Module 6: Nontraditional/Nonconforming Loans and Financing

Question 1

Define Permanent Buydown

Answer 1

When points are paid to a lender to reduce interest rate and loan payment for the entire life of loan.

Question 2

Define fully indexed rate

Answer 2

aka Fully Indexed Rate is the index plus the margin.

Question 3

Define Index

Answer 3

Index is the cost of money determined by different indices

Question 4

Define Margin

Answer 4

• Margin is fixed percentage of points added to the index and set by the lender
• Represents the profit margin being made by the lender

Question 5

Define Rate Adjustment Period

Answer 5

The length of time between interest rate changes.

Question 6

How are Interest rate caps shown

Answer 6

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)

Question 7

Define Hybrid ARM

Answer 7

• ARM with an initial fixed-rate period greater than 1 year

- Adjusts regularly for remainder of the loan term.

Question 8

Define Conversion Option

Answer 8

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%)

Question 9

What are ARM Disclosures

Answer 9

Under Regulation Z of TILA (Truth in Lending Act)

- Required to give CHARM within 3 business days of loan app.

Question 10

What notices must be given for ARM Interest rate/payment changes

Answer 10

• 60 days notice before an interest rate change that results in a new payment amount
• 7-8 months disclosure of initial interest rate change

Question 11

Define Construction Mortgage

Answer 11

Interim, short-term temporary loan used to finance construction of improvements and buildings on land

Question 12

Define Fixed Disbursement Plan

Answer 12

Pays % of funds at a set time called Obligatory advances.

Question 13

Define Voucher System

Answer 13

Contractor/borrower pays own bills then submits receipts to lender for reimbursement

Question 14

Define Warrant System

Answer 14

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.

Question 15

Define subprime loan

Answer 15

• Does not conform to secondary market standards
• Offered to less than prime credit candidates
• High interest rates
• High DTI
• Low Down payment

Question 16

Define layering of risk

Answer 16

When an underwriter identifies more than one risk factor associated with the mortgage loan

Question 17

What does a loan expressed as 360/120 mean?

Answer 17

• 360 is the term of the loan

- 120 is the month the full payment of loan is due

Question 18

What does a loan expressed as 30/15 mean?

Answer 18

• 30 is the term of the loan

- 15 is the year the balloon payment is due in full

Question 19

Define Home Equity Loan

Answer 19

HELOC is a loan secured by a mortgage on one’s principal residence

Question 20

Define closed-end loan

Answer 20

fixed amount of money that can be repaid with regular payments over a fixed term

Question 21

Define open-end loan

Answer 21

HELOC where borrower is granted a specific credit limit from which to draw and pay back principal.

Question 22

Define reverse mortgage, and list some examples

Answer 22

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

Question 23

What are the payment options for a reverse mortgage

Answer 23

1. Fixed monthly - as primary residence (tenure)
2. Lump sum
3. Fixed monthly (term)
4. LOC - line of credit access as needed.
5. Combination of of above options

Question 24

When is repayment due for reverse mortgage?

Answer 24

When the last surviving borrower:

1. Dies
2. Sells
3. Not living in residence for 12 consecutive months.

Question 25

Define Non-recourse Loan

Answer 25

Reverse mortgages repayment of loan cannot exceed the fair market sale price of the home minus reasonable sales expenses.

Question 26

Define Purchase money mortgage

Answer 26

Mortgage given by the buyer to the seller for the purchase of real estate aka Seller-held mortgage.

Question 27

Define assumption

Answer 27

One party agrees to take over payments of another party’s debt with terms of the note(loan) staying unchanged.

Question 28

Define Land Contract

Answer 28

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.

Question 29

Define Lease/Option

Answer 29

When seller leases property to someone for specified term with option to buy. Comprised of two elements:

1. Lease - contract to pay rent in exchange for possession of real estate.
2. Option - contract giving one party the right to do something within designated time period without obligation to do so.

Question 30

Define Lease/Purchase financing

Answer 30

Seller leases property with tenant agreeing to buy the property during or following lease term.

Question 31

Define Equity Exchange

Answer 31

Value in one property being traded for value in another property AKA:

• Tax-deferred exchange
• Tax-free exchange
• like-kind exchange

Question 32

Define Homebuyer assistance programs

Answer 32

DAP (Down payment Assistance Programs)