Module 6: Nontraditional/Nonconforming Loans and Financing Flashcards
Define Permanent Buydown
When points are paid to a lender to reduce interest rate and loan payment for the entire life of loan.
Define fully indexed rate
aka Fully Indexed Rate is the index plus the margin.
Define Index
Index is the cost of money determined by different indices
Define Margin
- Margin is fixed percentage of points added to the index and set by the lender
- Represents the profit margin being made by the lender
Define Rate Adjustment Period
The length of time between interest rate changes.
How are Interest rate caps shown
As two numbers ie 2/6:
- First number indicates the max amount the interest rate can increase from one adjustment period to the next (periodic cap).
- Second number indicates max amount the interest rate can increase during life of loan (lifetime cap)
Define Hybrid ARM
- ARM with an initial fixed-rate period greater than 1 year
- Adjusts regularly for remainder of the loan term.
Define Conversion Option
Gives the borrower the right to convert from ARM to fixed-rate
- Interest rate (initial and converted rate are often higher)
- limited time to convert (between the first and fifth year)
- Conversion fee (typically 1%)
What are ARM Disclosures
Under Regulation Z of TILA (Truth in Lending Act)
- Required to give CHARM within 3 business days of loan app.
What notices must be given for ARM Interest rate/payment changes
- 60 days notice before an interest rate change that results in a new payment amount
- 7-8 months disclosure of initial interest rate change
Define Construction Mortgage
Interim, short-term temporary loan used to finance construction of improvements and buildings on land
Define Fixed Disbursement Plan
Pays % of funds at a set time called Obligatory advances.
Define Voucher System
Contractor/borrower pays own bills then submits receipts to lender for reimbursement
Define Warrant System
Lender directly pays bills for suppliers and laborers. Borrower makes interest-only payments during construction on advanced funds and lenders collect monthly or escrow at close of loan.
Define subprime loan
- Does not conform to secondary market standards
- Offered to less than prime credit candidates
- High interest rates
- High DTI
- Low Down payment
Define layering of risk
When an underwriter identifies more than one risk factor associated with the mortgage loan
What does a loan expressed as 360/120 mean?
- 360 is the term of the loan
- 120 is the month the full payment of loan is due
What does a loan expressed as 30/15 mean?
- 30 is the term of the loan
- 15 is the year the balloon payment is due in full
Define Home Equity Loan
HELOC is a loan secured by a mortgage on one’s principal residence
Define closed-end loan
fixed amount of money that can be repaid with regular payments over a fixed term
Define open-end loan
HELOC where borrower is granted a specific credit limit from which to draw and pay back principal.
Define reverse mortgage, and list some examples
Allows borrower to convert home equity to cash and debt at a cost without selling or paying the lender.
- Reverse equity mortgage
- HECM (Home Equity Conversion Mortgage)
- Creates a “Rising Debt, Falling Equity” scenario
What are the payment options for a reverse mortgage
- Fixed monthly - as primary residence (tenure)
- Lump sum
- Fixed monthly (term)
- LOC - line of credit access as needed.
- Combination of of above options
When is repayment due for reverse mortgage?
When the last surviving borrower:
- Dies
- Sells
- Not living in residence for 12 consecutive months.
Define Non-recourse Loan
Reverse mortgages repayment of loan cannot exceed the fair market sale price of the home minus reasonable sales expenses.
Define Purchase money mortgage
Mortgage given by the buyer to the seller for the purchase of real estate aka Seller-held mortgage.
Define assumption
One party agrees to take over payments of another party’s debt with terms of the note(loan) staying unchanged.
Define Land Contract
Real estate installment agreement where buy pays seller for right to occupy and use property without a deed or title until until a specified portion or all payments made.
Define Lease/Option
When seller leases property to someone for specified term with option to buy. Comprised of two elements:
- Lease - contract to pay rent in exchange for possession of real estate.
- Option - contract giving one party the right to do something within designated time period without obligation to do so.
Define Lease/Purchase financing
Seller leases property with tenant agreeing to buy the property during or following lease term.
Define Equity Exchange
Value in one property being traded for value in another property AKA:
- Tax-deferred exchange
- Tax-free exchange
- like-kind exchange
Define Homebuyer assistance programs
DAP (Down payment Assistance Programs)
