Real Estate Course Level 13

Facts of a feather b) bridge loan

. a short-term loan taken out in anticipation of obtaining longer-term financing. . can be used to finance a home purchase before the buyer's previous home has sold. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Level Assessment a) a reverse mortgage. A reverse mortgage allows a homeowner to pledge equity to a lender in exchange for monthly payments.

A 65-year-old retiree has almost $80,000 in equity in their home. She does not have enough cash to travel as she have would have liked to do in retirement. The retiree should consider which of these financing alternatives to access her equity without selling her home? a) a reverse mortgage. b) novation. c) an adjustable-rate mortgage. d) a growing equity mortgage.

Level Assessment a) by subtracting $60,000 from the current maximum amount of entitlement. You could find her remaining entitlement by subtracting $60,000 from the current maximum amount of entitlement (which includes the secondary entitlement).

A VA borrower used $60,000 of her entitlement on the purchase of a home. How would you calculate her remaining entitlement? a) by subtracting $60,000 from the current maximum amount of entitlement. b) by subtracting the secondary entitlement amount from primary entitlement amount. c) by subtracting her down payment from $60,000. d) by adding $60,000 to the $36,000 entitlement amount.

Level Assessment c) purchasing an investment property. A VA loan may NOT be used for purchasing an investment property.

A VA loan may be used for all of the following EXCEPT: a) assuming another VA loan. b) purchasing an owner-occupied home. c) purchasing an investment property. d) refinancing another VA loan.

Level Assessment a) a commercial developer financing a project that hasn't been permitted yet. A bridge loan might be used by a commercial developer financing a project that hasn't been permitted yet. The loan would bridge the time between the actual funding being approved after the permit is approved.

A bridge loan might be used by: a) a commercial developer financing a project that hasn't been permitted yet. b) a residential buyer who is having trouble deciding which home to buy. c) a commercial broker listing a series of properties in the same neighborhood. d) a residential borrower trying to refinance their home.

Quiz Level 13 a) be paid off in full with the last scheduled monthly payment. Fully amortized loans require equal monthly payments that gradually pay off the loan balance until the last monthly payment, which should pay off the remaining loan balance.

A loan that is fully amortized will: a) be paid off in full with the last scheduled monthly payment. b) have varying monthly payment amounts. c) only include interest payments until the end of the loan's term. d) require a balloon payment at the end of the loan's term.

Level Assessment c) plans on moving soon. The borrower must continue living in the property. If they plan to move or sell in the future, a reverse mortgage is not for them.

A reverse mortgage might NOT be a good idea if a homeowner: a) is over the age of 70. b) has bad credit. c) plans on moving soon. d) doesn't want to receive monthly payments.

Facts of a feather b) construction loan

A type of open-end mortgage a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Chapter 9: Mortgage Insurance

After completing this chapter, you will be able to: . Explain the purpose of mortgage insurance . Differentiate between PMI and MIP . Explain how a borrower can avoid paying mortgage insurance. Why It Matters: Mortgage insurance is something that a bulk of homebuyers will have to pay. But as you'll see, there are ways to avoid it. Mortgage insurance also helps mortgagors give borrowers better terms, so there is a silver lining. Since mortgage insurance is a monthly payment, it adds up over time. An agent should be able to explain how long their client should expect to make mortgage insurance payments and how they could potentially avoid the payments. Key Terms: . private mortgage insurance (PMI) . mortgage insurance premium (MIP)

Chapter 7: VA Loans

After completing this chapter, you will be able to: . Understand the concept of entitlement . Explain the benefits of a VA loan Why It Matters: The rules for veterans are different than for non-veterans. Ever since the GI Bill was passed, veterans have been receiving great terms on their mortgages. Because of this, a large number of veterans are homeowners. It's important that you know how a buyer's veteran status affects a transaction. Key Terms: . VA entitlement

Chapter 8: USDA Loan Programs

After completing this chapter, you will be able to: . Understand the purpose and qualifications of USDA loans. Why It Matters: Another special category of government-backed mortgage loans is USDA loans. If you ever are doing business in a rural area, there is a decent chance that the USDA will play a hand in assisting with the mortgage. It's important to know when a client might qualify for a USDA loan.

Agricultural Bank Credit

Agricultural lending is an important business line for many banks, especially those in rural areas. Bank credit has played an important role in farm activities throughout U.S. history. Most farms in the United States remain family-owned. The financing supplied by banks is essential to many individual farm operators and to the development of new agricultural technologies and techniques. As with all forms of lending, agricultural credit presents the banker with a unique set of risks. The traditional role of bank credit in the agricultural industry has involved funding seasonal production and longer-term investments in land, buildings, equipment, and breeding stock. Loan repayment depends primarily on the successful production and marketing of agricultural products, and secondarily on loan collateral. In some cases, income generated from work performed outside the agricultural industry (non-farm income) or work performed for other farms (off-farm income) may be available. This kind of income is often devoted to family living expenses, however, and may only supplement the borrower's repayment ability. While agricultural lending can be a significant source of bank income, it can also be the source of significant losses. While a bank cannot control commodity prices or production levels, many banks have demonstrated that diligent adherence to prudent lending practices and regulatory guidance helps manage losses, even when a borrower's farm operation experiences significant stress.

Agriculture and Real Estate

Agriculture can be a cyclical business, which means that loans may not be needed during all times of the year. Similarly, payments may not be able to be made in all months, so lenders involved in agricultural lending have to understand the business and find creative solutions to deal with any potential challenges. In this chapter, we'll learn about how the real estate industry can best serve Old MacDonald. Let's E-I-E-I-go. Agricultural lending requires special education. I mean, you wanna know you're getting stuff done right, don't you? In order to move toward a career in agricultural lending, lenders must take a class designated by The American Banker's Association. This class educates on the current challenges facing agricultural lenders and moves toward a fundamental understanding of agricultural lending in the financial services industry.

VA Loan Funding Fees

All VA loans require a funding fee, which is different from the lender's origination fee. Unlike the origination fee, the funding fee can be financed into the loan amount. These fees go to pay for the cost of the VA loan guarantee program. The fee is waived for veterans with disabilities and for the surviving spouses of veterans who were killed in action or who are prisoners of war. For all other veterans, the fee is 2.15% with no down payment for the veteran's first VA loan and 3.3% for a second loan; this fee is lowered for those who pay higher down payments. National Guard members and special reservists typically pay a higher fee than veterans of the armed services.

USDA Farm Loans

Another department of the USDA is the Farm Service Agency, or FSA. This department serves farmers and ranchers who are unable to get credit to start, purchase, sustain, or expand a family farm. These FSA loans are temporary, but the goal is to get the farmer or rancher a start on building their own commercial credit. There are many types of FSA loans. . Direct Operating Loans: These loans are used to buy things like livestock and feed, farm equipment, fuel, farm chemicals, and insurance. They can cover family living expenses, be used to make minor improvements or repairs to buildings and fencing, and go toward general farm operating expenses. . Microloans: Microloans are operating loans meant to be put toward the needs of small and beginning farmers, non-traditional, specialty crop, and niche type operations. They ease some of the requirements and offer less paperwork. . Direct Farm Ownership Loans: These loans are used to do things like purchase or enlarge a farm or ranch, construct a new or improve existing farm or ranch buildings, and for soil and water conservation and protection purposes. . Guaranteed Loans: Guaranteed loans allow lenders to extend credit to family farm operators and owners who don't qualify for standard commercial loans. Farmers receive credit at reasonable terms to finance their current operations or to expand their business; financial institutions receive additional loan business and servicing fees, as well as other benefits from the program, like protection from loss. . Youth Loans: Youth loans are used by young people participating in clubs like 4-H clubs or FFA to finance educational, income-producing, agriculture-related projects. (Oh, to be young and in loans!) . Minority and Women Farmers and Ranchers Loans: These loans encourage full participation from minority and women family farmers by targeting a portion of direct and guaranteed farm ownership and operating loan funds for minority and women farmers to buy and operate a farm or ranch. . Beginning Farmers and Ranchers Loans: These loans provide credit opportunities to eligible family farm and ranch operators and owners who've been in business less than ten years. Aw, newbies! . Emergency Loans: These are designed to assist farmers and ranchers recover from any production or physical losses suffered from drought, flooding, other natural disasters, or quarantine. . Native American Tribal Loans: These loans are a resource for Tribes to acquire land interests within tribal reservations or Alaskan communities. The loans can be used to advance and increase current farming operations, provide financial prospects for Native American communities, increase agricultural productivity, and preserve cultural farmland for future generations.

VA Entitlement

As I stated at the beginning of this chapter, the VA guarantees only a portion of the total loan amount, based on the size of the loan and the amount of other guaranties the veteran has outstanding. The amount the VA will guarantee is as follows. These figures may change yearly. The amount of the guaranty is otherwise known as a veteran's entitlement. A lender is typically willing to lend four times a veteran's entitlement if there is no down payment, or four times the sum of the entitlement and the down payment. Each veteran receives at least $36,000 of basic home loan entitlement, provided they meet the established service requirements. However, the specific amount of loan that would be guaranteed is based on the loan amount and prior use of the entitlement for another VA loan. Remaining Entitlement: Veterans who had a VA loan before may still have "remaining entitlement" to use for another VA loan. The remaining entitlement is the difference between how much of an entitlement a borrower has used and the maximum entitlement amount. As you'll see, the maximum entitlement amount is $113,275, so if a borrower used $50,000 of their entitlement on a transaction, the borrower still has $63,275 leftover in entitlement. Most lenders require that a combination of the guaranty entitlement and any cash down payment must equal at least 25 percent of the reasonable value or sales price of the property, whichever is less. For example, a $23,500 remaining entitlement would probably meet a lender's minimum guaranty requirement for a no-down payment loan to buy a property valued at and selling for $94,000. You could also combine a down payment with the remaining entitlement for a larger loan amount.

The Takeaway

As you just learned, there are a lot of loan programs that the USDA manages. You don't need to understand the details of each of these programs, but it's important to know of their existence. Additionally, if you practice real estate near agricultural areas, familiarity with USDA loans will be crucial. In Chapter 8, you learned: ✅ The purpose and qualifications of USDA loans. Next, we'll move on from loan types and talk about something most homebuyers have to worry about: mortgage insurance.

Level Assessment b) Her loan is a subprime mortgage. This loan would be classified as sub-prime due to the borrower's poor financial history.

BT Bank is making a home loan to Kerry. Due to her poor financial history, the only loan she could qualify for is a high-interest loan. How would Kerry's loan be classified? a) Her loan is a prime mortgage. b) Her loan is a subprime mortgage. c) Her loan is a graduated mortgage. d) Her loan is a special financing mortgage.

Loan-to-Value Ratio

Before we get into mortgage insurance, it's important to understand the concept of LTV ratios. As you'll see, LTV ratios are used a lot when dealing with mortgage insurance. LTV stands for loan-to-value ratio. A mortgage that has a high LTV would be one in which the down payment was a low percentage of the sales price and the loan was a high percentage of the sales price. This means the loan is riskier for the lender. Essentially, the LTV is the percentage of the sales price that is covered by the mortgage. Calculating the LTV Ratio: If the sales price was $200,000 and the loan amount was $194,000, the LTV ratio is 97%. It would be calculated like so: $194,000 / $200,000 = 97% And to find out the down payment, all you would do is subtract the loan amount from the sales price: $200,000 - $194,000 = $6,000

Avoiding Mortgage Insurance

Borrowers can sometimes get impatient when it comes to paying private mortgage insurance. Besides just waiting until they have paid off enough of the loan, there are options for getting rid of those pesky monthly payments. Reappraisals: After a few years of paying off a mortgage, there is a decent chance that a borrower's home has increased in value. Some lenders will consider the new home value when judging whether a borrower needs to pay private mortgage insurance. If the lender is willing to accept the new home value, a borrower can hire a lender-approved appraiser to give a new appraised value of the property. The additional amount of the money that the home is worth over the original value will be added to the borrower's equity. If the borrower then has 20% equity in the home, they can request that the private mortgage insurance be canceled. If the borrower has 22% equity in the home, the servicer is required to eliminate the private mortgage insurance. While relying on the growth of the real estate market might be enough to increase a home's value, a borrower can take matters into their own hands, too. Remodeling, putting a pool in the home, building out a new room, or building a guest house are all ways that a home could increase in value. A borrower could request a new appraisal after doing work on their home. While this technique works for conventional loans, it does not for FHA mortgage insurance premiums. In order to cancel mortgage insurance premium payments, a borrower would have to refinance their loan into a non-FHA-insured loan. Piggyback Loans: Another way a borrower could avoid paying mortgage insurance is through a kind of second mortgage, called a piggyback loan, or an 80-10-10 loan. These loans are really two mortgages in one. Instead of giving the borrower one fixed-rate loan at the current market rate, the borrower receives two loans: . one loan for 80% of the sale price at the market rate . one loan for 10% of the sale price at a higher interest rate. For example, suppose a borrower wanted to purchase a home for $150,000. The lender might offer an 80-10-10 loan in which the borrower pays 10% down and receives two loans: one for $120,000 at a 7% interest rate and the other for $15,000 at a 9% interest rate. The appeal of the 80-10-10 loan is that it does not require the borrower to pay for private mortgage insurance and that, unlike PMI, the interest on the second loan is tax-deductible. PMI is cancelable when the borrower's equity reaches 20 percent, whereas the second loan of an 80-10-10 mortgage must be paid as any other loan. An 80-10-10 loan does have lower payments than a comparable single loan, with PMI and greater tax deductions. But if the borrower intends to build equity fast, the PMI loan might save more money in the long run.

VA Loans

By now, I'm sure you've heard the term VA loan, but what does that mean? Exactly who is eligible for this type of loan, and what can this loan do? The Department of Veterans Affairs (VA) is authorized to guarantee loans to purchase or construct homes for eligible veterans and their spouses. This includes the spouse of a veteran whose death was service-related or the spouse of a serviceperson missing in action/a prisoner of war (providing the spouse has not remarried). History of the VA Loan: The original Servicemen's Readjustment Act passed the United States Congress in 1944. This Act extended a wide variety of benefits to eligible veterans, notably the VA loan guaranty program. Under the law, the VA is authorized to guarantee or insure home, farm, and business loans made to veterans by lending institutions. Over the history of the program, 20 million VA home loans have been insured by the government. Until 1992, the VA loan guaranty program was available only to veterans who served on active duty during specified periods. However, with the enactment of the Veterans Home Loan Program Amendments of 1992, program eligibility was expanded to include Reservists and National Guard personnel who served honorably for at least six years without otherwise qualifying under the previous active duty provisions. Such personnel are required to pay a slightly higher funding fee when obtaining a VA home loan. What does it mean to guarantee a loan?: When I say that the VA guarantees loans, what exactly does that mean? A loan guaranty, in finance, is a promise by one party (the guarantor) to assume the debt obligation of a borrower if that borrower defaults. A guaranty can be limited or unlimited, making the guarantor liable for only a portion or all of the debt. As you'll see, VA loans have a limited guaranty, known as entitlement. The VA entitlement is the amount that the VA promises to pay back in the event of a borrower's default. VA Loan Basics: VA loans can be used for owner-occupied houses or condominiums, improvements, manufactured homes, land, farms, and refinancing or assuming VA loans. The loans cannot be used for purchasing an investment property. Typically, there is no required down payment. Veterans qualify on the basis of their debt-to-income ratio, which must not exceed 41%. A veteran who meets the established time-in-service criteria is eligible for a VA loan. VA-guaranteed loans assist veterans in financing the purchase of homes with little or no down payments. However, residential property must be owner-occupied. Like the FHA, the VA does not lend money — it guarantees loans made by approved, qualified lending institutions approved by the agency. Therefore, the term VA loan refers to a loan that is not made by the agency but guaranteed by it.

Level of Assessment c) vary by location. Loan limits vary in certain areas because of differences in property costs.

FHA loan limits: a) are set every 10 years. b) exceed 1 million dollars. c) vary by location. d) were eliminated in 2016.

Level Assessment b) the loan-to-value ratio of the loan is more than 80%. FHA loans require the payment of an annual mortgage insurance premium if the loan-to-value ratio of the loan is more than 80%.

FHA loans require the payment of an annual mortgage insurance premium if: a) the loan-to-value ratio of the loan is more than 75%. b) the loan-to-value ratio of the loan is more than 80%. c) the loan-to-value ratio of the loan is more than 70%. d) the loan-to-value ratio of the loan is more than 60%.

Quiz Level 13 c) 80% $280,000 divided by $350,000 equals 0.80, which means the loan has an LTV ratio of 80%.

Hank buys a home for $350,000. He took out a $280,000 mortgage to pay for the home. What is his LTV ratio? a) 87% b) 85% c) 80% d) 90%

Qualifying for an FHA Loan

Here are the requirements to qualify for an FHA loan: . Two years of steady employment, preferably with the same employer. . Last two years' income should be the same or increasing. . Credit report should typically have less than two 30 day late payments in the last two years, with a minimum credit score of 580 or higher (or in some cases, no credit score is required at all). FHA loans require additional information — from the required documents, the credit requirements, to the roles of the borrower, appraiser, and underwriter. Documents Needed: The lender might ask for the borrower's last two years of W-2s and one month of pay stubs in order to verify their income. If the client is self-employed, they will need to provide tax documents from the past two years. The lender might need additional documents, depending on the circumstances, since everyone's financial history is different. This process is not a short one — it can take up to 21 days to verify that all the documents are correct. Income: When talking about income, there is no official requirement. The lender will look at the whole picture of the borrower's debt-to-income ratio. In most cases, the debt-to-income ratio limit that lenders end up using is 45%. This means that a borrower's debt can only take up 45% of their entire income. At times, the lender may be able to go all the way up to 56% if the applicant's credit score is higher. Credit Score: According to FHA, the current credit score that qualifies a borrower to pay a minimum of 3.5% down is 580. If the borrower has a credit score between 500 and 579, they would be required to put down at least 10%. This doesn't mean that they should only put 3.5% down if they're allowed to — the borrower should always put down as much as they can. You will see that some of the lenders out there have overlays. An overlay is something that is self-imposed by the mortgage company or investors to have stricter lending requirements, which means a less risky loan. When an overlay is in place, the lender requires the applicant's credit score to be higher than FHA standards. This is why you hear from some lenders that the required credit score is as high as 640.

Level Assessment d) $36,000. A veteran's basic entitlement is $36,000. Secondary entitlements can be worth more.

How much is a veterans basic entitlement? a) $25,000. b) $77,000. c) $50,000. d) $36,000.

Level Assessment a) predetermined. With fixed-rate mortgages that are fully amortized, the amount of interest to be paid is predetermined.

In a fixed-rate mortgage that is fully amortized, the total amount of interest to be paid is: a) predetermined. b) based on an index. c) refundable. d) unknown.

The Takeaway

Insurance is everyone's favorite topic. Just kidding. But you should understand why lenders and the FHA charge for mortgage insurance. It's security for lenders, which allows them to lend at better rates to borrowers. In Chapter 9, you learned to: ✅ Explain the purpose of mortgage insurance. ✅ Differentiate between PMI and MIP ✅ Explain how a borrower can avoid paying mortgage insurance. That's it for this level, Yoni!

Quiz Level 13 b) Yes Private mortgage insurance is always required when the loan-to-value ratio is higher than 80%. In Kimberly's case, the loan-to-value ratio is above 92%.

Kimberly put down $10,000 on her conventional loan of $120,000. Will she have to pay private mortgage insurance? a) No b) Yes

Advantages and Disadvantages of FHA Loans

Let's make a pros and cons list! Advantages: Some FHA advantages compared to conventional loans include: . Borrowers who don't qualify for a conventional loan might be able to qualify for an FHA loan. . Mortgages can be made on a graduated payment schedule, with low monthly payments that increase over time. . FHA-insured loans are not allowed to carry a prepayment penalty. . FHA loans can be assumed by other borrowers. . However, since 1986, the assumptor has had to go through the same underwriting process — verification of debts and income, etc., as the original borrower to prove their creditworthiness. Disadvantages: FHA loans also have several disadvantages when compared with conventional loans. . There is a maximum loan amount on FHA loans, and this can be limiting. . The mortgage insurance premiums must either be paid up-front at closing or be financed. . The FHA loan program only insures loans to owner occupants. . FHA loans require that the house meet certain conditions and must be appraised by an FHA approved appraiser. . Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: . One is paid in full upfront (it can be financed into the mortgage) . The other is a monthly payment.

Other FHA Loans

Let's quickly go over some of the other FHA loans that you might encounter as an agent. Section 221(d)(3): Nonprofit sponsors looking to construct, purchase, or rehabilitate multi-family housing for moderate-income families can insure up to 100% of the loan amount under this program. There is no maximum loan amount, and loan terms can be up to 40 years. Section 221(d)(4): This is like Section 221(d)(3), but designed for for-profit sponsors. This program will insure only 90% of the loan amount. Section 223(f): Borrowers can get an FHA loan for the purchase, rehabilitation, or refinancing of existing multi-family housing (such as an apartment complex) under this section. Only an individual or a legal entity designed to hold just one asset may receive one of these loans, and only if the property is at least three years old and has no more than 20% of its space devoted to commercial services (such as a restaurant on the ground floor). Section 234(c): This one insures loans for those who are buying condominium units. It's exclusively meant for condominium projects that have been approved by HUD. Section 245(a): Borrowers seeking to purchase a single-family dwelling with an FHA-insured, graduated-payment mortgage may do so under this section. Graduated-payment mortgages of this type are subject to negative amortization because the initial payments are not sufficient to cover the interest due. These loans are attractive to young, first-time borrowers who expect their income to increase and stabilize as they get older.

USDA Loan Qualification Guidelines

Loan qualification guidelines for USDA mortgages are as follows: . 100% financing available. . Minimum credit score of 620. . Housing debt to income ratio 29% . Monthly mortgage insurance is less than 0.005 ÷ 12 of the loan amount. . Seller can contribute up to 6% of the sales price towards buyer's closing costs. . Eligible for a home loan after three years out of bankruptcy or foreclosure.

Level Assessment d) $65,000. Because Max's loan is under the FHA loan limit, 25% of his loan will be guaranteed by the VA. 25% of $260,000 equals $65,000.

Max took out a VA loan for $260,000. If he has all of his entitlement, how much will the VA guarantee on his loan? a) $114,275. b) $26,000. c) $36,000. d) $65,000.

Mortgage Insurance Premium (MIP)

Mortgage insurance premium (MIP) is the FHA's equivalent of private mortgage insurance. MIP payments are how FHA insurance is funded. There are two components to mortgage insurance premiums. 1. Upfront mortgage insurance premium 2. Monthly mortgage insurance premium Every FHA borrower must purchase the insurance. The FHA insurance is insurance on a private loan. Upfront Mortgage Insurance Premium: The borrower pays 1.75% of the loan amount upfront at closing. This is known as an upfront mortgage insurance premium, or, UFMIP for short. All FHA borrowers will pay this premium. The borrower does have the option of rolling the payment into the loan, so the fee is financed along with the mortgage. Annual Mortgage Insurance Premium: Like private mortgage insurance, if a borrower's down payment isn't large enough to give them 20% equity in the property, then they will have to pay annual mortgage insurance, divided into monthly payments. One notable difference between MIP and PMI is that MIP payments are not canceled once a borrower has gained a certain percentage of equity. In fact, if a borrower puts down less than 10% of the loan amount, they will have to pay mortgage insurance premiums for the entire life of the loan. If a borrower puts down more than 10%, then the MIP can be canceled after 11 years. Annual mortgage insurance premiums range from 0.45% to 1.05% of the loan amount. That amount is divided by 12 and paid monthly along with the PITI payment. The premiums go into an account held by the FHA to repay lost amounts on insured loans in which borrowers default. MIP Refunds: Certain borrowers may be eligible for a refund on their mortgage insurance. The borrowers must meet all of the following requirements: . They must have acquired the loan after September 1, 1983. . They must have paid an upfront premium at closing. . They must not have defaulted on the loan. . If the loan was originated before January 1, 2001, it must be terminated before the seventh year. . If the loan was originated on or after January 1, 2001, it must be terminated before the fifth year. Refunds are determined by the FHA commissioner and are based on the number of months for which the loan has been insured.

Entitlement Math

Okay. I bet you're ready for someone to clear up things a little bit... right? After all, if a veteran's basic entitlement is $36,000, and the VA will only guarantee the first 25% of the loan, then it would seem that the largest loan a vet could get would be $144,000, correct? $36,000 (entitlement) / 25% = $144,000 Well, because the VA recognizes that in most places in the U.S., $144,000 will not be enough to get a borrower into a home, the VA began linking its guaranty limits with the FHA conforming loan limits, which are presently set at $484,350. That means that 25% of the conforming limit of $484,350 would be $121,087.50, which is the maximum guaranty amount. Secondary Entitlement Amount: To make up the gap between that amount and the basic entitlement amount of $36,000, we need to find the secondary entitlement amount. We can find this by subtracting the basic entitlement amount ($36,000) from the maximum guaranty amount ($121,087.50). $121,087.50 - $36,000 = $85,087.50 This means that we can have a secondary entitlement amount of up to $85,087.50. In some of the more expensive areas of the country, the conforming loan amounts have been raised beyond $484,350. In places where this is the case, the VA guaranty limits have raised as well. The bottom line is this: the VA guaranty limits will be the lesser of: . 25% of the mortgage loan amount, or . 25% of the VA loan limit (the FHA conforming loan limit) for that county. Scenario: Susan's Entitlement: Susan is a veteran who has full entitlement available and is purchasing a home for $300,000 where the conforming loan limit is $484,350. Let's look at the two ways her guaranty can be calculated: . $484,350 X 25% = $121,087.50 (maximum guaranty amount) . $300,000 X 25% = $75,000 (amount guaranteed on Susan's loan). Since VA's guaranty is limited to the lesser of 25% of the county loan limit or 25% of the loan amount, the VA will guaranty $75,000 on Susan's $300,000 loan in this county. A down payment should not be required.

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is insurance paid to a private company by a borrower so that the lender will be insured for the loan amount in case of borrower default. So, contrary to what it sounds like, private mortgage insurance is not a way to protect the borrower, but instead a way to protect the lender if the borrower stops paying the loan. Make sure your client knows this, since they might think that it is insurance that is protecting them. PMI exists to allow borrowers who might not qualify for a specific loan to get that loan so they can afford a house. Since they're more risky borrowers, they will have to pay for the insurance, just in case something happens. Private mortgage insurance is always required when the loan-to-value ratio is higher than 80%. As the name implies, this type of insurance is provided by private insurance companies, not the lender. All kinds of factors affect the amount of PMI the borrower will pay, including the borrower's credit score, the amount of their down payment, the lender, and the market conditions. Not always, but sometimes instead of requiring PMI, some lenders will let borrowers have a loan with a higher interest rate.

Reverse Mortgages: The Good, the Bad, and the Ugly

Reverse mortgages, also called reverse annuity mortgages (RAMs) are loans designed for people over the age of 62. They can be a lifesaver when used to supplement income that is needed for essentials like medicine, food, payments, etc. Reverse mortgages can sometimes allow the borrower to take cash out. So what about the Bad and the Ugly? Nothing is bad unless it's misunderstood. And if it's misunderstood, it can be really ugly. Let's look at the facts. There a few things you should know about reverse mortgages: . The borrower does not have to qualify for the loan. This is because the lender's protection is in the property. . The borrower still owns the home. The lender has a lien on the property just like they would with other mortgage loans. . There are no monthly payments. This sounds good, but since there are no payments, interest is being added to the amount borrowed every month (negative amortization). So the balance is constantly going up. The longer the borrower has the loan, the higher the balance will get. It is very possible that if the borrower lives a nice, long life, the balance could exceed the value of the property. That's not a problem for the borrower, but what about heirs that would like to keep the property? . When the borrower passes away, the title to the property passes to the heir(s) with the borrower's estate. If there is any equity (the difference between what the property will sell for and the mortgage on the property) left in the property, it belongs to the heirs. One of the best things about reverse mortgages is that they are non-recourse loans. There is no personal liability. If the borrower lived a long life, and the balance on the loan now exceeds what the property will sell for, the lender cannot force anyone to pay for the loss. If the heirs choose to let the lender have the property rather than pay the debt, the lender will foreclose on the property, sell it for what they can, and assume any loss that results. The upfront fees can be high. The fees are sometimes added to the loan balance at the beginning, eating up equity right away. The best time to get a reverse mortgage is while the borrower feels like they still have many years left to live in the home.

Single-Family Housing Programs

Rural Housing Program: The USDA has a program called the Rural Housing Program. This program seeks to improve and build housing and community facilities in rural areas. It offers loans, grants, and loan guarantees for things like: . Single- and multi-family housing . Child care centers . Fire and police stations . Hospitals . Libraries . Nursing homes . Schools . First responder vehicles and equipment . Housing for farm laborers Single-Family Housing Programs: The USDA Single-Family Housing Programs give direct loans or loan guarantees to help low- and moderate-income rural Americans buy safe and affordable housing in rural areas. USDA also offers loans and grants to help rural residents make health and safety repairs to homes. Multi-Family Housing Programs: The Multi-Family Housing Programs offer loans to provide affordable rental housing for very-low-, low- and moderate-income residents, the elderly, and persons with disabilities. Funds can be used to buy and improve land or to provide necessary facilities like water and waste disposal systems. The USDA also provides rental assistance to help eligible rural residents with their monthly rental costs. Community Facilities Programs: The Community Facilities Programs provide loans, grants, and loan guarantees for essential community facilities in rural areas. First priority is given to health care, education, and public safety projects. These projects typically include hospitals, health clinics, schools, firehouses, community centers, first responder vehicles, equipment, and lots of other community-based initiatives.

Quiz Level 13 c) $87,500 Since Saeed's loan is less than the FHA conforming limit, his loan will be guaranteed for 25% of his loan amount, which equals $87,500.

Saeed is a veteran. He is taking out a VA loan for $350,000. How much of his loan will be guaranteed by the government? a) $36,000 b) $112,500 c) $87,500 d) $35,000

The Uniqueness of Agricultural Lending

So how is agricultural lending different from residential lending? Ah, let me count the ways. . Buyers want financing on unimproved properties that could lack utilities. . The value of agricultural land might significantly exceed the value of improvements. . Agricultural land may include outbuildings, like sheds, garages, or barns, that also need to be financed. . The property may be a farm or ranch that creates business and value. . With the sale of the property comes the sale of personal property like livestock and farm equipment. Like I said earlier, agricultural lending takes a different kind of education, so as an Aceable agent, you'll need to create a specific list of lenders who actually understand it. You don't want to be the license holder who refers a buyer to a lender who knows nothing about what they want or need!

Quiz Level 13 b) Terry will make low payments for a short term (7 years), after which a balloon payment is due. A balloon-payment mortgage usually includes a short term with low monthly payments, followed by a large balloon payment.

Terry takes out a balloon-payment mortgage of $300,000. Which of these most likely describes his loan? a) Terry will make high payments for a short term, paying off the loan with equal monthly payments. b) Terry will make low payments for a short term (7 years), after which a balloon payment is due. c) Terry's loan will include low payments for a long term (30 years), after which a balloon payment is due. d) Terry will pay an adjustable rate for 30 years, after which a balloon payment will be due.

Quiz Level 13 d) funds loans The FHA does not fund loans. They only insure them.

The FHA does all of the following, EXCEPT: a) provide loan limits b) insures loans c) provide qualification standards d) funds loans

Level of Assessment a) put down a smaller down payment than conventional loans. The Federal Housing Administration allows borrowers to put down a smaller down payment than conventional loans.

The Federal Housing Administration allows borrowers to: a) put down a smaller down payment than conventional loans. b) cosign with a lender in order to qualify for a larger loan. c) put down a larger down payment than conventional loans. d) pay a funding fee in order to qualify for a larger loan amount.

Rural Development

The USDA's Rural Development Guaranteed Housing Loan Program is a program that assists approved lenders with providing low- and moderate-income households with the opportunity to own safe and sanitary housing as their primary residence in eligible rural areas. Through the program, applicants can, "build, rehabilitate, improve or relocate a dwelling in an eligible rural area." The program gives a 90% loan note guarantee to approved lenders to reduce the risk of extending 100% loans to eligible rural homebuyers. Rural Development (RD) provides both direct and guaranteed loans for the purchase or construction of single-family homes, repair of existing homes, and the development of affordable rental housing. The program's full name is USDA Rural Development Guaranteed Housing Loan, but it is usually referred to as simply a USDA loan. It is also called a Section 502 Loan, referring back to its origins found in Section 502(h) of the Housing Act of 1949. These no-down-payment loans are 100% backed by the U.S. Department of Agriculture (USDA) and are available for suburban and rural homebuyers throughout the country. In spite of the "rural" name, as much as 97 percent of the country's territory qualifies. A borrower can use the online USDA eligibility map to determine if the property in question geographically qualifies for the program. The Rural Housing Service (RHS) is the agency that oversees the program. The USDA funds these loans, in part, via mortgage premiums that are assessed both as an upfront charge and monthly fees. The present mortgage insurance (MI) rates are as follows: . Home Purchases: 1% upfront, paid at closing (not as cash but included in loan balance). . Refinances: 1% upfront, paid at closing . All Loans: .35% annual fee, based on principal balance and paid monthly. Rural Development Loan Terms RD loans do not require a down payment, but they do require a 30- or 15-year fixed-rate term. Adjustable-rate mortgage loans and loans with balloon payments are not available. RD loans can be accessed by first-time homebuyers or repeat buyers. Also, there is no maximum loan amount limit - the borrower is only restricted by their debt-to-income ratio, which the program typically caps at 41%.

Quiz Level 13 c) low- and moderate-income rural Americans. The USDA Single-Family Housing Programs give direct loans or loan guarantees to help low- and moderate-income rural Americans buy safe and affordable housing in rural areas.

The USDA's Single-Family Housing Programs focus on giving loans to: a) low-income suburban Americans. b) urban residents who buy second homes in the country. c) low- and moderate-income rural Americans. d) large factory farms and their owners.

U.S. Department of Agriculture (USDA)

The United States Department of Agriculture, or USDA, is the federal executive department responsible for developing and executing laws concerning farming, agriculture, forestry, and food. The USDA works to do lots of great things for the agricultural industry, including: . Meet the needs of farmers and ranchers . Promoting agricultural trade and production . Assuring food safety . Protecting natural resources . Fostering rural communities . Ending hunger everywhere

Quiz Level 13 d) equity The difference between the amount owed to the mortgage company and the amount the home is worth is called equity.

The difference between the amount owed to the mortgage company and the amount the home is worth is called ______. a) principal b) APR c) lien d) equity

FHA Appraisal

The loan cannot be taken out until the property has been appraised by an FHA-approved appraiser. Appraisal fees are usually about $375 for a house that is about 2,000 square feet. The FHA has no requirement for the property to sell at or below the appraised value. The sale price can be any price agreed upon by the buyer and seller. However, maximum insurable loan amounts are computed on the FHA appraised value of the property or sale price (whichever is less). The difference between the actual sale price and maximum loan amount must be paid in cash by the borrower as a down payment at closing, or the borrower can choose not to buy the home.

Loan Processing

The process for getting an FHA loan isn't terribly different from the conventional loan process. The first thing a borrower will need to do is to get a pre-qualification letter from the lender. The lender, either over the phone or in person, will gather information about the borrower's income and debt to determine how much they can borrow. Like I talked about before, this involves their debt-to-income ratio. At this time, they may run a credit report to verify that everything the borrower gave them is correct, and that there will be no surprises. The lender will then have the borrower fill out the application, which will ask about the following: Current employment Number of years on job Social security number Current address Other pertinent information Once the lender has this information, they will need to verify that the information is correct, as lenders do. The main goal during this process is to determine if the borrower has the ability to repay the mortgage.

Quiz Level 13 b) the amount of money the government will guarantee on a home loan. Entitlement is the amount of money the government will guarantee for a veteran on their home loan.

The word entitlement, when referring to VA loans, is: a) the same thing as FHA loan qualification. b) the amount of money the government will guarantee on a home loan. c) the price of a home the veteran can afford. d) the number of years a veteran served in the military.

The Takeaway

There's a lot to FHA loans. And being as popular as they are, it's important that real estate agents understand their role in the real estate world. In Chapter 6, you learned to: ✅ Explain the standard terms of an FHA loan. ✅ Understand the advantages of taking out an FHA loan. Next, you'll learn about another government-backed loan type: VA loans.

Stages of ARMs

These are the stages of an adjustable-rate mortgage: 1. Initial Rate Period: The introductory period of an adjustable-rate mortgage loan in which the interest rate is locked at the initial rate 2. Adjustment Period: Set periods of time in which the ARM loan's interest rate can be adjusted. 3. Lookback Period: The date when the index rate for the upcoming adjustment period is selected

VA Eligibility Requirements

To determine whether an individual qualifies for VA loan benefits, the individual must apply for a certificate of eligibility. Eligibility is the veteran's entitlement to VA home loan benefits under the law, based on military service (see chart on ipad). A certificate of eligibility does not ensure that the veteran will get a loan; it simply reflects whether the individual is eligible for a VA loan.

Maximum Loan and Guaranty

To make these low down payment or no down payment loans acceptable to lenders, the VA guarantees the first 25% of the loan. This creates a loan product that has the equivalent of a 75% loan-to-value, at least in terms of the risk or exposure of the lender taking on the loan. So even if a borrower put down no down payment and then immediately defaulted on their loan, the lender would be protected for 25% of the loan amount. There is no VA limit on the amount of loan a veteran can obtain, rather the limit is determined by the lender. The VA simply limits the amount of loan it will guarantee in the event that a veteran defaults on their loan. Because most lenders want to participate in the secondary market, and because Ginnie Mae (the secondary market for most VA loans) requires at least a 25% guaranty, the lenders will generally base the maximum VA loan amount on VA's guaranty.

VA Loan Qualification

Two methods are used to determine a veteran's ability to qualify for a loan: 1. Debt-to-income ratio 2. Residual income Debt-to-Income Ratio: The VA has no housing expense qualifying ratio; only the total debt-to-income ratio is considered. Debt-to-income ratio means that the combined total of monthly debts cannot exceed 41% of the veteran's gross monthly income. These debts include: . The house payment . All installment accounts . All revolving accounts . Minimum payments on paid-out revolving accounts . Child support . Child care Residual Income: Residual income is defined as the amount of monthly income remaining after all the debts are deducted, including: . Income tax . Social security tax . Maintenance and utilities A regional chart showing residual incomes based on family size and loan amounts can be obtained from a local lender. It is important for an agent to have a copy of the chart.

The Takeaway

VA loans have some complicated features. Understanding entitlement is important, especially if you are practicing real estate in an area with a heavy military presence. In Chapter 7, you learned to: ✅ Understand the concept of entitlement. ✅ Explain the benefits of a VA loan. And we've got one more government-backed loan we will talk about next: USDA loans.

Level Assessment c) It's neither insured nor guaranteed by the government. A conventional loan is any loan that is neither insured by the government nor guaranteed by the government

What is TRUE of a conventional loan? a) It's guaranteed but not insured by the government. b) It's insured and guaranteed by the government. c) It's neither insured nor guaranteed by the government. d) It's insured but not guaranteed by the government.

Level Assessment c) a loan for which more than one collateral property acts as security. A blanket mortgage is a loan for which more than one collateral property acts as security.

What is a blanket mortgage? a) a loan that is fully due on a specific date; whose periodic payments often times are not sufficient to pay off the loan in time, creating in a large lump sum payment. b) a type of loan that is paid off in small, periodic payments, but at the end of which the remaining balance is due as a lump sum. c) a loan for which more than one collateral property acts as security. d) a provision in the mortgage contract that prohibits a new buyer from being able to assume the terms of the original loan without the lender's approval.

Level Assessment a) a loan that is NOT insured or guaranteed by a government entity. A conventional mortgage is a loan that is not insured or guaranteed by a government entity.

What is a conventional mortgage? a) a loan that is NOT insured or guaranteed by a government entity. b) a loan that is insured or guaranteed by a government entity. c) a mortgage with an interest rate that can be adjusted based on fluctuations in the cost of money. d) a loan for which more than one collateral property acts as security.

Level Assessment b) a mortgage with an interest rate that can be adjusted based on fluctuations in the cost of money. An adjustable-rate mortgage (ARM) is a mortgage with an interest rate that can be adjusted based on fluctuations in the cost of money.

What is an adjustable-rate mortgage (ARM)? a) the unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. b) a mortgage with an interest rate that can be adjusted based on fluctuations in the cost of money. c) terms in a mortgage that protect a borrower from large payment or interest rate increases. d) the part of the Truth in Lending Act (TILA) that seeks to protect consumers by requiring proper disclosures and fair lending practices.

Level Assessment b) the amount guaranteed by the government. A veteran's entitlement is the amount of a loan guaranteed by the government.

What is entitlement, as related to VA loans? a) the upper lending limit. b) the amount guaranteed by the government. c) a borrower's veteran status, qualifying them for a VA loan. d) the amount of money a veteran is allowed to borrow.

Level Assessment a) real and personal property. A package mortgage includes real and personal property.

What is included in a package mortgage? a) real and personal property. b) private mortgage insurance. c) multiple parcels or lots. d) cash for the construction of improvement on real estate.

Level Assessment b) MIP applies to FHA loans, PMI applies to conventional loans. MIP applies to FHA loans, PMI applies to conventional loans.

What is the difference between MIP and PMI? a) PMI payments are required when a loan-to-value ratio is above 80%, MIP payments are required when a loan-to-value ratio is below 80%. b) MIP applies to FHA loans, PMI applies to conventional loans. c) PMI applies to FHA loans, MIP applies to conventional loans. d) MIP payments apply to private loan and are typically much larger than PMI payments.

Level Assessment b) 75% $90,000 divided by $120,000 equals 75%.

What is the loan-to-value ratio of a loan of $90,000 on a property sold for $120,000? a) 60% b) 75% c) 80% d) 85%

Level Assessment c) subprime mortgage. A subprime mortgage is a loan created with a higher interest rate to offset the risk of borrowers with poor credit.

What is the name for a loan created with a higher interest rate to offset the risk of borrowers with poor credit? a) fixed-rate mortgage. b) one-end mortgage. c) subprime mortgage. d) adjustable-rate mortgage.

Level Assessment c) to pay for the cost of the VA loan guarantee program. All VA loans require a funding fee which pays for the cost of the VA loan guarantee program.

What is the purpose of the funding fee charged on VA loans? a) to pay for the lender's origination fee. b) to pay for the mortgage premium at close. c) to pay for the cost of the VA loan guarantee program. d) to pay for the costs associated with structuring the loan.

Level Assessment d) Their secondary entitlement could be used to cover up to 25% of the FHA conforming loan limit. If a basic entitlement is not enough to guarantee a loan, a secondary entitlement would cover up to 25% of the FHA conforming loan limit.

What might happen if a veteran's basic entitlement doesn't cover 25% of their loan amount? a) They must take out a conventional loan to cover the remaining 25% of the loan amount. b) They must cover the remaining loan amount in cash. c) They must pay for private mortgage insurance (PMI) on the 75% of the loan not covered. d) Their secondary entitlement could be used to cover up to 25% of the FHA conforming loan limit.

Quiz Level 13 a) debt-to-income ratio When qualifying, the FHA will look at a borrower's debt-to-income ratio.

When qualifying, the FHA will look at a borrower's: a) debt-to-income ratio b) medical records c) checking account d) family history

Level Assessment d) package mortgage A mortgage where personal property is financed with real property as a package is a package mortgage.

Which of the following is a mortgage where personal property is financed with real property as a package? a) fixed-rate mortgage b) construction mortgage c) FHA loan d) package mortgage

Quiz Level 13 c) The lender has a lien on the property. A reverse mortgage puts a lien on the property.

Which of these happens when a borrower takes out a reverse mortgage: a) The lender takes ownership of the property. b) The borrower pays monthly fees to continue the loan. c) The lender has a lien on the property. d) The borrower's original mortgage defaults.

Quiz Level 13 c) Loan repayment depends primarily on the successful production and marketing of agricultural products, and secondarily on loan collateral. Loan repayment depends primarily on the successful production and marketing of agricultural products, and secondarily on loan collateral.

Which of these is a fact unique to agricultural lending? a) USDA mortgages do not use property as collateral. b) The loans are sold on the secondary mortgage market. c) Loan repayment depends primarily on the successful production and marketing of agricultural products, and secondarily on loan collateral. d) Government-backed loans are only given to larger farms, making it difficult for family farms.

Quiz Level 13 b) They have a higher rate of default. GPMs have fallen out of favor with many lenders because the paperwork and underwriting considerations are more difficult, and because they carry a higher rate of default.

Which of these is a reason that GPMs have fallen out of favor with lenders? a) GPMs are rarely foreclosed on, which limits lenders margins. b) They have a higher rate of default. c) Borrower credit scores have risen too high. d) Interest rates are too high.

Level Assessment b) FHA loan. FHA loans require a minimum down payment of 3.5%.

Which of these loan types requires a minimum down payment of 3.5%? a) VA loan. b) FHA loan. c) USDA loan. d) None of these are correct.

Quiz Level 13 b) conventional loans Because they are not insured by the government, conventional loans are typically seen as having a higher risk for lenders.

Which of these loans is typically seen as a higher risk for lenders? a) government-backed loans b) conventional loans

Level Assessment d) interest rates. Refinancing can change a borrower's interest rate.

Which of these things can be changed with refinancing? a) sales price. b) the property being used as security. c) the details of the sales contract. d) interest rates.

Level Assessment a) The FHA. The FHA is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception in 1934.

Who is the largest insurer of mortgages in the world? a) The FHA. b) Fannie Mae. c) Freddie Mac. d) The VA.

Facts of a feather c) blanket mortgage

usually taken out by land developers. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather a) graduated-payment loan

originally used to entice first-time homebuyers who expected their incomes to increase. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather a) graduated-payment loan

. originally used to entice first-time homebuyers who expected their incomes to increase. . has a low initial payment that increases over time. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Chapter 5: Equity Loans

After completing this chapter, you will be able to: . Explain the terms and repercussions of taking out a loan on the borrower's equity. Why It Matters: Equity loans aren't taken out to buy property. It's the opposite, in fact. An owner is giving up equity in their property in exchange for a loan. Equity loans can be very beneficial in some circumstances, but they don't come without their dangers. Agents need to understand the pros and cons relative to equity loans. Key Terms: . home equity loan . reverse mortgage

Quiz Level 13 b) to the seller Jim's purchase-money mortgage was loaned by the seller of the home, so Jim will have to pay back the seller of the home.

Jim is buying a home, but Bank of Aceable didn't qualify him for the full home price. He takes out a purchase-money mortgage to supplement the rest of the sales price. Where will Jim's payments go for the purchase-money mortgage? a) to Bank of Aceable b) to the seller c) to the government d) the buyer

Level 13 b) Fannie Mae AND Freddie Mac Conventional conforming loans are loans that conform to the guidelines set by Fannie Mae and Freddie Mac and, thus, can be sold on the secondary market to Fannie Mae and Freddie Mac.

The guidelines that determine if a conventional loan is conforming or non-conforming are set by: a) The Mortgage Association b) Fannie Mae AND Freddie Mac c) Fannie Mae AND Farmer Mac d) Freddie Mac AND Ginnie Mae

Facts of a feather d) interest-only loan

. contains a balloon payment at the end of the loan term. . also called a straight loan. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather c) blanket mortgage

. have more than one collateral property as security. . usually taken out by land developers. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather b) construction loan

. the lender pays the borrower in installments called "draws". . A type of open-end mortgage. a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather a) purchase-money mortgage

. the loan is borrowed from the seller. . the borrower is the buyer and the lender is the seller. a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather c) subprime loan

. thought of as high-risk loans for lenders. . have higher fees and interest rates because of the perceived high risk of the loan. a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Quiz Level 13 c) the interest rate is fixed for 5 years. The first number will always be the number of years that the interest rate is fixed for. So a 5/1 will have a fixed interest rate for 5 years.

Jeremy took out a 5/1 ARM. What does the 5 mean? a) the loan has a 5 year term. b) the margin is 5. c) the interest rate is fixed for 5 years. d) the interest rate will start at 5%.

Quiz Level 13 a) 6 months After 6 months, the refinancing costs will be less than the money saved by having cheaper monthly payments.

Jill is refinancing her home. Payments on the new loan will be $350 less than her old loan. The refinancing costs will be $2,100. How long will it be until until the refinancing pays off for Jill? a) 6 months b) 12 months c) 2 years d) 5 months

Fixed-Rate and Fully-Amortized

Let's begin with fully-amortized, fixed-rate loans. In fully-amortized, fixed-rate loans, the interest rate remains the same for the life of the loan, and the monthly payments remain the same. The only thing that changes is how much of each monthly payment is applied to interest vs. principal — and even that is laid out on a predetermined schedule. With a fully-amortized, fixed-rate loan, you can see exactly how much you'll be paying in principal or interest in any month of the loan! Potential for Refinancing: If the borrower wants to get a fixed-rate mortgage, even if the rate isn't the best it could be, they could refinance in a few years if interest rates go down. This might be a better option for them than an adjustable-rate mortgage. Otherwise, if rates are on their way up, the rate they're getting at the moment they sign the contract is what they'll have for the foreseeable future.

Subprime Loans

Put simply, subprime mortgages are mortgages with higher interest rates. Subprime mortgages are normally made to borrowers with lower credit ratings. The lender offers a mortgage with a higher interest rate because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. Prime Lending: In order to understand what subprime lending is, we'll also have to talk about what prime lending is. Prime lending is based on what's called a prime rate. The prime rate is the interest rate that's issued for mortgage borrowers with what lenders deem "good credit." This rate is usually three percentage points above the federal funds rate, which is set by the government. This federal funds rate is the interest rate that banks charge other banks for overnight loans, so adding 3% to that gives you the prime rate. Subprime Lending: So, a subprime loan is a loan that has an interest rate greater than the prime rate. If the borrower has less-than-good credit, this is the option they'll be given by the lender. Their assessment and qualification is based on a few factors, including, in this order: . Credit score . Size of down payment . Number of delinquencies on a borrower's credit report . Types of delinquencies If there is just one area in which the borrowers are below standard, such as credit score, the lender will be less willing to give them a prime loan, even if their income and assets are to the lender's liking. When a borrower doesn't meet the lender's qualifications, the lender might still deem them creditworthy enough to approve them for a mortgage, that mortgage might just be at a subprime rate. Higher Rates and Fees: Because of the default risk associated with such borrowers, subprime mortgages have very high interest rates and much higher fees as compared to prime loans. This, combined with the fact that many subprime borrowers don't have the same level of financial knowledge as a prime borrower, means a lot of predatory lending takes place in the subprime market. That's why it's important for potential homeowners to shop around for mortgages, especially if their credit is less than stellar. This way, they can see what interest rates are being charged by different lenders and can pick one that has the best rates and features, hopefully avoiding predatory lenders.

Refinancing Defined

Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments, lower interest rates, take cash out of a home for large purchases, or change mortgage companies. Think of it as replacing a mortgage you don't want for a mortgage you do want. Most people refinance when they have decent equity in their home. Equity is the difference between the amount owed to the mortgage company and the amount the home is worth. Reasons for Refinancing: Borrowers may consider refinancing for several different reasons. I'll go over the main reasons: . A lower monthly payment . Shortened loan terms ⏱ . Changing from an ARM to a fixed rate . Avoiding balloon payments 🎈 . Getting rid of PMI . Cashing out equity or consolidating debt 💸

Facts of a feather a) purchase-money mortgage

the borrower is the buyer and the lender is the seller a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather d) wraparound mortgage

the lender assumes responsibility for an existing mortgage. a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather b) construction loan

the lender pays the borrower in installments called "draws". a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather a) purchase-money mortgage

the loan is borrowed from the seller a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather c) subprime loan

thought of as high-risk loans for lenders. a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Balloon-Payment Mortgages

A balloon-payment mortgage is not fully amortizing. It has a short term, usually five or seven years. But the payments are based on a longer term, as if the term were 30 years, for example. At the end of the loan's term, the often-large remaining balance of the mortgage is due as a lump sum (a balloon payment). At this time, the borrower can refinance this amount (if they qualify). Some balloon mortgages have a conversion option that allows the borrower to convert the remaining balance to a 25- or 23-year fixed-rate mortgage, based upon the term of the balloon mortgage. The conversion option usually provides for a rate slightly higher than that of fixed-rate mortgages. While balloon payment mortgages are more common in commercial transactions, they can be used in residential sales. An example of a balloon payment mortgage is the seven-year Fannie Mae Balloon, which features monthly payments based on a thirty-year amortization, with the remaining principal due after seven years. Advantages of a Balloon-Payment Mortgage: You may wonder why someone would want to take out a balloon mortgage. Well, I'll give you three reasons why: 1. It typically has an interest rate that is 0.25% to 0.5% less than comparable fixed-rate mortgages. 2. Those who plan to sell their homes after five or seven years are in an excellent position to take advantage of this rate reduction. It could also work to a buyer's advantage if they plan to refinance before the loan term is up. 3. The lower rate gives borrowers increased purchasing power because their housing expense is lower and they qualify for larger loans.

Quiz Level 13 a) FALSE A borrower can switch between either loan types.

A borrower can switch from an adjustable rate to a fixed rate, but they cannot switch from a fixed rate to an adjustable rate. a) FALSE b) TRUE

Quiz Level 13 d) by charging the borrower a higher interest rate With a zero-closing-cost mortgage, the lender might charge the borrower a higher interest rate.

A borrower takes out a zero-closing-cost mortgage. How might a lender make up the money for closing costs? a) by deferring the costs to the next refinance opportunity b) by charging the real estate agent the costs c) by taking back more equity in the home d) by charging the borrower a higher interest rate

Quiz Level 13 c) a low credit score A subprime loan might be the only option for a borrower with a low credit score.

A subprime loan might be the only option for a borrower with: a) minimal delinquencies b) multiple investment properties c) a low credit score d) high income

Quiz Level 13 c) the borrower doesn't plan on being in the house longer than the low initial interest rate. ARMs are advantageous for the borrower when the borrower doesn't plan on being in the house long, allowing them to take advantage of the low initial interest rate.

ARMs are advantageous for borrower when: a) the lender wants to sell the loan on the secondary market. b) interest rates are high and their loan's rates follow the market. c) the borrower doesn't plan on being in the house longer than the low initial interest rate. d) the loan has a really high rate cap, which allows the loan to fluctuate lower.

Home Equity Loan

A home equity loan is a loan in which funds are borrowed using the homeowner's equity for collateral. It's notable that these funds can be used for any purpose, such as remodeling the kitchen or paying for college tuition. Equity loans are often limited to 80% of the value of the property. For example, if a home is worth $215,000, the maximum amount the owner can take out in loans is $172,000. If there is already a mortgage on the house that will take $50,000 to pay off, the owner will be able to get no more than $122,000 in a cash-out equity loan. People that are in a large amount of debt might be tempted to take out a home equity loan to pay it off. Their credit card interest rate might be above 20%, while a home equity loan's could be in the single digits. This could be useful to a borrower if utilized correctly. For example, a borrower would save money if they were able to get a substantially lower interest rate and pay off the credit card. Better to be paying 5, 6, or even 10% in interest than the 20% or more that credit cards can charge. In taking out the loan, the borrower would also be consolidating their debt to one payment. This is known as debt consolidation. Risks of a Home Equity Loan: A home equity loan is a loan in which funds are borrowed, using the homeowner's equity for collateral. So, if the borrower finds themselves unable to repay the loan, they could lose their home. Therefore, borrowers should carefully consider their options before taking out a home equity loan. Home equity loans are not predatory by nature. In fact, it could be the right financial decision for someone. But keep in mind: predators like collateral. Borrowers should examine the terms of a loan very carefully before taking out a home equity loan. A predator might hit the borrower with a large balloon payment at the end, or a variable rate might put the borrower in a worse position than when they started. Debt consolidation through a home equity loan can be a risky move, and borrowers should be made aware of those risks. In addition, borrowers can find debt consolidation loans that don't use home equity as collateral.

The Takeaway

A lot of borrowers take out loans they don't fully understand and find themselves with payments they have trouble making. Other borrowers, due to their bad credit, knowingly take out a loan with bad terms. And some borrowers just find that they can save money if they get a new loan. For the last set of borrowers, refinancing is a great option. Refinancing can get a borrower out of a less-than-ideal loan situation, giving them more reasonable terms. In Chapter 4, you learned to: ✅ Explain how a borrower can utilize refinancing to change their financial situation. In the next chapter, we'll talk about loans a borrower can take out against their own equity.

Package Mortgage

A package mortgage includes not only the real estate but also all personal property and appliances installed on the premises. In recent years, this kind of loan has been used extensively to finance furnished condominium units. Package loans usually include personal property, such as furniture, drapes, and kitchen appliances, as part of the sales price of the home. A package deed of trust may serve as a security agreement on the personal property and fixtures to be placed in or attached to the real property.

Wraparound Mortgages

A wraparound mortgage, also called the wrap, is a form of secondary financing. A wraparound mortgage enables a borrower to obtain additional financing from a second lender without paying off the first loan. The lender of a wraparound mortgage is commonly the seller, but not always. The second lender gives the borrower a new, increased loan at a higher interest rate and continues payment of the existing loan. The total amount of the new loan includes the existing loan as well as the additional funds needed by the borrower. The borrower makes payments to the new lender on the larger loan, and the new lender makes payments on the original loan out of the borrower's payments. The buyer should require a clause in the loan documents that grants them the right to make payments directly to the original lender in the event of a potential default by the seller on the original loan. Sounds a little confusing, I know. I'll give you an example to help make it clearer. Scenario: Jim and Daisy: Jim has a mortgage on his house with a current principal balance of $100,000. His interest rate is 5%, and he has a monthly payment of $900. Jim is selling his house and found a buyer he likes. Her name is Daisy. Sadly, Daisy has very bad credit and is having a hard time qualifying for a decent loan to buy Jim's house. She knows she can afford to buy the house, but the bank is offering her subprime rates. After some negotiations, Jim and Daisy agree on a wraparound loan. Daisy pays Jim a down payment of $20,000, and she agrees to a $60,000 wraparound note at 7%. When all is said and done, Daisy makes a monthly payment of $1,200 to Jim. Jim continues to pay his lender his $900 monthly payment while he gets paid the $1,200 from Daisy. This gives Jim a monthly net income of $300 ($1,200 - $900). Be Warned: Banks do not always appreciate wraparound mortgages. In a way, the buyer and seller are going around the bank's back and handling all of the finances on their own. If the seller's lender is in the dark about the arrangement and then they find out about it, there's a decent chance that the lender will call the loan due. Most loans have an "acceleration clause," which lets the lender call the loan as due whenever ownership of the security changes. Why Is It Called a Wraparound Mortgage?: This is called a wraparound mortgage because usually the seller has a mortgage on the property that they keep, paid off with the monthly payments received from the buyer. For this reason, the seller usually charges a higher interest rate than that of the mortgage they hold. Nevertheless, this rate can be lower than the current market rate, making it appealing to buyers. Buyers also receive the advantages of no qualifying process and few closing costs. For example, there is no lender's origination fee, appraisal fee, or credit report fee, but there may be legal fees and homeowner's fees.

ARM Terms

ARMs have a vocabulary of their own. You should understand the following concepts as related to ARMs. The Benchmark: The benchmark (also known as index) is a way for investors to compare how this mortgage is doing compared to other similar types of mortgages. To find the benchmark for a specific mortgage, they look at things like risk and the style of the investment portfolio. This way, the mortgage has a standard that it can be compared to. The benchmark/index is the number that adjusts when the time comes. It's the adjustable in adjustable rate. Index Links: Most mortgages are linked to one of three potential indexes: the London Interbank Offered Rate (LIBOR), the 11th District cost of funds, or the maturity yield on one-year Treasury bills. Based on one of these three indexes, the index rate of the ARM will move up or down (like your own arm can move up and down). You'll probably never really need to know how ARMs are indexed, but if you have an investor client who knows their stuff, throwing around terms like "LIBOR" will make you look smart. 😉 ARM Margin: The spread (also known as the margin) is a fixed amount above the index, which the borrower will pay. This is given as a percentage to be added on top of the index. For example, if the spread on a loan is 3%, then the borrower is always paying 3% above whatever the index is at the last adjustment. The rate you get when you add the index and the spread is the fully-indexed rate. Remember that while the index may move up and down, the margin is fixed. That margin ain't changin', baby. It's set in stone. Your client should know that the margin is, most of the time, negotiable. They can speak with the lender to try and negotiate this number as low as possible. Choosing an Index and Margin: The important thing to know about margin and index amounts is that the higher the margin, the lower the index level, and vice versa. That is, if the chosen index is a very low rate that isn't prone to large variations, the spread will likely be higher. There may be a few margin/indexes available for the borrower to choose from, so they should figure out which will work best for them before choosing a loan. Margin Example: Let's look at an example. If the margin on a loan is 3% and the index rate is 5%, the interest rate will be 8%. If the index rate goes down to 3% at the next index reset period, the interest rate on the mortgage will be 6% (margin + index). When these two, the margin and the index, are combined, this is called the fully indexed interest rate.

Chapter 4: Refinancing

After completing this chapter, you will be able to: . Explain how a borrower can utilize refinancing to change their financial situation Why It Matters: Sometimes people find themselves with a mortgage that they can't afford. Sometimes the interest rate goes up significantly. Maybe a borrower is looking around at current market rates and wishing theirs was that low. Well, there is hope! A borrower can always try and refinance their home, putting themselves in a more reasonable financial situation. Key Terms . refinancing

Chapter 6: Federal Housing Administration (FHA)

After completing this chapter, you will be able to: . Explain the standard terms of an FHA loan. . Understand the advantages of taking out an FHA loan. Why It Matters: FHA loans are one of the most common loan types used by first-time homebuyers. An agent should understand these loans like the back of their hand!

Chapter 3: Other Types of Home Loans

After completing this chapter, you will be able to: . Identify and explain common types of mortgages used in real estate. Why It Matters: Home loans come in all sorts of shapes and sizes and costs. Chapter 3 will go over some of the more common loan types. All of these are financing options you will probably encounter in your career, so being familiar with each type is important. Key Terms: . graduated-payment loan . bridge loan . blanket loan . construction mortgage . subprime loan . purchase money mortgage . wraparound mortgage

Chapter 2: Fixed-Rate and Adjustable-Rate Mortgages

After completing this chapter, you will be able to: . Understand how interest rates can be fixed or adjustable. . Explain the phases of an adjustable-rate mortgage Why It Matters: Back in the last level, you learned about how to calculate interest payments. And if you recall, even a small change in an interest rate can make a huge difference in how much a borrower pays over the life of the loan. But as you'll see in this chapter, interest rates aren't always straightforward. Certain loans can have interest rates that dip and rise along with the market. You'll see what I mean. Key Terms . adjustable-rate mortgage (ARM)

Chapter 1: Basic Categories of Mortgages

After completing this chapter, you will be able to: . Understand the difference between conforming and non-conforming loans . Understand the difference between conventional and non-conventional loans . Understand how loans can be differently amortized Why It Matters: Let's start off by laying some groundwork. There are a number of specific mortgage types and mortgage terms that we will discuss in this chapter, but before we get into those gritty details, we have to make sure you've got the basics down. Key Terms: . conventional loan . balloon payment . negative amortization

Adjustable-Rate Mortgages

As opposed to a fixed-rate loan, an adjustable-rate mortgage (ARM) is a loan with an interest rate that can increase and decrease periodically throughout the life of the loan, often based on a market index. An ARM typically has an introductory interest rate that is lower than the market rate for conventional loans. An ARM's initial interest rate is locked for a certain amount of time — this is called the initial rate period. After the initial rate period ends, the lender can then adjust the loan rate every new adjustment period. The difference between the ARM's rate and it's eventual fully-indexed interest rate is known as the margin. So, if the ARM's indexed rate is at 3% and the margin is 4%, the fully-indexed rate is going to be 7%. If the ARM's index rate increases to 5%, the fully-indexed rate increases to 9%.

Avoiding Balloon Payments

Balloon-payment mortgages, like ARMs, are a good idea for lowering initial monthly payments and rates. However, at the end of the term, which is usually pretty short (five or seven years), the entire mortgage comes due. Before the balloon payment comes due, a borrower could refinance their loan, either to another balloon-payment mortgage, or a fully amortized loan. In this way, the borrower avoids having to pay the balloon payment.

What Your Client Should Know

Basically, these are the things your client should pay attention to in order to determine what kind of loan they need: . What is the current interest rate, based on the Fed? If it's high, an ARM could be beneficial to the borrower. If it's low, but predicted to rise, a fixed-rate will probably save them more money overall if they lock into the low rate. . Do they plan on staying in their house long? If not, they should take advantage of the introductory low interest rates of ARMs. Then they can get out of there before the rate increases, all while saving up for another home because of the low payments. . If the rates for the ARM do increase, would the borrower still be able to afford the payments? Maybe their introductory payment is at the top of their budget. If so, they should avoid ARMs and go for the fixed-rate. . When looking at ARMs, they should check to see how often they adjust. Some will adjust yearly, while others will adjust as much as monthly. If they'd rather have more stability, they should stick with a fixed-rate.

Blanket Mortgages

Blanket mortgages have more than one collateral property that acts as security for the loan. These mortgages typically are used by land developers and commercial investors, but anyone seeking to consolidate mortgage debts may receive such a loan. As they pay down the loan, they can get various properties released of their encumbrances. Blanket mortgages create a blanket lien on the collateral properties. This means that in the event of default, the lender may foreclose on all of the properties thus encumbered. This can cause problems for those who buy a lot from a developer, because the house may still be encumbered by the developer's blanket mortgage. If the developer defaults, the lender may foreclose on all of the collateral property, including lots that already have been sold.

Bridge Loans

Bridge loans are short-term loans typically taken out for a period of two weeks to three years, while the borrower works to attain larger or longer-term financing. That "bridge" can connect the borrower from their present construction loan to their eventual mortgage loan when the house is built. They are also used to bridge the mortgage loan on a borrower's present home to the mortgage on the new home they wish to purchase. The bridge loan may not require a payment for the first few months, giving the borrower time to sell their present home and avoid a property sale contingency on the offer they place on the new home. Scenario: Commercial Developer A commercial developer needs to finance a project while their permit approval is sought. Because there is no guarantee the project will happen, the loan they take out might be at a high interest rate and from a specialized lending source that will accept the risk. This is their bridge loan. Once the project is fully approved, it becomes eligible for more conventional loans with lower rates, longer terms, and greater amounts. A construction loan would then be obtained to take out the bridge loan and fund completion of the project. Scenario: Consumer A consumer is purchasing a new residence and plans to make a down payment with the proceeds from the sale of a currently owned home. The currently owned home will not close until after the close of the new residence. A bridge loan allows the buyer to take equity out of the current home and use it as a down payment on the new residence, with the expectation that the current home will close within a short time frame and the bridge loan will be repaid.

Quiz Level 13 c) before the borrower obtains more long-term financing. Bridge loans are typically used before the borrower obtains more long-term financing.

Bridge loans are typically used: a) to finance the construction of infrastructure. b) for long-term financing of real estate. c) before the borrower obtains more long-term financing. d) after a borrower defaults on the purchase of commercial property.

Quiz Level 13 d) Cammy is NOT correct; she has a fully-amortized, fixed-rate loan, so she knows exactly how much her monthly payments will be. Cammy has a fully-amortized, fixed-rate loan, so she knows exactly how much her loan payments will be every month.

Cammy takes out a fully-amortized, fixed-rate loan for her new vacation home on Lake Placid. When Cammy's mother asks her to fly to Singapore for their family vacation, Cammy tells her mother she doesn't know if she can afford it, as her loan payments could fluctuate. Analyze if Cammy is correct. a) Cammy IS correct; her loan payments could change at any time. b) Cammy is NOT correct; her loan payments may fluctuate, but they will not exceed a specified amount. c) Cammy IS correct; her loan payments will increase every month. d) Cammy is NOT correct; she has a fully-amortized, fixed-rate loan, so she knows exactly how much her monthly payments will be.

Conforming vs. Non-Conforming

Conventional loans are divided into two categories: conforming loans and non-conforming loans. Conforming Loans: Conventional conforming loans are loans that conform to the guidelines set by Fannie Mae and Freddie Mac and, thus, can be sold on the secondary market to government-sponsored enterprises (GSEs). Conforming loans are made using the Uniform Residential Loan Application (Fannie Mae Form 1003 or Freddie Mac Form 65). Loan Limits: The amount of money a buyer can borrow is not just limited to how much they qualify for with the lender. The government also limits how big a conforming conventional mortgage can be. The Federal Housing Finance Agency (FHFA) sets maximum limits on conforming loans. In recent years the loan limits for single-family residences have come in excess of $450,000. And for homes in high-cost areas in excess of $675,000. FHFA annually publishes these limits by state and county. Head to their website if you want to see the limits for your county. 💸 High-Cost Area: In 2016, the Housing and Economic Recovery Act (HERA) provisions set loan limits as a function of local-area median home values. This is why the maximum conventional loan limit is different in some cities than in others. In areas where 115% of the local median home value exceeds the baseline loan limit, the local loan limit is set at 115% of the median home value. The local limit cannot, however, be more than 50% above the baseline limit. Non-Conforming Loans: Conventional non-conforming loans are loans that do not follow Fannie Mae and Freddie Mac guidelines and, thus, will not be purchased by Fannie and Freddie on the secondary market (although other secondary market buyers may choose to purchase them). Jumbo Loan: A loan that is above the conventional loan limit is known as a jumbo loan and faces a somewhat higher interest rate because larger loans imply more lender risk. Jumbo loans still belong in the category of conventional loans (they're not insured or guaranteed by the government). But since they exceed the Fannie Mae and Freddie Mac loan limits, jumbo loans are considered non-conforming. Non-conforming Conventional Loan Advantages: As we prepare to move on from conventional loans to government-backed loans, I want to point out two advantages of non-conforming conventional loans: . The Advantage of Time: Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan can rarely be done in less than 30 days. (Increased regulations have lengthened closing times to where 30 days is somewhat rare even for conventional loans. Nevertheless, conventional loans still tend to close more quickly than their government-backed counterparts.) . The Advantage of No Limits: There is usually no legal limit on loan amounts with conventional loans, whereas government-backed loans have dollar limits that vary by agency.

FHA Loan: Section 203(b)

FHA loans have extremely catchy, fun names like Section 203(b). Very fun! Even though the name Section 203(b) is a stinker, it's important because it is the Federal Housing Administration's most used program and the main subject of this lesson. When a borrower is getting an FHA loan, they are most likely getting the loan that falls under the Section 203(b) program, called the FHA 203(b). This program insures fixed-interest-rate loans for owner-occupied, one- to four-family properties. Specifically, the FHA 203(b) loan insurance program is for people who want a single-family FHA-insured mortgage loan. The loan "may be used to purchase or refinance a new or existing one- to four- family home in both urban and rural areas including manufactured homes on permanent foundations," according to FHA.gov. Many other types of FHA-insured home loans are available besides the 203(b), but 203(b) is the one that most people are referring to when they talk about FHA loans. For these FHA-guaranteed loans, lenders offer loan terms of 15 or 30 years. The FHA does not set interest rates for these loans. Interest rates are negotiated between the borrower and the lender.

Quiz Level 13 d) Monthly payments stay the same, allowing for easier budgeting. Fixed-rate mortgages are advantageous because monthly payments stay the same, allowing for easier budgeting.

Fixed-rate mortgages are advantageous because: a) The monthly payment changes with the market, allowing the borrower to pay less. b) When the interest rates drop, the borrower can take advantage of the lower rate. c) The loans automatically refinance when the market drops. d) Monthly payments stay the same, allowing for easier budgeting.

Shortened Loan Terms

For someone trying to pay off their mortgage, refinancing their loan can shorten their loan term from a 30-year to a 10- or 15-year loan. There might be a slight increase in the monthly payment, but if the interest rate is also lower, the borrower will be paying a lot more on the principal. This means that they'll pay off their mortgage much sooner. For someone who doesn't want to be bothered with a mortgage any more, this is a good reason to refinance.

Graduated-Payment Mortgages

Graduated-payment mortgage (GPM) is a blanket term for a family of loans characterized by low initial payments that increase (or "graduate") at set intervals and by set amounts during the term of the loan. Payment amounts usually increase anywhere between 7.5% and 12.5% annually until reaching a fixed amount that continues for the rest of the term. GPMs were originally designed to entice first-time homebuyers into the mortgage market. In theory, a young borrower who expects their income to increase in the coming years may purchase a house with a GPM whose graduated payments they expect to be able to meet in the future as their income increases. In practice, however, GPMs have fallen out of favor with many lenders because the paperwork and underwriting considerations are more difficult, and because they carry a higher rate of default. Nevertheless, some lenders continue to offer GPM plans to interested and qualified borrowers. GPMs are attractive to some lenders because they typically have market interest rates 0.5% to 0.75% higher than comparable fixed-rate loans. Borrowers who can't qualify for a fixed-rate loan may qualify for a GPM on the basis of the lower initial payments. GPMs can make sense in rapidly appreciating areas because the increased payments go along with an increase in the value of the property. Negative Amortization: Some GPMs negatively amortize because the initial payments are not enough to cover all the interest due. This interest becomes compounded into the principal, causing even more interest to be due at the next payment period. However, not all GPMs have this feature. Some loans may have initial payments that cover only the interest, which in turn graduates to amortizing payments in the course of the loan term.

Purchase-Money Mortgages

I mentioned seller financing in the last level. Seller financing is a form of private lending. Money lent by a private party, instead of a bank. The loan given by a seller is referred to as a purchase-money mortgage. A purchase-money mortgage is a note and deed of trust created at the time of purchase. The term is used in two ways: First, it may refer to any security instrument originated at the time of sale. But more often, it refers to the instrument given by the purchaser to a seller who "takes back" a note for part or all of the purchase price. In a purchase-money mortgage, the buyer can borrow from the seller in addition to the lender. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount, so the seller "takes back" a portion of the purchase price as a second mortgage. EXAMPLE: A buyer wants to purchase a property for $200,000. He has $40,000 for a down payment and agrees to assume the existing mortgage of $100,000. The owner agrees to take back a purchase-money second mortgage in the amount of $60,000. At closing, the buyer will execute a note and deed of trust in favor of the owner, and the seller will transfer the title. The buyer will then owe the bank for the $100,000 mortgage and the seller for the $60,000 purchase money mortgage.

Quiz Level 13 d) 8% If the margin is 2% and the index rate is 6%, the interest rate will be 8%.

If a loan's margin is 2% and the index rate is 6%, the interest rate will be: a) 4% b) 2% c) 6% d) 8%

Fixed-Rate Advantages and Disadvantages

In order to help your client, it might be good to know the benefits and drawbacks of both fixed-rate and adjustable-rate mortgages. Here are the pros and cons of taking out a fixed-rate mortgage. Advantages: 1. Fixed-rate mortgages are good in a few ways: The payments are always going to be the same. Whatever the interest rate might be in the world, the borrower is protected. 2. Because of the stability, they'll be able to create a monthly budget and not have to worry about it changing because of the house payment. Disadvantages: And they are not good in a few ways, too: 1. If the interest rate is high when the borrower is trying to get a mortgage, their interest rate will stay high for the life of the loan. The only way they would be able to change their interest rate is to refinance, which can be helpful, but can also be a hassle. 2. If the interest rate drops by a lot, the borrower won't be able to take advantage of the drop. Again, their only option would be to refinance. 3. A lot of the time, fixed-rate mortgages are sold to the secondary market, while ARMs stay within the lender's institution. This means that ARMs can usually be more customizable than fixed-rate.

Amortization

In the last level, we talked quite a bit about amortization. Mortgage loans can be talked about in terms of their amortization, whether the loan is fully amortized, partially amortized, or is subject to negative amortization. Fully Amortized Loans: Mortgage loans that are fully amortized will include equal monthly payments that contribute to both principal and interest until the entire loan is paid. The payments will be credited first to the interest when due, with any remainder credited to the principal. What's unique about fully amortized loans is that if the borrower makes all their monthly payments in full and on time, the loan will be completely paid off with the last scheduled payment. Fully amortized loans usually have higher payment amounts than other types (interest-only, partially amortized) but are consistent in the amount that has to be paid. Partially Amortized Loans: A loan might also be partially amortized. This means that even though there are equal payments going towards the principal and interest, the loan will not be fully paid off with the last scheduled payment. A partially amortized loan might be designed to include a larger payment at the end of the loan's terms. This larger payment is called a balloon payment and would effectively pay off the balance of the loan. Negative Amortized Loans: Remember that with amortized loans, the interest is paid in arrears. This means that the borrower is paying for borrowing the money after they have already been "using" it for a period of time. If a borrower's payments are not large enough to cover the interest due on a loan, the unpaid interest is added to the principal balance. This is known as negative amortization or deferred interest. This is not a good situation for a borrower to be in!

Refinancing Example

Let's look at an example before we close out this chapter on refinancing. Tom has owned his home for several years. When he bought the home, interest rates were higher. He financed $150,000 for 30 years at 8.5%, and his monthly payments for principal and interest (P&I) are $1,153.37. His balance is down to $120,836, and his lender has told him he could refinance for 30 years at an interest rate of 3.75%. There will be $2,000 in closing costs that will be rolled in to (added to) his loan balance. His new monthly P&I payments will be $878.75. That is a savings of $274.62 per month. It will take some time for the monthly savings to cover the closing costs. From that point on, it is a true savings. The borrower must consider how long it will take him to recover the cost of refinancing and how long he intends to own the home. How long will it take for the refinancing to "pay for itself"? To find the answer, all you have to do is divide the refinancing cost by the monthly savings. $2,000 / 274.62 = 7.28 months So, it would take a little more than seven months for Tom's monthly savings to equal the amount he spent on closing costs to refinance. From that break-even point onward, he would actually be saving $274.62 per month. Refinancing is a good option as long as Tom intends to stay in his home for significantly longer than seven months. Additionally, Tom will be saving thousands of dollars in interest over the years with his new loan. So besides just the short term savings, refinancing is a great decision for Tom.

Straight Loans (Interest-Only Loans)

Let's start by talking about interest-only loans. An interest-only loan, also known as a straight loan or term loan, is a type of balloon-payment loan that calls for periodic payments of interest. So, monthly payments go towards paying only the loan's interest and not to both interest and the principal. Once the loan term is up, a balloon payment of the entire principal will come due. These loans are generally used for home improvement loans, second mortgages, and investor loans rather than for residential first mortgage loans. But it's not unheard of for a residential borrower to get an interest-only loan. One way an interest-only residential loan would make sense would be if the borrower expected strong appreciation of the property over the short term they planned to own it. That way, when they sell the property, the borrower will pay off the loan principal in full and get to keep the remaining funds from the sale. This is a risky proposition, but it might make sense in a hot market. Just beware: If the property doesn't appreciate in value over time, the borrower could end up with less in proceeds on the sale than what they need to pay off the loan. A Fannie Mae-backed interest-only loan requires a 30% down payment, at least a 720 credit score, and a 24-month cash cushion.

The Takeaway

Long story short: Be careful with equity loans! They can be very helpful for certain borrowers, but anyone thinking of taking out a home equity loan should do their research and make sure they understand how it could potentially affect them. In Chapter 5, you learned to: ✅ Explain the terms and repercussions of taking out a loan on the borrower's equity In the next chapter, we'll start talking about government-backed loans, starting with everyone's favorite: FHA!

Lower Payments

Lower monthly payments are probably the biggest reason for people wanting to refinance their home loan. It used to be that a 2% savings on interest was typically enough to get homeowners to refinance. These days, lenders recommend refinancing even if the savings are as little as 1%. This will still be a huge savings, as the buyer will be paying off more of the principal (and gaining more equity) while paying less money monthly. Sounds like a win-win-win. Refinancing a mortgage isn't free. There are still costs associated with mortgage origination, so before a buyer refinances, they should consider how much longer they plan on owning the property. If a borrower plans on living in their home for the next several years, the cost of a mortgage refinance will be paid for by the monthly savings gained. On the other hand, if a borrower is planning on moving to a new home in the near future, they may not be in the home long enough to recover from a mortgage refinance and the costs associated with it. Therefore, it is important to calculate a break-even point, which will help determine whether or not the refinance would be a sensible option.

ARM'd and Dangerous

Make sure you tell your client about ARM loan, in case it's something they're not aware of. If they do the math, they might see that this type of mortgage can potentially save them money. They have the ability to negotiate with the lender on ARMs. Some may say you want your client to be ARM'd and dangerous. Also, if they only plan on staying in their house for say, 12 years or less, it makes sense to try to get a 10- to 15-year introductory interest rate. They'll save a lot of money this way, which can help them save money to buy a new home. Additionally, before a borrower takes out an ARM, they should consider what the maximum possible monthly payment over the life of the loan could be. If the borrower doesn't think they will be comfortable with that monthly payment, they should probably keep exploring loan options. When taking out a mortgage, it's important to understand the worst-case scenarios. This ensures that the borrower is ready for whatever happens and greatly reduces the likelihood of foreclosure.

Going From an Adjustable-Rate to a Fixed-Rate

Maybe a borrower thought that they wouldn't be in that house very long, so they got an adjustable-rate mortgage. Then things changed, and they now want to stay but are worried about interest increases. Luckily an ARM isn't permanent, and they can refinance out of it and into a fixed-rate mortgage. They may want to switch from an adjustable-rate to a 30-, 15-, or 10-year fixed-rate mortgage. Switching to a fixed-rate mortgage may be the most sensible option, given the threat of rising interest costs. Going From Fixed to Adjustable Rate: On the other hand, if interest rates are falling, it could be a good idea to refinance from a fixed-rate mortgage to an ARM. This is a less popular reason for refinancing, but potentially a beneficial one. This could be helpful to avoid future refinances if the interest rate is supposed to drop multiple times in the foreseeable future. If the homeowner doesn't plan to stay in their current house for very long, refinancing to an ARM could be a good idea in order to pay less while not having to worry about a future increase.

Quiz Level 13 b) Millie will be receiving a net income of $900 from the wraparound mortgage. If Chris is paying Millie $1,750 every month, Millie will be receiving a net income of $900 from the wraparound mortgage.

Millie used a wraparound mortgage to sell her home to Chris. Chris is paying her a monthly payment of $1,750 while Millie continues to pay off her original loan with $850 monthly payments. Which of these is true of the situation? a) Chris will be receiving a net income of $900 from the wraparound mortgage. b) Millie will be receiving a net income of $900 from the wraparound mortgage. c) If Millie defaults, Chris will owe the bank a monthly payment of $2,600. d) The wraparound mortgage described here is illegal.

Quiz Level 13 d) If she defaults on the home equity loan, she could lose her home. By consolidating debt with a home equity, Moira is putting up her home as collateral for all her debt payments.

Moira had credit card debt, an auto loan, and a student loan. Then she found a home equity loan that had a lower interest rate than her other debts and she decided to consolidate all her loans with it. Which of these is a potential risk for Moira? a) The home could increase in value, making the equity loan less valuable. b) She could default on her student loan, which would place a lien on her education. c) The lender could demand more equity out of the home, potentially bankrupting Moira. d) If she defaults on the home equity loan, she could lose her home.

Government-Backed Loans vs. Conventional Loans

Mortgages are either government-insured or government-guaranteed, or they are conventional loans. Government-Backed Loans Government-backed loans include FHA, VA, and USDA, which we will talk about in later chapters. These programs do not provide the money for the loans. The money comes from private lenders. However, the loans are insured or guaranteed by special government programs. . The insurance to protect the lender that is provided by the Federal Housing Agency (FHA) is called a mortgage insurance premium (MIP). . VA loans are guaranteed by the Veterans Administration. . The U.S. Department of Agriculture (USDA) makes loans to low-income buyers that are guaranteed through government-backed programs. . Borrowers pay for the insurance or guarantees that protect the lender on these FHA, USDA, and VA loans. Conventional Loans: The money for conventional loans also comes from private lenders. However, they are not insured by the government at all. You're on your own, conventional loan holders! With conventional loans, the lender will ask for a 20% down payment since they are not protected by the government. But, if the borrower can only make a smaller down payment, the borrower can purchase private mortgage insurance called PMI (there's a chapter on PMI later). Conventional loans are the most common type of loan, and they adhere to the underwriting guidelines of Fannie Mae and Freddie Mac. Because these loans are not backed by the government, conventional loans are considered a higher risk for lenders. Approval for a Conventional Loan: In considering approving a loan, lenders will look closely at the property via the appraisal because that is the primary security for making the loan. The lenders will also look closely at the buyer's credit report, which is an indication of credit reliability, the source of steady income, and the amount of money available for a down payment and closing costs. Conventional loans generally have more stringent credit and income requirements than FHA and VA loans. Conventional loans are typically faster to obtain, have fewer eligibility requirements, and many have no mortgage insurance requirements. Additionally, the interest rates may be lower than government-backed loans. Some of the items the conventional lender will consider in making a loan are: . Total monthly expenses . Total gross income per month . Employment history . Credit score and payment history . Assets (checking, savings, and retirement accounts)

Adjustable-Rate Advantages and Disadvantages

Now let's talk about the pros and cons of adjustable-rate mortgages. Advantages: 1. The big draw toward ARMs is the fact that they offer introductory interest rates that will be lower than fixed interest rates. 2. If interest rates are dropping, ARM borrowers will be able to reap the benefits without doing anything. They won't have to refinance to take advantage of lower interest rates. 3. If the borrower doesn't intend to stay in the house long, they'll be able to take advantage of cheap low rates before selling their house. If they sell before the adjustment, they won't have to worry about a payment increase. Disadvantages: These also have some disadvantages: 1. Interest rates change. If interest rates go way up, the borrower will end up paying way more than they began paying in the introductory interest period. 2. The borrower will have to be careful because sometimes the rate caps don't apply to the first adjustment. Yikes! This is something they'll definitely want to discuss/negotiate with their lender. 3. If a borrower isn't super knowledgeable about ARMs, they might have trouble negotiating with the lender because there's so much that goes into them. Lenders might use the borrower's lack of knowledge to sign them up for something that isn't very beneficial to them.

Level 13: Methods of Financing

Objectives: By the end of this level, you will be able to: . Contrast the different types of mortgages, both private and government-backed, as well as their advantages and disadvantages. Overview: This level is approximately three hours long, which is a few minutes longer than the time Neil Armstrong spent walking on the moon. There are nine chapters: Chapter 1: Basic Categories of Mortgages. Chapter 2: Fixed-Rate and Adjustable-Rate Mortgages. Chapter 3: Other Types of Home Loans. Chapter 4: Refinancing. Chapter 5: Equity Loans. Chapter 6: FHA Loans. Chapter 7: VA Loans. Chapter 8: USDA Loans. Chapter 9: Mortgage Insurance.

How ARMs are Written

One thing you will need to know is how ARM mortgages are written. They look like a wonky fraction. You'll see things like 2/28 or 4/1. The first number will always be the number of years that the interest rate is fixed for. So, for the first example, the fixed rate will be for two years. In the second one, it will be for four years. The second number doesn't always mean the same thing. This isn't confusing at all. In the first example of 2/28, the second number probably means that the interest rate floats (changes) for the remaining 28 years after the initial two-year fixed period. For the second example of 4/1, the 1 means that the rate will adjust every year. BUT, you could also see 4/6, which might mean that the rate could change every six years or every six months. For this type of situation, it's important to make sure your client understands what the lender means by this number.

Construction Mortgages

One type of open-end mortgage is the construction mortgage. In a construction mortgage, the lender pays funds to a borrower in installments, called draws, as the construction progresses. The sum total of these draws is typically 75% of the value of the property when it is completed. At the end of the building's construction, the entire loan amount plus the interest accrued becomes due. This is usually paid for with a long-term mortgage that the borrower has arranged for in advance. Example: A borrower is constructing a single-family home whose value, when complete, will be $88,000. The construction loan amount, therefore, will be 75% of this, or 0.75 × $88,000 = $66,000. The mortgage contract calls for a series of six draws of $11,000 each over six months at a 10% annual interest rate. The borrower will want to have a long-term mortgage loan of $67,951.98 at the end of the sixth month when the construction loan balance becomes due. (Notice that the borrower pays almost $2,000 in interest for one six-month period.)

Open-End Mortgages

Open-end mortgages are called "open-end" because they allow the mortgagor to borrow additional funds at a later date on top of the original loan amount. This is useful to a new homebuyer who wishes to buy, for example, furniture or a washer and dryer after the home purchase. With this type of loan, the borrower can take out more money without having to refinance. In order to pay off the new debts incurred, the monthly payment or the loan term (sometimes both) of the open-end mortgage will be increased, often with a concurrent change in the interest rate. Contrast this with ARMs, whose interest rate changes but not the balance.

Cash Out Equity or Consolidate Debt

Over the long term, most homes increase in value. While a homeowner can't access that equity directly, there's a type of loan that can help them to take out some of that increased value and spend it on something else: purchasing a vacation property, buying a new car, paying a child's tuition, funding home improvements, paying off credit cards, or simply taking a much-needed vacation. A cash-out refinance is when a borrower refinances their home for more than their previous loan amount and keeps the difference in cash. It's a useful tool for debt consolidation; however, homeowners refinancing for this purpose should be careful. If they're the type of borrower who typically uses up all of their available credit, this might be a one-way ticket to Debt Town. Even though they got rid of some of their debt, they might just rack up that same type of debt while also paying their old debt on top of their mortgage. Kind of a scary situation if you think about it. Additionally, since the Tax Cuts and Jobs Act of 2017, if a borrower uses their cash-out refinance money for anything other than buying, building, or improving a home, the interest on that portion of the loan is not tax-deductible.

Quiz Level 13 d) Roberta will owe more money on the balloon payment than she will be able to get from the sale of the house. If Roberta sells her home for less than the loan amount, she will owe more money on the balloon payment than she will be able to get from the sale of the house.

Roberta took out an interest-only loan on her house. After 5 years, she needs to sell her house, but the property value has plummeted. Which of these describes Roberta's situation? a) Roberta will most likely avoid the balloon payment because the market value of the house has gone down. b) Roberta made a good investment and will be able to cover the balloon payment with the proceeds from the sale. c) Roberta's lender will apply the interest payments towards the principal, so Roberta will not be in debt. d) Roberta will owe more money on the balloon payment than she will be able to get from the sale of the house.

Oh, The Loans You'll See

Since there are so many beautiful home loans out there, a homebuyer should do their due diligence before settling on the first loan they are approved for. There might be a different loan that is more suited for their financial situation. The loans we covered in this chapter are: Straight loans (interest-only): a loan that only requires payments on the interest Balloon-payment mortgages: a type of loan that is paid off in small, periodic payments, at the end of which the remaining balance is due as a lump sum Graduated-payment mortgages: a fixed-rate mortgage that has a lower initial interest rate in its first years, but includes gradual increases each year Bridge loans: a short-term loan used to transition from one loan to another; can connect borrower from a construction loan to an eventual mortgage loan (or current home to their new home) Blanket mortgages: a loan for which more than one collateral property acts as security Open-end mortgages: a loan type that allows the mortgagor to borrow additional funds at a later date on top of the original loan amount Construction mortgages: a temporary mortgage used to finance a construction project, usually paid off in whole by long-term financing Subprime loans: a mortgage with an interest rate higher than prime mortgages due to the higher risk associated with a less qualified borrower Purchase-money mortgage: a loan in which the buyer borrows part or all of the purchase price from the seller Wraparound mortgage: an arrangement in which the seller of a property extends a mortgage to a buyer; the seller maintains their original loan and continues to pay it while also receiving mortgage payments from the buyer

Rate Caps

So you're probably thinking, "Wait, so the interest of an adjustable-rate mortgage can just go up and up and up without stopping?" Fortunately, no. The stopping point for the interest on an ARM is called a rate cap. These can limit how high the interest rate can go and also how big the difference can be between old and new payments. A homeowner wouldn't like waking up to find out that their mortgage payment was thousands of dollars higher than what they expected — this is what the rate cap helps to avoid. Types of Caps: A periodic rate cap limits the change in interest year over year. A lifetime cap, or ceiling, limits the increase of interest for the life of the loan. Also, payment caps limit the amount of the monthly loan payment for the borrower, which is stated in dollars and not in percentage points.

Federal Housing Administration (FHA)

The Federal Housing Administration (FHA) is a part of the United States Department of Housing and Urban Development (HUD) and is charged with: . Increasing homeownership. . Facilitating the financing of home sales and home repairs. . Contributing to building healthy neighborhoods and communities. How does the FHA accomplish these goals? By insuring mortgage loans and protecting lenders, allowing them to more confidently originate loans that are favorable to borrowers. In fact, the FHA is the largest mortgage insurer in the world with an active insurance portfolio of over $1.3 trillion. Think of how the secondary mortgage market made it easier for lenders to originate loans, knowing that they could turn around sell them off, giving the lender equity and a quick, reliable payment. This confidence benefited borrowers, as lenders were able to justify originating long-term, low-interest rate loans. The FHA has worked in a similar way, allowing lenders the flexibility to originate loans that they might not otherwise originate. This is because the FHA insures mortgage loans, protecting lenders from borrower defaults. Everyone wins. Lenders are protected, and borrowers get better mortgage loans. It's important to note that the FHA is not originating or funding loans; they are only insuring them.

Long-Term Plans

The borrower must continue living in the property. If they plan to move or sell in the future, this loan is not for them. Most loans allow borrowers to be gone temporarily as long as the intent is for them to return to the home. When the last homeowner passes away (if it's owned by a married couple, for example) or leaves the home permanently, the loan has to be paid in full. If the rules in the loan document are violated, the lender has the power of foreclosure. As long as the borrower is fully aware of the facts about the reverse mortgage, there really is no bad or ugly side to it. And lenders go to great extremes to be sure the borrower understands what they're agreeing to. The borrower must know the facts. Sherry's Social Security: Sherry is 75 years old. She paid off her home awhile ago. She is finding that her social security checks don't quite support her quality of life. She decides to take out a reverse mortgage. She gets her home valued at $225,000 and agrees to reverse mortgage $50,000 worth of equity. The terms of her loan give her a monthly payment of $415, which is enough for Sherry to keep up her chic-grandma lifestyle. Note, the loan does include interest payments, which will be taken out of the equity. So, whenever Sherry's home is eventually sold, Sherry or her heirs will have even less equity in the home. Remember: The balance on the $50,000 mortgage will be increasing, which may eat into her equity if the value is not increasing at the same rate.

FHA Loan Characteristics

There are some unique aspects to FHA loans. Because FHA loans are so popular, you should familiarize yourself with some of their notable characteristics. Low Down Payments: FHA loans do not come with a no-money-down option, but the minimum down payment is much lower than with a conventional loan. FHA mortgages can be obtained with a down payment as low as 3.5%. The FHA also allows a borrower's down payment to come from a family member or charitable organization in the form of a gift. Credit Check: FHA loans for new purchase homes and some kinds of refinancing require a credit check and a determination of the borrower's creditworthiness. But these loans are not necessarily credit score-driven. The FHA looks for a history of reliable payments rather than using credit scores as the benchmark. In some cases, a minimum credit score may be required, but the payment activity is a major part of approving or denying an FHA loan application. Only Participating Lenders: But not every bank can offer an FHA home loan. Some lenders choose not to participate, and some lenders aren't given permission to offer them. The FHA requires a lender to get its approval before it can issue an FHA home loan. The FHA and HUD work together with lenders to ensure quality, regulatory compliance, and fairness in the lending process. Income Ratios: For FHA loans, there are minimum required housing-to-income ratios and total debt ratios set by HUD, and these ratios can differ based on the applicant's credit score. Like we went over in the last level, the loan-to-value (LTV) ratios are a way to determine how much debt there is compared to the sales price of the property. FHA Loan Limits: The maximum allowable amount for an FHA loan varies by location. Loan limits vary in certain areas because of differences in property costs. Check out the HUD website for a tool that lets you look up the most current FHA loan limits by state and county. Mortgage-Insurance Premium (MIP): When a borrower takes out an FHA loan, they will be required to pay a mortgage insurance premium. First, there is an upfront premium of 1.75% of the loan total. The second is the annual premium, which is paid monthly. The annual premium amount varies based on length of loan and loan-to-value ratio. The last chapter of this level will discuss mortgage insurance more thoroughly. No Prepayment Penalty Clause: Some loans include a prepayment penalty clause, where a lender seeks to recoup lost interest on loans that are paid off earlier than expected. FHA-insured loans are not allowed to carry a prepayment penalty. That means a lender cannot charge a borrower for paying off their loan early.

The Takeaway

This was just a brief overview of some popular loan types. There are more types of loans out there, and you should always be sure to do your research whenever you encounter a type of loan you don't recognize. Buyer clients might need your help when deciding how to pay for their home. In Chapter 3, you learned to: ✅ Identify and explain common types of mortgages used in real estate. Just because you take out one of these loans, doesn't mean you are stuck with it for the remainder of the loan term. In the next chapter, we will talk about what it means to refinance a loan.

Banishing Private Mortgage Insurance

We'll talk more about this in a later chapter, but another reason people refinance is to eliminate their private mortgage insurance payments. Low or zero down payment options can allow buyers to purchase a home with less than 20% down. Unfortunately, they usually require the borrower to pay extra for private mortgage insurance (PMI) each month. Like we talked about before, PMI is designed to protect lenders from borrowers with a loan default risk. As the balance on a home decreases and the value of the home itself increases, the borrower's equity will get closer to the 20% that lenders like to see. The borrower may be able to cancel their PMI with a refinance if their equity is high enough. The lender will decide when PMI can be removed, but the law requires it to be removed by the 22% equity mark.

Quiz Level 13 a) a sudden and excessive increase in interest rate. Rate caps prevent a loan from having a sudden and excessive increase in interest rate.

What does a rate cap protect a borrower from? a) a sudden and excessive increase in interest rate. b) the loan changing hands on the secondary market. c) the loan switching to fixed-rate. d) the decrease of a loan's interest rate.

Quiz Level 13 c) the difference between the ARM's rate and its eventual fully-indexed interest rate. The difference between the ARM's rate and its eventual fully-indexed interest rate is known as the margin.

What does the margin of an ARM tell you? a) the market rate minus the fully-indexed rate. b) the difference between an amortized loan at market rate and the ARM's starting rate. c) the difference between the ARM's rate and its eventual fully-indexed interest rate. d) the fully-indexed rate as compared to market value.

Quiz Level 13 d) The borrower will take out long-term financing to pay off the construction loan. Once a construction loan becomes due, a borrower will typically use long-term financing to pay off the construction loan.

What usually happens when a construction loan becomes due? a) The interest gets assumed by the new long-term loan. b) The borrower takes out a new construction loan to pay for the draws. c) The lender will foreclose on the site until the borrower finds new financing. d) The borrower will take out long-term financing to pay off the construction loan.

Quiz Level 13 c) $8,750 The minimum FHA loan down payment is 3.5%. So an FHA loan of $250,000 would have a minimum down payment of $8,750.

What would the minimum down payment be for an FHA loan of $250,000? a) $50,000 b) $25,000 c) $8,750 d) $2,500

Quiz Level 13 a) The costs associated with refinancing might be higher than the amount saved in monthly payments. If a borrower is planning on moving to a new home in the near future, they may not be in the home long enough to recover from a mortgage refinance and the costs associated with it.

Why might a borrower who is planning on moving soon NOT want to refinance? a) The costs associated with refinancing might be higher than the amount saved in monthly payments. b) A new buyer could negotiate a lower sale price due to the refinance. c) A lender might raise rates, making the home harder to sell. d) The refinanced loan could be assumed by the buyer, giving the seller less leverage.

The Takeaway

You should now understand what people mean when they talk about conforming, non-conforming, conventional, and non-conventional loans. These terms will come up plenty when talking about loans, and now you have the knowledge to help your clients when they are confused about financing. In Chapter 1, you learned to: ✅ Understand the difference between conforming and non-conforming loans. ✅ Understand the difference between conventional and non-conventional loans. ✅ Understand how loans can be differently amortized. In the next chapter, we'll dig into some more detailed loan terms: fixed-rate and adjustable-rate. What fun!

The Takeaway

You'd be surprised at the number of people who have mortgages who don't know their interest rate or even whether their rate is adjustable or fixed. These things are complicated, but it's extremely important for a borrower to consider interest rates when taking out a mortgage. While you won't be helping clients choose a mortgage (their lender or mortgage broker will advise them on that), you can be a helpful resource on how mortgages work. In Chapter 2, you learned to: ✅ Understand how interest rates can be fixed or adjustable. ✅ Explain the phases of an adjustable-rate mortgage. Next, we go over some various loan types that you might run into in your life as an agent.

Facts of a feather d) wraparound mortgage

a form of secondary financing a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather b) bridge loan

a short-term loan taken out in anticipation of obtaining longer-term financing. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather d) interest-only loan

also called a straight loan. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather b) bridge loan

can be used to finance a home purchase before the buyer's previous home has sold. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather d) interest-only loan

contains a balloon payment at the end of the loan term. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather a) graduated-payment loan

has a low initial payment that increases over time. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan

Facts of a feather c) subprime loan

have higher fees and interest rates because of the perceived high risk of the loan a) purchase-money mortgage b) construction loan c) subprime loan d) wraparound mortgage

Facts of a feather c) blanket mortgage

have more than one collateral property as security. a) graduated-payment loan b) bridge loan c) blanket mortgage d) interest-only loan