Section 13
What would the minimum down payment be for an FHA loan of $250,000?
$8750 take $250,000.00 x .035= $8750
What are the three stages of an adjustable-rate mortgage ARM?
1. initial rate period - introductory period where interest rate is locked in 2. Adjustment period- sets periods of time in which the ARM loan's interest rate can be adjusted 3. Lookback period- date when the index rate for the upcoming adjustable period is selected
Advantages of a Balloon-Payment Mortgage
1. lower interest rate (.25% to .5%) lower than fixed 2. if you plan to sell in 5-7 years 3. lower rate gives borrowers increased purchase power because housing expenses are lower
two advantages of non-conforming conventional loans:
1. take longer to close 2. no legal limit on loan amount
The lender will decide when PMI can be removed, but the law requires it to be removed by what equity mark?
22%
Jill is refinancing her home. Payments on the new loan will be $350 less than her old loan. The refinancing costs will be $2,100. How long will it be until until the refinancing pays off for Jill?
6 months take the cost to refin $2100 and divide it by the difference for the new loan $350 = 6
If a loan's margin is 2% and the index rate is 6%, the interest rate will be:
8%
Example of how a construction loan works:
A borrower is constructing a single-family home whose value, when complete, will be $88,000. The construction loan amount, therefore, will be 75% of this, or 0.75 × $88,000 = $66,000. The mortgage contract calls for a series of six draws of $11,000 each over six months at a 10% annual interest rate. The borrower will want to have a long-term mortgage loan of $67,951.98 at the end of the sixth month when the construction loan balance becomes due. (Notice that the borrower pays almost $2,000 in interest for one six-month period.)
Cammy takes out a fully-amortized, fixed-rate loan for her new vacation home on Lake Placid. When Cammy's mother asks her to fly to Singapore for their family vacation, Cammy tells her mother she doesn't know if she can afford it, as her loan payments could fluctuate. Analyze if Cammy is correct.
Cammy has a fully-amortized, fixed-rate loan, so she knows exactly how much her loan payments will be every month.
Example of a wrap-around loan:
Daisy pays Jim a down payment of $20,000, and she agrees to a $60,000 wraparound note at 7%. When all is said and done, Daisy makes a monthly payment of $1,200 to Jim. Jim continues to pay his lender his $900 monthly payment while he gets paid the $1,200 from Daisy. This gives Jim a monthly net income of $300 ($1,200 - $900). banks don't like this
Another FHA characteristic- Mortgage-Insurance Premium (MIP)
FHA loans require this premium, upfront premium of 1.75% of the loan total 2nd is the annual premium, which is paid monthly- rate varies based on length of loan and loan to value ratio
Government-backed loans include
FHA, VA, USDA they don't provide money, they only insure or guarantee the loans
A borrower can switch from an adjustable rate to a fixed rate, but they cannot switch from a fixed rate to an adjustable rate.
False
The guidelines that determine if a conventional loan is conforming or non-conforming are set by:
Fannie Mae and Freddie Mac
Millie used a wraparound mortgage to sell her home to Chris. Chris is paying her a monthly payment of $1,750 while Millie continues to pay off her original loan with $850 monthly payments. This is true of the situation:
If Chris is paying Millie $1,750 every month, Millie will be receiving a net income of $900 from the wraparound mortgage.
Why might a borrower who is planning on moving soon NOT want to refinance?
If a borrower is planning on moving to a new home in the near future, they may not be in the home long enough to recover from a mortgage refinance and the costs associated with it.
Negative Amortized Loans (deferred interest)
If a borrower's payments are not large enough to cover the interest due on a loan, the unpaid interest is added to the principal balance.
Jim is buying a home, but Bank of Aceable didn't qualify him for the full home price. He takes out a purchase-money mortgage to supplement the rest of the sales price. Where will Jim's payments go for the purchase-money mortgage?
Jim's purchase-money mortgage was loaned by the seller of the home, so Jim will have to pay back the seller of the home.
Moira had credit card debt, an auto loan, and a student loan. Then she found a home equity loan that had a lower interest rate than her other debts and she decided to consolidate all her loans with it. Which of these is a potential risk for Moira?
Moira is putting up her home as collateral for all her debt payments.
FHA 203(b)
Specifically, the FHA 203(b) loan insurance program is for people who want a single-family FHA-insured mortgage loan. The loan "may be used to purchase or refinance a new or existing one- to four- family home in both urban and rural areas including manufactured homes on permanent foundations," loan terms 15 to 30 years
Terry takes out a balloon-payment mortgage of $300,000. Which of these most likely describes his loan?
Terry will make low payments for a short term (7 years), after which a balloon payment is due
Section 251 (FHA ARM)
The FHA insures adjustable-rate mortgages (ARMs) available for 1-4 family dwelling units down payment, loan amount and qualifying standards are the same as the 203b and may be written for 30 years
Index Links
The London Interbank Offered Rate (LIBOR), the 11th District cost of funds, or the maturity yield on one-year Treasury bills. Based on one of these three indexes, the index rate of the ARM will move up or down (like your own arm can move up and down).
the margin
The difference between the ARM's rate and it's eventual fully-indexed interest rate eg. ARM's indexed rate is at 3% and the margin is 4%, the fully-indexed rate is going to be 7%. If the ARM's index rate increases to 5%, the fully-indexed rate increases to 9%.
What does the margin of an ARM tell you?
The difference between the ARM's rate and its eventual fully-indexed interest rate is known as the margin.
mortgage insurance premium (MIP)
The insurance to protect the lender that is provided by the Federal Housing Agency (FHA) 1.75% of total loan upfront annual premium- paid monthly- rate varies based on length of loan and loan-to-value ratio
fully-indexed rate
The rate you get when you add the index and the spread
Partially Amortized Loans
This means that even though there are equal payments going towards the principal and interest, the loan will not be fully paid off with the last scheduled payment.
A Fannie Mae-backed interest-only loan requires a 30% down payment, at least a 720 credit score, and a 24-month cash cushion. True or False
True
It's important to note that the FHA is not originating or funding loans; they are only insuring them.
True
The FHA does not set interest rates for these loans. Interest rates are negotiated between the borrower and the lender.
True
The Federal Housing Finance Agency (FHFA) sets maximum limits on conforming loans. True or False
True
The U.S. Department of Agriculture (USDA) makes loans to low-income buyers that are guaranteed through government-backed programs. True or False
True
fixed-rate mortgages are sold to the secondary market, while ARMs stay within the lender's institution. This means that ARMs can usually be more customizable than fixed-rate.
True
the FHA is the largest mortgage insurer in the world with an active insurance portfolio of over $1.3 trillion.
True
Graduated-payment mortgage (GPM)
a blanket term for a family of loans characterized by low initial payments that increase (or "graduate") at set intervals and by set amounts during the term of the loan. Payment amounts usually increase anywhere between 7.5% and 12.5% annually until reaching a fixed amount that continues for the rest of the term. not used as much anymore; some have negative amortization
What usually happens when a construction loan becomes due?
a borrower will typically use long-term financing to pay off the construction loan
The spread (also known as the margin)
a fixed amount above the index, which the borrower will pay. This is given as a percentage to be added on top of the index. For example, if the spread on a loan is 3%, then the borrower is always paying 3% above whatever the index is at the last adjustment.
home equity loan
a loan in which funds are borrowed using the homeowner's equity for collateral. It's notable that these funds can be used for any purpose, such as remodeling the kitchen or paying for college tuition. often limited to 80% of the value of the property
purchase-money mortgage
a loan in which the buyer borrows part or all of the purchase price from the seller selling financing is a form of private lending can borrow from the seller in addition to a lender
adjustable-rate mortgage (ARM) loan
a loan with an interest rate that can increase and decrease periodically throughout the life of the loan, often based on a market index. may have an introductory rate
A subprime loan might be the only option for a borrower with:
a low credit score
What does a rate cap protect a borrower from?
a sudden and excessive increase in interest rate.
interest-only loans (straight loan/term loan)
a type of balloon-payment loan that calls for periodic payments of interest. loan goes toward interest only generally used for home improvements, 2nd mortgages, investor loans
The benchmark (also known as index)
a way for investors to compare how this mortgage is doing compared to other similar types of mortgages.
Open-end mortgages
allow the mortgagor to borrow additional funds at a later date on top of the original loan amount. This is useful to a new homebuyer who wishes to buy, for example, furniture or a washer and dryer after the home purchase. open-end mortgage will be increased, often with a concurrent change in the interest rate.
A wraparound mortgage, also called the wrap
an arrangement in which the seller of a property extends a mortgage to a buyer; the seller maintains their original loan and continues to pay it while also receiving mortgage payments from the buyer a form of secondary financing
A loan that is fully amortized will:
be paid off in full with the last scheduled monthly payment
Bridge loans are typically used:
before the borrower obtains more long-term financing.
loan that has more than one collateral property as security
blanket mortgage
loan usually taken out by land developers
blanket mortgage
can be used to finance a home purchase before the buyer's previous home has sold
bridge loan
short-term loan taken out in anticipation of obtaining longer-term financing
bridge loan
Conventional loans
comes from private lenders, not insured by the government generally 20% down payment, may need PMI considered high risk for lenders
A type of open-end mortgage
construction loan
the lender pays the borrower in installments called "draws"
construction loan
Which of these loans is typically seen as a higher risk for lenders?
conventional loans
Blanket mortgages
create a blanket lien on the collateral properties. This means that in the event of default, the lender may foreclose on all of the properties thus encumbered more than one collateral property that acts as security for the loan
The difference between the amount owed to the mortgage company and the amount the home is worth is called ______.
equity
The FHA does not:
fund loans
What are the two types of mortgage loans?
government insured/govt guaranteed or conventional loans
originally used to entice first-time homebuyers who expected their incomes to increase
graduate mortgage payment loan
loan that has a low initial payment that increases over time
graduated payment loan
Tax Cuts and Jobs Act of 2017
if a borrower uses their cash-out refinance money for anything other than buying, building, or improving a home, the interest on that portion of the loan is not tax-deductible.
package mortgage
includes not only the real estate but also all personal property and appliances installed on the premises. used often in the sale of condos
The Federal Housing Administration (FHA) is a part of the United States Department of Housing and Urban Development (HUD) and is charged with:
increasing home ownership facilitating and financing home sales and home repairs contributing to building healthy neighborhoods and communities
also called a straight loan
interest only loan
contains a balloon payment at the end of the loan term
interest only loan
Reverse mortgages, also called reverse annuity mortgages (RAMs)
loans designed for people over the age of 62. They can be a lifesaver when used to supplement income that is needed for essentials like medicine, food, payments, etc. Reverse mortgages can sometimes allow the borrower to take cash out.
Conventional conforming loans
loans that conform to the guidelines set by Fannie Mae and Freddie Mac and, thus, can be sold on the secondary market to government-sponsored enterprises (GSEs). made using the Uniform Residential Loan Application (Fannie Mae Form 1003 or Freddie Mac Form 65).
Conventional non-conforming loans
loans that do not follow Fannie Mae and Freddie Mac guidelines and, thus, will not be purchased by Fannie and Freddie on the secondary market (although other secondary market buyers may choose to purchase them). eg Jumbo loan
Fully Amortized Loans
loans that include equal monthly payments that go toward the interest and principal interest paid in arrears- borrower is paying for borrowing the money after they have been using it for a period of time
FHA Loan characteristics
low down payments (as low as 3.5%) down payment can come from a family member or charitable organization looks for a history of reliable payments over credit scores minimum required housing-to-income ratios and total debt rations loans vary by location no prepayment penalty clause
Fixed-rate mortgages are advantageous because:
monthly rates stay the same, allowing for easier budgeting
subprime mortgages
mortgages with higher interest rates generally made to borrowers with lower credit ratings lots of predatory lending happens here
balloon-payment mortgage
not fully amortized short term- usually 5-7 years, but payments are based on a longer term, as if it was 30-years more common in commercial transactions, some residential
What are the interest rate caps for FHA ARMS?
one and three year ARMS- annual cap of 1% and life-of-loan cap of 5% five, seven, and 10 year hybrid ARMs- annual cap of 2% and life-of-loan cap of 6%
What are the three types of cap rates?
periodic rate cap- limits the change of interest year over year lifetime cap (ceiling)- limits the increase of interest for the life of the loan payment caps- limits the amount of the monthly load payment from the borrow- states in dollars and not % points
The FHA does all of the following:
provides qualification standards insures loans provides loan limits insures ARMS
the borrower is the buyer and the lender is the seller
purchase money mortgage
the loan is borrowed from the seller
purchase-money mortgage
Roberta took out an interest-only loan on her house. After 5 years, she needs to sell her house, but the property value has plummeted. This describes Roberta's situation?
she will owe more money on the balloon payment than she will be able to get from the sale of the house.
Bridge loans
short-term loans typically taken out for a period of two weeks to three years, while the borrower works to attain larger or longer-term financing. used in new construction of a home being built, also used to bridge the mortgage between current home and a new one they wish to purchase eg. a construction loan; buyer gets the new house before closing the one current house- the bridge loan would allow the buyer to take equity out of the current home and use it as a down payment on the new home, with the expectation that the current home will sell soon
What is an overlay?
something that is self-imposed by the mortgage company or investors to have stricter lending requirements, which means a less risky loan When an overlay is in place, the lender requires the applicant's credit score to be higher than FHA standards.
rate cap
stopping point for the interest on an ARM
have higher fees and interest rates because of the perceived high risk of the loan
subprime loan
thought of as high-risk loans for lenders
subprime loan
Jeremy took out a 5/1 ARM. What does the 5 mean?
the interest rate is fixed for five years first number will always be the number of years that the interest rate is fixed
federal funds rate
the interest rate that banks charge other banks for overnight loans, so adding 3% to that gives you the prime rate
prime rate
the interest rate that's issued for mortgage borrowers with what lenders deem as "good credit." This rate is usually three percentage points above the federal funds rate, which is set by the government.
Which of these happens when a borrower takes out a reverse mortgage:
the lender has a lien on the property
A borrower takes out a zero-closing-cost mortgage. How might a lender make up the money for closing costs?
the lender might charge the borrower a higher interest rate.
construction mortgage
the lender pays funds to a borrower in installments, called draws, as the construction progresses. The sum total of these draws is typically 75% of the value of the property when it is completed. At the end of the building's construction, the entire loan amount plus the interest accrued becomes due. This is usually paid for with a long-term mortgage that the borrower has arranged for in advance.
fully indexed interest rate
the margin and the index, are combined If the margin on a loan is 3% and the index rate is 5%, the interest rate will be 8%. If the index rate goes down to 3% at the next index reset period, the interest rate on the mortgage will be 6% (margin + index).
Refinancing
the process of obtaining a new mortgage in an effort to reduce monthly payments, lower interest rates, take cash out of a home for large purchases, or change mortgage companies. Think of it as replacing a mortgage you don't want for a mortgage you do want.
In a fully-amortized, fixed-rate loans what happens with the interest rate?
the same for the life of the loan, and the monthly payments remain the same
Which of these is a reason that GPMs have fallen out of favor with lenders?
they carry a higher rate of default
ARMs are advantageous for borrower when:
when the borrower doesn't plan on being in the house long, allowing them to take advantage of the low initial interest rate.
a form of secondary financing
wrap around mortgage
the lender assumes responsibility for an existing mortgage
wrap around mortgage
