GENERAL MORTGAGE KNOWLEDGE Flashcards
GENERAL MORTGAGE KNOWLEDGE (20%)
Qualified mortgages
Qualified Mortgages (QM):
* A QM loan meets all the consumer protection requirements set by the Consumer Financial Protection Bureau (CFPB).
* Key features of QM loans include:
* Debt-to-Income Ratio (DTI): Borrowers must have a reasonable DTI.
* Loan Features: Lenders cannot offer risky loan features, such as interest-only loans, balloon payments, or negative amortization.
* Upfront Costs and Fees: QM loans have limits on upfront costs and fees.
* Loan Term: Repayment terms cannot exceed 30 years.
* Ability to Repay: Lenders assess borrowers’ ability to repay based on assets, credit history, employment, and income.
Non-Qualified Mortgages (Non-QM):
* Non-QM loans do not conform to the CFPB’s consumer protection provisions.
* These loans may use alternative methods of income verification and are not insured or guaranteed by FHA, VA, Fannie Mae, or Freddie Mac.
* Non-QM loans provide more flexibility for borrowers with unique circumstances, such as varying income sources or freelancers
GENERAL MORTGAGE KNOWLEDGE (20%)
Conventional/conforming
Includes
Fannie Mae and Freddie Mac
Definition:
* Conforming loans adhere to the loan limits set by the Federal Housing Finance Agency (FHFA).
* These loans are not backed by the federal government (unlike FHA, VA, and USDA loans).
* Conventional loans can be either conforming (following Fannie Mae and Freddie Mac’s lending rules) or non-conforming (non-QM), which means they don’t follow Fannie and Freddie’s guidance.
Fannie Mae and Freddie Mac:
* Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) created by the U.S. Congress.
* They help keep the mortgage lending industry running smoothly by providing cash to lenders, allowing them to fund mortgages at affordable rates.
* Fannie Mae and Freddie Mac set the qualification guidelines used by most conventional mortgages but offer different loan programs.
* They buy and sell mortgages from lenders, enabling low-down-payment loans with up to 30-year repayment terms.
Loan Programs:
Fannie Mae:
* Offers the HomeReady® loan (a low-down-payment program) and the HomeStyle® Renovation loan for fixer-upper properties.
* Provides specialized programs like the conventional MH® programs for manufactured homes.
Freddie Mac:
* Offers the Home Possible® loan (a 3% down program for low-income borrowers) and the CHOICEHome® mortgage option for manufactured homebuyers.
* Other programs include the HomeOne® Mortgage (no income limits for first-time buyers) and the CHOICERenovation® program (similar to Fannie’s HomeStyle renovation program)
GENERAL MORTGAGE KNOWLEDGE (20%)
Government
Includes FHA, VA, USDA
FHA (Federal Housing Administration) Loans:
* Purpose: FHA loans are designed to help first-time homebuyers, low-income borrowers, and those with less-than-perfect credit.
Features:
* Flexible Down Payment: FHA loans offer more lenient down payment requirements.
* Underwriting Guidelines: The FHA provides more flexibility in underwriting.
* Mortgage Insurance: Borrowers pay mortgage insurance premiums to protect lenders.
* Benefits: FHA loans allow borrowers to purchase a home with a lower down payment and relaxed credit requirements1.
VA (Department of Veterans Affairs) Loans:
* Eligibility: VA loans are exclusively for eligible veterans, active-duty service members, and surviving spouses.
Features:
* Zero Down Payment: VA loans offer a no-down-payment option.
* No Mortgage Insurance: VA loans do not require private mortgage insurance (PMI).
* Flexible Qualification: The VA provides more leniency in credit and income requirements.
Benefits: VA loans honor military service by providing favorable terms for homebuyers1.
USDA (U.S. Department of Agriculture) Loans:
* Eligibility: USDA loans are typically approved for borrowers in rural areas who meet specific income requirements.
Features:
* Zero Down Payment: USDA loans offer a no-down-payment option.
* Income-Based: Borrowers must qualify based on both FICO scores and financials.
* Location-Specific: USDA loans are available for properties in designated rural areas.
* Benefits: USDA loans support homeownership in rural communities and provide affordable financing options
GENERAL MORTGAGE KNOWLEDGE (20%)
Conventional/nonconforming
Jumbo, Alt-A
Conforming Loans (Conventional Loans):
* Definition: Conforming loans adhere to the loan limits set by the Federal Housing Finance Agency (FHFA).
Features:
* Loan Limits: Conforming loans must fall within the specified loan amount limits.
* Underwriting Guidelines: These loans follow standard underwriting guidelines.
* Mortgage Insurance: Borrowers may need private mortgage insurance (PMI) if their down payment is less than 20%.
* Benefits: Conforming loans offer competitive interest rates and are widely available in the market.
Non-Conforming Loans:
* Jumbo Loans:
* Purpose: Jumbo loans are for loan amounts that exceed the FHFA’s conforming loan limits.
Features:
* Higher Loan Amounts: Jumbo loans allow borrowers to finance larger purchases, such as luxury homes.
* Stricter Qualifications: Borrowers typically need higher credit scores and larger down payments.
* No Mortgage Insurance: Jumbo loans often do not require PMI.
* Benefits: Jumbo loans provide flexibility for high-end real estate transactions.
Alt-A Loans:
* Definition: Alt-A loans fall between prime and subprime loans.
Features:
* Credit Profile: Alt-A loans cater to borrowers with unique credit profiles (e.g., self-employed individuals or those with non-traditional income sources).
* Documentation Flexibility: Alt-A loans may allow alternative income documentation.
* Riskier Features: These loans may have riskier terms (e.g., interest-only payments or adjustable rates).
* Benefits: Alt-A loans accommodate borrowers who don’t fit traditional lending criteria
GENERAL MORTGAGE KNOWLEDGE (20%)
Subprime mortgage
A subprime mortgage is a type of home loan issued to borrowers with low credit scores (often below 640 or 600, depending on the lender). Because the borrower is a higher credit risk, a subprime mortgage comes with **higher interest rates **and longer repayment terms. These loans are typically offered by lenders who charge more to compensate for the risk of default. Unlike conventional mortgages, subprime mortgages have less favorable terms, making them less attractive for borrowers with better credit profiles.
Definition:
* A subprime mortgage is normally offered to borrowers with impaired credit records.
* Lenders charge higher interest rates to compensate for accepting the greater risk of lending to such borrowers.
Credit Score Impact:
* Borrowers with FICO credit scores below 620 often end up with subprime mortgages.
* Waiting and building up credit history before applying for a mortgage can help borrowers qualify for prime loans.
Interest Rates and Risk Factors:
* The interest rate on a subprime mortgage depends on:
* Credit score
* Down payment size
* Late payment delinquencies on the borrower’s credit report
* Types of delinquencies found on the report
Historical Context:
* The 2008 financial crisis was partly attributed to the proliferation of subprime mortgages offered to unqualified buyers.
* New subprime mortgages now have restrictions and must be properly underwritten.
In summary, subprime mortgages cater to borrowers with low credit scores but come with higher interest rates and risk.
GENERAL MORTGAGE KNOWLEDGE (20%)
Guidance on nontraditional mortgage product risk
This guidance aims to address risks associated with the growing use of mortgage products that allow borrowers to defer payment of principal and, sometimes, interest. These products, referred to as “nontraditional,” “alternative,” or “exotic” mortgage loans, include:
Interest-Only Mortgages:
* Borrowers pay only the interest portion of the loan during an initial period (usually 5 to 10 years).
* After the interest-only period, the loan converts to a fully amortizing loan, and borrowers must repay both principal and interest.
Payment Option Adjustable-Rate Mortgages (ARMs):
* Borrowers have multiple payment options each month:
* Minimum payment (usually less than the interest due)
* Interest-only payment
* Fully amortizing payment
* The minimum payment may not cover the full interest, leading to negative amortization.
Key Points from the Guidance:
Risk Management:
* Institutions offering nontraditional mortgage products should assess and manage the risks associated with these loans.
* Risk management practices should address credit risk, interest rate risk, liquidity risk, and operational risk.
Consumer Disclosure:
* Institutions must clearly disclose the risks that borrowers may assume when opting for nontraditional mortgage products.
* Borrowers should understand the potential payment shock when the loan transitions to a fully amortizing structure.
Sound Lending Practices:
* Institutions should ensure that borrowers have the ability to repay the loan, especially when the payment structure changes.
* Underwriting standards should consider the borrower’s ability to handle future payment increases.
In summary, the guidance provides a framework for institutions to offer nontraditional mortgage products while safeguarding borrowers and promoting transparency
GENERAL MORTGAGE KNOWLEDGE (20%)
Non-qualified mortgage
Let’s explore the difference between conforming loans (also known as conventional loans) and non-qualified mortgages (Non-QM):
Conforming Loans (Conventional Loans):
* Definition: Conforming loans adhere to the loan limits set by the Federal Housing Finance Agency (FHFA).
Features:
* Loan Limits: Conforming loans must fall within the specified loan amount limits.
* Underwriting Guidelines: These loans follow standard underwriting guidelines.
* Mortgage Insurance: Borrowers may need private mortgage insurance (PMI) if their down payment is less than 20%.
* Benefits: Conforming loans offer competitive interest rates and are widely available in the market.
Non-Qualified Mortgages (Non-QM):
* Definition: Non-QM loans do not conform to certain standards set by the Consumer Financial Protection Bureau (CFPB).
Criteria:
* Non-QM loans have their own distinct set of criteria, including flexible income and credit requirements.
* Borrowers may need to make a larger down payment and pay a higher interest rate.
* Purpose: Non-QM loans serve borrowers who don’t meet traditional lending requirements but need alternative financing options.
In summary, conforming loans follow FHFA limits, while Non-QM loans provide alternatives for borrowers with specific needs.
GENERAL MORTGAGE KNOWLEDGE (20%)
Mortgage Loan Products
Fixed-rate mortgages
A fixed-rate mortgage is a home loan with a fixed interest rate for the entire term of the loan. Once locked in, the interest rate does not fluctuate with market conditions. Borrowers who want predictability and/or who tend to hold property for the long term tend to prefer fixed-rate mortgages. With a fixed-rate mortgage, your monthly mortgage payment – the amount you pay toward your mortgage principal and interest – will remain the same throughout the life of the loan. However, keep in mind that other components of your monthly payment, such as homeowners insurance and property taxes, can still change. These additional expenses are typically held in an escrow account by your lender, who pays them on your behalf when they’re due. Overall, fixed-rate mortgages provide consistency and stability, making budgeting easier for homeowners. If you’re looking for predictable payments, a fixed-rate mortgage may be the right choice for you!
GENERAL MORTGAGE KNOWLEDGE (20%)
Adjustable-rate mortgages (ARMs)
Interest Rate Variability:
* Unlike fixed-rate mortgages, where the interest rate remains constant, ARMs have an initial fixed-rate period (usually 3, 5, 7, or 10 years).
* After the initial period, the interest rate adjusts based on a specific index (such as the London Interbank Offered Rate (LIBOR) or the U.S. Prime Rate).
Adjustment Frequency:
* The frequency of rate adjustments varies:
* Annual ARMs: Adjust once a year after the initial fixed-rate period.
* Hybrid ARMs: Combine an initial fixed-rate period with subsequent adjustments (e.g., 5/1 ARM has a fixed rate for 5 years, then adjusts annually).
* Monthly ARMs: Adjust monthly after the initial fixed period.
Index and Margin:
* The interest rate adjustment is based on the chosen index (e.g., LIBOR) plus a margin set by the lender.
* The margin remains constant throughout the loan term.
Rate Caps:
* ARMs have rate caps to limit how much the interest rate can change:
* Initial Cap: Limits the rate adjustment at the end of the initial fixed-rate period.
* Periodic Cap: Limits the rate change at each adjustment.
* Lifetime Cap: Sets the maximum rate increase over the life of the loan.
Considerations:
* Borrowers should evaluate their financial situation, future plans, and risk tolerance.
* ARMs may be suitable for those who plan to sell or refinance before the rate adjusts.
* The initial lower rate can provide short-term savings.
In summary, ARMs offer flexibility but come with interest rate uncertainty. Borrowers should understand the terms, caps, and potential payment fluctuations.
GENERAL MORTGAGE KNOWLEDGE (20%)
Purchase money second mortgages
A purchase money second mortgage is a loan that works in conjunction with a first mortgage when buying a home. Let’s break it down:
First Mortgage (Primary Loan):
* The first mortgage is the primary loan used to purchase the property.
* It covers a significant portion of the home’s value (usually around 80% of the purchase price).
* The lender places a lien on the property as collateral.
Purchase Money Second Mortgage (Second Lien):
* The second mortgage is an additional loan taken out simultaneously with the first mortgage.
* It covers a smaller portion of the home’s value (typically around 10%).
* The purpose is to make up the difference between the first mortgage amount and the total purchase price.
* The second mortgage is subordinate to the first mortgage in terms of lien position.
Benefits and Considerations:
* Avoiding PMI: By keeping the first mortgage below 80% loan-to-value (LTV), borrowers can avoid paying private mortgage insurance (PMI).
* Risk and Position: If the borrower defaults, the first lien position has priority in recovering losses from the property sale.
* Interest Rates: Second mortgages often have higher interest rates than first mortgages.
Example:
* Suppose you’re buying a $300,000 home:
* First Mortgage (80% LTV): $240,000
* Second Mortgage (10% LTV): $30,000
* Total LTV: 90%
* The second mortgage helps you avoid PMI while providing the necessary down payment.
Remember that purchase money second mortgages can be a useful strategy, but borrowers should carefully evaluate their financial situation and understand the risks.
GENERAL MORTGAGE KNOWLEDGE (20%)
Balloon mortgages
Fixed Interest Rate:
* Initially, the balloon mortgage has a fixed interest rate for a specified period (usually 5 to 7 years).
* During this time, borrowers make regular monthly payments.
Large Final Payment (Balloon Payment):
* At the end of the fixed-rate period, the remaining balance becomes due in full.
* This final payment is significantly larger than the regular monthly payments made during the initial term.
Short-Term Financing:
* Balloon mortgages are considered short-term financing options.
* Borrowers often use them when they plan to sell the property or refinance before the balloon payment is due.
Considerations:
* Borrowers should carefully evaluate their financial situation and future plans.
* Balloon mortgages can be risky if borrowers cannot make the large final payment.
* Some balloon mortgages allow conversion to a fixed-rate loan before the balloon payment is due.
In summary, balloon mortgages offer lower initial payments but require a substantial final payment.
Borrowers should weigh the benefits against the risks based on their individual circumstances.
GENERAL MORTGAGE KNOWLEDGE (20%)
Reverse mortgages
A reverse mortgage is a financial arrangement that allows homeowners aged 62 and older to borrow against their home’s equity.
Here’s how it works:
**Eligibility: **To qualify for a reverse mortgage, you need a significant amount of equity in your home. While you won’t be able to borrow the entire value of your home, you can access a portion of it.
Payment Options: Reverse mortgages offer several payment options:
* Line of Credit: You can receive cash as a line of credit.
* Monthly Payments: You receive regular monthly payments.
Lump Sum: You get a one-time lump sum payment.
* Combination: You can combine a line of credit with monthly payments.
No Repayment Until Specific Events Occur:
* You don’t have to repay the reverse mortgage until:
* Your death
* You permanently move out of the home
* You sell the home
Common Uses:
* Supplement Retirement Income: Many homeowners use reverse mortgages to supplement their retirement income.
* Cover Expenses: Reverse mortgages can help cover home repairs, medical expenses, or other financial needs.
* Downsizing or Relocating: Some options allow you to use the payments to buy a new primary residence, giving you flexibility to downsize or relocate.
Types of Reverse Mortgages:
* Home Equity Conversion Mortgages (HECMs): Insured by the Federal Housing Administration (FHA), these are the most common type for borrowers aged 62 and older.
* Non-HECM Loans: These include proprietary reverse mortgages from private lenders and single-purpose reverse mortgages issued by state/local governments or nonprofits.
Remember to consult a financial advisor or estate attorney to understand how a reverse mortgage might impact your finances or those of your surviving spouse or heirs
GENERAL MORTGAGE KNOWLEDGE (20%)
Home equity line of credit (HELOC)
Definition: A HELOC is a variable-rate second mortgage that provides access to cash based on the value of your home. It operates like a revolving line of credit, similar to a credit card. You can borrow funds, repay them, and then borrow again during a set draw period.
Equity Utilization: With a HELOC, you tap into the equity you’ve built up in your home. Equity is calculated as the home’s value minus the amount you owe on your primary mortgage.
Qualification Requirements:
* Good Credit: Lenders typically require a credit score above the mid-600s, with a score above 700 considered ideal.
* Equity: You should have at least 15% to 20% equity in your home.
* Payment History: Lenders review your payment history for late payments.
* Debt-to-Income Ratio (DTI): A lower DTI is preferable.
* Proof of Income: Reliable income is necessary to demonstrate your ability to make loan payments.
Draw Period and Repayment:
* Draw Period: The initial phase allows you to borrow funds. During this time, you can use the HELOC as needed.
* Repayment Period: After the draw period, you enter the repayment phase. You’ll make payments on the borrowed amount.
Common Uses:
* Home Improvements: Many homeowners use HELOCs for home renovations or repairs.
* Education Expenses: HELOCs can fund education costs.
* Debt Consolidation: High-interest credit card debt can be consolidated using a HELOC.
* Other Financial Needs: You can use the funds for various purposes.
* Interest Rates: HELOCs have variable interest rates, which means they can fluctuate over time.
Remember that while a HELOC provides flexibility, it’s essential to manage it responsibly.
GENERAL MORTGAGE KNOWLEDGE (20%)
Construction mortgages
Purpose: Unlike traditional mortgages that are used to buy existing homes, construction mortgages provide funds for building a house from scratch. They cover the costs associated with constructing a new home.
Shorter Terms and Higher Interest Rates: Construction loans typically have shorter terms compared to traditional mortgages. They are usually repaid within a year or so. Additionally, the interest rates on construction loans tend to be higher.
**Disbursed in Installments: **Instead of receiving the entire loan amount upfront, the lender disburses the funds in installments as the construction progresses. This ensures that the money is used for its intended purpose.
Collaboration with Contractors: During the construction process, the lender works closely with the contractor. As different phases of construction are completed (such as foundation, framing, roofing, etc.), the lender releases the corresponding funds.
**Interest-Only Payments: **Some construction loans allow interest-only payments during the construction phase. This means you only pay interest on the amount disbursed, which can make it more affordable.
Conversion to Permanent Mortgage: Once your home is move-in-ready, you can convert the construction loan into a conventional mortgage. This transition allows you to continue financing your home with more favorable terms.
Remember that finding an experienced and accommodating home construction lender is crucial.
GENERAL MORTGAGE KNOWLEDGE (20%)
Interest-only mortgages
An interest-only mortgage is a type of mortgage in which the borrower is required to pay only the interest on the loan for a certain period. During this initial period, the principal amount remains unchanged. Here’s how it works:
Payment Structure:
* Interest-Only Payments: At the start of the loan term (typically between seven and ten years), you make interest-only payments. These payments cover only the interest charges, not the principal.
* Principal Repayment: After the interest-only period ends, you transition to making regular payments that include both principal and interest. The remaining principal balance is then repaid over the remaining loan term.
Affordability and Flexibility:
* Lower Initial Payments: Interest-only mortgages offer lower monthly payments during the initial phase. This can be beneficial if you need to manage your cash flow or have other financial priorities.
* Flexibility: Borrowers can use the extra cash flow to invest, save, or address other financial needs.
Considerations:
* Risk: While interest-only payments are lower initially, they can lead to higher payments later. Be prepared for the transition to principal and interest payments.
* Property Value: Interest-only mortgages are often used for higher-priced properties that don’t meet conventional loan standards.
* Variable Interest Rates: Interest rates may be variable, so your payments could change over time.
Pros and Cons:
Pros:
* Lower Initial Payments: Ideal for short-term affordability.
* Investment Opportunities: Allows you to allocate funds elsewhere.
Cons:
* Higher Future Payments: Principal repayment begins after the interest-only period, potentially leading to larger payments.
* Market Risk: If property values decline, you may owe more than the home is worth.
Remember that interest-only mortgages are a niche product and may not be widely available. If you’re considering one, consult with a mortgage professional to assess whether it aligns with your financial goals and risk tolerance.
