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Residential Financing Considerations: Size, Rate & More

Discover key factors when shopping for home loans, including down payment, interest rate, rate-lock period, and more. Explore types of loans like conventional, FHA, and VA, and learn about the application procedure.

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Residential Financing Considerations: Size, Rate & More

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  1. Lecture 14 Residential Financing

  2. 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

  3. Types of Home Loans • Conventional Financing • Federal Housing Administration (FHA) • Department of Veterans Affairs (VA)

  4. 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

  5. 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

  6. 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)

  7. 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

  8. 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.

  9. 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

  10. 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

  11. Lecture 14 Other Types of Residential Financing

  12. 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).

  13. 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

  14. 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

  15. Lecture 14 Borrower Competition for Mortgage Money

  16. Competition For Mortgage Money • Government • Business • Households

  17. Lecture 14 Types of Mortgage Lenders

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

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