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SAFE > Unit 2 APPLICATION > Flashcards

Unit 2 APPLICATION Flashcards

Fundamentals of Mortgage Education

1
Q

Application Name/Acronym/Form #

A

URLA
Uniform Residential Loan Application
Form 1003

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2
Q

Closed End Mortgage and its Benefit

A

mortgage loan with final payoff date determined at origination; provides certainty when loan will be repaid

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3
Q

Example of Traditional Mortgage

A

30 yr - fixed rate

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4
Q

Interest

A

Cost lender charges for borrowing money

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5
Q

When is the interest rate determined?

A

When loan terms are negotiated at time of application

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6
Q

Set / Fixed Rate

A

Rate remains constant for life of the loan

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7
Q

Variable Rate

A

Interest rate can change throughout repayment cycle

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8
Q

T/F: Fully amortized loans can have either a fixed or variable rate.

A

True - Ex: An Adjustable Rate Mortgage will still be fully paid off within the provided terms.

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9
Q

Two most prevalent products in the marketplace:

A

Fixed and Adjustable Rate Mortgages

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10
Q

Features of a Closed End Mortgage

A
  • term and maturity date cannot change

- predetermined payoff date (as long as payoff schedule is followed)

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11
Q

Examples of Closed End Mortgages

A

Fixed Rate Mortgages
Adjustable Rate Mortgages
Graduated Payment Mortgages
Balloon Mortgages

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12
Q

Fixed Rate Mortgage

What if there’s escrow?

A

rate, principal, and interest remain the same throughout loan term

(taxes and insurance could change if escrow is involved)

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13
Q

Amortization/Amortization Schedule

A

Combined principal and interest of payment schedule which allows for full repayment of loan

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14
Q

(ARM)

A

Adjustable Rate Mortgage

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15
Q

Adjustable Rate Mortgage (ARM)

A

interest rate can change over loan term but still be paid off within most common 30-year amortization schedule

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16
Q

Variable Rates are based on…

A

state of financial marketplace

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17
Q

Generally interest rates rely on…(think ARM)

A

money markets’ value of $
Ex: $ readily available = low rates
vs.
unavailable $/inflation = higher rates

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18
Q

Factors that impact ARM interest rate

A

Margin and Index

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19
Q

Margin

A

Amount of interest that remains constant, to secure lender’s profit

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20
Q

T/F - The interest rate of an ARM can go below the margin, depending on market factors.

A

False - ARM interest rates can never go below the margin pg. 64

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21
Q

Index

Examples (3 Names and Acronyms)

A

instrument that measures financial marketplace to determine interest rate adjustment

  • LIBOR: London Interbank Offered Rate
  • T-bill: Treasury Bill
  • COFI: Cost of Funds Index
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22
Q

AKA for Cost of Funds Index

A

The 11th District

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23
Q

The index responsible for the interest rate adjustment in the mortgage contract (can OR cannot) be changed once the loan closes?

A

CANNOT

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24
Q

Types of ARMS

A

Traditional, Hybrid, Option

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25
Q

Traditional ARM

A
  • periodic rate adjustment
  • rate typically adjusts yearly
  • (past: changed monthly)
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26
Q 
Hybrid ARM 
(structure + repayment periods available)
A
  • 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
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27
Q

Interpret the ARM repayment structures:

  • 3/1
  • 5/1
  • 7/1
  • 10/1
A

First ___ years remain fixed, with 1 yr/annual adjustment afterwards

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28
Q

Option ARM

A

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

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29
Q

Fully Indexed Rate equation

A

Margin + Index = Fully Indexed Rate

lender profit + LIBOR/T-Bill/COFI = full index rate

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30
Q

Note Rate (and AKA)

A

Initial Rate as listed on the promissory note (promise to pay document)

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31
Q

CAP

A

Voluntary limit (set by lender) on how much the arm rate may change, up or down at any given interval, per mortgage agreement/contract

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32
Q

Common Caps

A
  • Initial/Note
  • Annual aka Periodic caps
  • Lifetime
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33
Q

Interpret Mortgage Industry Shorthand for ARM caps:

2/3/5

A
  • 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
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34
Q

Periodic Adjustment Range

A

Plus/Minus the maximum change of first adjustment from the Note Rate

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35
Q

Payment Shock

A

Sudden/severe increase in monthly amount due on Bor’s mortgage loan

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36
Q

Balloon Mortgages

A

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

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37
Q

The inability to refinance or pay full balance of balloon mortgage may…

A

…cause the BOR to lose their home

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38
Q

Balloon Loan Structure:

30/15

A

Payments first 15 years for fully amortized 30 yr fixed rate mortgage; after 15 years the remaining full balance is due.

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39
Q

Reset and Conditional Refinance Provision

A
  • 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)
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40
Q

Explain structure of balloon loan with reset option: 5/25

A
  • Balance due/New Reset Term
  • Lump sum due after 5 years
  • New amortizing term is 25 years
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41
Q

Reset and Conditional Refinance Requirements (4):

A
  • Primary Residence
  • Mortgage being reset must be ONLY lien
  • No late payments in last 12 months
  • Bor doc signing and closing costs still required
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42
Q

GPM (Graduated Payment Mortgage)

A
  • 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)
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43
Q

Negative Amortization

Two Ex:

Is this risky?

Any affects?

A

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

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44
Q

Open Ended Mortgages

Two examples

A

Terms and maturity (aka payoff) date can change, and no date to when the commitment will end
- Reverse Mortgage + HELOC

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45
Q

Home Equity Line of Credit (HELOC)

A
  • 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
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46
Q

Reverse Mortgage

A
  • 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
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47
Q

Methods of Equity Conversion (typically w/reverse mortgage)

A
  • Lump Sum Cash Out
  • Tenure and/or Term Cash Out
  • Line of Credit
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48
Q

Lump Sum Cash Out

A

Bor receives one time payment OR transfer of existing principal balance at laon close

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49
Q

Tenure and/or Term Cash Out

A

Bor receives regular payment for life of loan (aka tenure) or over a period of time (aka term)

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50
Q

Line of Credit

A
  • Bor receives max cred limit @ close

- Used like credit card

51
Q

Elderly (definition)

A

natural person 62+ yrs of age as defined under ECOA

52
Q

Types of Reverse Mortgages

A
  • Single Purpose Reverse Mortgage
  • Proprietary Reverse Mortgage
  • Fair Housing Administration - Home Equity Conversion Mortgage (FHA HECM)
53
Q

Reverse Mortgage:

Requirements (3)
Restrictions (5)
Benefit

Impact if Restrictions Violated

A

Requirements:

  1. Elderly Bor (62+)
  2. Primary residence
  3. No other liens on property

Restrictions:

  1. On time Taxes+Insur
  2. Maintenance/Repair of property
  3. No other owners added to title
  4. No renting out property
  5. Cannot declare bankruptcy

Benefit: repayment not required until property is left/sold

Violated restrictions = immediate obligation to repay loan

54
Q

Short Term Mortgages (aka interim loans)

Characteristics
Payment type
Examples

A
  • Typically 12 months or less in length
  • higher rates
  • higher risk

Interest only payments

Ex:
Construction + Bridge Loans

55
Q

Construction Loans

A
  • 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
56
Q

Bridge Loans

A
  • Either Secured or Unsecured

- Temp financing for home buyer who is still paying mortgage on current home

57
Q

Secured Loan

A

lender has lien on/interest in home)

58
Q

Unsecured Loan

A

No lender security interest in Bor home, while current home is under contract for sale with buyer/in process of being sold

59
Q

Home Equity Loan (HEL)

A
  • Mortgage loan that allows bor access to equity

- lump sum payment at close aka cash out transaction

60
Q

Piggyback Loan

A
  • Mortgage that covers down payment
  • Prior to 2008, used to avoid PMI
  • Rarely seen today
61
Q

(PMI)

A

Private Mortgage Insurance

62
Q

Piggyback Loan Structure:

80/20 or 80/10/10

A

80/20 - primary mortgage covered 80% of purchase price, and piggyback loan covered 20%

80% primary mort, 10% lien 2, 10% loan 3

63
Q

Subordinated

A
  • Secondary order in which loan is to be repaid; also has higher rate/higher risk
64
Q

Benefit of Piggyback Loan

A
  • Agency helps supplement Bor qualifications

- Payment may be flexible (ex: no repayment as long as living in the home)

65
Q

Sub-Prime Mort

Rate/structure

A

Options for BORs with:

  • lower income
  • poor/limited cred history
  • minimal assets

Higher rate to offset risk

66
Q

Jumbo Mortgages

A
  • $ amount of loan exceeds conforming loan limits (as set by FHFA)
  • high loan amount risky
  • requires higher cred scores/income
67
Q

FHFA

A

Federal Housing Finance Agency

68
Q

Alternative A-Paper (Alt-A) Mortgages

Rate/Structure

A

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
69
Q

Niche Loans (and ex.)

A
  • Not available through major lenders
  • Unique BOR needs/circumstances
  • Higher int. rates

Ex: Alt-A Mortgage

70
Q

Qualified Mortgages (QM)

A
  • 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

71
Q

Sub-prime Borrower Criteria

A
  • 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
72
Q

Two Directives to avoid future industry pitfalls that caused 2008 issues

It is not a…
Precursor to….

A

(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
73
Q

The Statement

A
  • 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
74
Q

The Guidance (def + 3 points)

A
  • Warnings/Recommendations for lenders how to issue high risk credit products
  1. Loan terms and UW standards: focus on how payment shock would impact bor’s ability to repay
  2. Risk management:
    - written policies/procedures
    - monitoring/reporting of default warning signs
    - Quality control/audits of risk measures
  3. Protection for consumers: MLOs to alert bor of risk/info in timely manner through (fed law) disclosures, ensuring informed Bor decision when selecting product
75
Q

8 Criteria of (QM)

  • plus two additional features
A
  1. 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.))
  2. No balloon payments twice as large as avg. of earlier scheduled payments
  3. Verify income w/docs
  4. Fixed rate w/ appropriate taxes/insurance/other assessments needed for full maturity estimates
  5. Adjustable rate loan w/ appropriate taxes/insurance/other assessments; must use max interest rate on first 5 years of loan when preparing payment schedule
  6. Within 43% DTI ratio guidelines
  7. Points/fees payable re: mortgage loan cannot exceed 3% of loan amount
    Exception: bona fide discount points excluded
  8. 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

76
Q

GSE and examples

A

Government Sponsored Enterprise-eligible = qualified mortgage (QM)

Ex: HUD, VA, USDA

77
Q

Non-qualified Mortgage (non-QM)

A
  • Loans not meeting QM standards
  • Also can’t be sold to Fannie/Freddie secondary markets
  • Instead sold to provide investors or held by lender
78
Q

Small Creditor Qualified Mortgage

A
  • 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

79
Q

(ATR) / or ATR Requirements

A

Ability to Repay - requirements of Qualified Mortgage

80
Q

Prepayment Penalty

A

Charge to the Bor on close ended loan for paying part/all of principal prior to maturity date

81
Q

Criteria of (QM) Prepayment Penalty

A

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
82
Q

Subordination

*can it change?

A

establishes rank/priority for which lien is paid (in case of sale, foreclosure, action with title)

yes, with agreement between Bor and Lender

83
Q

(I/O) acronym

A

Interest Only

84
Q

Interest Only Loan

ex: product?

A

soley the interest portion is provided from Bor during repayment, and principal is not impacted - Ex: option ARM

(i.e. renting the money)

85
Q

Do interest only payments, take up the majority of the repayment period?

A

No, I/O is typically a limited feature (5-10 years)

86
Q

Initial repayment is a feature of which type of product?

A

Balloon

87
Q

Reduced (No) Documentation Loans

A
  • allowed Bor to apply/receive funds w/o full supporting docs
  • some strong qualifications and good relationship
  • fueled 2008 crisis
88
Q

Alt-A Borrower

Ex:

A

Meets most but not all U/W requirements for prime mortgage

Ex: Business owner shows little income

89
Q

(VOE)

A

Verification of employment

90
Q

Docs a loan originator needs

A
  • VOE
  • credit report review
  • appraisal for subject property
91
Q

Types of Reduced Doc Loans:

A

NINA - No Income No Assets
SISA - Stated Income, Stated Assets
NIVA - No Income, Verified Assets
SIVA - Stated Income, Verified Assets

92
Q

Who verifies assets?

A

Underwriter

93
Q

How did lenders justify writing reduced doc loans for less qualified individuals?

A

They charged a higher costs and fees.

94
Q

Sub-prime loans

A
  • 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
95
Q

Conventional Mortgage Loans

A
  • the first available, privately lent loans that set the standard
  • these private programs are not government sponsored or insured
96
Q

What are the two types of conventional mortgages available?

A

Conforming and Non-conforming

97
Q

Conforming Loans/Mortgages

A
  • 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
98
Q

Non-conforming Loans/Mortgages

A
  • Loans not align to Fannie Mae/Freddie Mac

- NOT sponsored by the government

99
Q

Conventional Conforming Loan examples

A
  • 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

100
Q

Why were Fannie/Freddie created?

A

To reduce cost and improve availability of money in the mortgage marketplace

101
Q

If a lender makes a conventional CONFORMING mortgage, whose standards does it conform to?

Benefit:

A

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

102
Q
  • Federal National Mortgage Association (Fannie Mae)

Who/When + Responsibility + Why Created

A
  • 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
103
Q
  • Federal Home Loan Mortgage Corporation (Freddie Mac)

Who/When + Responsibility + Why Created

A
  • 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
104
Q

When/why did Fannie Mae become publicly traded?

A

1968 - Pres. Lyndon B. Johnson made Fannie became publicly traded (due to toll on budget from Vietnam )

105
Q

What are thrifts? (pg. 83)

A

Smaller lenders

106
Q

Fannie/Freddie standards include:

A
  • loan size limits

- FHFA annually establishes limits based on median home price

107
Q

(FHFA)

2008 Activity

A
  • Federal Housing Finance Agency

- During crises, loans with amounts exceeding FHFA limits were pulled from the market

108
Q

Conventional Conforming Mortgage Loan Standards

Rate types:
Loan Amount Limits

A

Rate types: Fixed, ARM, hybrid-ARM, or super conforming

109
Q

Super Conforming Mortgage Loans

A

Loans for high cost areas that require larger loan amounts

110
Q

4 C’s

Who/what are they used for?

A
  • Capacity
  • Credit
  • Capital (aka cash)
  • Collateral

Used by Fannie/Freddie and adopted by lenders writing conventional conforming loans,

111
Q

Four C’s Definitions

A

Capacity - Monthly DTI and ATR
Credit - Financial Character
Capital - ($ for downpayment)
Collateral - Property Value

112
Q

Conventional Non-Conforming Loans

Ex:

A

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

113
Q

Non-Conventional Mortgage Loans (Government Loans)

A

Loans with lower qualifications/flexibility that are backed by the Government AND are more accessible to consumers

114
Q

Who’s responsible for the accuracy/and input/completion of the 1003?

A

Both the MLO and Borrower

115
Q

FHA Mortgage Loan

A

Federal Housing Administration

116
Q

VA Mortgage Loan

A

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)
117
Q

USDA Mortgage Loan

Ex: Products

A

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

118
Q

CoBorrower vs. CoSigner

A

Coborrower - on note and ownership interest in the property

Cosigner - on note and responsible for debt but not ownership of property

119
Q

Mortgage Fraud - penalty for lying on Application

A

$1 million fine and 30 years in prison

120
Q

Credit Report

A 
ALIENS needed for cred pull
A - Address
L - Loan Amount
I - Income 
E - Estimated Property Value 
N - Name 
S - Social Security Number
121
Q

1003/URLA/Uniform Residential Loan Application

Sections Broken Down

A
  • 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
122
Q

Who’s responsible for the accuracy/and input/completion of the 1003?

A

Both the MLO and Borrower

123
Q

Tangible Net Benefit

A

Advantage for the Borrower to completing the loan

SAFE (9 decks)

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