General Mortgage Knowledge Exam with Complete Solutions

Qualified and Non-qualified Mortgage Programs - ANSWER-The Qualified Mortgage (QM) is a section of TILA that went into effect in 2014. It was mandated by the Dodd-Frank Wall Street Reform Act of 2010 and enforced by the CFPB. The QM Rule works hand in hand with the Ability to Repay Rule (ATR). The QM requirements generally focus on prohibiting certain risky features and practices such as negative amortization and interest-only periods and loan terms longer than 30 years. Features of a qualified mortgage - ANSWER-There are different requirements for the different types of QM, but over the four types of QM, there are a few things that remain the same: - A loan cannot be QM if they have negative amortization or interest-only payments. - A loan cannot have a term longer than 30 years. - There is a threshold on points and fees for QM loans - generally, three (3) percent of the loan balance. - No neg am - No interest only - No balloon payments - Cannot exceed 30 year terms Allowable points and fees for qualified mortgages - ANSWER-To be considered a qualified mortgage, points and fees cannot exceed the following thresholds (as of January 1, 2020): - 3% of the total loan amount for a loan greater than or equal to $109,898. - $3,297 for a loan greater than or equal to $65,939 but less than $109,898. - 5% of the total loan amount for a loan greater than or equal to $21,980 but less than $65,939. - $1,099 for a loan greater than or equal to $13,737 but less than $21,980. - 8% of the total loan amount for a loan less than $13,737. Points and fees include: - Finance charges - Loan originator compensation - Real estate related fees - Insurance premiums - Maximum prepayment penalties - Prepayment penalties paid in a refinance Information used to determine whether a loan is qualified - ANSWER-There are four types of QM loans, but the most common and the one that most MLOs will come across is the General QM. To be considered a General QM, the lender must: - Underwrite based on fully amortizing schedule using the maximum rate permitted during the first three (3) years after the date of the first payment. For loans with initial term of five (5) years or longer, the borrower is qualified a the higher of the initial interest rate or the fully indexed rate (margin and index). - Consider and verify the consumer's income, assets, debt obligations, alimony and child support obligations. - Determine that the consumer's total monthly debt-to-income is no more than 43 percent. Two options to meet QM requirements and give Safe Harbor to the mortgage company and MLO, showing they proved the Ability to Repay: 1. 43% max debt to income and no more than 3% in fees 2. Approved eligible from Fannie Mae or Freddie Mac and must meet High Priced Lending Limits Safe Harbor and Rebuttable Presumption - ANSWER-QMs that are not higher-priced have safe harbor (they are presumed to comply with ATR requirement) QMs that are higher-priced have a rebuttable presumption that they comply with ATR requirements but a consumer can rebut that presumption APRs that make a mortgage qualified - ANSWER-The APR does not exceed the APOR by more than the sum of the annual MIP plus 1.5percentage points The loan does not exceed the QM Rule's points and fees limitation (3%, in most cases) Categories of qualified mortgages - ANSWER-A Qualified Mortgage is a mortgage that has complied with the Ability to Repay requirements. There are four types of qualified mortgages: General QM. Temporary QM. Small Lender; and Balloon-Payment QM. Any lender can originate from the first two, while the other two are only allowed to be originated by small lenders. Conventional/conforming (e.g., Fannie Mae, Freddie Mac) - ANSWER-A conforming mortgage is a mortgage that conforms with Fannie Mae and Freddie Mac guidelines. A conventional loan can be either non-conforming or conforming Conventional loans can be a fixed-rate mortgage, adjustable-rate mortgages, balloon mortgages, or hybrid mortgages, as long as the loan meets Fannie or Freddie requirements. The most common loan types used in conforming lending are 30 year and 15-year fixed-rate mortgages. Responsibilities of Fannie Mae and Freddie Mac - ANSWER-Both Fannie Mae (FNMA) and Freddie Mac (FHLMC) are government-sponsored entities or GSE's. They provide liquidity to the market by purchasing mortgages and mortgage-backed securities and selling them on the secondary market. Fannie Mae and Freddie Mac purchase conventional loans only. Secondary market! Government sponsored entities that buy only Conventional Conforming Loans and are overseen by Federal Housing Finance Agency (FHFA). Fannie & Freddie place the loans into a Mortgage Backed Security (MBS) and is sold into the Secondary Market. Qualifications for Conventional Loans - ANSWER-Maximum Debt to Income: Manually Underwritten - 28%/36% Minimum Credit Score: Depends, but a general rule of thumb is 640 FICO (though it can go lower) Loan Limit: $510,400 conforming (Adjusted annually), over 510,400 = a non-conforming conventional loan Private Mortgage Insurance (PMI): Required on conventional loans with less than 20% down (or LTVs over 80%) Appraisal: Required unless Fannie Or Freddie give an Appraisal Waiver when the loan goes through the automated Underwriting system, then it is not required. Gift Funds Allowed for Down Payment: Yes Borrowers with Bankruptcy? 2 years from Chapter 13 discharge, 4 years from dismissal Chapter 7 filing - 4 years, or 2 years with extenuating circumstances Borrowers after Foreclosure? 7 years from foreclosure, 4 years for short sale LTV requirements on cash-out refinance: 85% Maximum LTV Reserves: Usually 2 to 4 months Non-Occupying Co-Borrower: Not allowed Assumable? No Employment History: 2 years Limits on closing cost concessions - ANSWER-3% Allow for the seller to only pay a set percentage of seller concessions, limiting the number of contributions paid to help cover the borrower's closing costs. Fee charges on loans with certain risk characteristics - ANSWER-For loans with certain risk characteristics, Fannie Mae charges increased fees that are called Loan level price adjustment Use of Fannie Mae/Freddie Mac's automated underwriting systems - ANSWER-To determine whether a loan is going to conform with Fannie Mae or Freddie Mac guidelines, an underwriter will submit the loan file through an automated underwriting system or AUS. Freddie Mac's automated underwriting system - ANSWER-Freddie Mac's AUS is Loan Product Advisor or LP (formerly known as Loan Prospector). Fannie Mae's automated underwriting system - ANSWER-Fannie Mae's AUS is Desktop Underwriter or DU Requirements when purchasing a non-owner occupied rental property - ANSWER-Unlike other government-backed mortgages, investors can use conventional mortgages to buy rental properties. Basically, all of the requirements are the same as buying a primary residence, except the investor will have to pay more down (from 20 to 30 percent) and the interest rates will be higher. For investment properties, higher cash reserves are also required. Acceptable down payment amounts - ANSWER-Minimum Down Payment is 3% (Up to 97% LTV) - with PMI 20% down without PMI Down payments may be made through gifts. Also, a mortgage can be structured into two separate loans when a borrower pays 10 percent down and borrows 10 percent for a second mortgage and 80 percent for a conventional mortgage. This eliminates the PMI requirement. Hazard insurance requirements - ANSWER-All homes purchased with a conventional mortgage must be insured for the life of the loan. The minimum coverage of the hazard insurance must be equal to the replacement cost of the improvements on the property (the term improvement is synonymous with the home on the property). Lenders and servicers cannot require hazard insurance in any amount greater than the insurable value of the home on the property. The minimum insurance amount is 100 percent of a single family home's value and 90 percent of a multifamily home's value. There must be proof of insurance before a mortgage closes. Pre-payment requirements - ANSWER-No pre-payment penalties Government Loans - ANSWER-Mortgage insured by a government entity, such as Federal Housing Administration (FHA), Veteran's Administration (VA) or Rural Housing Service (RHS - USDA loans). Definition of "FHA mortgage" - ANSWER-An FHA mortgage is a government-backed mortgage insured by the Federal Housing Administration. The Department of Housing and Urban Development (HUD) insures FHA (Federal Housing Administration) Loans. The FHA does not actually lend the money for a mortgage. The loans are originated by FHA-approved lenders, and the FHA insures the mortgages. A lender is approved through FHA to originate FHA loans. If approved as an unconditional Direct Endorser (DE), the lender can underwrite and close mortgage loans without prior FHA review or approval. FHA is the largest insurer of mortgages in the world. HUD insurance of FHA loan - ANSWER-When HUD insures a loan, it protects the lender from incurring damages due to a borrower defaulting on an FHA loan. For example, if a borrower had a $100,000 FHA loan and the balance is down to $80,000, and they default on the loan (resulting in foreclosure), the lender can submit a claim to FHA. The FHA insurance would cover the unpaid balance, interest that is due, unpaid real estate taxes and the costs for the foreclosure. FHA can also opt to take over the property and attempt to recover as much as possible. Facts about FHA loans - ANSWER-They are popular among first-time homebuyers because they require smaller down payments and lower credit scores. FHA home loans are generally easier to obtain as their underwriting guidelines are more lenient than conventional guidelines. FHA loans are more lenient on credit and employment history than conventional guidelines. They even allow for non-traditional credit and no credit score loans. FHA loans are more picky on the property/ less picky on the credit and income. Qualifications for FHA loans - ANSWER-Maximum Debt to Income: 31%/43% Minimum Down Payment: Minimum Down Payment is 3.5% (Up to 96.5% LTV). Minimum Credit Score: 580 with 3.5% down or 500-579 if the borrower puts down 10% or more. Monthly Mortgage Insurance: Yes - required. (.8% on most transactions) Upfront Mortgage Insurance: Yes - required. (1.75%) Appraisal: Required. Gift Funds Allowed for Down Payment? Yes Borrowers with Bankruptcy? 2 years after Chapter 7 discharge - 1 year after Chapter 13 filing Borrowers after Foreclosure? 3 years from foreclosure. LTV requirements on Cash-Out Refinances: 85% maximum LTV Reserves: No reserve requirement. Seller Concessions: 6% maximum Non-Occupying Co-Borrower: Allowed Assumable? Yes, with an FHA creditworthiness check. Employment History: FHA loans are less strict on employment history. FHA loans are for people who have less than perfect credit and income qualifications. Owner Occupancy: Yes (must move in within 60 days) and continue occupancy for one year. Underwriting Standards for FHA Loans - ANSWER-Underwriters or lenders use FHA's "4 C's of Underwriting" when evaluating FHA applications: - Credit history of the borrower - Capacity to repay the loan - Cash assets available to close the mortgage - Collateral, which evaluates the value of the home When evaluating an FHA file, some prior credit issues may not be a problem. The borrower must pay off all court-ordered judgments before an FHA loan can close. Also, if the borrower can never have defaulted on a student loan or be delinquent or in default on any other type of federal debt. An underwriter will use the Credit Alert Verification Reporting System (CAIVRS) to determine whether a borrower has ever failed to repay their federal debts or obligations. The CAIVRS system is a database created by the federal government and used for this specific purpose. Definition of "FHA" - ANSWER-Federal Housing Administration An agency in the U.S. Department of Housing and Urban Development responsible for facilitating FHA mortgage lending by insuring mortgage loans on houses meeting the agency's standards. The FHA was created in 1934. The Federal Government Agency that oversees the US Housing Market. FHA mortgages are guaranteed by the Federal Government and offered by banks/lenders. The FHA was one of the first government agencies created to help more Americans become homeowners. The FHA also made it easier for borrowers to qualify for loans. With lenders confident they would be protected in the event of default, rates of homeownership steadily increased FHA Program: Home Equity Conversion Mortgages (HECM) - ANSWER-The most common type of reverse mortgage is the FHA Home Equity Conversion Mortgage or HECM. A HECM is a particular type of mortgage/home equity loan developed and insured by the Federal Housing Administration (FHA) that enables older homeowners to convert the equity they have in their homes into cash, using a variety of payment options to address their specific financial needs There are only some costs that are allowable on a HECM transaction. The costs include mortgage insurance premiums - because this is an FHA program, there are mortgage insurance premiums. There are third-party charges like appraisals that are acceptable. The lender can charge an origination fee. The lender will take care of the loan if the loan amount exceeds the value of the property Facts about USDA loans - ANSWER-The USDA loan or U.S. Department of Agriculture loan is a type of mortgage that is available in rural areas of less than 35,000 people. USDA loans offer many benefits to borrowers, including no down payment, 100 percent financing, lower-than-market interest rates, and a lower PMI rate than any other loan program. USDA approved lenders can only offer 30-year loans for USDA borrowers; however, the USDA can offer a Direct Loan to low to very low-income applicants. Direct Loans are not an option for any borrower who doesn't go directly through the USDA. (Sources of funds for USDA loans come mostly from banks, but the USDA will also lend directly to borrowers who qualify, usually for very low-income borrowers.) The USDA guarantees USDA loans. The USDA program provides a 90 percent loan note guarantee to approved lenders to reduce the risk of extending a 100 percent loan to eligible rural homebuyers. Qualifications for USDA loans - ANSWER-Maximum Debt to Income: 29%/41% Minimum Down Payment: 0% (100% financing available) on purchase transactions Minimum Credit Score: N/A Monthly Mortgage Insurance: No - they have a guarantee fee Upfront Mortgage Insurance: No- they have a guarantee fee Income Limits: 115% max of area median Appraisal: Required Gift Funds Allowed for Down Payment?: No Down Payment Required Borrower's with Bankruptcy?: 3 years from Chapter 7 discharge, 1 year from Chapter 13 filing Reserves: No reserve requirement Seller Concessions: Unrestricted amount USDA Guarantee Fee - ANSWER-Government "mortgage insurance" or guarantee fee required for the life of the loan. The guarantee fee on a USDA has two parts. There is the monthly and the initial guarantee fee. - On USDA loans, the initial guarantee fee is 1 percent. - The monthly guarantee fee is .35 percent. The initial guarantee fee can be added into the loan amount and push the LTV over 100 percent Facts about VA loans - ANSWER-VA loans or Veterans Affairs Loans are loans specifically for veterans of the United States armed forces. VA loans simplify the process of buying or refinancing a home, particularly during a service member's time in service or after they are honorably discharged. A surviving spouse can also use the Veteran's benefit if the surviving spouse had a Veteran spouse die while in active duty, or the Veteran spouse died from a service-connected disability. The VA (Department of Veteran's Affairs) guarantees all VA loans. The VA GUARANTEES a certain portion of a VA loan, meaning that the VA will pay the lender up to 25 percent of the loan value should a borrower default on their loan. A guarantee is different than insurance. Maximum guarantee authorized by the VA is 25% of the loan amount, up to $113,275. The maximum VA home loan is Fannie or Freddie loan limits. A borrower can only use a VA loan for primary residences. Qualifications for VA loans - ANSWER-Maximum Debt to Income: 41% with Residual Income Minimum Down Payment: 0% (100% financing available dependent on Veterans available benefits) on purchase transactions - maximum LTV = 100% Minimum Credit Score: N/A Monthly Mortgage Insurance: No - they have a funding fee Upfront Mortgage Insurance: No - they have a funding fee Appraisal: Required Gift Funds Allowed for Down Payment?: No Down Payment Required Borrowers with Bankruptcy? 2 years after Chapter 7 discharge - 1 year after Chapter 13 filing Borrowers after Foreclosure? 2 years after a foreclosure LTV requirements on cash-out refinance: 90% cash out with a 2.3% funding fee Reserves: No reserve requirement Seller Concessions: 4% Assumable: Yes - with VA/lender approval Owner Occupancy: Yes (move into the property within 60 days) Minimum down payment on VA loans - ANSWER-0% Down payment is determined by obtaining the DD214 from the veteran, which tells you they have benefits, the information is loaded into the VA website and then the Certificate of Entitlement or Eligibility (COE) is issued. The higher the benefits, the higher the loan to value. Prohibition on mortgage insurance - ANSWER-Unlike Federal Housing Administration (FHA) loans that require mortgage insurance, often for the life of the loan, and conventional loans that require mortgage insurance with down payments of less than 20 percent, Veterans Administration (VA) loans do not require mortgage insurance. Although mortgage insurance ends when a homeowner obtains 20 percent equity, not paying mortgage insurance at all can be a huge savings and a big selling point for VA mortgages. For VA loans, the money saved on mortgage insurance can go toward other things like paying off other debts, paying down mortgage principal, or for homeowner costs and maintenance. FHA interest rate calculation scenarios - ANSWER-FHA's most popular home loan is the Fixed-Rate 203(b) loan but there are also many other programs available based on the 203(b) that have additional features. One of these is the Section 251 Adjustable Rate Mortgage program which provides insurance for Adjustable Rate Mortgages. When interest rates are high, Adjustable Rate Mortgages keep the initial interest rate on a mortgage low which allows borrowers to qualify for the financing they need. While the Section 251 program helps to keep mortgage interest rates and payments low they may change over the life of the loan. The maximum amount of fluctuation in your interest rate in any given year cannot exceed 1 percentage point. And over the life of your loan, the interest rate cannot increase more than 5 percent from your initial rate. (5/1 ARM) FHA 2-1 Buy Downs - require borrowers to qualify at the note rate. - However, funds placed in an escrow account will allow them to pay a discounted monthly payment based on a lower interest rate for two years - 2% in the first year and 1% the second year. Pay the note rate from the third year o. Types of government guarantors - ANSWER-There are several government agencies that guarantee mortgages for the purchase of a primary residence. Federal Housing Administration (FHA) and Veterans Administration (VA) loans, two of the largest providers of government-backed mortgages. Ginnie Mae, a government agency that backs mortgage securities, and Fannie Mae and Freddie Mac, two quasi-government entities that also back mortgage securities. The U.S. Department of Agriculture (USDA) runs another popular government-backed loan program. Definition of "entitlement" - ANSWER-The entitlement is the amount of a loan that the Veterans Administration (VA) guarantees to repay to a lender should a borrower default on a VA mortgage. The basic entitlement on a VA loan is $36,000. Eligible service personnel are allowed to borrow up to four times the basic entitlement for a loan amount of $144,000 ($36,000 x 4 = $144,000). Entitlement is a confusing topic for some borrowers who mistakenly believe it is their maximum loan amount or a lump sum payment the VA provides to buy a home. It is neither of these things. The VA has a second tier, called bonus entitlement, the veteran may want to buy a home that costs more than $144,000. To help veterans do this, the VA offers what's called bonus (or Tier 2) entitlement. To determine a veteran's bonus entitlement, the VA will look at the Federal Housing Finance Agency's (FHFA's) current national conventional financing confirming limit and the veteran's state's county loan limits. We'll guarantee 25% of their loan amount, based on these loan limits. Some eligible service members can qualify for a bonus entitlement of up to $70,025 for loans over $144,000. This makes for a maximum loan size of $424,100 ($144,000 + $70,025 x 4 = $424,100). Restoration of Entitlement - ANSWER-Veterans can have a previously used entitlement restored to purchase another home with a VA loan if: - The property purchased with the prior VA loan has been sold and the loan paid in full, or - A qualified Veteran-transferee (buyer) agrees to assume the VA loan and substitute his or her entitlement for the same amount of entitlement originally used by the Veteran seller. The entitlement may also be restored one time only if the Veteran has repaid the prior VA loan in full but has not disposed of the property purchased with the prior VA loan. Remaining entitlement and restoration of entitlement can be requested through the VA Eligibility Center by completing VA Form 26-1880 Certificate of eligibility requirement - ANSWER-A veteran borrower must have suitable credit, income, and a valid Certificate of Eligibility (COE) to be eligible for a VA loan. Borrowers applying for a Veterans Administration (VA) mortgage must prove they are eligible for the loan. The proof required is called a certificate of eligibility (COE). The borrower must have been honorably discharged or meet certain service requirements to obtain a valid COE. Documentation of service is required and depends on a borrower's type of service. For veterans, a DD214 form will suffice as long as it shows type of service and reason for leaving. If a borrower does not meet the minimum service requirements, they may still be eligible if they were discharged due to - Hardship, - The convenience of the government, - Reduction-in-force, - Certain medical conditions, or - A service-connected disability. Acceptable funds for a down payment/closing costs - ANSWER-FHA: A borrower can use gift funds received from a relative or employer for the entire amount of the down payment. To be considered a gift, the relative or employer cannot require repayment of the funds from the borrower. A gift letter must be signed by the donor listing their name and contact information, as well as the specific dollar amount of the gift. Down payments cannot come from borrowed funds. Acceptable down payment sources can be checking and savings balances, cash saved at home, savings bonds, IRA and 401k accounts, investments, gifts, and the sale of personal property. Gifts are limited to those that come from family, the borrower's employer or union, a close friend, and charitable or government organizations. It is prohibited to receive a gift from the seller, a real estate agent, or the home builder. Down payment money is considered separately from and in addition to closing cost funds but can come from the same list of acceptable sources. FHA: 6% maximum seller concessions VA: no down payment required; 4% seller concessions USDA: no down payment required; unrestricted seller concessions Properties eligible for FHA purchase transactions - ANSWER-While FHA is less stringent on the profile of the borrower, they are stricter on the property conditions. If a property has significant defects or needs significant renovations or updating, an FHA loan will not be the best route for that borrower. FHA will not insure a loan collateralized by a dilapidated property. FHA loans are available only for primary residences - FHA security instruments require a borrower to establish occupancy in a home as the borrower's principal residence within 60 days of signing the security instrument, with continued occupancy for at least one year (borrower must live there, even if it has multiple units, they must live in one of the units) FHA loan limits - ANSWER-FHA has a maximum loan amount that they will insure (known as the lending limit). These limits are updated annually and based upon the location of the property. FHA loan limits vary from county to county across the country. Limits depend on home prices in a specific area. FHA Streamline - ANSWER-FHA Streamlines are a standard FHA refinance product. Streamlines are utilized by borrowers with current FHA mortgages when they would like to reduce their mortgage insurance, interest rate, or their payment. The term "streamline" is used as they require less documentation and underwriting, and in some instances, may not require an appraisal. VA funding fees - ANSWER-VA funding fees vary for different situations. Veterans using their benefits for their first home purchase will pay a different funding fee than the Veterans using their benefits for a second transaction. Funding fees may also vary for different branches of the military (i.e., National Guard or Reservists) or for Veteran borrowers who also make a down payment. - 2.3% funding fee for FIRST time use and less than 5% down - 3.6% funding fee for SUBSEQUENT use and less than 5% down - 1.65% for 5% or more down on any use - 1.4% for 10% or more down on any use - Veterans disabled during their service and surviving spouses of military killed in action or who died from a service-related disability do not have to pay the fee. - 90% Cash out refinance: 2.3% first time use, 3.6% subsequent use Funding fees do not have to be paid out of pocket by the veteran at closing. The borrowers can finance the funding fee directly into the loan amount. Upfront mortgage insurance premiums - ANSWER-An insurance policy used in FHA loans, ensuring the lender if the borrower goes into default and is not allowed to be cancelled during the life of the loan. The FHA assesses either an "upfront" MIP at the time of closing, or an annual MIP that is calculated every year and paid in 12 installments. Mortgage insurance premium paid in a lump sum upfront on an FHA loan. A borrower pays UFMIP in a one-time payment at closing, or the cost is financed into the loan amount. The UFMIP is currently at 1.75 percent of the base loan amount. UFMIP is a requirement that applies regardless of the term or LTV ratio on the FHA loan. Residual income qualification test - ANSWER-The VA only uses the back end or total debt to income ratio when calculating debt to income. The maximum back-end debt to income ratio is 41 percent. Underwriters will also look at a veteran's residual income. Residual income is the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses such as food, health care, closing, and gasoline. The acceptable thresholds for residual income are based on the region that the Veteran lives. These thresholds are based on the information supplied by the Consumer Expenditures Survey that is published by the Department of Labor. When determining a borrower's residual income, the underwriter will have to take into consideration all members of the household, including the veteran's dependents. VA IRRLs - ANSWER-The VA IRRRL or VA Interest Rate Reduction Refinance Loan is similar to the FHA streamline but is offered as a VA to VA no-cash out refinance loan. IRRRL's do require an additional funding fee, and the veteran cannot receive any additional funds out of their property. These loans often do not require an appraisal, much like the FHA streamline. The funding fee on an IRRRL is 0.50 percent for everyone. IRRRLs do not require an appraisal or a credit underwriting package. IRRRL's can also be done with no money out of pocket by including all costs in the new loan or by funding the new loan at an interest rate high enough to enable the lender to pay the costs. With this type of loan, the borrower cannot receive any cashback from the loan proceeds. Closing Costs on VA loans - ANSWER-Some fees are acceptable, and some fees are not acceptable on VA loans. The VA maintains a 1 percent maximum origination charge. Reasonable and customary fees include: Appraisal fee, Recording fees, Credit report fee, Prepaid items, Flood determination, Survey, Title examination, Title insurance, and Other fees authorized by the VA It is unacceptable for a lender to charge any fees other than the 1 percent origination fee. The lender may not charge the Veteran for any attorney's fees or escrow service fees associated with the settlement of the loan. Required documentation - ANSWER-FHA: All institutions have basic documentation requirements, but for Federal Housing Administration (FHA) mortgages, certain documents need to be collected regardless of the lender's internal policies. - the Form 1003 Universal Residential Loan Application - sign an addendum to this application known as the HUD-92900A (The addendum certifies that all of the information the borrower has provided in the application is true. The lender also signs this addendum, certifying that the loan is eligible for federal backing) - Proof of social security (Usually a photocopy of the borrower's social security card suffices) - A credit report - proof of employment, which can be as simple as showing a pay stub with the employer's name, address, and phone number - Two year's tax returns are required - A sales or purchase agreement is mandatory, signed by both the buyer and the seller - The FHA Amendatory Clause form must be included, which gives the buyer the right to cancel the purchase without losing the deposit if the house appraises for less than the sale price - The Real Estate Certification form is required, whereby all parties attest to the terms and conditions of the sales contract. - Appraisal VA: - COE Monthly mortgage insurance payment scenarios - ANSWER-Mortgage insurance charged monthly on an FHA loan. Calculated based on the borrower's down payment, loan amount, and the term of the loan. MIP is required for the life of the loan if over 90% LTV When a borrower takes out a mortgage with a term of 15 years or more, the annual mortgage insurance premium will be as follows: Term, LTV, Time Period for the MMI • ≤ 15 years, ≤ 78%, 11 years ≤ 15 years, 78.01% to 90%, 11 years ≤ 15 years, > 90%, loan term > 15 years, ≤ 78%, 11 years > 15 years, 78.01% to 90%, 11 years > 15 years, > 90%, loan term FHA loans with mortgage insurance may have the mortgage insurance removed once term and LTV criteria are met. Most FHA borrowers pay down the minimum of 3.5 percent on a 30-year mortgage, which means their monthly mortgage insurance premium would be 0.85 per cent of the loan amount divided by 12. Ex. a $250,000, 30-year mortgage with a 10 percent down payment: $250,000 x 0.85 = $2,125. The monthly premium comes to: $2,125 / 12 = $177.08. What's the difference between PMI and MMI? - ANSWER-A borrower purchased Private Mortgage Insurance for a conventional loan through a third -party company. Mortgage Insurance Premium and Upfront Mortgage Insurance Premiums are paid directly to the FHA. Mortgage Insurance Premium on FHA loans can sometimes be less expensive than PMI, so it's important to compare both options when comparing loan scenarios Minimum down payment for an FHA loan - ANSWER-The minimum down payment on an FHA loan is 3.5 percent (Up to 96.5% LTV). A borrower needs a credit score of at least 580 to be eligible to make the minimum down payment. Borrowers with credit scores between 500 and 579 can still qualify for an FHA mortgage but will have to pay down a minimum of 10 percent. Conventional/nonconforming (e.g., Jumbo, Alt-A) - ANSWER-Jumbo loans or any loans using non-verified income. Examples of borrowers who would fall into conventional/non-conforming borrowers include borrowers with less than perfect credit, borrowers with less than two years of job history or who have non- traditional types of income, higher DTI's, or loan amounts that exceed the loan limits. Facts on "jumbo loans" - ANSWER-A jumbo loan is a single-family mortgage loan in a principal amount that exceeds Fannie Mae and Freddie Mac's dollar loan limits (remember the loan limits change yearly). Jumbo loans are conventional, but non-conforming loans. Not government back and ineligible for purchase and resale on the secondary market. For banks, more money means more risk, so qualifying for a jumbo loan is harder. Loan amount over $510,400 Alta-A loans - ANSWER-Are used for borrowers who do not represent the credit risk of subprime but who do not meet the underwriting requirements for conforming prime rate loans. Definition of "nonconforming loan" - ANSWER-A non-conforming loan is any loan that does not conform to Fannie Mae and Freddie Mac guidelines. Fannie Mae and Freddie Mac's guidelines are typically more stringent than other loan programs; therefore, not all borrowers will qualify for a Fannie Mae or Freddie Mac loan. Examples of "nontraditional loans" - ANSWER-Any loan that is not 30-year fixed i.e. 15 year fixed, ARM, etc. Nontraditional loans are mortgages that do not follow standard amortization schedules or do not follow standard payment schedules. Examples are loans with balloon payments, interest-only loans, and adjustable rate mortgages (ARM). Because these loans are out of the norm, they carry heavier risks and the associated higher interest rates and fees. Requirements for an escrow account associated with a "high-priced loan" or "high-cost loan" - ANSWER-The escrow account is required for at least five (5) years. Federal Truth in Lending Act (TILA) regulations require certain escrow account terms. First, an escrow account is mandatory for at least the first five years of the loan. Escrow accounts must be established for the collection of property taxes, homeowners insurance, and mortgage insurance for the first five years. The escrow account can be canceled after five years if the loan is paid off or the borrower requests the escrow account to be canceled. However, the borrower must be current on the mortgage and have at least 20 percent equity in the home to cancel. Some predominantly rural areas are exempt from the TILA escrow rules. Statement on Subprime Lending - ANSWER-The purpose of the statement was to promote consumer protection standards as well as encourage lenders to ensure that borrowers only obtain loans that they can afford to repay. The Statement includes guidelines for defining predatory lending, underwriting standards, establishing control systems, and consumer protection. The standards are concerned explicitly with certain ARM products, that typically have these characteristics: - Low initial payments based on a fixed introductory rate that expires after a short period and then adjusts to a variable index rate plus a margin for the remaining term of the loan. - Very high or no limits on how much the payment amount or the interest rate may increase ("payment or rate caps") on the reset date. - Limited or no documentation of borrowers' income. - Product features likely to result in frequent refinancing to maintain an affordable monthly payment. - Substantial prepayment penalties or prepayment penalties that extend beyond the initial fixed interest rate period. Definition of "payment shock" - ANSWER-Payment shock is what occurs when a borrower's payment suddenly increases. Payment shock happens in situations where the interest rate is variable, or there is an introductory interest rate. The change in the interest rate causes the borrower's payment to increase, and in some situations, the borrower can no longer afford to pay their mortgage because the interest rate is so high. This situation causes the borrower to then default on the loan. Many lenders try to prevent payment shock by calculating the risk that a borrower might default. One way to do this is to measure debt to income and set limits on what is acceptable. Definition of "subprime" - ANSWER-Below the qualifications set for prime borrowers. Loans for borrowers who have poor credit, an unstable income history, or high debt to income ratios The rates are higher because the risk of default is greater when credit scores are lower. These loans are available on a limited basis. They are one of the main causes of the mortgage meltdown in 2008 and 2009. They have been replaced in some form by Non-Qualified Mortgages (Non-QM loans). Characteristics of ARMs - ANSWER-An adjustable rate mortgage (ARM) is a mortgage in which the rate periodically adjusts. The index, margin, and adjustment caps on the ARM determine the amount of each adjustment. ARMs start with an initial rate and payment. The initial rate and payment amount on an ARM remain in effect for a limited period. That limited period can range from one (1) month to several years. With most ARMs, the interest rate and monthly payment can change every month, quarter, year, three (3) years, or five (5) years. The period between rate changes is called the adjustment period. Some examples include: an ARM that has an adjustment period of one (1) year is called a one-year ARM, and the interest rate and payment can change once every year. An ARM with a three-year adjustment period is called a three-year ARM, and the interest rate can adjust every three (3) years. An interest rate on an ARM has two parts: the index and the margin (fully indexed rate). The index is a measure of market interest rates and the margin is the profit the lender adds. The index fluctuates with the market. The margin is assigned at the loan origination and always stays the same Definition of a debt-to-income ratio assessment - ANSWER-Debt to Income (DTI) is a calculation made to determine whether the borrower can repay the loan they are attempting to receive. The Debt to Income ratio or Qualifying Ratio vary from program to program. There are two parts to the Debt to Income ratios: - The Front-End Debt to Income Ratio/Housing Expense Ratio: This ratio simply takes the amount that the borrower will be paying for their mortgage and divides it by their gross monthly income - The Back-End Debt to Income Ratio/ Total Expense Ratio: This ratio takes all of the borrower's monthly liabilities and divides it by their gross monthly income. A loan program and Truth-in-Lending Act (TILA) have maximum DTI ratios allowed for the loan program and mortgage rules. When determining a loan program, the borrower qualifies for, one of the first steps is to determine if the borrower has sufficient income to support the DTI requirements for the loan amount requested. DTI is debt divided by income DTI does not take into account everyday expenses (utilities, phone bill, etc.) Examples of credit risk characteristics - ANSWER--credit history -late payment -little credit -foreclosure -repossessions -bankruptcy within the last 5 years the five Cs: character, capacity, capital, collateral, and conditions. A lender can discern a lot about a borrower by looking at his or her credit report. An indication of good character is a person who honors his or her obligations. A good payment history and history of paying off debts with no liens, bankruptcies, or judgements all indicate good character. Capacity is the debt-to-income scenario. Capital is the down payment. Borrowers who are willing to put their own money down up front are better risks. Collateral is the home being purchased. Whether the home is primary, a vacation, or investment affects risk. Conditions are the terms of the loan: the number of years to repay, the type of mortgage, the size of the loan. Scenarios to determine when a balloon loan may be appropriate for a borrower - ANSWER-A balloon mortgage is a mortgage that requires a larger than usual one-time payment at the end of the term The type of borrower that this might work for is someone who intends to sell their home after a short period. An example would be someone who often relocates for work, they purchase their new home with a smaller monthly payment and then immediately pay it off when they sell it and move onto the next home. Another borrower who this might work for is someone who gets a large amount of money yearly but does not have as steady of an income during the rest of the year—for example, a farmer. A farmer has some income during the year but makes the bulk of their money after a harvest. At harvest time, they put a large chunk of money on their balloon mortgage, and by the time the fixed period is up, and the balloon payment is due, they likely have already paid off that mortgage or have the funds to make that balloon payment. Someone who is expecting his or her income to increase significantly over time It could also work for someone with low credit scores now who wants to refinance again when his or her credit scores improve. Characteristics of subprime borrowers - ANSWER-A subprime borrower is someone whose credit history is dinged up. Lenders will loan to subprime borrowers but at higher rates than those with good credit histories. FICO refers to dings on a credit history as derogatory information—anything from missed payments to bankruptcy. A subprime borrower typically has a low credit score, in the 600 range or lower. A subprime borrower usually has a history of delinquencies, two or more 30-day delinquencies in the last 12 months, or one 60-day delinquency in the last 24 months. Subprime borrowers will often have loans that have been charged off A borrower would fall into the subprime category with a foreclosure in the past 24 months or a bankruptcy in the last 60 months. Subprime borrowers usually have debt-toincome ratios in the 50s and show a history of troubles with budgeting for everyday expenses. Characteristics of a subprime mortgage - ANSWER-- Manually underwritten. - little or no amortization or included negative amortization features - Low credit requirements (credit scores in the 500's). - May not require private mortgage insurance or escrow features. - little verification of what the borrower was presenting as their income, assets, or employment. The lack of verification made them incredibly risky for lenders. These loans usually came with much higher interest rates, and usually, the borrower could not afford the loan. The rates are higher because the risk of default is greater when credit scores are lower. a) Stated income loans b) Non-income verifying loans - ANSWER-Stated income loans, also knowns as non-income verification or alternative document loans, are loans provided to borrowers with little or no proof of income. These loans are rare and usually approved for borrowers who have trouble documenting their income, for example, people who work on commission, business owners who keep all their assets in the business, seasonal workers, and freelancers Instead of using traditional methods to verify income, like W-2s and income tax returns, lenders use bank statements, both personal and business, to verify income. Stated income loans are often considered subprime because they are more risky and therefore have higher interest rates and fees. A few examples of subprime loans include: - ANSWER-- NINA - No Income/No Asset Mortgages - Often referred to as "No Doc" mortgages. The borrower is not required to provide any financial information regarding their income or their assets. - SISA- State Income/Stated Asset - SISSA loans only require the borrower to state their income and asset situation but do not require the verification of the income or asset information - SIFA or SIVA - Stated Income/Full Asset or Stated Income/Verified Asset - SIFA or SIVA loans only require the borrower to state their income but provide asset information.