Types of Mortgages and Sources of Financing Snapshot Review
CONVENTIONAL MORTGAGES
● conventional mortgage loan: permanent, long-term loan not insured by FHA or guaranteed by VA
Down payment and LTV
● lack of government guarantee or insurance means higher down payment and lower loan-to-value ratio
PMI
● private mortgage insurance usually required if down payment less than 20% of value
COMMON MORTGAGE TYPES
● amortizing, negative amortizing, interest only, fixed rate, adjustable rate, senior,
junior, fixed or graduated payment, balloon, buydown
Amortized
● principal and interest paid over loan term; if fully amortized, loan balance = 0 at end of term
● negatively amortized: loan balance increases over term; may occur on graduated and adjustable rate loans
Adjustable and fixed rate
● fixed-rate loans have unchanged interest rate over loan term; adjustable rate loans have changing rate, usually tied to a financial index
CUSTOM MORTGAGES
Partially amortized
● monthly payments insufficient to pay down loan; balloon payment at end of term
Biweekly
● the loan is amortized for twelve months but half-payments are made twice a month, leading to an extra month’s worth of repayment each year
Package
● the security for a mortgage loan incudes personal as well as real property
Home equity loans
● a junior mortgage secured by a home’s equity
Purchase money
● borrower gives a mortgage and note to the seller; seller financing
Reverse annuity
● homeowner pledges home equity as security, receives periodic payments over loan term
Other loan types
● senior and junior, graduated payment, interest-only, buydown, construction, bridge, equity participation, take-out, blanket
GOVERNMENT-INSURED FHA PROGRAM
Purpose
● insure permanent long-term loans to protect lenders and enable buyers to make smaller down payment
Characteristics of FHA
loans
● Section 203(b) program for 1-4 unit residential properties; income and debt ratios to qualify; mortgage insurance premiums; low down payment; points, fees, costs; assumable if qualified
● insured loans granted by FHA-approved lenders to borrowers who meet FHA qualifications
VA LOAN GUARANTEE PROGRAM
Guarantee feature
● loans guaranteed for qualified veterans; enables lenders to lend more with lower down payment
Characteristics of VA
loans
● borrower and property must be eligible; debt ratio with regional adjustments to qualify; no down payment required by VA; interest rate negotiable; points, fees, costs; loans granted by VA-approved lenders
QUALIFYING FOR A LOAN
Equal Credit Opportunity
Act
● lender must evaluate applicant according to applicant’s own income and credit
information
Loan application process
● use required form; provide required information
Loan underwriting
● evaluate ability to repay; appraise property value; set loan terms; LTV: ratio of loan amount to property value
Qualifying the buyer
● income ratio and debt ratio qualify borrower’s income; income ratio applied to gross income determines housing expense maximum; debt ratio takes revolving debt into account
●lender verifies applicant’s sources of cash for down payment; extra cash enhances income qualification evaluation
● net worth: extent to which applicant’s assets exceed liabilities as a further source of reserves
● credit evaluation: lender obtains credit reports to evaluate applicant’s payment behavior
Loan commitment
● written pledge by lender to grant loan under specific terms; firm, lock-in, conditional, take-out
PRIMARY SOURCES OF HOME FINANCING
The mortgage market
● originates mortgage loans directly to borrowers; savings and loans, commercial
banks, mutual savings banks, life insurance companies, mortgage bankers, credit unions
●relationship between money supply and demand affects interest rates, consumer
prices, availability of mortgage money
●Federal Reserve controls: T-bills; reserve requirement, discount rate
Mortgage lenders
● primary mortgage market: savings and loans, commercial banks, mutual savings banks, life insurance companies, mortgage bankers, credit unions; mortgage brokers find borrowers for lenders; portfolio lenders retain mortgage loans instead of selling to secondary market
Mortgage loan originators
● MLOs work for lenders; licensed and registered under SAFE Act
Seller financing
● purchase money mortgages: loans by the seller to the property buyer for all or part of the purchase price; contract for deed: installment sale where seller finances buyer and retains title until contract terms are met; wraparound: seller uses buyer’s payments on second mortgage to make payments on first mortgage
SECONDARY MORTGAGE MARKET
● buys existing loans to provide liquidity to primary lenders; Fannie Mae, Ginnie Mae, Freddie Mac, investment firms, life insurance companies, pension funds
Cycle of mortgage
money flow
● secondary market buys pooled mortgages from primary market, securitizes and sells to investors as securities; returns funds to primary lenders, maintains liquidity; secondary market sets lending standards
Fannie Mae
● FNMA buys conventional, FHA- and VA-backed loans and pooled mortgages;
guarantees payment on mortgage-backed securities; sells mortgage-backed securities
Gov’t Nat’l Mortgage
Association
● GNMA guarantees payment on certain types of loans
Freddie Mac
● FHLMC buys and pools mortgages; sells mortgage-backed securities
MORTGAGE FRAUD
● intentional misstatement, misrepresentation, or omission of information in making, buying, or insuring a mortgage loan
Common types of
mortgage fraud
● falsifying loan applications and appraisals; obtaining multiple loans, filing multiple liens; using stolen identity; using false credit information (straw buyer); issuing loans to unqualified buyers
Red flags
● signs of possible fraud: suspicious appraisals, contract prices, documentation, ownership, loan features
● mortgage fraud a second or third degree felony in Florida
FAIR CREDIT AND LENDING LAWS
Consumer Credit
Protection Act
● CCPA contains Truth-in-Lending Act and ECOA
Truth-in-lending and
Reg Z
● Reg Z implements Truth-in-Lending Simplification and Reform Act and Consumer Credit Protection Act
●provisions: lender must disclose finance charges and APR prior to closing; borrower has limited right of rescission; lender must follow disclosure requirements in advertising
Equal Credit
Opportunity Act
● ECOA prohibits discrimination in lending
Real Estate Settlement
and Procedures Act
● RESPA standardizes settlement practices
●provisions: lender must provide CFPB booklet explaining loans, settlement costs and procedures; lender must provide CFPB Loan Estimate of settlement costs within three days of application; lender must provide CFPB Closing Disclosure three days before loan consummation