CHAPTER 13: Types of Mortgages and sources of Financing

Question 1

Two categories of mortgage loans

Answer 1

1) Conventional Loans
- Are NOT insured or guaranteed by a government agency.
- Requires LENDER to assume the FULL RISK of default

2) Nonconventional Loans
- Includes FHA-insured and VA-guaranteed loans
- Requires smaller down payment
- Govt provides some risk to the lender

Question 2

4 features of Conventional mortgage loans

Answer 2

1) Interest rate is negotiated between lender and borrower
2) Assumption not allowed (due-on-sale clause)
3) Prepayment clause allows borrowers to prepay principal
4) Down payment and must meet loan to value ratio

Question 3

What is used to qualify for a conventional mortgage loan?

Answer 3

Total Obligations Ratio (TOR) must not exceed 36%

Question 4

Amortized mortgage

Answer 4

• Debt is GRADUALLY paid and extinguished by regular period payments. (CONSTANT)
• Entire loan is paid off at the end of the loan term

Question 5

Three factors needed to calculate a mortgage amortization

Answer 5

1) Loan amount
2) Interest rate
3) Monthly payment (principal and interest rate only)

Question 6

Adjustable-rate mortgage (ARM)

Answer 6

Financing technique lenders use to raise or lower the interest rate using a predetermined index

Question 7

Negative amortization

Answer 7

When mortgage payments are NOT LARGE ENOUGH to cover interest expense

Question 8

Partially Amortized mortgage loan

Answer 8

• Single final BALLOON payment for unpaod balance at the end

- Regular payments do not completely pay off the loan at the end of the term

Question 9

Three economic tools that influence money supply

Answer 9

1) Open market operations
-Feds➡️purchase securities ⬆️Money supply ⬇️interest
➡️sell securities ⬇️Money supply ⬆️interest

2) Discount Rate- Interest charged to banks for borrowing $ from the Fed Reserve
⬆️Increased ⬇️Loans ⬇️Money Supply
⬇️Decreased ⬆️Loans ⬆️Money Supply

3) Reserve Requirement (LAST RESORT)
⬆️Increased ⬇️Money Supply ⬆️interest
⬇️Decreased ⬆️Money supply ⬇️interest

Question 10

Which agencies are primarily involved in the SECONDARY market

Answer 10

Federal Agencies

🔵Freddie Mae
🔵Genni Mae
🔵Freddie Mac

Question 11

Truth in Lending Act

Answer 11

🔵Enforced by the Federal Reserve (Regulation Z)

Question 12

Equal Credit Opportunity Act (ECOA)

Answer 12

🔵Enforced by Consumer Financial Protection Bureau

Question 13

Mortgage loan originator

Answer 13

🔵Accepts mortgage loan applications
🔵Negotiates new or existing terms of mortgage loans for lender or borrower
🔵LICENSE IS REQUIRED

Question 14

VA qualifying ratio

Answer 14

(TOR) cannot exceed 41%

Question 15

Loan application process (hint 4)

Answer 15

• Credit evaluation and credit scoring
• Qualifying ratios
• Qualifying the property
• Preapproval and prequalification

Question 16

FHA qualifying ratios

Answer 16

• Housing expense ratio (HER) cannot exceed 31%

- Total obligations ratio (TOR) cannot exceed 43%

Question 17

TILA-RESPA

Answer 17

• Loan Estimate form THIRD business day after receiving application
• Closing Disclosure at least THREE business days prior to closing
• Escrow statement required at closing
• Annual escrow statement required from loan servicer once a year