CHAPTER 2: LEARNING THE PRODUCTS & PROGRAMS

Question 1

What is one of the most popular programs for mortgage?

Answer 1

Fixed Rate mortgages, one of the most popular programs that sets the interest rate at
closing and will remain the same for the life of the loan.

Question 2

Adjustable Rate Mortgage (ARM) –

Answer 2

This product is not for every borrower, as the

interest rates can go up or down at each adjustment, which may put the borrower at risk.

Question 3

The five parts of an ARM loan are

Answer 3

o Program,
o Caps,
o Margin,
o Index; and
o Fully indexed rate

Question 4

Most ARM products, the interest rate will ______ the same for the _____ term and then
are subject to change at each ________ period.

Answer 4

1. remain
2. initial
3. adjustment

Question 5

The CAPS, are exactly as they state, there is:

Answer 5

o An adjustment cap, which limits the amount the interest rate can go or down at
each adjustment.
o The life cap is the addition of the starting interest rate and the 2nd number of the
caps, which gives you the highest the interest rate can go over eh life of the loan.

Question 6

There are two types of construction loans

Answer 6

the construction with a permanent take out and

construction permanent.

Question 7

A bridge loan

Answer 7

in temporary financing against the equity of the borrower’s present home to
make a down payment on a new home or to start building a home.

Question 8

Graduated payment mortgage:

Answer 8

o Lower payments at the beginning of the loan and then go up gradually to help the
borrower.
o The lower payments could result in negative amortization.

Question 9

HELOC – Home Equity Line of Credit

Answer 9

a loan that uses the equity in your home to
borrower money and pay it back as you see fit and only pay interest on the amount you
have drawn each month.
o The interest rate is floating, usually against prime.

Question 10

Balloon mortgages

Answer 10

allow for 30-year amortization, but the mortgage will be called due,
when the balloon period ends.
o The balloon cannot be less than five (5) years.

Question 11

Conventional Conforming Loans

Answer 11

– any loan that Fannie Mae or Freddie Mac meet their

requirements and will be purchased from approved lenders

Question 12

Non-Conforming Loans –

Answer 12

any loan that will not be purchased by Fannie Mae or Freddie
Mac because the loans do not meet their guidelines. The loans will be purchased by
private investors

Question 13

Conventional Loans:

Answer 13

o Minimum 3% down payment
o 28%/36% DTI ratios
o Annually changing loan limits
o PMI required with less than 20% down
o 1 year from Chapter 13 discharge, 4 years from Chapter 7 filing (2 years with
extenuating circumstances)
o 2 years from foreclosure
o 3% seller concessions

Question 14

The Front-End Debt to Income Ratio/Housing Expense Ratio:

Answer 14

This ratio simply
takes the amount that the borrower will be paying for their mortgage and divides
it by their gross monthly income

Question 15

The Back-End Debt to Income Ratio/ Total Expense Ratio:

Answer 15

This ratio takes all of

the borrower’s monthly liabilities and divides it by their gross monthly income

Question 16

Loan to Value

Answer 16

is another calculation made to determine whether a borrower qualifies for
a property or not

Question 17

Seller concessions.

Answer 17

o The seller will help the borrower with down payment, closing costs or discount
points.
o There are limits for each program

Question 18

Private mortgage insurance allows

Answer 18

borrowers to put less than 20% down.
o The premium is paid by the borrower
o PMI has to be dropped at 78%LTV as required by Homeowners Protection Act
(HPA)
o The borrower can request that PMI be dropped at 80% per the HPA

Question 19

FHA – Federal Housing Administration loans are insured by the FHA

Answer 19

o 3.5% down payment
o 31/43% DTI rations
o 580 credit score with 3.5% down
o 2 years after Chapter 7 Discharge, 1 year after Chapter 13 filing
o 2 years after a foreclosure
o 6% maximum seller concessions
o Assumable
o MMI and UFMIP required
o Underwriters or lenders use FHA’s “4 C’s of Underwriting” when evaluating
FHA applications:
▪ Credit history of the borrower
▪ Capacity to repay the loan
▪ Cash assets available to close the mortgage
▪ Collateral, which evaluates the value of the home
o FHA Streamlines are 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 their payment.
o Reverse Mortgages (HECMs) allow borrowers 62 and older to use the equity in
their home to help them meet their living expenses or supplement their income.
The loan results in negative amortization

Question 20

FHA Streamlines

Answer 20

are 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 their payment.

Question 21

Reverse Mortgages (HECMs)

Answer 21

allow borrowers 62 and older to use the equity in
their home to help them meet their living expenses or supplement their income.
The loan results in negative amortization

Question 22

VA loans are guaranteed by the VA:

Answer 22

o 41% DTI with Residual Income
o 0% down payment (100% financing available dependent on Veterans benefits)
o Funding Fee required
o 2 years after Chapter 7, 1 year after Chapter 13
o 2 years after a foreclosure
o 4% seller concessions
o Assumable
o Valid COE required
o IRRLS – VA streamline (known as Interest Rate Reduction Refinance Loan)

Question 23

USDA – mortgage loans for rural areas of less than 35,000 people.

Answer 23

o 100% financing available
o 29%/41% DTI ratios
o Guarantee fee
o There are income limitations. (115% max of area median income)
o 3 years from Chapter 7 discharge, 1 year from Chapter 13 filing

Question 24

Jumbo Loans exceed what?

Answer 24

– they exceed the Fannie Mae and Freddie Mac loan limits

Question 25

Subprime loans

Answer 25

are designed for borrowers who have less than perfect credit.

Question 26

Example of

Subprime Loans include:

Answer 26

o No Income/No Assets (NINA)
o Stated Income/Stated Asset (SISA)
o No Doc & Low Doc Loans

Question 27

Interagency Guidance on Nontraditional Mortgage Product Risks:

Answer 27

o Provides guidance on how lenders should handle nontraditional mortgage
products
o Concerned with payment shock
o Advises lender to underwriter loans based on the fully indexed rate
o Advises lenders to participate in risk layering

Question 28

Statement on Subprime Mortgage Lending

Answer 28

o includes guidelines for defining predatory lending, underwriting standards,
establishing control systems, and consumer protection
o The Statement encourages lenders to give borrowers the necessary facts to
understand the terms, costs, and risks associated with subprime products
o The Statement also defines predatory lending

Question 29

Qualified Mortgage:

Answer 29

• A section of TILA, created in 2014, mandated by Dodd-Frank, enforced by the CFPB
• Works with the ATR Rule
• Four types of QM’s
o General
o Temporary
o Small Creditor
o Balloon
• Safe Harbor & Rebuttable Presumption
• A loan cannot be QM if they have negative amortization or interest-only payments.
• A loan cannot have a term longer than 30 years.
• There is a threshold on points and fees for QM loans – generally, three (3) percent of the
loan balance.

Question 30

To be considered a General QM, the creditor must:

Answer 30

o Underwrite based on fully amortizing schedule using the maximum rate permitted
during the first three (3) years after the date of the first payment. For loans with
initial term of five (5) years or longer, the borrower is qualified a the higher of the
initial interest rate or the fully indexed rate (margin and index)
o Consider and verify the consumer’s income, assets, debt obligations, alimony and
child support obligations.
o Determine that the consumer’s total monthly debt-to-income is no more than 43
percent.

Question 31

To be considered a qualified mortgage, points and fees cannot exceed the following
thresholds (as of January 1, 2020):

Answer 31

o 3 percent of the total loan amount for a loan greater than or equal to $109,898.
o $3,297 for a loan greater than or equal to $65,939 but less than $109,898.
o 5 percent of the total loan amount for a loan greater than or equal to $21,980 but
less than $65,939.
o $1,099 for a loan greater than or equal to $13,737 but less than $21,980.
o 8 percent of the total loan amount for a loan less than $13,737.

Question 32

A Non-Qualified Mortgage or Non-QM loan

Answer 32

is a loan that does not conform with the
Qualified Mortgage rule; it also means that the loan is not accepted by governmentsponsored entities like Fannie Mae or Freddie

Question 33

Ability to Repay

Answer 33

• Section of TILA, effective 2014, mandated by the Dodd-Frank Act, enforced by the
CFPB
• The ATR Rule has eight (8) underwriting factors that creditors must consider and verify.
Those eight underwriting factors are:
o Current or reasonably expected income or assets (other than the value of the
property that secures the loan) that the consumer will rely on to repay the loan.
o Current employment status (if you rely on employment income when assessing
the consumer’s ability to repay).
o The monthly mortgage payment for this loan.
o The monthly payment on any simultaneous loan secured by the same property.
o The monthly payment for property taxes and insurance that you require the
consumer to buy, and certain other costs related to the property such as
homeowner’s association fees or ground rent.
o The borrower’s debts, alimony, and child-support obligations.
o The monthly debt-to-income ratio or residual income.
o Credit history.
• The eight (8) underwriting factors must also be verified using reasonably reliable thirdparty records. Examples of these records include W-2’s or payroll statements

Question 34

Homeownership Equity Protection Act (HOEPA)

Answer 34

• Amendment to TILA made in 1994
• Protect consumers from predatory home loans associated with high-cost home loans
• Also known as Section 32 of Regulation Z (TILA)
• Doesn’t apply to:
o Reverse Mortgage
o Construction Loans
o USDA loans
o Loans originated by a Housing Finance Agency

• HOEPA requires additional and specific:
o Disclosure requirements,
o Restricts terms on transactions,
o Restricts fees and practices,
o Adds additional ability to repay requirements, and
o Requires pre-loan counseling for all high-cost home loans,
o Full appraisal and
o Escrows for the first five (5) years.

Question 35

What are the three tests for HOEPA?

Answer 35

Three tests:
o APR
o Points and Fees
o Prepayment Penalty Test

If the loan fails any of these three tests, it is considered a high-cost home loan

Question 36

Higher Priced Mortgage Loans (HPML, Section 35 of TILA)

Answer 36

• Known as section 35 of TILA
• Deals with higher-priced mortgage loans
• APR that exceeds the APOR for a comparable transaction by:
o 1.5 percent for loans secured by a first lien loan; or
o 3.5 percent for a second-lien loan.
• The escrow account is required for at least five (5) years.
• When originating higher-priced mortgages, the creditor cannot:
o Rely on the collateral alone for repayment of the loan, without considering the
borrower’s financial ability to make payments.
o Rely on the consumer provided information on income and assets without
verification.
o Charge a prepayment penalty; if the rate can change in the first four (4) years of a
loan, otherwise you can charge a 2 percent penalty; or
o The lender must escrow for at least the first 60 months of the loan.