Unit 8: Conventional Loans Flashcards
What type of mortgage has no direct federal involvement?
Conventional Loans
Why are conventional loans considered the most secure loans?
It has the lowest loan to value (LTV) ratio making it the most secure loan.
Why might a borrower be required to buy private mortgage insurance (PMI) for their conventional loan?
The borrower is unable to pay 20% or more for their downpayment.
What makes a conventional mortgage different from an insured conventional mortgage?
With a conventional mortgage, there is no PMI because the LTV is 80% or less thus making it less risky for lenders.
With an insured conventional mortgage, the borrower could not do 20% down so the LTV more than 80% thus making it more risky for the lender.
What is the purpose of private mortgage default insurance?
It protects lenders from loss because of a deficiency, which would occur after a foreclosure.
T/F PMI pays off the full loan.
False. PMI covers the shortfall between the amount obtained by the foreclosure and the outstanding mortgage debt.
What is the advantage of private mortgage insurance for the borrower?
They can put down a smaller down payment.
What is loan to value?
An assessment of lending risk that financial institutions and other lenders examine before approving a mortgage
How do lenders calculate the loan to value?
borrowed amount / appraised value = LTV
You buy a home appraised at $100,000.
You have $10,000 as a down payment,.
You borrow $90,000.
LTV ratio of 90% (90,000/100,000)
