Programs - Chapter 8 Flashcards
The 4Cs
Credit, Collateral, Capacity, Cash
Conventional Loans
Conventional mortgages were the first type of mortgages available, so they set the standard.
Conventional Conforming Loans
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government sponsored enterprises (GSE) that set the underwriting standards for Conventional Conforming mortgages. Even though Fannie and Freddie are GSEs, they are NOT insured or guaranteed by the government.
Fannie Mae
In 1938, President Franklin Roosevelt and the United States Congress created the Federal National Mortgage Association (Fannie Mae) as an entity responsible for buying mortgages from lenders. The lenders could then use the influx of capital to provide more loans. The agency along with FHA supported a methodology that created a new wave of American home ownership for low and middle income borrowers.
Fannie Mae typically buys loans from larger lenders such as high volume depository institutions.
Freddie Mac
In 1968, Fannie Mae was spun off from the government into a publicly traded company. President Lyndon Johnson made this decision due to the heavy toll the Vietnam War was taking on the federal budget. To counterbalance Fannie Mae’s potential monopoly, the Federal Home Loan Mortgage Corporation (Freddie Mac) was created in 1970. Freddie Mac went public in 1989.
Freddie Mac typically works with small lenders. These lenders are often referred to as thrifts.
Conventional Conforming Loan Qualifying Standards
Fannie and Freddie ensure liquidity in the marketplace by purchasing loans that meet their standard. These standards include limits on the size of loans established annually by the Federal Housing Finance Agency (FHFA) based on changes in median home price. The limitations on loan amounts, as shown in the chart, determine whether or not a loan qualifies as a conforming loan.
Conventional conforming mortgage loans can be fixed-rate mortgages, ARMs, hybrid ARMs, or super conforming mortgages.
Super Conforming Mortgage Loans
For high-cost areas that require larger loan amounts. During the financial crisis of 2008, many loan programs that supported loan amounts exceeding the FHFA loan limits were pulled from the market. Recognizing the need to service higher loan amounts, Fannie Mae and Freddie Mac worked with FHFA to increase loan limits for high-cost areas. These higher loan amounts are super conforming loans.1
A-Paper or Prime Loans
Conforming mortgages with limited risk involving a borrower with a FICO score greater than 680, an LTV less than 80%, and a DTI of less than 36%.
Conventional Conforming Loans / CREDIT
To qualify for a conventional conforming loan the consumer’s FICO score should be 620 or higher.
Conventional Conforming Loans / COLLATERAL
A standard appraisal must be completed by a licensed/certified appraiser. Maximum LTV will
vary depending on loan program and occupancy status. For investment properties, requirements
are more strict. For purchase loans, the maximum LTV is 95%.
Conventional Conforming Loans / CAPACITY
The DTI ratio standards for conforming loans are generally a 28% housing DTI ratio (front-end) and a 36% total DTI ratio (back-end) with an allowance of up to 45% with compensating factors such as substantial assets.
Non-taxable income, such as social security, disability, charitable donations, life insurance payouts, child support, or any public assistance, can be grossed up by 25% (for a total of 125% of the income).
A 2-year average of overtime and/or bonuses the consumer receives should be considered. 75% of rental income can be utilized in determining total monthly income.
If a revolving debt does not state a monthly payment on the credit report, 5% of the debt must be included in the consumer’s total monthly liabilities.
Conventional Conforming Loans / CASH
The consumer will need to prove asset reserves for certain programs. For example, mortgage loans for investment properties usually require up to 6 months of reserves to be verified.
If the consumer is bringing money to the closing of a mortgage loan transaction, then the source of those funds must be verified.
Conventional Conforming Purchase Loans: Down Payment
As an overall minimum, Fannie Mae and Freddie Mac require a 95% LTV (5% down payment) for 1-unit primary residences. Second homes and investment properties require a lower LTV (greater down payment) due to the increased risk factor. The minimums for eligible programs may vary depending on the following factors:
• Number of property units
• Occupancy: principal, second, or investment property
• Automated underwriting vs. manual underwriting
• Credit score, if applicable
• Transaction type: purchase, limited cash-out refinance, or cash-out refinance
• Mortgage program type: fixed, ARM
Conventional Conforming Purchase Loans: Seller Concessions
In a purchase transaction, the seller may pay a percentage of the buyer’s closing costs. If the buyer obtains a conforming mortgage loan, the maximum amount the buyer can receive from the seller is 6% of the purchase price if the buyer puts a down payment of 10% or more toward the purchase. If the buyer decides to put down less than 10%, the maximum seller concessions are 3%. Lastly, if the buyer is purchasing an investment property, the maximum seller concessions are 2% regardless of how much the buyer puts down.
Conventional Non-Conforming Loans
Non-conforming mortgages may be considered non-conforming even if the loan only misses one of Fannie or Freddie’s qualifying standards. An example of this could be the Alt-A borrower who shows lower-income, but was still considered less-risky by the lender.
Because conventional non-conforming loans are by their nature NON-CONFORMING, there are no specific set qualifying requirements.
Jumbo Loans
Conventional non-conforming mortgages that exceed the loan limits established by the Federal Housing Finance Agency (FHFA) and thus do not meet the standards set for conforming mortgages.
Niche Loans
Conventional non-conforming loans provided under special or unique circumstances by private lenders.
Example: A borrower has little to no credit and/or work history, but a high level of net worth and the
lender makes the loan based on their net worth; think of a young NBA player who just signed a multi- million dollar contract.
Non-Traditional ARMs
A conventional non-conforming loan option ARM could be an example of a non-traditional ARM.
Graduated Payment Mortgages (GPM)
Because of its negatively amortizing features, a GPM could be a non-conforming loan.
Sub-Prime Mortgages
Conventional non-conforming loans for borrowers with lower qualifications, such as poor credit or bankruptcies.
Non- Conventional Mortgage Loans (Government Loans)
Non-conventional mortgages are also known as government mortgages. The reason they’re considered non- conventional is because they were created to meet a public need not being filled by conventional mortgage loan programs.
Non-conventional mortgage loans are offered from three different program providers: the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), and the United States Department of Agriculture (USDA). While the FHA loan program is accessible for all Americans that meet its qualification standards, both VA and USDA loans do come with some restrictions as to who can apply and qualify for their products.
Each one of these programs provide loans that are accompanied by some kind of government insurance or guaranty. It is this guaranty that provides lenders with the assurance that they will be compensated even in the case of borrower default. This encourages lenders to offer non-conventional loans to their borrowers.
FHA Mortgage Loans
The Federal Housing Administration (FHA) offers a variety of mortgage products to consumers. In comparison to conventional conforming products, FHA loans have lower qualification requirements and therefore are more
accessible to consumers. These qualifications include lower credit score, LTV, DTI, and reserves, but share similar loan limit requirements of conventional conforming loans.
FHA Loan Qualifying Standards / CREDIT
Mortgage late payments, bankruptcies, and seriously delinquent accounts could prevent a borrower from being eligible for this mortgage loan.
A credit score of 580 makes a borrower eligible for maximum financing. A 500-579 score limits a
borrower to a 90% LTV eligibility. And a score below 500 disqualifies a borrower.
FHA Loan Qualifying Standards / COLLATERAL
The livable condition of the home and its appraised value will determine whether or not it qualifies for an FHA loan. The consumer may be required to make minor home repairs, such as adding hand rails for a staircase or repairing water damage. For purchase loans, the maximum LTV is 96.5%. For a refinance loan, a maximum LTV of 97.75%.