Unit 2

FHA Mortgage Insurance

program thrives bc of the protections provided through mortgage insurance premiums to lenders. UFMIP: up front mortgage insurance premium - one time fee charged to the borrower at closing. Mortgage insurance premium (MIP): a fee calculated annually and paid monthly that is included w/ the borrowers PITI payment

type of mortgage and term of loan section on URLA

provides basic info about the loan - self explanatory. -agency case number is the number assigned by the program provider such as FHA, VA, etc. - makes it trackable

borrower information section of the URLA

provides snapshot of the borrower. -section discussing married, unmarried, or separated is important -to be considered separated requires a legal document from a court of law

monthly income and combined housing information section of URLA

provides the borrowers front-end or housing DTI

introductory section of URLA

purpose is to establish that the consumer is responsible for the info on the application -borrower expected to sign at bottom to recognize that

USDA backing

rather than insurance, USDA loans require a guarantee fee paid at closing and an annual fee that is paid back in monthly installments beginning 12 months after loan closing. both the guarantee fee and the annual fee function similarly to other government loans - they provide assurances to lenders in case of borrowers default

application accuracy

usually it is a mistake - overtime want to make sure everything is completely accurate to give them the loan that will best fit their situation

Definition of complete application

when the consumer provides the mortgage loan originator with the 6 key pieces of information need to apply for credit

Subordination

(the act of subordinating a loan) to establish rank or priority for which loan gets paid off in the case of a sale, foreclosure or another act on the property's title. -typically, the lower the rank of the loan, the higher the interest rate of the loan. Higher rate is due to the level of risk the lender carriers with being placed behind other lenders in the rank of who gets paid first

VA funding fee, entitlement and guaranty

Funding fee: one time fee. fee amount depends on the veterans circumstances. fee ranges from 0.5% to 3.3%. fee may be waived if the veteran has a documented disability due to military service. Entitlement: the amount that a veteran can be guaranteed Guarantee: amount the VA may pay a lender in the event of loss due to foreclosure

Margin

The lenders profit on the loan and an amount of interest that remains constant. Since it serves as the lenders cut of the mortgage payment, the interest rate of an ARM can never go below this - regardless of market factors

HECM qualifying standards

focused soley on the value of the property involved. Borrowers credit history and financial capacity need to be verified, there are no minimum requirement thresholds. timely payments verified as well.

Types of balloon mortgages

-30/15 - the borrower makes payments for the first 15 years in the amount of a fully amortizing payment for a 30 year fixed rate mortgage. At the end of the payment period (15 years), the remaining balance is due. (Does not contain reset option). -Reset and Conditional refinance: Allows the borrower to roll the remaining principal balance over into a more traditional product like a fixed rate or adjustable rate mortgage (must meet certain criteria) -7/23 loan - lump sum is due after 7 years while the reset amortizing term is 23 years.

Methods of equity conversion

-Lump sum cash out -Tenure and/or term cash out -Line of credit

Types of ARMs

-Traditional -Hybrid -Option

FHA HECM

Assumes the same standards as the proprietary reverse except that it is insured by the federal government and requires counseling on the part of the borrower prior to loan closing

Qualifying standards of Freddie and Frannie

-Underwriting and Credit: minimum underwriting qualifications use the 4 C's (credit, capacity, collateral, cash) to help determine if a consumer qualifies for a conforming mortgage loan 4C's: -Credit: to qualify for a conventional conforming loan the consumers FICO score should be a 620 or higher -Capacity: DTI ratio standards are generally a 28% housing DTI ratio and a 36% total DTI ratio with an allowance of up to 45% with compensating factors such as substantial assets -Collateral: max. LTV will vary depending on loan program and occupancy status. for investment properties, requirements are more strict. -Cash: consumer will need to prove asset reserves for certain programs. Fees: Fannie Mae and Freddie Mac do not set any limitations for mortgage loan fees. fees must be in compliant with federal regulations Unique Features: conventional loans allow consumers to get a loan for a second home or an investment property, in addition to a primary home Down Payment: require a 95% LTV (5% down payment) for 1-unit primary residences. second homes and investment properties require a lower LTV (greater down payment) due to the increased risk factor. Seller concessions: ?? Securitization: they package the loans they purchase into collateralized debt obligations (CDO) called mortgage backed securities (MBS) which they then sell to investors in the financial market

MLO role in the application

-assists the borrower with completing the application -helps determine the suitability of mortgage loan products and programs for a particular consumer -figure out the borrowers tangible net benefit

What are the requirements necessary for the borrower to obtain a reverse mortgage?

-borrower must be 62 years of age or older -home must be the borrower's primary residence -no other liens may exist on the property

Reduced documentation loans

-fueled the fire in 2008 -loans allowed borrowers to apply for and receive mortgage loans without full documentation to support their application types of reduced documentation loans: -no income, no assets -stated income, state assets -no income, verified assets -stated income, verified assets -no documentation with the exception of the no doc loan, these loans still require a review of the credit report, confirmation of employment status and a property appraisal

URLA sections

-introductory section -type of mortgage and terms of loan -property information and purpose of loan -borrower information -employment information -monthly income and combined housing expense information -assets and liabilities -details and transactions -declarations -acknowledgement and agreement -information for government monitoring purpose

FHA Fees

-lender origination fee -attorney fee -appraisal fee -home inspection fee -title insurance fee -title examination fee -document preparation fee -property survey fee -credit report fee -transfer stamps -recording fee -taxes

examples of tangible net benefit

-lower interest rate -consolidation of debt -shorter amortization schedule -changing from an ARM to fixed rate -eliminating a negative amortization feature -eliminating a balloon payment feature -receiving a cash-out from the new loan in an amount greater than all closing costs incurred in connection with the loan -avoiding the likelihood of foreclosure -eliminating mortgage insurance

Types of reverse mortgages

-single purpose -proprietary -FHA HECM

What are the restrictions that must be observed by a borrower with a reserve mortgage?

-taxes and insurance must be paid on time -property must be maintained and kept in good repair -no additional owners may be added to the title -borrower may not rent the property -borrower may not declare bankruptcy

application - credit report

-usually the first thing a MLO will do as part of the application process. tells what you will qualify for. permissible purpose: MLO needs permission from the consumer to access the report information on it includes: -open and closed accounts -payment history -public records information

CAP example

2/2/5. 2 is the initial rate change - meaning at the time of the intial adjustment the rate may only go up or down by 2%. The 3 is the annual rate change cap and it also shows that the rate may only move up or down by a maximum of 3% at each change after the first. The 5 is an indicator of the lifetime cap, which means that over the life of the loan the rate may never change by more than 5% of the initial rate of the mortgage

Caps

A limit on how much the ARM's rate may change, up or down, at any given interval. Think of it as a ceiling or a floor that the ARM's rate cannot exceed. Part of the mortgage contract

6 key pieces of information MLO needs to apply borrower for credit

ALIENS. A - address of the property: so the appraisal and title work can be done. L - loan amount: will allow us to determine the LTV once the appraisal is complete, but prior to that we can compare it with the estimated property value. I - income: will help determine the borrowers DTI. will also probably provide us with the information to confirm their employment. E - estimated property value: will allow us to provide an initial determination of collateral qualification. N - name: thats it S - SSN: needed to pull credit report.

Traditional ARM

ARM in which the rates adjust on a periodic basis. Most traditional ARM's have an interest rate that adjusts each year, but at one time in history it was not unusual for the rate to change monthly

Option ARMs

ARMs in which the borrower has the option of 3 different payment amounts. One option allows for the borrower to make a flat payment amount that is only partially amortizing (the borrower does not make a full payment). This flat payment would then result in negative amortization. A third option allows the borrower to make an interest-only payment in which the monthly interest is paid.

Home equity lines of credit

Acts as if the house is a credit card. A form of open-end mortgage that allows the borrower to make repeated withdraws and payments again the equity they have in their home

Why do we need to know whether a loan is open or closed as a MLO's?

Because this will dictate some of our responsibilities and actions as mortgage loan originators as well as type of disclosures we are required to provide to the borrower

Fully indexed rate

Combination of the margin plus the index. It is the interest rate of a mortgage provided there are no constraints on how high or low they may go

Common FHA Products

Common products: -203b fixed rate mortgages -203(k) rehab and repair -204(g) good neighbor next door -232 residential care facilities financing -234(c) - condos -242 hospital financing -245(a) growing equity mortgage (GEM) -251 ARM -255 home equity conversion mortgage (HECM) -513 energy efficient mortgages

Fannie Mae (Federal National Mortgage Association)

Created by Roosevelt as an entity responsible for buying mortgages from lenders. Lenders could then use the influx of capital to provide more loans. -typically buys loans from larger lenders such as high volume depository institutions

FHA Purchase Transactions

Down payment: borrower must provide at least 3.5% of the purchase price of the home as the down payment. Seller concessions: the max amount the buyer can receive from the seller is 6% HECM purchase: allows seniors to purchase a new primary residence with its reverse mortgage program. if the home being purchased is newly constructed, it must be 100% complete at the time of inspection and initial application. Seller concessions are not applicable to HECMs

VA Purchase transactions

Down payment: offers purchase and refinance loan programs that require no down payment or equity, and therefore 100% financing is available Seller Concessions: if the buyer obtains a VA mortgage loan, the max amount of concessions the buyer can receive from the seller is 4% of the purchase price.

USDA purchase transactions

Down payment: offers purchase programs that require no down payment and therefore 100% financing available Seller concessions: the amount of these a buyer can receive in a purchase transaction is unlimited. if, however, the amount of seller concessions exceeds 6%, a comment from the appraiser is required explaining why a greater amount is needed

VA unique features

Essential that certain forms such as the COE and DD form 214 are provided. LES also requested from borrower - essentially a pay stub for military and government workers

Conventional conforming loans

Fannie Mae and Freddie Mac set the underwriting standards. -NOT insured or guaranteed by the government

Government sponsored enterprises (GSE)

Frannie Mae and Freddie Mac are these

Interest-only loans (I/O)

Loan for which the borrower is only required to pay the interest portion of their payment -a limited feature of a loan product (option ARM) -most short term loans are I/O products

ARM (AKA variable rate mortgage)

Loan in which the interest rate can change over the term of the loan. Functions on a 30 year amortization schedule. How and why the interest rates change is tied to the current state of the financial marketplace.

Open-end mortgage

Loans in which the terms and maturity date can change. The final pay-off date is unknown when the loan is originally made. -Common form of this are a reverse mortgage and a HELOC

Qualified loan (QM)

Loans that are considered less risky due to the standards and thresholds required during the qualification and underwriting process. Criteria: -regular periodic payments -loan does not include balloon payments that are twice as large as the average of earlier scheduled payments -income and financial resources of the consumer are verified and documented -(fixed rate loans) - underwriting process is based on a payment schedule that fully amortizes the loan over the entire loan term, and taxes into account all applicable taxes, insurance, and other assessments -(ARM loans) - the underwriting process is based on the maximum interest rate allowed during the first 5 years of the loan. also based on payment schedule that fully amortizes the loan over the entire loan term -loan complies with guidelines established by CFPB relating to ratios of total monthly DTI or alternative measure of ability to repay -the total points and fees payable in connections with the mortgage loan do not exceed 3% of the total loan amount and "bona fide discount points" are excluded for prime loans -the term of the mortgage loan does not exceed 30 years

Non-qualified mortgages (non QM)

Loans that do not meet the QM standard. Loans that do not meet the QM standards cannot be sold to Fannie Mae or Freddie Mac and are either sold to private investors or held by the lender in their own portfolio

Balloon mortgages

Loans that require a planned full repayment of the balance prior to the end of a 30 year amortization schedule. Basically, you state making payments at or below amortization and then after that period, you pay a large lump sum - either the remaining balance of the loan or a really big chunk of it -If the borrower falls on hard times and is unable to pay or refinance the remaining balance when the period of regular payments ends - they may lose their home

Who's responsible for the application?

MLO and borrower

Index

Makes the ARM's rate change. It is an instrument that measures the financial marketplace. If the marketplace moves, so will the rate of the ARM. -LIBOR -T-Bill -COFI

How to calculate the index on an ARM

Margin + Index = Fully indexed rate

Fixed-rate mortgage (AKA set mortgage rate)

Mortgage in which the interest rate of the mortgage remains constant throughout the loan. Allows borrowers to easily manage their budgets. Only P+I stay the same. Most common forms are the term lengths of 10, 15, 20, 25, and 30.

Short term mortgages (interim loans)

Most common form of these loans are construction loans and bridge loans. Their intent is to only be in place for a limited period of time. -12 months or less in length -higher interest rates because of the short repayment period and higher level of risk -interest only in their payment type

Reverse mortgages

Products designed for a specific borrower - homeowners 62 years of age or older. They were created with the idea that retirees who spent a lifetime building equity in their home shouldnt be forced to sell the house when they can no longer afford to pay the monthly payment. -It allows the homeowner to tap their equity and use it -each month, rather than pay the lender, the lender simply accrues the monthly payment and holds it until the borrower either moves out or passes away. -when the borrower leaves, the lender can then collect on the amount due either through collection from the borrower (or their heirs) or through the sale of the property. -It is open-ended

Graduated payment mortgages (GPM)

Products that allow the borrower to ease into a fully amortizing payment on the loan. Typically used by first-time home buyers, it features monthly payment amounts that increase annually until they reach the full payment. -The gradually increasing payment period usually last 5-10 years. During this time the payment does not fully amortize, and thus the remaining unpaid interest for each payment is added to the principal balance of the loan - aka negative amortization.

Proprietary reverse mortgage

Provided by a private lender

Single purpose reverse mortgage

Provided to the borrower for a specific need. ex: paying property taxes or making needed repairs. Often provided by a local government or non-profit agency, and is typically a fairly small amount

USDA products

Section 502 direct housing loan program: also known as USDA direct. is available in terms of 33-38 years and is available to low income borrowers Single family housing guaranteed loan program: only available in the form of a 30 year fixed rate mortgage and is designed for moderate income borrowers

Bridge loans

Temporary financing for a home buyer when purchasing a new home if they are still paying a mortgage on their current home. Two forms: -secured: allow the lender to secure a lien interest in the borrowers current home until it sells and the borrower can repay the lender. -unsecured: the lender is not taking out a security interest in the borrowers current home. This is allowed if the borrowers current home is in the process or under contract for sale with a buyer

Line of credit

The borrower receives a maximum credit limit at the time of closing which they may utilize in a similar fashion to a credit card

Lump sum cash out

The borrower receives a one-time payment or transfer of existing principal loan balance at the time of closing

Tenure and/or term cash out

The borrower receives a regular payment for the life of the loan (tenure) or over a set period of time (term)

Closed-end mortgage

The final pay-off date is determined when the loan is originally made. Loans whose term and maturity date cannot change. Will know exactly when the loan will be repaid if the payment schedule is followed. These types of mortgages include: -Fixed rate -ARM -Graduated payment -Balloon

Note rate

The interest rate at the time of the loan closing. The reason it is known as this is because it is the one noted on the promissory note

Hybrid ARMs

The most common ARM available in the market today. It combines features of a fixed rate mortgage and an ARM. Ex: 5/1 -With a 5/1 ARM, in the first 5 years the loans interest rate remains fixed at the initial rate. After the fifth year, the rate adjusts once annually. Common forms of these are: -3/1 -5/1 -7/1 -10/1

Non-Conventional Loans (Government Loans)

They were created to meet a public need not being filled by conventional mortgage loan programs. -offered from 3 different providers: FHA, VA, and USDA Each one of these programs provide loans that are accompanied by some kind of government insurance or guaranty. it provides lenders with the assurance that they will be compensated even in the case of borrower default.

Niche Loans

Type of loan for unique circumstances of needs. Typically unavailable through major lenders and usually requires higher rates of interest for the borrower. Ex: Alt-A mortgage loan

Alternative A-paper (Alt-A) mortgages

Type of loan intended for borrowers who have good credit but don't meet other underwriting criteria for conforming prime loans. Borrower shortcomings such as: -high loan-to-valur and debt-to-income ratios -limited documentation of the borrowers income makes the loan higher risk and may require higher interest rates

Sub-prime mortgages

Type of loan intended for borrowers with less than prime qualifications. -lower income -poor -limited credit history -minimal assets These loans carry a higher level of risk and therefor lenders will charge a higher rate of interest to offset the risk

Jumbo mortgages

Type of loan where the dollar amount of the mortgage exceeds the conforming loan limits set by FHFA. -considered riskier than normal because of the high dollar amount -requires higher credit scores and a higher level of income compared to the borrowers month debt (DTI ratio)

USDA qualifying standards

Underwriting and Credit: 4C's Credit: mortgage late payments, bankruptcies, and serious delinquent accounts could prevent a borrower from being eligible for this, but there are no specific credit rating requirements Capacity: 29% DTI housing ratio and 41% total DTI Collateral: appraisal is needed. properties cannot be located in a floodplain-defined as landforms subject to repeated flooding Cash: no specific asset verification requirements exist

FHA Qualifying Standards

Underwriting and Credit: 4C's to determine creditworthiness of a mortgage loan applicant Credit: mortgage late payments, bankruptcies, and seriously delinquent accounts could prevent a borrower from being eligible. credit score of 580 make borrower eligible for max financing. 500-579 score limits borrower to 90% LTV. score below 500 disqualifies borrower Capacity: 31% housing DTI and 43% total DTI Collateral: livable condition of the home and its appraised value Cash: Asset verification

VA qualifying standards

Underwriting and Credit: 4Cs Credit: same as others. specifically requires that the borrowers qualifying credit report must be less than 120 days old Capacity: requires a paystub from within the last 60 days. 41% total DTI. Collateral: Once appraisal is complete, the VA will issue a certificate of reasonable value (CRV) that shows the propertys current market value based on the appraisal. valid for 180 days Cash: Same as others

Construction loan

Used to finance the construction of a new home or addition to a home. Finances the project based on the plans, materials, labor and permit costs needed. Once built, the borrower is expected to refinance or pay off the principal balance.

Freddie Mac (Federal Home Loan Mortgage Corporation)

Was spun off from the government into a publicly traded company. President Johnson made this decision due to the heavy toll the vietnam war was taking on the federal budget. To counterbalance Frannie Mae's potential monopoly, the Freddie Mac was created in 1970 and went public in 1989. -typically works with small lenders. these lenders are often referred to as thrifts

Negative amortization

a loan is this if the amount of interest due is not paid. that unpaid interest is then added to the loans principal balance. Ex: reverse mortgages, graduated payment mortgages. -they are very risky because the borrower will ultimately owe more after the payment cycle than before the payment cycle starts. -because of the risk, these products require borrower counseling as a condition for loan approval if the borrower is a first time homebuyer

VA Products

available in fixed rate, ARM, and energy efficient options. VA guarantees 30-, 25-, 20- and 15-year rate mortgage programs as well as ARM programs 1% annual interest rate cap and a 5% lifetime interest rate cap for 1- and 3-year hybrid ARMs.

acknowledgement and agreement section of URLA

borrower signs to indicate that the information they've provided on the application is honest and truthful. (second signature location for borrower)

(co)borrower vs. (co)signer

co-borrower: more than one person applying for the mortgage. a mortgage loan can have as many co-borrowers as desired. to be this, the individual must be an owner of the property (have title rights). co-signer: an individual who provides their qualifications to assist the borrower in receiving the loan. typically they are included on the loan application bc the borrower is unable to quality without the co-signers qualifications. they do not have ownership rights. both have equal responsibility for the debt, so if the debt is not paid, the borrowers will loss their home and damage their credit history - for the co-signer, it will only damage their credit.

VA fees

customary and reasonable costs needed to close the mortgage loan. brokerage fees cannot be charged on a VA mortgage loan. typically origination fee is 1% on VA loan.

property information and purpose of loan section of URLA

gives info about the property, who owns the property and why the loan is being applied for

FHA unique features

if a property with this financing is re-sold within 90 days of the date of its purchase, the property will not be eligible for this mortgage loan

employment information section of URLA

includes current job info, employer and income info from previous jobs if they've been on their current job for less than 2 years

continuation sheet of URLA

last page. can be used to add any info that could not fit on the form in previous sections. third signature location for the borrower. if there are more sheets needed, borrower is required to sign each of them

Conventional Non-conforming loans

loan that does not meet the requirements established by fannie mae and freddie mac. -considered riskier than a conforming mortgage loan -lower qualification standards and higher costs and fees -can remain in the lenders portfolio or be securitized by the lender and then sold to an investor as an MBS Ex: jumbo loans, niche loans, non-traditional ARMs, graduated payment mortgages, and sub-prime mortgages

USDA unique features

loans are distinct bc they are made in rural areas. some USDA loans can be used for home repairs finished after closing

mortgage fraud

lying on the application is a punishable offense with as much as a $1 million fine and 30 years in prison. make sure borrower understands the important of being truthful

Subordinate

means lower in rank or position

Conventional loans

means setting the standard. they were the first types of mortgages available. when first created, they were only available through private lenders and this was the only way a buyer could finance the purchase of a home. -not government sponsored or insured. -categorized into two different groups" -conventional conforming mortgages: meet the underwriting standards or Frannie Mae and Freddie Mac -conventional non-conforming loans: Do not meet standards

Home equity loan (HEL)

mortgage loan in which the borrower used to access their existing equity in the home. Often referred to as a cash out transaction because the borrower is literally taking cash out of their own equity value in the home

USDA fees

no fee limitations. fees must comply with federal regulations

declarations section of URLA

opportunity for the MLO to double check and ensure that nothing has been missed during discussions with the borrower about potential liabilities not provided on the credit report. liabilities include lawsuits that could negatively impact the borrowers ability to pay their mortgage. there's also a series of questions dealing with principal residency and other properties owned. if the borrower lies on this section of the application, the lender may have a legal recourse to call the loan due or change the terms of the mortgage agreement

USDA Mortgage Loan

restricted to property areas designated as rural. rural is defined very broadly in USDA requirements, and may include towns and small cities. it should be in open country and not associated with an urban area. It is not for farms. Loans are really meant for people who work in the agriculture industry or support that industry.

details of transaction section of URLA

shows a summary of the loan including closing costs

assets and liabilities section of the URLA

shows the borrowers assets and liabilities (the bills they're obligated to pay). MLO can use this to determine back end DTI

VA Mortgage loan eligibility

specifically for active duty and retired military personnel and their spouses, along with surviving spouses. only available on primary homes and may not be used for investment properties or secondary homes. -transaction can be used for a purchase, refinance, construction, land contract, or assumption loan. -do not impose a max loan amount for qualification -also depends on the length and character of the veterans service. -borrowers level of eligibility is documented in a certificate of eligibility. -a veteran dishonorably released or discharged from military service does not qualify for this

URLA (uniform residential loan application)

standard mortgage application form used in almost all mortgage processes. fannie mae, freddie mac, FHA, VA, USDA all require it

information for government monitoring purposes section of URLA

the MLO is required to ask monitoring questions in compliance with ECOA, fair housing laws and HMDA. the borrower can choose not to answer, but the MLO is required to make a best faith effort to answer the questions if the borrower chooses not to do so. MLO must sign in this section

FHA mortgage loans

these loans have lower qualification requirements and therefore are more accessible to consumers. Qualifications include: lower credit score, LTV, DTI, and reserves, but share similar loan limit requirements of conventional conforming loans

Piggyback loan

type of mortgage that provides a loan to cover the down payment. Typically used pre-2008. two types are: -80/20: the primary mortgage covered 80% of the home's purchase price, while the other loan covered 20% of the price -80/10/10: was when the 80, once again, covered 80% of the homes purchase price, but the other loan was provided in two separate loans of 10% each