© Cengage Learning 1
CHAPTER 8
GOVERNMENT LENDING
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, students should be able to:
State the major functions of Federal Government mortgage
insurance and guarantee programs
Explain how the FHA mortgage insurance program stimulated
lending activity among life insurance and mortgage companies
List three reasons why use of FHA insurance declined in the
1970s
Understand the basic guidelines of FHA and VA loans
Compare and contrast the basic provisions of FHA insurance,
VA guarantee, and USDA guarantee programs
Explain how FHA, VA, and RHS programs have changed in the
last ten years and why
© Cengage Learning 2
I. Introduction
A. Types of Government Programs
B. Benefits of Government Programs
II. Practice of Government Lending- Who is the
Lender?
III. Government Programs- Federal Housing
Authority
A. Early Opposition
B. Mortgage Lending Industry Benefits Derived
from FHA
C. FHA Today
1. Loss Mitigation Tools
2. HOPE for Homeowners
3. Green Initiative
4. Lender Insurance
5. FHA Modernization
6. Additional Single Family Improvements
D. FHA Insurance
E. Section 203(b)
F. FHA Loan Limits
G. Eligibility
H. Down payment
I. Source of Funds
J. Income and Employment
K. Credit/Liabilities
L. Qualifying Ratios
M. Processing
N. Automated Underwriting
O. Documentation
IV. Veterans Administration
A. Guaranteed Loans
B. Program Today
C. Guarantee
D. Eligibility
E. Restoration of Veteran’s Entitlement
F. Down payment
G. Source of Funds
H. Credit/Liabilities
I. Income and Employment
Teaching Tips
Review the evolution of the FHA mortgage
from the 30s to current times.
Has the FHA grown much larger than
originally intended? Is it now “too big to fail”?
What are the advantages of PMI compared
MIP?
Discuss the positive and negative factors of an
FHA mortgage program vs. a conventional
program.
What types of FHA programs have been added
in the last ten years?
Discuss the positive and negative factors of a
VA mortgage program vs a conventional
program.
Qualify a veteran applicant for a VA loan.
Qualify an applicant for an FHA loan.
Compare to conventional loan qualification.
What important documentation differences are
there for FHA vs VA vs conventional loan
programs?
© Cengage Learning 3
J. Qualifying Ratios/Residual Income
K. Processing
L. Certificate of Reasonable Value
M. Underwriting
N. Automated Underwriting
O. Documentation
P. Assumptions
Q. No-Bids
V. U.S. Department of Agriculture
A. Rural Housing Services (RHS)
B. RHS Single Family Programs—Section 502
C. Property
D. Single Family—Homeownership Direct Loan
Program
E. Single Family—Home Loan Guarantee
Program (SFHLGP)
F. RHS Recent Changes
Review the loan programs available through Rural
Housing Services. It is an important underutilized
program that most people are not aware of.
What areas and applicants does RHS target?
How do RHS programs compare to other government
and conventional programs?
What have these government agencies done recently
to make their programs more competitive and why?
What have they done recently to make them less
competitive and why?
© Cengage Learning 4
SUGGESTED TRUE/FALSE QUIZ
1. FHA and VA loans follow the same guidelines because the U.S.
Government backs them both.
2. FHA loans are only for poor people with bad credit.
3. The VA offered mortgage guarantees to veterans returning
home from WW II in order to assist them with purchasing
homes.
4. Most mortgage guaranty companies had adequate reserves to
withstand the Depression years.
5. Careless underwriting and appraisal procedures contributed to
the failure of mortgage guaranty companies in the 1920s.
6. FHA-insured mortgages reduced risk to investors by
establishing standards for the borrower and the property.
7. Mortgage companies make FHA-insured loans in areas with
capital shortages and sell the loans in capital surplus areas.
8. FHA-insured loans offer an attractive yield to investors because
of the dramatically higher interest rates.
9. The ceilings set for the maximum FHA-insured loan amount
© Cengage Learning 5
often fall behind the cost of real estate
10. The length of time required to obtain a commitment from FHA
contributed to the decline in the program’s usage in the 70s
© Cengage Learning 6
MULTIPLE CHOICE QUESTIONS. More than one answer may be
correct – select all correct answers. (Correct answers are italicized.)
1. Under current provisions the maximum loan amount permitted for
single family homes under FHA program Section 203(b) is:
a. $150,995
2. During the 1970s FHA insurance declined in the number of loans
insured. The following are reasons for this decline EXCEPT:
a. Internal reorganization within HUD
3. The FHA guidelines for ratios for housing expenses and total debt to
gross monthly income are:
a. 25/30
© Cengage Learning 7
4. Under the VA-guaranteed loan program, the current maximum loan
guarantee is:
a. $20,000
5. The following are eligible for a VA-guaranteed loan EXCEPT:
a. Qualified current or former armed service personnel
SUGGESTED SHORT ESSAY QUESTIONS
1. What are the advantages and disadvantages of FHA-insured and VA-
guaranteed loans to the lender?
ANSWER: FHA and VA loans appeal to many lenders because of
the high amount of insurance protection offered. They are also
© Cengage Learning 8
2. In what ways is private mortgage insurance preferable to FHA
insurance or VA guarantees, from a lenders point of view?
ANSWER: The insurance premium for PMI is lower than that for
FHA. The coverage is available to a wider group of borrowers than
3. Explain what the statement means “FHA is not a lender.”
ANSWER: FHA – a division of HUD – does not make mortgage
loans; it provides insurance that the loan will be repaid when due and
4. Explain what the purpose of a VA-guaranteed loan is
ANSWER: In recognition of the sacrifices made by members of the
military, Congress enacted the Servicemen’s Readjustment Act, which
© Cengage Learning 9
5. What is the purpose of the USDA’s Rural Housing Services
Guarantee program?
ANSWER: The purpose was to help borrowers (who meet income
qualifications) in rural areas of the country to obtain financing for the
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
discussion in class. Suggested answers/points to emphasize for the
questions are found below.
1. Discuss the positive and negative ways in which government-sponsored
mortgage programs impact housing.
ANSWER: The social benefit derived from government-sponsored
mortgage insurance/guarantees is that it allows for more people to purchase
© Cengage Learning 10
2. How is mortgage insurance (FHA or PMI) different from a mortgage guarantee
(VA or USDA)?
ANSWER: The major difference is mortgage insurance requires the
3. Why has FHA mortgage lending increased so dramatically in recent years?
ANSWER: The program has attracted many first-time homebuyers because
of the low down payment requirement. Also, nearly 35 percent of all FHA
4. Explain how FHA mortgage programs differ from conventional mortgage
programs.
ANSWER: FHA insurance is a government-sponsored program and can
involve more red restrictions and delays. It features a low down payment –
© Cengage Learning 11
5. How do VA guarantee programs work?
ANSWER: The Veterans Administration will guarantee to mortgage
6. What program eligibility issues and restrictions does the VA impose?
ANSWER: VA-guaranteed loans are only available to qualified current or
former armed service personnel, un-remarried surviving spouse of a veteran
7. What eligibility issues and restrictions do USDA RHS programs have?
ANSWER: The biggest restriction is that of the property and its
© Cengage Learning 12