Module A Flashcards
Characteristics of a Qualified Mortgage
- Closed-end Loan
- Periodic payments are sufficient to pay principal and interest without negative amortization
- No interest-only payment streams
- No balloon payments
- Loan term cannot exceed 30 years
- Debt-to-Income less than 43%
- Points and Fees not to exceed 3% of the total loan amount
Seasoning period for seasoned QM
36 months after first payment due date
Mortgages that meet loan limits and other standards that loans must meet to qualify for purchase by Fannie Mae and Freddie Mac
Conforming Loans
Term used for the liability protection lenders gain from originated Qualified Mortgages
Safe Harbor
Qualified Mortgages are regulated by
Regulation Z
Underwriting of a Qualified Mortgage must thoroughly examine the borrower’s ability to repay the loan, governed by:
Ability to Repay Rule
Qualified Mortgage points and fees threshold:
Loan >= $110,260
3% of loan amount
Qualified Mortgage points and fees threshold:
$66,256 <= Loan < $110,260
$3,308
Qualified Mortgage points and fees threshold:
$22,052 <= Loan < $66,256
5% of loan amount
Qualified Mortgage points and fees threshold:
$13,783 < Loan < $22,052
$1,103
Qualified Mortgage points and fees threshold:
Loan < $13,783
8% of loan amount
Qualified Mortgages not involving higher-priced mortgage loans receive this type of compliance recognition
Conclusive Presumption of Compliance
Qualified Mortgages involving higher-priced mortgage loans receive this type of compliance recognition
Rebuttable Presumption of Compliance
The type of transactions governed by the QM rule, including closed-end loans secured by a dwelling
Covered Transactions
Due QM covered transactions include investment properties?
Yes
What is the main change included in the Final QM Rule, which becomes effective February 2022?
The revision eliminates the DTI ratio requirement and instead focuses on APR
What limit is placed on APR by the Final QM Rule?
APR cannot exceed the average prime offer rate (APOR) by more than 2.25%
What interest rate must creditors use to assess ATR on a variable rate loan to be a Qualified Mortgage?
The highest interest rate that may apply in the first five years
The Final QM Rule takes effect on February 8, 2022, but when will compliance become mandatory?
October 1, 2022
What are product restrictions under the Final Seasoned QM Rule?
- First Lien only
- Fixed-rate only
- Fully amortized by substantially equal payments over life of loan
- No negative amortization
- No balloon payments
- Loan term not to exceed 30 years
- No HOEPA High Cost mortgages
- Points and fees do not exceed the threshold based on loan amount (generally 3%)
When may a balloon payment or loan term greater than 30 years be acceptable for a Seasoned QM?
To accommodate a “disaster or pandemic-related national emergency”
What are delinquency rules for a Seasoned QM?
- No more than two delinquencies of 30 days, AND
2. No delinquencies of 60 or more days
What is the definition of a Small Creditor under the QM Rule?
- Assets < $2billion (end of preceding calendar year)
2. Originated < 2,000 first-lien transactions (previous calendar year)
Small Creditor product restrictions under QM Rule?
- No negative amortization
- Loan term not to exceed 30 years
- Points and fees not to exceed 3%
Who defines QM rules for non-conventional mortgages?
VA and HUD
Restrictions for FHA Qualified Mortgages?
- APR <= APOR + MIP + 1.15%
2. Adheres to the 3% points and fees cap
What is the points and fees rule of VA Qualified Mortgages related to a IRRRLs?
Veteran must recoup all fees charged to refinance within 36 months of closing
Conforming Loan limit on loan amount?
$548,250 (or $822,375 for high-cost areas)
Conforming loan seller concession limits
25% Down Payment - 9%
10 - 24.99% Down Payment - 6%
> 10% Down Payment - 3%
When creditors enforce stricter underwriting standards than what is required by FNMA and FRE
Credit Overlays
Loans made to borrowers between prime and subprime, which are non-conforming loans
Alt-A Loans
Does the FHA originate loans?
No - the FHA only insures loans
What body implements and enforces rules related to FHA loans?
HUD
HUD announces changes to FHA Loan policies using:
Mortgagee Letters
The collection of historical FHA standards and policies can be found in:
Single Family Housing Policy Handbook
What are loan amount limits for FHA loans:
Same as GSE loan limits
Do FHA loans require mortgage insurance?
Yes, they are required to pay:
Upfront Mortgage Insurance Premiums, AND
Annual Mortgage Insurance Premiums
How does HUD ensure FHA loans remain available to those who need them?
Limiting the loan amount on FHA loans
Loan limits for FHA Loans?
Lesser of:
- 115% median house price in area
- 150% of the national conforming loan limit of $548,250
Assigned by HUD at application for an FHA Loan
FHA Case Number
There is a higher level of leniency for delinquent payments when underwriting an FHA loans; however, there is zero tolerance for:
Delinquencies on federal debt (tax liens, unpaid student debt, alimony, and child support)
How does HUD receive funding for FHA loans?
Insurance payments by borrowers held in the Mutual Mortgage Insurance Fund (MMIF)
What is the capital reserve ratio in the MMIF?
2% of loans guaranteed
What is the cost of Upfront Mortgage Insurance Premiums for FHA Loans?
1.75% of the loan amount - can be financed into the loan
What factors are included in calculation of the Annual Mortgage Insurance Premium of an FHA loan?
Base Loan Amount
LTV
Loan term
When do Annual Mortgage Insurance Premiums cancel for an FHA loan?
LTV > 90%: Never
LTV < = 90%: After 11 years
Down payment requirement for FHA loans?
3.5% with 0 seller assistance allowed (if FICO is at least 580)
When Fico is less than 580, 10% down payment is required
The FHA version of a reverse mortgage is called a:
Home Equity Conversion Mortgage
The amount the VA will guarantee in the event a veteran enters foreclosure on a house financed via a VA loan
Entitlement ($36,000 or $68,250 in high cost areas)
Lenders will generally lend up to X times the veteran’s entitlement without down payment
4x the entitlement
The first step to purchase under a VA loan is to apply for a
Certificate of Eligibility (COE)
What is the required index for variable-rate VA loans?
1 Yr TBill
When is the first allowed rate change for a variable rate VA loan?
36 months after first payment date
What is the maximum rate change for a given period on a variable rate VA loan?
1% up or down
What is the total cap on interest rate on a variable rate VA loan?
5% from original rate
Maximum origination fee for VA loans
1% of loan amount
General DTI requirement for VA loans
41% (with exceptions)
Loans that are made for the purpose of assisting low-income borrowers purchase homes in rural areas
RHS Loans or Section 502 Loans
RHS loans that are funded directly by the U.S. Government,
RHS Direct Loans
RHS loans that are funded by private lenders, but are guaranteed by the RHS in the event that the borrower’s loan goes into foreclosure
RHS Guaranteed Loans
Available loan terms for RHS direct loans
33 or 38 years
The lower the term of a variable rate index, the ____ the risk of interest rate fluctuation for the borrower
Higher
The limit on the amount that the interest rate can increase or decrease at the first adjustment date for an ARM
Initial Rate Cap
The limit on the amount that the interest rate can change up or down on any adjustment date.
Periodic Rate Cap
The limit on the amount that an interest rate can change over the life of an ARM, functioning as a rate ceiling
Lifetime Rate Cap
The limit on the amount that the payment can change on any adjustment date from the current or previous payment amount on an ARM.
Payment Cap
What happens when payment caps result in a monthly payment that is not sufficient to pay all of the interest due
Unpaid interest is added to the outstanding principal balance of the loan (negative amortization).
Negative Amortization is limited for ______ and _____by the following regulation _______
High Cost Mortgages and Qualified Mortgages; HOEPA
TILA requires the following disclosures to be delivered to borrowers in ARM transactions:
CHARM Booklet (3 days after application)
Loan Program Disclosures (required for each ARM program for which the customer states interest)
Rate Change Disclosures (Due 120-60 days before each rate change)
What is the lookback requirement for calculating the Fully Indexed Rate when underwriting an ARM transaction
45 Days preceding the scheduled close date (Average rate over the period)
A mortgage loan with a rate that does not adjust during the first few years of the loan’s term, usually a period of anywhere between three and ten years. After the initial rate period expires, the loan adjusts based on the index and margin specified in the lending agreement.
Hybrid ARM
High Cost Mortgage Loan APR Thresholds (First and subordinate liens)
First Lien: 6.5 above APOR
Subordinate Lien: 8.5 above APOR
High Cost Mortgage points and fees thresholds
Loan > $22k: 5% of loan amount
Loan < $22k: 8% of loan amount or $1,103
Who must receive disclosures related to HOEPA?
- Any consumer primarily liable for the transaction
- Any person with an ownership interest in the securing dwelling
When are HOEPA disclosures due to recipients?
3 business days prior to consummation
What is a unique task borrowers of High-Cost Mortgages must undertake in order to close the loan under HOEPA?
Counseling
When a non-depository mortgage banker closes a loan in its name using a line of credit and immediately assigns the loan to the creditor that provided the loan funds
Assignment (different than selling a loan on secondary market)
What is a requirement of an originator who immediately assigns or sells a high cost mortgage under Reg Z?
Provide notice to receiving party of HOEPA status and reminder that purchaser or assignee have full responsibility and accountability under TILA
Higher Priced Mortgage Loan APR thresholds (First and Subordinate Lien)
First Lien - 1.5 above APOR and 2.5 for jumbo loans
Subordinate Lien - 3.5 above APOR
Higher Priced Mortgage Loans require an escrow account for a minimum of ___ years
5 years
What is the borrower’s limitation to cancelling the escrow account on a HPML after 5 years?
They must have achieved 80% LTV
What lenders are exempt from requiring an escrow account on HPMLs?
Small Creditors
In terms of HPML escrow exemptions, how does Reg Z define a small creditor?
A creditor who:
- Has made at least 1 closed-end loan to a rural or underserved area in the preceding calendar year
or
- Has made at least 1 closed-end loan to a rural or underserved area in the two preceding calendar years, when they have received an application before April 1 of the current year
and
- No more than 2,000 first-lien transactions in previous year
- No more than $2billion assets in previous year
When are two appraisals required for an HPML (purchase transaction):
Either of the two scenarios:
- Seller bought property no more than 90 days prior & are selling the home for at least a 10% markup of their purchase price
- Seller bought property between 91-180 days prior & are selling the home for a 20% markup
One of the two appraisals on a flipped property involving a HPML must include:
- Difference between purchase / selling price
- Analysis of changes in market conditions
- Analysis of upgrades made to property
Can a creditor charge the borrower of an HPML for both appraisals?
No, only one
Describe an 80-10-10 piggy-back loan
- First mortgage covers 80% of purchase price (80% LTV and no PMI is required)
- Second mortgage covers 10% of purchase price
- Borrower makes as 10% down payment
How would a borrower typically gather the funds to make a balloon payment?
Refinancing
Term used to describe when, to minimize the risk of a balloon payment, there is an option to convert a loan to a fixed-rate loan at maturity:
Conditional Refinancing Provision
Example loan terms for a loan featuring a balloon payment with a conditional refinancing provision
5/25
7/23
Example loan terms for a loan featuring a balloon payment without a conditional refinancing provision
5/30
7/30
10/30
When may a Qualified Balloon Payment Mortgage be made?
- By a small creditor
- Loan term not exceeding 5 years
In what situations may a balloon payment be a suitable option for a borrower?
- Expectation of largely increased income in near future
- Plans to refinance after 5 or so years
- Plans to move and sell home after 5 or so years
Age requirement for reverse mortgages
62 years or older
Reverse mortgages that are low-cost loans offered to low income borrowers by state and local agencies or non-profit organizations. Borrowers can only use them for the purpose specified by the lender such as payment for home improvements or payment of property taxes.
Single Purpose Reverse Mortgages
Reverse mortgages that are regulated and insured by HUD. They allow borrowers to receive fixed monthly payments, a line of credit, or a combination of payments and a credit line. These loans are available to homeowners who owe little or no money on their home.
Home Equity Conversion Mortgages (HECMs)
Reverse Mortgages made as private loans. They are more expensive but often allow homeowners to borrow more than they can borrow with a HECM. Homeowners with expensive homes who want to borrow more than they can borrow with a HECM may consider this type of reverse mortgage.
Proprietary Mortgages
Is the borrower required to reside in the dwelling secured by a Reverse Mortgage?
Yes
What additional disclosure does TILA require for Reverse Mortgages?
Loan Cost Disclosure Form which covers:
- Up-front cost
- Interest
- Ongoing costs
The bulk of Reverse Mortgage originations are:
Home Equity Conversion Mortgages (HECMs) regulated by HUD
How much equity must a borrower have in a home for a HECM transaction?
100%
What task must a borrower complete in a HECM transaction to satisfy HUD requirements?
They must complete a consumer information session on reverse mortgages
Explain the two loans created in an HECM transaction:
- The reverse mortgage between the lender and the borrower
2. A mortgage created and held by the HUD to guarantee payments are made timely (protects HUD and the lender)
What two payments must a borrower continue to make in the event of a Reverse Mortgage origination on their home?
- Homeowner’s Insurance
2. Property Taxes
How is interest accounted for in a reverse mortgage transaction?
The interest is added to the loan balance
How are funds disbursed to a borrower of a fixed-rate reverse mortgage?
Lump sum
Do variable rate reverse mortgages require a borrower to receive funds in a lump sum?
No, they can receive as a lump sum, but they may also receive in the form of monthly payments or in the form of a home equity line of credit
What is the primary advantage of adjustable-rate HECMs as it relates to interest payjments?
Interest is charged on only the amount of funds disbursed to the borrower (if they take monthly payments on a HELOC)
What is the required index for adjustable-rate HECMs?
One-year Constant Maturity Treasury (CMT)
What is the national cap on claim amount for an HECM?
$822,375
What is the limit of the initial disbursement amount for a HECM?
60% of the principal limit, unless the funds are being used to pay debt
HELOC amount limit formula
Available HELOC Amount =
(Appraised value *.85) - UPB of first mortgage
Construction loan whereby consumers borrow initially to pay for construction. Once construction is complete, the balance of the loan is converted to a permanent mortgage.
Construction-to-permanent loan
Construction loan whereby consumers obtain a loan to pay for construction. After construction is complete, the borrower obtains a separate mortgage loan to pay off construction debt.
Stand-alone construction loan
This term relates to construction financing and applies to a range of short-term loans that are taken out by homeowners who are waiting for long-term financing
Bridge Loans
What types of construction & bridge loans are subject to disclosure requirements of TRID and Reg Z?
Closed-end
Money paid by a buyer to a seller at the time of entering a contract to indicate intent and ability of the buyer to carry out the contract.
Earnest Money
A purchase transaction, often involving an assumable mortgage, in which the party selling the property provides all or part of the financing.
Seller Carry-back
Incurred when a loan applicant accepts an interest rate that is higher than the best rate for which they qualify. The difference is used to defray closing costs.
Borrower Credits or Yield Spread Premium (YSP)
A certain amount of financing made available to borrowers by their lender in order to pay certain closing costs. Lender credits are typically “made up” by the lender through an increased interest rate.
Lender Credits
Interest accruing on a loan on a daily basis, calculated by counting the number of days between the date of the last payment received and the date on which the current payment is received.
Daily Simple Interest
A written instrument properly signed and delivered that conveys Title to real property.
Deed
In many states, a form of security agreement used to pledge a borrower’s real property as security for the payment of a note. It is a three-party instrument in which the borrower assigns his/her ownership interest to a trustee who may sell the property and apply the net proceeds of the sale to the outstanding debt if the borrower fails to pay the note as agreed.
Deed of Trust
A type of loan product in which the monthly payments are reduced for a period of time because someone has prepaid the interest for one or two years.
2-1 Buydown
The transfer of ownership interest in real property from one person to another.
Conveyance
A clause in a mortgage that conveys title to a borrower once the loan is paid in full.
Reconveyance
Term used for when mortgage bankers and brokers may close loans in their own names, so that the note and security agreement show them as the lender, but immediately (generally within 24 hours) assign the loan to the creditor that actually funded the loan.
Table Funding
