Government Participation in Real Estate Finance

Cal­i­for­nia State Capital

There are two fed­eral agen­cies and one state agency that help make it pos­si­ble for peo­ple to buy homes they would never be able to pur­chase with­out gov­ern­ment involvement.

The two fed­eral agen­cies that par­tic­i­pate in real estate financ­ing are the Fed­eral Hous­ing Admin­is­tra­tion (FHA) and the Vet­er­ans Admin­is­tra­tion (VA). The Cal­i­for­nia Farm and Home Pur­chase Pro­gram, or Cal­Vet loan, is a state pro­gram that helps eli­gi­ble vet­er­ans.
Fed­eral Hous­ing Admin­is­tra­tion (FHA)

The FHA pro­gram, a part of HUD (U.S. Depart­ment of Hous­ing and Urban Devel­op­ment) since 1934, has caused the great­est change in home mort­gage lend­ing in the his­tory of real estate finance. The FHA was estab­lished to improve the con­struc­tion and financ­ing of hous­ing. The main pur­pose of the FHA pro­gram has been to pro­mote home own­er­ship. Sec­ondary results include set­ting min­i­mum prop­erty require­ments and sys­tem­iz­ing appraisals. An appraiser would be rep­ri­manded if he or she did not use FHA guide­lines when prepar­ing appraisals for FHA loans. Addi­tion­ally, an appraiser who inten­tion­ally mis­rep­re­sents the value on FHA loan appraisals, which sub­se­quently cause a loss, could be fined and face legal action.

The FHA does not make loans; rather, it insures lenders against loss. Loans are made by autho­rized lend­ing insti­tu­tions such as banks, sav­ings banks, and inde­pen­dent mort­gage com­pa­nies. As long as FHA guide­lines are used in fund­ing the loan, the FHA, upon default by the bor­rower, insures the lender against loss. If the bor­rower does default, the lender may fore­close and the FHA will pay cash up to the estab­lished limit of the insurance.

The lender is pro­tected, in case of fore­clo­sure, by charg­ing the bor­rower a fee for an insur­ance pol­icy called Mutual Mort­gage Insur­ance (MMI). This insur­ance require­ment is how the FHA finances its pro­gram. The pre­mium may be financed as part of the loan or paid in cash at the close of escrow.

The bor­rower applies directly to the FHA-approved lender (mort­gagee), not the FHA, for a loan. FHA does not make loans, build homes, or insure the prop­erty. A buyer who would like to pur­chase a home with FHA financ­ing would apply to an FHA-approved mort­gagee (lender) who would then request a con­di­tional com­mit­ment from FHA. The con­di­tional com­mit­ment is good for six months. A firm com­mit­ment is requested when the FHA approves the bor­rower (mortgagor).

The FHA guide­lines encour­age home own­er­ship by allow­ing 100% of the down pay­ment to be a gift from fam­ily or friends and by allow­ing clos­ing costs to be financed to reduce the up-front cost of buy­ing a home. The down pay­ment on FHA loans varies with the amount of the loan.

Pop­u­lar FHA Loan Programs

Sec­tion 203(b)

The FHA 203(b) loan offers financ­ing on the pur­chase or con­struc­tion of owner-occupied res­i­dences of one-to-four units. This pro­gram offers 30-year, fixed-rate, fully amor­tized, mort­gages with a down pay­ment require­ment as low as 3%, allow­ing financ­ing of up to 97% of the value of the home. FHA has mort­gage lim­its that vary from county to county.

Their web­site, https://entp.hud.gov/idapp/html/hicostlook.cfm, pro­vides the cur­rent FHA mort­gage lim­its for sev­eral areas.

Sec­tion 203(k)

A pur­chase reha­bil­i­ta­tion loan (pur­chase rehab) is a great option for buy­ers who are look­ing to improve their prop­erty imme­di­ately upon pur­chase. This mort­gage loan pro­vides the funds to pur­chase your home and the funds to com­plete your improve­ment project all in one loan, one appli­ca­tion, one set of fees, one clos­ing, and one con­ve­nient monthly payment.

A pur­chase rehab loan could be used for a vari­ety of improve­ments such as adding a fam­ily room or bed­room, remod­el­ing a kitchen or bath­room, mak­ing gen­eral upgrades to an older prop­erty, or even com­plet­ing a total tear­down and rebuild.

Sec­tion 245 Grad­u­ated Pay­ment Mortgage

A grad­u­ated pay­ment mort­gage (GPM) has a monthly pay­ment that starts out at the low­est level and increases at a spe­cific rate. Pay­ments for the first five years are low, and cover only part of the inter­est due, with the unpaid amount added to the prin­ci­pal bal­ance. After that time, the loan is recal­cu­lated with the new pay­ments stay­ing the same from that point on. In this loan, the inter­est rate is not adjustable and does not change dur­ing the term of the loan. What actu­ally changes is the amount of the monthly mort­gage payment.

A GPM is offered by the FHA to bor­row­ers who might have trou­ble qual­i­fy­ing for reg­u­lar loan pay­ments, but who expect their income to increase. This loan is for the buyer who expects to be earn­ing more after a few years and can make a higher pay­ment at that time. GPMs are avail­able in 30-year and 15-year amor­ti­za­tion and for both con­form­ing and jumbo loans. The inter­est rate for a GPM is tra­di­tion­ally .5% to .75% higher than the inter­est rate for a straight fixed-rate mort­gage. The higher note rate and sched­uled neg­a­tive amor­ti­za­tion of the GPM makes the cost of the mort­gage more expen­sive to the borrower.

Energy Effi­cient Mortgage

The Energy Effi­cient Mort­gages Pro­gram (EEM) helps home­buy­ers or home­own­ers save money on util­ity bills by enabling them to finance the cost of adding energy-efficiency fea­tures to new or exist­ing hous­ing. The pro­gram pro­vides mort­gage insur­ance for the pur­chase or refi­nance of a prin­ci­pal res­i­dence that incor­po­rates the cost of energy effi­cient improve­ments into the loan.

Sec­tion 255 Reverse Annu­ity Mortgages

Reverse Annu­ity Mort­gages are also called Home Equity Con­ver­sion Mort­gages (HECM). It is a pro­gram for home­own­ers (62 years and older), who have paid off their mort­gages or have only small mort­gage bal­ances remain­ing. The pro­gram has three options for home­own­ers: (1) bor­row against the equity in their homes in a lump sum, (2) bor­row on a monthly basis for a fixed term or for as long as they live in the home, or (3) bor­row as a line of credit.

The bor­rower is not required to make pay­ments as long as the bor­rower lives in the home. The loan is paid off when the prop­erty is sold. FHA col­lects an insur­ance pre­mium from all bor­row­ers to pro­vide mort­gage cov­er­age that will cover any short­fall if the pro­ceeds from the sale of the prop­erty are not suf­fi­cient to cover the loan amount. Senior cit­i­zens are charged 2% of the home’s value as an up-front pay­ment plus 1/2% on the loan bal­ance each year. These amounts are usu­ally paid by the mort­gage com­pany and charged to the borrower’s prin­ci­pal bal­ance. FHA’s reverse mort­gage insur­ance makes this pro­gram less expen­sive to bor­row­ers than the smaller reverse mort­gage pro­grams run by pri­vate com­pa­nies with­out FHA insurance.