Non-Traditional Lending

To the Students from the March 29-31 Prelicensing Class in Bellevue, WA

Hi Everyone,

Here are the Q&As from Day 1.

There was a question about Errors and Omission Insurance available for loan originators. In doing research, I see that carrying this type of insurance is a requirement already in some states and in those states, insurance carriers have stepped up to offer the product. I can forsee a point in the future where lenders will require this in all states.

Here is a link to a good FAQ page on the new WA State Domestic Partnership Law with links to the final bill signed into law.

There was a question regarding whether or not we can originate Pay Option ARMs or ARMs with negative amortization in WA State and David W referenced a 2008 law.  Here’s the RCW. Click on “negative amortization” to read more. See 19.144.050:

“A financial institution may not make or facilitate a residential mortgage loan that includes any provisions that impose negative amortization and which are subject to the interagency guidance on nontraditional mortgage product risks and the statement on subprime mortgage lending.”

To get the full answer, we need to refer to “the interagency guidance on nontraditional mortgage product risks…” located here, that was written way back in 2005.   Interesting that when you read the NTM attachment at the bottom of the page, the FRB specifically excludes reverse mortgages but specifically INCLUDES interest only loans. So are we still doing interest only loans in WA State?

DAY 2

I promised a link to the Financial Crisis Inquiry Commission….and a blog post I wrote to them.

There was a question as to whether a person can still add an “authorized user” to their account to help improve another person’s credit score. Here’s what the folks at FICO have to say about that.

Here’s a link to HUD’s Frequently Asked Questions PDF on the new RESPA changes. This page also has a link to the new HUD Booklet for the consumer.

…and here’s a link to a page on NAMF that has the links to all the state and federal laws for further review. Remember, for the sake of efficiency, it’s important to know the purpose of each law which is stated in the preamble.

DAY 3

Oh my. I found lots of consumer complaint articles about bankrate.com and some revolve around bankrate blaming the lenders for providing inaccurate info.

There was a request for more information on commercial loan modifications and commercial loan defaults locally and nationally.

There was a request to read more about HVCC (the Home Valuation Code of Conduct.)

Cristy was right. There is more discussion about further limiting loan originator compensation structure.  Here’s a nice summary/testimony pdf. This rule has a better than 50% chance of passing due to the current political climate. We’ll have to keep an eye on this.

Well Nik called with his NMLS number so now you know I’ll be able to sleep tonight, and get ready for FRIDAY! Here’s some web surfing music tonight to keep you company from Muse and SSPU.

Z3 Case Studies

Pedro and Kip are ready to buy a home.  Kip is a Veteran and they want to use her VA Eligibility Certificate to finance a home.  Pedro just finished college and has a degree in theater.  He is new on the job and works in customer service in a white collar industry.  Kip has worked part time in retail sales for 3 months. Prior to that she was in the service and was trained as “Human Resources Specialist” but currently can’t find work in that field.  Pedro has some credit and what he does have is good but Kip had problems using lots of payday lenders trying to make ends meet and her credit history is poor, her score is just over 600. What loan type would you recommend for this married couple?

Z2: Case Studies

Vashon and Riley want to re-enter the housing market as investors. (They currently own their own single family homes.) They have attended several investment seminars put on by local real estate agents and have decided to begin buying homes at the foreclosure auctions or buying REOs from the banks.  They both have $50,000. to invest for a combined total of $100,000 capital.  What type of mortgage loan would you recommend for these two investors?  We can assume they will qualify with decent credit scores and DTI ratios.
 

Z1: Case Studies

Steve and Scott want to buy a small, 4 unit investment property. They will each live in a unit and they will rent out the other two units.  Steve is a Veteran. The home is located in a USDA approved area.  They have saved 10% for a downpayment. Which loan program would your group recommend for Steve and Scott?

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Greg and Lisa have lots of money. They’ve always been savvy about knowing when to make a move on a good investment and they believe the housing market has bottomed and now is finally the time to buy.  Unfortunately, they have not been terribly good at making their payments on time.  Their credit reports show a long history of not paying their bills on time, lots of medical collections, a bankruptcy tied to a medical illness, and no real “reestablished credit” after the bankruptcy was discharged…but they have a lot of money in the bank. They can make a 20% downpayment on a home.  What type of loan would best suit this couple?

VA Loans

VA guaranteed home loans benefit veterans because they do not need to make a down payment and there is no upper limit or required cap on the income of the borrower.  Without a down payment as security against foreclosure, lenders receive a certificate of guaranty from VA.  In essence, as gratitude for honorable military service, the government is vouching for the veteran’s trustworthiness to repay his/her debt.  
 
To determine eligibility, a military veteran, active duty person, or a member of the National Guard or selected reserves, must submit a VA Form 26-1880 along with proof of service (DD Form 214, a statement of active duty, or proof of participation in the national guard or reserves) to the VA Eligibility Center, P.O. Box 20729, Winston-Salem, NC 27120.  Based on the applicant’s length and type of service, VA issues a certificate for each person determined eligible to apply for a VA guaranteed home loan. 

The seller can contribute up to 4% of the home price for their non-recurring closing costs and impounds.
Veterans must qualify on full income documentation. PITI plus all other debt (second ratio) must be under 43% of their gross monthly income unless they meet the VA residual income qualifications.  Current service members receive an allowance for housing and food and those figures can be “grossed up” 115% for income qualification.

Appraisers are assigned by VA and the lender orders the appraisal. Many lenders participate in a delegated underwriting program but some opt to let the VA underwrite the appraisal.

VA doesn’t have a minimum required credit score though some lenders might have a minimum.  A 12-24 month history of decent and reasonable payment history is required.

Underwriting: All loans will be submitted to DU. Approve/Eligible decision is required. If refer/eligible, the brokers will submit the full credit package to the lender for underwriting.

Minimum FICO for manual underwriting will vary from lender to lender. 

Maximum LTV:
Purchase 100% + funding fee
No cash out refinance 90% + funding fee
Cash out refinance 90% + funding fee
IRRRL(interest rate reduction refinance loan): maximum mortgage calculated based on unpaid principal balance & costs of refinance
Most lenders and mortgage brokers are easily approved to originate VA home loans; sponsorship by a VA-approved lender is all that’s required.

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With the new Good Faith Estimate requiring that all broker and lender fees go on line 1, together with the VA requirement that the loan originator can only earn a 1% fee, it is highly likely that when LOs originate a VA loan, their profit margin is tight if non-existent. 

Should the VA allow for a higher percentage amount to be charged to the Veteran on line 1. of the new GFE? 

How much would be a reasonable amount?  Please break down your estimation with a math example. For example, loan amount is X.  What are the standard fees typically charged with originating a loan that includes ALL lender AND ALSO all broker fees? 

What percentage does that come to?

Do you believe VA will approve a change to allow for the higher amount shown in your math example?

Hard/Private Money

A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued at much higher interest rates than a traditional mortgage loan. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers.

The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.

Many hard money mortgages are made by private investors, generally in their local areas. In the past documenting credit history and income were not as important, as the loan is secured by the quick sale value of the collateral property. Today most hard money lenders require a traditional credit review.

Quick sale value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress and assumes amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe.

1) Common reasons for seeking a hard/private money loan:
a. Homeowner or subject property does not qualify for traditional agency type loan (FHA, VA, Fannie, Freddie)
b. Investor purchasing a home in need of a temporary bridge loan
c. Homeowner wants to stop foreclosure
d. Pull equity out
e. Unusual type of property
f. Borrower needs to establish creditworthiness

2) Typical terms: 
a. 50% to 70% max loan to value
b. Higher interest rates: 12 to 18%
c. Balloon payments
d. First mortgage lien position
e. Higher fees: 4to 8 points
f. Full documentation
g. Detailed appraisal

3) Differences between hard money and private money
a. Hard money lenders are licensed and organized to lend money and private money lenders could be a friend, a family, a business associate.
b. Hard money lenders have set lending criteria with defined loan terms, rates and points all of which are known up front.  Private money is more flexible on all the typical criteria and open to negotiation.
c. Private money lending is often less expensive than hard money loans.   Hard money lenders get their money from private sources so they mark up the rate and fees to make a profit.  When an LO works directly with private sources of capital, you can often negotiate better terms.

4) Hard or Private money borrowers need to plan an exit strategy prior to obtaining the loan. 

Traditional lenders and investors may require a minimum of 6 to 12 months seasoning on title to refinance to the new appraised value. When your clients are using hard money to acquire investment properties you will need prepare them to be in that hard or private money for 12 months.

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Due to each state’s different usury laws, many hard/private money lenders are refusing to loan on residential, owner occupied homes and instead prefer to only make business-related loans or investor loans. Fees on hard/private money loans can be quite lucrative at 5 to 8 points. 

Q: In the mid-1980s when many loan officers worked at a bank and the mortgage broker community was quite small, mortgage brokers were THE source for hard and private mortgage money.  When a person could not get a loan at a bank, consumer finance company, or credit union, they found a broker and the broker was the person who knew where to find mortgage money for that particular person whose situation fell outside of traditional guidelines. Do you believe mortgage brokers will once again become this source or is it still fairly easy to compete against bank loan officers for traditional vanilla mortgage products?

USDA Loans

USDA Rural Development Loan home page
USDA Mortgage Loan Origination Handbook
USDA ActiveRain channel
USDA Fact Sheet

USDA Guaranteed

Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility: Applicants for loans may have an income of up to 115% of the median income for the area. Area income limits for this program are here.   Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance.  In addition, applicants must have reasonable credit histories.

Approved lenders under the Single Family Housing Guaranteed Loan program include:

Any State housing agency;
Lenders approved by:
HUD for submission of applications for Federal Housing Mortgage Insurance or as an issuer of Ginnie Mae mortgage backed securities;
the U.S. Veterans Administration as a qualified mortgagee;
Fannie Mae for participation in family mortgage loans;
Freddie Mac for participation in family mortgage loans;
Any FCS (Farm Credit System) institution with direct lending authority;
Any lender participating in other USDA Rural Development and/or Farm Service Agency guaranteed loan programs.

Terms: Loans are for 30 years.  The promissory note interest rate is set by the lender.

There is no required down payment. The lender must also determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

Standards: Under the Section 502 program, housing must be modest in size, design, and cost.   Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and HCFP thermal and site standards. New Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and HCFP thermal and site standards.  Existing manufactured housing will not be guaranteed unless it is already financed with an HCFP direct or guaranteed loan or it is Real Estate Owned (REO) formerly secured by an HCFP direct or guaranteed loan.

Approval: Rural Development officials have the authority to approve most Section 502 loan guarantee requests.

USDA 502 Direct

Rural Housing Direct Loans are loans that are directly funded by the Government.   These loans are available for low- and very low-income households to obtain homeownership.  Applicants may obtain 100% financing to purchase an existing dwelling, purchase a site and construct a dwelling, or purchase newly constructed dwellings located in rural areas.  Mortgage payments are based on the household’s adjusted income.  These loans are commonly referred to as Section 502 Direct Loans.

Purpose:  Section 502 loans are primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities.

Eligibility:  Applicants for direct loans from HCFP must have very low or low incomes.   Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI. Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance, which are typically within 22 to 26 percent of an applicant’s income.  However, payment subsidy is available to applicants to enhance repayment ability.  Applicants must be unable to obtain credit elsewhere, yet have reasonable credit histories. .

Terms:  Loans are for up to 33 years (38 for those with incomes below 60 percent of AMI and who cannot afford 33-year terms). The term is 30 years for manufactured homes. The promissory note interest rate is set by HCFP based on the Government’s cost of money.  However, that interest rate is modified by payment assistance subsidy.

Standards:  Under the Section 502 program, housing must be modest in size, design, and cost. Modest housing is property that is considered modest for the area, does not have market value in excess of the applicable area loan limit, and does not have certain prohibited features. Houses constructed, purchased, or rehabilitated must meet the voluntary national model building code adopted by the state and HCFP thermal and site standards. Manufactured housing must be permanently installed and meet the HUD Manufactured Housing Construction and Safety Standards and HCFP thermal and site standards.

Approval:  Rural Development officials should make a decision within 30 days of the Rural Development office’s receipt of the application.

There are other USDA programs beyond Guaranteed and Direct such as rural rehab loans.  Read more here.

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Questions
USDA underwriting guidelines mirror FHA’s UW guidelines. 
With 100% LTV loans still available via USDA, do you believe this program should be used to purchase new construction homes?  See this WSJ article for reference.
If yes, why? If no, why not?