USDA Loans & Ch 6A Nontraditional Financing Tools-Buydowns and ARMs

Graduated Payment Buydown The most common type of graduated payment buydown plan is often referred to as a 2-1 buydown. 2-1 buydowns and 3-2-1 buydowns are often incorporated with homes priced for first-time buyers. These buydowns allow purchasers to lower their payments early on, which allows them to purchase much more house than they could afford otherwise.

A ___________ ________ buydown is a plan where payment subsidies in the early years keep payments low. Payments increase each year until they're high enough to fully amortize the loan. & FHA rules are if a buydown is used, the buyer must now qualify at the note rate. The loan is usually structured so the subsidy lasts only two or three years.

Rural Development

A government agency under the Department of Agriculture that guarantees or makes loans to help buyers of homes and farms in rural areas or small towns. Formerly the Farmer's Home Administration (FmHA).

1% On a $100,000 loan, the borrower would pay an additional $1,000 for every point the lender charged.

A point is __% of the loan amount.

Regulation Z of the Truth in Lending Act Regulation Z requires: general brochure, CHARM be given to borrowers certain specific disclosures be made if relevant to the ARM program disclosure of the APR The disclosure of APR must be based on the initial rate plus the lender's margin, and should reflect a composite(combined) APR based on the lower rate for a certain number of years and the higher rate for the remaining years on the loan term.

ARM Disclosures Lenders offering residential financing, including ARMs, must comply with federal guidelines under what?

restrictions

ARM loans with loan-to-value ratios (LTVs) of 80%, 90%, and 95% are available. Loans with higher LTVs are often subject to ______________

No. If the rate changes more often than payments are received, negative amortization occurs. Caps keep loans from growing out of control.

ARMS Does the rate and payment have to adjust at the same time?

Higher interest rate Limited time to convert Conversion Cost fee For Example: A Fannie Mae convertible ARM program may be converted between the 13th and 60th month for a processing fee paid to the lender. The initial rate on the ARM loan is the same as for other Fannie Mae ARMs but, if converted, the fixed rate is 0.125% higher than the standard fixed rate at the time of conversion.

ARMs with a conversion option typically include a: • _______ interest rate: often both the initial and converted rate • _________ time to convert ex.between the first and fifth year • _____________ _____ fee

true so if you have an ARM

Adjustable Rate Mortgages can adjust up and down based on what the market is doing and within the same caps true or false

net proceeds

Although paying discount points to get a lower interest rate seems to benefit the buyer, they can also benefit the seller. often a seller will pay them to make the subject property more marketable and affordable for a buyer. However, having the seller pay the points as part of the negotiated purchase price lowers the seller's ___ ________ Who pays the points is open to negotiation,

No!

Are Buydowns & Arms considered conforming loans?

Yes

Are primary VA loans for veterans who were honorably discharged only?

True Although the majority of borrowers prefer the security of a fixed rate provided the rate is not too high, ARMs have maintained a place in the market despite comparatively low mortgage rates. Of course, as interest rates rise, so does ARM popularity.

Because ARMs shift the risk of interest rate fluctuations to the borrower, lenders normally charge a lower rate for an ARM than for a fixed rate loan. True or False

Anyone seeking more information about homeownership financing or any other USDA Rural Development program may visit http://www.rurdev.usda gov.

Best Practices If a buyer is eligible, or may be best suited for a government loan, you may have to shop around for an approved lender. It might help to ask your broker for a source, or you may explore the FHA, VA, or USDA websites to find approved lenders for your area. ➡️

Remember, an increase in tax payments may occur as well, adding to the monthly financial obligation.

Buydowns Best Practices: Even though smaller payments are due at the beginning of the loan term, they will continue to increase. Buyers must consider whether this may pose a problem down the road. Failure to consider this increase is one of the reasons for the rise in foreclosure rates, especially for new builds.

lender.

Calculating Permanent Buydowns: To accurately determine buydown rates, you should get a quote from the ______

2.5

Calculating Temporary Buydowns: To accurately determine temporary buydown rates, always have clients get a quote from the lender. As a rough estimate, 2-1 buydowns cost about ___ points.

Many ARMs now have conversion options that allow borrowers to convert to fixed rate loans, for a fee, at certain periods or points in the loan term. ARMs with conversion options often have higher interest rates than those without. Check the loan documents and disclosures, and ask about the lender's policies.

Can my ARM be converted to a fixed-rate loan? 3

deducted

Contributions by sellers or other interested parties are limited to a percentage of the property's sale price or appraised value, whichever is less. If contributions exceed Fannie Mae and Freddie Mac guidelines, the contribution amount must be __________ from the property's value or sale price before determining the maximum loan amount.

The lender must also give the borrower an example, based on a $10,000 loan, showing how the payments and loan balance are affected by changes.

Disclosures lender must give the borrower advance notice of any change in payment, interest rate, index, or loan balance at least 25 days in advance, but not more than 120, before a new payment level takes effect.

whichever occurs first. must explain: how the mortgage works the terms how it will be adjusted

Disclosures must be provided when: the loan application is made or before payment of any non-refundable fees, ___________ ______ ______

True

Discount points have traditionally been associated with FHA and VA loans, but points for conventional loans are becoming more common. True or false

Yes and the movement of interest rates or other factors in the financial markets do not affect it.

Does the lenders margin remain constant/fixed for the life of the loan?

6%. For this rule, remember that seller-paid contributions include any items normally paid by the buyer. Family contributions are also excluded.

FHA guidelines also impose limits on discounts, buydowns, and other forms of seller contributions. the FHA allows a maximum seller contribution of _% If the contribution is more than 6%, the FHA, like Fannie Mae and Freddie Mac, deducts the excess from the maximum loan amount.

C. The market because FHA just insures the loans, they don't make loans

FHA interest rates are set by а. federal regulations. b. the FHA. C. the market.

The U.S. Department of Housing and Urban Development HUD

FHA loans are government insured loans. VA loans are Government Gauranteed loans who insures FHA loans?

T Limits are placed on these items to prevent buyers from acquiring property they will not be able to afford in the future.

Fannie Mae and Freddie Mac guidelines limit discounts, buydowns, and other forms of seller contributions including finance costs such as prepaid interest, escrows for property taxes, hazard insurance, and mortgage insurance T or F

95% The LTV requirements are based on the potential risk of increasing payments when the interest rate is adjusted.

Fannie Mae and Freddie Mac have stricter LTV guidelines for ARMs than for fixed-rate loans. LTV ratios may not exceed __% for standard ARMs purchased by Fannie Mae and Freddie Mac.

96.5% The UFMIP does not figure into the LTV

For an FHA insured loan purchase price is $278,000 3.5% down: $8,340 UFMIP is financed into loan for $4,875 What is the LTV

Consumer Handbook on Adjustable Rate Mortgages, CHARM

General Brochure What's the name of the General Brochure booklet that's given to loan applicants, prepared by the Federal Reserve & Federal Home Loan Bank Board. & is required under Regulation Z of the Truth In Lending Act for residential ARM loans

sponsored Traditionally, this does not refer to involvement of the government in the secondary markets.

Government Financing is Real estate loans that are insured, guaranteed, or __________ by government programs on the federal level.

A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government

Grantees may provide an interest rate subsidy to make the payments more affordable. For example, a bank may provide a couple with a home loan with a five percent interest rate. The grantee may subsidize it so that the interest rate changes from five percent to three percent, thereby lowering the mortgage payment.

Yes

Home Equity Conversion Mortgage HECM is FHAs version of a reverse mortgage is it's formal name section 255?

Rate adjustments will be explained in detail in the loan papers and in the disclosures available from the lender.

How often will my interest rate change?

It means that the points can only increase up to 2 points each interval, and that the total points can only increase by 6 points from the start of the loan to the end of the loan

If you see a percentage point cap that's described as 2/6 what does this mean?

Fully Indexed Rate

Index + Margin =

Yes

Is a buydown a good way to get a buyer accustomed to a larger mortgage payment vs maybe the $700-$800 monthly rent they are used to?

Some ARMs have payment caps while others keep increases under control with interest rate caps. If there are payment caps, they're usually 7.5%-15% of the payment amount, which is equal to about a 1%-2% interest rate change.

Is there a limit to how much my payment can increase at any one time?

Most ARMs have interest rate caps. The most common annual interest rate caps are usually 1%-2% the most common life-of-the-loan caps are 5% and 6% and are set by Fannie Mae and Freddie Mac FHA caps are 1% annual and 5% life of loan for some programs and 2% annual and 6% life of loan for other programs. Refer the buyer to the lender for specifics.

Is there any limit to how much my interest rate can increase?

Yes & It's far easier to sell when the buyer's interest rate is lower.. When points are paid to reduce the buyer's interest rate, it's called a buydown. Many times, if the seller knows he is getting full price for his home or close to it, this incentive could influence whether or not the contract closes.

Is who pays the points open to negotiation?

11 years His points will cost him $3,000 ($150,000 × .02). He is saving $22 a month, so $3,000 ➗ 22 = 136.36 months. It will take him just over 11 years to recoup his $3,000 upfront discount points (136.36 ➗ 12 = 11.36)

Jake borrows $150,000 on a 30-year loan. Assuming no other bank fees, at an interest rate of 4.75%, he will owe his lender about $782 every month for 360 months to cover the principal and interest. If he brings the interest rate down to 4.5% by paying 2 points, his monthly payment will be about $760. How many years does Jake have to pay on that loan to recover his upfront payment?

Direct Endorser

Lender authorized to underwrite their FHA loan applications and is responsible for the entire loan process through closing

VA Automatic Endorser

Lender authorized to underwrite their VA loan applications and who is responsible for the entire mortgage process through closing.

Closing Costs & depending on the type of loan program, can be quite expensive. Make sure your buyers know how these costs affect how much money they need to close their loans and their monthly payments.

Lenders may charge other fees to make a loan, but they are not to lower the interest rate, what are these called?

Upfront Mortgage Insurance Premium UFMIP the initial MIP for FHA loans

MMIP Mutual Mortgage Insurance Plan MIP Mortgage Insurance Premium The fee charged for FHA mortgage insurance coverage. Initial premium can be financed, and there is a monthly premium. what does UFMIP stand for?

negative amortization

Many lenders refuse to make 90% or 95% ARM loans if there's a possibility of __________ ________________

property and the LTV Please consult the lender for complete rules as these vary by loan program.

Maximum contributions for Fannie Mae & Freddie Mac are based on the type of _______ and the ___.

D. Negative amortization does not occur with a temporary buydown since the increased rate is anticipated and accounted for, but any of these other situations could result in negative amortization.

Negative amortization can occur in each of these circumstances EXCEPT when A. interest rate adjustments occur more frequently than mortgage payment adjustments. B. the interest rate rises but payments are locked at a low amount due to payment caps. C. the loan balance grows from deferred interest. D. the borrower's temporary buydown expires and the interest rate rises.

subprime loans.

Non traditional financing tools that no longer exist: These loans were given to borrowers with less than pertect credit, or some other risk factor that did not allow them to quality for a conventional loan. & allowed the lender to charge an interest rate above what is typical for conventional mortgages.

no document no doc low document loan

Non traditional financing tools that no longer exist: a variation of the subprime loan that required no verification of income and were used when a borrower was too busy, or found it difficult, to provide income verification. The decision to fund the loan was based upon other merits like credit score, & occupation

Escrows Impounds

Prepaids are Pre-payable expenses the lender requires a borrower to set aside prior to closing like property taxes & insurance what's two other names for prepaids?

Because lower interest rate=lower payment & lower payment=easier to qualify because less monthly debt

Since with Buydowns you now have to qualify at the highest interest rate during your loan, how could you say that a buydown makes it "easier for a buyer to qualify"

A. A point is equal to 1% of the loan amount $80,000 × .06 = $4,800.

The Jones family is buying a home for $105,000 and it appraised for $102,000. On an $80,000 loan, six points is equal to A. $4.800. B. $4,896. C. $6.120. D. $6,300.

True & Any applicable guidelines or requirements of Fannie Mae, Freddie Mac, and the FHA and/or private mortgage insurers must also be followed

The lender has the option of increasing the borrower's interest rate or leaving it unchanged when the selected index rises, but if the index falls, a reduction in the borrower's rate is mandatory. True or False

B. The interest rate on an adjustable rate loan is found by adding the agreed upon margin to the current index value.

The margin is the difference between the A. APR and the cost-of-funds index (COFI). B. index value and the interest rate charged to the borrower. C. value of the home and the amount borrowed. D. initial interest rate and the current interest rate.

Acquisition Cost

The purchase price of a property, plus allowable buyer paid closing costs.

percentage point A point is one percent of the loan amount.

The term point is short for _______________ ______.

From the borrower's perspective, knowing which index is chosen is not as important as knowing whether it is one the lender can or cannot manipulate. ⭐️The index should be one that is determined and affected by market conditions, and is regularly listed in a major publication.

There are Several acceptable indexes published periodically that are easily available to lenders and borrowers. Three of them are the most commonly used indexes & you can find these in your docs notes under ARMS These indexes move in step with other short-term interest rate debt instruments. ➡️

appraised

USDA Rural Development Loans 100% Financing: up to the _________ value

640+ apply owner condition Requirements an acceptable credit history: preferably credit score 640+ Income Limits may apply: adequate to meet all obligations owner occupancy dwellings must be structurally sound, functionally adequate, and in good condition.

USDA Rural Development Loans Requirements an acceptable credit history: preferably credit score ____ Income Limits may _____: adequate to meet all obligations _______ occupancy dwellings must be structurally sound, functionally adequate, and in good __________

0% down, No Downpayment Required

USDA Rural Development Loans What is the downpayment?

6%

USDA Rural Development Loans seller paid closing cost up to __% allowed

Yes

USDA Rural Development Loans Can closing costs be financed into the loan?

financed into the loan paid by buyer paid by the seller gifted paid by a nonprofit organization

USDA Rural Development Loans Closing Costs can be: 5

No Can qualify for a loan amount up to a county-by-county loan limit based on their debt-to-income ratios.

USDA Rural Development Loans Is there a loan limit?

No

USDA Rural Development Loans Is there reserve requirements?

29% 41% Conventional 28% 36% FHA 31% 43% USDA 29% 41%

USDA Rural Development Loans What is the debt to income ratios?

Fees 1% up front guarantee fee .35% annual fee paid monthly

USDA Rural Development Loans what are the Fees?

Consumer Handbook on Adjustable Rate Mortgages

What does CHARM stand for?

Housing and Economic Recovery Act of 2008

What does HERA stand for?

Mutual Mortgage Insurance Plan Up Front Mortgage Insurance Premium Mortgage Insurance Premium

What does MMIP stand for what does UFMIP stand for what does MIP stand for

US Department of Agriculture

What does USDA stand for?

It means the interest rate will be reduced by 2% the first year, then 1% the second year then stay the higher interest rate for the life of the loan

What does a 2-1 buydown mean?

It means the interest rate will be reduced by 3% the first year, 2% the second year, 1% the third year then be at the higher interest rate for the rest of the life of the loan

What does a 3-2-1 buydown mean?

March This is called the Rate Adjustment Period

What is the common month of the year that lenders will adjust the ARM

To make sure the buyer doesn't acquire a property that they can't afford in the future

What is the point of limits on seller paid contributions and buydowns on behalf of the buyer?

This is not very likely. Interest rate caps, negative amortization caps, and re-amortization requirements protect both the borrower and lender. if interest rates rise sharply and rapidly, there's always a possibility for negative amortization. But with the changing nature of money markets, interest rates have not increased dramatically. They rise and fall, so the borrower's rate will increase at one interval and be reduced at another. If there's negative amortization at one point, when interest due exceeds interest paid, there's a good chance that soon afterward, index declines will result in accelerated amortization. This up and down pattern, though unpredictable, should continue through the life of the loan.

What is the probability of runaway negative amortization? 6

⭐️30-year fixed rate

What type of loan are USDA Rural Development Loans?

Be sure to know the initial ARM interest rates. Monitor local rates because they change regularly. The rates are usually published in the Business or Home section of the daily or Sunday newspaper At first, a buyer will be more concerned with the total rate, but as the home purchase gets closer, a buyer may be interested in more specific information. Refer the buyer to the lender for specifics.

What will my interest rate be?

Spread

What's another term for margin?

A 2-1 temporary buydown

What's would the name of a buydown be that temporarily reduces the interest rate for 2 years? For example a loan that starts off at 3% interest for the first 12 months then 4% interest for the next 12 months & then 5% interest for the remainder of the loan

True

When a buyer's interest rate is permanently lowered by a buydown, the lender will write that interest rate into the promissory note. Thus, the nominal rate/coupon rate stated in the note is actually the reduced interest rate. True or false

When interest rates are high & when buyers are having a hard time qualifying for a loan getting a lower interest rate getting a bigger house refinancing and paying off a loan sooner

When are alternative financing tools a good option? 5

At the time a loan is made Thereafter, the loan interest rate will rise and fall with the rates reported by that index.

When does the lender select the index?

True Financing tools are important elements of real estate finance that can help buyers achieve their goals. By starting out with a lower payment, a buyer can get a more expensive home now and grow into larger payments over time.

When interest rates are high or buyers can't qualify for traditional financing, nontraditional financing tools are often used to lower a buyer's monthly payment and/or down payment, or help them qualify in some other way. True or False

nominal rate note rate coupon rate

With a buydown: the lender is discounting the normal interest rate what's 3 terms for "normal interest rate"

Index + Margin For example If the current index value is 4.25% and the lender's margin is 2%, the current ARM interest rate will be 6.25%.

_____+ ______ = Adjustable Interest Rate Borrower Pays on the Loan

2-1 buydown For Example: The lender makes a 30-year loan for $170,000 at 6.75% interest rate. The builder agrees to a 2-1 buydown.

a graduated payment buydown where the payments are lower for only two years.

homebuyer assistance programs

a nontraditional financing program that helps borrowers qualify more easily, obtain a larger loan, or pay a reduced down payment. These types of loans are often referred to as

Floor Rate in most cases it's the initial interest rate that lenders will set as the floor rate because the initial rate is based on the index plus the margin so the lender can profit

a rate in ARMS that represents that you can't go below a certain rate. the opposite of a cap

Buydowns

are additional funds in the form of points paid to a lender at the beginning of a loan term to lower the interest rate and monthly payments.

Discount points also called discounts or points. By paying a one-time fee to a lender, a borrower gets a discount on the interest rate of the loan.

are paid to a lender to make up the difference between the current market interest rate and the rate given to a borrower on a note. increase a lender's yield on loans with lower-than-market interest rates, allowing the lender to give the borrower a loan with a lower interest rate.

margin example: home equity line of credit: lenders quote the interest rate as: prime rate plus/minus a certain percentage so w an ARM the prime rate serves as the index the additional percentage serves as the margin The lender adds a margin to the index to ensure sufficient income for administrative expenses and profit.

difference between the index value and the interest rate charged on an ARM.

USDA Rural Development Loans formerly called Farmer's Home Administration, FmHA. Note: not always are the properties that are eligible for these loans are rural in many cases, you'll find that properties in suburban areas actually qualify for a USDA loan actually typical suburban areas will most likely qualify for USDA loans

direct and government guaranteed loan programs that provide low-interest, no-down-payment loans to help eligible families living in rural communities and rural areas purchase existing or new homes. this direct loan program is geared toward low-income individuals.

Conversion Option usually within time frame like 5-7 years and with a small fee. But still even with the fee, it's still comes out cheaper than a full refinance

in an ARM means the borrower has the right to convert from an adjustable rate to a fixed rate mortgage.

occupy the property because owner-occupants are considered better credit risks than non-occupant borrowers.

in most cases where borrowers are seeking 90% or 95% ARMs, they'll be required to what?

Teaser Rates Initially, teaser rates were offered without caps, which eventually led to payment & portfolio shock. & are one of the reasons the movement toward payment caps was so strong. They also led the government to impose regulations on the disclosure of interest rates and the true costs of ARMs.

initial interest rates that are much lower than typical adjustable interest rates. designed to entice borrowers to accept ARMs because lenders see them as an opportunity to increase earnings and insulate themselves from fluctuations in interest rates. usually return to normal after the first adjustment period.

Prime rate The prime rate is rarely used for long-term home mortgages because, for these types of loans, lenders like to choose an index that is more responsive to actual economic fluctuations and takes into consideration other risk factors.

is the lowest rate banks charge their best commercial customers.

Negative Amortization Negative Amortization would occur only if interest rates increased several percent a year, for many years, without relief. & is most likely to occur when there are frequent rate changes: like every six months and infrequent payment adjustments: like every three years

is when a loan balance increases, rather than decreases, because payments don't cover interest on the loan.

Caps Today, most ARMs have some type of cap; this is a result of uniform ARM lending practices combined with a period of self-regulation

limits on interest rate increases, number of percentage points an interest rate can increase, and negative amortization

2% to 3%

margins for ARMs usually vary from _% to _%

nontraditional mortgage

part of HERA defines a _______________ _________ as "anything other than a 30-year fixed rate mortgage."

buydowns involves discounts and the payment of points to the lender.

payments to the lender at the beginning of the loan to lower interest rate or a lower monthly payment or to defer higher interest rates or higher payments until later in the loan.

index Once the initial interest rate for the ARM loan is set, it is tied to the widely recognized, published index. future interest rate adjustments for ARM loans are based on the up and down movement of the index.

statistical report that indicates the approximate cost of money.

rate adjustment period This interval can range from monthly to ten years; however, the most common rate adjustment period is every year. After checking movement in the selected index, the lender will notify the borrower, in writing, of any increase or decrease in the rate.

the interval at which a borrower's interest rate changes with ARMs.

Annual Percentage Rate APR

the relationship between the cost of borrowing money and the total amount financed, represented as a percentage.

adjustable rate mortgage ARM If rates climb, payments go up; if they decline, payments go down. popular alternative financing tools bc they can help borrowers qualify more easily for a home loan qualify for a larger home loan

way to decrease the initial interest rate on a loan thus decreasing monthly payments the borrower assumes part of the lenders interest rate risk & allows the lender to raise or lower the interest rate as the cost of money changes.

The Housing and Economic Recovery Act of 2008 HERA

what federal act was passed for several reasons, including the modernization of FHA, foreclosure prevention, and the enhancement of consumer protection.

temporary buydown When interest rates are high, temporary buydowns are a popular way to reduce payments early in the loan. Many buyers feel they can grow into a larger payment, but need time to get established.

when money is paid to a lender to reduce the interest rate and payments early in a loan, with both rising later.

permanent buydown

when points are paid to a lender to reduce the interest rate and loan payments for the entire life of the loan.

True Points can be combined with closing costs as fees charged to the buyer.

• Points are computed only on the loan amount, not the sale price. True or False