Unit 13: Types of Mortgages and Sources of Financing
EXAMPLE 1: A potential buyer's monthly housing expenses total $1,470, and monthly gross income is $5,880. What is the buyer's housing expense ratio?
$1,470 monthly housing expense ÷ $5,880 monthly gross income = .25 or 25%
. Loans for more than 80% (20% down) LTV require borrowers to buy
private mortgage insurance (PMI).
EXAMPLE: The interest portion of the first month's mortgage payment is $770, the interest rate is 10.5%, and the LTV is 80%. Calculate the sale price of the property.
$770 × 12 months = $9,240 interest per annum $9,240 ÷ 10.5% = $9,240 ÷ .105 = $88,000 mortgage amount $88,000 ÷ 80% or .80 LTV = $110,000 sale price
Mortgage loans can be grouped into two general categories:
1) conventional loans, and (2) nonconventional loans.
Thus, a $60,000 mortgage at 10% simply means that the interest rate is
10% per year. To find the monthly interest actually paid, first determine what 10% of $60,000 will amount to for the entire year. Dividing this amount by 12 (the number of months) gives the amount of interest for one month. When the principal amount changes, the calculation must be done over again, based on the new principal balance. The new balance must be treated as though it were to be applied to the entire 12 months.
the Funding fee is XXX of the loan amount, with no down payment for first-time users.
2.15%
Lenders typically require a XXX down payment for conventional loans.
20%
Assume the borrower has an ARM tied to the one-year T-bill rate with a margin of 2.25. If the T-bill rate is 4%, the calculated interest rate is:
4% index + 2.25% margin = 6.25% calculated interest rate
The veteran borrower's total monthly obligations may not exceed XXX of the total monthly gross income
41%
Purchase Money Mortgage
A XXX is a mortgage given as part of the buyer's consideration for the purchase of real property. The XXX is delivered when the deed is transferred as a simultaneous part of the transaction.
conventional loan
A XXX is one that is not insured or guaranteed by a government agency. The lender assumes the full risk of default in a XXX.
Package Mortgage
A XXX loan includes both real and personal property as security for the debt. A buyer uses a XXX, for example, when purchasing a restaurant complete with cooking equipment and other personal property that serve as a part of the collateral for the debt.
Biweekly Mortgage
A XXX loan is amortized the same way as other loans with monthly payments, except the borrower makes a payment every two weeks. The amount paid is equal to one-half the normal monthly payment. Because there are 52 weeks in the year, the borrower makes 26 XXX payments. Therefore, the borrower makes the equivalent of an extra month's payment each year (26 half-size payments equal 13 full-month payments instead of 12). This saves the borrower considerable interest, and the loan is paid off sooner.
Credit Scores
A credit score is a number that assists lenders with predicting whether a borrower is likely to make timely credit payments. Lenders use credit scores to measure potential risk of making a loan. Higher credit scores mean that an applicant is more likely to be approved and pay a lower interest rate on new credit.
balloon payment
A single large final payment, including accrued interest and all unpaid principal, then becomes due on the loan maturity date
Rate Caps
ARMs typically include XXX to limit how much the interest rate may change. A periodic XXX limits the amount the rate may increase at any one time. For example, the interest rate may be capped to not increase more than 2% during an adjustment period. ARMs typically also cap the total amount the interest rate may increase over the life of the loan. For example, the loan might have a life-time cap or ceiling of 6% over the life of the loan.
What are The primary components of adjustable-rate mortgages a
Adjustable-Rate Mortgage Index Margin Calculated Interest Rate adjustment period Rate Caps Payment Cap Teaser Rate
Adjustable-Rate Mortgage
An XXX is a loan characterized by a fluctuating interest rate over the term of the loan. The XXX is originated at the initial interest rate. The rate can then increase or decrease, based on an objective economic indicator called an index. As the index changes, the interest rate on the loan changes at preset intervals.
Qualifying a buyer involves two separate but important processes:
Determining the potential buyer's real property needs (housing objectives) Determining the potential buyer's economic capability to satisfy those needs (financial abilities) Discussions of the following subjects and procedures are designed to assist licensees in reaching decisions in these two areas.
Describe an Amortized Mortgage
Each monthly payment includes both interest and principal. Although the borrower pays the same amount each month, on a fixed-rate mortgage, the portion used to pay interest decreases each month, while the portion used to repay principal increases each month.
Qualifying Ratios
FHA lenders use gross monthly income to calculate two qualifying ratios for loan applicants. The housing expense ratio (HER) is calculated by taking monthly housing expenses for principal, interest, property taxes, and hazard insurance (PITI) and the monthly mortgage insurance premium (MIP) and dividing by the applicant's monthly gross income.
Lending Source
FHA loans are made by FHA-approved lenders. The FHA does not make loans to borrowers. The FHA does not process loans or build houses.
Prepayment
Fixed-rate conventional mortgages contain a prepayment clause that allows borrowers to prepay the mortgage principal.
Assumption
Fixed-rate conventional mortgages typically contain a due-on-sale clause, meaning that they are not assumable.
XXX are secured by the borrower's residence. The original mortgage remains in place. The home equity is usually a second mortgage (junior to the original mortgage).
Home equity loans
Home Equity Conversion Mortgage (HERM) or Reverse Mortgage
Homeowners age 62 and older who have paid off their mortgage or have only a small mortgage balance remaining are eligible to participate in HUD's XXX program. The only XXX insured by the U.S. Federal Government is called a XXX, and is only available through an FHA approved lender.
Home Equity Loan
Homeowners use XXX to finance consumer purchases; consolidate existing credit card debt; and pay for college tuition, medical expenses, or home improvements. Because the interest on most XXX is tax deductible, they are more popular than other types of consumer credit.
Index
Lenders legally are allowed to link the interest rate of an ARM with any recognized XXX (for example, U.S. treasury securities). The XXX moves up and down with fluctuations in the nation's economy. The XXX must not be controlled by the lender, and it must be verifiable by the borrower.
Constant (Level) Monthly Payment
Mortgages used to purchase residential property usually call for regular, equal payments that include both interest payments and payments on the unpaid balance of the debt (principal). This type of mortgage is called the XXX or, more commonly, a fixed-rate amortized mortgage, because the regular, periodic payments remain the same. However, the amount of the payment that goes for interest gradually decreases, and the amount assigned to amortizing the debt (principal) gradually increases.
explain-and-request technique
One proven technique for economic qualification. After a brief summary of available financial options, a licensee explains the need to ask the prospective buyer some general questions and then requests permission to ask the questions.
what are the Qualifications for a VA Mortgage Loan
Only veterans, unremarried surviving spouses of veterans, and active military personnel may apply for a VA loan.
Interest Rate
Private lenders make conventional mortgage loans. XXX for conventional mortgages reflect market conditions and are negotiated between the lender and the borrower.
Ability to Pay Debt
Prospective borrowers must provide information to lenders about their present employment, financial history, and present obligations. In addition, federal regulations require lenders to obtain documented proof, such as tax returns and financial statements. Lenders use this information to make a decision about loan approval or rejection. The lender is interested in the borrower's debt-paying ability and the risk involved. The quantity of the borrower's income is the amount earned. However, amount alone is not sufficient, because the probable duration of income is also important when the debt obligation may extend up to 30 years. So, the quality of the income is also evaluated—the length of time of the applicant's present employment and probable continuation of that employment. Lenders also evaluate demands on a prospective borrower's income; that is, income taxes, installment credit amounts, proposed mortgage payments, and property taxes.
A XXX is used to fill a gap between the buyer's down payment and a new first mortgage or an assumed mortgage. Title passes to the buyer, and the seller retains a vendor's lien right as security for the debt.
Purchase Money Mortgage
The reasons for qualifying potential buyers fall into four areas:
Saves time Increases confidence in sales associate Fits buyers to properties Retains buyers
Teaser Rate
Sometimes, a lender will offer borrowers an initial below-market interest rate or teaser. The low rate is usually offered for the first year of the loan, with a sharp annual rate increase at the next rate-adjustment period to bring the loan in line with the agreed-upon index.
what are the Eligibility Requirements for a VA Mortgage Loan
Specific eligibility requirements are based on the period of active duty or the period of continuous service, as applicable. Real estate licensees should rely on a VA lender to determine an applicant's eligibility for a VA loan.
EXAMPLE: A home for sale has a mortgage of $30,000 at 8% interest. Your buyer wants to know how much of the $220.13 monthly payment will go for interest and how much for principal during the first three months.
Step 1: $30,000 unpaid balance × .08 rate = $2,400 interest ÷ 12 months= $200 first month's interest Step 2: $220.13 monthly payment - $200 interest = $20.13 payment on principal So the first month's interest was $200, and the principal reduction in month one was $20.13. However, the buyer wanted to know about the first three months, so take credit for the $20.13 paid on the principal by subtracting that amount from the $30,000. Step 3: $30,000 - $20.13 principal paid first month = 29,979.87 new principal balance
Describe 3 steps in Amortizing a Mortgage
Step 1: principal balance × annual interest ÷ 12 = first month's interest Step 2: monthly mortgage payment - first month's interest = payment on principal Step 3: beginning principal balance - principal payment = new principal balance
Now repeat the previous steps to determine the answers for the second and third months, beginning with:
Step 4: $29,979.87 new principal balance × .08 rate = $2,398.3896 ÷ 12 months = $199.87 interest Repeat steps 2 and 3 to determine the unpaid balance remaining after payment of the second month's principal. Begin with this new principal balance at the end of the second month and repeat steps 1, 2, and 3 to find the amount paid for interest and principal during the third month. Thus, the answer to your buyer's question is: First month: principal = $20.13; interest = $200.00 Second month: principal = $20.26; interest = $199.87 Third month: principal = $20.40; interest = $199.73
Purpose of TILA and Regulation Z
TILA is intended to inform borrowers of the true cost of obtaining a loan. The law ensures that credit terms are disclosed in a meaningful and uniform way so consumers can compare credit terms more readily and knowledgeably. Before its enactment, consumers were faced with various credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format. Under TILA, all creditors must use the same credit terminology and expressions of rates.
Purpose of the FHA
The National Housing Act of 1934 created the Federal Housing Administration (FHA). A major focus of FHA is to stimulate homeownership. The FHA is a government agency within the Department of Housing and Urban Development (HUD). The FHA functions as an insurance company, insuring mortgage loans made by approved lenders.
VA Loan Guarantee Program
The Servicemen's Readjustment Act (GI Bill of Rights) was passed to aid returning World War II veterans. This act and subsequent acts gave the Department of Veterans Affairs (VA) the authority to partially guarantee mortgage loans made to veterans by private lenders. The partial guarantee covers the top portion of the loan. The VA issues rules and regulations that set the qualifications, limitations, and conditions under which a loan may be guaranteed. The VA loan guarantee differs from the FHA program that insures loans (see below).
VA loan guarantee or the maximum entitlement
The VA establishes loan guarantee limits. The 2014 XXX is $104,250. A veteran's XXX is the maximum amount the government guarantees the lender will be paid in the event the borrower defaults.
VA Funding Fee
The VA requires a XXX or user's fee to help the government defray the cost of foreclosures. Currently, the XXX is 2.15% of the loan amount, with no down payment for first-time users.
Margin
The XXX (or spread) is the percentage added to the index. The XXX represents the lender's cost of doing business plus profit. The XXX percentage remains constant over the life of the loan.
annual mortgage insurance premium (MIP).
The XXX P is paid monthly (annual premium divided by 12) as part of the monthly mortgage payment. The XXX must be included in the proposed monthly expenses when calculating the buyer's qualifying ratios. The monthly XXX is paid for the life of the FHA loan when the borrower receives maximum financing. UFMIP and XXX go into an FHA fund for repaying lenders if borrowers default.
Calculated Interest Rate
The XXX is arrived at by adding the index to the lender's margin: index + margin = XXX
Interest Rate
The XXX on FHA mortgages is not set by the FHA or HUD. The XXX is allowed to fluctuate with the market and is negotiable between the lender and the borrower.
what are the loan limits for a VA Mortgage Loan
The amount that a veteran may borrow depends on the value of the real estate. The loan may not exceed the amount stated in the certificate of reasonable value (CRV). The CRV is based on the property value estimated by a VA-approved appraiser. The other limiting factor is the veteran's income and ability to make the monthly mortgage payments.
Appraisal
The home must be appraised by an FHA-approved appraiser. HUD requires the appraiser to confirm the property meets HUD's minimum property standards. However, the FHA does not warrant the condition of the property. The FHA encourages buyers to have a home inspection conducted.
Adjustment Period
The interest rate on an ARM adjusts periodically based on the XXX established in the mortgage loan documents. For example, the interest rate may adjust annually or for a longer term, such as three years or seven years.
To calculate how much money is to be regarded as interest and how much is to be paid on the principal, three facts are needed:
The outstanding amount of the debt (principal) The rate of interest The amount of the payment per period (usually monthly)
Home Equity Conversion Mortgage (HERM) or Reverse Mortgage
The program allows homeowners to borrow against the equity in their homes. Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. The size of XXX is determined by the borrower's age, the interest rate, and the home's value.
Lenders generally use five major qualifying guidelines in borrower qualification and risk analysis:
The quantity and quality of the borrower's income (Does the borrower have the ability to repay the debt?) Other assets of value (What is the proposed mortgagor's net worth, and what is the ratio of total liabilities to total assets?) Past credit history (Is the borrower willing to repay the debt?) Loan-to-value ratio (How much equity is the borrower investing?) The borrower's credit score (In today's marketplace, an applicant's credit score is an important component of all loan decisions. The strength of the credit score determines the interest rate offered to the applicant and also dictates the amount of supporting documentation required for the loan application.) Loan underwriting (borrower qualification and property qualification) should not be confused with buyer qualification, which has to do with what the buyer wants and can afford. The loan underwriting process begins with the FNMA/FHLMC Uniform Residential Loan Application for all one-family to four-family homes.
Willingness to Repay Debt
The third area of concern is the applicant's XXX, based on credit history, obtainable from a local credit bureau. The existing national network of credit bureaus permits a comparatively rapid check of buyers, even of new residents from other states.
www.annualcreditreport.com
This is the only site that participates with the government program, so don't be fooled by "free credit report" gimmicks from other sites. You can download and print your credit report online or request your credit report by mail. You can also order by telephone at 877-322-8228.
Amortized Mortgage
Today, the most popular loan payment plan is the fully amortized, level-payment plan mortgage. Webster's defines the word XXX as meaning to extinguish or deaden. An XXX mortgage is gradually and systematically killed or extinguished by equal regular periodic payments.
True/False
True - Conventional loans usually have a lower loan-to-value ratio (LTV) than either FHA or VA loans. In other words, conventional loans require a larger down payment (equity) as compared with FHA and VA.
True/False
True - Lenders may charge discount points on VA guaranteed loans. The veteran buyer or the seller may pay the points.
True or False
True - On a 30-year fixed-rate mortgage, the payments during the first few years are used almost entirely to pay interest; payments during the last few years are almost entirely principal repayment.
Prepayment
VA mortgage loans do not contain a XXX penalty clause. Therefore, veterans may prepay all or a portion of the mortgage loan ahead of schedule without penalty.
Partially Amortized Mortgage
With a XXX, the buyer makes regular payments smaller than what is required to completely pay off the loan by its date of termination. In other words, the payments do not fully amortize the loan. In Florida, a XXX must be clearly identified as such on the face of the mortgage, with the amount of the final balloon payment disclosed.
private mortgage insurance (PMI)
XXX insures that portion of the mortgage loan that exceeds the 80% of value. Conventional loans are available for 90% or 95% LTV if the borrower buys XXX insurance.
Nonconventional loans
XXX typically require a smaller down payment compared with conventional loans, because with XXX, the government provides some risk protection to the lender.
The total obligations ratio (TOR)
a measure of a borrower's total monthly installment debt divided by monthly gross income. The XXX includes monthly expenses found on the borrower's credit report, such as credit card payments, auto payments, student loan payments, and child support payments, in addition to the PITI. To qualify for a conventional mortgage, the borrower's XXX must not exceed 36%.
A veteran begins by applying to the VA for a
certificate of eligibility.
Mortgage lenders use income ratios to qualify potential borrowers. For a lender to be able to sell mortgages in the secondary market (described later in this chapter), the mortgages must meet
designated expense/income ratio requirements.
VA loans are made by VA-approved lenders. However, the VA does have the power to make
direct loans to veterans in areas where VA loans are not available. The VA loan program may be used to purchase, refinance, or construct one to four-unit properties provided the veteran resides in one of the units. The maximum loan term is 30 years. The interest rate on VA loans varies based on market conditions and is negotiated between the borrower and the lender.
Truth in Lending Act and Regulation (TILA)
is Title 1 of the Consumer Credit Protection Act. Most of the requirements imposed by TILA are contained in Federal Regulation Z; therefore, the terms Truth in Lending Act and Regulation Z are often used interchangeably. The law became effective in 1969 and has been amended as recently as 2009. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau, consolidating most federal consumer financial protection authority under a single bureau. The Consumer Financial Protection Bureau supervises banks and credit unions and also enforces federal consumer financial laws, including the Truth in Lending Act.
The Fair and Accurate Credit Transaction Act (FACT Act)
makes it possible for consumers to monitor their credit reports at no cost. The government allows consumers to request a free copy of their credit report every 12 months from each of the three credit bureaus—Equifax, Experian, and TransUnion. Consumers can request all three reports at once or spread out their requests over the 12-month period.
Funding fee expenses may be added to the
maximum loan amount and financed over the life of the loan. If a veteran has a service-connected disability, the funding fee is waived. VA loans do not require mortgage insurance premiums (MIP).
how is the housing expense ratio (HER) calculated
monthly housing expenses (PITI and MIP) ÷ monthly gross income
Conventional lenders use gross
monthly income to calculate qualifying ratios for borrowers. Lenders also want to know what percentage of total monthly income is already obligated to pay other debt.
The TOR includes monthly expenses found
on the borrower's credit report, such as credit card payments, auto payments, student loan payments, and child support payments, in addition to the PITI. To qualify for a conventional mortgage, the borrower's TOR must not exceed 36%.
The partial guarantee covers the top portion of the loan. The VA issues rules and regulations that
set the qualifications, limitations, and conditions under which a loan may be guaranteed. The VA loan guarantee differs from the FHA program that insures loans
certificate of eligibility.
states the amount of entitlement available to the veteran borrower. The VA loan guarantee program uses a scale that establishes each veteran's entitlement based on the loan amount. A veteran who has used the entitlement in the past may only now be eligible for a portion of the entitlement. The unused portion is available to the veteran borrower up to the maximum guarantee. When a VA loan is paid off, the veteran's maximum entitlement is reinstated.
Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as
the borrower lives in the home. Lenders recover the principal and interest when the home is sold. The remaining value of the home goes to the homeowner or to the homeowner's survivors. If the sale proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from the borrower to provide this coverage.
how is the total obligations ratio (TOR) calculated
total monthly obligations ÷ monthly gross income
The Servicemen's Readjustment Act (GI Bill of Rights)
was passed to aid returning World War II veterans.This act and subsequent acts gave the Department of Veterans Affairs (VA) the authority to partially guarantee mortgage loans made to veterans by private lenders.
Negative amortization occurs
when the mortgage payments are not large enough to cover the interest expense. The result is the unpaid principal balance of the mortgage loan increases.
EXAMPLE 2: The buyer's total monthly obligations are $2,058, and the buyer's monthly gross income is $5,880. What is the buyer's total obligations ratio (TOR)?
$2,058 total monthly obligations ÷ $5,880 monthly gross income = .35 or 35% TOR
Payment Cap
A XXX limits the amount the monthly payments can increase during any year. If interest rates rise sharply but the payments do not because of a XXX, the unpaid interest is added to the loan balance.
Down Payment
A major benefit of FHA-insured loans is that the down payment is much smaller than the amount required for conventional mortgage loans. A borrower can obtain an FHA-insured loan with a down payment as low as 3.5% of the purchase price or the appraised value, whichever is less. FHA refers to the required down payment as the minimum cash investment. Closing costs may not be used to meet the minimum 3.5% down payment requirement. Borrowers must have a good credit history to qualify for maximum financing.
Assumption
Because they do not have due-on-sale clauses, VA loans are assumable (even by nonveterans). VA loans made prior to March 1, 1988, are assumable without a credit check of the new mortgagor. However, both seller and buyer will be liable in case of default, unless the buyer qualifies and completes all substitution documents. For VA loans made on or after March 1, 1988, the buyer must qualify. The buyer must pay an XXX or transfer fee to the lender plus an XXX fee to the VA. The seller is then released from liability for the VA loan.
Describe how a Blanket mortgages works
Blanket mortgages cover a number of parcels, usually building lots. The developer uses proceeds from the sale of individual lots to pay off the blanket mortgage. A partial release clause commonly used in blanket mortgages provides for the release of individual parcels from the blanket mortgage upon payment of a specified amount. The partial release clause stipulates the conditions under which the mortgagee will grant a release of lots, free and clear of the mortgage.
Insurance Premium - up-front mortgage insurance premium (UFMIP)
Borrowers are charged a one-time mortgage insurance fee at closing. This fee is called the XXX. The percentage of the XXX is based on the type (new or refinance) and term (15-year or 30-year) of the mortgage. The XXX is paid at closing and can be financed into the mortgage amount.
Land Development Loans
Developers commonly purchase land for development by securing seller financing. The developer usually requests that the seller agree to a subordination clause. This arrangement allows the developer to secure a construction loan from a traditional lending institution.
Loan Insurance
FHA loans are a type of nonconventional loan because they are insured by the FHA up to certain limits. The FHA insures mortgage loans to protect lenders in the event that borrowers default. The cost of the mortgage insurance is passed on to the borrower.
Assumption
FHA mortgage loans do not have a due-on-sale clause in the mortgage. The FHA requires complete qualification of the buyer assuming the loan. All assumed loans (and new FHA loans) are for owner-occupied use only (no investor loans). The lender must release the original mortgagor from liability if the assuming mortgagor is found creditworthy and executes an agreement to assume and pay the mortgage debt. By law, FHA loans cannot charge prepayment penalties; the loan may be paid off early without penalty.
Loan Limit
FHA sets limits on the amount that can be borrowed. The limits vary significantly, depending on the average cost of housing in different regions of the country. For example, the maximum FHA loan for a one unit residence is greater in Fort Lauderdale and Miami than in Gainesville or Tallahassee, Florida, because the average cost of housing is greater in the Fort Lauderdale and Miami markets. Lenders make FHA-insured loans in even $50 increments.
Discount Points
FHA-approved lenders may charge discount points on FHA-insured mortgage loans. Discount points may be paid by either the seller or the buyer.
Sufficient Security for Debt
The second area of concern in analyzing a loan application is the total value of the mortgaged property plus other assets belonging to the applicant. Other real estate, savings accounts, stocks, bonds, and equity in personal property are examples of assets that could act as sources of funds for mortgage payments if the applicant's income is interrupted.
True/False
True - The VA does not set loan limits
provide examples of a explain-and-request technique
Work with reasonably general questions: "Have you a fairly good idea of how much you plan to invest as a down payment?" "Have you thought about the approximate amount you would feel comfortable with as a monthly mortgage payment?" Amounts the buyer provides may or may not be realistic. However, the buyer responses will confirm such information or bring to the surface any misconceptions about the market value of real estate and how much home the buyer can afford
The FHA insures mortgages for various types of properties. Common FHA loan programs include
a mortgage program for condominium units and an adjustable rate loan program. Section 203(b) is the most popular home mortgage program of the National Housing Act. Section 203(b) fixed-rate mortgage loans require a small down payment for the purchase or construction of one-family to four-family residences.
In addition to the UFMIP, the borrower is also charged an
annual mortgage insurance premium (MIP).
FICO® scores
are the most widely used credit scores. Credit scores are based on information found in a consumer's credit report. Scores reflect a consumer's payment history, amount owed, how much available credit is being used, length of credit history, and whether the consumer has recently applied for or opened new credit accounts. XXX range from 300 to 850. XXX above 700 are a sign of good financial health. XXX below 600 indicate high risk to lenders and could result in denial of a credit application. Lenders buy XXX from three national credit reporting agencies.
Calculation of The total obligations ratio (TOR)
total monthly obligations ÷ monthly gross income = TOR
To qualify loan applicants, the VA uses a XXX and a table of residual incomes calculated for different regions in the United States
total obligations ratio (TOR)