Unit 2 APPLICATION Flashcards
Fundamentals of Mortgage Education
Application Name/Acronym/Form #
URLA
Uniform Residential Loan Application
Form 1003
Closed End Mortgage and its Benefit
mortgage loan with final payoff date determined at origination; provides certainty when loan will be repaid
Example of Traditional Mortgage
30 yr - fixed rate
Interest
Cost lender charges for borrowing money
When is the interest rate determined?
When loan terms are negotiated at time of application
Set / Fixed Rate
Rate remains constant for life of the loan
Variable Rate
Interest rate can change throughout repayment cycle
T/F: Fully amortized loans can have either a fixed or variable rate.
True - Ex: An Adjustable Rate Mortgage will still be fully paid off within the provided terms.
Two most prevalent products in the marketplace:
Fixed and Adjustable Rate Mortgages
Features of a Closed End Mortgage
- term and maturity date cannot change
- predetermined payoff date (as long as payoff schedule is followed)
Examples of Closed End Mortgages
Fixed Rate Mortgages
Adjustable Rate Mortgages
Graduated Payment Mortgages
Balloon Mortgages
Fixed Rate Mortgage
What if there’s escrow?
rate, principal, and interest remain the same throughout loan term
(taxes and insurance could change if escrow is involved)
Amortization/Amortization Schedule
Combined principal and interest of payment schedule which allows for full repayment of loan
(ARM)
Adjustable Rate Mortgage
Adjustable Rate Mortgage (ARM)
interest rate can change over loan term but still be paid off within most common 30-year amortization schedule
Variable Rates are based on…
state of financial marketplace
Generally interest rates rely on…(think ARM)
money markets’ value of $
Ex: $ readily available = low rates
vs.
unavailable $/inflation = higher rates
Factors that impact ARM interest rate
Margin and Index
Margin
Amount of interest that remains constant, to secure lender’s profit
T/F - The interest rate of an ARM can go below the margin, depending on market factors.
False - ARM interest rates can never go below the margin pg. 64
Index
Examples (3 Names and Acronyms)
instrument that measures financial marketplace to determine interest rate adjustment
- LIBOR: London Interbank Offered Rate
- T-bill: Treasury Bill
- COFI: Cost of Funds Index
AKA for Cost of Funds Index
The 11th District
The index responsible for the interest rate adjustment in the mortgage contract (can OR cannot) be changed once the loan closes?
CANNOT
Types of ARMS
Traditional, Hybrid, Option
Traditional ARM
- periodic rate adjustment
- rate typically adjusts yearly
- (past: changed monthly)
Hybrid ARM (structure + repayment periods available)
- most common
- combines fixed/adjustable rate
- When Initial/Note Fixed Rate expires and becomes subject to periodic adjustment for remainder of loan term
- 3, 5, 7, 10
Interpret the ARM repayment structures:
- 3/1
- 5/1
- 7/1
- 10/1
First ___ years remain fixed, with 1 yr/annual adjustment afterwards
Option ARM
Bor choice of 3 diff payment amounts:
- fully amortized payment
- flat partial payment
- interest only payment (principal untouched)
*Flat/Interest payments limited to typically first 5 yrs of term, (as it results in negative amortization -> risk) before returning to fully amortizing payments
Fully Indexed Rate equation
Margin + Index = Fully Indexed Rate
lender profit + LIBOR/T-Bill/COFI = full index rate
Note Rate (and AKA)
Initial Rate as listed on the promissory note (promise to pay document)
CAP
Voluntary limit (set by lender) on how much the arm rate may change, up or down at any given interval, per mortgage agreement/contract
Common Caps
- Initial/Note
- Annual aka Periodic caps
- Lifetime
Interpret Mortgage Industry Shorthand for ARM caps:
2/3/5
- 2% Initial/Note Rate = first rate change can only go up or down by 2%
- 3% Periodic/Annual Rate = next max rate at each change after cannot exceed 3%
- 5% Lifetime Cap = rate change cannot exceed 5% from initial rate of mortgage
Periodic Adjustment Range
Plus/Minus the maximum change of first adjustment from the Note Rate
Payment Shock
Sudden/severe increase in monthly amount due on Bor’s mortgage loan
Balloon Mortgages
Loan that allows partial/interest/full monthly payment but requires FULL repayment of balance prior to the end of the 30 yr annual amortization schedule
The inability to refinance or pay full balance of balloon mortgage may…
…cause the BOR to lose their home
Balloon Loan Structure:
30/15
Payments first 15 years for fully amortized 30 yr fixed rate mortgage; after 15 years the remaining full balance is due.
Reset and Conditional Refinance Provision
- If Bor is unable to refi/payoff lump sum of balloon loan, there may be a provision to convert the loan structure to a fully amortizing mortgage at the maturity date
- Agreed upon between BOR + lender/investory at Application and requires no requalification of income/credit
- Not built into every loan (Ex: 30/15 has no reset)
Explain structure of balloon loan with reset option: 5/25
- Balance due/New Reset Term
- Lump sum due after 5 years
- New amortizing term is 25 years
Reset and Conditional Refinance Requirements (4):
- Primary Residence
- Mortgage being reset must be ONLY lien
- No late payments in last 12 months
- Bor doc signing and closing costs still required
GPM (Graduated Payment Mortgage)
- Typical for 1st time home buyers
- Payment structure that eases into full amortizing payments (lasting about 5-10 yrs)
- Negative amortization throughout graduated payments (aka rising payment period)
- Monthly payments increase annually until full payment is reached
- Only available from the FHA (pg. 82)
Negative Amortization
Two Ex:
Is this risky?
Any affects?
Payments are so low, that unpaid interest is added to the principal due, increasing the balance higher than previous payment cycle (pg.70+80)
Ex: Reverse Mortgage + Graduate payment program
Yes, high risk.
Negative am. products, may require BOR counseling, contingent to loan approval if first time homebuyer
Open Ended Mortgages
Two examples
Terms and maturity (aka payoff) date can change, and no date to when the commitment will end
- Reverse Mortgage + HELOC
Home Equity Line of Credit (HELOC)
- Open ended mortgage that allows for repeated withdraws/payments against equity in the home (think credit card)
- Minimum payment expires, and loan structure adjusts to being fully amortized
Reverse Mortgage
- Open Ended Mort for elderly Bor’s 62+ yrs old
- Instead of paying the lender the monthly payment, interest accrues on full balance until Bor moves out/passes away
- Amount due is collected through
property sale/Bor heirs
Methods of Equity Conversion (typically w/reverse mortgage)
- Lump Sum Cash Out
- Tenure and/or Term Cash Out
- Line of Credit
Lump Sum Cash Out
Bor receives one time payment OR transfer of existing principal balance at laon close
Tenure and/or Term Cash Out
Bor receives regular payment for life of loan (aka tenure) or over a period of time (aka term)
Line of Credit
- Bor receives max cred limit @ close
- Used like credit card
Elderly (definition)
natural person 62+ yrs of age as defined under ECOA
Types of Reverse Mortgages
- Single Purpose Reverse Mortgage
- Proprietary Reverse Mortgage
- Fair Housing Administration - Home Equity Conversion Mortgage (FHA HECM)
Reverse Mortgage:
Requirements (3)
Restrictions (5)
Benefit
Impact if Restrictions Violated
Requirements:
- Elderly Bor (62+)
- Primary residence
- No other liens on property
Restrictions:
- On time Taxes+Insur
- Maintenance/Repair of property
- No other owners added to title
- No renting out property
- Cannot declare bankruptcy
Benefit: repayment not required until property is left/sold
Violated restrictions = immediate obligation to repay loan
Short Term Mortgages (aka interim loans)
Characteristics
Payment type
Examples
- Typically 12 months or less in length
- higher rates
- higher risk
Interest only payments
Ex:
Construction + Bridge Loans
Construction Loans
- Financing for construction of new home/home addition
- Project plans/materials/labor/permit costs covered
- Once home is built, Bor is expected to refinance or pay off principal
- (C.O.) Certificate of Occupancy shows construction is complete and ready for residency
- Loan may be structured to auto-adjust from interim to permanent
Bridge Loans
- Either Secured or Unsecured
- Temp financing for home buyer who is still paying mortgage on current home
Secured Loan
lender has lien on/interest in home)
Unsecured Loan
No lender security interest in Bor home, while current home is under contract for sale with buyer/in process of being sold
Home Equity Loan (HEL)
- Mortgage loan that allows bor access to equity
- lump sum payment at close aka cash out transaction
Piggyback Loan
- Mortgage that covers down payment
- Prior to 2008, used to avoid PMI
- Rarely seen today
(PMI)
Private Mortgage Insurance
Piggyback Loan Structure:
80/20 or 80/10/10
80/20 - primary mortgage covered 80% of purchase price, and piggyback loan covered 20%
80% primary mort, 10% lien 2, 10% loan 3
Subordinated
- Secondary order in which loan is to be repaid; also has higher rate/higher risk
Benefit of Piggyback Loan
- Agency helps supplement Bor qualifications
- Payment may be flexible (ex: no repayment as long as living in the home)
Sub-Prime Mort
Rate/structure
Options for BORs with:
- lower income
- poor/limited cred history
- minimal assets
Higher rate to offset risk
Jumbo Mortgages
- $ amount of loan exceeds conforming loan limits (as set by FHFA)
- high loan amount risky
- requires higher cred scores/income
FHFA
Federal Housing Finance Agency
Alternative A-Paper (Alt-A) Mortgages
Rate/Structure
Bor’s have good credit but do not meet other U/W standards for conforming prime loans
Higher int rates to compensate for Bor risk:
- high LTV + DTI
- limited docs
Niche Loans (and ex.)
- Not available through major lenders
- Unique BOR needs/circumstances
- Higher int. rates
Ex: Alt-A Mortgage
Qualified Mortgages (QM)
- loan that meets specific standard, regardless of program its provided from
- more investor certainty + can be resold on secondary market
- Guidance and the Statement provided foundation
*see 8 criteria + features
Sub-prime Borrower Criteria
- 2 or more 30-day lates/delinquencies in last 24 months
- judgement, foreclosure, repossession, or charge-off in last 24 months
- bankruptcy in last 5 years
- 660 credit score or below
- DTI 50% or higher
Two Directives to avoid future industry pitfalls that caused 2008 issues
It is not a…
Precursor to….
(The Statement) - The Statement on Subprime mortgage lending
(The Guidance) - The Guidance on Nontraditional Mortgage Product Risks
- not a law
- precursor to Qualified Mortgage rules as implemented by CFPB
The Statement
- Addressed risks w/sub-prime lending practices + lack of Bor’s understanding of them
- Unfair/Abusive to issue loan to Bor who cannot pay/rapid interest increase
The Guidance (def + 3 points)
- Warnings/Recommendations for lenders how to issue high risk credit products
- Loan terms and UW standards: focus on how payment shock would impact bor’s ability to repay
- Risk management:
- written policies/procedures
- monitoring/reporting of default warning signs
- Quality control/audits of risk measures - Protection for consumers: MLOs to alert bor of risk/info in timely manner through (fed law) disclosures, ensuring informed Bor decision when selecting product
8 Criteria of (QM)
- plus two additional features
- NO balloon, interest only, or negative amortization
Exception: Balloon can be QM if small creditor portfolio in rural/underserved areas
((Fixed int rate, 5 yrs or longer + certain basic U/W standards, not subject to 43% DTI.)) - No balloon payments twice as large as avg. of earlier scheduled payments
- Verify income w/docs
- Fixed rate w/ appropriate taxes/insurance/other assessments needed for full maturity estimates
- Adjustable rate loan w/ appropriate taxes/insurance/other assessments; must use max interest rate on first 5 years of loan when preparing payment schedule
- Within 43% DTI ratio guidelines
- Points/fees payable re: mortgage loan cannot exceed 3% of loan amount
Exception: bona fide discount points excluded - Does not exceed 30 yr term
Exception: unless CFPB extends it in high cost area
Feature 1 - eligible to be purchased/guaranteed/insured by government sponsored enterprise
Feature 2 - Prepayment penalty fee limit
GSE and examples
Government Sponsored Enterprise-eligible = qualified mortgage (QM)
Ex: HUD, VA, USDA
Non-qualified Mortgage (non-QM)
- Loans not meeting QM standards
- Also can’t be sold to Fannie/Freddie secondary markets
- Instead sold to provide investors or held by lender
Small Creditor Qualified Mortgage
- creditor assets equal less than $2 billion
- 1st lien, closed ended origination is less than 500
as defined by TILA (pg.79)
Exception: no DTI limit - other QM criteria apply
(ATR) / or ATR Requirements
Ability to Repay - requirements of Qualified Mortgage
Prepayment Penalty
Charge to the Bor on close ended loan for paying part/all of principal prior to maturity date
Criteria of (QM) Prepayment Penalty
Allowed on fixed, (QM), non-HPML with following criteria:
- prepayment period cannot extend past 3 years
- max penalty cannot exceed 2% in first 2 years (or 1% the third year)
- if current product has prepayment penalty, creditor must offer alternative w/o charge fr early payoff
- evidence of compliance is required for 3 years after closing of transaction
Subordination
*can it change?
establishes rank/priority for which lien is paid (in case of sale, foreclosure, action with title)
yes, with agreement between Bor and Lender
(I/O) acronym
Interest Only
Interest Only Loan
ex: product?
soley the interest portion is provided from Bor during repayment, and principal is not impacted - Ex: option ARM
(i.e. renting the money)
Do interest only payments, take up the majority of the repayment period?
No, I/O is typically a limited feature (5-10 years)
Initial repayment is a feature of which type of product?
Balloon
Reduced (No) Documentation Loans
- allowed Bor to apply/receive funds w/o full supporting docs
- some strong qualifications and good relationship
- fueled 2008 crisis
Alt-A Borrower
Ex:
Meets most but not all U/W requirements for prime mortgage
Ex: Business owner shows little income
(VOE)
Verification of employment
Docs a loan originator needs
- VOE
- credit report review
- appraisal for subject property
Types of Reduced Doc Loans:
NINA - No Income No Assets
SISA - Stated Income, Stated Assets
NIVA - No Income, Verified Assets
SIVA - Stated Income, Verified Assets
Who verifies assets?
Underwriter
How did lenders justify writing reduced doc loans for less qualified individuals?
They charged a higher costs and fees.
Sub-prime loans
- funded loans with higher costs/fees for less qualified borrowers, that lead to default of their loan obligations
- these were also sold on the secondary market
- maintaining document requirements, may have eliminated risk
Conventional Mortgage Loans
- the first available, privately lent loans that set the standard
- these private programs are not government sponsored or insured
What are the two types of conventional mortgages available?
Conforming and Non-conforming
Conforming Loans/Mortgages
- Loans that meet the U/W standards of Fannie and Freddie
- Credit scores, DTI, LTV, reserves, and max loan amount standards are considered higher than conventional non-conforming loans
Non-conforming Loans/Mortgages
- Loans not align to Fannie Mae/Freddie Mac
- NOT sponsored by the government
Conventional Conforming Loan examples
- Federal National Mortgage Association (Fannie Mae)
- Federal Home Loan Mortgage Corporation (Freddie Mac)
*Both are GSE’s but NOT insured or guaranteed by the government
Why were Fannie/Freddie created?
To reduce cost and improve availability of money in the mortgage marketplace
If a lender makes a conventional CONFORMING mortgage, whose standards does it conform to?
Benefit:
Fannie and Freddie’s
If the standards conform, Fannie/Freddie can buy the mortgage, so the lender can take the new $ to provide more loans
- Federal National Mortgage Association (Fannie Mae)
Who/When + Responsibility + Why Created
- Created by FDR + Congress in 1938
- Buys compliant mortgages from larger lenders (aka high volume depository institutions) to free up their $, to make more loans
- With the FHA, they help provide loans to low/middle income Bors
- GSE but not insured by gov’t
- Federal Home Loan Mortgage Corporation (Freddie Mac)
Who/When + Responsibility + Why Created
- 1970 as a counterbalance to the potential monopoly of Fannie, Pres. LBJ created Freddie
- Typically works w/smaller lenders (aka thrifts pg. 83)
- This GSE (not insured by the gov’t) went public in 1989
When/why did Fannie Mae become publicly traded?
1968 - Pres. Lyndon B. Johnson made Fannie became publicly traded (due to toll on budget from Vietnam )
What are thrifts? (pg. 83)
Smaller lenders
Fannie/Freddie standards include:
- loan size limits
- FHFA annually establishes limits based on median home price
(FHFA)
2008 Activity
- Federal Housing Finance Agency
- During crises, loans with amounts exceeding FHFA limits were pulled from the market
Conventional Conforming Mortgage Loan Standards
Rate types:
Loan Amount Limits
Rate types: Fixed, ARM, hybrid-ARM, or super conforming
Super Conforming Mortgage Loans
Loans for high cost areas that require larger loan amounts
4 C’s
Who/what are they used for?
- Capacity
- Credit
- Capital (aka cash)
- Collateral
Used by Fannie/Freddie and adopted by lenders writing conventional conforming loans,
Four C’s Definitions
Capacity - Monthly DTI and ATR
Credit - Financial Character
Capital - ($ for downpayment)
Collateral - Property Value
Conventional Non-Conforming Loans
Ex:
Doesn’t meet Freddie/Fannie standards, have lower qualifications, and are a bit more risky
Jumbo Loans - loan limit exceeds FHFA standards
Niche Loans - private lenders provide on special/unique circumstances
Non-Traditional ARMs - Ex: option ARM w/ 3 diff possible payments
Graduated Payment Mortgage - Negatively amortized features
Sub-Prime Mortgages - for Bor’s w/low credit/bankruptcies
Non-Conventional Mortgage Loans (Government Loans)
Loans with lower qualifications/flexibility that are backed by the Government AND are more accessible to consumers
Who’s responsible for the accuracy/and input/completion of the 1003?
Both the MLO and Borrower
FHA Mortgage Loan
Federal Housing Administration
VA Mortgage Loan
Non-conventional loans guaranteed by the Department of Veteran Affairs
- Active Duty/Retired Personnel/Their Spouses
- Certificate of Eligibility and DD Form 214
Funding Fee (added to loan amount) Entitlement (helps w/downpayment in high cost areas) Guaranty (what the VA will pay lender if foreclosure causes loss)
USDA Mortgage Loan
Ex: Products
Non-conventional loans guaranteed by the US Dept. of Agriculture
USDA Purchase Loans:
- no downpayment
- unlimited seller concessions/ appriaser explanation if exceeds 6% and explanation why greater amount is needed
Products:
+ Section 502 - Direct Housing Program
+ Single Family Housing Guaranteed Loan Program
CoBorrower vs. CoSigner
Coborrower - on note and ownership interest in the property
Cosigner - on note and responsible for debt but not ownership of property
Mortgage Fraud - penalty for lying on Application
$1 million fine and 30 years in prison
Credit Report
ALIENS needed for cred pull A - Address L - Loan Amount I - Income E - Estimated Property Value N - Name S - Social Security Number
1003/URLA/Uniform Residential Loan Application
Sections Broken Down
- Intro - explains Bor responsible and applying for credit
- Title I - Type of Mortgage and Loan Terms (Agency Case # from program provider - FHA, VA, etc. vs. Lender Case # is loan number)
- Title II - Property Info and Loan Purpose (who owns residence and why funds are needed)
- Title III - Bor Info (marital status has an impact here)
- Title IV - Employment Info (looking for 2 yrs)
- Title V - Monthly Income and Combined Housing Expenses Info (front end/Housing DTI)
- Title VI - Assets and Liabilities (back end/Total DTI)
- Title VII - Details of Transaction (loan summary and closing costs)
- Title VIII - Declarations (verifies accuracy of bor info)
- Title IX - Acknowledgement and Agreement
- Title X - Gov’t Monitoring Purposes (compliance to ECOA/Fair Housing/HMDA)
- Continuation Sheet
Who’s responsible for the accuracy/and input/completion of the 1003?
Both the MLO and Borrower
Tangible Net Benefit
Advantage for the Borrower to completing the loan
