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REAL3000 > Chapter 10 (plus 11) > Flashcards

Chapter 10 (plus 11) Flashcards

1
Q

What are the four types of residential mortgage loans? Two most popular?

A

Conventional mortgage loans (POPULAR)
FHA and VA gov. mortgages (POPULAR)
Home equity loans
Reverse mortgages

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2
Q

Conventional mortgage loan

A

Any loan that’s not a government loan (FHA and VA)

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3
Q

Conforming conventional loan

A

Form of conforming loan that Meets the requirement for purchase by the GSEs (ex. Fannie Mae and Freddie Mac)

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4
Q

What is typical of a non-conforming loan relative to conforming?

A

Non-conforming is generally riskier, lower liquidity, higher rate. Ex. subprime mortgages are non-conforming.

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5
Q

Private mortgage insurance (PMI)

A

Protects lender against loss due to borrower default. Think “deficiency insurance”

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6
Q

When is PMI required and how can this be circumvented?

A

PMI required when LTV > 80%. Borrowers can piggyback two loans (ex. 80% LTV loan and 15% LTV loan) to avoid paying PMI.

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7
Q

How much of the loan amount will PMI insure and why?

A

Up to 30%, generally the “top 30%” of the loan amount. This is because the property is collateral and covers the rest.

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8
Q

Mortgage insurance premium (MIP)

A

Pay down payment on the PMI and then pay monthly.

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9
Q

How long does PMI last?

A

Until the loan gets down to 80% LTV, then you can cancel PMI. Value = original value at purchase or current market value.

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10
Q

How does PMI differ from piggyback mortgage?

A

PMI is insuring up to 30% of the loan amount. Second piggyback mortgage (ex. 15% LTV if first is 80% LTV) will have a higher rate and shorter term, but this higher rate is only on 15% of the loan!

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11
Q

FHA mortgage

A

FHA is a government loan insurance program, gives borrowers who can’t get a conventional loan to receive a loan. FHA loans through PRIVATE sellers.

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12
Q

How much of the loan does FHA insure, and who are they insuring?

A

FHA insures 100% of loan (cf. PMI 6-30%). It’s impossible for a lender to lose money on an FHA loan.

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13
Q

What is the maximum LTV for an FHA loan?

A

96.5% LTV

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14
Q

How does an FHA loan differ from a conventional loan in terms of insurance paid?

A

Conventional: Borrower stops paying MIP once loan reaches 80% LTV.
FHA: Ongoing MIP, more expensive! Upfront premium is added to loan.

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15
Q

Equity = ???

A

Home value - loan balance

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16
Q

HELOC

A

Home equity line of credit. It’s open-end and revolving, so it goes up and down like credit card debt.

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17
Q

How do rates for mortgages compare to consumer loans?

A

Home equity loans have better rates. Home as collateral is very secure!

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18
Q

Reverse mortgage

A

Convert home equity to income as payments without requiring borrower to sell more. Restricted to 62+ year old.

19
Q

When is a reverse mortgage paid back?

A

The earlier date between death and moving out of the house.

20
Q

What are the two types of reverse mortgages?

A

Term: Equal monthly payments for fixed period/occupancy. RARE! Ex. $1000 monthly payments for 60 mo. At mo. 61, you won’t receive $1000 but interest will continue to add to loan amt.
Tenure: Equal monthly payments for life/occupancy. Loan amount determined by borrower’s age, int rate, and home val.

21
Q

FHA’s Home Equity Conversion mortgage

A

Non-recourse reverse mortgage. Insurance pays any deficiency if balance exceeds value of home at time of repayment. MIP like FHA mortgages, which are expensive!

22
Q

Interest-only mortgage

A

Bullet loan! Typically adjustable rate and short term. Common for development/construction.

23
Q

Interest only amortizing loan

A

Pay interest-only for some period (ex. 5 years). At the end the loan converts to a fully amortizing LPL.

24
Q

Hybrid ARM

A

A loan that adjusts after some fixed period. Fully amortizing over life of loan. Lower rates than fully amortizing LPL.

25
Q

Define a 5-1 hybrid ARM

A

Loan is fixed for 5 years. Adjusts 1 time/year thereafter.

26
Q

Option ARM

A

Borrowers select from several initial payment options. Arbitrarily low start rate (as low as 1%), rate adjusts monthly. At end of initial period (ex. 5 yrs) or max loan amt (ex. 120% of original loan) it converts to a fully amortizing LPL. HUGE payment increases.

27
Q

Which type of ARM is negative amortizing?

A

Subprime loans and Option ARM. Payment caps so negatively amortizes.

28
Q

What is the only way a negatively amortizing loan would be viable?

A

If the property appreciates in value faster than the negative amortization. Then borrower could refinance after initial period.

29
Q

APR

A

Annual Percentage Rate. A standardized way of stating the REAL costs of a loan (interest + costs)

30
Q

What’s the flaw with APR?

A

Assumes that up-front costs are spread over full life of loan. If you only hold a 30-year loan for 7 years, the borrowing rate will be HIGHER than APR.

31
Q

Net benefit

A

Benefit - Cost

Benefit: Sum of savings in future interest payments over remaining holding period
Cost: Up-front costs associated with refinancing

32
Q

Interest rate spread rule

A

Refinance if spread between old and new rate is greater than 2%. TERRIBLE!

33
Q

Payback period rule

A

(Cost of switching. Think upfront) / (total monthly savings between two loans) = payback period. Ex. If cost of switching is $20,000 and total monthly savings is $2000, the payback period is 10 months. If we expect to hold prop longer than 10 months, refinance!

34
Q

Net benefit rule

A

Sum of savings over holding - cost

35
Q

What is the issue with the int rate spread rule, payback period rule, and net benefit rule?

A

We are paying the cost up-front but enjoying benefits over time. We need to adjust those future cash flows to PV and these methods don’t do that.

36
Q

Loan underwriting

A

Determining whether to approve a particular loan for a particular borrower.

37
Q

What are the three C’s of traditional underwriting

A
  1. Collateral. This is the HOUSE, value determined by appraisal.
  2. Creditworthiness. Determined by FICO score.
  3. Capacity. Ability to repay, may look at income.
38
Q

What is the difference between approvals for residential and commercial loans?

A

For commercial, appraisal will also make thorough estimations of cash flows (CF). Lender gets paid back from CF, so personal financial stability isn’t taken into account.

39
Q

PITI

A

Principal, interest, taxes, and insurance. These are the four components of a mortgage payment.

40
Q

GMI

A

Gross monthly income.

41
Q

Housing expense ratio (“front-end”)

A

= PITI/GMI. Can I pay the mortgage payment with my monthly income?

42
Q

What is the max housing expense ratio for conventional and FHA loans?

A

Conventional: 28%
FHA: 31%

43
Q

Total debt ratio (“back-end”)

A

= (PITI + LTO) / GMI. LTO is long-term obligations such as child support or car loans.

44
Q

What is the max total debt ratio for conventional and FHA loans?

A

Conventional: 36%
FHA: 43%

REAL3000 (12 decks)

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