered
risky because they are loans with low down payments
Required for LTV ratios over 80% (20% equity capital, 80% debt capital)
Typically insures top 20% to 25% of the debt capital (NOT sales price)
Federal Housing Administration
(FHA)
Loans made by supervised lending institutions
which are partially insured by the U.S. Government
MAXIMUM LOAN LIMITS - JACKSONVILLE MSA (2006)
One Family:
$209,000
Two Family:
$256,248
Three Family:
$309,744
Four Family:
$384,936
Federal Housing Administration
(FHA)
INSURANCE PREMIUM
1. Funding Fee: 2.25% of loan for 30-year, 2.00% for 15-year.
(can be financed into the loan)
2. Mortgage Insurance Premium (MIP): Annual premium of 0.5% of
the loan amount (paid monthly) for 30-year loans, 0.25% for 15-year
loans.
Department of Veterans Affairs (VA)
Loans made by supervised lending institutions
which are partially guaranteed by the U.S. Government
Primary Benefit: Zero-Down Payment Financing
Loan applicant must be active for 181 days if currently listed in armed forces
Discharged Personnel: Must have served at least two years to apply
Application for a VA loan the same as conventional or FHA financing, but
further requires a Certificate of Eligibility
Department of Veterans Affairs (VA)
INSURANCE PREMIUM
1. Funding Fee (based on amount of down payment):
First Use:
1.25% to 2%
Additional Uses:
1.25% to 3%
National Guard Duty:
2% to 2.75%
(can be financed into loan or paid up-front)
2. NO MIP REQUIRED
Lecture 14
Other Types of
Residential
Financing
Types of Residential Financing

15-Year Loan
–
–
–

Faster loan maturity
Lower interest rates than 30-year term
Lower total interest due than 30-year term
7-Year Balloon (Interest-Only Financing)
–
–
Lower monthly payment; larger “balloon” payment due at end
of term
Borrower anticipates selling before balloon due, or makes
arrangements for refinancing balloon amount (loan balance).
Types of Residential Financing

Adjustable Rate Mortgage (ARM)
–
–
–
–
–
May be able to obtain a lower interest rate than a FRM
mortgage because a lender is not locked-down in a high-rate
market
Borrower accepts risk of floating interest rates
Buyer somewhat protected by interest rate caps
Interest rates marked by indices such as LIBOR, U.S.
Treasury Securities, etc.
Offer “teaser rates” at the beginning
Types of Residential Financing

80 / 20 Loans
–
–
–
80% 1st Mortgage, 20% 2nd Mortgage
No MIP/PMI
Some Loans allow 2nd Mortgage to be openended, similar to a credit card
Lecture 14
Borrower
Competition for
Mortgage Money
Competition For Mortgage Money

Government

Business

Households
Lecture 14
Types of Mortgage
Lenders
Mortgage Lenders

Mortgage Companies
–


Commercial Bank
Thrift Institutions
–

Mortgage Bankers, Mortgage Brokers
Savings & Loan Associations, Savings Banks,
Mutual Savings Banks, Credit Unions
Individuals