Section 5 Conventional Conforming Mortgage Loans Flashcards
Conventional Mortgage Loans
Conventional
Government - such as loans insured by the Federal Hosting Administrator (FHA)
VA - Guaranteed by the US Department of VA
Conventional vs Conforming Loans
Conventional Loans and LTV
Conventional loans were not secured but they had 20% down payment. They were considered safe
LTV
Loan to Value Ratio. If the property value is $100k and loan amount is $80k, it is an 80% loan.
Conventional Loan Terms and Interest
15-30 years but 20 or 40 years are not unheard of.
Standard conventional loan is a Fixed rate mortgage loan with a 30 years fixed term
Most conventional loans are amortized.
What is amortized means
This simply means that agreed upon payments are applied to both principal and interest. So the monthly payment remains the same over the life of the loan.
Down payment Workaround
Borrowers may qualify for conventional loan based on credit history, income, work history etc but don’t have full down payment can purchase private mortgage insurance (PMI). PMI is provided by a third party and insures the gap between the loan percentage and an 80% LTV
PMI
It is calculate between 0.5% to 1% on the entire loan amount annually.
1% of 100000 would pay $1000 per year.
PMI rates are based on many factors, including the loan type (e.g. fixed, adjustable rate), property type and whether the PMI will be paid up. Property type and whether the PMI will be paid up front or monthly.
MLO who estimate their PMI payment can use online calculators or obtain rate card from their lender’s PMI provider.
Conforming vs Non conforming
Conforming loans can be sold on the secondary market because they meet the criteria required by the Federal National Mortgage Association (Fannie Mae or FNMA) and the Federal Home Loan Mortgage Corporation ) Freddie Mac or FHLMC).
Conforming Loan Requirements
Loan amount
Down Payment
Loan to value Ratio
Housing debt-to-income and/or total debt-to-income ratios
Non Conforming Loans
Loans that don’t meet all qualifying guidelines set by Fannie Mae and Freddie Mac. They are called Jumbo Loans. Which means they dont meet all qualifying guidelines set by Fannie Mae and Freddie
Harder to sell on secondary market and not every lender offers it.
Lenders that offer these loans offset their risk by charging a higher interest rate.
Is there any cap on Non Conforming Loans
The loan amount must be below the annual dollar cap for the county in which the property is located to be eligible to be delivered to Fannie Mae and Freddie Mac.
Loan limits are published annually by Federal Housing Financing Agency (FHFA) and apply to all conventional loans.
You must always verify loan limits for the current year and your borrower’s county.
Who is Fannie Mae
Fannie Mae also know as FNMA is the Federal National Mortgage Association, a private for profit corporation that operates under a congressional charter that buys mortgages on the secondary market from larger retail and commercial banks.
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC) purchases mortgages on the secondary market from smaller community banks to increase availability of financing for conventional mortgages insured by the federal government.
Are Fannie Mae and Freddie Mac government agencies
No but they are closely regulated by the federal government. President appoints the members of their boards of directors. They are called government sponsored entities or GSEs
Desktop Underwriter/Desktop Originator
It is Fannie Mae automated underwriting system that provides underwriting recommendation and credit risk assessments.
DU is used on conjunction with Desktop Originator DO by MLOs and sponsored mortgage brokers to streamline the loan application process.
Loan Product Advisor
Fraddie mac uses Loan Product Advisor to assess credit risk and provide underwriting recommendations.
FNMA and FHLMC Guidelines
FNMA guidelines that can be found on website.
What are the Hazard Insurance requirements?
On the FNMA web site, type “General Property Insurance Coverage in the search field
More FNMA Guidelines
What is the limit on closing cost concessions?
On the website, Type Interested Party Contributions
FNMA Eligibility Matrix
It contains LTV, CLTV and HCLTV ration requirements for conventional first mortgage loans eligible for delivery to FNMA
How much I pay annually in interest rate on a $275,000 loan with 4.75% interest rate?
Loan Balance * interest rate=annual interest amount
275000 * 4.75% = 13062.50
How much interest will I pay over the life of my loan on 275,000 loan with 4.75% interest rate for 30 years
275000 * 0.0475 *30 = 391,875
Qualified Mortgages
QM For a loan to be considered qualified, which makes the loan insurable, strict income and debt to income ratios apply.
What are the 3 main categories of QM
General qualified mortgage: A loan that meets all the requirements and has debt to income ration of 43% or less
Small creditor qualified mortgage: A loan that meets all the requirements and is originated by a lender that makes 500 or fewer mortgages annually and has $2 billion or less in assets
GSE-eligible qualified mortgage: A loan that meets all the requirements and can be purchased, insured or guaranteed by a GSE, FHA, VA or USDA.
NON QM Loan
It requires less documentation and is made based on an applicant’s state creditworthiness.
Ability to Repay Rule
Lenders that want to make QM are required to make a good faith effort to determine that borrowers have the ability to repay their mortgage. This is called ability to replay/qualified mortgage.
It means that lenders must find out, consider and document the borrower’s income, assets, employment, credit history and monthly expenses.
Requirements for QM
Loan term of 30 years or less and maximum debt to income ratio of 43%.
They can’t include any risky loan features. These can include but are n’t limited to the following:
- Interest only
- Negative Amortization
- Ballon payments
- Loan terms longer than 30 years
Limits on Upfront Points and Fees
QM include limits on upfront points and fees
$124,33,1 and greater: No more than 3% of the total loan amount
$74,599 - 124,331 No more than $3730
$24886 - 74599 No more than 5% of the total loan amount
15541 - 24866 no more than 1243
15541 or less : No more than 8% if the total loan amount
Traditional and Non traditional Mortgage Products
What are Non Traditional Loans
Any product other than 30 years fixed loans. They are referred to as alternatives or exotic loans. They are found in markets with large increases in home mortgage values. those buyers have no choice but to take an risk of a non traditional loan because it’s the only way they can afford to buy house
Non Conforming Loans
Dont meet all guidelines set by Fannie Mae and Freddie Mac. They are called Jumbo Loans., which means they are above the loan limit for government backed loans
Negative Amortization
Many non traditional loan products create negative amortization which is gradual increase in mortgage debt that occurs when the periodic monthly payment isn’t sufficient to cover the monthly principal and interest. The amount of deficit is added to the remaining principal balance. This discrepancy creates negative amortization
Interest Only Mortgage
For a specified no of years, the borrower is required only to pay the interest due on the loan., the rate may fluctuate or it may be fixed causing the payments to vary.
Non QM Loan
Reduced docs., low docs no income no asset, statement income or stated asset loans. The qualification criteria for reduced documentation loans are based on creditworthiness and the increased risk to loan providers due to the reduced or minimal docs
Pre-payment Penalities
It is monetary penalty imposed on a borrower for paying off a loan before its intended term ends. These types of loans don’t permit borrowers to refinance or sell the home without paying a penalty. They are banned in some states
ARM Features
Index: ARM rates are then linked with a recognized index such as US Treasury securities which fluctuates with the economy
Margin: The percentage added to the index, which remains constant over the life of the loan.
ARM Interest rate
Index + margin = calculated interest rate
Adjustment Period
The interest rate adjusts automatically (Annually, every three or five years)
Rate Cap
Limit How much the interest may change either periodically or over the life time of the loan
Payment Cap
Limit the monthly payments can increase during one year
Teaser Rates
Sometimes an ARM will have an initial below market interest rate for the first year. The rate increases of the next rate adjustment period
Purchase Money Second Mortgage
This can take the form of equity in the property or can be seller funded loan. It’s loan that covers part of the purchase price.
Construction Mortgage
It is temporary financing for construction purposes. The developer submits plans for a proposed project, and the lender makes a loan based on the value of the property and construction plans
The entire loan is not given at once; Disbursements are made at intervals as phases of construction are completed. Upon completion, the lender makes a final inspection, closes the construction loan and converts the loan into permanent long term financing
Construction loans are risky?
Lender is loaning on land, air, and promise to build) and usually come with higher interest rates.
Guarantee Fees
Loans that carry risks must provide certain legal protections for lenders, which are called guarantee fees or g-fees.
Fannie Mae and Freddie Mac charge lenders mortgage g-fees so that principal and interest payments on mortgage-backed securities (MBS) are guaranteed.
G-fees cover admin costs, losses in the borrower defaults and a return on capitol.
G-fees are certain percentage of MBS or fixed amount.
Of course, lenders pass an g-fees to consumers by charging higher rates
g-fees are imposed on the entire length of the loan.
Grading Paper
In the mortgage business, loans which are called papers, are graded according to the borrower’s credit standing.
The grading is a letter scale of A to D
A Terrific credit
A -
B-
C-
D- does not mean the borrower is automatically a bad risk
It means that he just doesn’t have enough credit established.
Lenders that specialize in B- C- and D- rated borrowers are known as subprime lenders.
Alt A Loans
are riskier than prime loans but as risky as subprime ones, therefore in order of descending risk are:
Subprime Loans (Higher Risk)
Alt-a Loans (Medium Risk). Alternative a -paper
Prime Loans (Lowest Risk)
Prime loans are also called a-paper loans.
Alt-a loans can be a good solution for borrowers who have good credit score but low income levels. These loans feature lower down payments and higher debt-to-ratios
Subprime Loans and Borrowers
It is type of loan that is offered at a rate above prime to individuals who don’t qualify for prime rate loans. Most cases, these borrowers were turned down by traditional lenders because of poor credit and are seen as less
subprime
It refers to borrowers who are not prime
Subprime Characteristics
Typically Higher rates and fees which can cause thousands of dollars worth of additional cost
they are considers 2-4 years. giving borrowers a chance to pay back debts and clean up their credits.
What is a Higher Priced Mortgage Loan
HPML is secured by borrower’s principal residence with APR that exceeds the Average Prime Offer Rate (APOR) depending on the lean type:
First Lien Mortgage If the first mortgage has an APR that is 1.5 more percentage points higher than the APOR.
Jumbo Mortgage. If the loan is a jumbo mortgage and has an APR that is 2.5 or more percentage points higher than APOR
Subordinate Lien Mortgage: If the loan is a subordinate lien and has an APR that is 3.5 or more percentage points higher than the APOR.
An MLOs role before Underwriting
It’s role is to prevent loss for the lender. Yes, you are MLO not an underwriter. But it
s helpful to know the criteria an underwriter reviews for non traditional loans so you know what you will need from borrowers and how to structure loans.
Lenders rely on underwriting and you to ensure that the level of rsik they are taking when loaning money is acceptable.
Non Conforming and Nontraditional Mortgage loans and subprime lending
CSBS and AARMR The conference of State Bank Supervisors A national organization dedicated to protecting and advancing the nations’ dual bank system.
CSBS does not work alone but instead it overseas the industry, along with the American Association of Residential Mortgage Regulators (AARMR). AARMR is a national organization that represents state residential mortgage regulators.
Underwriter’s role in Non Traditional Underwriting
- Establishing Capacity; Whether the borrower has ability to repay the loan
- Establish level of comfort with borrower’s willingness to repay; Current and past credit.
- To review the security for the loan to ensure that if the loan can be repaid through the sale of the property. This process is referred to as a review of the collateral
Traditional and Nontraditional Mortgage Products
Govt Mortgage Loan Programs
FHA Loan
Loans insured by Federal Housing Administration are great for buyers who dont qualify for conventional loans.
Minimum Credit Score
- At or above 580 they are eligible for maximum financing
- Between 500 - 579, they are limited to a maximum LTV of 90%
- Less than 500, they are not eligible for FHA financing
FHA Loan
Single Family Residences
Two to 4 unit multi-family residences
Condominiums
Certain manufactured homes
New construction or renovation of an existing home
Down payment requirements
FHA borrowers must put down 3.5% as a down payment, which is also called the minimum required investment (MRI). This amount is calculate based on the the lesser of the sales price or appraised value.
Acceptable Source of a down payment
Cash on hand with proper documentation
Own funds from a checking or savings account
Retirement accounts
Stocks and bonds
Private Savings Clubs
Gift from family member, employer, labor union charitable organizations, government agency or homeownership assistance program or a close fiend with a clearly defined and documented interest in the borrower.
A gift of equity
IPC Interested Party Contriutions. IPC may be upto 6% of the sales price towards origination fees, discount points, prepaid items and other closing costs
FHA
It does scrutinize the source of down payment funds and doesn’t allow the seller to contribute to the buyers’ downpayment
A portion of the 3.5% may be used toward approved closing costs.
Borrowers whose credit scores are n’t strong may have to put down as much as 10%
FHA Insurance Premium
Pay upfront monthly mortgage insurance premium (MIP) as well as an annual MIP, which is divided by 12 monthly payments. Both are percentage of the loan.
Upfront MIP
It is the percentage of the base loan amount.
The Annual MIP
AMIP is also a percentage but it is based on the amount of the loan, the LTV and the loan duration. Over the years, FHA has adjusted the percentage for both the upfront and annual MIP.
What loan amount annual MIP uses
It uses base loan amount not the total loan amount, which includes the finances upfront MIP.
the annual MIP is recalculated each year using hte end of year loan balance, plys the balance after the next 11 payments. MIP will decrease each year as the loan balance is paid down
MIP. vs PMI
MIP is different from private mortgage insurance (PMI) in that it is not automatically removed after the homeowners has earned a sufficient amount of equity
FHA Income Qualifications
FHA uses two types of income ratios and borrowers must qualify under both ratios to be eligible.
DTI (Housing Ratio)
Debt to Income ratio must not exceed 31%.
Monthly mortgage payment, including subordinate mortgages, can’t exceed 31%
What are the expenses that are included when calculating this ratio are:
Mortgage (Principal, Interest, Property Taxes, Home Insurance Premiums and Mortgage Insurance Premiums)
Home owner or condo Association Fees, if applicable.
What is formula for DTI
DTI=[Principal + Interest + taxes + Insurance + association fees] / Monthly Gross Income * 100
Second qualifying ratio (Total Ratio)
Total Debt to Income Ratio (Back End Ratio) must not exceed 50% of the gross monthly fees
This includes
1. Housing Expenses
2. Any recurring debt, such as student loans, credit card payments or car payments
TDTI
Total DTI = (Monthly Debt Obligations / Monthly Gross Income) * 100
FHA 203 (b) Loan
3.5% down
Bad Credit History
High debt to Income Ratio
Lender is allowed to consider factors that compensate for bad credit.
Other FHA Programs
Energy Efficient Mortgages
Good Neighbor Next Door
Homeownership voucher assistance
Disaster Victims Mortgages 203(h)
Rehabilitation Mortgage 203(k)
Energy Efficient Mortgages
A loan with adding cost of adding energy efficient features to new or existing houses in combination with 203(b) or 203(k) or 203(h) in connection with disaster
Good Neighbor Next Door
Law enforcement officers, K-12 teachers firefighters and EMTs a deal on purchasing foreclosed FHA-insured properties
50% discount of the list price
Smaller downpayment as long as the buyer commits to living in the property for 3 years
Homeownership Voucher assistance
Housing Choice Voucher Program funds. which are normally used to pay rent, to help pay monthly homeownership expenses. First time buyer
Disaster Victims (203h)
A rehab loan program that’s available to borrowers in federally declared disaster areas.
Rehabilitation Mortgage 203(k)
A renovation loan that givers borrowers ability to renovate or rehab or rehab a new or current home by including finances in their purchase or refinance.
