Types of Mortgage Loans Flashcards
Starting this chapter off general mortgage knowledge, this section will highlight the different types of mortgage loans. You will be tested on the most common types of mortgages, how to tell them apart, and what makes them the best options for certain types of home loan applications.
There are many types of mortgage loans that a lender can offer; among them is what is called a jumbo loan. So, what factors might cause a lender to recommend a jumbo mortgage?
A. The biggest mortgage loan an applicant can get.
B. A loan that is 726,200 or more.
C. A loan that exceeds the FHFA limit.
D. All the above
Answer: D
D is correct, as an applicant who requires a jumbo mortgage will have a property that they want to purchase that exceeds the FHFA limits of a conventional loan (this being 726,200 in 2023). This breach of the FHFA limit on a property puts it into the non-conventional property class, which is
of higher risk to lenders, so they classify it as a jumbo loan. A jumbo loan has its own rules that are separate from the more common conventional loan, often with greater interest rates and larger down payments to ensure the lender is confident in the ability of the applicant to repay their loan.
When it comes to mortgages, the most common type is a conventional mortgage; however, for another large portion, it is one issued by the government. How is this government-insured loan different from other mortgage loans?
A. A special government loan for the state to purchase properties.
B. A government-backed mortgage loan.
C. A loan approved by government lenders.
D. It is a non-conventional loan for low-credit borrowers.
E. B & D
Answer: E
E is correct because the most obvious fact that makes a government-insured
loan is that fact it comes directly from government agencies. These agencies
include the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the Department of Veterans Affairs (VA). An applicant may opt to apply for this type of loan if they don’t qualify for a conventional loan which has a high credit rating and stable financial requirements, while the government loan offers many benefits to people of low-income and low-credit ratings. This is a non-conventional mortgage like the jumbo loan, with its own rules that differ from the standard conventional loan.
When it comes to home loans, lenders should always find ways to help the client save money. So why might an applicant NOT pick an adjustable-rate mortgage (ARM)?
A. Investment properties.
B. Short-term loan.
C. High income.
D. Inconsistent income.
E. Save money in the short term.
Correct answer: D
D is correct, as an ARM would not be a great mortgage loan option for a person that does not have a consistent income. With their low credit rates, borrowers will save money in the short term, which is perfect for those who only want the loan for a year or two or have a high income and will sell.
ARMs allow resellers to save money as they will often sell the property before high fees after the rate-lock period ends.
If a client wants to find ways to save money, why might a lender suggest a fixed-rate mortgage to make repayments easier to budget?
A. It is a mortgage rate that always changes.
B. It is an amended mortgage rate.
C. It is a mortgage rate that does not change.
D. It is a court-ordered mortgage rate.
Correct answer: C
C is correct because a fixed-rate mortgage is a type of loan with an unchanging rate for the whole duration of the lending period. However, even with fixed-rate mortgages, this may change after a set term depending
on the mortgage agreement. A lender may suggest a fixed-rate mortgage to help the client with budgeting, as the payments will be the same for a set period or the whole duration of the loan’s tenure.
Mortgages that stick to standard loan rules are known as conventional loans; what are these mortgage types, and why are they so popular?
A. A loan obtained from the government.
B. An easy mortgage loan for houses under 200,000.
C. A loan obtained from private lenders.
D. A loan obtained from government sponsored GSCs (Fannie Mae and
Freddie Mac).
E. C & D.
Correct answer: E
E is correct, as a conventional mortgage is a popular loan supplied by private lenders, but only some government agencies like GSCs, Fannie Mae, and Freddie Mac. Conventional loans are for the purchase of property that is valued up to 720,200 (in 2023) under the FHFA limit. They are
popular loans as they offer great interest rates and deposit requirements for
those with high credit scores and a high income and are the perfect choice for long-term loans.
Of the many types of mortgages in the US, what is the most
common?
A. A fixed-rate mortgage.
B. Government-insured loan.
C. A jumbo loan.
D. A conventional loan.
Correct answer: D
D is correct because conventional loans are the most common mortgage
type in America. They are great for those that have good savings and credit
ratings and help borrowers save money. It is for these very reasons that
most lenders will offer these loans, as most applicants who apply for a loan
have a good income, saving habits, and high credit ratings. Those that do
not meet these standards either cannot secure a loan at all or try their luck at
a government loan. Then a few that have millions, a jumbo loan is a risky
mortgage that few will ever be able to secure.
A lender should know the ins and outs of mortgage products and
services and thus be able to offer advice for those that want different
mortgage options. So, what mortgage offers smaller down payments for
those that cannot secure a conventional loan?
A. A conventional loan.
B. An FHA loan.
C. A Government-insured loan.
D. A jumbo loan.
Correct answer: B
B is correct because an FHA loan is a type of mortgage loan backed by the
Federal Housing Administration (FHA) for those that do not qualify for the
standard conventional loan and who make a down payment of less than 20%
on their loan. Of course, a lender should still disclose to the applicant that if
they choose to apply for this loan, the downside to paying a smaller
down payment is the extra MIP fees (mortgage insurance) that is required to
be paid for the whole duration of the loan.
Mortgage Insurance Premiums (MIPs) help protect FHA-backed
lenders from many factors by the lender offering lower down payments
on loans. What do these risks entail?
A. Default payments.
B. High-risk borrowers.
C. Mortgages paid out before the end of the repayment period.
D. A & B.
Correct answer: D
D is correct, as both A and B are the same risk that MIPs are insuring the
lender against should the applicant default on payments. They are taking an
added risk by approving a loan for a person with a low credit rating and low
income who pays less than 20% of the house deposit. The MIP will cover
them if the payments cease, and they also encourage FHA borrowers to
consider paying a higher deposit, so they do not need to pay extra fees.
When it comes to mortgage loans, is there a mortgage specific to renovations?
A. Yes.
B. No.
Correct answer: A
A is correct, as the US provides several types of mortgage loans depending
on the buyer’s situation, including renovation mortgages. Renovation loans
cover repairs and renovations to a home, and money is lent out based on the
home’s estimated value after works are completed. These include the FHA
203(k) Loan, Fannie Mae and Freddie Mac renovation mortgages, VA Loan,
and a Construction-to-Permanent Loan.
