NMLS Chapter 4

Graduated payment mortgage

-payment starts low and increases over time -initial payment used for qualifying purposes -may be good for individuals who expect their income to increase over time

PITI

-principal, interest, taxes, and insurance (hazard, flood, mortgage) -monthly housing expense -includes any monthly homeowner's association fees

Amortization

-process of fully paying off loan in regular payments over specified period of time -portion of each monthly payment that goes to reduce outstanding principal balance gradually increases w/ each payment throughout the life of the loan -portion used to pay interest gradually decreases each month

PMI (conventional)

-required on all loans borrower puts less than 20% of loan amount down at closing -creates pool of money, helps compensate the lender if it takes loss of foreclosure sale -allows borrower to use leverage and to buy more expensive property than he might if he had to make larger down payment -insures top 20% of loan -paid down or canceled at 78% LTV

Alt-A mortgage

-riskier than A-paper (prime) -less risky than subprime -IR determined by credit risk -characterized by: 1. borrowers w/ less than full documentation 2. higher LTV ratio 3. higher DTI ratio

Wraparound mortgage

-seller finances enough money to cover existing loan as well as any additional funds needed by borrower -original loan can't have due-on-sale clause, since seller will continue to make these payments after title is transferred to the new purchaser -makes sense if IR on wraparound mortgage is higher than rate on existing lien, this is how seller/lender makes profit

Construction loan

-short-term temp loan -money is advanced in stages as construction progresses and borrower pays interest on each draw -no structure to act as collateral: IR, down payments, and borrower credit score requirements tend to be higher than residential purchase mortgages

Senior mortgage

-superior lien position

Reverse mortgage payment plans

-tenure: payments continue for life of borrower as long as it remains principal residence -term: borrowers select desired number of monthly payments -line of credit: borrowers withdraw money as needed -modified tenure: tenure combined w/ line of credit -modified term: term combined w/ line of credit

Escrow impounds

-usually collected by lenders as part of monthly mortgage payment -include monthly amount for property taxes, hazard and flood insurance, if required

FHA

-w/in HUD -guarantees approved lenders are reimbursed for losses suffered if there is a foreclosure or short sale in which property sells for less than mortgage balance -maximum loan amount depending on county; based on loan amount not including UFMIP -no due-on-sale clause -assumable by qualified borrowers -no prepayment penalties -appraisers required to perform limited home inspection w/ appraisal -max term 30 years -SSN required -late fee 4% monthly P&I -lender sets rate

Where HUD gets money to insure loan

1. one-time closing cost (up front mortgage insurance premium, ufmip) that is a small % of total loan amount 2. monthly Mortgage Insurance Premium (MIP) paid by borrower every month -fee paid on all FHA loans w/ terms greater than 15 years

VA loan

-gov involvement: partially guaranteed -min down payment: 0% -special closing fee: funding fee -monthly mortgage insurance: none -due-on-sale: no, assumable -investment properties: no -appraisal: CRV VA appraiser -late fees: 4%

Rate caps

- typically 1-3% per adjustment period -5-6% over life of loan -2/3/6 cap allows loan to adjust max 2% 1st adjustment period, 3% subsequent, 6% lifetime

Basis point

-100 basis points = 1%

Conventional

-2017 limit $424,100 1st mortgage on single-family house -any single-family loan above that amount are nonconforming or jumbo loans and not bought by Fannie Mae or Freddie Mac -minimum 3% down payment on 1st mortgage Fannie Mae loan if borrower has PMI -may have due-on-sale clause -may or may not be prepayment penalty -issued for investment properties, primary residences, and 2nd homes -late fee 5% monthly P&I -non-owner occupied rental properties riskier than owner-occupied, lenders will usually charge higher IR and larger down payment (20% min)

Conventional seller concessions

-75% LTV or less = 9% seller concessions -75%-90% LTV = 6% -90% or more = 3% -investment properties max 2% seller concessions

3 loan types

-FHA -VA -USDA

Nontraditional Mortgages

-Interagency Guidance on Nontraditional Mortgage Product Risks -addresses risks posed by different types of adjustable-rate mortgages, including "interest-only" mortgages and "payment options" adjustable-rate mortgages that could result in negative amortization -guidelines: 1. qualifying borrower based on low introductory IR rather than final fully indexed rate 2. allowing adjustable-rate mortgages to be combined w/ interest-only, reduced documentation, or 2nd mortgage loans 3. lenders need to implement strict controls and monitoring practices if high % of their business involves risky loans; monitor practices of 3rd party LOs 4. products and risks must be fully explained to customers 5. lenders must ensure borrowers receive all required state and federal disclosures

USDA loan

-gov involvement: partially guaranteed -min down payment: 0% -special closing fee: guaranty fee -monthly mortgage insurance: MIP -due-on-sale: no, assumable -investment properties: no -appraisal: FHA approved appraiser -late fees: 4%

Reverse mortgage limit

-how much a borrower can borrower is based on age, IR, and value of home -number known as initial principal limit and increases every year of the loan -limits of 1st year withdraws: 1. 60% of initial principal payment 2. enough to pay off existing mortgage (if more than allowable 60%) plus 10% of principal limit

Subprime lending

-Statement of Subprime Mortgage Lending -addresses risks relating to certain subprime mortgages and qualifications of borrower -typically borrowers will display range of credit risks: 1. 2+ 30-day delinquencies in last 12 months or 1+ 60-day delinquencies in 24 months 2. judgement, foreclosure, repossession, charge-off in prior 24 months 3. bankruptcy in last 5 years 4. relatively high default probability evidenced by credit score of 660 or below 5. DTI 50% or higher -products agencies were particularly concerned about: 1. low initial payments based on fixed introductory rate that expires after short period and then adjusts to variable index rate plus a margin for remaining term of loan 2. very high or no limits on how much payment amount or IR may increase ("payment or rate caps") on reset dates 3. limited or no doc of borrower's income 4. product features likely to result in frequent refinancing to maintain affordable monthly payment 5. substantial prepayment penalties and/or prepayment penalties that extend beyond the initial fixed IR period

Certificate of Reasonable Value (CRV)

-VA appraisal -performed by VA approved appraiser who operates on a rotation system

Borrower Funds

-acceptable sources: 1. bank and brokerage accounts 2. IRA, 401k, other retirement funds 3. doc sale of assets 4. net proceeds from loan against cash value (or surrender) of life insurance policy

Reverse mortgage potential closing costs fees

-appraisal -credit report -deposit verification -document preparation -property survey -title examination and title policy -attorney -settlement -mortgage broker -recording fees and taxes -property tests or treatments -courier services

Simultaneous 2nd-lien loan

-arrangement where either a closed-end 2nd-lien or HELOC is originated simultaneously w/ first lien mortgage loan, typically higher down payment

Buy-down mortgage

-begins at rate below existing market rate and then rises, usually every year, at predetermined amount -developer may work with lender and in return for volume of business, lender may offer lower IR for 2-3 years if borrower uses developer's financing

Construction-to-permanent loan

-borrower applies for 2 types of loans w/ 1 app -payments on permanent loan begin after final inspection or issuance of Certificate of Occupancy -creditors allowed to treat multiple advance loans to finance construction of dwelling that may be permanently financed by the same creditor either as a single transaction or as more than one transaction

Bi-weekly mortgage

-borrower must make mortgage payment every 2 weeks -allows borrower to build up equity faster and pay less interest over life of loan

FHA insurance

-borrowers may finance UFMIP cost as part of loan amount and pay MIP premiums along w/ month PITI payment -MIP continues over life of the loan

Interest-only mortgage

-borrowers pay only monthly interest due during specified term of loan -when term is about to expire, borrowers may: 1. make lump sum loan payoff 2. refinance into an amortizing fixed rate or adjustable mortgage 3. start paying off balance at higher IR -not considered quality mortgages

Gift funds

-both go and conventional loans allow cash gifts from approved classes of donors to be used to pay down payment -gift must be accompanied by letter containing 1. dollar amount of gift and date funds were transferred 2. donor's statement that no repayment is expected 3. donor's name, address, number, and relationship to borrower -approved cash gift donors: 1. relative of borrower 2. domestic partner 3. fiancee or fiance 4. employer 5. charitable organization 6. gov or public entity providing homebuyer assistance -may not include parties w/ interest in purchase transaction including: 1. seller 2. builder 3. real estate agent 4. LO -builders, real estate agents, and LOs may be allowed w/ lender approval to credit towards other types of borrower closing costs; sellers are always allowed to

Bridge loan (swing loan)

-bridges gap between purchase of new home and sale of current home -current home used as collateral -loan used to close on new home before current home is sold -signed contract to sell current house

Package mortgage

-can be amortizing or non -lien includes personal property as well as real property -more common in commercial lending

Risk layering

-combining multiple risky loan features into one package

Reverse mortgage end

-doesn't have to be repaid until borrower dies or home is vacant for more than 1 year -owner retains deed and possession

Nonconforming Mortgage

-doesn't meet Fannie Mae/Freddie Mac underwriting guidelines -reasons: 1. loan amount too high 2. borrower's credit too low 3. borrower doesn't have enough assets 4. borrower has too much debt -higher IR

USDA

-farm/rural development loan -partially guaranteed by US gov -allow for 100% financing -one-time funding fee (guaranty fee) paid at closing -require monthly mortgage insurance -property must be located in rural area (defined by dep. of agr.) -lower-income, owner-occupied, 30-year fixed -gifts allowed -repair costs can be included in loan amount -no prepay penalty -FHA appraiser used -late fee 4% monthly P&I -seller may contribute up to 6% of sale price toward buyer's reasonable closing costs -down payment gifts allowed

Growing equity mortgage (GEM)

-fixed IR and increasing payments so loan balance is paid off more quickly

HELOC

-form of revolving credit in which home serves as collateral -amount of available credit depends on borrower's equity in home -funds can be withdrawn for stated period of time after which repayment period starts -IRs vary, repayment may vary month to month -lenders can cancel credit line at any time

Fixed-rate mortgage

-fully amortized -15-30 year terms -1st few years interest, last few years principal -15-year lower IR, higher monthly payments

FHA loan

-gov involvement: 100% insured -min down payment: 3.5% -special closing fee: UFMIP -monthly mortgage insurance: MIP -due-on-sale: no, assumable -investment properties: no -appraisal: FHA approved appraiser -late fees: 4%

Conventional loan

-gov involvement: none -min down payment: 3% -special closing fee: none -monthly mortgage insurance: PMI if less than 20% down -due-on-sale: yes, usually -investment properties: yes -appraisal: standard -late fees: 5%

ARM

-index that fluctuates and margin that's fixed -index + margin = fully indexed rate -IRs usually lower -index is known, reliable, fluctuating financial indicator expressed a % -margin is fixed % rate (typically 2-3%) added to specified index at each adjustment period to determine fully indexed rate -adjustment period specifies initial term before first IR adjustment -1, 3, 5 year ARMs -rate caps limit how much IR can change at each adjustment and over life of mortgage -borrowers must be notified of rate change 6 months before initial reset -payment caps limit amount monthly payment may increase at time of each adjustment -interest not paid b/c of cap is added to balance of loan -payment cap can limit amount of monthly payment increases, but can also add to loan balance -can result in negative amortization

Predatory lending

-involved as least one element: 1. making loans based predominantly on foreclosure or liquidation value of borrower's collateral rather than on borrower's ability to repay mortgage according to its terms 2. introducing borrower to repeatedly refinance a loan in order to charge high points and fees each time loan is refinanced ("loan flipping") 3. engaging in fraud or deception to conceal true nature of mortgage loan obligation, or ancillary products, from unsuspecting or unsophisticated borrower 4. loans to borrowers who don't demonstrate capacity to repay loan may lack sufficient consumer protection safeguards and are generally considered unsafe and unsound -elevated risk conduct will violate Section 5 of FTC Act or other state laws

Consumer Protection Principles

-lender needs to inform subprime borrower about: 1. potential payment increases, including his new payment will be calculated when introductory fixed rate expires 2. existence of prepayment penalty, how it will be calculated, and when it may be imposed 3. existence of balloon payment 4. whether there is pricing premium attached to reduced documentation or stated income loan program 5. requirement to pay possibly substantial real estate taxes and insurance in addition to loan payments

Jumbo mortgage

-loans that exceed Fannie Mae lending limits -IRs may be higher

Reduced documentaion

-low doc/no doc -no income/no asset -stated income -stated assets -minimal doc standard

Junior mortgage

-lower lien position than sr. mortgage

FHA seller concessions

-max 6% which cannot be used for down payment

Reverse mortgage advertisements may not

-misrepresent gov affiliation -provide inaccurate info about IRs -provide misleading statements concerning costs of reverse mortgages -misrepresent amount of cash or credit available to consumer

P&I (debt service)

-monthly principal and interest payment -late fees 4 or 5% of debt service

FHA Direct Enforcement

-mortgagee can underwrite and close FHA loans w/out HUD review or approval

Reverse mortgage/home equity conversion mortgage (HECM)

-negatively amortizing loan that allows elderly homeowners to convert equity in primary residence into monthly cash flow or line of credit -HECMs have no max payout -requirements: 1. youngest borrower is 62 2. home is 1-unit primary residence, including condos 3. no existing mortgage on property or one that can be satisfied with 1st reverse mortgage payment 4. borrower must receive counseling from HUD-approved home counseling agency 5. borrower must maintain hazard insurance, pay property taxes, pay MIPs, and possibly pay monthly servicing fees 6. payments can continue as long as borrower lives, or property is vacant for more than 12 consecutive months for health reasons, or borrower violates terms of mortgage 7. new FHA appraisal -can be fixed or ARM, 2% annual cap and 5% lifetime cap -non-recourse loans since heirs are not personally liable for note -if lien is greater than market value of home, lender must accept sold price and cannot file for deficiency judgement against heirs -HECM is FHA's reverse mortgage loan

VA

-no max VA loan -DVA controls amount of guaranty that reimburses lenders if they suffer loss due to foreclosure or short sale -$424,100 limit for more counties -DVA guarantees lenders 25% of this limit as reimbursement for losses -lenders generally lend up to 4x amount of veteran's entitlement w/o requiring down payment -can have 100% financing on 1st mortgages for primary residences only -IRs competitive, partially guaranteed -lender sets rate -assumable (no due-on-sale clause) -no prepayment penalties -no MIP -max term 30 years -late fee 4% monthly P&I -majority are 100% financing -down payment gifts allowed if needed -sellers may contribute up to 4% sale price, plus reasonable and customary loan costs: 1. property taxes and insurance 2. discount points above 2% of loan amount 3. borrower's judgments and debts 4. VA funding fee 5. standard closing costs

Term mortgage

-non-amortizing interest-only loan -balance due at end of term in balloon payment

Jumbo loan

-nonconforming mortgage -exceeds Fannie Mae/Freddie Mac allowable loan limits

Payment-option ARM

-nontraditional adjustable-rate mortgage that allows borrowers to pick their type of payment each month -minimal payment based on starter IR, interest-only payment, fully amortized payment

Reverse mortgage disclosures

-notice of right of recession -ARM disclosure -initial payment plan details -HUD-1 closing statement -HUD-1 certification statement

Negative amortization

-occurs in mortgage repayment plan in which borrower makes payments that amount to less than interest due -unpaid interest added to outstanding loan balance, causing loan balance to increase

Positive amortization

-occurs when monthly mortgage payment decreases loan balance

VA funding fee

-one-time fee paid at closing creates a pool of money that makes partial guarantee possible -paid by veteran and may be added to loan balance and amortized over life of loan

Balloon mortgage

-partially amortized -payments calculated as 30-year term, balance due before then as lump sum -5, 7, 10 year terms -IR lower than fixed-rate 360/180 loan is balloon amortized w/ lump-sum payment due after 15 years -accepted as qualified mortgages in few circumstances including loans made by small lenders or short term (12 months or less) bridge loans to provide closing funds while buyer is in process of selling another house