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