module 5 - mortgage Flashcards
There are two main categories of mortgage loans available:
conventional and high ratio.
A conventional mortgage is when a borrower has a down payment of at least 20% of the appraised lending value or
sale price (whichever is less). Conventional mortgages afford lenders a higher level of protection as the borrower
has more invested in the property. Should market conditions change during the term of the mortgage, the lender is
not at as much risk for loss should the property be sold as the proceeds are more likely to be sufficient to repay the
loan.
A high ratio mortgage is when a borrower has a down payment of less than 20%. A high ratio mortgage will require mortgage default insurance. There are fees associated with this type of mortgage that the borrower will pay. The insurance protects the lender when a default has occurred. Institutional lenders, such as banks, trust companies, credit unions, and mortgage loan companies are not permitted to lend mortgage money when the amount is in excess of 80%.
the loan-to-value ratio
is the percentage of the value of the property that is mortgaged.The loan-to-value ratio for a buyer will vary depending on the lender, the type of property being mortgaged, and the financial capability of the borrower.
A high loan-to-value ratio is generally seen as a higher risk as the borrower has less equity invested in the purchase, and—should values fall—the risk of having a property over-financed is increased.
