Chapter 9_updated

Chapter 9_updated - Chapter 9: Government-Sponsored and...

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Unformatted text preview: Chapter 9: Government-Sponsored and Other Financing Hua Sun Department of Accounting and Finance California State University, San Bernardino Feb 26, 2009 Hua Sun (CSUSB) Government-Sponsored and Other Financing Feb 26, 2009 1 / 14 Government Involvement: Background Conventional loans have no government involvement Government programs include: I FHA- insured loans (Federal Housing Administration) F Minimum down of 1.25 to 2.85 percent F Borrower needs to contribute on cash at least 3.5% of the sale price (FHA insures from 97.15% to 98.75% on FHA appraisal value) F Reaming money from borrowers cash contribution, if any, is used to pay loan closing costs. I VA- guaranteed loans (Veterans Administration) F No minimum down payment requirement. F VA certificate of guarantee is at no cost to borrower F Loan guarantee amount: 25% of Freddie Mac Conforming Loan Limit I Cal- Vet loans (California Department of Veteran Affairs) Hua Sun (CSUSB) Government-Sponsored and Other Financing Feb 26, 2009 2 / 14 FHA: Federal Housing Administration Insures loans made by mortgage lenders (primarily via section 203 program) I Maximum loan amount depends on county (actual loan amount can be higher than the ceiling, but without insurance on extra amount) I FHA mortgage insurance premium of 1.5% is paid at closing I Monthly insurance charge of spread 0.5% (annually) I Borrower can be charged discount points by lender (on top of 1% loan fee) F Example: $1,000, 10% mortgage contractual rate, 1 year term, with l0 discount points ($100) F Borrower gets $900 only, and needs to pay $1,100. In this case, the effective borrowing cost if 22.22%. ( $900(1 + 0 . 222) = $1 , 100 ) F APR: the nearest 1/8 of effective borrowing cost: 22.125% and it needs to be disclosed by law. F Sometimes buyers may be willing to pay discount point; depends on private negotiation. F Approximation: 1 discount point increases lenders yield by about 1/8 percent. I No prepayment penalty Hua Sun (CSUSB) Government-Sponsored and Other Financing Feb 26, 2009 3 / 14 Buyer qualification for FHA insured loan Purpose: reduce default rate I Seller cannot contribute more than 6% of acquisition cost (discount point, closing cost, buy...
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Chapter 9_updated - Chapter 9: Government-Sponsored and...

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