Chapter 2 Flashcards
Products & Programs
Name the two major types of mortgage products
- Fixed-Rate
- Adjustable Rate
. A fixed-rate mortgage
has fixed terms of _____.
10 years, 15 years, 20 years, 25 years, or 30 years
What is the only time that a fixed-rate payment
can change?
The only time a payment changes on a fixed rate mortgage is in the event of the borrower’s
taxes and insurance increasing (if the
borrower is escrowing) or when the mortgage
insurance is removed.
What’s the difference between a traditional and a
non-traditional mortgage?
A traditional mortgage is a 30-year fixed
mortgage.
A non-traditional mortgage is
anything other than a 30-year fixed-rate
mortgage, like a 15-year or a 25-year fixed rate mortgage.
Adjustable-Rate Mortgages (ARMs) start with an ____.
initial rate and payment
Adjustment period
The period between rate changes
Name the two parts of an ARM’s interest rate.
- Index
- Margin
When the lender adds the current index plus the margin, they get the
______.
fully indexed rate
Name the three types of interest rate adjustment caps that can exist on ARMS.
- First Adjustment Cap
- Subsequent Adjustment Cap
- Lifetime Adjustment Cap
Some ARMS have ____ instead of, or in addition to, interest-rate caps.
payment caps
Name the three most common types of ARMs
- Hybrid ARM
- Interest-Only ARM
- Payment Option ARM
periodic interest rate
the interest rate charged on a loan over a specific period
TRUE OR FALSE. Lenders quote interest rates monthly, but in most cases, the interest
compounds more frequently than monthly.
FALSE (Correct Answer: Annually)
Name three questions you should ask a borrower before suggesting an ARM
- Is your income high enough – or likely to rise enough – to cover the higher
mortgage payments if interest rates go up? - Will you be taking on any other sizable debts, such as a car loan or school
tuition soon? - 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).
TRUE OR FALSE. A construction loan generally has lower 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.
FALSE (Correct Answer: higher
interest rate)
Explain a Construction Permanent 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.
Explain a Bridge Loan
a short-term loan secured by the borrower’s 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.
Explain a Balloon Mortgage
a mortgage that requires a larger than usual one-time
payment at the end of the term. These loans generally 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 ______.
two times the loan’s average monthly
payment and can often be thousands to tens of thousands of dollars.
A graduated-payment mortgage (GPM) is
a mortgage that has a low initial monthly
payment that gradually increases over a specified time frame, designated at the time
of origination.
A GPM uses
negative amortization to allow the borrower to have an initially discounted monthly payment. GPMs typically require a larger than usual down payment. The purpose of a GPM 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 Home Equity Line of Credit, or HELOC
is a 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 borrower’s equity in
their property. The draw period is for a set period of time, like 5, 10, or 15 years.
The term simultaneous second may also come up when we talk about
second mortgages.
A simultaneous second is a second loan that is closed at the same time as the first
mortgage. In this situation, the second mortgage is used to provide a portion of the down payment primarily to avoid private mortgage insurance (PMI).
There is a required disclosure for homeowners obtaining HELOCs, called
“What You Should Know About Home Equity Lines of Credit.” MLOs are required to provide this disclosure within three business days of application.
A conforming mortgage
A mortgage that conforms with Fannie Mae and Freddie Mac guidelines, specifically with the loan limit set by them yearly.
A non-conforming loan
is any loan that does not conform to Fannie Mae and Freddie Mac guidelines.
A conventional loan
can be either non-conforming or conforming
Name Fannie Mae and Freddie Mac’s Automated Underwriting Systems.
- Freddie – Loan Product Advisor (LP)
- Fannie – Desktop Underwriting (DU)
Conventional Loans: Maximum Debt-to-Income
Manually Underwritten – 28%/36% (up to 45% with specific requirements)
Conventional Loans: Minimum Down Payment
Minimum Down Payment is 3% (Up to
97% LTV)
Conventional Loans: Minimum Credit Score
Depends, but general rule of thumb is
640 FICO (thought it can go lower)
Conventional Loans: Loan Limit
For 2022, $647,200 conforming (adjusted
annually)
Over $647,200 is a non-conforming
conventional loan (jumbo loan)
For 2021, the conventional loan limit is
$548,250.
Conventional Loans: Private Mortgage Insurance (PMI)
Required on conventional loans with less
than 20% down (or LTVs over 80%)
Conventional Loans: Appraisal
Required unless Fannie or Freddie give
an Appraisal Waiver when the loan goes
through automated underwriting
Conventional Loans: Gift Funds
Yes, Allowed
Conventional Loans: Borrowers with Bankruptcy
4 years from Chapter 13 discharge or
dismissal, 4 years from Chapter 7 filing
(or 2 years with extenuating
circumstances)
Conventional Loans: Borrowers after Foreclosure
7 years from foreclosure, 4 years from
short sale
Conventional Loans: Conventional Loans: LTV requirements on Cash Out Refinances
85% Maximum LTV
Conventional Loans: Reserves
Usually 2 to 4 months (determined by LP or DU)
Conventional Loans: Seller Concessions
3% in most situations, can go higher if the down payment is higher.
Conventional Loans: Non-Occupying Co-Borrower
Not Allowed
Conventional Loans: Assumable
No
Conventional Loans: Employment History
2 years required
Debt-to-income
is a calculation made to determine whether the borrower can repay the
loan they are attempting to receive. The debt-to-income ratio, or qualifying ratio, varies
from program to program.
What are the two different parts of the debt-to-income ratio?
- The Front-End Debt to Income Ratio/Housing Expense Ratio: This ratio
simply 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 borrower’s monthly liabilities and divides them by their gross monthly
income.
Loan-to-value
LTV, is another calculation made to determine whether a borrower qualifies for a program or not. Programs require that borrowers put a specific amount down or have a specific amount of equity in their property to obtain a loan.
A lower LTV typically indicates a higher risk to lenders.
FALSE (Correct Answer:
higher LTV)
Explain Loan Limits
Loan limits are the maximum that you can lend on the property based on Fannie and Freddie Guidelines. They change annually.
Seller concessions
the costs that the seller or lender are paying
(The limit on seller concessions on conventional loans depends on how much the borrower is putting down. If the borrower’s down payment is less than 10%, the seller can contribute up to 3%. If borrower’s down payment is between 10% and 25%, the seller can contribute
up to 6%. If the borrower’s down payment is more than 25%, the seller can contribute up
to 9%. )
Reserves, or PITI Reserves
(Principal/Interest/Taxes/Insurance Reserves), is the cash
amount that the borrower has available after making a down payment and paying closing costs for the purchase of a home.
Private Mortgage Insurance (also known as PMI)
required on all conventional/conforming loans when the borrower’s down payment is less than 20% or if the loan has an LTV of more than 80%.
Private Mortgage Insurance (PMI) is insurance for conventional loans that
protects
the lender from incurring a loss in the event of default.
FHA Loans: Maximum Debt to Income
31%/43%
FHA Loans: Minimum Down Payment
Minimum Down payment is 3.5% (Up to 96.5% LTV)
FHA Loans: Minimum Credit Score
580 with 3.5% down or 500-579 if the borrower puts down 10% or more
FHA Loans: Annual Mortgage Insurance
Yes- required
FHA Loans: Upfront Mortgage Insurance
Yes - required
FHA Loans: Appraisal
Required
FHA Loans: Gift Funds
Yes- allowed
FHA Loans: Borrowers with Bankruptcy
2 years after Chapter 7 discharged, 1 year after Chapter 13 filing
FHA Loans: Borrowers after Foreclosure
3 years from foreclosure or short sale
FHA Loans: LTV requirements on cash-out refinances
85% maximum LTV
FHA Loans: Reserves
No Reserve Requirement
FHA Loans: Seller Concessions
6% Maximum
FHA Loans: Non-Occupying Co-Borrower
Allowed
FHA Loans: Assumable
Yes, with FHA creditworthiness check
FHA Loans: Employment History
FHA loans are less strict on employment history, no specific requirement
FHA Loans: Owner-Occupancy
Yes (must move in within 60 days) and continue occupancy for one year
The Department of Housing and Urban Development (HUD) insures
FHA (Federal Housing Administration) Loans.
Name the 4’C of Underwriting.
- Credit history of the borrower (Do they pay?)
- Capacity to repay the loan (Can they pay?)
- Cash/Capital assets available to close the mortgage
- Collateral, which evaluates the value of the home.
An underwriter will use the Credit Alert Verification Reporting System (CAIVRS) to
determine whether a borrower has ever failed to repay their federal debts or obligations.
The CAIVRS system is a database created by the Federal Government and used for this
specific purpose.
The minimum down payment on an FHA loan is
3.5%
Define gift funds
A borrower can use gift funds received from a relative or employer for the
entire amount of the down payment. To be considered a gift, the relative or employer
cannot require repayment of the funds from the borrower. A gift letter must be signed by the donor, listing their name and contact information, as well as the specific dollar amount of the gift
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.
Mortgage Term of More than 15 Years & Less than or equal
to $625,500
Less than 90% LTV | Greater than 90%, but less than 95% LTV | Greater than 95%
LTV
Less than 90% LTV: MIP -80, Duration -11 years
Greater than 90%, but less than 95% LTV: MIP- 80, Duration -Mortgage term
Greater than 95%
LTV: MIP -85, Duration -Mortgage term
Mortgage Term of More than 15 Years & Greater than $625,500
Less than 90% LTV | Greater than 90%, but less than 95% LTV | Greater than 95%
LTV
Less than 90% LTV: MIP -100, Duration -11 years
Greater than 90%, but less than 95% LTV: MIP- 100, Duration -Mortgage term
Greater than 95%
LTV: MIP -105, Duration -Mortgage term
Mortgage Term of Less Than Or Equal to 15 Years & Less than or equal to $625,000
Less than 90% LTV |
Greater than 90%
Less than 90% LTV: MIP- 45, Duration -11 years
Greater than 90%: MIP -70, Duration - Mortgage term
Mortgage Term of Greater Than Or Equal to 15 Years & Greater than or equal to $625,000
Less than 78% LTV | Greater than78% but less than 90% |Greater than 90% LTV
Less than 78% LTV: MIP - 45, Duration -11 years
Greater than 78% but less than 90%: MIP - 70, Duration - 11 years
Greater than 90% LTV: MIP-95, Duration -Mortgage term
Explain the difference between PMI and FHA mortgage insurance.
A borrower purchases Private Mortgage Insurance for a conventional loan through a
third-party company. Mortgage Insurance Premium and Upfront Mortgage Insurance
Premiums are paid directly to the FHA. It’s important to remember the difference
between the two, particularly when you are talking to your borrowers. Mortgage
Insurance Premium on FHA loans can sometimes be less expensive than PMI, so it’s
important to compare both options when comparing loan scenarios.
Lending limit
FHA has a maximum loan amount that they will insure
Explain 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.
Assumable mortgages typically have fewer closing costs and can serve as a unique
marketing strategy for sellers.
Explain FHA Streamlines
a 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 instances, an appraisal
A reverse mortgage is
The most common type of reverse mortgage is
a type of home equity loan.
the FHA Home Equity Conversion Mortgage, or HECM.
Explain HECMS
An HECM is a particular type of mortgage/home equity loan developed and insured
by the Federal Housing Administration (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
Name three basic requirements for HECMs.
- 62 years of age
- Principal residence that is paid off or almost paid off
- Mandatory counseling
VA Loans: Maximum Debt-to-Income
41% Residual Income
VA Loans: Minimum Down Payment
0% (100% financing available on purchase
transactions)
VA Loans: Minimum Credit Score
N/A
VA Loans: Funding Fee
Required – based on down payment and
entitlement
VA Loans: Appraisal
Required
VA Loans: Gift Funds
Allowed if the Borrower puts a payment down
VA Loans: Borrower with Bankruptcy
2 years after Chapter 7 discharge, 1 year after Chapter 13 filing
VA Loans: Borrowers after Foreclosure
2 years after foreclosure or short sale
VA Loans: LTV requirement on cash-out refinance
Maximum 90% LTV
VA Loans: Reserves
No reserve requirement
VA Loans: Seller Concessions
4%
VA Loans: Assumable
Yes – with VA/lender approval
VA Loans: Owner-Occupancy
Yes – within 60 days
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.
A veteran borrower must have?
suitable credit, income, and a valid Certificate of Eligibility (COE) to be eligible for a VA loan. A borrower can only use a VA loan for primary residences.
Veterans can have a previously used entitlement restored to?
purchase another home with a VA loan if certain requirements are met.
maximum loan limit
The amount a borrower qualified for with full entitlement without making a down
payment
The basic entitlement that is available to the veteran is
$36,000. Most lenders will lend up to four times the veteran’s available entitlement without a down payment.
As the veteran’s
basic entitlement, the VA guarantees to the lender that they will pay up to ?
at least $36,000
or 25% of the veteran’s loan amount, whichever is less, if the veteran defaults
bonus entitlement
The VA has a second tier, in case the veteran wants to buy a home that costs more than $144,000.
Funding Fees: First Use
Down Payment %: Less than 5%
Down Payment %: 5% or more
Down Payment %: 10% or more
Down Payment %: Less than 5%
Funding Fee Required: 2.3%
Down Payment %: 5% or more
Funding Fee Required: 1.65%
Down Payment %: 10% or more
Funding Fee Required: 1.4%
Funding Fees: After First Use
Down Payment %: Less than 5%
Down Payment %: 5% or more
Down Payment %: 10% or more
Down Payment %: Less than 5%
Funding Fee Required: 3.6%
Down Payment %: 5% or more
Funding Fee Required: 1.65%
Down Payment %: 10% or more
Funding Fee Required: 1.4%
For cash-out refinance VA loans
the funding fee is 2.3% for first use and 3.6% if it’s subsequent use
When calculating debt-to-income the VA only uses
The VA only uses the back end or total debt-to-income ratio
The maximum back-end debt-to-income ratio is 41%.
Explain residual income.
Residual income is 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. The acceptable thresholds for residual income
are based on the region in which the veteran lives.
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 or Certificate of Reasonable
Value (CRV)
The NOV must be submitted in conjunction with the appraisal report when originating a
VA loan.
The VA maintains a 1%
maximum origination charge
Name three examples of reasonable and customary fees allowed on a VA loan.
- Appraisal fees
- Recording fees
- Credit report fees
The lender may not charge the veteran for ?
any attorney’s fees or escrow service fees associated with the settlement of the loan
The VA IRRRL, or VA Interest Rate Reduction Refinance Loan
is 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.
The funding fee on an IRRRL is
0.50% for everyone
USDA Loans: Maximum Debt-to-Income
29%/41%
USDA Loans: Minimum Down Payment
0% (100% financing available on purchase
transactions)
USDA Loans: Guarantee Fee
Required
USDA Loans: Income Limit
115% max of area media
USDA Loans: Gift Funds
Allowed if the Borrower puts a payment
down
USDA Loans: Borrower with Bankruptcy
3 years after Chapter 7 discharge, 1 year after Chapter 13 filing
USDA Loans: Borrowers after Foreclosure
3 years after foreclosure, 2 years from short sale
USDA Loans: Reserves
No reserve requirement
USDA Loans: Seller Concessions
Unrestricted
The USDA loan, or U.S. Department of Agriculture loan
is a type of mortgage that is available in rural areas of less than 35,000 people.
USDA-approved lenders can only offer
30-year loans for USDA borrowers; however, the
USDA can offer a direct loan to low, or very low, income applicants.
The USDA guarantees their 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
Name the two parts of the USDA guarantee fee
- The monthly fee
- The initial guarantee fee
To qualify for a USDA loan, the 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.
Explain a Jumbo Loan
a single-family loan that exceeds Fannie Mae and Freddie Mac’s loan
limits (remember, the loan limits change yearly). Jumbo loans are conventional, but
non-conforming loans.
Name three examples of subprime or Alt-A loans.
- NINA – No Income/No Asset Mortgages: Often referred to as “No Doc”
mortgages. The borrower was not required to provide any financial
information regarding their income or their assets. - SISA- State Income/Stated Asset: Only required the borrower to state their
income and asset situation but did not require the verification of the income
or asset information. - SIFA or SIVA – Stated Income/Full Asset or Stated Income/Verified
Asset: Only required the borrower to state their income but they needed to
provide asset information.
What is included in the Guidance?
The Guidance provides guidelines to lenders regarding nontraditional mortgage
products. The Guidance 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.
Explain payment shock
Payment shock occurs when a borrower’s payment suddenly increases. Payment
shock happens in situations where the interest rate is variable, or there is an
introductory interest rate. The change in the interest rate causes the borrower’s
payment to increase, and in some situations, the borrower can no longer afford to pay
their mortgage because the interest rate is so high. This situation causes the
borrower to then default on the loan
The Guidance also indicates that a lender should not rely solely on ?
the amount of collateral (equity) the borrower has in the property when making the loan. This
practice is not safe or sound underwriting.
If a lender is going to allow no or low document loans or simultaneous seconds, the lender should?
document risk-mitigating features such as high credit scores, lower LTVs,
lower DTIs, credit enhancements, and mortgage insurance. This practice is called risk
layering.
The Guidance encourages that mortgage loan underwriting standards
should address a substantial payment increase when?
determining whether a borrower can
repay a nontraditional mortgage loan
When was the Statement on Subprime Mortgage Lending issued?
A year after the Interagency Guidance on Nontraditional Mortgage Product Risks was
published, the same financial regulatory agencies issued the Statement on Subprime
Mortgage Lending.
Explain the purpose of the Statement on Subprime Mortgage Lending.
The purpose of the statement was to promote consumer protection standards as well as encourage lenders to ensure that borrowers only obtain loans that they can afford
to repay. The Statement includes guidelines for defining predatory lending, underwriting standards, establishing control systems, and consumer protection
What are two things included in the Statement that MLOs should inform consumer of?
- Payment Shock
- Prepayment Penalties
What are the elements of predatory lending outlined in the Statement?
- Making loans based predominantly on the foreclosure or liquidation value of a borrower’s collateral, rather than on the borrower’s ability to repay the mortgage according to its terms.
- 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”).
- Engaging in fraud or deception to conceal the true nature of the mortgage loan obligation, or ancillary products, from an unsuspecting or
unsophisticated borrower.
Explain what a Non-QM Loan is.
A Non-Qualified Mortgage, or Non-QM loan, is 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 notso-perfect borrower.
