Conventional/Conforming and Nonconventional Loans

Question 1

What is the conforming loan limit per Fannie and Freddie?

Answer 1

Other than in high-cost areas, the loan limit for 2021 is $548,250.

Question 2

What is the loan-to-value (LTV) ratio?

Answer 2

The loan-to-value (LTV) ratio is the relationship between the loan amount and the appraised value or purchase price of the property securing the loan. The ratio is calculated using the lesser of the appraised value or purchase price.

Question 3

What is the combined loan-to-value (CLTV) ratio?

Answer 3

The combined loan-to-value (CLTV) ratio is the sum of first and second mortgage divided by lower of the appraised value or purchase price. This ratio uses only the disbursed balance of the second lien (if the second lien is a line of credit).

Question 4

What is the high loan-to-value (HLTV) ratio?

Answer 4

The high loan-to-value (HLTV) ratio is the first lien plus the maximum amount available on the line of credit or second lien (not only the amount disbursed or drawn), divided by the property value. HLTV and TLTV (Total Loan to Value) are interchangeable.

Question 5

What is private mortgage insurance?

Answer 5

Conventional loans with a loan-to-value ratio over 80% require private mortgage insurance (PMI). PMI benefits borrowers by allowing them to purchase homes with less than 20% down and protects lenders from borrower default. In the event that a property is foreclosed or sold through short sale, the PMI may reimburse the lender for its losses up to a certain amount

Question 6

When must a lender cancel PMI?

Answer 6

• When a borrower pays the mortgage down to 78% of the original value, if current on payments and in good standing, or
• When the mortgage loan reaches its midpoint (e.g., if a 30-year loan, after 180 payments)

Question 7

When can a borrower submit a written request to cancel PMI?

Answer 7

• When the borrower pays the loan amount down to 80% LTV, or
• If the borrower has not made a payment that was more than 30 days late in the past year or 60 days late in the past two years

Question 8

What can a borrower do to avoid PMI?

Answer 8

To avoid mortgage insurance, a lender may offer programs that include a first mortgage at 80% combined with a second mortgage to provide the required 20% down payment. If the borrower is able to qualify for both loans (simultaneous loans) under the Ability to Repay Rule, mortgage insurance may be avoided.

Question 9

If a loan contains a prepayment penalty what must be disclosed?

Answer 9

If the loan does contain a prepayment penalty, it must be disclosed in the note (or on an attachment to the note) and must be clearly disclosed on the Loan Estimate and Closing Disclosure.

Question 10

What are prepayment penalties restricted to now?

Answer 10

Under federal law, prepayment penalties are now restricted solely to fixed-rate qualified mortgages and may not be charged after the first three years of the loan term.

Question 11

What is the primary/front-end debt ratio?

Answer 11

Primary/front-end debt ratio = monthly housing expense (e.g., principal, interest, taxes, insurance, and mortgage insurance) divided by gross monthly income.

Question 12

What is the secondary/back-end debt ratio?

Answer 12

Secondary/back-end debt ratio = all monthly debt obligations (e.g., housing expense and other monthly obligations) divided by the gross monthly income. Does not include utility payments (though utility payments are included when calculating ratios for a VA loan), car insurance payments, phone bills, cable TV bills, etc. Include anything showing on the credit report, as well as obligations such as alimony and child support.

Question 13

What is the DTI used for?

Answer 13

The debt-to-income ratio (DTI) is used when underwriting a loan to determine if the borrower is able to afford the mortgage.

Question 14

What are the DTI limits?

Answer 14

Traditionally the conventional requirements are 28% percent for the primary ratio and 36% for the secondary or back-end ratio.

Question 15

What are the maximum allowable contributions by sellers and/or lenders?

Answer 15

Maximum allowable contributions by sellers and/or lenders are limited as follows:

• 2% of the lesser of the appraised value or sales price for investment properties
• 3% of the lesser of the appraised value or sales price for a principal residence or second home if the LTV is greater than 90%
• 6% of the lesser of the appraised value or sales price for a principal residence or second home if the LTV is between 76% and 90%
• 9% of the lesser of the appraised value or sales price for a principal residence or second home if the LTV is 75% or less

Question 16

What are FHA Loans?

Answer 16

Federal Housing Administration (FHA) loans are nonconventional loans made by approved lenders and insured by the federal government through the FHA. FHA loans are only offered for owner-occupied primary residences.

Question 17

What insurance do FHA loans typically require?

Answer 17

• An upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount, paid at closing
• An annual mortgage insurance premium (MIP), paid monthly

Question 18

What is the maximum time period required for payment of the annual MIP?

Answer 18

• 11 years for all loans, regardless of term, with an original principal loan balance that results in an LTV of less than or equal to 90%
• The term of the mortgage or 30 years, whichever is less, for all loans with an original principal loan balance that results in an LTV of more than 90%

Question 19

What is the difference between PMI and FHA MIP?

Answer 19

This is notably different from private mortgage insurance (PMI) paid on conventional loans, as FHA MIP does not terminate at 80% LTV.

Question 20

When applying for a mortgage loan what are the minimum credit score?

Answer 20

• Borrowers with a minimum score of 580 or above are eligible for maximum financing
• Borrowers with a minimum score of 500 to 579 will be eligible for a loan with up to 90% LTV
• Borrowers with a minimum score under 500 are not eligible for FHA financing

Question 21

What are the DTI limits for FHA loans?

Answer 21

The income ratios used for FHA files that are manually underwritten are generally 31% (front-end)/43% (back-end).

Question 22

What happens if a borrower wishes to have their FHA file transferred?

Answer 22

If an FHA borrower wishes to have their FHA file transferred while it is in process, they will need to request the transfer in writing and pay any fees due to the original lender.

Question 23

What is the base loan amount?

Answer 23

FHA maximum loan amount by county

Question 24

What is the max LTV for an FHA loan?

Answer 24

If a borrower qualifies, the maximum FHA loan available is a 96.5% LTV loan (i.e., a minimum 3.5% down payment is required for an FHA loan).

Question 25

What are the FHA limits for trasnactions?

Answer 25

• Resales occurring 90 days or less following acquisition will not be eligible for an FHA mortgage
• Resales occurring 91 to 180 days following acquisition will be eligible for an FHA loan provided an additional independent appraisal is obtained
• Resales occurring 90 days to one year following acquisition will be subject to additional review to establish value

Question 26

What are VA Loans?

Answer 26

Loans through the Department of Veteran Affairs (VA loans) are nonconventional loans made by approved lenders and guaranteed (not insured) by the VA. Borrowers must be either current or former members of the military.

Question 27

What is a nonrefundable funding fee on VA Loans?

Answer 27

VA loans require an upfront nonrefundable funding fee, which is similar to the FHA’s UFMIP. The funding fee is typically financed into the loan amount.

Question 28

What determines the amount of the funding fees?

Answer 28

Funding fees vary depending on whether the borrower:

• Is a first-time or repeat borrower
• Served in the military or in the Reserves or National Guard
• Makes a down payment of at least 5% or makes no down payment

Question 29

What are some examples of funding fees?

Answer 29

• First-time use, no down payment 2.3%
• First-time and subsequent use, down payment between 5% and less than 10% 1.65%
• First-time use, down payment of 10% or more 1.4%
• Subsequent use, no down payment 3.6%
• Subsequent use, down payment of 10% or more 1.4%

Question 30

What does the VA consider when determining the eligibility for a VA loan?

Answer 30

• The debt-to-income ratio (generally, 41% is the standard)
• Residual income (i.e., a determination as to whether the borrower has sufficient income, after paying fixed debts, to cover daily living expenses as set forth in VA underwriting guidelines)

Question 31

How is the maximum loan amount determined?

Answer 31

The maximum loan amount guaranteed by the VA is determined by:

• Property location
• The veteran’s entitlement, found on the Certificate of Eligibility

Question 32

What is the maximum amount of guaranty available for a loan greater than $144,000?

Answer 32

The maximum amount of guaranty available for a loan greater than $144,000 is 25% of the loan amount, regardless of the conforming loan limit.

Question 33

What is a Certificates of Reasonable Value (CRV)?

Answer 33

VA appraisal reports are called Certificates of Reasonable Value (CRV)

Question 34

What is a jumbo loan?

Answer 34

Any loan with a loan amount in excess of Freddie Mac or Fannie Mae loan limits is considered a “jumbo” loan.