Chapter 2
What are the DTI ratios for a conventional loan?
28% / 36%
PMI is required when:
a borrower puts down 20% or less.
an adjustable rate mortgage (ARM) is also sometimes referred to as a _____. what is it?
variable rate mortgage a mortgage loan where the interest rate periodically adjusts the index, margin, and adjustment caps on the ARM determine the amount of each adjustment
What is the cap on HECM origination fees?
$6000
In the statement on subprime mortgage lending, it encourages lenders to give borrowers the necessary facts to understand the terms, costs, and risk associated with subprime products. MLOs should inform consumers of:
- payment shock - prepayment penalties - balloon payments - cost of reduced documentation loans - responsibility for taxes and insurance
What fees are able to be associated on a VA loan?
1. Appraisal fees 2. recording fees 3. credit report fees 4. prepaid items 5. flood determination 6. survey 7. title examination 8. title insurance 9. other fees authorized by the VA ** the VA maintains a 1% max origination charge ** it is unacceptable for a lender to charge any fees other than the 1% origination fee. The lender may not charge the veteran for any attorney's fees or escrow service fees associated with the settlement of the loan
What are the 4 C's of underwriting when evaluating FHA applications:
1. Credit history of the borrower 2. Capacity to repay the loan 3. Cash/capital assets available to close the mortgage 4. Collateral, which evaluates the value of the home ***perfect credit score will always be the most appealing to underwriters. ***Borrower must pay off all court-ordered judgements before an FHA loan can close. ***Borrower can never have defaulted on a studen loan or be delinquent or in default on any other type of federal debt.
What are the VA funding fees?
1. First Use, down payment less than 5% = 2.3% funding fee 2. first use, down payment 5% or more = 1.65% funding fee 3. first use, down payment 10% or more = 1.4% funding fee 4. after first use, down payment less than 5% = 3.6% 5. After first use, down payment 5% or more = 1.65% funding fee 6. after first use, down payment 10% or more = 1.4% funding fee 8. cash out refinance VA loans, funding fee is 2.3% for first use, and 3.6% after first use **if a veteran borrower has a service-connected disability of 10% or more, there is never a funding fee, regardless of branch of military ** funding fees do not have to be paid out of pocket by the veteran. The borrowers can finance the funding fee directly into the loan amount.
Borrowers who would qualify for conventional/non-conforming loans are those with:
1. less than perfect credit score 2. less than 2 years of job history 3. non-traditional types of income 4. higher DTIs 5. loan amounts that exceed the loan limits
The homeowners protection act provides two ways for PMI to be canceled or removed:
1. when the borrower has at least 20% equity in their home and has paid down the mortgage balance to 80% (this is at the option of the lender) 2. When the balance owed drops to 78%, the lender, servicer is required to remove PMI
FHA Requirements:
1. Max DTIL: 31% / 43% 2. Min Down Payment: 3.5% (Up to 96.5% LTV) 3. Annual mortgage insurance: required 4. upfront mortgage insurance: required 5. appraisal: required 6. gift funds: allowed 7. borrowers with bankruptcy: 2 years after chapter 7 discharge, 1 year after chapter 13 filing 8. LTV requirements on cash-out refinances: 85% max LTV 9. Reserves: no reserve requirement 10. Seller concession: 6% MAX 11. Non-occupying co-borrower: allowed 12. Assumable: Yes, with FHA creditworthiness check 13. employment history: FHA loans are less strict on employment history, no specific requirement 14. Owner-occupancy: Yes (must move in within 60 days) and continue occupancy or one year
What are examples of subprime loans?
1. NINA - No income/No Asset Mortgages: often referred to as "no doc" mortgages. The borrower is not required to provide any financial information regarding their income or their assets 2. SISA - State Income/Stated Asset: only require the borrower to state their income and asset situation but do not require the verification of the income or asset information 3. SIFA or SIVA - Stated Income/ Full Asset or State Income/Verified Asset: only require the borrower to state their income but they need to provide asset information 4. No Doc: no additional income documents are required 5. Low-Doc: minimal income documents are required
What are the types of payment options for a reverse mortgage (HECM)?
1. Tenure: the borrower receives monthly payments from the lender if the borrower lives in, and continues to occupy, the home as a principal residence. Payments will stop when the last borrower or surviving spouse passes away or leaves the home 2. Term: the borrower receives monthly payments for a fixed period (ex: 20 year term: the borrower receives monthly payments for 20 years) 3. Line of credit: the borrower can make withdrawals (up to a set max amount) at the borrowers discretion 4. Modified Tenure: a combination of the tenure and a line of credit options 5. Modified Term: a combination of the term and line of credit options
What are the similarities between all 4 types of qualified mortgages?
1. a loan cannot be QM if they have negative amortization or interest-only payments 2. a loan cannot have a term longer than 30 years 3. there is a threshold on points and fees for QM loans; generally, 3% of the loan balance
When originating higher-priced mortgages, the lender:
1. cannot rely on the collateral alone for repayment of the loan, without considering the borrowers financial ability to make payments 2. cannot rely on the consumer provided information on income and assets without verification 3. cannot charge a prepayment penalty if the rate can change in the first 4 years of a loan; otherwise, you can charge a 2% penalty. 4. must escrow for at least the first 60 months of the loan
For closed end HOEPA loans, lenders must follow the Ability to Repay Rule. For open-end High-cost mortgages, repayment ability must be determined using HOEPAs ability to repay rules. In general, the lender must consider:
1. current and reasonably expected income or assets (verified by W2s, tax returns, etc.) 2. current obligations, including any mortgage related obligations, like taxes and required insurances
The ATR rule has 8 underwriting factors that lenders must consider and verify:
1. current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan 2. current employment status (if you rely on employment income when assessing the consumers ability to repay) 3. the monthly mortgage payment for the loan 4. the monthly payment on any simultaneous loan secured by the same property 5. the monthly payment for property taxes and insurance that the consumer is required to buy, and certain other costs related to the property, such as homeowners association fees or ground rent 6. the borrowers debts, alimony, and child support obligations 7. the monthly debt to income ratio or residual income 8. credit history **the rule requires that lenders consider at least these 8 factors. These 8 underwriting factors also must be verified used reasonably reliable 3rd party records (W-2/payroll statements)
If a borrower does not meet the minimum service requirements on a VA loan to receive the COE, they may still be eligible if they were discharged due to:
1. hardship 2. the convenience of the government 3. reduction-in-force 4. certain medical conditions 5. a service-connected disability
What financial requirements must the borrower meet for a reverse mortgage:
1. income, assets, monthly living expenses, and credit history be verified 2. timely payment of real estate taxes, hazard, and flood insurance premiums will be verified
In the statement on subprime mortgage lending, it defines predatory lending, which is a loan that has at least one of the following elements:
1. making loans based predominately on the foreclosure or liquidation value of a borrowers collateral, rather than on the borrowers ability to repay the mortgage according to its terms 2. inducing a borrower to repeatedly refinance a loan to charge high points and fees each time the loan is refinanced (known as loan flipping, churning, or equity skimming) 3. engaging in fraud or deception to conceal the true nature of the mortgage loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower
What are some key points of a subprime loan?
1. manually underwritten 2. little or no amortization or included negative amortization features 3. low credit score requirements (500s) 4. may not require PMI or escrow features 5. little verification of what the borrower was presenting as their income, assets, employment 6. comes with higher interest rates
What to know on VA Loans:
1. max DTI: 41% residual income 2. min down payment: 0% (100% financing available on purchase transactions) 3. minimum credit score: N/A 4. Funding fee: required - based on down payment and entitlement 5. appraisal: required 6. gift funds: allowed if the borrower puts a payment down 7. borrower with bankruptcy: 2 years after chapter 7 discharge, 1 year after chapter 13 filing 8. borrowers after foreclosure: 2 years after foreclosure or short sale 9. LTV requirement on cash-out refinance: Max 90% LTV 10. Reserves: no reserve requirement 11. Seller concessions: 4% 12. Owner-occupancy: Yes - within 60 days
What are the requirements for reverse mortgages:
1. must be 62 years old 2. Own a property outright, paid-down a considerable amount and has a good amount of equity 3. occupy the property as their principle residence 4. not be delinquent on any federal debt (have any federal tax liens or any other federal debt) 5. have financial resources to continue to make ongoing property insurance payments, taxess, and homeowners association dues, plus regular maintenance 6. participate in a consumer information session give by a HUD approved HECM counselor
What types of transaction are tested against the HOEPA coverage tests?
1. purchase money loans 2. refinances 3. closed end home equity loans 4. open-end credit plans (like HELOCs) If these loans meet the coverage tests, they are required to comply with restrictions under HOEPA.
HOEPA restricts the following acts or practices on high-cost mortgages:
1. recommending default on any existing loan to be refinanced by a high-cost mortgage 2. charging a fee to modify, defer, extend, or amend a high-cost mortgage 3. late fees cannot exceed 4% of the past-due payment, and pyramiding late fees is prohibited 4. fees for payoff statements are generally banned 5. points and fees cannot be financed. However, you can finance closing charges excluded from the definition of points and fees such as bona-fide third party charges 6. you cannot purposefuly structure a transaction to evade HEOPA coverage 7. negative amortization 8. a payment schedule that consolidates more than two periodic payments and pays them in advance from the loan proceeds is prohibited (balloon payment) 9. an increase in interest rate after default 10. paying a contractor under a home-improvement contract from the proceeds of high-cost mortgage 11. selling a high cost mortgage in the secondary market without providing a high cost mortgage notice to the assignee 12. refinancing any high cost mortgage into another high cost mortgage within one year after having extending credit, unless the refinancing is in the consumers best interest
What type of transactions are exempt from HOEPA?
1. reverse mortgages 2. construction loans 3. loans originated and directly financed by a Housing Finance Agency 4. Loans originated under the US Department of Agricultures Rural Development Section 502 Direct Loan Program
what are the requirements of a property on a reverse mortgage?
1. single family home or 2-4 unit home with one unit occupied by the borrower 2. HUD approved condominium project 3. manufactured home that meets FHA requirements
If the borrower dies, what are the options for how a reverse mortgage may be satisfied?
1. the borrower's estate/heirs may sell the home and pay off the reverse mortgage 2. the borrower's estate/heirs may pay off the reverse mortgage and keep the property 3. The borrower's estate/heirs may surrender the property to the lender of the reverse mortgage
What is the guarantee fee on a USDA loan?
1. the monthly guarantee fee (1%) 2. the initial guarantee fee (.35%) - can be added into the loan amount and push the LTV over 100%
A veteran can have a previously used entitlement restored to purchase another home with a VA loan if:
1. the property purchased with the prior VA loan has been sold and the loan is paid in full 2. a qualified veteran-transferee (buyer) agree to assume the VA loan and substitute his or her entitlement for the same amount of entitlement originally used by the veteran seller 3. The entitlement may able be restored one time only if the veteran has repaid the prior VA loan in full but has not disposed of the property purchased with the prior VA loan ***remaining entitlement and restoration of entitlement can be requested through the VA eligibility center by completing VA form 26-1880
What are the 3 separate HOEPA coverage tests:
1. the transactions APR (annual percentage rate) 2. The amount of points and fees paid in connection with the transaction 3. the prepayment penalties that are charged under the loan or credit agreement if the loan fails any of these 3 tests, it is considered a high-cost home loan. It does not have to fail all three, or two; just one fail and the loan is considered a high-cost home loan
When did the Homeowners protection act go into effect? What is it for?
1999 addresses how/when PMI is removed from a loan **before this, the fededral government did not regulate PMI
USDA approved lenders can only offer ___ year loans for USDA borrowers
30 year however, the USDA can offer a direct loan to low, or very low, income applicants. Direct loans are not an option for any borrower who doesnt go directly through the USDA
What does an underwriter use to determine whether a borrower has ever failed to repay their federal debts or obligations?
Credit alert verification system (CAIVRS) this is created by the federal government and used for this specific purpose
___ is the largest insurer of mortgages in the world
FHA
What is the most common type of reverse mortgage? what does it allow homeowners to do?
FHA Home Equity Conversion Mortgage (HECM) developed and insured by the FHA that enables older homeowners to convert the equity they have in their homes into cash, using a variety of payment options to address their specific financial needs **There is also a reverse for purchase HECM loan available for borrowers who may put a sizeable down payment and not have a required monthly mortgage payment
What is the most common QM loan? To be considered this type of loan, the lender must: pg 82, 83
General QM to be considered a General QM, the lender must: 1. underwrite based on a fully amortizing schedule using the maximum rate permitted during the first 3 years after the date of the first payment. For loans with initial terms of 5 years or longer, the borrower is qualified at the higher of the initial interest rate or the fully indexed rate (margin and index) 2. Consider and verify the consumer's income, assets, debt obligations, alimony, and child support obligations 3. determine that the consumers total monthly debt-to-income is no more than 43% **The general QM definition will be replaced by the Price Based QM definition. The main difference between the two is that the new definition removes the 43% DTI requirement. There are also new APR thresholds.
HOEPA is also known as:
HOEPA is also known as Section 32 of Regulation Z.
What is the principal limit? How do you determine this for a reverse mortgage?
How much the borrower can borrow? the borrowers age, interest rate on the loan, and the equity in the borrowers home determine the loans principal limit
What happens in a reverse mortgage if an heir inherits the home worth more than the loan balance? What happens in a reverse mortgage if an heir inherits the home worth less than the loan balance?
Inherit home worth more than the loan balance > sell home to pay loan and keep the difference inherit home worth less than the loan balance > sell home for 95% of appraised value **your heirs wont have to pay more than 95% of the appraised value. The remaining balance of the loan is covered by mortgage insurance
Which type of loans exceed the Fannie Mae and Freddie Mac loan limits?
Jumbo Loans exceed the Fannie Mae and Freddie Mac loan limits.
USDA Loan Requirements
MAX DTI: 29% / 41% Min Down Payment: 0% (100% financing available on purchase transactions Min Credit Score: N/A Guarantee Fee: Required Income Limit: 115% max of area media Gift Funds: Allowed if the borrower puts a payment down Borrower with bankruptcy: 3 years after chapter 7 discharge, 1 year after chapter 13 filing Borrowers after foreclosure: 3 years after foreclosure or short sale Reserves: no reserve requirement Seller Concessions: unrestricted
What is MIP?
Mortgage insurance premium FHAs mortgage insurance requirement
What are the DTI ratios for a VA loan?
NA / 41%
What is the Interagency guidance on nontraditional mortgage product risks? When was it published and by who?
Published in 2006 by the Federal financial regulatory agencies provides guidelines to lenders regarding nontraditgional mortgage products. defines nontraditional mortgage products as products that allow borrowers to defer principal and in some cases, interest. These include products with interest-only features and products that have the potential for negative amortization, including products with flexible payment options Guidance is concerned about payment shock, competitive pressures, and ceding underwriting standard to 3rd party organizations.
What is the difference between PMI and MIP?
a borrower purchases PMI for a conventional loan through a 3rd party company MIP and UFMIP is paid directly to the FHA MIP on FHA loans can sometimes be less expensive than PMI
What is a higher-priced mortgage, where is this located?
TILA Section 35 covers higher-priced mortgages (Section 32 is high cost mortgage loans) a mortgage loan covered by section 35 is a closed-end consumer credit transaction secured by a consumers principal dwelling, with an APR that exceeds the APOR for a comparable transaction by: - 1.5% for loans secured by a first lien loan - 3.5% for a second-lien loan If the APR is higher than the APOR index plus the trigger listed above, it is a higher-priced mortgage. if a lender extends a higher-priced mortgage, the loan must have an escrow account for the collection and payment of property taxes and premiums for mortgage-related insurance. The escrow account is required for at least 5 years.
What is bonus entitlement with a VA loan?
The VA has this as a second tier, in case the veteran wants to buy a home that costs more than $144,000. To help veterans do this, the VA offers bonus (or tier 2) entitlement. The determine a veterans bonus entitlement, the VA will look at the Federal Housing Finance Agency's )FHFA's) current national conventional financing confirming limit and the veterans state country loan limits the VA will guarantee 25% of their loan amount, based on these loan limits
What is the VA DTI?
The VA only uses the back end or total debt to income ratio when calculating debt to income Max back end DTI is 41%
True or False: The Interest-Only loan is the most dangerous type of ARM.
The most dangerous type of ARM is the Minimum Payment ARM.
What is a VA IRRRL? What is the funding fee?
VA Interest Rate Reduction Refinance Loan Similar to the FHA streamline but is offered as a VA to VA no-cash out refinance loan IRRRLs do require an additional funding fee, and the veteran cannot receive any additional funds out of their property. These loans often do not require an appraisal, much like the FHA streamline the funding fee is 0.50% for everyone. IRRRLs do not require an appraisal or a credit underwriting package Can be done with no money out of pocket by including all costs in the new loan or by funding the new loan at an interest rate high enough to enable to lender to pay the costs. With this type of loan, the borrower cannot receive any cash-back from the loan proceeds.
What type of loan is a reverse mortgage?
a home equity loan
What is a Non-qualified mortgage (Non-QM loan)?
a loan that does not conform with the qualified mortgage rule; it also means that the loan is not accepted by government sponsored entities like Fannie Mae or Freddie Mac. Non-QM loans cater to the not-so-perfect borrower required to follow ATR requirements responsible non-QM programs can help millions of creditworthy borrowers who don't fit the traditional credit box - and help lenders find growth even as traditional lending slows. Non-QM products can open the doors for a mortgage lender to help those less than perfect borrowers.
Upfront mortgage insurance premiums (UFMIP) - what is it, what is the percentage currently?
a one-time payment paid by the borrower at closing, or the cost is financed into the loan amount the UFMIP is currently at 1.75% of the base loan amount. UFMIP is a requirement that applies, regardless of the term or LTV ratio on the FHA loan.
What is the prepayment penalty coverage test under HOEPA?
a transaction is a high-cost mortgage if the loan includes a prepayment penalty that: - is more than 36 months after consummation or account opening - is an amount more than 2% of the amount prepaid
assumable loans
allow for a borrower to assume a current mortgage, generally with little to no change in terms (especially the interest rate), if approved by the lender.
What is a High-Cost Home Loan (HOEPA)? What section of TILA is it? when was it amended?
amendment made to TILA in 1994, section 32 known as "section 32 of Regulation Z (TILA) purpose is to protect consumers from predatory lending practices associated with high-cost home loans HOEPA applies to most types of consumer credit transactions secured by a consumers principal dwelling - that means that vacation and second homes are not covered. Manufactured homes and other types of personal property, like RVs/houseboats, are subject to HOEPA coverage if the dwelling is the consumers principal dwelling. HOEPA requires additional/specific disclosure requirements, restricts terms on transactions, restricts fees and practices, and adds additional ability to repay requirements. HOEPA requires pre-loan counseling for all high-cost home loans, full appraisals, and escrows for the first 5 years. Lenders are required to disclose to consumers at least 3 days before consummation ("cooling off period"). The disclosure must be in writing and must inform the consumers that the loan will not be effective until consummation. It must explain the consequences of default, disclose loan terms (ex: apr), the amount borrowed, and the monthly payment. In the case of variable rate loans, the disclosure must explain the max monthly payment. ***HOEPA restricts some risky loan features for high-cost mortgages, including balloon payments, prepayment penalties, and due on demand features
non-conforming loan
any loan that does not confirm to Fannie Mae and Freddie Mac guidelines
What are the homeowner counseling requirements under HOEPA?
before making a high-cost home loan, the borrower must undergo homeownership counseling. The lender must receive a written certification from the homeownership counselor that the borrower has completed the required counseling. HOEPAs home counseling rule also applies to negative amortization loans made to the first time borrower. It also requires that all federally-related loan applicants receive a list of housing counselors. The list of housing counselors must be sent 3 business days after receiving the application.
How to qualify for a USDA loan?
borrower must prove that they have income up to 115% of the median income of the area the borrower must also be living in or purchasing a property that is in a rural area ***The USDA only has a set amount of money allotted to them within the federal budget annually. Often, by the end of Sept, they have hit that limit and will suspend issuing loan guarantees until the beginning og the next year. Important to remember when talking to your rurally-located, USDA eligible borrowers at the end of the year
What costs are associated on a HECM transaction?
costs include: - mortgage insurance premiums (since an FHA program) - appraisals (3rd party charges) - origination fee (can be charged by the lender. can be the greater of $2500, or 2% of the first $200,000 of their homes value, plus 1% of the amount over $200,000. - servicing fees (servicers who service the HECM can charge this fee of no more than $30 if the loan has an annually adjusted interest rate or fixed-interest rate. If the interest rate adjusts monthly, they cannot adjust more than $35. ***At loan closing, the lender sets aside the servicing fee and deducts the fee from the available funds. Each month, the monthly servicing fee is added to the loan balance. Servicers can also choose to include the servicing fee in the mortgage interest rate
What is a subprime loan (subprime mortgages - (Alt-A)
designed for borrowers who have less than perfect credit. These loans are available on a limited basis. ***They are one of the main causes of the mortgage meltdown in 2008/2009 They have been replaced in some form by non-qualified mortgages (non QM Loans)
If a lender is going to allow no or low document loans or simultaneous seconds, the lender should document risk mitigating features such as: This is called:
document risk mitigating features such a high credit scores, lower LTVs, lower DTIs, credit enhancements, and mortgage insurance. This is called risk layering
What is the points and fees test under HOEPA?
if a transaction exceeds the following thresholds, the loan is considered a high cost mortgage (Jan 2020) - 5% of the loan amount for loans greater than $21,980 OR - for loans less than $21,980, the lesser of 8% of the loan amount or $1,099 if a transaction exceeds the following thresholds, the loan is considered a high cost mortgage (Jan 2021) - 5% of the loan amount for loans greater than $22,052 OR - for loans less than $22,052, the lesser of 8% of the loan amount or $1,103 if a transaction exceeds the following thresholds, the loan is considered a high cost mortgage (Jan 2022) - 5% of the loan amount for loans greater than $22,969 OR - for loans less than $22,969, the lesser of 8% of the loan amount or $1,148
What is the APR test?
if the APR on the mortgage exceeds the average prime offer rate (APOR) for a comparable transaction by more than the below percentages, the loan is considered a high-cost home loan: the APOR is issued by the FFIEC weekly. - 6.5% for the first-lien transaction that are more than $50,000, and secured by personal property - 8.5% for junior-lien transactions (second mortgages) or first lien transactions that are less than $50,000
when HUD insures a loan, it protects the lender from:
incurring damages due to a borrower defaulting on an FHA loan. Ex: borrower had $100,000 FHA loan and the balance is down to $80,000. Borrower defaults on the loan (resulting in foreclosure), the lender can submit a claim to FHA. FHA insurance would cover the unpaid balance, interest that is due, unpaid real estate taxes, and the costs for the foreclosure. FHA can also opt to take over the property and attempt to recover as much as possible.
What are VA Loans (Veterans Affairs Loans)?
loans specifically for veterans of the United States Armed Forces. VA Loans simplify the process of buying or refinancing a home, particularly during a service members time in service or after they are honorably discharged. VA loans are also available to a veterans surviving spouse.
How long do the borrower's estate/heirs have from the time of the borrowers death to determine how they would like to proceed with the handling of the property in a reverse mortgage?
may have up to 1 year if a borrower already had a traditional mortgage, some of the money that is borrowed from the HECM will be used to pay off the current mortgage. If they owe a lot of their current mortgage, they may not have much, or any money from the reverse mortgage to spend on other things. the benefit would be that they would free up the money they've been paying monthly on their current mortgage to use for other purposes.
What is required for a veteran to be eligible for a VA loan?
must have: - suitable credit - suitable income - valid certificate of eligibility (COE)
The installments that the elderly borrower receives during the reverse mortgage come from:
negative amortization of the loan. The lender of the reverse mortgage will make payments to the borrower based on the built-up equity in the home
A lender is prohibited from extending a higher-priced mortgage loan without first:
obtaining a written appraisal of the property to be mortgaged. the appraisal must be provided to the borrower no later than 3 business days before consummation.
What is payment shock?
occurs when a borrowers payment suddenly increases. Happens in situations where the interest rate is variable, or if there is an introductory interest rate. the change in the interest rate causes the borrowers payment to increase, and in some situations, the borrower can no longer afford to pay their mortgage because the interest rate is so high. Therefore, the borrower defaults on the loan.
When is PMI required? what is PMI? Who provides PMI?
on all conventional/conforming loans when the borrowers down payment is less than 20% or if the loan has an LTV of more than 80% PMI is insurance for conventional loans that protects the lender from incurring a loss in the event of default by the borrower. a 3rd company provider provides PMI. the payment for PMI is part of the borrowers monthly mortgage payment.
Which types of homes are covered by HOEPA?
primary residences
A borrower can only use a VA loan for what type of residences?
primary residences.
What was the purpose of the Statement on subprime mortgage lending? When did it get published and by who?
published one year after (2007) the interagency guidance on nontraditional mortgage product risks was published by the same agency the purpose of the state was to promote consumer protection standards as well as encourage lenders to ensure that borrowers only obtain loans that they can afford to repay. includes guidelines for defining predatory lending, underwriting standards, establishing control systems, and consumer protection. The standards are concerned explicitly with certain ARM products that typically have these characteristics: - low initial payments based on a fixed introductory rate that expires after a short period and then adjusts to a variable-index rate plus a margin for the remaining term of the loan - very high or no limits on how much the payment amount of the interest rate may increase (payment or rate caps) on the reset date - limited or no documentation of borrowers income - product features likely to result in frequent refinancing to maintain an affordable monthly payment - substantial prepayment penalties or prepayment penalties that extend beyond the initial fixed interest rate period
A QM loan that is higher-priced is a ____
rebuttable presumption. Under a rebuttable presumption, if a court finds that a mortgage originated by a lender was a higher-priced QM, a consumer can argue that the lender violated the ATR rule. For the consumer to win that argument, they must show that, based on the info available to the lender at the time, the consumer did not have enough residual income left to meet living expenses after paying their mortgage/other debts
When is the borrower required to make payments on a reverse mortgage?
reverse mortgages do not require the borrower to make any payments until the borrower dies, sells the home, or moves out permanently.
How does a reverse mortgage work?
reverse mortgages take the equity that has accumulated over time in an elderly borrowers home and pay it back to them through either installment payments, line of credit, or in a lump sum. with a reverse mortgage, you borrow money using your home as a guarantee from the loan. A reverse mortgage is repaid when the borrower no longer lives in the home. you dont make monthly payments, but you will need to continue to payb property taxes and homeowners insurance. Because interest and fees are added to the loan balance each month, your loan balance goes up, not down. As your loan balance increases, your home equity decreases. **Borrowers usually use the loan to help pay for living expenses
A QM loan that is not higher-priced has a ___
safe harbor. if a loan has a safe harbor, they are conclusively presumed to comply with the ATR requirements. Under this, if a court finds that a lender originated a mortgage that was a QM, that finding conclusively establishes that the lender complied with the ATR requirements when they originated the mortgage.
who insured FHA loans?
the department of housing and urban development (HUD) FHA loans are easier to obtain, as their underwriting guidelines are more lenient than conventional guidelines. A lender is approved through FHA to originate FHA loans.
What is a Qualified Mortgage (QM) a section of? Went into effect when? Mandated and enforced by who? What is it, what are the different types?
section of TILA that went into effect in 2014. Mandated by the Dodd-Frank Wall Street Reform Act of 2010 and enforced by the CFPB. The QM rule works hand in hand with the Ability to Repay Rule (ATR). A QM is a mortgage that has complied with the Ability to Repay requirements. There are currently 6 types of qualified mortgages: 1. General QM 2. Temporary QM 3. Small Lender 4. Balloon Payment QM 5. Priced Based QM - a new category for 2021 6. Season QM - a new category for 2021 **Any lender can originate the first two, while the other two are only allowed to be originated by small lenders. The QM requirements generally focus on prohibiting certain risky features and practices (negative amortization & interest only periods & loan terms longer than 30 years)
Ability to repay rule (ATR)
section of TILA that went into effect in 2014. The Dodd-Frank Act mandated it, and the CFPB enforces it. The ATR rule works with the QM rule ATR aims to remedy the loose underwriting practices and requires entities to determine whether the consumer can repay their loan.
What is a jumbo loan?
single family loan that exceeds Fannie Mae and Freddie Macs loan limits. conventional, but non-confirming loans
FHA Streamlines
standard FHA refinance product. Streamlines are utilized by borrowers with current FHA mortgages when they would like to reduce their mortgage insurance, interest rate, or payment. The term "Streamline" is used as less documentation and underwriting is required, and in some cases, an appraisal may not be required.
Who guarantees a USDA loan?
the USDA guarantees USDA loans the USDA program provides a 90% loan note guarantee to approved lenders to reduce the risk of extending a 100% loan to eligible rural homebuyers
What is a guarantee on a VA loan?
the VA guarantees a certain portion of all VA loans, meaning that the VA will pay the lender up to 25% of the loan value should a borrower default on their loan. A guarantee is different than insurance.
what is full entitlement in a VA loan?
the amount a borrower qualified for with full entitlement without making a down payment is the max loan limit. the basic entitlement that is available to the veterani s $36,000. Most lenders will lend up to 4x the veterans available entitlement without a down payment. As the veterans basic entitlement, the VA guarantee to the lender that they will pay up to at least $36,000 or 25% of the veterans loan amount, whichever is less, if the veteran defaults on their loan. So the veteran loan limit would be $36,000 x 4 = $144,000
How does a reversed mortgage work in a purchase situation?
the borrower puts down a large amount of money for their new home (usually 50% or more). the borrower can use the proceeds of the sale of their previous home, their savings, or a combination of both. The size-able down payment creates instant equity in the home that the borrower can draw upon in monthly installments
While FHA is less stringent on the profile of the borrower, they are stricter on:
the property conditions. if a property has significant defects or needs significant renovations or updating, an FHA loan will not be the best route for that borrower. FHA will not insure a loan collateralized by a dilapidated property
Is there any prohibition to a borrower who would like to sell their home if they have a reverse mortgage?
there is no prohibition if the borrowers reverse mortgage balance is less than what the home is worth, the sale of the house will work like anyb other sale of the house; the house will be sold, and the profit will be used to pay off the reverse mortgage. If the balance of the reverse mortgage is more than the value of the borrowers home, the borrower does not have to pay the difference. When the borrower sells their home, for the appraised fair market value, mortgage insurance pays the remaining balance of the loan
FHA Maximum Loan Limit
this is known as the lending limit. This is the max amount that FHA will insure. FHA is required by the National Housing Act, as amended by the Housing and Economic Recovery Act of 2008, to set single family forward loan limits at 115% of medium house prices, subject to a floor and a ceiling on the limits. FHA calculates forward mortgage limits by metropolitan statistical area and county.
What is a USDA loan (US Department of Agriculture)
type of mortgage that is available in rural areas of less than 35,000 people. these loans offer many benefits to borrowers, including no down payment, 100% financing, lower than market interest rates, and a lower PMI rate than any other loan program
If approved as an unconditional direct endorser (DE), the lender can:
underwrite and close mortgage loans without prior FHA review or approval.
What is residual income? what is the threshold on VA loans?
underwriters will look at residual income the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses, such as food, health care, closing, and gasoline. thresholds are based on the information supplied by the consumer expenditures survey, which is published by the department of labor. When determining a borrowers residual income, the underwriter will have to take into consideration all members of the household, including the veterans dependents.
What is a Notice of Value (NOV) with a VA loan?
when a VA appraisal is completed, it is underwritten by a LAPP (lender approved processing program). the lender's underwriter then issues a notice of Value (NOV) or certification of reasonable value (CRV). The NOV must be submitted in conjunction with the appraisal report when originating a VA loan
what is the most common type of buydown? How does it work?
permanent discount buydown, also referred to as a discount point or points. The borrower pays the discount points based on a percentage of the loan amount to "prepay" interest to obtain a lower note rate for the duration of the loan.
interest rate adjustment caps
put into place to make sure the borrowers interest rate never goes up more than a certain percentage every time it adjusts.
To escrow, the lender divides:
the amount of the borrowers taxes and insurance by 12 and adds it to the monthly payment. The lender pays the taxes and insurance when they become due
What is a requirement for a borrower to qualify for a HELOC?
the borrower must have equity already built in their home
construction permanent Loan or Construction-to-perm loan
the borrower obtains one loan from a lender and only pays one set of closing costs. While they are building the house, they only pay interest. Once construction is done, the lender will figure the new P&I to pay the loan off in the remaining term.
what are seller concessions? what do they include? what is the limit on them?
the costs that the seller or lender are paying. include: - title insurance - origination fees - processing fees some loan programs allow for the seller to only pay a set percentage of seller concessions, limiting the number of contributions paid to help cover the borrowers closing costs. the limit on seller concessions on conventional loans depends on how much the borrower is putting down: Principal residence or second home: - Down payment less than 10% (LTV greater than 90%) > maximum concession of 3% - down payment between 10% and 25% (LTV 75.01 - 90%) > max concession of 6% - down payment more than 25% (LTV 75% or less) > max concession of 9% Investment property: - all down payment (LTV ratios) have a max concessions of 2%
What are the 3 types of ARMs:
the hybrid ARM the interest only ARM the payment option ARM
periodic interest rate
the interest rate charged on a loan over a specific period. lenders quote interest rate on an annual basis, but in most cases, the interest compounds more frequently than annually. As a result, the periodic interest rate is the annual interest rate divided by the number of compounding periods.
If I am buying a home for $200,000 and want to put down 20%, what is my loan amount?
$160,000
The cap on origination fees for Reverse Mortgage loans is:
$6,000
escrow/escrowing:
an item of value, money, or documents deposited with a third party to be delivered upon the fulfillment of a condition ex: the deposit by a borrower with a lender of funds to pay taxes and insurance premiums when they become due. These items are placed into an escrow account. This escrow account is where the funds to pay taxes and insurance are held until they are due to be paid.
How to determine whether a loan is going to confirm with Fannie Mae or Freddie Mac guidelines?
an underwriter will submit a loan file through an automated underwriting system, or AUS.
____ is the most common type of mortgage available
fixed rate
what are the two major types of mortgages:
fixed rate and adjustable rate
In order to get a reverse mortgage, how much of the home needs to be paid off?
To get a reverse mortgage loan, the home only needs to be almost paid off.
down payment gift funds can come from:
a family member, an employer, a charity, etc.
Payment Option ARMs
allows the borrower to choose from several payment options: - interest only payment: the borrower pays only the interest on the loan each month - minimum payment: the borrower pays a payment that can be less than the interest due that month, which may increased the amount the borrower owes on the mortgage (negative amortization) - combined PMT, which includes the interest payment and a payment towards the principal
what is a non-traditional mortgage?
anything other than a 30 year fixed rate mortgage, like a 15 or 25 year fixed rate mortgage
Reserves, or PITI Reserves (Principal/Interest/Taxes/Insurance Reserves
the cash amount that the borrower has available after making a down payment and paying closing costs for the purchase of a home. some loan programs require that a borrower have reserves available at the time of closing (can be long term assets, not just liquid assets). having the reserves available is viewed favorably by underwriters because it shows that the borrower is able to make their monthly mortgage payments and they can do so without incurring the payments as financial hardship
What is the maximum LTV for a conventional conforming loan?
97%
_________________ occurs when a borrower's payment increases dramatically.
payment shock
conventional loans can be which types of mortgages?
fixed rate mortgages, adjustable rate mortgages, balloon mortgages, or hybrid mortgages as long as the loan meets Fannie or Freddies requirements.
The test to determine if you have a High-Cost Loan are:
1. APR 2. Prepayment Penalty 3. Points and Fees.
What is a conventional loan: conforming or non conforming?
can be either
What does COE stand for with regard to VA loans?
COE stands for Certificate of Eligibility
an interest rate on an ARM has two parts:
index and the margin (fully indexes rate)
Bridge Loan
short term loan secured by the borrowers current home (which is usually for sale) that allows the borrower to use their equity for building or down payment on a purchase of a new home before the current home sells. Typically interest only loans This is a loan that bridges one transaction to another. May occur when a borrower must relocate for work. the bridge loan allows the borrower to move to her new location and purchase a new home without her original home selling. The borrower pays off the bridge loan once the old house sells.
Home equity line of credit (HELOC)
type of revolving loan that enables a homeowner to obtain multiple advances of the loan proceeds at his or her discretion, up to an amount that represents a specified percentage of the borrowers equity in their property this is like having a credit card on the borrowers home. It is an open-ended loan that allows the borrower to take money out of their home to use for other purposes. A lot of borrowers use HELOCs for home improvement projects. ex: a borrower owes a small amount of money on their home ($50,000) but their home is worth $150,000. The borrower can take a HELOC out on their home and have access to some of that $100,000 in equity. However, a HELOC does not generally allow the borrower to take 100% of the equity out of the property. It usually allows around 80% of the equity, which leaves the borrower at least 20% equity in the property. usually only requires monthly interest payments on the balance and can be paid down. Once the borrower pays the loan down, the borrower can take out more money.
qualifications for conventional loans:
1. Max DTI: 28%/36% (can go up to 45% if certain circumstances are met, 45% will not be on test though) 2. Minimum down payment: 3% (97% LTV) 3. Minimum credit score: 640 FICO 4. Loan Limit: - 2020, $510,400 confirming (adjusted annually) - over $510,400 is a non-conforming conventional loan (jumbo loan) - for 2021, the conventional loan limit is $548,250 5. PMI: required on conventional loans with less that 20% down (LTVs over 80%) 6. Appraisal: required unless Fannie or Freddie give an appraisal waiver when the loan goes through automated underwriting 7. gift funds: allowed 8. borrowers with bankruptcy: - 2 years from chapter 13 discharge or 4 years from dismissal (2 years with extenuating circumstances) - 4 years from chapter 7 filing (or 2 years with extenuating circumstances) 9. borrowers after foreclosure - 7 years from foreclosure - 4 years from short sale 10. LTV requirements on cash out refinances: 85% maximum LTV 11. Reserves: usually 2-4 months (determined by LP or DU) 12. Seller Concessions: depends on down payment amount 13. Non-occupying co-borrower: not allowed 14. Assumable: No 15. Employment history: 2 years required
An MLO should ask their borrower some questions before suggesting an ARM, such as:
1. is your income high enough, or likely enough, to cover the higher mortgage payments if interest rates go up? 2. will you be taking on any other sizable debts, such as a car loan or school tuition, soon? 3. How long do you plan to live in the home? (If they plan to sell soon, rising interest rates may not pose the problem that they might if they intend to stay in the home for a longer period). 4. Do you plan to make any additional payments or pay the loan off early? It is important for the MLO to show that the borrower has the ability to repay the loan at the highest possible interest rate
Which of the following are required on USDA loans? 1. must be in a rural area 2. down payment 3. appraisal 4. seller concessions
1. must be in a rural area 3. appraisal 4. seller concessions No down payment is required on USDA loans.
To qualify for a USDA loan, the borrower's income must not exceed ______ of the area's median income.
115%
What are the DTI ratios for a USDA loan?
29% / 41%
The minimum down payment on an FHA loan is:
3.5%
Benjamin has an FHA 2/1 buydown. His note rate is 3.5%. What will benjamins rate be in year 3?
3.5% a 2/1 buydown only lasts for 2 years and then reverts to the note rate. So, in year 3, the note rate is the rate in year 3.
The most common loan types used in confirming lending are ____ and ____ mortgages.
30 year and 15 year fixed rate mortgages
What are the DTI ratios for a FHA loan?
31% / 43%
What is the maximum percentage allowed for Late Fees on High-Cost Loans?
4%
A borrower wants to refinance their home. They have a first mortgage of $100,000 and a 2nd mortgage of $50,000. Their home was appraised for $325,000. What is the borrower's CLTV?
46%
How many Underwriting Factors are part of the Ability to Repay Rule (ATR)?
8
when will a balloon mortgage be called due?
A Balloon Mortgage will be called due when the balloon period ends.
A borrower can buy a home with a conventional mortgage how many years after a Chapter 13 Bankruptcy is dismissed.
A borrower can buy a home with a conventional mortgage four years after a Chapter 13 bankruptcy is dismissed.
What is a discount point?
A type of buydown. a buydown gives borrowers the opportunity to decrease their interest rate. discount point appear on LE and CD. Appear on page 2, Box A of the CD
What is the second most common product in the mortgage industry?
ARM
initial rate and payment:
ARMS start with this. the initial rate and payment amount on an ARM remain in effect for a limited period. That period can range from 1 month to several years. With most ARMS, the interest rate and monthly payment can change ever month, quarter, year, 3 years, or 5 years. the period between rate changes is called the adjustment period
How long is an Escrow Account required on a Higher-Priced Mortgage Loan (HPML)?
An escrow account is required on HPMLs for five years.
What is Fannie Maes AUS? What is Freddie Macs AUS?
Fannie: Desktop Underwriter or DU Freddie: Loan Product Advisor or LP (formerly known as Loan Prospector)
A borrower has an initial interest rate of 2.25%. The margin is 1.5%, and the index is the COFI. The ARM has 3/2/8 interest caps. The COFI, at its first adjustment is 1%. The COFI at its second adjustment is 3.25%. The third adjustment is 9.5%. what is the interest rate at the second adjustment?
First we take the margin (1.5%). Then we take the COFI index at the second adjustment (3.25) and add them together: 1.5% + 3.25% = 4.75%, which is the fully indexed rate ***Following 3/2/8, on subsequent adjustments, the interest rate cannot increasde or decrease by more than 2% from the first adjustment. Our interest rate at the first adjustment was 2.5%. So you take the rate at the second adjustment (4.75%) and subtract the interest rate of the first adjustment (2.5%) 4.75% - 2.5% = 2.25% Therefore, we take the interest rate at the first adjustment (2.5%) and add our cap at the second adjustment (2%) 2.5% + 2% = 4.5%, which is the interest rate at the second adjustment
A borrower has an initial interest rate of 2.25%. The margin is 1.5%, and the index is the COFI. The ARM has 3/2/8 interest caps. The COFI, at its first adjustment is 1%. The COFI at its second adjustment is 3.25%. The third adjustment is 9.5%. what is the interest rate at the third adjustment?
First, take the margin (1.5%), then you take the COFI index at the third adjustment (9.5%), and add them together 1.5% + 9.5% = 11%, which is the fully indexed rate **This is where the lifetime cap would kick in (3/2/8). To figure out what the interest rate cap would be, we take the initial rate (2.25%) and add the lifetime cap (8%). 2.25% + 8% = 10.25% - this number would be the interest rate cap of the entire life of the loan On the 3rd adjustment, the new fully indexed rate was 11%. This is over the cap limit, and exceeds the subsequent adjustment cap of 2%. Therefore: 4.5% (interest rate at 2nd adjustment) + 2% (subsequent adjustment cap) = 6.5%. This would be the interest rate at the third adjustment.
negative amortization
For instance in a payment cap, if there is an adjustment but there is a payment cap, the borrower might not be paying all of the interest on the loan. That interest is added to the balance of the loan, which is then called negative amortization When the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition.
What can cause a borrower's payment to change on a traditional fixed-rate mortgage?
Mortgage Insurance can cause a borrower's mortgage payment to change.
______________ refers to unethical practices during the loan origination process that are unfair, deceptive, or fraudulent.
Predatory lending refers to unethical practices that are unfair, deceptive, or fraudulent.
When a borrower chooses to have an Escrow Account it means that the lender will be paying which bills on the borrower's behalf?
Property tax and Homeowners insurance
Lila is purchasing a home for $150,000. If she purchases two discount points, how much will Lila be paying for those discount points?
Step 1: 1% of $150,000 is $1,500 per discount point Step 2: $1,500 x 2 = $3,000 Answer: $3,000
Tue or False: A HELOC allows interest-only payments for a specified amount of time.
TRUE A HELOC allows interest-only payments for a specified amount of time.
what are the 4 types of qm loans (qualified mortgage loans)?
The 4 types of QM loans are 1. Small Creditor 2. General 3. Temporary 4. Balloons.
What are the 4 most common indexes in the mortgage industry?
The LIBOR (London Interbank Offered Rate) - has been the index of use for years on AMRS, but sometime in 2021 it will be discontinued The COFI (FHLBB 11th District Cost of Funds Index) - being phased out after is final publication in 2021 The CMT (Constant Maturity Treasury) The SOFR (Secured Overnight Financing Rate) - the federal reserve has recommended this as the alternative to LIBOR and has published a transition plan to promote the use of SOFR on a voluntary basis
What would be the benefit for a veteran to get an IRRRL?
The benefit to an IRRRL is to receive a lower interest rate.
What are the 3 different types of interest rate caps on ARMs? What are the definitions of them?
The first adjustment cap: this allows the loans interest rate to increase or decrease by only a certain amount at the first adjustment the subsequent adjustment cap: this only allows the interest rate to increase or decrease by a specific percentage on any other adjustments after the first adjustment the lifetime adjustment cap: this limits the number of total upward adjustments for the life of the loan (starting interest rate + the lifetime cap = the lifetime maximum interest rate)
A borrower obtains a 3/1 ARM. The initial interest rate is 3% and the margin in 2.25%. The adjustment caps are 4/3/10. The COFI at the first adjustment after the three years is 2%. What is the borrower's interest rate on the first adjustment?
The interest rate at the first adjustment would be 2.25% (margin) + 2% (COFI Index) =- 4.25%. This would not hit any adjustment caps.
What is the maximum origination fee on VA loans?
The maximum allowable origination fee on VA loans is 1%.
A borrower has an initial interest rate of 2.25%. The margin is 1.5%, and the index is the COFI. The ARM has 3/2/8 interest caps. The COFI, at its first adjustment is 1%. The COFI at its second adjustment is 3.25%. The third adjustment is 9.5%. What is the interest rate at the first adjustment?
To solve this, look at what the interest rate is, by adding the margin and the index. The margin is 1.5% but the COFI at the first adjustment is 1%. The two need to be added together. 1.5% (margin) + 1% (COFI Index) = 2.5%, which is the fully indexed rate at the first adjustment. ***remember the adjustment cap of 3/2/8. The first adjustment cannot increase/decrease by more than 3% from the initial rate. the initial rate was 2.25% and the new fully indexed rate at the first adjustment is 2.5%. Since the interest rate at the first adjustment is 2.5%, the cap does not kick in and the interest rate at the first adjustment will be: 2.5%
How are UFMIPs paid?
UFMIPs can be paid in a one-time upfront payment, or they can be financed into the loan.
How much is a borrower generally allowed to take out of the equity in a HELOC?
a HELOC does not generally allow the borrower to take 100% of the equity out of the property. It usually allows around 80% of the equity, which leaves the borrower at least 20% equity in the property.
what is loan to value (LTV) used for? how to determine?
a calculation made to determine whether a borrower qualifies for a program or not. to determine a borrowers LTV, the MLO or underwriter will take a loan amount and divide it by either the borrowers purchase price or the property appraised value, whichever is lower ex: a borrower is purchasing a condo for $100,000. Appraised value is $125,000, and the loan amount will be $90,000. To calculate the LTV, take the loam amount and divide it by the purchase price. The total LTV is 90% a high LTV typically indicates a higher risk to lenders
what is debt to income?
a calculation made to determine whether the borrower can repay the loan they are attempting to receive.
What is the index on an ARM? What is the margin on an ARM? Which change and stay the same?
a measure of market interest rates, and the margin is the profit the lender adds. INDEX FLUCTUATES WITH MARKET MARGIN STAYS THE SAME (assigned at the loan origination)
conforming mortgage
a mortgage that conforms with Fannie Mae and Freddie Mac guidelines, specifically with the loan limit set by them yearly
what is a fixed rate mortgage?
a mortgage with a fixed interest rate over the entire term of the loan ex: 10 years, 15 years, 25 years, or 30 years
down payment
a portion of the price of the home. lenders do not allow a borrower to borrow money to cover the down payment, as this will affect the borrowers DTI gift funds for down payments can be used if the "gift" is from a blood relative who does not expect to be paid back. lenders and underwriters prefer down payments that are sourced solely from the borrower. A borrower sourced down payment shows the lender that the borrower has made a financial commitment to the home, which then shows the lender that it is a less risky investment
What is the period called between rate changes? what happens during this?
adjustment period ex: an ARM that has an adjustment period of 1 year is called a one year ARM, and the interest rate and payment can change once a year. at the time of an adjustment, the lender will add the current index number (this depends on the loans assigned index) plus the margin ex: at the time of adjustment, one year ARM with a margin of 1.25 has an index (LIBOR) of .5%. If you hadd the two together, the new interest rate on the ARM is 1.75%. This is called the fully indexed rate
How does the Hybrid ARM work? How is it advertised?
advertised as 3/1, 5/1, 7/1, or 10/1. These types of ARMs are a mix between fixed rate and adjustable rate mortgages, hence the term hybrid. the ARMs are fixed for a specific amount of time before they begin adjusting. For example, the 3/1 interest rate is fixed for 3 years and then adjusts every 1 year after the fixed period ends.
How does an interest only ARM payment work?
allows the borrower to pay only the interest for their loan for a specified number of years. Typically, interest-only ARMs allow for interest only payments for 3-10 years. This option allows the borrower to have smaller monthly payments for that period. After the interest-only period, the monthly payment increases, and the borrower pays both principal and interest. Some interest only ARMs allow for the interest rate to adjust during the interest only period, some do not.
Which of the following pieces of an ARM does go up and down before and after closing? a) margin b) index c) lifetime cap d) subsequent adjustment cap
b) index The index moves constantly while all other terms of the ARM stay the same.
what are the two types of bankruptcy? what do each allow?
chapter 7 and chapter 13 chapter 7: provides for the complete liquidation of the debtors debt chapter 13: allows the debtor to pay back their lenders through a payment plan decided by the court
On test, we are only tested on interest only payments. Therefore: Regan has finally decided to purchase a new home. Regan works closely with a financial planner. After speaking with her financial planner, she decides that the best product for her would be a 5/1 interest only ARM. Regans new loan amount will be $445,000 and her interest rate is 3.75%. What will her interest only payment be without taxes and insurance?
for interest only, the formula is: Loan amount x rate = payment/12 months Step 1: $445,000 x 3.75% = $16,687.50 Step 2: We then divide $16,687.50/12 months = $1,390.63 Answer: $1390.63
construction loan
generally has higher interest rates than longer-term mortgage loans used to purchase homes the money borrowed through a construction loan is provided in a series of advances as the construction progresses ex: loan pays out $50,000 for the initial foundation work. A month later, another $50,000 for framing, etc. the borrower must pay interest at the end of each month on the amount that has been drawn on the loan. The construction loan is complete when the house is finished. The borrower then goes to the lender that committed on the permanent loan and pays off the construction loan. If the borrower needs a new loan, it is called a "take out" or "end loan". This loan may be fixed rate or an ARM loan.
the loan limit for a conventional mortgage is what?
in 2021 on a one unit property in the US and puerto rico, it is $548,250. the loan limits for Alaska, Hawaii, Guam, and US virgin islands is $822,375 for a one unit property. if a loan amount exceeds conventional loan limits, it will be considered a non-conforming product and cannot be sold to fannie mae or freddie mac
when would a payment ever change on a fixed rate mortgage?
in the event the borrowers taxes and insurance increases (if the borrower is escrowing or when the mortgage insurance is removed) inflation of taxes or insurance is the only way that fixed-rate mortgage payments can go up. If that happens, the lender will divide the new amount of taxes by 12 and add that back into the payment
the interest rate on a mortgage is compounded or applied how often? How is it calculated?
monthly if the annual interest rate on a mortgage is 8%, the periodic interest rate used to calculate the interest assessed in any single month is 0.08/12 = 0.0067 or .67%. The remaining principal balance of the mortgage loan has a .67% interest rate applied it it.
graduated payment loan
mortgage that has a low initial monthly payment that gradually increases over a specified time frame, designed at the time of origination. this type of loan uses negative amortization to allow the borrower to have an initially discounted monthly payment. usually require a larger than usual down payment. The purpose of this type of loan is to allow a borrower with limited income, who can document a likely future increase in income, to buy a house sooner by starting with a smaller house payment that increases over time. a good option for a doctor/lawyer whos income will increase
balloon mortgage
mortgage that requires a larger than usual one time payment at the end of the term. Genrally have P&I payments before the balloon payment comes due, but the borrower will owe a large amount at the end of the loan a balloon payment is more than 2x the loans average monthly payment and can be tens of thousands of dollars. Most balloon payments require one large payment that pays off the remaining balance at the end of the loan. For ex: 360/180. The loan amortizes over 360 months or 30 years (so the payment is a 30-year payment) but the loan is required to be paid in full at 180 months (15 years) in this type of loan, the borrower will pay interest and principal payments for a fixed term, usually the term of a balloon. After that fixed term is over, the borrower must pay off the balance of the loan. a good type of loan for someone who intends to sell their home after a short period
what is the most important difference between a fixed rate mortgage and an adjustable rate mortgage?
most important difference between the two is that the interest rate on an ARM fluctuates. For this reason, a lender will often charge lower interest rates on ARMs than on a fixed rate product
regular amortization
occurs when a payment covers the amount of interest being accrued, plus an additional amount towards the principal balance of the loan. an amortization schedule shows how much a person would have to pay monthly to pay off their loan in a specific period. Ex: the borrower has a 30 year fixedd rate mortgage, they are paying $900 P+I per month. If they make the $900 P&I payment each month, the loan will pay the mortgage off in 30 years. If they pay more, it will speed up the amortization, and they will pay off their mortgage faster than 30 years
when do payments start on a construction loan?
sometimes start 6-24 months after the loan is made. The borrower can pay the loan off in a lump sum or convert the loan to a conventional mortgage loan
how does a borrower qualify for a graduated payment mortgage?
the underwriter will check the numbers based on the full payment amount. a 2/1 temporary buydown is a type of graduated payment mortgage. ex of a graduated payment mortgage borrower receives a 100,000 loan. He selects this type of mortgage and initially pays only $200 a month toward his mortgage. That $200 covers a portion of the $600 interest that accrues on the loan every month. That additional $400 is added back to the principal balance. Therefore, the principal loan amount is growing, as opposed to going down with each monthly payment.
what happens when someone files bankruptcy?
they are legally declared unable to pay their debts. this can severely impact borrowers credit and their ability to borrow money
What position is a HELOC in?
they can be in first or second lien position. Will be in first position if no other lien exists
what is a temporary 2-1 buydown? How does it work?
this means that during the first year of the loan, the borrower will make payments based on an amortization schedule computed using a rate which is 2% less than the rate stated in the note. the second year, the borrower will make payments based on an amortizations schedule computed using a rate which is 1% less than the rate stated in the note. In the third year, the borrower makes the payments on the full note rate. These are similar to graduated payment mortgages where the payment is lower and then gradually increases; in this cased because the interest rate is going up 1% per year
the 30 year fixed rate mortgage is considered a ____ mortgage.
traditional mortgage
how many parts are there to the debt to income ratio? what do each of them include/how are they calculated?
two parts: the front end debt to income ratio/housing expense ratio - this ratio takes the amount that the borrower will be paying for their mortgage and divides it by their gross monthly income the back end debt to income ratio/total expense ratio - this ratio takes all the borrowers monthly liabilities and divides it by their gross monthly income
