II General Mortgage Knowledge (23%) B. Mortgage Loan Products

Partially amortizing loan

(also known as a balloon loan) has a repayment schedule that is not sufficient to pay off the loan over its term. This type of loan calls for regular, periodic payments of principal and interest for a specified period of time. At maturity, the remaining unpaid principal balance is due as a balloon payment.

Underwriting Criteria for QM loans

-Highest Monthly Payment.The monthly payment is calculated based on the highest expected payment in the first 5 years.(El pago mensual se calcula en función del pago más alto esperado en los primeros 5 años.) -Verifiable income. The lender considers and verifies the borrower's current and reasonably expected income and expenses. This includes debt obligations, alimony, and child support. )Ingresos comprobables. El prestamista considera y verifica los ingresos y gastos actuales y razonablemente esperados del prestatario. Esto incluye obligaciones de deuda, pensión alimenticia y manutención infantil.) Maximum of 43% DTI. The borrower's debt-to-income ratio does not exceed 43%. (Máximo de 43% DTI. La relación deuda / ingreso del prestatario no supera el 43%) • Maximum APR. The annual percentage rate (APR) of the loan should not exceed the average prime offer rate (APOR) for that mortgage by 150 basis points (bps) or more. •( APR máximo. La tasa de porcentaje anual (APR) del préstamo no debe exceder la tasa de oferta preferencial promedio (APOR) para esa hipoteca en 150 puntos básicos (bps) o más.)

Basic Features of ARMs

-Initial interest rate and payment, -adjustment period, -index, -margin, -caps.

What are the Fixed Rate Loan features?

-fixed interest for the life of the loan -level payments.

The two interest rate caps are

-periodic adjustment caps and -lifetime caps.

Options for lenders based on the ATR/QM Rule,

1. Satisfy the requirements for a "QM Safe Harbor" loan to take advantage of the defense it provides to borrower claims for damages or recoupment or offset. 2. Satisfy the requirements for a "QM Rebuttable Presumption" loan to take advantage of the lesser degree of defense provided. 3. Offer non-ATR/QM loans that will not have the benefit of any special legal protections and would be subject to a case-by-case judicial determination as to whether they satisfy the ATR Requirement. 1. Satisfacer los requisitos para un préstamo de "QM Safe Harbor" para aprovechar la defensa que brinda a los prestatarios por daños, recuperación o compensación. 2. Satisfacer los requisitos para un préstamo de "QM Presunción Rebuttable" para aprovechar el menor grado de defensa proporcionado. 3. Ofrecer préstamos "sin" ATR/QM que no tendrán el beneficio de ninguna protección legal especial y estarían sujetos a una determinación judicial caso por caso en cuanto a si cumplen con el requisito de ATR.

Types of Hybrid ARMS

2/28 or 3/27 ARM

A 40-year fixed-rate

A 40-year fixed-rate loan has the lowest monthly payments of fixed-rate loans but has a dramatically higher amount of interest costs.

A balloon payment

A balloon payment is a payment that is more than two times the loan's average monthly payment and pays off the remaining balance at the end of the loan term. A balloon payment is not allowed in a Qualified Mortgage, with some limited exceptions.

A convertible ARM

A convertible ARM is an ARM that can be converted to a fixed rate by the borrower at some point during the loan term.

A forward mortgage

A forward mortgage is any mortgage in which the borrower has a monthly or other periodic mortgage payment obligation.

Fully Amortizing Loan

A fully amortizing loan is fully repaid at maturity by periodic reduction of the principal. When a loan is fully amortized, the payments the borrower makes are equal over the duration of the loan.

purchase money loan.

A loan that is used to purchase property is called a purchase money loan. It is used strictly for financing the purchase of real property. Most loans used to purchase property are closed-end loans.

Fixed Rate Loan

A loan with a rate that does not change over the life of the loan.

A maturity date

A maturity date is the date on which a debt becomes due for payment. Maturity dates for fixed-rate loans range from 40, 30, 20, 15, to 10 years. Most popular ones 30 and 15

Nonstandard mortgage

A nonstandard mortgage is a covered transaction that is an adjustable-rate mortgage with an introductory fixed interest rate for a period of one year or longer, an interest-only loan, or a negative amortization loan.

payment cap

A payment cap restricts a payment from increasing more than a specified percentage above the prior year's payment amount.

ARM

Adjustable Rate Mortgage (or loan)

lifetime cap

Almost all ARMs have a lifetime interest rate cap called a lifetime cap. The lifetime cap is the maximum interest rate that may be charged over the life of the loan. Example: An ARM has an initial interest rate of 5.5% with a 6.0% lifetime cap. This means that the interest rate can never exceed 11.5%. If the index increases 1.0% for 10 years, the interest rate on the loan will be 15.5% without the lifetime cap. However, with the lifetime cap it will be 11.5%.

Amortization

Amortization is the liquidation of a financial obligation on an installment basis. An amortization schedule details each payment, displays the specific amount applied to interest and principal, and shows the remaining principal balance after each payment.

Amortization type

Amortization type is the basis for how a loan will be repaid. The most common amortization types include fixed-rate and adjustable-rate mortgages.

interest-only loan

An interest-only loan is not amortized. The borrower only makes periodic interest payments during the term of the loan. The entire principal balance is due in one lump sum upon maturity.

An option ARM

An option ARM is a type of loan that allows the borrower to choose among several payment options each month: Minimum payment 15 years or 30 years fully amortizing payment Interest only payment

Hard Money Loan

Any loan used to take cash out of a property is a hard money loan. Hard money loans draw on the equity in property.(capital de la propiedad). This type of loan includes home equity loans, home equity lines-of-credit, and swing loans. Cash-out refinancing is not the same as a home equity loan. Cash-out refinancing replaces an existing loan with a new one. A home equity loan is a second loan against the equity in your home.

Types of Qualified Mortgages

General QM loans and Small Creditor loans.

Type 1: General QM definition

General QM loans may not have negative-amortization, interest-only, or balloon-payment features or terms that exceed 30 years. They also may not have points and fees that exceed the specified limits.

limited discount points

If the fee paid only lowers the interest rate for a specified amount of time rather than for the entire loan term, it is called limited discount points.

interest

Interest is the fee the lender charges for the use of their money. name for the rent paid to use someone else's money.

Interest-Only ARM

Interest-Only ARM An interest-only ARM (IO) loan allows payment of interest only for a specified number of years (typically between 3 and 10 years). This allows the borrower to have smaller monthly payments for a period of time. Example: A person borrows $150,000 on a 6.0% 5/30 IO ARM. If the loan is fully amortizing over 30 years, the monthly payment will be $900. However, for the first 5 years, the borrower's monthly interest-only payment is $750. Over the next 25 years, the borrower repays both principal and interest. Therefore, the monthly payment increases even if the rate stays the same. Beginning in year 6, the new monthly payment will be $966.

Interest-only fixed-rate loans

Interest-only fixed-rate loans are short-term fixed-rate loans that have fixed monthly payments usually based on a 30-year fully amortizing schedule and a lump sum payment at the end of its term. They typically have terms of 3, 5, and 7 years. Interest-only loans with a refinancing option allow borrowers to convert the mortgage at maturity to a fixed-rate loan The most popular terms for this conversion are the 5/25 and 7/23.

traditional mortgages

Most traditional mortgages required a substantial initial down payment (usually about 20%) and a 25 to 30-year payment schedule with monthly payments that would fully amortize the loan at the end of its term.

Recasting

Option ARM payments are typically adjusted every 5 years This automatic payment adjustment is called recasting.

Principal

Principal is the amount of money a person borrows from the lender.

Rebuttable presumption

Rebuttable presumption means a borrower could claim the ability to repay standard was not met either because the points and fees limit was exceeded or because the creditor failed to follow underwriting requirements.

Record Retention

Record Retention A creditor must retain evidence of compliance with Section 1026.43 for three years after consummation.

Assumable Feature

Sometimes ARMs are assumable, which is important for borrowers who plan to resell the property within a short time. The assumable feature of a loan allows a borrower to transfer the loan to another borrower, usually with the same terms, if the new homebuyer qualifies for the loan.

Interest-only fixed-rate loans "Advantage"

The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30- or 15-year loans, which results in lower monthly payments.

The interest rate is made up of two parts:

The interest rate is made up of two parts: the index and the margin. -The index is a measure of interest rates -The margin is an extra amount that the lender adds.

The interim

The interim caps apply at the time the loan adjusts.

Loan Term

The loan term is the agreed period the borrower has to repay the loan. For some loans, this could be a year or less; however, for most home loans it is 25-30 years.

Payment Cap

The minimum payment is usually capped so that it cannot be increased more than 7.5% above the prior year's payment amount.

Note Rate

The note rate is the interest rate on the ARM loan at the time it is funded.

Prime Rate

The prime rate refers to the interest rate that individual banks charge their most creditworthy customers for short-term loans.

The repayment schedule

The repayment schedule shows the mortgage payments laid out over the life of the loan.

hard money loan types

This type of loan includes home equity loans, home equity lines-of-credit, swing loans or bridge loans

In addition, in order for a loan to be a General QM loan, the creditor must:

Underwrite based on a fully-amortizing schedule using the maximum rate permitted during the first 5 years after the date of the first periodic payments (suscripción basada en un programa de amortización total utilizando la tasa máxima permitida durante los primers 5 anos) Consider and verify the consumer's income or assets, current debt obligations, alimony and child-support obligations. Determine that the consumer's total monthly debt-to-income ratio is no more than 43%.

"nontraditional mortgage product"

all residential mortgage loan products that allow borrowers to defer(POSPONER) repayment of principal or interest. This includes all interest-only products and negative amortization mortgages, with the exception of HELOCs. SAFE Act DEFINITION: any mortgage product other than a 30-year fixed-rate mortgage. Any mortgage other than a 30-year, fully amortizing, fixed-rate mortgage is a nontraditional mortgage.

Discount points

are a one-time charge paid by the borrower to lower the interest rate on the loan. A point is equal to one percent of the loan amount.

Non-qualifying mortgages (Non-QM)

are mortgage loans to borrowers whose financial and/or property profiles fall outside the guidelines for qualifying Frequently, lenders retain the non-QM mortgages in their loan portfolios.

Types of amortizations

fixed-rate or ARM

Hybrid ARMs

have two interim caps.

index

indice

Cash-out refinancing

involves refinancing the loan for a larger amount than the current loan.

Standard Mortgage

is a covered transaction that provides for regular periodic payments that do not cause the principal balance to increase, do not allow the consumer to defer repayment of principal, or result in a balloon payment. The total points and fees must fall within the thresholds for Qualified Mortgages, the loan term cannot exceed 30 years, and the interest rate is fixed for at least the first five years of the loan. Finally, the proceeds from the loan are used solely to pay off the outstanding principal balance on the nonstandard mortgage and to pay required RESPA closing or settlement charges.

30-year fixed-rate loan

offers low monthly payments while providing for a never-changing monthly payment schedule. A typical 30-year, fixed-rate loan takes 22.5 years of level payments to pay half of the original loan amount.

PITI

payment that includes the principal, interest, taxes, and insurance (PITI), represents the borrower's total monthly payment.

The lenders or the secondary market investor (Fannie Mae or Freddie Mac)

required that the borrower's housing and fixed expenses did not exceed certain percentages of his or her income. These underwriting standards resulted in a relatively stable market

General Requirements of QM Loans

restrictions on loan features, points and fees, and underwriting. For a loan to be a QM, the points and fees may not exceed the points-and-fees caps and the borrower's total debt-to-income ratio is not higher than 43%.

Risks of Nontraditional Mortgage Products

• Interest rate uncertainty when the rate is not fixed • Value of the home declining or even remaining stable though the principal balance is increasing with each mortgage billing cycle • Inability to refinance as needed due to credit eligibility or declining property values causing lack of equity

Advantages of Reverse Mortgages

• No taxes are paid on the cash from a reverse mortgage loan • Social Security and Medicare benefits are not affected by reverse mortgages • No payments are due as long as the homeowner lives in the home • It pays off the existing mortgage on the home • Homeowner retains title to his or her home and can sell at any time • Homeowner continues to live in his or her home • No pre-payment penalty with reverse mortgages • A "non-recourse" clause, which prevents the estate from owing more than the value of the home when the loan becomes due and the home is sold. • Heirs inherit the home and keep the remaining equity after the balance is paid off—even if the loan balance is greater than the value of the home.

An adjustable-rate loan or adjustable-rate mortgage (ARM)

is a loan with an interest rate that adjusts in accordance with a movable economic index. The interest rate on the loan varies upward or downward over the term of the loan depending on money market conditions and the agreed upon index. The interest rate on the ARM only changes if the chosen index changes.

A teaser rate

is a low, short-term introductory interest rate designed to tempt a borrower to choose a loan.

A reverse mortgage

is a non-recourse, first-lien, home equity on a primary residence for homeowners aged 62 and older.

Payment shock

is a significant increase in the monthly payment on an ARM that may surprise the borrower.

A qualified mortgage (QM)

is a type of loan that meets certain requirements and that the creditor followed the ability-to-repay rule when originating the loan.

Negative amortization

is an increase in the principal balance caused by low monthly payments that do not pay all the interest due on the loan

An interest rate cap

is beneficial to borrowers in a rising interest rate market. It limits the increase on the interest rate at the end of each adjustment period. Interest rate caps are based on the note rate.

A closed-end loan

is one in which the borrower receives all loan proceeds in one lump sum at the time of closing. The borrower may not draw additional funds against the loan at a later date.

A 15-year fixed-rate loan .

is repaid twice as fast because the monthly payment is higher. More money is applied to the principal in the early months of the loan, which cuts the time it takes to reach free and clear ownership. Additionally, the borrower pays less than half the total interest costs of the traditional 30-year loan.

Compound interest

is the interest paid on original principal and on the accrued (generado) and unpaid interest that accumulates as the debt matures. It is the interest that interest earns.

Most used indexes

CMT, COFI, and LIBOR indexes (80% of ARMs) CTM-Ii the volatile most used index COFI -is the slowest one and more stable index.

Mortgages are categorized as

traditional or nontraditional.

Caps on points and feed for a QM loans

Points and fees may not be excessive. The cap limit ranges between 3% and 8% depending on the loan amount.

QMs can receive two different levels of protection from liability

—safe harbor and rebuttable presumption.

Loan Features for QM Loans

• Equal, regular periodic payments of principal and interest tha will repay the loan amount over the loan term. • No negative amortization • No deferral (aplazamiento) of principal. (A loan allows the deferral of principal repayment if one or more of the periodic payments may be applied only to accrued (acomulado) interest and not to loan principal.) • No balloon payments • Term cannot exceed 30 years

Types of Reverse Mortgages

• Home Equity Conversion Mortgages—federally insured reverse mortgages that are backed by the U. S. Department of Housing and Urban Development. • Proprietary Reverse Mortgages—private loans that are backed by the companies that develop them. • Public Sector Reverse Mortgages—offered by some state and local government agencies and nonprofit organization.

terms of a loan

• Principal (Loan Amount) • Interest • Interest Rate • Loan Term (Number of Months) • Repayment Schedule

Type 2: Small Creditor QM definition

A creditor is a small creditor if it has less than $2 billion in assets and originates 500 or fewer first-lien, closed-end residential mortgages that are subject to the ATR requirements per year. Loans made by a small creditor that are originated and held in the creditor's portfolio are QMs if the creditor considered and verified a borrower's debt-to-income ratio.

Hybrid Loans

A hybrid ARM combines the features of a fixed-rate loan with those of an adjustable-rate loan. The fixed-rate feature gives the borrower some security with fixed payments in the initial term of the loan. A fixed interest rate exists for a period of 3, 5, 7, or 10 first years of the loan. After that the rate may adjust periodically until the loan is paid off. This adjustment period begins on what is called the "reset date for the loan". Hybrid ARMs are often advertised as 3/1, 5/1, 7/1, or 10/1 ARMs (5/1- theorist number tells how long the fixed interest-rate period will be 5 years, the second number tells how often the rate will adjust after the initial period.)

prepayment penalty

A prepayment penalty is a fee charged when the loan is paid off early. The penalty is typically equal to six months' interest on the loan.

Adjustment Period

Adjustment Period For most ARMs, the interest rate and monthly payment change every month, quarter, year, 3 years, or 5 years. The period between rate changes is the adjustment period. Example: A loan with an adjustment period of 1 year is called a 1-year ARM. This means the interest rate and payment can change once every year. A loan with a 3-year adjustment period is called a 3-year ARM.

A higher-priced mortgage e.

Is a mortgage that, at the time the interest rate on the loan was set, the APR was 1.5 percentage points or more over the Average Prime Offer Rate (APOR) for a first-lien mortgage, or by 3.5 percentage points for a subordinate-lien mortgage.

COFI

Is the mes stable index

Types of non-QM loans:

Jumbo loans, Interest-only loans, Stated income loans,(préstamos de ingresos declarados). Mortgages with 40-year terms, Loans using alternate documents

Loans with a biweekly payment plan

Loans with a biweekly payment plan call for payments every 2 weeks. Since there are 52 weeks in a year, the borrower makes 26 payments, which is equivalent to 13 months of payments, every year. The interest costs for the biweekly mortgage are decreased even farther because a payment is applied to the principal (upon which the interest is calculated) every 14 days.

introductory rate or start rate,

Many adjustable-rate loans (ARMs) have a low introductory rate or start rate, sometimes as much as 5.0% below the current market rate of a fixed-rate loan. This start rate is usually good for 1 month to as long as 10 years. As a rule, the lower the start rate, the shorter the time before the lender makes the first adjustment to the loan.

Margin

Margin The lender adds a few percentage points, or margin, to the index to determine the interest rate that a borrower pays. Some lenders base the amount of the margin on the borrower's credit record—the better the credit, the lower the margin the lender adds and the lower the interest on the loan.

Refinancing

Refinancing replaces the old loan with a new one. A person may refinance to reduce the interest rate, lower monthly payments, or change from an adjustable-rate to a fixed-rate loan. The loan amount remains the same, but the terms change. Refinancing usually makes sense only when there has been a drop in interest rates and a person wants a new loan at a lower rate than the existing loan. Refinancing may also benefit those who want to refinance for a longer term to lower monthly payments.

Underwriting Standard

Normas de suscripción

Periodic Adjustment Cap

Periodic Adjustment Cap All adjustable-rate loans carry periodic adjustment caps (interim rate caps). The periodic adjustment cap limits the amount the interest rate can adjust up or down from one adjustment period to the next after the first adjustment.

Safe Harbor

Provision in a law or regulation that provides some measure of protection from liability if certain conditions are met A safe harbor means that the loans are conclusively presumed to comply with the ATR requirements. The safe harbor provides greatest legal certainty for creditors.

Interest-Only Fixed-Rate Loans "Disadvantage"

The disadvantage is that at the end of the term the borrower must make a lump sum payment to the lender. Additionally, with an interest-only fixed-rate loan, the borrower is not building equity.

Index

The index is a publicly published number that is used as the basis for adjusting the interest rates of adjustable-rate mortgages.

The most common indices are:

The most common indices, or indexes, are the Constant Maturity Treasury (CMT), the 11th District Cost of Funds Index (COFI), the London Inter Bank Offering Rates (LIBOR), Certificate of Deposit Index (CODI), and the Bank Prime Loan (Prime Rate).

Fully Indexed Rate

When the margin is added to the index, the result is known as the fully indexed rate on the loan. Example: The current index value is 5.5% and the loan has a margin of 2.5%. Therefore, the fully indexed rate is 8.0%.

interest rate

is a figure calculated as a percentage % that is used to indicate the rate charged for use of money in a loan. Interest rates may be fixed or variable.

Features of Non-QM Loans

• Points and fees exceed the allowed percentage thresholds for QMs. • Risky features such as negative amortization, interest-only, or balloon loans. • Maximum loan term is more than 30 years. • Borrower debt-to-income ratio exceeds 43%. • Any loan that is not eligible for purchase, guarantee, or insurance by a GSE (Fannie Mae or Freddie Mac), VA, USDA, or FHA.

Disadvantages of Reverse Mortgages

• Program is not well understood • High upfront costs • Equity in the home can be partially or completely used up • Medicaid and other needs-based government assistance programs can be affected if too much money is withdrawn within a few months • Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole