CH 17-1: Conventional Loans

A condition in a loan instrument that allows the lender to demand the full and immediate payment of the loan when the borrower sells or otherwise transfers ownership of the property.

Alienation Clause || Due on Sale Clause

A financing arrangement in which a borrower transfers their outstanding loan and its terms to a buyer; requires the approval of the lender.

Assumable Loan

The relationship between the unpaid principal balances of all loans and the value (appraised value or sales price, whichever is lower) of the property.

Combined Loan-to-Value

Financing made by an institutional lender or a private party with real estate as security for the loan without any guaranty or insurance from the government.

Conventional Loan

An owner’s unencumbered interest in property; the difference between the value of the property and the liens, such as a mortgage, against it.

Equity

The amount of money borrowed, compared to the value (the lesser of the sales price or appraised value) of the property.

Loan-to-Value Ratio (LTV)

A policy paid for by a borrower using conventional financing that protects a lender if the borrower defaults on their loan obligation; usually required when the loan-to-value is greater than 80%.

Private Mortgage Insurance (PMI)

A loan obtained in addition to a first mortgage that is used to pay for part of the purchase price or closing costs.

Secondary Financing

A written arrangement between lienholders that prioritizes the order of liens for the purpose of recovering losses after a foreclosure or bankruptcy.

Subordination Agreement

TRUE or FALSE: Now that Nancy is making a $42,400 down payment to purchase a house for $200,000, her loan-to-value is 78%, not 80%.

FALSE: The loan-to-value is determined using the sales price OR the appraised value, whichever is LESS. In Nancy’s transaction, the appraised value is lower, so it’s the number on which to base the LTV: $157,600 loan amount / $197,000 appraised value = 0.80 or 80%. This is still an 80% conventional loan.

Lois accepts buyer Allen’s offer of $161,500 to buy her home. The property appraises at $163,000. If the lender requires an LTV of 80%, how much is the lender willing to lend?

$129,200

YES or NO: A lender is willing to lend $129,200 on the sales price of $161,500. Prospective buyer Allen has $34,000 to make a down payment. Is that enough to buy this house?

YES: The lender will lend $129,200, so Allen needs to put only $32,300 down to make the purchase ($161,500 - $129,200 = $32,300). This meets the lender’s criteria for an 80% conventional loan, which means Allen has enough to purchase the house.

Allen has a $32,300 cash down payment. The sales price of the property is $161,500, so he is looking at a mortgage of $129,200. What if the property appraisal came in at $159,500? What is the loan-to-value ratio (LTV)?

81%

Let’s say the lender would accept an LTV of 90% on a $180,000 property. How much is the lender willing to lend?

$162,000

TRUE or FALSE: By law, lenders must automatically cancel PMI when the loan-to-value reaches 80% of the property’s original value.

FALSE: The Homeowners Protection Act of 1998 (HPA) requires lenders to automatically cancel PMI when a home has been paid down to 78% of its original value, assuming the borrower is not delinquent. A borrower can request PMI cancellation when the LTV reaches 80% of the property’s value.

YES or NO: Joe is buying a house for $500,000. He takes out a first loan for $400,000 and a home equity line of credit for $50,000 at the same time to finance the purchase. He will make a $50,000 down payment. Will Joe be required to purchase private mortgage insurance (PMI)?

NO: The loan-to-value on this loan is 80% ($400,000 first loan amount / $500,000 sales price = 0.80 or 80%). Although his CLTV is 90% because of the secondary financing, only the LTV is considered for private mortgage insurance. Since Joe’s LTV is 80%, he would not have to pay PMI.

Of these options which one is an advantage a conventional loan has over a government-backed loan?

No cap on loan amount

Lower Down payment requirement

No potential prepayment penalty

Lender are less likley to adjust qualifying standards

No cap on loan amount

Why might a borrower choose a 15-year loan term instead of the traditional 30 years?

The monthly payments will be lower on a 15-year loan.

Total interest rate will be less/lower on a 15-year loan vs a 30-year loan.

Borrower will pay less income tax on a 15-year loan.

Borrower will gain more income tax deduction on a 15-year loan.

Total interest rate will be less/lower on a 15-year loan vs a 30-year loan.

A borrower’s _ , also called the front-end ratio, is the relationship of the borrower’s total monthly housing expense to income.

housing expense ratio

A lender considers a borrower’s income adequate if the proposed monthly loan payment does not exceed __ of gross monthly income.

28.%

A borrower’s _, also called the back-end ratio, is the relationship of their monthly debt obligations (including housing and long-term debts that cannot be canceled) to income.

debt-to-income ratio

Understanding LTV T-Math: How do you find the loan amount?

Sales Price * (LTV)%

Understanding LTV T-Math: How do you find the Sales Price?

Loan Amount / (LTV)%

Understanding LTV T-Math: How do you find the (LTV)%?

Loan Amount / Sales Price