Ch. 11 - Conventional Mortgage Loans

What is the required down payment if the purchase price is $500,000 and the lender will approve a loan-to-value ratio of 80%?

$100,000

You are pre-qualifying a buyer for a conventional loan on a house with the purchase price of $160,000. She states she does not want to pay PMI on the loan. In that case, what is the maximum loan amount she can receive (assuming no lender-paid PMI)?

$128,000

Seller Kathy accepts buyer Gary's offer of $200,000 to buy her home. The appraisal on the property comes in at $206,000. If the lender requires an LTV of 80%, how much is the lender Louis willing to lend?

$160,000 - 200,000 x .80

Lender Louis is willing to lend Kathy $160,000 on the sale price of $200,000. Kathy needs how much for a down payment to buy this house?

$40,000

If the fee due at loan closing is $558, how much will be added to the borrower's monthly mortgage payment?

$46.50 - $46.50 ($558.00 ÷ 12 = $46.50)

If the sale price of a home is $100,000 on a 90% LTV 30-year fixed mortgage, calculate the PMI using the sample rate card. Use the Fannie Mae/Freddie Mac required 25% coverage at a rate of 0.62%. What is the fee due at loan closing?

$558 - $558 (0.0062 rate card factor x $90,000)

If the sale price of a home is $100,000 on a 90% LTV 30-year fixed mortgage, calculate the PMI using the sample rate card. Use the Fannie Mae/Freddie Mac required 25% coverage at a rate of 0.62%. What is the loan amount?

$90,000 - $90,000 (90% LTV)

Fannie Mae and Freddie Mac require mortgage insurance on home loans with less than what percentage down?

20%

For lender LuAnn to meet the conforming loan standards of Fannie Mae/Freddie Mac, the loans she submits need to meet which of the following qualifying ratios? Select all correct responses.

28% total housing expense ratio / 36% total debt-to-income ratio wrong answers: 80% loan-to-value ratio / 80% combined loan-to-value ratio

$90,000 75% First Mortgage (primary lender)$18,000 15% Second Mortgage (from seller)+ $12,000 10% Down Payment (from borrower)$120,000 100% Total Sales Price For a second financing for a $120,000 home, what is the loan-to-value (LTV)?

75%

A borrower offers to purchase a home for $120,000. His first mortgage amount is $90,000 and the seller is providing a second mortgage of 15% of the sale price. The borrower provides the balance as a cash down payment. What are the LTV and CLTV?

75% / 90%

By law, lenders must cancel PMI when the loan-to-value reaches what percent of the property's original value?

78%

The _________ conventional loan has been the standard conventional loan for many years. With this type of loan, the buyer makes a 20% down payment and obtains a 30-year, fixed-rate conventional loan for the balance of the purchase price.

80%

A buyer can make a maximum cash down payment of $35,000. The sale price of the property is $170,000, so the buyer wants to borrow $130,000. The property was appraised at $160,000, and the lender requires an 80% loan-to-value ratio. What is the loan-to-value ratio (LTV) for this transaction?

81%

A buyer is paying $200,000 for a house. He makes a $30,000 down payment, gets a first mortgage for $160,000, and a second mortgage to cover the balance. What is his CLTV?

85%

$90,000 75% First Mortgage (primary lender)$18,000 15% Second Mortgage (from seller)+ $12,000 10% Down Payment (from borrower)$120,000 100% Total Sales Price For a second financing for a $120,000 home, what is the combined loan-to-value (CLTV)?

90%

All of the following statements would apply to a lender's explanation of a conforming loan, except for

A conforming loan is the same as a conventional loan. - A conforming loan is not the same as a conventional loan. Most conventional loans are conforming; however, conventional loans may be conforming or nonconforming loans. Conventional loans are typically fully amortizing, have a fixed-rate, and are long-term; whereas, conforming loans meet Fannie Mae/Freddie Mac standards and therefore can be sold on the secondary market. Among the loan types FNMA or Freddie Mac purchases in the secondary market is an adjustable-rate mortgage with terms ranging from eight to 30 years with a maximum loan-to-value of 90% for owner-occupied home loans.

___________ meet Fannie Mae/Freddie Mac standards and therefore can be sold on the secondary market. Conforming conventional financing has traditionally used the qualifying guidelines of a 28% total housing expense ratio and a 36% total debt-to-income ratio. A borrower must typically qualify under both ratios. Nonconforming loans do not meet these standards and therefore cannot be sold to Fannie Mae or Freddie Mac.

Conforming loans

A loan made by an institutional lender or a private party with real estate as security for the loan. The government neither guarantees nor insures conventional loans.

Conventional Loan

___________ are not insured or guaranteed by a government agency. Traditional conventional loans are long-term, fully amortizing, and have a fixed-rate. Conventional loans may be for 15 or 30 years, conforming or nonconforming. A 15-year loan retires sooner and saves interest but requires higher payments.

Conventional loans

Potential borrower Nicky has asked lender Victor to describe the features of a TRADITIONAL conventional mortgage loan. Select a feature that should be included in Victor's description.

Fixed-rate wrong answers: Adjustable-rate / Partially amortizing / Short-term

Any mortgage with a lower lien position than another.

Junior Mortgage

The order in which liens are paid off out of the proceeds of a foreclosure sale.

Lien Position

The amount of money borrowed, compared to the value (or price) of the property.

Loan-To-Value Ratio (LTV)

Each of these borrowers is getting a conventional loan. Who will NOT be required to pay PMI?

Lori, who is borrowing $150,000 to purchase a house for $200,000

Wyatt takes out an 80% conventional loan, and also gets a 10% home equity line of credit at the same time, for a combined loan-to-value of 90%. Will Wyatt be required to purchase private mortgage insurance?

No - Only the loan-to-value ratio of the first mortgage is considered for PMI, so a borrower with a higher CLTV would not have to pay PMI if the LTV is 80% or less.

Buyer Teresa takes out a conventional loan with an 80% LTV and also gets a home equity line of credit with a 10% LTV at the same time. Will Teresa be required to purchase private mortgage insurance for a conventional loan that requires an LTV of 80%?

No - Only the loan-to-value ratio of the first mortgage is considered for PMI. A borrower with a higher CLTV would not have to pay PMI if the LTV on the first loan is 80% or less.

there are disadvantages to 15-year mortgages for borrowers:

Payments are higher. Higher payments consume financial resources that might be invested in other ways and earn a higher return than the interest rate paid on the mortgage. The borrower's income tax deduction declines more quickly because less interest is paid each year as the principal is paid sooner.

Insurance offered by private companies to insure a lender against a borrower's default on a loan.

Private Mortgage Insurance (PMI)

When a buyer borrows money from another source in addition to the primary lender to pay for part of the purchase price or closing costs.

Secondary Financing

___________ is when a buyer borrows money from another source to pay part of the purchase price or closing costs. A secondary financing strategy that a borrower can use to eliminate PMI is to obtain and use a second mortgage.

Secondary financing

. A secondary financing strategy that a borrower can use to eliminate PMI is to obtain and use a second mortgage. For example: A home costs $300,000, the buyer obtains a first mortgage for $240,000 and makes a $30,000 down payment. The buyer also obtains a second mortgage for $30,000. This eliminates the need to pay PMI because the LTV ratio of the first mortgage is 80%. Understand, however, the buyer now has a second mortgage that will almost certainly carry a higher interest rate than your first mortgage.

True

A fully amortizing loan is one for which the total payments over the life of a loan pay off the entire balance of principal and interest due at the end of the term.

True

Annually the Federal Housing Finance Agency (FHFA) adjusts the Fannie Mae and Freddie Mac conforming loan limits based on the average U.S. home price.

True

Conventional loans are classified by the relationship between the amount of money being loaned and the value of the property. As you learned previously, this is known as the loan-to-value ratio or LTV.

True

Fixed-rate loans have interest rates, but not necessarily payments, that remain constant for the duration of the loan.

True

If the house were appraised for less than $80,000—say, $75,000—you could borrow only 80% of that appraised value, or $60,000 ($75,000 x .80 = $60,000). If you still wanted to buy the home, you would need to pay the extra money as part of the down payment.

True

Loans with an LTV higher than 80% are possible because of private mortgage insurance (PMI) and secondary financing,

True

Private mortgage insurance (PMI) is a type of insurance that may be required by your mortgage lender if your down payment is less than 20 percent of your home's purchase price. PMI protects the lender against losses if you default on your mortgage.

True

The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD). Oversight of FHA loan programs is through HUD's Office of Housing.

True

The Homeowners Protection Act of 1998 (HPA) requires lenders to automatically cancel PMI when a home has been paid down to 78% of its original value,

True

The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act defines a nontraditional loan as any loan other than a 30-year fixed-rate fully amortizing loan. Therefore, a traditional loan is a 30-year fixed-rate fully amortizing loan.

True

The combined loan-to-value (CLTV) is the percentage of the property value borrowed through a combination of more than one loan, such as a first mortgage and a second mortgage home equity loan. The CLTV is calculated by adding all loan amounts and dividing by the home's appraised value or purchase price, whichever is lower. For the purpose of private mortgage insurance, only the loan-to-value ratio of the first mortgage is considered, so a borrower with a higher CLTV would not have to pay PMI if the LTV is 80% or less.

True

The property's value is defined by the lender as the appraised value or the sales price, whichever is less.

True

The combined loan-to-value (CLTV) is the percentage of the property value borrowed through a combination of more than one loan, such as a first mortgage and a second mortgage home equity loan.

True - A buyer purchases a property valued at $100,000 with two loans: A first mortgage for $80,000 and a second for $10,000: $80,000 + $10,000 -------------------------- = 90% CLTV

When meeting with a potential borrower, all of the following features would be included in a lender's explanation of a typical conventional mortgage loan, EXCEPT

partially amortizing wrong answers: fixed-rate / fully amortizing / long-term

When you take out a mortgage loan, the lender will likely include a __________ Within this clause, the lender essentially states that their lien will take precedence over any other liens placed on the house. A subordination clause serves to protect the lender in case you default.

subordination clause.

Private mortgage insurance is NOT required on a conventional loan when

the loan has been paid down to 78% or less of the property's current value. wrong answers: a buyer makes less than a 20% down payment on a loan. / interest rates are high. / interest rates are low.