Module 2 Flashcards
equity
value of ownership interest in property
determined by the difference between fair market value of a home and the remaining mortgage balance owed
foreclosure
a legal process in which mortgaged property is sold to pay the loan of a defaulting borrower
foreclosure laws are state-specific
default
the inability to make timely payments or fulfill legal obligations of loan terms
mortgages are generally considered in default when a payment has not been made after 60-90 days
escrow
funds to be used for specific purposes by parties carrying out a mutual transaction, deposited with a third party
commonly used by lenders to allocate funds for a homeowner’s property taxes, insurance premiums, or other fees when they become due
closing costs
fees for final property transfer that are not included in the price of the property
can include loan origination fees, discount points, appraisal fee, survey, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, etc.
while often 3-4% of purchase price, they can be lower or higher, depending on geographic region or loan type
front-end ratio definition
a rate that calculates a borrower’s housing-related obligations as a percentage of gross monthly income
frequently used by lenders to qualify borrowers for a mortgage
also called a housing ratio
front-end ratio formula
front-end ratio = monthly housing expenses/gross monthly income
desired front-end ratio range for homeowners
typically 28% for those obtaining a conventional loan
31% for those with an FHA loan
(so, either 28% or lower, or 31% or lower, depending on loan type)
desired front-end ratio range for renters
30% or lower
conventional loan
a mortgage loan backed by private lenders
though not insured by any government program, loans with a down payment of less than 20% of the purchase price may require private mortgage insurance
PITIA
acronym for monthly housing expenses for homeowners
P = principal
I = interest
T = taxes
I = insurance
A = association dues & special assessments
expenses could also include ground rent and payments for any secondary financing
principal
the amount of money borrowed to buy a house or the amount of the loan that has not been paid back to the lender
this does not include the interest paid to borrow that money
the principal balance is the amount owed on a loan at any given time
it is not the original loan amount minus the total repayments of principal made
interest
part of a mortgage payment, the rate the bank charges you for borrowing money
taxes
property taxes charged by the municipality in which your home is located
proceeds pay for education, law enforcement, and other services
these are mandatory and typically cost 1% of the value annually, though the tax rate can vary depending on geographic region
mortgage insurance premium
a monthly payment, usually part of the mortgage payment for FHA loans, paid by a borrower for mortgage insurance
private mortgage insurance
insurance policy that protects a lender from potential risks when a homebuyer pays less than 20% for a down payment
although the policy protects the lender and is typically selected by the lender, the homebuyer is responsible for the monthly payment
ground rent
an arrangement in which the owner of a dwelling or structure does not own the land on which the structure resides
in such cases, the borrower takes out a mortgage to purchase the dwelling, but must still pay rent for the land
association dues
charged by community or homeowners association to pay for repairs, upkeep, landscaping, improvements, and property management
gross monthly income definition
gross income refers to money earned before taxes and other deductions
4 steps to determine gross monthly income
1) identify the client’s pay schedule for each source of income. Sources may include employment, SSI and/or SSDI, pension or other retirement benefits, family support such as child support or alimony, public assistance, or income from a second job.
2) select the appropriate calculation for gross monthly income for each source of income based on its pay schedule
3) perform the calculation for gross monthly income for each source of income
4) add all products together to determine a client’s gross monthly income
back-end ratio definition
a rate that calculates a borrower’s total monthly debt, including housing and other debt obligations, as a percentage of gross monthly income
frequently used by lenders to qualify borrowers for a mortgage
also called a debt-to-income ratio
back-end ratio formula
back-end ratio = total monthly debt expenses/gross monthly income
maximum back-end ratio for homeowners
although the maximum back-end ratio for conventional loans was traditionally 36%, limits can increase to 45% depending on the loan product
eligible clients who meet specific criteria may even qualify for certain mortgage products with back-end ratios as high as 50%
back-end ratio guidelines for clients with an FHA loan or Energy Efficiency Mortgage loan can stretch to 43% and 45 % respectively
lenders can make exceptions provided that clients meet certain criteria and demonstrate ability to repay the loan
maximum back-end ratio for renters
rental agencies or landlords may deny potential renters if the monthly rent creates a back-end ratio greater than 36%, though it is very common to allow a higher ratio
4 C’s of credit
1) Character
2) Capacity
3) Capital
4) Collateral
4 C’s of credit - character
lenders will review a borrower’s credit history, employment history, and housing stability to determine the likeliness the borrower will repay their debts
4 C’s of credit - capacity
lenders may consider the following indicators to determine a borrower’s capacity to repay outstanding debt:
- consistency of employment and income
- adequacy of income to repay debt
- recurring debts
- frequency and type of wages
4 C’s of credit - capital
lenders will inquire about how much money a borrower has saved to pay a deposit or down payment for the home they intend to purchase
4 C’s of credit - collateral
lenders will often request a borrower to pledge specific property or assets as collateral to a lender to secure repayment of a loan
for a homebuyer, the collateral is the home they are purchasing
4 C’s of credit when an FHA loan is involved
1) credit history
2) capacity to repay
3) cash assets available to close the mortgage
4) collateral
conventional mortgage loan
this is the most common type of mortgage and is backed by private lenders, like banks
it offers competitive rates and comes in “conforming” mortgage amounts (limits set by the federal government each year) and less common “non-conforming” or jumbo mortgage amounts (any loan amount or other criteria above the conforming limits)
who a conventional mortgage is good for
those who:
- have a good credit history
- have funds for a down payment (typically 20% of the purchase price) and closing costs
- meet lender-specific qualification requirements regarding income, credit score, and other factors
interest only terms
interest only mortgages give borrowers the option of paying only the interest on the loan, in monthly payments, for a fixed term
these loans are good for those who prefer a monthly mortgage payment that is lower because their income fluctuates but can occasionally make payments toward their principal during the interest-only term
there are risks to this type of mortgage–expected increases in income may not materialize, and the principal balance remains the same if only interest payments are paid during the interest-only term
subprime mortgage loans
a type of mortgage with less stringent lending and underwriting terms and conditions, usually offered to borrowers with blemished or limited credit histories
due to the increased credit risk, subprime loans carry higher interest rates than conventional mortgages, which are also known as prime loans
who a subprime mortgage is good for
those who:
- have a poor credit history
- are ineligible for other loans
government-insured mortgage loans
there are several government-insured mortgages
while each agency issues a range of products, the 30-year fixed rate mortgage is most common (other types may be available, such as 15-year fixed rate or adjustable rate mortgage, as well as products for home rehabilitation)
most common government-insured loans are:
- FHA
- VA
- USDA
FHA mortgage loans
Federal Housing Administration is a government agency that provides mortgage insurance on loans made by private FHA-approved lenders
may be a good fit for clients who:
- have limited funds for a down payment and closing costs
- may not qualify for a conventional mortgage loan due to flawed credit history, bankruptcy, or high debt-to-income ratios
VA mortgage loans
these mortgages are guaranteed for eligible veterans, active duty personnel, and surviving spouses
they offer competitive rates and low or no down payments
a good fit for those who:
- are eligible veterans, active duty personnel, or surviving spouses
- have suitable credit and sufficient income
- have a valid Certificate of Eligibility
USDA mortgage loans
offers both guaranteed and direct loans to homeowners interested in living in eligible rural areas
guaranteed loans, issued by private lenders and insured by the USDA, are designed for homebuyers with low- to moderate-income, offer competitive rates, and do not require a down payment
who USDA mortgage loans are a good fit for
those who:
- want to live in eligible rural areas, as defined by the USDA
- make less than 115% of Area Median Income, or AMI
- may need flexible credit guidelines or need to rely on non-traditional credit for qualification
- may not have funds for a down payment
- must be without adequate housing
key differences for USDA direct mortgage loans
- homebuyer income must be less than 80% of AMI
- homebuyers are unable to obtain other financing but have reasonable credit
- loan terms can go up to 33 years, though exceptions allow for loan terms up to 38 years if certain income criteria apply
fixed rate mortgage
a fixed rate mortgage, typically paid off in 30 years, has an interest rate that does not fluctuate, it stays the same over the life of the loan
some people get a 15-year or other term, but these have higher monthly payments since you’re paying off the mortgage faster
adjustable-rate mortgage
adjustable rate mortgages have an initial rate that applies for a defined period of time (typically from one month to 10 years) and then adjusts at pre-determined intervals for the life of the loan
interest rates can increase or decrease when they are adjusted, but there are caps on how large an adjustment can be
second mortgage
a second mortgage is a subordinate loan on a property
second mortgages may help lower the amount of the principal mortgage during home purchase, or they can be taken out at any point during the life of the first mortgage to pay for things like repairs, costly purchases, and education
loan-to-value ratio
a percentage calculated by dividing the amount of the outstanding loan amount by the sales price or appraised value of the home; also called an LTV ratio
upfront mortgage insurance premium (UFMIP)
an insurance premium of 1.75% that is collected on FHA loans
UFMIP can be paid at the time the loan closes or rolled into the mortgage payments
it is in addition to ongoing mortgage insurance premium payments
HOME investment partnerships program
HUD program that provides grants to states and localities for building, buying, and/or rehabilitating affordable housing for rent or homeownership or providing direct rental assistance to low- and moderate-income persons
community development block grant program
HUD program that provides grants to states and localities to provide decent housing and suitable living environment and to expand economic opportunities, principally for low- and moderate-income persons
HUD website resources - subsidized apartment search
what is it?
a directory, maintained by HUD, listing privately owned subsidized housing units for low-income residents to search for affordable apartments by location
HUD website resources - subsidized apartment search
how does it work?
HUD helps apartment owners offer reduced rents to low-income tenants
families receive housing assistance as long as they live in the subsidized property
HUD website resources - subsidized apartment search
how to apply?
residents can search for an apartment on the HUD website and apply directly at the property management office
HUD website resources - public housing agency
what is it?
public housing agencies offer public housing and housing vouchers for low-income residents
housing can range from scattered single-family houses to high-rise apartments
HUD website resources - public housing agency
how does it work?
HUD administers funds to PHAs, who manage affordable housing units and assistance programs for residents
HUD website resources - public housing agency
how to apply?
residents can search for their local PHA contact information on the HUD website and apply through the PHA
public housing agencies - definition
a state, county, municipality, or other government agency that develops or operates low-income housing
PHAs, which receive federal funding from HUD for program administration, include a broad range from local housing authorities to state departments of community affairs or housing and finance agencies
fair market rent
a determination of the monthly rent of a rental property, calculated by HUD
factored by geography and unit size, it sets payment standards for public housing programs
what is the upfront mortgage insurance premium (UFMIP) for an FHA mortgage?
1.75%
what is the annual MIP for FHA mortgages?
ranges between 0.8-1.05%
what is the upfront Guarantee Fee for USDA loans?
2%
eligibility requirements for down payment assistance programs usually include which factors?
- income
- homebuyer education and/or counseling
- purchase prices
what is the minimum percentage of the purchase price that a client needs to make as a down payment to avoid having to pay mortgage insurance with a conventional mortgage?
20%
what factor determines whether the client will have to pay private mortgage insurance versus mortgage insurance premium?
type of loan
private mortgage insurance (PMI) relates to conventional loans, and mortgage insurance premiums (MIP) are associated with FHA loans
factors that could influence the cost of PMI include the loan size, loan-to-value ratio, and the client’s credit score
