Lesson 10 - basic loan features

An FHA borrower is allowed to have a housing expense to income ratio as high as 43%.

false

If a seller offering primary financing to a buyer owns the property free and clear, she is guaranteed first lien priority.

false

If a seller taking back a second mortgage sets an interest rate that is too high, he might be penalized under the IRS imputed interest rule.

false

The Federal Housing Administration is a secondary market entity, similar to Fannie Mae and Freddie Mac.

false-The FHA insures loans made by banks and other institutional lenders. It has more in common with a mortgage insurance company than a secondary market entity.

loan-level price adjustment

(LLPA) if her loan is going to be sold to one of the secondary market entities. The amount of this charge depends on the borrower's credit score and LTV. The riskier the loan, the larger the LLPA.

A conventional loan is any loan that is not insured by the FHA, guaranteed by the VA, or sponsored by a state governmental agency.

true- A conventional loan is an institutional loan that does not have government backing.

FHA-insured loans never call for a prepayment penalty. FHA loans can be paid off at any time without penalty.

prepayment penalty

When a conventional loan's LTV is over 80%, the borrower will be required to obtain private mortgage insurance. The mortgage insurance company will insure the lender against losses resulting from foreclosure.

private mortgage insurance

A lender must automatically cancel PMI when a borrower's principal balance is scheduled to reach 80% of the property's current appraised value.

false

A lender's risk is greater with a 90% loan than with a 95% loan.

false

Most conventional lenders will not allow a borrower to use secondary financing.

false

An installment debt is counted as part of a loan applicant's recurring obligations if more than five payments remain to be made.

false

Adjustable-rate loans

, rapid fluctuations in interest rates left many lenders uncomfortable about loaning money at a fixed rate for 30 years. Adjustable-rate mortgages (ARMs) were introduced in response to both of these problems.

The basic features of a mortgage loan include

- the repayment period, -the amortization, the loan-to-value ratio, a secondary financing arrangement (in some cases), the loan fees, and a fixed or adjustable interest rate. --Note that most of these features are part of any type of mortgage loan, whether it is conventional or government-sponsored.

2 examples

-A loan with a 95% LTV, requiring a 3% downpayment from the borrower's own funds and allowing the other 2% to come from other sources. -A loan with a 97% LTV, requiring a 3% downpayment from the borrower's own funds, plus a 3% contribution to closing costs from other sources.

The federal government sets a single conforming loan limit that applies to all conventional loans.

false

First of all, there are rules about who can provide gift funds.

1.The donor generally has to be the buyer's relative, betrothed, spouse or domestic partner, or possibly the buyer's employer or a nonprofit organization. 2.the buyer must receive a letter from the donor stating that the funds are a gift and do not need to be repaid. 3.or high-balance loans or for loans to buy a non-principal residence property, the borrower must make a downpayment of at least 5% out of her own funds.

risk based loan fees

Loan-level price adjustments may be charged to conventional borrowers whose loans will be sold to Fannie Mae or Freddie Mac. The size of the charge depends on the riskiness of the loan, as determined by the borrower's credit score and LTV.

A buydown where, for instance, the interest rate is reduced 3% in the first year, 2% in the second year, and 1% in the third year.

A buydown with a graduated payment plan is a temporary buydown where the rate reduction changes at several points during the buydown period.

loan limits

A conventional loan can't be purchased by Fannie Mae or Freddie Mac if it exceeds the applicable conforming loan limit. Currently, the conforming loan limit for single-family homes in most areas of the country is $417,000. The limit is higher in areas where housing is more expensive.

If a loan contains a prepayment penalty clause, the lender can charge a fee to a borrower who pays off all or part of the principal balance before it is due.

true

Fixed-rate loans

A mortgage loan may be a fixed-rate loan or an adjustable-rate loan. A fixed-rate loan has an interest rate that stays the same throughout the loan term. For instance, a 30-year fixed-rate loan that begins at 4.5% interest will remain at 4.5% for all 30 years of the loan term, even if market interest rates go up or down during that time.

Repayment period / loan term

A mortgage loan's repayment period is the number of years the borrower has in which to repay the loan. The repayment period is also called the loan term. The length of the repayment period affects both the amount of the monthly payment and the total amount of interest paid over the life of the loan.

Partially amortized loans

A partially amortized loan requires regular payments of both principal and interest. However, the monthly payments are not big enough to completely pay off the debt by the end of the loan term. There is some principal left at the end of the term, which must be paid off in one lump sum, called a balloon payment.

A type of loan where the interest rate is automatically readjusted after five or seven years to reflect current market rates.

A two-step mortgage offers some of the advantages of an adjustable-rate mortgage with lower risks, since the rate is only adjusted once during the loan term.

Most lenders will require private mortgage insurance on a loan with an LTV greater than 80%.

true

A conventional loan offered to first-time homebuyers that has a 97% LTV and requires a 3% downpayment from the buyers' own funds would be classified as this.

Low-downpayment programs

FHA maximum loan amounts are based on median housing prices. In some areas, the FHA maximum loan amounts are considerably lower than the maximums for conforming conventional loans.

maximum loan amount

assumption

Conventional loans generally have alienation (due-on-sale) clauses, so the lender's permission is required for an assumption. The lender will usually charge an assumption fee, and may also raise the interest rate.

This comes in two varieties: level payment and graduated payment.

Correct! With a temporary buydown,

rate adjustment period

Depending on the loan, the rate adjustment period might be six months or three years or some other time period. The most common rate adjustment period is one year. An ARM with a one-year rate adjustment period is called a one-year ARM. At the end of each year, the lender checks the index. If the index rate has increased, the lender can increase the borrower's interest rate. If the index rate has decreased, the lender must decrease the borrower's interest rate

A loan that cannot be sold on the secondary market because it does not abide by Fannie Mae criteria is a non-conventional loan.

FALSE

However, if there are factors that suggest increased rather than decreased risk, a lender will probably be unwilling to approve a loan if the applicant's income ratios exceed the benchmarks.

For instance, a lender would be unlikely to accept a total debt to income ratio over 36% on a loan with an LTV over 90% or an adjustable-rate loan, since such a loan would represent increased risk. =Even if compensating factors do make a total debt to income ratio over 36% acceptable, neither Fannie Mae nor Freddie Mac will accept a ratio over 45% on a manually underwritten loan application. If an automated underwriting system is used, there's no set maximum. The system will decide whether the higher ratio is acceptable in the context of overall risk presented by the application.

loan fees

In addition to an origination fee, an FHA borrower may have to pay discount points as well, depending on the policy of the individual lender

Loan Fees

In addition to interest, mortgage lenders charge their borrowers loan fees. Loan fees may also be referred to as "points," which is short for percentage points. A "point" is equal to one percentage point, or one percent, of the loan amount. For instance, if a lender is charging four points on a $100,000 loan, that means the lender will collect a one-time fee at closing of $4,000 (4% of $100,000). Two common forms of loan fees are origination fees and discount points.

Origination Fees

Origination fees cover the administrative costs of making loans. An origination fee is charged in most mortgage loan transactions, with the exception of no-fee loans (which compensate for the lack of an origination fee by charging a slightly higher interest rate over the loan term). It may be called a service fee, administrative charge, or simply a loan fee. The origination fee is paid at closing, and it is ordinarily paid by the borrower.

conversion option

Over the long haul, interest rate increases and decreases tend to balance each other out, but borrowers can be faced with large payment increases. Many borrowers are uncomfortable with this risk. -One feature that can alleviate that discomfort is a conversion option. A conversion option allows the borrower to convert the ARM to a fixed-rate loan under certain circumstances (for example, during the first five years of the loan). Conversion is usually less expensive than refinancing.

secondary financing

Secondary financing can be used in conjunction with a conventional loan, but the primary lender will usually impose certain restrictions on the secondary financing.

FHA qualifying standards are less stringent than conventional standards. An FHA loan applicant's fixed payment to income ratio should not exceed 43%, and his housing expense to income ratio should not exceed 31%. Ordinarily, no cash reserves are required, and gift funds or secondary financing from close family members may be used to help close the transaction.

UNDERWriting standareds

Secondary Financing

Sometimes a buyer gets two loans at the same time. One of those loans is a primary loan for most of the purchase price. The other loan is used to pay part of the downpayment or closing costs required for the first loan. This second loan is referred to as "secondary financing."

note rate

The note rate is simply the ARM's initial interest rate. It is referred to as the note rate because it is the interest rate stated in the promissory note for the loan.

Paying off a loan in installments that include both principal and interest.

amortization

An applicant has a proposed monthly mortgage payment of $1,950 and a monthly income of $6,200. The applicant's housing expense to income ratio is lower than the maximum usually allowed for a conventional loan.

false- The standard acceptable housing expense to income ratio for a conventional loan is 28%. The applicant's ratio exceeds that ($1,950 / $6,200 = 0.315).

fha loan amounts

he 203(b) loan program is aimed at low- and middle-income home buyers, so there are maximum loan amounts. However, eligibility is not limited to buyers with incomes under a certain limit. Theoretically, a billionaire planning to purchase an inexpensive property could qualify for an FHA loan—as long as the loan amount doesn't exceed the maximum and she intends to occupy the home as her primary residence.

The housing expense to income ratio considers only the applicant's proposed monthly PITI payment as a percentage of the applicant's monthly income. The benchmark maximum housing expense to income ratio for conventional loans is 28%.

housing expense to income ratio

bank of commerse conventional loan requirements

housing expense to income ratio may not exceed 28%-The proposed housing expense, including principal, interest, taxes, and insurance, generally must not exceed 28% of the loan applicant's stable monthly income.

The _______________ is the statistical report that the lender uses to measure changes in the cost of money.

index

A/an _______________ limits how much the interest rate can increase in one adjustment period.

interest rate cap.

A loan where the borrower is allowed to pay only interest in the early years of the loan and later must begin repaying the principal as well.

interset only mortgage

level payment buydow

involves an interest reduction that stays the same during the buydown period. For instance, a level payment buydown might reduce the buyer's interest rate by 2% during the first two years of the loan; the buyer would then pay the note interest rate for the remainder of the loan term.

FHA mortgage insurance is required on all FHA loans, regardless of the size of the downpayment. (By contrast, private mortgage insurance is only required for conventional loans with a loan-to-value ratio over 80%. But as a practical matter, the vast majority of FHA loans are low-downpayment loans, so mortgage insurance would be required in any event.)

mortgage insurance

An FHA borrower pays both a one-time premium and annual premiums. The one-time premium can be financed over the loan term. The annual premium is paid in monthly installments.

mortgage insurance premiums

A/an _______________ limits how much a borrower's monthly payment amount can increase.

mortgage payment cap.

A/an _______________ prevents the loan's principal balance from increasing over a specified limit if the monthly payment no longer covers all of the interest accruing.

negative amortization cap

If gift funds are used in a transaction, under most circumstances the buyer must make a downpayment of at least 5% out of his or her own funds.q

true- Unless the gift is 20% of the purchase price or more, a buyer using gift funds must still make a downpayment of at least 5% using his or her own funds.

To be eligible for a VA loan, a veteran must have served a minimum amount of continuous active duty. The veteran must have a Certificate of Eligibility from the VA.

eligibility

How seller financing works

-The promissory note is evidence of the debt, and the mortgage or deed of trust makes the property collateral for the loan. -These same documents may also be used in seller financing. -The buyer signs a promissory note, promising to pay the seller the amount of the debt, and then signs a mortgage or deed of trust that gives the seller a security interest in the home being sold. -The buyer signs a promissory note, promising to pay the seller the amount of the debt, and then signs a mortgage or deed of trust that gives the seller a security interest in the home being sold. -This kind of seller financing arrangement is called a purchase money loan.

jumbo loans

enders generally charge higher interest rates and fees and apply stricter underwriting standards. Jumbo loans are generally ineligible for sale to the major secondary market entities.

Loan amount

A VA loan cannot exceed the appraised value of the home or the sales price, but there are no other official restrictions on the loan amount. Lenders impose some unofficial restrictions, however. Lenders usually apply a rule that states that the guaranty amount must equal at least 25% of the value or sales price of the property, whichever is less. So in an area where the current maximum guaranty amount is $104,250, most lenders will not lend more than $417,000 without some kind of downpayment.

pre payment penalties

A prepayment penalty is not a standard provision in a conventional loan for the purchase of residential property. When the loan agreement does provide for a prepayment penalty, it is typically charged only if the borrower pays all or part of the principal before it is due during the first few years of the loan term.

the loan payments must be current, the new buyer must be an acceptable credit risk, and the new buyer must assume the veteran's obligations on the loan.

After a VA loan is assumed, the original veteran borrower will remain liable for the loan unless he gets a release of liability from the VA. To get a release of liability, the following conditions must be met:

seller second

As you know, when a buyer supplements a first loan with additional financing, it is called secondary financing. A buyer may be able to obtain secondary financing from an institutional lender, but in many cases it's the seller who provides secondary financing. This kind of secondary financing is called a seller second, and it's one of the most common forms of seller financing. =-With a seller second, the buyer pays most of the purchase price with an institutional loan, and the seller finances some of what would normally be the buyer's downpayment with a second mortgage.

Loan guaranty

Because VA loans are guaranteed by the federal government, lenders are willing to make the loans without requiring a downpayment. A lender's risk of loss if a VA borrower defaults is minimal.

The Federal Housing Administration (FHA) is an agency within the Department of Housing and Urban Development. The FHA does not originate loans, but rather provides mortgage insurance for loans made by banks and other lenders. FHA programs are targeted at low- and middle-income home buyers.

FHA

Repayment plans

If a VA borrower runs into temporary financial difficulties such as illness or unemployment and misses payments as a result, a VA loan officer can help the borrower negotiate a repayment plan with the lender.

Secondary financing can come from a variety of sources.

It can come from the same lender who originates the primary loan, or from another lender, or from the seller, or from a private third party. -Secondary financing may have an impact on the primary lender's security interest in the borrower's property. -So most lenders require certain rules to be followed when secondary financing is used. -For instance, the borrower usually must qualify based on the combined payment for both the primary and secondary loans, so that she doesn't become financially overextended. -And usually the borrower will be required to make at least a minimum cash downpayment out of her own funds. -This is true even if the secondary financing will cover most of the downpayment required for the primary loan.

Va- no downpayjment

One of the biggest advantages of VA loans is that they don't necessarily require a downpayment. A VA loan can equal the sales price or appraised value of the home, whichever is less. This allows many veterans to buy homes who would otherwise be unable to do so.

Even if a seller can't afford to offer financing to a buyer, there are other ways the seller can help the buyer close the transaction. Two simple ways that we've already discussed are buydowns, and seller contributions to closing costs. Both will help the buyer to more easily afford a loan. Two other ways for sellers to help close the transaction are the equity exchange and the lease/option.

Other ways sellers can help

This enables a veteran to get another VA loan after paying off a VA loan.

Restoration of entitlement

The qualifying standards for an FHA loan are not as strict as they are for a conventional loan.

qualifying standards

Restoration of entitlement

The VA loan guaranty available to a particular veteran, which is sometimes called the veteran's "guaranty entitlement," does not expire. However, if a veteran uses her entitlement to purchase a property, she can obtain another VA loan only if the loan is repaid and the entitlement is therefore restored or reinstated.

This protects the lender against losses due to default on a VA loan.

The VA loan guaranty protects the lender against losses due to default and foreclosure.

Va guaranteed loans

The federal VA home loan program allows eligible veterans to finance the purchase of their homes with low-cost loans. Like FHA loans, VA loans are made by institutional lenders, not by a government agency. VA loans are guaranteed by the U.S. Department of Veterans Affairs, so the lender's risk in making a VA loan is greatly reduced.

loan costs

There is no maximum interest rate for VA loans; instead, the rate is negotiable between borrower and lender. The lender may charge no more than 1% of the loan amount as an origination fee. The lender may also charge discount points, which may be paid by the borrower, the seller, or a third party.

To qualify for a VA loan, a buyer must have one of these, which confirms that he or she has served a certain amount of time on active duty in the military.

To be eligible for a VA loan, a buyer must have a Certificate of Eligibility from the VA.

Monthly payment amount

To demonstrate the impact of the repayment period, we'll compare a 30-year loan to a 15-year loan. There is no question that a 30-year loan is more affordable. Stretching the loan out over 30 years keeps the monthly payment lower and therefore easier for the borrower to make. A borrower with a 15-year loan has to make a significantly higher monthly payment.

Interest rates

To keep things simple in our comparison, both the 30-year loan and the 15-year loan had the same interest rate, 8%. However, a lender will typically charge a significantly lower interest rate on a 15-year loan than on a 30-year loan. The shorter the loan term, the lower the risk of default, so the lender can charge less for the loan.

Benchmark ratio

To qualify for a conventional loan, the loan applicant's total monthly obligations (including the proposed mortgage payment) generally must not exceed 36% of her stable monthly income. In other words, the maximum acceptable total debt to income ratio is 36%. This is sometimes called the "benchmark" total debt to income ratio for conventional loans

Encumbered property

Typically, the seller financed the purchase of the property and still owes money on that loan when he decides to sell. -For example, suppose Wallace is selling his home for $400,000.

funding fee

Unlike high-LTV conventional loans and all FHA loans, VA loans do not require mortgage insurance. However, VA borrowers do have to pay a funding fee. The funding fee is a percentage of the loan amount. The percentage varies depending on a number of factors, such as whether the veteran is making a downpayment of 5% or more. The funding fee is waived for veterans with service-related disabilities.

loan term

VA loans have 30-year terms and are fully amortized. They may not contain any prepayment penalties.

Wraparound financing

Wraparound financing involves a first mortgage and a second mortgage. The first mortgage, called the underlying mortgage, is the seller's mortgage. The seller doesn't pay off this underlying mortgage at closing, nor does the buyer assume the mortgage. Instead, the buyer takes the property "subject to" the underlying mortgage. This means the seller remains primarily responsible for making the payments on the underlying mortgage.

The cost of a permanent buydown

depends on the loan amount and how much the interest rate is reduced. The greater the rate reduction, the higher the cost. For example, it might take about 6% of the loan amount (or six points) to increase a lender's yield on a 30-year loan by 1%. So a lender offering an interest rate that is 1% below market rate might charge six points to make up the difference.

One of the main advantages of a VA loan is that it does not require this.

downpayment

The _______________ determines how often the lender may change the interest rate.

rate adjustment period.

A person with an annual income of $500,000 per year who was planning to purchase a $100,000 house as a primary residence could not qualify for an FHA loan.

false-There is no maximum income limit for FHA eligibility. It's the loan amount, not the borrower's income, that is limited.

The basic maximum loan amount for an FHA loan is $271,050, but can reach up to $625,500 in areas with high-cost housing.

fha loan amounts

instead of requiring the buyer to pay the downpayment entirely in cash, the seller accepts some other asset—such as recreational property, a car, or a boat—as all or part of the downpayment. Again, this kind of transaction enables the buyer to close the sale with significantly less cash.

in an equity exchange,

There are times when a buyer simply isn't ready to purchase a home. The buyer may need time to save a downpayment, pay off debts, or improve her credit rating. Or perhaps the buyer needs more time to sell a property she already owns. In these circumstances, a lease arrangement may help the buyer purchase the home. A lease arrangement can take the form of a lease/option. A lease/option is a combination of a lease and an option to purchase. The seller leases the property to a prospective buyer for a specific period of time. At the same time, the seller gives the buyer an option to purchase the property at a stated price during the lease period.

lease/options

The VA guaranty covers only a portion of the loan amount. Lenders are generally willing to make a no-downpayment VA loan if the guaranty will cover at least 25% of the loan amount. If the available guaranty is less than 25% of the loan amount, the veteran will usually be required to make a downpayment. A downpayment is also necessary if the sales price exceeds the appraised value.

loan guaranty

two-step

mortgage or a balloon/reset mortgage, where the interest rate adjusts to the market rate at one point during the loan term, but then remains stable for the rest of the loan term. In this context, it might be known as a 5/25 instead of a 5/1; after it resets in the fifth year, it would remain unchanged, instead of being subject to change every year. This is less risky and more predictable for a borrower, but won't offer as low an initial interest rate as would an ARM

The initial interest rate charged for an adjustable-rate loan is the _______________.

note rate.

The fee charged by an institutional lender to cover the administrative costs of making a loan.

orgination fee

For the original borrower to receive this in an assignment, the new borrower must be an acceptable credit risk and assume all of the obligations on the VA loan.

realease of liability

This underwriting technique is used to make sure that a VA borrower has enough money left over after paying housing expenses and other regular bills to cover food and other basic expenses.

residual income method.

A veteran who has used his full entitlement to get a VA loan can get another VA loan only if his entitlement is restored. Entitlement is restored if the first loan is repaid, or if another eligible veteran agrees to assume the loan and substitute his or her entitlement for the seller's entitlement.

restoration of entitlement

A VA borrower may use this to cover closing costs if she can qualify for the combined payments on both loans.

second finanacing

The total of all financing may not exceed the appraised value of the property; the buyer must qualify for the payments on both loans; and any conditions placed on the second loan can be no more stringent than those that apply to the VA loan

secondary financing

Primary financing

seller is main or only source of finaincing

The total debt to income ratio measures the relationship between the loan applicant's monthly income and all monthly obligations, including the housing expense. The benchmark maximum total debt to income ratio for conventional loans is 36%.

total debt to income ratio

A buydown may be more valuable to a buyer than a straight price reduction, since it can enable the buyer to qualify for a lower interest rate and save more money in the long term.

true

A purchase money loan is an extension of credit from the seller to the buyer.

true

An FHA borrower may use a second mortgage provided by her parents as a means of making the minimum cash investment.

true

An FHA borrower must intend to occupy the property that he is purchasing.

true

An FHA loan may be assumed only by a buyer who intends to occupy the property.

true

In a seller second, the buyer will pay most of the purchase price with an institutional loan and finance part of the downpayment with a second mortgage from the seller.

true

In a wraparound mortgage, the buyer will make a payment on the wraparound mortgage to the seller, part of which the seller will then use to make the monthly payment on the underlying mortgage.

true

Seller financing may be particularly beneficial to buyers at a time when interest rates are high.

true

The maximum loan amounts for FHA loans are partially based on median housing costs in each area, so they can vary from place to place.

true

To be effective, the underlying loan in a wraparound mortgage cannot have a due-on-sale clause.

true

An FHA loan requires a one-time mortgage insurance premium in addition to annual premiums.

true-An FHA loan requires a one-time (upfront) premium in addition to annual premiums. The one-time premium may be paid at closing or financed over the loan term.

An FHA borrower must make a minimum cash investment of at least 3.5% of the sales price.

true-The minimum contribution by a borrower is 3.5% of the sales price. Borrower-paid closing costs, discount points, and prepaid expenses do not count toward this amount.

A VA loan applicant must qualify under both the income ratio method and the residual income method. The applicant's total debt to income ratio should not exceed 41%. The residual income method is used to determine whether the applicant will have sufficient cash flow for other expenses after paying the mortgage payment and other monthly obligations.

underwriting standards

VA loans are guaranteed by the Department of Veterans Affairs, which will reimburse lenders for losses resulting from a borrower's default. Characteristics of VA loans include no downpayment requirement, lenient qualifying standards, no mortgage insurance, and no maximum loan amount.

va loans

With wraparound financing, the buyer takes title subject to the seller's existing mortgage and then makes payments to the seller. The seller continues to make payments on the existing mortgage and keeps the remainder of the payments.

wraparound financing

A fee paid up front in exchange for the lender making the loan for a lower interest rate.

A lender will charge discount points to increase the yield on a loan. This may enable the lender to charge a below-market interest rate.

Permanent buydowns

A permanent buydown reduces the note rate—the interest rate stated in the buyer's promissory note. For example, if a lender is planning to charge 12% interest and the seller buys down the interest rate to 11%, the buyer will sign a note promising to repay the loan at the lower rate, 11%. Since the note rate is reduced, the monthly payments are reduced for the entire life of the loan.

Amortization

Amortization refers to how the principal and interest on a loan are paid during the repayment period. Most mortgage loans are fully amortized. A fully amortized loan is repaid within a set period of time with regular monthly payments. Each monthly payment is for the same amount, and includes both a principal portion and an interest portion.

small downpayment

An FHA loan requires a comparatively small downpayment, and the loan fees and other charges may be lower than they would be for a typical conventional loan.

Margin

Every ARM has a margin. The margin is the difference between the index rate and the interest rate the lender charges the borrower. The margin is essentially the lender's income from the loan, providing the lender with a profit. A typical margin is two to three percentage points. For example, suppose the current index rate is 5%. The lender's margin is 2%. 5% plus 2% equals 7%. So the lender charges the borrower 7% on the loan. The 2% margin is the lender's income from the loan.

Limits on buydown amount

Fannie Mae and Freddie Mac limit the amount a seller or other interested party (such as a real estate agent) may contribute to help the buyer purchase the property. -These limits apply to buydowns as well as any payment of closing costs ordinarily paid by the buyer. -The amount of the limit varies depending on the loan program. -

In contrast to a permanent buydown, a temporary buydown doesn't reduce the interest rate for the life of the loan.

In contrast to a permanent buydown, a temporary buydown doesn't reduce the interest rate for the life of the loan. -Temporary buydowns appeal to sellers, because they can cost less than permanent buydowns. -And temporary buydowns appeal to buyers who believe that they can grow into larger mortgage payments over the next few years. -

The relationship between the loan amount and the value of the home being purchased.

Loan to value ratio

Mortgages with lower initial payments

Many home buyers, especially first-time buyers, are starting out in their careers. They may have limited incomes and high debts from student loans, but expect their incomes to increase steadily. If these buyers can obtain a loan with lower initial payments and larger payments later, they may be able to afford a more expensive house than they otherwise might.

laon terms

Most FHA loans have 30-year terms, although 15-year loans are also available. And all FHA loans must have a first lien position—that is, they must have priority over all other mortgage liens.

Low-downpayment programs

Often the problem for home buyers, especially first-time buyers, is not whether they have a reliable source of income. Instead, it's not having enough cash saved up to cover the downpayment, closing costs, and cash reserves required for a conventional loan. In many cases, even the 5% downpayment required for a 95% conventional loan may be out of reach. However, many lenders offer special conventional loan programs that allow borrowers to make smaller downpayments and receive cash from alternative sources.

negative amortization caps

Some ARMs have both a mortgage payment cap and an interest rate cap. Others have only an interest rate cap, or only a payment cap. Either way, the borrower is protected from payment shock. However, if the ARM has a payment cap but no rate cap, the borrower may run into negative amortization. -Negative amortization occurs when unpaid interest is added to the loan's principal balance. Usually, a loan's principal balance declines steadily over the loan term. But negative amortization makes the loan balance go up instead of down. The borrower can end up owing the lender more money than the original loan amount. -Negative amortization can also occur when an ARM's interest rate adjustments occur more frequently than the payment adjustments. For example, if the rate adjustment period is six months, but the payment adjustment period is one year, the borrower may end up paying too little interest while waiting for the payment adjustment to catch up to the rate adjustment. Most ARMs are structured to avoid negative amortization. However, if negative amortization is a possibility, the ARM usually includes a negative amortization cap -A negative amortization cap limits the amount of unpaid interest that can be added to the principal balance. Typically, a negative amortization cap limits the total amount the borrower can owe to 110% of the original loan amount (though these caps may run as high as 125%).

Index

The ARM's index is the statistical report the lender has chosen to use as a measure of changes in the cost of money, so that the interest rate on the loan can be adjusted accordingly. The lender may use any of several available indexes, such as the weekly auction rate of Treasury bills, or the Eleventh District cost of funds index.

Loan-to-value ratios

The loan-to-value ratio (LTV) refers to the relationship between the loan amount and the value of the home being purchased. -A loan with a low LTV is generally less risky than one with a high LTV. The borrower's investment in her home is greater, so she'll try harder to avoid defaulting on the loan and losing the home. And if the borrower does default, the outstanding loan balance is less, making it more likely that the lender will recover the full amount in a foreclosure sale - The higher the LTV, the greater the lender's risk of loss in the event of default and foreclosure. Nonetheless, mortgage loans with high LTVs (95% or even higher) are available. Lenders use loan-to-value ratios to set maximum loan amounts for their different loan programs.

AmortizationInterest-only loans

The third alternative—the interest-only loan—calls for regular payments during the loan term that cover the interest but do not pay off any of the principal. At the end of the term, the entire principal amount is due and must be paid off with a balloon payment. For example, suppose a buyer borrows $90,000 on an interest-only basis. During the loan term, he'll pay only the interest due on the loan. At the end of the loan term he'll have to repay the whole $90,000 he originally borrowed. Another type of interest-only loan allows interest-only payments during a specified period at the beginning of the loan term (for example, the first five or ten years). At the end of that period, the borrower must begin making amortized payments that will pay off all of the principal and interest by the end of the term.

arm checklist

What will the initial interest rate be? How often will the interest rate change? How long is the first rate adjustment period? How often will the payment change? Is there a limit to how much the interest rate can be increased? Is there a limit to how much the payment can be increased at any one time? Does the loan allow negative amortization? Can the loan be converted to a fixed-rate loan?

qualifying rate

When a buydown is temporary, the lender might not be willing to qualify the borrower based on the buydown rate and payment amount, since the buyer will have to be able to afford a higher rate and a larger payment when the buydown period ends. Instead, the lender might use a rate somewhere between the note rate and the buydown rate in order to qualify the borrower.

mortgage payment cap

a mortgage payment cap serves the same purpose as a rate cap: limiting how much the borrower's monthly mortgage payment can increase. A payment cap directly limits how much the lender can raise the monthly mortgage payment, regardless of what is happening to the interest rate on the loan. For example, a payment cap might limit payment increases to 7.5% annually.

Discount points

are used to increase the lender's yield on a loan. In exchange for a lump sum payment up front, the lender is willing to make the loan at a lower interest rate. In other words, the lender "discounts" the loan for a flat fee. The lower interest rate means that the borrower's monthly payment will be lower, which makes it easier for the borrower to qualify for the loan. -Paid at closing. They are usually paid by the borrower, but the property seller or a third party may pay the points to help the borrower afford the loan. Discount points are quite common nowadays. A lender that offers a below-market interest rate typically compensates for it by charging discount points.

A payment required at the conclusion of a loan term that is substantially larger than the regular payments.

baloon payment

An ARM with a/an _______________ allows a borrower to change the loan to a fixed-rate loan under certain circumstances, without the expense of refinancing.

conversion option.

The traditional loan-to-value ratio for conventional loans is 80%. Most lenders consider an 80% loan to be a safe investment, since the borrower has a strong incentive to avoid default and the lender could probably recover the full amount owed through a foreclosure. Some lenders offer 90% and 95% loans. For these loans, they often charge higher interest rates and loan fees

loan to value ratios

Borrowers with incomes that are below the median for a metropolitan area, or who are buying in a targeted low-income neighborhood, may be eligible for loan programs that offer increased debt to income ratios.

low income programs

The _______________ is the profit a lender will make from an adjustable-rate loan, reflecting the difference between the index rate and the interest rate charged to the borrower.

margin

buydowns

n a buydown arrangement, the seller (or a third party) pays a lump sum at closing to the buyer's lender so that the lender will charge the buyer a lower interest rate. A buydown may be permanent or temporary.- In a buydown arrangement, the seller (or a third party) pays the buyer's lender a sum of money at closing so that the lender will charge the buyer a lower interest rate. There are two types of buydowns: permanent and temporary.

Borrowers with incomes that are below the median for a metropolitan area, or who are buying in a targeted low-income neighborhood, may be eligible for loan programs that offer increased debt to income ratios.

ow downpayment mortgages

FHA borrowers must intend to occupy the property they're financing with an FHA loan as their primary residence. FHA loans are not available to investors, and so they cannot be used to finance rental properties. An FHA loan can be used for the purchase of a property with up to four dwelling unit

owner occupancy

A seller pays discount points on a buyer's loan, lowering the note rate for the entire loan term.

permanent buydown

Also known as the loan term, this describes the number of years in which the borrower will pay off the loan.

repayment peroid

Obtaining an additional loan to pay part of the downpayment or closing costs.

secondary financing

graduated paymen

the interest rate does not change on this type of mortgage, but the payment schedule is still designed so that payments will start smaller and increase at preset intervals. Following the financial crisis of 2008, though, banks have tended to be leery of exotic loans where it is likely that payments will increase significantly, creating the risk of payment shock. Today, most of the market for loans with lower initial payments is met simply through hybrid ARMs such as the 5/1.

graduated payment buydown,

the reduced interest rate increases in steps, usually each year. A common graduated payment plan is the 3-2-1 buydown, which calls for a 3% reduction in the interest rate in the first year of the loan, a 2% reduction in the second year, and a 1% reduction in the third year. In the fourth year of the loan, the buyer will begin paying the note rate.

Total debt to income ratio

the total debt to income ratio is sometimes called the total debt service ratio or simply the debt to income ratio. It measures the relationship between the loan applicant's stable monthly income and his total monthly debt. This monthly debt is made up of the proposed housing expense (which includes the PITI payment: principal, interest, taxes, hazard insurance, and any mortgage insurance or homeowners association dues), plus any other recurring obligations, including revolving debts, installment debts, and other types of debts like child support or alimony.

A lender might be willing to consider a debt to income ratio over 36% if an applicant has a substantial net worth and a demonstrated ability to accumulate savings.

true

If a borrower defaults on a loan that has PMI coverage, the lender may foreclose on the property and then file a claim with the insurer if the foreclosure results in a loss.

true

The standard debt to income ratio for a conventional loan is 36%.

true