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Rocket Pro SAFE > Programs - Chapter 8 > Flashcards

Programs - Chapter 8 Flashcards

1
Q

The 4Cs

A

Credit, Collateral, Capacity, Cash

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2
Q

Conventional Loans

A

Conventional mortgages were the first type of mortgages available, so they set the standard.

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3
Q

Conventional Conforming Loans

A

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government sponsored enterprises (GSE) that set the underwriting standards for Conventional Conforming mortgages. Even though Fannie and Freddie are GSEs, they are NOT insured or guaranteed by the government.

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4
Q

Fannie Mae

A

In 1938, President Franklin Roosevelt and the United States Congress created the Federal National Mortgage Association (Fannie Mae) as an entity responsible for buying mortgages from lenders. The lenders could then use the influx of capital to provide more loans. The agency along with FHA supported a methodology that created a new wave of American home ownership for low and middle income borrowers.
Fannie Mae typically buys loans from larger lenders such as high volume depository institutions.

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5
Q

Freddie Mac

A

In 1968, Fannie Mae was spun off from the government into a publicly traded company. President Lyndon Johnson made this decision due to the heavy toll the Vietnam War was taking on the federal budget. To counterbalance Fannie Mae’s potential monopoly, the Federal Home Loan Mortgage Corporation (Freddie Mac) was created in 1970. Freddie Mac went public in 1989.
Freddie Mac typically works with small lenders. These lenders are often referred to as thrifts.

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6
Q

Conventional Conforming Loan Qualifying Standards

A

Fannie and Freddie ensure liquidity in the marketplace by purchasing loans that meet their standard. These standards include limits on the size of loans established annually by the Federal Housing Finance Agency (FHFA) based on changes in median home price. The limitations on loan amounts, as shown in the chart, determine whether or not a loan qualifies as a conforming loan.

Conventional conforming mortgage loans can be fixed-rate mortgages, ARMs, hybrid ARMs, or super conforming mortgages.

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7
Q

Super Conforming Mortgage Loans

A

For high-cost areas that require larger loan amounts. During the financial crisis of 2008, many loan programs that supported loan amounts exceeding the FHFA loan limits were pulled from the market. Recognizing the need to service higher loan amounts, Fannie Mae and Freddie Mac worked with FHFA to increase loan limits for high-cost areas. These higher loan amounts are super conforming loans.1

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8
Q

A-Paper or Prime Loans

A

Conforming mortgages with limited risk involving a borrower with a FICO score greater than 680, an LTV less than 80%, and a DTI of less than 36%.

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9
Q

Conventional Conforming Loans / CREDIT

A

To qualify for a conventional conforming loan the consumer’s FICO score should be 620 or higher.

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10
Q

Conventional Conforming Loans / COLLATERAL

A

A standard appraisal must be completed by a licensed/certified appraiser. Maximum LTV will
vary depending on loan program and occupancy status. For investment properties, requirements
are more strict. For purchase loans, the maximum LTV is 95%.

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11
Q

Conventional Conforming Loans / CAPACITY

A

The DTI ratio standards for conforming loans are generally a 28% housing DTI ratio (front-end) and a 36% total DTI ratio (back-end) with an allowance of up to 45% with compensating factors such as substantial assets.

Non-taxable income, such as social security, disability, charitable donations, life insurance payouts, child support, or any public assistance, can be grossed up by 25% (for a total of 125% of the income).
A 2-year average of overtime and/or bonuses the consumer receives should be considered. 75% of rental income can be utilized in determining total monthly income.

If a revolving debt does not state a monthly payment on the credit report, 5% of the debt must be included in the consumer’s total monthly liabilities.

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12
Q

Conventional Conforming Loans / CASH

A

The consumer will need to prove asset reserves for certain programs. For example, mortgage loans for investment properties usually require up to 6 months of reserves to be verified.

If the consumer is bringing money to the closing of a mortgage loan transaction, then the source of those funds must be verified.

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13
Q

Conventional Conforming Purchase Loans: Down Payment

A

As an overall minimum, Fannie Mae and Freddie Mac require a 95% LTV (5% down payment) for 1-unit primary residences. Second homes and investment properties require a lower LTV (greater down payment) due to the increased risk factor. The minimums for eligible programs may vary depending on the following factors:
• Number of property units
• Occupancy: principal, second, or investment property
• Automated underwriting vs. manual underwriting
• Credit score, if applicable
• Transaction type: purchase, limited cash-out refinance, or cash-out refinance
• Mortgage program type: fixed, ARM

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14
Q

Conventional Conforming Purchase Loans: Seller Concessions

A

In a purchase transaction, the seller may pay a percentage of the buyer’s closing costs. If the buyer obtains a conforming mortgage loan, the maximum amount the buyer can receive from the seller is 6% of the purchase price if the buyer puts a down payment of 10% or more toward the purchase. If the buyer decides to put down less than 10%, the maximum seller concessions are 3%. Lastly, if the buyer is purchasing an investment property, the maximum seller concessions are 2% regardless of how much the buyer puts down.

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15
Q

Conventional Non-Conforming Loans

A

Non-conforming mortgages may be considered non-conforming even if the loan only misses one of Fannie or Freddie’s qualifying standards. An example of this could be the Alt-A borrower who shows lower-income, but was still considered less-risky by the lender.

Because conventional non-conforming loans are by their nature NON-CONFORMING, there are no specific set qualifying requirements.

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16
Q

Jumbo Loans

A

Conventional non-conforming mortgages that exceed the loan limits established by the Federal Housing Finance Agency (FHFA) and thus do not meet the standards set for conforming mortgages.

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17
Q

Niche Loans

A

Conventional non-conforming loans provided under special or unique circumstances by private lenders.

Example: A borrower has little to no credit and/or work history, but a high level of net worth and the
lender makes the loan based on their net worth; think of a young NBA player who just signed a multi- million dollar contract.

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18
Q

Non-Traditional ARMs

A

A conventional non-conforming loan option ARM could be an example of a non-traditional ARM.

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19
Q

Graduated Payment Mortgages (GPM)

A

Because of its negatively amortizing features, a GPM could be a non-conforming loan.

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20
Q

Sub-Prime Mortgages

A

Conventional non-conforming loans for borrowers with lower qualifications, such as poor credit or bankruptcies.

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21
Q

Non- Conventional Mortgage Loans (Government Loans)

A

Non-conventional mortgages are also known as government mortgages. The reason they’re considered non- conventional is because they were created to meet a public need not being filled by conventional mortgage loan programs.

Non-conventional mortgage loans are offered from three different program providers: the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), and the United States Department of Agriculture (USDA). While the FHA loan program is accessible for all Americans that meet its qualification standards, both VA and USDA loans do come with some restrictions as to who can apply and qualify for their products.

Each one of these programs provide loans that are accompanied by some kind of government insurance or guaranty. It is this guaranty that provides lenders with the assurance that they will be compensated even in the case of borrower default. This encourages lenders to offer non-conventional loans to their borrowers.

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22
Q

FHA Mortgage Loans

A

The Federal Housing Administration (FHA) offers a variety of mortgage products to consumers. In comparison to conventional conforming products, FHA loans have lower qualification requirements and therefore are more
accessible to consumers. These qualifications include lower credit score, LTV, DTI, and reserves, but share similar loan limit requirements of conventional conforming loans.

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23
Q

FHA Loan Qualifying Standards / CREDIT

A

Mortgage late payments, bankruptcies, and seriously delinquent accounts could prevent a borrower from being eligible for this mortgage loan.
A credit score of 580 makes a borrower eligible for maximum financing. A 500-579 score limits a
borrower to a 90% LTV eligibility. And a score below 500 disqualifies a borrower.

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24
Q

FHA Loan Qualifying Standards / COLLATERAL

A

The livable condition of the home and its appraised value will determine whether or not it qualifies for an FHA loan. The consumer may be required to make minor home repairs, such as adding hand rails for a staircase or repairing water damage. For purchase loans, the maximum LTV is 96.5%. For a refinance loan, a maximum LTV of 97.75%.

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25
Q

FHA Loan Qualifying Standards / CAPACITY

A

The ratios used to qualify a mortgage loan applicant based on their ability to repay an FHA loan are generally a 31% housing DTI ratio and a 43% total DTI ratio.

26
Q

FHA Loan Qualifying Standards / CASH

A

At closing, the borrower may need to bring cash to cover closing costs and prepaid items (property taxes and insurance, or a down payment requirement on
a purchase loan). The borrower must demonstrate that they have these funds available through asset verification (checking or savings account statement, money market account, 401K retirement account, etc.). Gift funds received from a relative are acceptable
as long as there is a statement (gift letter) from the gift
donor.

27
Q

FHA Mortgage Loan Fees

A 
For an FHA loan, mortgage lenders are able to charge borrowers “customary and reasonable” costs needed to close the mortgage loan. The following are considered to be customary and reasonable:
•	Lender origination fee
•	Attorney’s fee
•	Appraisal fee
•	Home inspection fee
•	Title insurance
•	Title examination fee
•	Document preparation fee
•	Property survey fee
•	Credit report fee
•	Transfer stamps
•	Recording fee
•	Taxes
As an additional note, the FHA does not consider a processing fee or an expediting fee to be customary and reasonable.

Unique Features
If a property with FHA financing is re-sold within 90 days of the date of its purchase, the property will not be eligible for a FHA mortgage loan.

28
Q

FHA Mortgage Loan Mortgage Insurance

A

The FHA mortgage program thrives because of the protections provided through Mortgage Insurance Premiums (MIP) to lenders. MIP provides support for lenders in the case of borrower default. There are two forms of MIP - both of which are required with FHA loans. Here’s a basic explanation of how mortgage insurance premiums work. At the time of closing, the borrower pays their UFMIP and then includes their MIP payment as part of their monthly payment to the mortgage servicer. If the borrower defaults (doesn’t pay) the mortgage payment and the home is foreclosed upon, the lender can sell the home to recoup (get back) the principal balance owed by the borrower.
If the house sells for less than the balance due, the FHA will provide the lender with the difference. Through the collection of mortgage insurance, FHA provides certainty and support to lenders. This insurance makes lenders more willing to write loans for borrowers who meet FHA’s lower qualifying standards because they know they are protected in case of default.

29
Q

UFMIP

A

Up Front Mortgage Insurance Premium: This is a one-time fee charged to the borrower at closing. It is a standard 1.75% of the loan amount and may be rolled into the amount financed by the borrower.

30
Q

MIP

A

Mortgage Insurance Premium: This is a fee calculated annually and paid monthly that is included with
the borrower’s PITI payment (MIP is part of that second “I” for insurances). The amount required for MIP is based upon the term, loan amount, and initial LTV of the mortgage.

31
Q

FHA Purchase Transactions: Down Payment

A

With an FHA purchase loan, a borrower must provide at least 3.5% of the purchase price of the home as the down payment. Because of this, the maximum LTV for most FHA purchase loans is 96.5%. (The maximum LTV for most FHA refinance mortgage loans is 97.75%) For properties under construction or existing construction less than a year old, the maximum LTV is 90%—the borrower would have to make a down payment of 10% of the purchase price. The minimum credit scores for FHA financing affect qualifications. Therefore, not all consumers will qualify for the low minimum down payment amount.

32
Q

FHA Purchase Transactions: Seller Concessions

A

In a purchase transaction the seller is able to pay a percentage of the buyer’s closing costs. If the buyer obtains a FHA mortgage loan, the maximum amount the buyer can receive from the seller is 6% of the purchase price. These seller concessions cannot be considered as a cash reserve for the borrower, and they may only be applied towards allowable closing costs and prepaid items. Regardless of the amount of seller concessions in an FHA purchase transaction, the borrower must still provide at least a 3.5% down payment.

33
Q

Qualifying Standards For FHA HECM Loans

A

Qualifying differs with FHA’s HECM product. As a reminder, a HECM is the FHA’s reverse mortgage program. The HECM is focused specifically on the value of the property involved. While the borrower’s credit history and financial capacity needs to be verified, there are no minimum requirement thresholds. Timely payment of the borrower’s property taxes, hazard and flood insurance premiums (if applicable) will be verified as well.

Instead of traditional LTV ratios to determine how much money the borrower can receive, the underwriter calculates the Principal Limit (PL) based on:
• Age of the youngest borrower
• Current interest rate
• Maximum claim amount (lesser of the appraised value, sales price, or mortgage limit of $822,325).5
• Initial Mortgage Insurance Premium

A HECM mortgage loan becomes due and payable upon certain conditions such as death of the last surviving borrower. In cases where there is a non-borrowing spouse, if the borrower passes then the due and payable status will be deferred (postponed) for as long as the non-borrowing spouse continues to meet all qualifying requirements for the loan.

34
Q

HECM Purchase

A

The FHA HECM allows seniors to purchase a new primary residence with its reverse mortgage program. Using the loan proceeds of a reverse mortgage to purchase a home enables senior homeowners to relocate closer to family or to downsize to homes that meet their physical needs.
If the home being purchased is newly constructed, it must be 100% complete at the time of inspection and initial application. Seller concessions are not applicable to HECMs. The cash investment in the property must equal the difference between the amount of the insured mortgage, excluding any upfront MIP, and the total cost to purchase the property (closing costs).

35
Q

HECM Particulars

A

HECM costs include ongoing and initial costs. Accrued interest and annual Mortgage Insurance Premium (MIP) are ongoing costs. The following are initial costs:
• UFMIP - 2%
• MIP - .5%
• Origination Fee - Up to $2,500 for loans less than $125,000. For loans $125,000 or greater the fee is 2% of the first $200,000 and then 1% of anything beyond the first $200,000 with a maximum of $6,000 total.
• Third-Party Costs - Appraisal, title insurance, survey, inspection fees, recording fees and taxes, credit report fee, attorney’s fees, etc.
• Servicing Fee - Covers the cost of managing the administrative responsibilities of the loan.

36
Q

VA Mortgage Loans

A

Loans are non-conventional loans that are guaranteed by the Department of Veterans Affairs.

37
Q

VA Loan Eligibility

A

Mortgage loans provided by the Department of Veterans Affairs (VA) are specifically and only for active duty and retired military personnel and eligible spouses, along with surviving spouses. VA loans were initially created to provide financial support for returning military veterans and their families after World War II. Since that time, the program has flourished through the well-deserved benefits provided to VA borrowers.

A VA loan is only available on primary homes and may not be used for investment properties or secondary homes. The transaction can be for a purchase, refinance, construction, land contract, or assumption loan. Unlike FHA loans, VA loans do not impose a maximum loan amount for qualification.

Eligibility for a VA mortgage requires more than a borrower’s qualification as a veteran; it also depends on the length and character of the veteran’s service. The borrower’s level of eligibility is documented on a Certificate of Eligibility (COE). To request a COE for VA home loan benefits, a veteran submits a VA Form 26-1880 to the Atlanta Regional Loan Center. The COE is mailed directly to the veteran. Veterans in the Reserves, National Guard, or on active duty must also obtain a signed statement of service issued by their commanding officer. A veteran dishonorably released or discharged from military service does not qualify for a VA mortgage. A DD Form 214 is needed to prove a veteran was released or discharged from active duty under any condition other than dishonorable.

38
Q

VA Loan Products

A

VA loans are available in fixed rate, adjustable rate, and energy efficient mortgage loan products. Even though they’re government loans, they carry much of the same qualifying standards as conventional conforming mortgages.

VA guarantees 30-, 25-, 20- and 15-year fixed rate mortgage programs as well as ARM programs.
VA ARM programs have a 1% annual interest rate cap and a 5% lifetime interest rate cap for 1- and 3-year hybrid ARMs. As with all ARMs, the interest rate caps remain throughout the life of the loan.

VA Energy Efficient Mortgage (EEM): Just like FHA EEMs, VA EEMs are loans to cover the cost of making energy efficiency improvements to a home. They can be made in conjunction with a VA loan for the purchase of an existing home or a VA refinancing loan.

39
Q

VA Loan Qualifying Standards / CREDIT

A

Credit history standards are similar to other government programs as well as Fannie Mae and Freddie Mac programs. The VA specifically requires that the borrower’s qualifying credit report must be less than 120 days old.

40
Q

VA Loan Qualifying Standards / COLLATERAL

A

Once the appraisal is complete, the VA will issue a Certificate of Reasonable Value (CRV) that shows the property’s current market value based on the appraisal. The CRV does not include information regarding any defects associated with the property. A VA appraisal is valid for up to 180 days. Maximum LTV is 100%.

41
Q

VA Loan Qualifying Standards / CAPACITY

A

The VA requires a pay stub from within the last 60 days. The ratio used to qualify a mortgage loan applicant based on their ability to repay a VA loan is usually a 41% total DTI. The VA also includes a residual income threshold as a factor for determining loan suitability for applicants. Because regular expenses such as food, clothing, and gasoline are paid out of the residual, VA uses the residual income factor to ensure that the new mortgage will not put an unnecessary strain on the prospective borrower’s household budget. Residual income requirements vary by region and family size.
Even though these residual income requirements are a factor in determining borrower qualification, a failure to meet the threshold does not cause immediate application rejection.

42
Q

VA Loan Qualifying Standards / CASH

A

At closing, the borrower may need to bring cash to cover closing costs and prepaid items (property taxes and insurance, or a down payment requirement on
a purchase loan). The borrower must demonstrate that they have these funds available through asset verification (checking or savings account statement,
money market account, 401K retirement account, etc.). Gift funds received from a relative are acceptable as long as there is a statement (gift letter) from the gift
donor.

43
Q

VA Loan Particulars: Funding Fee (Chart on pg. 106)

A

This is a one time fee, required by the VA to be paid by the borrower and added to the loan amount. The fee amount depends on the veteran’s circumstances, such as if they had a previous VA loan. The fee ranges from 0.5% to 3.60%. For example, the funding fee on a purchase VA loan with no down payment is a set 2.30%. The funding fee is waived for veterans who are eligible for military disability classification and surviving spouses of veterans deceased due to military activities.

The funding fee may be waived if the Veteran has a documented disability due to military service. A funding fee refund may be allowed when a veteran paid the fee despite being exempt (disability)
or when there was an overpayment due to a miscalculation.

44
Q

VA Loan Particulars: Entitlement (Chart on pg. 106)

A

This is the amount that a veteran can be
guaranteed for a VA mortgage loan; it is on the COE. The entitlement is the basis upon which a guaranty will be provided to the lender in case of borrower default. The basic entitlement that VA offers is $36,000 for loans of $144,000 or less.
For loans greater than $144,000, VA offers an
increased entitlement amount of 25% of the loan amount to help with down payments in higher cost areas. Entitlement is not given in the form of cash or checks directly to the veteran, and it
cannot be exchanged for cash.

45
Q

VA Loan Particulars: Guaranty (Chart on pg. 106)

A

This is the amount VA may pay a lender in the event of loss due to foreclosure. The maximum guaranty VA will issue is 25% of the value of the loan amount for homes valued at $453,100 or less. This guaranty can come from a client’s available entitlement. There are some rare exceptions made for expanded guaranty limits in some of the more high-cost U.S. counties.
VA determines the maximum guaranty amount for these counties by establishing limits. VA uses the same loan limits as Fannie and Freddie, which are set by FHFA. The maximum guaranty amount (available for loans over
$144,000) is 25% of this loan limit. A veteran with full entitlement available may borrow up to the limit and VA will guarantee 25% of the loan amount. If the veteran’s loan amount exceeds the limit, they may be required to supply a down payment to meet the required 25% guaranty. If a veteran has previously used entitlement that has not been restored, the maximum guaranty amount available to that veteran is reduced accordingly

46
Q

VA Loan Particulars: Fees (Chart on pg. 106)

A

For a VA loan, mortgage lenders may charge borrowers “customary and reasonable” costs needed to close the mortgage loan. Brokerage fees cannot be charged on a VA mortgage loan. The typical origination fee charged by a mortgage lender for a VA mortgage is 1%.

47
Q

VA Loan Particulars: Unique Features (Chart on pg. 106)

A

With VA loan programs, it is essential that certain forms, such as the COE and DD Form 214, are provided. Often a Leave and Earnings Statement (LES) is requested from a borrower. This is essentially a pay stub for military and government workers.

Additionally, in order to qualify for a VA loan, clients must meet a specific residual income threshold, which varies depending on the size of the family and location.

48
Q

VA Purchase Loans: Down Payment

A

The VA offers purchase and refinance loan programs that require no down payment or equity, and therefore 100% financing is available.

49
Q

VA Purchase Loans: Seller Concessions

A

If the buyer obtains a VA mortgage loan, the maximum amount of concessions the buyer can receive from the seller is 4% of the purchase price.

50
Q

USDA Mortgage Loans

A

USDA mortgage loans are non-conventional loans guaranteed by the U.S. Department of Agriculture.

51
Q

USDA Basics

A

Just as VA loans are restricted to military personnel, United States Department of Agriculture (USDA) loans are restricted to properties in designated rural areas. Rural is defined very broadly in USDA requirements and may include towns and small cities. For the sake of simplicity, let’s consider that for a property to be called rural, it should be in open country and not associated with an urban area.

The purpose of USDA loans is not for farms (we know, you’d think that a loan from the Department of Agriculture would be for farms - in fact USDA expressly prohibits their loans to be used for income producing properties like farms). Instead, USDA loans are really meant for people who work in the agriculture industry or support that industry. Think about how few apartment buildings or rental properties are located in rural areas. Finding housing if you work on a farm or for a business that works with the farming industry could be very challenging, so the need for housing financing in rural areas is a necessity.

52
Q

USDA Products: Section 502 Direct Housing Loan Program

A

Also known as USDA Direct, this program is available in terms of 33-38 years and is available to low income borrowers.

53
Q

USDA Products: Single Family Housing Guaranteed Loan Program

A

Also known as SFHGLP or Guaranteed, this program is only available in the form of a 30-year fixed rate mortgage and is designed for moderate income borrowers.

54
Q

USDA Products: USDA Backing

A

As the FHA requires MIP and VA requires the Funding Fee, the SFHGLP requires a Guarantee Fee paid at closing and an Annual Fee that is paid in monthly installments beginning 12 months after loan closing. Both the Guarantee Fee and the Annual Fee function similarly to other government loans - they provide assurances to lenders in case of borrower default.

55
Q

USDA Loan Qualifying Standards / CREDIT

A

Mortgage late payments, bankruptcies, and seriously delinquent accounts could prevent a borrower from being eligible for this mortgage loan, but there are no specific credit rating requirements.

56
Q

USDA Loan Qualifying Standards / COLLATERAL

A

A standard USDA appraisal is needed. Properties cannot be located in a floodplain — defined as landforms subject to repeated flooding. Maximum LTV is 100%.

57
Q

USDA Loan Qualifying Standards / CAPACITY

A

The ratios used to qualify a mortgage loan applicant based on their ability to repay a USDA loan are generally a 29% housing DTI ratio and a 41% total DTI for the SFHGLP (guaranteed loan). For the 502 Direct Housing Loan, USDA requires the borrower to prove they have low income based on area median income.

58
Q

USDA Loan Qualifying Standards / CASH

A

No specific asset verification requirements exist.

59
Q

USDA Mortgage Loan Particulars: Fees

A

For a USDA loan, there are no fee limitations. Fees must comply with federal regulations.

60
Q

USDA Mortgage Loan Particulars: Unique Features

A

These mortgage loans are distinct because they are made in rural areas. Some USDA loan products can be longer than 30 years. And some USDA loans can be used for home repairs finished after closing.

61
Q

USDA Purchase Loans: Down Payment

A

The USDA offers purchase loan programs that require no down payment, and therefore 100% financing is available.

62
Q

USDA Purchase Loans: Seller Concessions

A

With a USDA loan, the amount of seller concessions a buyer can receive in a purchase transaction is unlimited. If, however, the amount of seller concessions exceeds 6%, a comment from the appraiser is required explaining why a greater amount is needed.

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