Lesson 10: Financing Programs Flashcards
loan term
A mortgage loan’s repayment period is the number of years the borrower has in which to repay the loan.The repayment period is also called the loan term.
The length of the repayment period affects both the amount of the monthly payment and the total amount of interest paid over the life of the loan.
hybrid ARMs
Other two-tiered ARMs are available, such as 5/1 ARMs. The first number represents the number of years before the first rate adjustment, and the second number indicates that subsequent adjustments will happen once a year.
These are sometimes called hybrid ARMs, because they are a cross between adjustable-rate and fixed-rate mortgages.
A hybrid ARM may be an ideal loan for a buyer who plans to sell or refinance before the first rate adjustment, since the initial interest rate is usually significantly lower than for a fixed-rate loan.
loan-level price adjustment (LLPA)
In addition to the standard origination fee, most conventional borrowers will be charged a loan-level price adjustment (LLPA) if the loan is going to be sold to Fannie Mae or Freddie Mac.
The amount of this charge depends on the borrower’s credit score and LTV. Additional charges may be imposed for risky types of loans, like investor loans or interest-only loans.
The riskier the loan, the larger the LLPA.
level payment buydown
There are two types of temporary buydowns: level payment and graduated payment.
A level payment buydown involves an interest reduction that stays the same during the buydown period.
For instance, a level payment buydown might reduce the buyer’s interest rate by 2% during the first two years of the loan; the buyer would then pay the note interest rate for the remainder of the loan term.
graduated payment buydown
With a graduated payment buydown, the reduced interest rate increases in steps, usually each year.
A common graduated payment plan is the 3-2-1 buydown, which calls for a 3% reduction in the interest rate in the first year of the loan, a 2% reduction in the second year, and a 1% reduction in the third year. In the fourth year of the loan, the buyer will begin paying the note rate.
effective income
The FHA’s term for stable monthly income is effective income.
Effective income is the applicant’s gross income from all sources that can be expected to continue for the first three years of the loan term.
guaranty entitlement
The VA loan guaranty available to a particular veteran, which is sometimes called the veteran’s “guaranty entitlement,” does not expire.
However, if a veteran uses her entitlement to purchase a property, she can obtain another VA loan only if the loan is repaid and the entitlement is therefore restored or reinstated.
residual income analysis
The second method used to qualify VA borrowers is the residual income analysis, also called cash flow analysis.
This method checks whether, after paying the monthly mortgage payment and other recurring obligations, the borrower will have enough money left over to meet all other basic expenses.
monthly shelter expense
An applicant’s residual income is monthly gross income less payroll taxes (income taxes, social security, and Medicare), the monthly shelter expense, and the other recurring obligations.
The monthly shelter expense is the borrower’s proposed PITI payment plus maintenance and estimated utilities.
imputed interest rule
However, if a seller charges an interest rate that’s too far below a typical market rate, she is subject to the Internal Revenue Service’s imputed interest rule.
Under this rule, the IRS treats some of the principal received in each payment as interest, which is taxable.
In other words, the seller can’t completely avoid taxation by charging little or no interest and claiming everything is principal.
You should always advise clients to seek tax advice from a lawyer or accountant before offering seller financing.
wraparound loan
A wraparound loan (also called an all-inclusive trust deed) involves a first mortgage and a second mortgage. The first mortgage, called the underlying mortgage, is the seller’s mortgage.
The seller doesn’t pay off this underlying mortgage at closing, nor does the buyer assume the mortgage.
Instead, the buyer takes the property “subject to” the underlying mortgage. This means the seller remains primarily responsible for making the payments on the underlying mortgage.
equity exchange
In an equity exchange, instead of requiring the buyer to pay the downpayment entirely in cash, the seller accepts some other asset—such as recreational property, a car, or a boat—as all or part of the downpayment.
Again, this kind of transaction enables the buyer to close the sale with significantly less cash.
