Module 4: Conventional Loans and Financing

Question 1

Define Conventional Loans

Answer 1

Loan that is usually made by a bank/institutional lender and not insured or guaranteed by a government entity or agency.

Question 2

Define Conforming Loan

Answer 2

Loans that meet criteria to be sold in the secondary market

Question 3

Define Traditional Conventional Loans

Answer 3

30-year fixed rate fully amortizing loan

Question 4

Define Amortization

Answer 4

Reduction of the balance of the loan by paying back some of the principal owed on a regular basis.

Question 5

Define Fully Amortizing Loan

Answer 5

total payments over the life of a loan pay off the entire balance of principal and interest due at end of term. AKA Self-liquidating.

Question 6

Define Fixed-Rate loan

Answer 6

Interest rates that remain constant for the duration of loan.

Question 7

Define Non-conforming loans

Answer 7

Do not meet the standards for secondary market sale.

Question 8

What are 2 reasons a loan would be classified as nonconforming

Answer 8

1. Size of loan - Jumbo loans exceed the maximum loan amount established by FHFA (Fannie Mae and Freddie Mac conforming mortgage loan limits)
2. Credit Quality of Borrower - B or C borrower. Someone with credit problem in the past.

Question 9

Define A-minus Conventional Loans

Answer 9

Allows borrowers with a less than perfect credit, little money down, or high DTI ratio to get a loan that can be sold on the secondary market. To combat market share lost to the subprime lenders.

Question 10

Define LTV

Answer 10

Loan-to-value (LTV) refers to the amount of money borrowed compared to the value of property.

Question 11

97% Conventional Loan

Answer 11

Offered under “Home Ready (FNMA)” and “Home Possible (FHLMC)” with relaxed underwriting guidelines regarding sources of down payment, income, and credit. Buyers must meet certain income limit requirements.

Question 12

Define PMI

Answer 12

Private Mortgage Insurance:

• Offered by private companies to insure lenders
• Protects against loss of collateral value when borrower defaults

Question 13

How does PMI work?

Answer 13

Typically PMI will cover 20-25% of loan.

Question 14

What did the Homeowners Protection Act of 1998 (HPA) require lenders to do?

Answer 14

Automatically cancel PMI when loan paid down to 78% of original value or property has attained 22% equity based on original value.

Question 15

Define secondary financing

Answer 15

When buyer borrows money from another source to pay part of the purchase price or closing costs. Another way a borrower can get a conventional loan without a 20% down payment.

Question 16

Define Combined Loan-to-Value

Answer 16

CLTV is percentage of property value borrowed through a combination of more than one loan.
= (loan 1+ loan 2)/ appraised value or purchase price whichever is lower

Question 17

Does LTV consider CLTV for PMI?

Answer 17

Only mortgage 1 is used to calculate LTV for PMI needs. Home equity uses CLTV.

Question 18

Can a borrower have an adjustable rate on both first and second mortgages?

Answer 18

NO! The interest rate on second mortgage can be fixed or adjustable but cannot have adjustable rates on both loans.