General Mortgage - Part 4

Subprime loans are…

Loans with higher interest rates made to borrowers with blemished credit or other qualification issues. The loans do not conform with Fannie Mae and Freddie Mac underwriting requirements.

Nontraditional mortgage products are defined as…

Any mortgage product other than a 30-year fixed-rate mortgage loan.

FHA’s adjustable-rate program is…

Called 251. It is based on the 203(b) program and offers a number of adjustment options ranging from one to ten year(s).

In a fixed-rate mortgage…

The interest rate is set at the time of settlement and does not change during the life of the loan. Monthly payments would only change if the loan servicer finds a shortage or surplus in the escrow amount (i.e., taxes and insurance premiums).

In an adjustable-rate mortgage…

The interest rate may change one or more times over the life of the loan. ARMs are often initially made at lower interest rates than fixed rate mortgages.

An initial rate cap is…

A limit on the amount that the interest rate can increase during the first adjustment period for an ARM.

A periodic rate cap is…

A limit on the amount that an interest rate can change during any adjustment period for an ARM, with exception of the initial adjustment, assuming an initial cap is in place on that particular product.

A lifetime rate cap is…

The limit on the amount by which an interest rate can change over the life of an ARM. It is also known as a rate ceiling.

The adjustment frequency establishes…

How often an interest rate adjustment can occur on an ARM. The frequency can be annually, every few years, or even monthly.

Discount points are paid…

To the lender at closing to reduce the note rate of the loan.

Securitization is used to…

Pool similar types of loans to create mortgage-backed securities for sale on the secondary mortgage market. These securities are used to create a renewable source of funds for lenders.

The index for an ARM must be disclosed…

On the early ARM disclosure provided at application and on the promissory note when the loan goes to closing.

The risk of a balloon mortgage can be minimized if…

The loan agreement contains a conditional refinance provision. This gives the borrower the option to convert the loan to a regular fixed-rate loan at its maturity date.

A home equity loan is an example of…

Closed-end credit. A cash-out refinance is an example of a home equity loan.

Borrowers owning more than 25% of a business must…

Provide up to two years of tax returns for income qualification.

A HELOC is an example of…

Open-end credit. In a HELOC, a borrower pays off the principal and can then continue to make withdrawals. This is similar to a credit card.

An 80-10-10 loan is an example of…

A piggyback loan. In a piggyback loan scenario, a borrower takes a simultaneous second mortgage. In an 80-10-10 loan, the first lien is 80% LTV, the second is 10% LTV and the borrower makes a 10% down payment.

A construction loan is…

An interim loan used to pay for the construction of a home. They are short-term financing and often handled as interest-only transactions. A construction loan can be considered a type of “bridge loan.”

Borrowers who obtain interest-only loans…

Pay only the monthly interest due on the loan, which keeps monthly payments low. However, at the end of the term, the borrower still owes the principal amount of the loan.

Conforming loans meet…

Loan limits and underwriting standards established by Fannie Mae and Freddie Mac.