Residential Financing

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Lecture 14

• Residential Financing

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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

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Types of Home Loans

• Conventional Financing
• Federal Housing Administration (FHA)
• Department of Veterans Affairs (VA)

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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
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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 -Borrowers current and expected
debt obligations, credit review
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Conventional Mortgage LoansPrivate 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)
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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 Fo
ur Family 384,936
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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.
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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
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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
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Lecture 14

• Other Types of Residential Financing

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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).

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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

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Types of Residential Financing

• 80 / 20 Loans
• 80 1st Mortgage, 20 2nd Mortgage
• No MIP/PMI
• Some Loans allow 2nd Mortgage to be open-ended,
  similar to a credit card

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Lecture 14

• Borrower Competition for Mortgage Money

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Competition For Mortgage Money

• Government
• Business
• Households

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Lecture 14

• Types of Mortgage Lenders

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Mortgage Lenders

• Mortgage Companies
• Mortgage Bankers, Mortgage Brokers
• Commercial Bank
• Thrift Institutions
• Savings Loan Associations, Savings Banks,
  Mutual Savings Banks, Credit Unions
• Individuals