5 / CONVENTIONAL, INSURED AND GUARANTEED LOANS

This chapter is the first of four chapters that addresses the question of What kinds of loans are available? Included in this chapter is information pertinent to conventional, insured and guaranteed loans.

The conventional lender is held to the standards adopted and amended from time to time by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) commonly known as "Fannie Mae" and "Freddie Mac." These secondary market operators dictate how the conventional lenders will act because inevitably, these lenders will seek to sell their loans to them.

Conventional loans are so named because they are generally written without any third party guarantees. Thus, the lender has to exercise caution in their underwriting since the lender is directly at risk in the event of a default. However, if the conventional loan is issued at greater than 80% of the collateral property's value, the FNMA and FHLMC guidelines require that they be insured by a private mortgage insurance company.

This chapter also presents a comprehensive review of the current FHA programs. The recent financial institutions crisis and concomitant real estate recession created havoc with the FHA. Foreclosures overwhelmed its reserves and it was considered technically bankrupt. The government bailed it out, but the FHA management has severely tightened its underwriting requirements, driving borrowers to the conventional loan market.

Finally, the current activities of the DVA are examined in the light of their struggles to survive, with many of their potential borrowers also moving into the conventional market. Both the FHA and DVA have expanded into huge bureaucracies and have begun to introduce new products in order to preserve their market positions. But conventional lenders are moving aggressively into the low downpayment arena and have taken a large lead in numbers of loan originations.

This is the time to invite an experienced mortgage broker or banker to lead the class in a comprehensive exercise in securing a conventional, FHA and DVA loan. Not only should the presentation cover the terms and conditions of these loans, but an analysis of various loan applications should be made as to a borrower's ability to make payments.

Upon completion of this chapter, the student should be able to:

1. Describe the concept of loan-to-value (L/V) ratios;
2. Understand the underwriting guidelines established by FNMA and FHLMC for lenders who want to sell their loans in the secondary market;
3. Differentiate between conforming and nonconforming conventional loans;
4. Define conventional guaranteed mortgages;
5. Understand the organization and purposes of the FHA;
6. Identify the FHA programs;
7. Describe how an FHA loan may be secured;
8. Define the loan limitations of both FHA and DVA loans;
9. Determine the FHA and DVA loan income level requirements;
10. Analyze an adjustable rate loan and a graduated payment mortgage.

I. Conventional Real Estate Loans

A. Loan-to-value ratios (L/V)

1. 65% for land acquisition

2. 75% for land development

3. 80% for multifamily and commercial properties

4. 85% for one- to four-family properties

B. FNMA and FHLMC conventional loan guidelines

C. Conforming and nonconforming conventional loans

1. Conforming loan limits (see text)

D. Interest rates

E. Fixed-rate loans

1. Conventional loans are mostly fixed-rate loans

2. Loan payments are uniform throughout loan period

3. 30-year terms vs. 15-year terms

F. Adjustable-rate loans

1. Interest rates adjusted over term of loan

2. Adjustments made according to prescribed index

3. Adjustments usually made annually

4. Adjustments usually have annual and life-time caps

G. Private mortgage insurance

II. The Federal Housing Administration (FHA)

A. Organization and requirements

1. Under HUD

B. Program summary

1. FHA issues mortgage insurance protecting lenders

2. Eliminates lenders' risks

3. Stabilizes mortgage markets

C. Contributions to real estate finance

D. Advantages of FHA loans

1. High L/V ratios

2. Large variety of loan types eligible for FHA insurance

3. Most loans assumable

4. No prepayment penalties

E. Underwriting guidelines

1. Borrowers' income qualifications

a. 29% of gross income for payments

b. 41% of gross income for payments, maintenance and other debts

2. Maximum loan limits

3. Down payment requirements

a. 3% of first $25,000

b. 5% of amount $25,001-$125,000

c. 10% over $125,000

4. Loan settlement costs

5. Mortgage insurance premiums

6. Second mortgages and buydowns

7. Assumptions

a. FHA loans are fully assumable without any

interest rate adjustments

b. New buyers must qualify under the 29/41% rule

c. Investors can not assume existing FHA loans

8. Selected major FHA programs

a. Section 203(b) Home Mortgage Insurance

b. Section 203(b)(2)VET

c. Section 221(d)(2)Homeowners Ass. Program

d. Section 245 Graduated Payment Program

e. Title I Home Improvement Loans

f. FHA Adjustable Rate Mortgage (ARM)

(1) Indexed to one-year Treasury bills

(2) 1% per year cap

(3) 5% lifetime cap

9. Direct endorsement and coinsurance

a. Loans can be underwritten by approved lender

b. Loans can be processed by approved lender

F. FHA foreclosure sales

1. HUD holds weekly sealed bids on foreclosed properties

2. Some sold "as is"

A. Program application

B. Eligibility/entitlement

1. 90 days of continuous active duty in wars

2. 181 days of continuous active duty after wars

3. 24 months continuous active duty in peacetime

4. 6 years continuous active duty as reservist

5. Unremarried spouses also eligible

6. Limited to owner-occupied single-family homes and up to four multi-units

7. Veteran secures Certificate of Eligibility upon discharge from service

C. Schedule of guarantees

D. Interest

1. The DVA no longer specifies interest rates

2. This policy an experiment until October 28, 1995

E. Income qualifying requirements

F. Closing costs

1. Loan origination fee: 1%

2. Loan discount points: Market

3. Appraisal fee: $250

4. Credit report: $55

5. Title Insurance: Market

6. Recording fee: $20

7. Also pro-ration of interest and taxes and prepayment of impound funds

G. Funding fee

1. May be paid in cash or included in loan amount

2. See schedule in text

H. Second liens allowed when

1. Documents must be approved by DVA

2. Total loans may not exceed value of property

3. Interest rate on second may not exceed first

4. No prepayment penalty or balloon payment

5. Amortized at least five years

I. Buydowns allowed

1. Only on loans with level payments

2. Borrower qualifies at first year's payment rate

J. Assumptions

K. Release of liability and novation

L. DVA Graduated Payment Mortgage: no longer available

M. DVA Adjustable Rate Mortgage

1. Three-year test in affect from October 28, 1992

2. Adjustments indexed to average Treasury securities yield

3. Capped at 1% per year and 5% overall