not insured or guaranteed by government agency: EX; bank loan insured by private mortgage company
__________ and ___________ are the major secondary market entities that purchases conventional loans. Loans that comply with their guidelines are called __________ loans and the loans not made in compliance with these two entities are considered __________ and can't be sold to either GSE
Fannie Mae and Freddie Mac
conforming loans
nonconforming
The two entities' (Fannie Mae and Freddie Mac) underwriting guidelines are widely followed by the mortgage industry.
True: lenders can sell them loans for good prices.
Conventional loans may be secured by, principal residence, second home or investment property.
true
To be eligible for purchase by Fannie Mae and Freddie Mac, the loan must not exceed the applicable conforming loan limit. The loan limit is set by the Federal Housing Finance Agency based on median housing prices nationwide and is adjusted annually. Conventional loans that exceed that the limit are called __________ loans and cannot be sold to Fannie Mae or Freddie Mac.
Jumbo; lender generally charge higher interest rates and fees and apply stricter underwriting standards
-EX of limit: 2015 general loan limit: $417,000, high-cost areas: $625,500, above that is it a jumbo
Conventional Loans range from 10 to 40 years, but Fannie Mae and Freddie Mac usually wont' buy a loan longer than __ yrs.
30
High LTV-loans played a significant role in the nationwide mortgage foreclosure crisis.
True: LTVs over 90% are very rare and have very strict qualifying standards and are fixed interest rate, to decrease chance of default.
In case of financing where there are junior mortgages, a lender will be concerned with the __________________, which is the ratio of all loans to the value of the property.
combined loan-to-value ratio (CLTV)
How to figure out the LTV ratio of a loan and downpayment?
EX: Maynard is buying a house: sales price $318,750, and the appraisal came in at $321,000.
Manynard wants to make a $25,500 downpayment and obtain a conventional loan for the rest of the price. What would Maynard's loan-to-value ratio be?
1.) Find which is lower price for house: sales price or appraisal price; A: sales price $318,750.
2.) Subtract downpayment from sales price: 318750-25500= 293250 (Loan amount)
3.) Take loan amount and divide it by the sales price: 293250/318750= .92= 92% LTV
Do borrowers have a say in the decision if their loan is being sold? Because they would have to pay fees such as Loan-level price adjustments.
??
Conventional borrowers are nearly always expected to pay an origination fee, and they may also agree to pay discount points.
True
origination fee (lender administrative costs)
For conventional loans, if they are going to be sold to Fannie Mae or Freddie Mac, the borrowers will probably have to pay for one or more _____________, aka delivery fees.
Loan-level price adjustments (LLPAs)
-shifts some of the risk (cost) of default to borrowers; pay at closing or by increasing interest rate.
Nearly all loans sold to the secondary market entities are subject to an LLPA that varies depending on the borrower's __________ and the ____________ ratio; percentages charged can be found on tables issues by Fannie Mae and Freddie Mac.
-credit score and the LTV ratio
-LLPAs are higer if the credit score is low and depending on the risk of the type of property; arms, investment property, etc.
Private mortgage insurance (PMI) comes from private insurance companies, not FHA mortgage insurance programs. But like FHAs, PMIs are designed to protect lenders from the greater risk of __________.
high-LTV loans
Both Fannie Mae and Freddie Mac require PMI on conventional loans if the LTV ratio is greater than...
80%
PMIs assume all risk of default on loans.
False; only a portion of the risk; 25-30%
The amount of PMI coverage varies depending on the loan term and LTV ratio, but coverage of ___ to ____ is typical.
25% to 30%
Mark buys a house for $200,000. The LTV ratio is 90% and the amount of PMI coverage is 25%. How much is covered by the PMI in dollar amount?
$200,000 x 90% = $180,000 (90% of loan)
$180,000 x 25% = $45,000 (covered by PMI)
$45,000 is covered by PMI coverage and the rest, $135,000 the lender has to cover in loss by selling.
**The lender can either sell the property and make a claim for reimbursement of actual losses (if any) up to the policy amount ($45,000 in ex), or give up the property to the insurer and make a claim for actual losses up to the coverage amount.
PMI premiums can be paid in which two ways?
1.) borrower pays a large initial premium (closing), plus smaller annual renewal premiums thereafter; one-twelfth of the annual premium is charged to the borrower each month.
2.) lender adds premium to the loan amount before calculating the monthly payment; borrower doesn't have to come up with cash at closing fro the PMI
The Homeowners Protection Act requires lenders under special conditions to cancel a loan's PMI. Automatic cancellation of the PMI, without a request from the borrower is required once the loan balance reaches ___ of the property's original value.
78%
The Homeowners Protection Act applies only to loans on __________ occupied at the borrower's principal residence.
Lenders generally allow secondary financing, but since secondary financing increase the risk of default on the primary loan, most lenders set restrictions on secondary financing. What are the seven main restrictions that lenders could place on secondary financing?
1.) borrower must be able to qualify for the payments on both the first and second mortgages.
2.) The borrower must make a minimum 5% downpayment; will not allow the total of the first and second mortgages to exceed 95% of the loan.
3.) Scheduled payments must be due on a regular basis
4.) The second mortgage can't require a balloon payment sooner than 5 years after closing.
5.) If the first mortgage has variable payments, the second mortgage must have fixed payments
6.) No negative amortization
7.) No prepayment penalty
Piggyback loans are
secondary loans
Buyer can finance most or all of the downpayment by using a _______, instead of coming up with the cash.
piggyback loan/secondary loan
Hillary buys a house for $200,000 and gives a downpayment of 10%. She pays an annual premium payment of 0.52% for 25% insurance coverage. How much is she paying for insurance monthly?
$78
$200,000 x .1 = $20,000
$200,000 - $20,000 = $180,000 (90% of loan)
$180,000 x 0.52% = $936
$936/12 = $78
For qualifying for home purchase loans, Lenders (Freddie Mac, Fannie Mae, others), must evaluate risk factors in the loan. This is down buy manual or automated __________.
underwriting
What are the main reasons for manual underwriting?
-no established credit
-application comes back as "Refer" or "Caution"
What are the primary risk factors evaluated for loan qualification?
-credit reputation (credit score)
-cash investment (LTV ratio)
-debt to income ratio
-cash reserves
-capacity to repay (income and liquid assets)
-collateral (value of property)
Credit reputation, aka credit score, is the most important factor in determining whether an applicant qualifies for a loan.
true
The three main credit bureaus, may give a different score for a particular loan. Which score do underwriters usually pick to use as the indicator score, aka representative score?
lower or middle score
EX: 690, 705, and 710, then 705 will most likely be picked.
Credit scores can affect the cost of the conventional loan.
true: better score equals low reserves, low downpayment, etc. Poor scores, higher downpayment and interest
When two people (ex: married) apply for a conventional loan together, the lender will obtain credit scores for both applicants and select one score for each of them. Which score then is picked as the indicator score?
lower of the two, although the person with the higher score, may help to offset the lower score.
Fannie Mae and Freddie Mac usually will not buy a loan with a credit score under a certain score (620). This is the same even with married couples applying together and one spouse has a higher score.
true
Income analysis for stable monthly income for underwriting a loan depends on quality and durability. Fannie Mae and Freddie Mac consider income durable is it is expected to continue for at least __ years after the loan is made. To figure the quality, the lender uses _______.
3
income ratios
Lenders generally consider a loan applicant's income adequate for a conventional loan if the applicant's total monthly obligations do not exceed __ of her stable monthly income. What all do the total monthly obligations consist of?
36%
-Housing expense (PITI)
-Installment debts; fixed payment and months; ex, car payments; included if more than 10 monthly payments remain or are large payments.
Standard housing expense to income ratio is what percent?
28%
Housing expense ratio is less important than debt to income ratio.
true; especially for Fannie Mae; no longer applies a housing expense to income ratio; Freddie Mac and other lenders use both housing expense and recurring debts
Marianne Smith has a stable monthly income of $4,200. She has four long-term monthly obligations: a $310 car payment, a $65 personal loan payment, a $40 Macy's charge account payment, and a $45 MasterCard payment. What is the largest payment she can qualify for?
$4,200 (SMI) x 36% = $1,512 Maximum total obligations
$1,512 - 310-65-40-45 = $1,052 Maximum mortgage payment under the debt to income ratio.
Housing expense to income ratio:
$4,200 (SMI) x 28% = $1,176 Maximum mortgage payment under the housing expense ratio.
Smith can qualify for up to a $1,052 mortgage payment. ***Remember, after both ratios have been applied, the lower resulting figure is the one that counts.
To figure out how much an applicant can qualify for on a monthly mortgage payment, take the applicants total stable monthly income and multiply it by ___. Then all up all the Monthly obiligations (recurring debt) and subtract it from the number on the first step. That is the maximum mortgage payment under the debt to income ratio.
To find the Maximum mortgage payment under the housing expense ratio, take the stable monthly income and multiply it by __, housing expense to income ratio.
36%
28%
Although, 36% and 28% are usually the maximum allowable income ratios for conventional loans, both Fannie Mae and Freddie Mac will purchase a loan even though a borrower's income ratios exceed those limits, depending on compensating factors. What are some compensating factors?
-excellent credit
-large downpayment
-liquid assets
-potential for increased earnings
-short-term income
-rental income for family
-ability to carry higher expenses
-energy-efficient home
Fannie Mae and Freddie Mac generally accept ARMs underwritten using the same income ratios that apply to fixed-rate loans (36%, 28%). However a higher qualifying rate will be used to calculate the applicant's proposed housing expense, which is usually __%.
2%; so initial interest rate + 2% (Mary's initial interest rate for her loan is 5.5%. Lenders will apply the standard 36% and 28% income ratios, but the income ratios will be calculated using a proposed housing expense based on 7.5% (5.5+2).
***THis rule does not apply to hybrid ARMs that have an initial fixed rate period longer than 5 years.
Conventional loan applicants should have the equivalent of at least __ months of mortgage payments in reserve after making the downpayment and paying all the closing costs.
2; certain types of loans such as, investor loans, lender may require a full six months of reserves on hand at closing.
Reserves must be ____ or ______.
cash or liquid assets
In regard to the resources that a borrower has available for closing, Fannie Mae and Freddie Mac have some rules concerning the use of gift funds. The donor must be a relative, employer, city or nonprofit organization. However the lender may require that the borrower pay at least 5% of the sales price out of her own resources.
True
Gift funds can count towards a downpayment, _________, and/or ___________.
closing costs, resevers
What is a buydown?
-When a property seller or third-party pays the lender a lump sum at closing to lower the interest rate on the buyer.
-Increases the lenders yield and decreases (permanently or temporary) buyer's payments
-Makes it easier for buyer to qualify for loan, espically during times of high interest rates.
With a permanent buydown, the borrower pays the lower interest rate for the entire loan term. With a temporary buydown, the interest rate and monthly payment are reduced only during the first years of the loan term. How does buydowns work? How would you know the exact cost of of a buydown?
the number of points of the loan amount; EX: four to six points to buy a 1% reduction in the interest rate.
-ask the lender on the cost.
EX: lender charges the seller six points for a 1% buydown. $150,000 loan amount multiplied by 6% (6 points) equals $9,000
What are the two types of temporary buydown plans?
-level payments: calls for an interest payment reduction that stays the same throughout the buydown period
-Graduated payments:calls for the largest payment reduction in the first year, with progressively smaller reductions in each subsequent year of the buydown period.
The most common form of graduated payment buydown is the...
2-1 buydown
How does the 3-2-1 buydown work?
-interest is brought down 3% on the first year, 2% the second year, 1% the third year, and the four year and beyond goes back to the normal interest rate.
There are no limits on buydowns.
false; Fannie Mae (3%), Freddie Mac, other lenders all most likely have set limits for buydowns. If what the seller or third-party gives exceeds the buydown limit, the extra money will go to paying off the loan; ex: if the maximum contribute to buydowns is $18,000 (ex 6 points) for a $300,000 sales price, and the the seller gives $19,000, the extra $1,000 goes to the loan, so the max loan amount can be only $269,100.
Affordable housing programs are easier to qualify for, the cash requirements are reduced, and eligibility is based on income, property location, or job.
True: total debt to income ratio of 38-40%, waive income limits for buyers who are purchasing homes in low-income or rundown neighborhoods.
Biweekly mortgage
payments are made every two weeks; pay off loan quicker; borrower saves on interest
Private mortgage insurance (PMI) is ordinarily required only if the loan-to-value ratio is:
over 80%
As a general rule, a buyer who is seeking a loan with a 90% LTV, may use secondary financing for 5% of the purchase price.
