Chapter 11: Applying for a Residential Loan Flashcards
Index
The interest rate on an ARM is tied to an index, a published indicator of changes in market rates.
Increases and decreases in the index rate are the basis for changes in the loan’s interest rate.
Margin
When an ARM is made, the lender sets a margin for the loan.
The margin is the difference between the index rate and the actual rate the borrower is charged. It covers the lender’s administrative expenses and provides a profit
Conventional Loan
A conventional loan is an institutional mortgage loan that is not insured or guaranteed by a government agency such as the FHA or the VA.
Nonconforming loan
A nonconforming loan is a conventional loan that doesn’t meet the uniform underwriting standards established by Fannie Mae and Freddie Mac.
Nonconforming loans are more difficult to sell on the secondary market than conforming loans.
Conventional Loan LVT’s
Conventional loans may have LTVs as high as 95% or even 97%.
However, loans with LTVs greater than 80% typically come with higher interest rates and fees.
Private Mortgage Insurance
For a conventional loan with an LTV over 80%, the borrower is usually required to purchase private mortgage insurance, or PMI.
The insurance will reimburse the lender for losses incurred if the borrower defaults.
Qualifying Standards
For conventional loans, lenders generally use both a housing expense to income ratio and a debt to income ratio to evaluate whether the loan applicant’s income is sufficient.
As a general rule, the applicant will qualify for the loan only if his income is adequate under both tests.
VA-guaranteed loan
VA-guaranteed home purchase loans are available to eligible veterans of the armed forces.
The loans are guaranteed by the federal government, so that if the borrower defaults, the VA will reimburse the lender for its losses.
Eligibility
To be eligible for a VA loan, a veteran must have served at least a minimum amount of time on active duty.
The amount of active duty required is less for service during wartime.
An eligible veteran is issued a Certificate of Eligibility by the VA.
Notice of Value
The appraisal document used in a VA loan transaction is called the Notice of Value.
VA Guaranty
Although the VA does not set a maximum loan amount, it does have a maximum guaranty amount.
Restoration of Entitlement
If a VA loan is assumed, the original borrower’s VA entitlement can be restored if the buyer is an eligible veteran willing to substitute his entitlement for the seller’s.
After restoration of entitlement, the seller can apply for a new VA-guaranteed loan to purchase another home.
Predatory Lending
Predatory lending is lending that takes unfair advantage of unsophisticated borrowers, sometimes with the participation of real estate agents or appraisers.
