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Ch 3: Loans: Conventional

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Title: Ch 3: Loans: Conventional


1
Ch 3 Loans Conventional
  • By Dr. D. Grogan
  • M.C. Buzz Chambers

2
PREVIEW
  • The purpose of this unit is to acquaint the
    learner with the various types of non-government
    loans available in the conventional lending
    arena. These loans usually follow FNMA, GNMA or
    FHLMC guidelines. New loans become available on a
    regular basis to meet new consumer demands. Some
    traditional loan programs do not always have
    funding available by investors for particular
    types of loans.
  • The market is ever changing and the mortgage loan
    broker must be flexible. Other loans are SBA,
    reverse mortgages, refinance loans, junior liens,
    equity loans and less than A paper loans.
    Defaults are also discussed.

3
Contents
  • PART 2 Loans
  • Ch 3 Loans Conventional
  • 3.1 How a mortgage broker selects a loan
  • 3.2 Conventional loan features
  • Loan amounts
  • Eligibility requirements for high-balance loans
  • Loan to value ratio
  • Loan to value payment
  • Fixed rate loan
  • Bi-Weekly fixed rate loans
  • The 10- or 15-year mortgage
  • Adjustable rate mortgages
  • Index
  • Treasury bill rate
  • LIBOR
  • The two step mortgage
  • Price level-adjusted mortgage
  • Reverse annuity mortgage

4
Contents
  • 3.4 California loan programs (cont.)
  • Public Employees Retirement System
  • State Teacher Retirement System
  • Home Ownership Program
  • My Community mortgage loan
  • Energy Efficient Mortgage
  • Other loan programs
  • 3.5 Refinance, Equity and Junior or Sub-Prime
    loans
  • Refinance loan
  • Junior liens
  • Home equity line of credit
  • Loans Sub-Prime borrowers
  • Defaults
  • 3.2 Conventional loan features (cont.)
  • FNMA FHLMC loan programs
  • Condominium loans
  • 3.3 Mortgage insurance
  • 3.4 California loan programs
  • California housing finance agency
  • Southern California Home Financing Authority
  • Hope for Ownership of Single Family Homes
  • Home Investment and Affordable Housing

5
Student Learning Outcomes
  1. Compare and contrast the primary considerations
    used to select one conventional lender over
    another.
  2. Differentiate among the various conventional
    loans for FNMA, GNMA, and FHLMC.
  3. Describe conventional loans features used to
    determine which loan best suits a particular
    borrower.
  4. List and explain the components of various types
    of indexes for which a loan rate would be tied.
  5. Describe conventional loan insurance programs,
    when such is required and the coverage.
  6. Identify the loan criteria that serve as a match
    with buyer qualification.
  7. Explain the nature of the various conventional
    programs.
  8. Describe the elements of junior lien types.
  9. Discuss subprime or B-paper loans.

6
3.1 How a Loan Broker selects a loan
  • What is the lenders ability to lock in an
    interest rate?
  • What date or event will the loan rate tie to
    application date, funding date, advertised rate?
  • What loan points, fees, and costs go with which
    kind of loan?
  • Will the lender give you references of other loan
    brokers who use this lender?
  • What is the average time to close the loan once a
    processed loan is submitted?
  • What loan terms and programs are available to the
    loan broker?
  • What are underwriting guidelines that the lender
    prefers for the loan package?

7
3.2 Conventional loan features
  • NOT a government loan NOT insured by state or
    federal agency
  • Conforming loan guidelines for secondary market
  • Maximum loan amount
  • Minimum qualification for borrower property
  • Secondary money market loans must meet the
    guideline standards set by FNMA or FHLMC

8
CONVENTIONAL LOAN FEATURES
  • Prefer single-family, owner-occupied homes or
    condos.
  • Prefer working with only certain loan programs.
  • No one conventional lender dominates the market.
  • Different conventional lenders have different
    stacking orders.
  • Processing time varies from conventional lender
    to lender.
  • Typical down payment required on many of these
    loans ranges from five to ten percent.

9
CONVENTIONAL LOAN FEATURES (cont)
  • Loan-to-Value (LTV) ratios
  • Up to 95 of the appraised property value
  • Interest rates and loan fees will vary
  • Each lender sets own guidelines for LTV
  • Amortized loan payment
  • Some principal and interest payment.
  • Impound account may be required for taxes and
    insurance.

10
Conventional Loans
  • Loans made by institutional lenders
  • Life insurance companies prefer larger loans.
  • Commercial banks prefer loans on construction,
    refinance home equity line.
  • Savings prefer owner occupied home loans.

11
Conventional Loans
  • Loans made by non-institutional lenders
  • Mortgage Companies prefer saleable loans
  • Loan correspondent represents one company,
    usually for income property loans
  • Funded by a mortgage banker
  • Private investors include sellers who carry back
    junior loans on property they sell
  • Soft money loan is when a seller is the lender
  • Hard money loan is funded by an outside source

12
Conventional Loan Amounts
  • OTS sets upper limits on loan-to-value (LTV) (for
    SLs only, not for all mortgage lenders)
  • High-cost areas maximum loan amounts changed Jan
    2, 2009
  • Land up to 65
  • Land development up to 75
  • Multifamily commercial property up to 80
  • 1-4 family properties up to 95-100

13
Loan Amounts
  • Non-Conforming loans
  • Jumbo loans
  • Exceed the maximum loans amounts of FNMA
  • Underwriting guidelines different
  • See www.fanniemae.com
  • Maximum loan amount General High-cost area
  • One unit (SFR, Condo) ________ _________
  • Two units (duplex,2 on a lot) ________ _________
  • Three units ________ _________
  • (triplex, house2units)
  • Four units ________ _________

14
Jan 1, 2009 FNMA Changes
  • Housing and Economic Recovery Act (ERA) changed
    maximum loan amounts.
  • American Recovery and Reinvestment Act (ARRA)
    modified high balance eligibility requirements.
  • Super-conforming loan costs less than jumbo loans
    that FNMA cannot buy.

15
Super-conforming loan
  • Borrower must have
  • good credit
  • 3 months house payment as a reserve
  • Interest rate
  • 1-1.5 higher than conforming loan
  • Slightly higher than conforming loan
  • Less costly than jumbo loan
  • A basis point one hundredth of a percent
  • Loan costs 25-30 basis points over conforming
    loan

16
Eligibility Requirements for High-Balance Loans
  • Loans must be conventional first loans ONLY.
  • One-to-four unit properties are eligible.
  • Loans may be fixed-rate or adjustable rate, but
    NO balloon payment is permitted.
  • Loans may be underwritten manually or with
    Desktop Underwriter (DU).
  • Loans must meet the loan-to-value (LTV), combined
    loan-to-value (CLTV), and home equity combined
    loan-to-value (MCLTV) ratio requirements.
  • Borrowers must meet the minimum credit score
    requirements.
  • All borrowers must have a credit score.
  • Financed borrower-purchaser loan insurance is
    permitted however, the maximum grow LTV cannot
    exceed 90.
  • All high-balance loan must meet all standard
    Fannie Mae eligibility and delivery requirements.

17
1990-2008 loans
18
Loan-to-Value Ratio (LTV)
  • 95 of appraisal or sales price (lower)
  • owner-occupied
  • Conventional
  • 80 LTV
  • Most common conventional loan

19
Loan Payment
  • Pity Me
  • A ssociation dues (HOA)
  • P rincipal
  • I nterest
  • T axes (property)
  • I nsurance (mortgage, fire, flood, etc)
  • MI Mortgage Insurance

20
AMORTIZATION
  • Example 200,000 loan _at_ 8, 30 year term

Pmt No. Principal Total
Interest Principle Ending
Balance Pmt. Portion Portion
Balance
1 2 3 4 5 6 7 8 9 10
200,000.00 1467.54 1333.33 134.21
199,865.79
199,865.79 1467.54 1332.44 135.10
199,730.69
21
Fixed Rate Loans (FRL)
  • Fixed monthly loan payment
  • Amortized from 15 to 40 years
  • No prepayment penalty
  • No balloon payment
  • Available on 1-4 unit properties
  • Either owner or Non-owner occupied property
  • Low down payment with high LTV
  • Usually contains a Due-On-Sale clause
  • Permits buydown

22
Bi-Weekly Fixed Rate Loan
  • Shortens the life of the loan
  • The borrower makes 26 payments a year one every
    two weeks
  • Reduces the total interest paid

23
10- or 15- year loan
  • Lower interest rate
  • Shorter duration
  • Pays off a 30 year about 9 years early
  • To convert a 30 year loan to 15 year payoff, pay
    4.5 more each year.

24
15 YEAR LOANS
Substantial Savings over life of Loan
Pmt 1,343 _at_ 10
125,000 Mortgage
Pmt 1,143 _at_ 10.5
Pmt 1,075 _at_ 10
100,000 Mortgage
Pmt 915 _at_ 10.5
Pmt 752 _at_ 10
Lower Interest Rate
70,000 Mortgage
Pmt 640 _at_ 10.5
May Require Larger Down Payment
25
WHAT TO KNOW ABOUT ARMs
Probability of Negative Amortization?
How often will the Rate Change?
Is there a Payment Cap?
Is there a Rate Cap?
Initial Interest Rate?
Option to Convert Fixed Rate?
How Often will Payment Change?
26
ADJUSTABLE RATE MORTGAGES
  • Interest Rate Cap over the life of the loan
  • Lifetime Cap Maximum interest rate
  • Per-Adjustment Cap The max allowable up or down
    adjustment
  • Conversion Option Terms to convert to fixed rate
  • Payment Cap
  • Payment Adjustment Period Over the life of the
    loan
  • Rate Adjustment Period At any one adjustment
    period
  • Teaser Rate Low initial rate with adjustments
    where
  • borrower qualifies for later, higher rate
  • Negative Amortization Difference between fully
  • indexed rate, minus actual amount paid which is
    added
  • to unpaid loan balance.

27
ADJUSTABLE LOAN(Note Index changed every 6
months Payment adjusted twice, year 3 (up)
year 6 (down)
1st Payment Adjustment (UP)
Payment
2nd Payment Adjustment (DOWN)
Index
28
ADJUSTABLE RATE MORTGAGES
  • Lower initial rate with shared risk of rising
    interest rate.
  • Index is a published indicator COFI, LIBOR,
    11th district, prime rate, moving averages.
  • Margin is a fixed rate added to an index.
  • Note rate is interest actually charged on the
    amount borrowed (index margin).
  • Historical rate information must be given to
    borrower.

29
Jan 1991 July 2009
  •   

30
Other conventional loans
  • Two-Step
  • Interest rate adjusted only once
  • Rate usually adjusted at year five or seven
  • Price Level-Adjusted Mortgage (PLAM)
  • The rate is the same as the Consumer Price Index
  • Adjustment in monthly payment and outstanding
    principal annually.

31
Reverse Annuity Mortgage (RAM)
  • Borrower must be age 62 or older
  • Borrower equity rich, but cash poor
  • Loan may be a lump sum or a line of credit
  • Must occupy the property as their principal
    residence
  • Single-purpose reverse mortgage that may be used
    for only one specified purpose (to pay property
    taxes or make a home repair).
  • Federally insured reverse mortgage that may be
    used for any purpose and is available throughout
    the United States, providing the largest advances
    that are convention, insured loans.
  • Proprietary reverse mortgages may be used for any
    purpose and are designed for advances where the
    property value is substantially more than the
    median home value in the country, called
    high-cost areas.
  • http//www.aarp.org/revmort

32
RAM loan options
  • ARM payment option-Borrower
  • Receives monthly payment for fixed period they
    select.
  • Receive monthly payment until they no longer
    occupy the property as their principal residence.
  • May draw the principal in equal monthly payments.
  • May draw cash at times amounts of their
    choosing.
  • May change from one option to another for a fee
    with HUD authorization.
  • Fixed-rate Single payment option
  • Borrower may draw entire line of credit at
    closing.
  • Future draws or access are allowed only for
    repairs or servicing fees.
  • FNMA will only fund closed-end, fully drawn,
    fixed-rate HECMs that comply w/HUD regulations.

33
Step to obtain a RAM
  • Awareness Go online to learn about reverse
    mortgage for general information.
  • Action Contact a reverse mortgage lender or
    NRMLA.
  • Counseling Obtain counseling from a HUD approved
    counseling agency or AARP-trained counselor.
    Counseling is mandatory, regardless of which
    program chosen.
  • Application The homeowner completes an
    application and selects the payment option fixed
    monthly payments, lump sum amount, line of credit
    or combination.
  • Processing Loan broker orders title and lien
    payoffs. Financial institution orders appraisal
    to determine the property value and physical
    condition of the property.
  • Underwriting Loan broker finalizes loan
    parameters with the homeowner and submits the
    loan package to an underwriter for final loan
    approval.

34
Step to obtain a RAM (cont.)
  • Closing After the loan is approved and the
    closing date is scheduled for the signing of the
    final loan documents, the loan closes escrow. The
    initial and expected interest rates are then
    calculated and the final figures are prepared.
    Once completed, the homeowner signs the new loan
    papers.
  • Funding The homeowner has three business days to
    cancel the loan. After the three days, the loan
    funds are disbursed.
  • Payments The homeowner does not make any monthly
    loan payment to the lender during the life of the
    loan. The loan is due upon death or sale.

35
FNMA FHLMC Loans
  • FNMA- Fannie Mae -Federal National Mortgage
    Association
  • http//www.fanniemae.com
  • FHLMC - Freddie Mac - Federal Home Loan Mortgage
    Corp.
  • http//www.freddiemac.com
  • GNMA - Ginnie Mae Government National Mortgage
    Corp.
  • http//www.ginniemae

36
Mortgage Credit Certificate (MCC)
  • 15 of the interest paid on the loan is a direct
    credit on federal taxes
  • Allows some borrowers to qualify for a loan that
    they might otherwise not be able to obtain.

37
LOANS on a CONDOMINIUM
  • Same for owner-occupied single-family residences
    and for owner-occupied condominium units.
  • 80 LTV loan The project must be 51 or more
    owner occupied.
  • 90 LTV loan w/PMI The project must be 70
    owner-occupied.
  • If 15 of total homeowner association dues are
    delinquent, no loan.

38
3.3 Mortgage Insurance
  • Premium paid in cash, up-front, as a lump-sum
    payment at the close of escrow.
  • Premium may be financed as part of the loan.
  • Annual premium divided by 12 gives the monthly,
    on-going, impounded payment.
  • LTV Annual Premiums
  • 80.190.0 0.0067
  • 90.195.0 0.0078
  • 95.1100 0.0122

39
PRIVATE MORTGAGE INSURANCE
Annual Premium
Private Mortgage Insurer
Borrower
Coverage in Case of Default
Mortgage Loan
Lender
40
Private Mortgage Insurance
  • Written to protect the lender from loss
  • Covers a percentage of the loan being insured
  • Meets conforming guidelines
  • Premiums paid by borrower in impound account
  • PMI Terminates
  • when loan reaches 80 LTV, or
  • when trustors equity reaches 22 (LTV ratio
    78)
  • Borrower must contact lender to have PMI
    discontinued
  • mgic.com

41
3.4 California Loan Programs
  • (CHFA)-California Housing Finance Agency
  • Helps low- to moderate-income persons and
    families obtain affordable housing, especially
    first-time home buyers
  • Sales tax-exempt notes and mortgage revenue bonds
    (MRBs)
  • Offers a 35-year, interest-only loan with
    variable-rate interest
  • Single family or condominium only no 2-4 units
  • Strongly committed to minority, women and
    disabled veterans

42
(CHFA)-California Housing Finance Agency
  • Program 1 (EDA)
  • Economically Distressed Area
  • Program 2 (MSP) - maximum sales price
  • Program 3 FTHB First time home buyer

43
Other CA loan programs
  • SCHFA Southern California Home Financing
    Authority created by DAD Community Development
    Commission
  • PERS Public Employees Retirement System for
    city or state workers or public school workers.
    JRS Judges Retirement System members qualify.
  • STRS/CalSTRS CA state teacher retirement system

44
Other CA loan programs
  • HOPE Home Ownership for first time home buyers
  • HOP Home Ownership Program
  • My Community Mortgage Loan- loan-level price
    adjustment (LLPA_
  • EEM Energy Efficient Mortgage

45
Rate lock
  • A rate commitment where the lenders holds a
    certain interest rate and a points for a specific
    period of time.
  • The lock is to hold until the close of escrow.
  • Rate float is a delay of the decision to fix the
    interest rate.
  • Float-down option is the ability to lock a rate
    today and take advantage of any future drop in
    interest rate until the loan closes.

46
Refinance Loan (Refi)
  • Borrower objectives
  • Do it if new interest rate is 2 lower than
    existing.
  • To cut out-of-pocket loan costs and benefit the
    shortest pay back time to cover these costs.
  • Pay off an existing loan that has poor terms,
    such as rate increase or short-term due date.

47
Junior liens
  • Any loan on a property above the existing loans
    (1st, 2nd, 3rd, etc.)
  • Seller carry-back loans
  • Home equity loans
  • Used when borrower cannot obtain desired amount
    finance with one loan due to
  • Poor credit
  • Lack of equity low appraisal

48
Home Equity Line of Credit (HELOC)
  • A form of revolving credit.
  • Property serves as collateral.
  • Borrower may obtain multiple advances up the
    maximum approved loan amount.
  • After a certain time the loan locks at whatever
    is the then unpaid balance with no future
    advances allowed.

49
Loans for Subprime Borrowers
  • A paper is for prime borrowers
  • B, C or D paper is for less credit worth
    borrowers
  • Delinquencies
  • Foreclosure
  • Bankruptcy
  • Low FICO score

50
Defaults
  • Bank failures
  • 2008 - California had 5 of 25 banks 20
  • 2009 California had 12 of 36 banks 33
  • Individual failures
  • NOD -Notice of Default Required by loan
    insurer/guarantor
  • NOS - Notice of Trustee Sale A final sale
  • REO Real Estate Owned Property owned by the
    investor as a result of foreclosure or deed in
    lieu of foreclosure.

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