When it comes to getting a mortgage, most people will go through a loan officer. This person is responsible for helping the borrower get the best deal possible on their mortgage. They work with banks and other lending institutions to find you the best rate, terms, and overall package. So, can a realtor also be a loan officer? The answer is yes. However, there are some qualifications and requirements that must be met in order to become a loan officer.
First and foremost, a loan officer must have a college degree. This is not always a requirement for realtors, but it is for loan officers. They must also have at least two years of mortgage-related experience. This could include working in a bank or lending institution or even being a realtor who has worked with mortgages extensively. Finally, loan officers must pass a licensing exam.
So, can a realtor be a loan officer? The answer is yes, but they must meet certain qualifications. Realtors who are looking to move into the mortgage industry should consider becoming a loan officer to expand their business opportunities. There are both pros and cons to having a realtor be a loan officer. On the one hand, they have the experience and knowledge necessary to help borrowers get the best mortgage possible. On the other hand, they may be seen as biased towards a certain lender or bank. As always, it is important to weigh both sides of the argument before making a decision.
What are the qualifications for being a loan officer?
When it comes to the qualifications for being a loan officer, it’s not as simple as having a college degree. There are a few key things you’ll need to have in order to be successful in this career field. First and foremost, loan officers need to have strong math skills. They also need to be able to effectively communicate with people, both orally and in writing. Being able to stay organized is also important, as loan officers often have a lot of paperwork to keep track of. Finally, it’s helpful to be familiar with computers and various software programs that are used in the lending industry. If you have all of these skills and qualities, then you may be a good fit for a career as a loan officer.
What are the pros and cons of having a realtor be a loan officer?
When it comes to having a realtor be a loan officer, there are pros and cons on both sides of the argument. On one hand, having a realtor as your loan officer can be beneficial because they know the market inside and out and can help you get the best rate possible. They also have experience dealing with buyers and sellers, so they can help you through the entire process. On the other hand, some people believe that having a realtor as your loan officer is a conflict of interest. Since they are being paid by the seller, they may not be as motivated to get you the best deal possible.
Can a Realtor Duble Dip on Two Transactions?
SO the question is if the real estate agent can be a realtor on a transaction and do the loan be a loan officer also? Can a real estate collect two checks on a broker and real estate side? The answer is YES on conventional loans but NOT on government loans. There is no conflict of interest but certain government guidelines, a SAFE act which prohibit realtors and loan officers from making money twice on the same transaction. It doesn’t matter if he or she is an attorney and collects an attorney fee and a real estate commission or an insurance agent making money by selling a real estate and the insurance policy.
The cons of having a realtor as your loan officer
When it comes to getting a home loan, you have a lot of options to choose from. One of those options is whether or not to have a realtor as your loan officer. There are pros and cons to both choices, so it’s important to weigh them all before making a decision. In this blog post, we’ll take a closer look at the pros and cons of having a realtor as your loan officer.
1. You may not get the best interest rate. Realtors are paid by commission, so they may not be as motivated to get you the best interest rate possible. They may also have relationships with certain lenders that could give you a better rate than you would get on your own.
2. You may not get the best terms and conditions. Realtors are likely more focused on the sale of a property than on the details of a loan. They may not be as knowledgeable about the various terms and conditions that could be negotiated on your behalf.
3. You may not get the best customer service. A loan officer who is also a realtor may be too busy or too stretched to provide the best customer service. They may not have the time to answer all of your questions or to help you through the loan process.
When choosing a loan officer, it is important to weigh the pros and cons of having a realtor as your loan officer. In some cases, it may be the best decision for you, but in others, it may be wiser to go with a loan officer who is not also a realtor.
Conforming and Nonconforming Loans
There is many types of mortgage loans. Conventional loans are loans made by private parties and nongovernment lending institutions without any government insurance or government guarantee against loss for the lender. Mortgage loans that are not FHA, VA or USDA (or Rural Housing Service) loans are conventional loans. They may be conforming or nonconforming.
Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae or Freddie Mac are considered conforming loans. Fannie Mae and Freddie Mac have a maximum loan limit for loans they will purchase, which is adjusted annually.
Loans to persons with satisfactory credit but that exceed this loan limit are called jumbo loans or non-conforming loans. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have a higher interest rate than conforming loans.
Conventional loans can be insured or uninsured. Generally, a conventional loan of up to 80 percent of the property’s value will be made without private mortgage insurance. Some lenders will charge higher interest rates to compensate for the increased risk inherent in making a loan that is more than 80 percent of the value; however, most require that the loan be insured by a private mortgage insurance company.
Private mortgage insurance (PMI) is an insurance policy issued to provide protection to the mortgage lender in the event of financial loss due to a borrower’s default that results in foreclosure. In the event of a foreclosure, the insurance company will either purchase the loan or let the lender foreclose and pay the lender for losses up to the face amount of the policy.
So that he may get a loan with a small down payment, the borrower pays a mortgage insurance premium either as a lump sum at closing covering the life of the loan, or by paying the first year’s premium at closing and then paying annual premiums as part of his mortgage payment. The amount of the premium is a percentage of the loan amount based on the borrower’s down payment. The annual premiums and the insurance stop automatically once the loan is paid down to 78 percent, or may be canceled at the borrower’s request once the loan balance reaches 80 percent of the value of the property at the time the loan was made.
Subprime Loans – one of Types Of Mortgage Loans
Until 2008, credit-impaired borrowers and other borrowers unable to obtain credit in the prime market were able to easily obtain financing from lenders specializing in subprime loans. Loans made to borrowers meeting Fannie Mae and Freddie Mac credit requirements are called A-paper loans. A-paper loans are conforming loans. Loans not meeting these requirements were called “Alt-A,” “B,” “C” and “D” paper loans, or subprime loans. Alt-A loans were treated as “A-” (A-minus) loans, in some cases because of less-than-prime credit, in other cases because of a lack of supporting documentation.
Factors causing a borrower to seek a loan from a subprime lender include:
- a weak past credit performance.
- a high monthly debt payment relative to income.
- a lack of assets other than current income to support loan payments.
- self-employment, variable income, or a desire to limit disclosure of his financial situation.
Under the risk-based pricing model used for subprime loans, up-front fees and interest rates were based on the degree of risk posed by the subprime borrower: the higher the risk, the higher a borrower’s rate and costs.
However, due to laxity and abuses in the origination and securitization of subprime loans, the actual loss far exceeded the estimated risk, resulting in bankruptcy and foreclosure for many borrowers and upheaval in primary and secondary markets, as well as real estate markets across the country.
Many real estate mortgage loans are insured or guaranteed by the federal government through such programs as:
- FHA-insured loans.
- VA-guaranteed loans.
- USDA-guaranteed loans.
These programs are one of the types of mortgage loans that have more liberal qualification criteria in terms of qualifying ratios and credit standards and higher loan-to-value ratios (LTVs). They also have requirements for some loan terms, including a limit of 4 percent as a late charge on a payment 15 days late and loan assumability.
Federal Housing Administration (FHA) Loans
The FHA is a division of HUD. FHA loans are loans that meet FHA program criteria and are made by approved lenders. For these loans, the FHA insures the issuing lender against loss in the event of default. Under the FHA program the lender can charge whatever points and interest a borrower is willing to pay, as the cost of the loan is negotiable. The advantage to the borrower is that the lender will make the loan with a very high LTV because it is insured.
However, FHA loan limits restrict the size of mortgages that can be insured by the Federal Housing Administration. The floor for a low-cost area is 65 percent of the national conforming loan limit. This is currently $417,000 for a one-unit property. For areas that have been designated high-cost areas, the ceiling loan limit is 150 percent of $417,000, as prescribed by the National Housing Act and the Economic Stimulus Act of 2008. The following table itemizes the floor/ceiling limits through December 31, 2016. (Single Family Housing Policy Handbook 4000.1)
Low–Cost Area Floor
High–Cost Area Ceiling
The states and territories of Alaska, Guam, Hawaii and the U.S. Virgin Islands are special exception areas allowing loan limits to be adjusted up to 150 percent of the national ceiling.
Federal Housing Administration (FHA) Loans
The FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. Most FHA mortgages require payment of an up-front mortgage insurance premium (UFMIP). The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years).
In addition, most FHA loans require payment of an annual mortgage insurance premium, payable monthly as part of the mortgage payment. This premium is based on the loan program, the loan term and the LTV.
- For all mortgages, regardless of their amortization terms, involving an original principal obligation (excluding financed UFMIP) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.
- For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, the FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first. (12 USC §1709(c)(2)(B), Single Family Housing Policy Handbook 4000.1)
Federal Housing Administration (FHA) Loans
The table below shows the previous and the new duration of annual MIP by amortization term and LTV ratio at origination. (Single Family Housing Policy Handbook 4000.1)
|≤ 15 yrs||≤ 78%||No annual MIP||
|≤ 15 yrs||78.01% – 90%||Canceled at 78% LTV||
|≤ 15 yrs||> 90%||Canceled at 78% LTV||
|> 15 yrs||≤ 78%||5 years||
|> 15 yrs||78.01% – 90%||Canceled at 78% LTV & 5 yrs||
|> 15 yrs||> 90%||Canceled at 78% LTV & 5 yrs||
Under Public Law 111-229(1)(b), the FHA may adjust its mortgage insurance premium rates, as measured in basis points (bps).
This first table shows the previous and the new annual MIP rates by amortization term, base loan amount and LTV ratio. All MIPs in this table are effective for case numbers assigned on or after January 26, 2015.
Term > 15 Years
Base Loan Amt.
This second table shows the effective annual MIP rates for loans with terms of up to 15 years. The new annual MIP for these loans is effective for case numbers assigned on or after January 26, 2015.
Term ≤ 15 Years
Base Loan Amt.
78.01 – 90%
The increases in the annual MIP specified in the Single Family Housing Policy Handbook 4000.1 apply to all mortgages insured under the FHA’s single-family mortgage insurance programs except:
- streamline refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009.
- Section 247 (Hawaiian Homelands).
The most popular of the FHA loan programs is the 203(b) program. This program helps finance the purchase of a one- to four-unit family home that the borrower intends to occupy as his residence (i.e., move in within 60 days after closing and stay in the property for 12 months), using a 15- or 30-year loan and a cash investment of as little as 3.5 percent of the lesser of the property value or the purchase price. An applicant with a credit score of at least 580 can qualify for the 3.5 percent rate. One with a score of 500-579 can qualify with a cash investment of 10 percent. One with a score below 500 is not eligible for the loan.
Some or all of the cash investment can come from a gift from:
- an immediate relative.
- a labor union or employer.
- a government agency or public entity.
- a nonprofit charitable organization.
The gift donor, and the source of the gift donor’s funds, may not be a person or entity with an interest in the sale of the property (e.g., the seller, the real estate agent or broker, the builder, or an associated entity). A gift from any of these sources would be considered an inducement to purchase and would have to be deducted from the sales price. Therefore, a seller could not give the buyer a gift directly or channel funds through a nonprofit charitable organization to assist the buyer in acquiring the funds for his down payment.
The FHA allows the seller to contribute up to 6 percent of the purchase price toward the buyer’s actual closing costs, prepaid taxes and insurance, discount points, buydown fees, mortgage insurance premiums, and other financing concessions, but nothing toward the down payment.
Home Equity Conversion Mortgages (HECMs) The FHA’s Home Equity Conversion Mortgage (HECM) is a loan that enables an individual age 62 or older to:
- convert some of the equity in his primary residence to cash to pay living expenses; or
- purchase a primary residence, if he has the cash to pay the down payment and closing costs.
The borrower may take the loan funds in monthly advances for a fixed period or until he no longer qualifies and/or through a line of credit. Each month’s interest is added to the principal loan balance, causing the interest to be compounded.
The key points regarding HECM loans include the following:
- The borrower must be 62 years of age or older, have significant equity in the property, occupy the property as his principal residence, and participate in a consumer information session given by an approved HECM counselor.
- The loan amount is based on the age of the youngest borrower, the current interest rate, and the lesser of appraised value or the HECM FHA mortgage limit. The loan amount may include closing costs.
- The borrower can select a fixed interest rate or an adjustable rate and choose whether the rate will adjust monthly or annually.
- The loan has no specified term, prepayment penalties, or credit or income qualifications, as it requires no repayment until either the property is sold or the owner:
- permanently moves;
- fails to live in the house for 12 consecutive months; or
- fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).
Unlike other FHA mortgage programs, the HECM has:
- a UFMIP of 0.5 percent or 2.5 percent, depending on the disbursements;
- an annual MIP of 1.25 percent; and
- a loan origination fee limit of:
- the greater of $2,500 or 2 percent of the first $200,000; and
- 1 percent of the amount over $200,000 of value.
HECM origination fees are capped at $6,000.
The FHA used to provide a second option, known as the HECM Saver, but the two programs were consolidated in 2013.
HECM Counseling (HUD Mortgagee Letter 2010-37; 2011-26; 2011-31)
All owners shown on the property deed (or legal representative in cases involving documented lack of competency) and a nonborrowing spouse must personally receive HECM counseling prior to entering an HECM contract. The counseling certificate must be signed and dated by:
- the counselor;
- all owners shown on the property deed (or legal representative in cases involving documented lack of competency); and
- the nonborrowing spouse.
Lenders are required to provide each client with a list of HECM counseling agencies that includes no fewer than nine HUD-approved counseling agencies, including:
- five agencies within the local area and/or state of the prospective borrower;
- one agency within reasonable driving distance for the purpose of face-to-face counseling; and
- national intermediaries awarded HECM counseling grant funds by HUD.
Fees and Loan Limits
The FHA allows most loan and closing fees, including discount points and yield spread premiums. However, it does prohibit the borrower from being charged a tax service fee, and it limits:
- the loan origination fee on its HECM and Section 203(k) rehabilitation loans.
- appraisal and credit report charges to their actual cost.
- other closing costs to what would be customary and reasonable.
The maximum insurable mortgage amount is the lesser of:
- a statutory loan limit for the area (based on housing costs), typically a county or metropolitan statistical area (MSA); or
- the applicable LTV limit.
Neither limit includes the UFMIP, even if it is added to the base loan amount.
Income and Credit Qualifications
FHA loans are not restricted to first-time homebuyers or those with low or moderate income. Anyone who can meet the FHA’s liberal underwriting criteria can obtain such a loan. The borrower’s income and employment must be verified, and his credit history will be analyzed (e.g., a court-ordered judgment must be paid off or be in the process of being paid off under an agreement with the creditor for regular and timely payments). The FHA also accepts nontraditional mortgage credit reports on borrowers lacking the types of trade references that normally appear on traditional credit reports, provided the information is verified and documented. These may be a substitute or a supplement to a traditional credit report. Such reports include credit references relating to rental housing payments, utility payments and other bill payments (e.g., insurance, child care, phone, auto leases, etc.)
A borrower can qualify for an FHA loan with monthly payments for principal, interest, and property taxes and insurance (PITI) of up to 31 percent of his gross monthly income; and total monthly debt of up to 43 percent of his gross monthly income. In addition, sources of regular income not subject to federal taxes (e.g., certain types of disability and public assistance payments, Social Security income, and military allowances) and child support income can be grossed up by 25 percent in calculating the borrower’s income for qualifying purposes. This means the amount of continuing tax savings attributable to that source may be added to the borrower’s gross income. When a borrower does not have to file a federal income tax return, the tax rate used is 25 percent. On the other hand, the FHA requires that gross rental income be reduced by either 25 percent or a percentage developed by HUD’s jurisdictional Homeownership Center (HOC) for vacancies and maintenance.
Before agreeing to insure a loan, the FHA can require repairs necessary to preserve the continued marketability of the subject property and protect the health and safety of the occupants. If the home requires flood insurance and is not located in an area where the National Flood Insurance Program is in force, it is not eligible for FHA financing.
The FHA requires that a “For Your Protection: Get a Home Inspection” notice be given to a prospective homebuyer at first contact (whether for prequalification, preapproval or initial application), but never later than at the time of the initial application. The notice informs the buyer of the importance of a home inspection prior to purchasing a home. It also makes clear that:
- the FHA does not insure the condition of the property.
- the appraisal is intended only to assist the lender.
The FHA also requires the use of an amendatory clause in most transactions. This provides that the buyer is not obligated to conclude the transaction and is entitled to a full refund of his earnest money deposit if the property is appraised at less than the purchase price.
Most FHA loans are assumable, subject to the person assuming the loan qualifying. However, a loan insured after 1989 can only be assumed by an owner-occupant. A lender cannot approve the sale or other transfer of a property to a person (e.g., an investor) who will not be using the property as a primary residence or a secondary residence.
VA loans are made by approved lenders and guaranteed by the U.S. Department of Veterans Affairs. The guarantee is similar to mortgage insurance in that it limits the lender’s exposure to loss in the event of a borrower’s default that results in foreclosure. However, the veteran borrower is charged a nonrefundable up-front funding fee that can be financed, instead of a mortgage insurance premium for the guarantee. A veteran receiving VA compensation for a service-connected disability is exempt from the fee requirement.
The fee varies based on whether the borrower:
is a first-time VA borrower or a repeat borrower;
is eligible because of service in the regular military, or because of service in the Reserves or National Guard; and
puts nothing down, or puts at least 5 percent down.
The fee for a first-time VA borrower who is a veteran of the regular military is 2.15 percent of the loan amount. It is higher if he qualifies as a Reservist or has obtained a VA loan previously. It is lower if he makes a down payment of at least 5 percent. As with the FHA premium, this fee can be financed in the loan.
Advantages of VA Loans
VA loans are types of mortgage loans that primary advantage of a VA loan is that there is no down payment required on a loan of up to Freddie Mac’s conforming loan limit. In addition, the seller can pay:
- all of the borrower’s nonrecurring closing costs and discount points, with no limit.
- up to 4 percent of the sales price in seller concessions (i.e., anything of value added to the transaction for which the borrower pays no additional amount and that the seller is not customarily expected to pay). Concessions include prepaid taxes and insurance, the VA funding fee, payoff of the borrower’s existing debts, temporary buydown fees, and gifts.
Additionally, it is easier to qualify for a VA loan than for a conventional loan. The VA uses two methods for qualifying its borrowers:
- A 41 percent debt-to-income ratio (including housing and fixed debt)
- The residual income method, which determines whether the veteran has enough income after paying his fixed debts to cover his daily living expenses and which can qualify a borrower whose ratio might exceed the 41 percent limit
However, the interest rate is not lower than that for other loans, the seller is generally not required to make repairs, and finance charges are not significantly lower.
A VA loan is available only to veterans of the armed services, certain active and discharged military personnel, and their spouses; however, the loan is assumable by nonveterans. In order to obtain the loan, the applicant must obtain a Certificate of Eligibility from the VA (directly online, through the lender online, or by mail). This will determine whether he is eligible for a VA loan and whether he is eligible for a loan with the full guarantee.
The maximum loan guarantee varies depending on the location of the property. While the VA does not have a maximum loan amount, it will guarantee to the lender the lesser of 25 percent of the loan balance or 25 percent of the Freddie Mac limit. For high-cost counties, the guarantee is the lesser of 25 percent of the loan balance or 25 percent of the VA county loan limit, which takes into consideration the county’s median home price and the Freddie Mac conforming loan limit. The guarantee enables the lender to avoid losing money if he can recoup 75 percent of the loan balance from a sale of the borrower’s property at or after foreclosure.
U.S. Department of Veterans Affairs (VA) Loans
An applicant who has used all or part of his entitlement for a VA loan can get it back to purchase another home if any of the following applies:
- The prior property has been sold and the VA loan has been paid in full.
- A qualified veteran buyer has agreed to assume the outstanding balance on the VA loan and substitute his entitlement for the same amount of entitlement the applicant originally used to get the loan.
- One time only, the applicant has repaid the prior VA loan in full without disposing of the property securing that loan.
- Even if an existing VA loan has not been paid off, the applicant has “remaining entitlement” due to an increase in the maximum entitlement amount since he obtained that loan.
- The borrower must also sign a Certificate of Occupancy, certifying that he will use the property as his primary residence. As with an FHA loan, for a VA loan, the applicant must intend to move in within 60 days after closing and stay in the property for 12 months.
A veteran cannot borrow more than the value shown on the VA appraisal, called a Certificate of Reasonable Value (CRV). He can, however, buy the property for a higher purchase price if he pays the difference in cash. If he does not wish to do so, he can terminate the transaction and receive a refund of his earnest money, utilizing an escape clause required in the VA sales agreement.
The VA does not warrant the condition of the property and is not concerned with cosmetic items, such as chipped paint. However, if the property was constructed before 1978, any area with chipping or peeling paint must be stabilized (i.e., scraped and painted to remove the lead-based paint hazard) and a lead paint notification and disclosure must be provided to the buyer.
The Rural Housing Service (RHS), within the USDA, makes financing available in rural areas through its Section 502 guaranteed loan program.
The loan funds can be used to build, repair, rehabilitate, renovate or relocate a primary residence or to purchase and prepare a site for one, including providing water and sewage facilities. The housing must be modest in size, design and cost and also meet the voluntary national model building code adopted by the state and the Housing and Community Facilities Program’s (HCFP) thermal and site standards.
This program is similar to that offered by the federal VA in that both involve loans with a 30-year term, a fixed interest rate set by the lender, no required down payment and an up-front 2 percent guarantee fee (which may be financed). However, the USDA guarantee applies to 90 percent of the loan. Lenders for this program include state housing agencies and lenders approved for participation in FHA, VA, Fannie Mae or Freddie Mac loan programs.
Loan applicants must:
- be without adequate housing.
- have less than 20 percent liquid assets (not including retirement accounts).
- have a steady income of up to 115 percent of the median income for the area;
- have a reasonable credit history; and
- be able to afford the mortgage payments, including taxes and insurance.
The lender must determine repayment feasibility, using 29 percent housing-to-income and 41 percent debt-to-income ratios.
For low-income creditworthy households unable to obtain credit elsewhere, the USDA is authorized to make loans through Section 502.
Fixed-Rate Mortgage (FRM)
Names (or terms) are often applied to mortgages and trust deeds to describe a certain feature of the loan, such as its purpose, the type of interest charged, the security used for the loan, etc. The mortgage or trust deed itself would not show the term, but a feature of that document would cause people to use the term to describe it. In most instances, in fact, one document could be described using any number of terms.
With a level-payment fixed-rate mortgage (FRM), both the interest rate and the monthly principal and interest payments stay the same for the entire loan term. The fixed interest rate will not change, regardless of future changes in the money supply, rate of inflation or anything else. The only possible change in monthly payments on the loan will result from changes in the cost of property taxes and insurance, if those are included in the monthly payment. The lender will change the payment amount after performing its annual escrow analysis.
In the case of a balloon/reset loan (or two-step loan), the interest rate and payments remain fixed for a specified term. At the end of that term, the borrower has the choice of repaying the loan or resetting the interest rate to the current interest rate and having a new fixed rate and payment amount for the remainder of the loan term.
Fixed-Rate Mortgage (FRM)
Particularly during periods when the interest rates are relatively low, borrowers will select the fixed-rate loan over a variable-rate loan. Those last one are more popular types of mortgage loans. The drawbacks of this type of loan, however, are that:
- the rate is usually higher than the initial variable rate being offered at the same time.
- if interest rates were to decrease during the term of the loan, the borrower would have to refinance the loan (i.e., obtain a new loan to pay off all or part of the existing loan) and incur new loan costs in order to take advantage of the lower rates. As a result, during periods of high interest rates more borrowers will lean toward adjustable-rate mortgages (ARMs).
A fixed-rate loan has no index rate or adjustment period; those are features of an ARM.
Adjustable-Rate Mortgage (ARM)
The initial (start) interest rate for an ARM is lower than that for fixed-rate mortgages for those types of mortgage loans. The initial rate and payment amount will remain in effect for a limited time. After the initial period, the ARM interest rate will be based on an index rate, which increases or decreases periodically during the term of the loan according to an index specified in the loan agreement, plus a fixed margin amount. An ARM is subject to any limits, or caps, on changes in the rate or payment amount.
Amortization is the process of paying off a loan by gradually reducing the balance through a series of installment payments.
Fully Amortizing Loan
A fully amortizing (or self-liquidating) mortgage provides for periodic payments that repay the loan in its entirety by the end of the mortgage term. The most common methods of payment used for these loans are:
- the level payment mortgage, which provides for equal payments of principal and interest throughout the loan period. As the principal balance is paid down, the portion of each payment that applies to the principal increases while the portion applying to interest goes down. However, the total monthly payment remains the same.
- the budget mortgage, which provides for monthly mortgage payments to include an amount equal to 1/12 of the estimated annual property taxes and property insurance premiums, homeowners’ association dues and/or special assessments.
Partially Amortizing Loan
A partially amortized (balloon) mortgage provides for some, but not total, amortization during the mortgage term. It has payments that are equal and regular in nature. However, the loan term is shorter than the time needed to repay the full loan balance by making those payments. Therefore, at the end of the loan term, a large balloon payment is needed to pay off the remaining balance.
If periodic installment payments on a loan are insufficient to pay all of the interest due, the unpaid interest is added to the principal, causing the loan balance to increase rather than decrease. This is called negative amortization.
Negative amortization may occur when the loan is:
- a graduated-payment mortgage (GPM). In a GPM, payments start at a level that does not pay all of the interest being charged, so the unpaid interest is added to the loan balance, causing negative amortization. The payments gradually increase in scheduled amounts at scheduled times until they finally level out at the amount needed to amortize the loan over the remainder of the loan term.
- an ARM with a payment cap. This loan allows a borrower to make payments that do not cover all of the interest being charged, while the lender adds unpaid interest to the outstanding loan balance.
- an option ARM, or payment-option ARM, which gives the borrower options to make payments to amortize the loan over 15 years or 30 years, to pay interest-only for a period, or to make minimum payments. Payments under the minimum payment option (negative amortization, deferred interest) will not pay all the interest being charged, so the unpaid interest is added to the loan balance. (This type of loan is no longer generally available.)
- a reverse mortgage, or reverse annuity mortgage. This loan has a balance that increases as loan proceeds are disbursed to the borrower and as interest is added to the balance.
An interest-only mortgage, also called a term or a straight mortgage, provides for no amortization during the term of the loan. The principal is repaid at the end of the loan term through a balloon payment. Some interest-only loans are really combination loans, as they have an initial period during which payments are interest-only followed by a period of substantially higher payments amortizing the loan for the remainder of the loan term.
Construction financing is one of the types of mortgage loans and is high-interest interim (or temporary) financing that serves to finance the cost of labor and materials used during construction. It extends from the start to the completion of the work, when it is then paid off, often with the proceeds of a more permanent form of financing (a take-out loan).
At the time a construction mortgage is created, the building that is pledged as part of the collateral for the loan does not exist, so only the land value is available as collateral. Generally, the lender wants the loan to be a first mortgage on the property. This means that either the land must be free of liens or the existing liens must be subordinated to the construction loan.
The loan is generally an open-end mortgage or a line of credit, in which the lender commits to lending (or authorizes) a certain amount, usually around 75 percent of the expected value of the property after the work has been completed. However, the lender does not initially release the full loan amount. Instead, it provides advances, or draws, as work is completed. If the mortgage provides for obligatory future advances (i.e., advances that must be provided if certain conditions are met by the borrower), those advances have priority over intervening liens.
The lender may withhold the final release of funds until the building inspector issues a certificate of completion and:
- the lien period has expired, to ensure no liens are filed against the property for unpaid work; or
- all labor and materials have been paid for, as evidenced by lien waivers from each of the contractors and subcontractors on the job.
Interest is charged on the money only as it is disbursed. It is generally repaid in interest-only installments during the loan period, although some lenders will allow interest to be repaid in a lump sum after the work is complete. In either case, the entire loan amount is due in full within a short period after completion of the work.
Permanent construction loans or construction-to-permanent loans which are types of mortgage loans for investors may be made to owner-occupants and developers. Fannie Mae’s construction-to-permanent mortgage is a 15- or 30-year loan that can be used to finance construction of one- or two-unit owner-occupied homes, one-unit second homes, or investor homes. The loan amount may be up to 95 percent of the construction cost or the value of the property upon completion of construction, and the funds may be used to purchase the land for the home.
Under both guidances, the term “nontraditional mortgage product” refers to a closed-end residential mortgage loan product that allows a borrower to defer payment of principal and sometimes interest. This would include an interest-only mortgage, where the borrower pays no loan principal for the first few years of the loan with the potential for negative amortization. On the other hand, the SAFE Act defines a nontraditional loan as any loan that is not a 30-year fixed-rate loan (including any type of ARM, a reverse mortgage, or a 10- or 20-year fixed-rate loan). To avoid confusion, the types of loans to which the guidances apply will be referred to as interest-only ARM loans.
The intent of both guidances is to give regulators the authority to ensure that nontraditional products are offered in a way that ensures consumers have a greater understanding of all of the risks involved with such a loan, whether they are applying through a bank loan officer or a mortgage broker.
Unfortunately, the guidances did not prevent the eventual collapse of the housing market. Consumers uninformed of the true extent of the risks of the obligations undertaken agreed to risky nontraditional loans, based on risky, unwise underwriting procedures and loan originator compensation practices, which had disastrous results. These results produced changes in RESPA and TILA disclosures as well as restrictions on methods of compensating loan originators. Because of these changes, as well as losses suffered by primary mortgage market lenders and secondary market investors, many nontraditional loan products and many subprime loan underwriting practices, if not actually prohibited, may no longer be offered (e.g., payment-option ARM loans).
The CSBS-AARMR Guidance is organized around three primary topics:
- Loan terms and underwriting standards
- Risk-management practices
- Consumer protection issues, which include recommended practices and control systems
Providers are expected to effectively assess and manage the risks associated with interest-only ARM loan products and ensure that their risk-management processes, policies and procedures adequately manage these risks.
The CSBS-AARMR Guidance is very much concerned with the effect of the payment shock resulting from the sharp increase in loan payments when:
- a loan begins to amortize;
- the interest rate adjusts.
To manage the potential for payment shock in a high-risk loan, a provider:
- should avoid overreliance on credit scores as a substitute for verification of the borrower’s income, assets and outstanding liabilities in the underwriting process.
- should have underwriting criteria that recognize the potential impact of payment shock and develop a range of reasonable tolerances for a borrower with a high loan-to-value ratio (LTV), a high debt-to-income ratio (DTI) or a low credit score.
- should include an evaluation of the borrower’s ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule based on the term of the loan.
- should base the repayment analysis on the initial loan amount plus any balance increase resulting from negative amortization.
- could limit the spread between any introductory interest rate and the fully indexed rate. This spread will determine whether or not a loan balance has the potential to reach the negative amortization cap before the end of the initial payment-option period (usually five years)
A loan that can be repaid only by the sale or refinancing of the property securing the loan is a collateral-dependent mortgage loan. A provider would be engaging in unfair or abusive practices if:
- its loan terms and underwriting practices heighten the need for a borrower to sell or refinance the property once amortization begins in order to repay the loan.
- it makes loans to borrowers who cannot demonstrate the capacity to repay the loan as structured from sources other than the collateral pledged.
A loan that is originated based solely on the equity available in the property and not on the borrower’s repayment capacity or credit analysis presents a high risk of default by the borrowers. This is considered a type of predatory lending.
A provider should offer an interest-only loan with reduced documentation or a simultaneous second-lien loan that combines (i.e., layers) features increasing its risk only if mitigating factors can support the underwriting decision and the borrower’s repayment capacity. Mitigating factors can include higher credit scores, lower LTV and DTI ratios, significant liquid assets, mortgage insurance or other credit enhancements, but not higher pricing.
Underwriters using full documentation to verify an applicant’s income, employment and assets will review:
- W-2 forms, pay stubs, 1099s, tax returns showing self-employment or business income, a business income statement, and proof of retirement or disability income.
- bank statements and investment and retirement account statements.
- information about other real estate and personal property assets owned.
Prior to the amending of federal law and regulations as a result of the housing market meltdown, when written verification was delayed or unobtainable, or when the borrower objected to verification, Alt-A loans were made available, at higher cost, and required no documentation or only limited documentation. Types of Alt-A loans commonly used before underwriting requirements were tightened include the following:
- No-doc loan: Employment, income and assets are not stated on a loan application; only the applicant’s credit and the property’s value are verified. Such a loan would have the highest rate.
- Limited-doc loan: Employment and/or assets are verified, but income is not.
- Stated-income (no income verification) loan: Both assets and employment are verified, but income is not. However, the underwriter still analyzes the income to determine whether the amount stated is reasonable in light of the applicant’s employment. If it is not, he may hold up approval unless the applicant can provide some sort of verification. These loans have come to be known as “liar’s loans.”
- Stated-income stated-assets loan: Employment is verified, but assets and income are not.
- Bank statement program: For a borrower who is self-employed or paid on commission, the underwriter calculates income based on deposits shown on the applicant’s personal or business bank statement for a specific number of consecutive months rather than on his pay stubs. For a wage-earning and self-employed customer, income is calculated based on average monthly deposits over a specific number of consecutive months as reflected by the borrower’s most recent bank statements for that time period. For an applicant who qualifies to submit business bank statements (i.e., a sole proprietor or self-employed customer who has 100 percent ownership of the business bank account), income is calculated based on 75 percent of gross deposits over a specific number of consecutive months as reflected by the borrower’s most recent bank statements for that period.
- No-ratio documentation loan: For all of the other no-doc or low-doc loans, the applicant must satisfy standard guideline ratios relating housing expense and living expense to income, even though the figures used might not be verified. However, with a no-ratio documentation loan, assets and employment are verified, but income is not disclosed or used in qualifying the borrower. The loan decision is based on the borrower’s credit rating and down payment or equity in the property, and standard guideline ratios relating housing expense and living expense to income are ignored. Generally, the major requirements to qualify for such a loan are that the borrower has a substantial down payment and a review of the:
- applicant’s credit score;
- amount of loan desired; and
- amount of documentation he is willing to provide.
The CSBS-AARMR Guidance suggests that:
- policies should provide for more diligent verification and documentation of income and debt-reduction capacity as the level of credit risk increases.
- stated income should be accepted only when mitigating factors clearly minimize the need for direct verification of repayment capacity. For most borrowers, income can readily be documented using recent W-2 statements, pay stubs or tax returns. Furthermore, the Truth in Lending Act (TILA) prohibits the underwriting of a higher-priced mortgage loan based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation.
Simultaneous second-lien loans involve use of a closed-end second lien or a home equity line of credit originated simultaneously with a first-lien mortgage loan in order to avoid the need for a higher down payment. These loans increase credit risk, as the borrower will have little or no equity in the property and may have little incentive to avoid foreclosure if he becomes delinquent. Therefore, they generally should not allow for delayed or negative amortization without other significant risk-mitigating factors.
Lending to Subprime Borrowers
Providers targeting subprime borrowers through tailored marketing, underwriting standards and risk selection should:
- ensure the terms of these programs do not become predatory or abusive.
- recognize that risk-layering features in these loans significantly increase risks for both the provider and the borrower.
Regulation Z’s provisions relating to higher-priced/high-cost (subprime) mortgage loans prohibit:
- a prepayment penalty.
- extension of a first lien on a principal dwelling without an escrow account being established before consummation for payment of property taxes and any required mortgage-related insurance premiums.
Non-Owner-Occupied Investor Loans
For a loan to finance a non-owner-occupied investment property:
- the borrower should be qualified based on his ability to service the debt over the life of the loan.
- the combined LTV ratio should reflect the potential for negative amortization and the need to maintain sufficient equity over the life of the loan.
- underwriting standards should require evidence that the borrower has sufficient cash reserves to service the loan, considering the possibility of extended periods of property vacancy and the variability of debt service requirements associated with interest-only and payment-option ARM loan products.
To ensure that risk-management practices keep pace with changes in the market, providers should:
- develop written policies that specify acceptable product attributes, production and portfolio limits, sales and securitization practices, and risk-management expectations.
- design enhanced performance measures and management reporting that provide early warning for increasing risk.
Providers with concentrations in nontraditional mortgage products should:
- have well-developed monitoring systems and risk-management practices.
- consider the effect of employee and third-party incentive programs that could produce higher concentrations of loans with high-risk features.
Secondary Market Activity
The sophistication of a provider’s secondary market risk-management practices should be commensurate with the nature and volume of activity. Providers with significant secondary market activities should have comprehensive, formal strategies for managing risks, including contingency plans for responding to reduced demand in the secondary market.
Third-party loan sales can transfer a portion of the credit risk, but not the provider’s:
- contingent liability risk, if it is required to repurchase defaulted mortgages.
- reputation risk, when the provider determines it needs to repurchase defaulted mortgages to protect its reputation and maintain access to the markets.
A provider’s quality control, compliance and audit procedures should focus on mortgage lending activities posing high risk, in particular by monitoring compliance with underwriting standards and exceptions to those standards.
The quality control function should regularly review:
- a sample of nontraditional loan products from all origination channels.
- a representative sample of underwriters to confirm that policies are being followed.
When control systems or operating practices are found deficient, business-line managers should be held accountable for correcting deficiencies in a timely manner.
Providers should have strong systems and controls to monitor the originations of any third parties (e.g., mortgage brokers or correspondents), to ensure they comply with the provider’s lending standards and applicable laws and regulations.
The quality of loans should be tracked by both origination source and key borrower characteristics in order to make it easier to identify problems such as early payment defaults, incomplete documentation and fraud. If appraisal, loan documentation or credit problems or consumer complaints are discovered, the provider should take immediate action (e.g., more thorough application reviews, more frequent re-underwriting, or even termination of the third-party relationship).
Consumer Protection Issues
Marketing and promotion of these products have emphasized potential benefits (e.g., lower initial payments) without clear and balanced information about the risk of payment shock and negative amortization. This information should be provided, even before TILA and RESPA disclosures may be required, to assist the consumer in the product selection process.
Providers must ensure that any offer of nontraditional mortgage products complies with all applicable laws and regulations, including:
- Section 5 of the Federal Trade Commission (FTC) Act, prohibiting unfair or deceptive acts or practices.
- fair lending laws.
- the Real Estate Settlement Procedures Act (RESPA).
- TILA and its implementing regulation, Regulation Z, governing disclosures that providers must provide:
- in advertisements;
- with an application;
- before loan consummation; and
- when interest rates change.
- TILA and Regulation Z prohibitions relating to loan originator compensation:
- being based on any of the transaction’s terms or conditions;
- being paid by both the consumer and some other person(s); or
- being increased by steering the consumer to one particular transaction rather than another, unless the consummated transaction was in the consumer’s interest.
|Note: Prohibitions related to loan originator compensation are now specifically addressed in the TILA-RESPA Rule.|
Moreover, the sale or securitization of a loan may not reduce a provider’s potential liability for violations of TILA, RESPA, the FTC Act or other laws in connection with its origination of the loan. State laws, including laws regarding unfair or deceptive acts or practices, may apply as well.
To address the risks raised by nontraditional mortgage products, providers should adhere to the following practices as well as to other recommendations from their primary regulators.
Communications with Consumers
Information promoting or describing these products should be designed, in terms of timing, content and clarity, to help a consumer make an informed decision when selecting and using them (e.g., presented at a time that will help the consumer select a product and choose among payment options).
A provider should offer clear and balanced product descriptions when a consumer inquires about a mortgage product and receives information about interest-only products or when giving marketing material relating to these products to the consumer, not just upon the submission of an application or at consummation.
Providers should strive to:
- focus on information important to consumer decision-making.
- highlight key information so that it will be noticed.
- employ a user-friendly and readily navigable format for presenting the information.
- use plain language, with concrete and realistic examples.
Comparative tables and information describing key features of available loan products may also be useful.
Promotional Materials and Product Descriptions
Promotional materials and other product descriptions should provide information about product costs, terms, features and risks that can assist consumers in their product selection decisions.
Consumers should be made aware of:
- balloon payments.
- when structural payment changes will occur (e.g., when introductory rates expire, or when amortizing payments are required) and what the new payment amount will be or how it will be calculated. Descriptions can indicate that a higher payment may be required at other points in time because of such factors as negative amortization or increases in the interest rate index.
- any potential for increases in payment obligations (e.g., when interest rates or negative amortization reach a contractual limit).
Product descriptions could state the maximum monthly payment a consumer would be required to pay under a hypothetical loan example once amortizing payments are required and the interest rate and negative amortization caps have been reached.
When negative amortization is possible, consumers should be made aware of the potential for increasing principal balances and decreasing home equity, as well as other potential adverse consequences.
Product descriptions should disclose the effect of negative amortization on loan balances and home equity and could describe the potential consequences to the consumer of making minimum payments that cause the loan to negatively amortize. One possible consequence is that it could be more difficult to refinance the loan or to obtain cash upon a sale of the home.
Consumers should be alerted to any prepayment penalty that may be imposed for mortgage prepayment as well as the need to ask the provider about the amount of the penalty.
Cost of Reduced-Documentation Loans
If a provider offers both reduced- and full-documentation loan programs, consumers should be alerted to any pricing premium attached to the reduced-documentation program.
Practices to Avoid
Providers should avoid the following practices:
- Obscuring significant risks to the consumer
A provider advertising or promoting a high-risk mortgage by emphasizing the comparatively lower initial payments should also provide clear and comparably prominent information alerting the consumer to the risks.Such information should explain that these payment amounts will increase, that a balloon payment may be due, and that the loan balance will not decrease and may even increase because of the deferral of interest and/or principal payments.
- Promoting payment patterns that are structurally unlikely to occur
- Giving consumers unwarranted assurances or predictions about the future direction of interest rates (and, consequently, the borrower’s future obligations)
- Making one-sided representations about the cash savings or expanded buying power to be realized from these products in comparison with amortizing mortgages
- Making misleading claims that interest rates or payment obligations for these products are “fixed”
- have strong control systems to monitor whether actual practices are consistent with their policies and procedures and address compliance and consumer information concerns as well as risk-management considerations.
- review consumer complaints to identify potential compliance, reputation and other risks.
- pay attention to appropriate legal review and use compensation programs that do not improperly encourage lending personnel to direct consumers to particular products.
Lending personnel should be:
- trained to convey information about product terms and risks in a timely, accurate and balanced manner.
- given additional training, as necessary, to continue to be able to convey information in this manner, as products evolve and new products are introduced.
- monitored to determine whether they are following these policies and procedures.
A provider making, purchasing or servicing high-risk mortgage loans using a third party (e.g., a mortgage broker, correspondent or other intermediary) should take appropriate steps to mitigate risks relating to compliance and consumer information concerns, including the following:
- Conduct due diligence and establish other criteria for entering into and maintaining relationships with those third parties
- Establish criteria for third-party compensation designed to avoid providing incentives for originations inconsistent with this CSBS-AARMR Guidance
- Set requirements for agreements with such third parties
- Establish procedures and systems to monitor compliance with applicable agreements, policies and laws
- Implement appropriate corrective actions in the event that the third party fails to comply with applicable agreements, policies or laws
The federal Interagency Guidance recommends that promotional materials and other product descriptions provide consumers with information about the costs, terms, features and risks of high-risk mortgage products that can assist consumers in their product selection decisions. The Interagency Guidance provides illustrations showing how this information could be provided in a concise and focused manner and format:
- A narrative explanation of nontraditional mortgage products
- A chart comparing interest-only loans to fixed-rate and traditional adjustable-rate loans
Providers do not have to use these illustrations. A provider may use them or provide information based on them, and it may also expand, abbreviate or otherwise tailor any information in the illustrations as appropriate to reflect:
- the provider’s product offerings (e.g., by deleting information about products and terms not being offered and by revising them to reflect specific terms currently being offered).
- the consumer’s particular loan requirements.
- current market conditions (e.g., by changing the loan amounts, interest rates and corresponding payment amounts to reflect current local market circumstances).
- other information consistent with the Guidance (e.g., the payment and loan balance information for statements or information about when a prepayment penalty may be imposed).
- the results of consumer testing of the forms.
- an alternative format for providing the information described in the Guidance.
Statement on Subprime Mortgage Lending
In June 2007, the Federal Financial Institution Regulatory Agencies (the Agencies) issued a Statement on Subprime Mortgage Lending (the Subprime Statement) to provide financial institutions with principles for prudent risk-management practices and consumer protection when dealing with subprime loans.
The Subprime Statement was issued because of the Agencies’ concern that many borrowers did not fully understand the risks and consequences of obtaining subprime loans with one or more of the following characteristics:
- Low initial payments based on a fixed introductory rate that quickly expires and adjusts to a fully indexed variable rate for the remaining loan term
- Very high or no limits on the increase in payment or interest rate (“payment or rate caps”) on reset dates
- Limited or no documentation of borrowers’ income
- Features likely to result in frequent refinancing to maintain an affordable monthly payment
- Prepayment penalties that are substantial or that extend beyond the initial fixed interest rate period
The consequences to borrowers have included:
- unaffordable monthly payments after the initial rate adjustment.
- difficulty in paying real estate taxes and insurance that were not escrowed.
- expensive refinancing fees, frequently due to closing costs and prepayment penalties.
The consequences to lenders have included unwarranted levels of credit, legal, compliance, reputation and liquidity risks due to the elevated risks.
Predatory Lending Considerations
Institutions risk being charged with commission of unfair or deceptive acts or practices in violation of Section 5 of the FTC Act if they engage in predatory lending. A predatory loan may have many of the features of a subprime loan but will also involve at least one of the following elements:
- It is based predominantly on the foreclosure or liquidation value of a borrower’s collateral rather than on his ability to repay the mortgage.
- The borrower has been induced to repeatedly refinance a loan so the lender can repeatedly charge high points and fees (“loan flipping”).
- Fraud or deception was used to conceal the true nature of the loan or ancillary products.
Underwriting of subprime loans should include:
- evaluation of a borrower’s ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule (e.g., by using a DTI that includes the borrower’s total monthly housing-related payments [the PITI] as a percentage of gross monthly income).
- verification and documentation of the borrowers’ assets, liabilities and income. Stated-income loans and reduced-documentation loans should not be accepted unless there are documented mitigating factors that clearly minimize the need for such verification, such as the following:
- The borrower has a favorable payment performance and a financial condition that has not deteriorated and wants to refinance an existing mortgage with a new loan of a similar size and with similar terms.
- The borrower has substantial verified and documented liquid reserves or assets that demonstrate repayment capacity.
A higher interest rate, charged to cover additional anticipated losses, is not considered an acceptable mitigating factor.
Financial institutions are not required to foreclose on loan collateral as soon as the borrower exhibits repayment difficulties. They are encouraged to work with the borrower to determine whether a loan modification or a workout arrangement will be beneficial to both parties.
Consumer Protection Principles
To protect the consumer, institutions should approve loans based on the borrower’s ability to repay the loan according to its terms.
Communications with a consumer, including advertisements, oral statements and promotional materials, should:
- provide clear and balanced information about the relative benefits and risks of the products.
- be provided in time for the consumer to use them in selecting a product, not provided just upon submission of an application or at consummation of the loan.
- not be used to steer the consumer to subprime loan products to the exclusion of other products for which the consumer may qualify.
Consumer Protection Principles
Mortgage product descriptions and advertisements should provide clear, detailed information about the costs, material terms, features, and risks of the loan to the borrower. Consumers should be informed of:
- payment shock (i.e., potential payment increases, including how the new payment will be calculated when the introductory fixed rate expires).
- prepayment penalties (i.e., the existence of any prepayment penalty, how it will be calculated, and when it may be imposed). Prepayment penalties should not apply past the initial reset period, and borrowers should be provided a reasonable period of time (typically at least 60 days prior to the reset date) to refinance without penalty.
- balloon payments (i.e., the existence of one).
- cost of reduced-documentation loans (i.e., whether there is a pricing premium attached to a reduced-documentation or stated-income loan program).
- responsibility for taxes and insurance (i.e., the requirement to make payments for real estate taxes and insurance in addition to their loan payments, if not escrowed, and the fact that taxes and insurance costs can be substantial).
Strong control systems need to be established to monitor whether actual practices are consistent with the institution’s policies and procedures. These systems should:
- apply to institutional personnel and applicable third parties (i.e., mortgage brokers and correspondents) and include appropriate criteria for:
- hiring and training loan personnel;
- entering into and maintaining relationships with third parties;
- conducting initial and ongoing due diligence on third parties; and
- ensuring compensation plans do not encourage origination of loans that violate sound underwriting and consumer protection principles or steer consumers to subprime products to the exclusion of other products for which the consumer may qualify.
- address compliance and consumer information concerns and safety and soundness by providing for:
- monitoring of compliance with applicable laws and regulations, third-party agreements and internal policies;
- appropriate corrective actions when there is noncompliance; and
- review of consumer complaints to identify potential compliance problems or other negative trends.
Loan Type After Bankruptcy, W2 guidelines and collection accounts
The three devices typically used to secure real estate for a loan (such as in a sales transaction) are the land contract, the mortgage and the trust deed.
A land contract is known by different names in different parts of the country, including “agreement of sale,” “land sales contract,” “real estate contract,” “installment sales contract” and “contract for deed.”
In such a contract, the seller (or vendor) finances the purchase of his property for the buyer. The buyer (or vendee) makes payments to the seller in installments until he can pay off the entire debt, generally by refinancing, at which time he is given a deed transferring ownership of the property to the buyer. The transfer of property, and the deed itself, may be called a conveyance.
Until the contract is paid off, the seller keeps legal title to the property, even though the contract may give the buyer possession and equitable title as soon as it is signed. Equitable title means the buyer is entitled to a deed conveying the legal title when the contract is fully paid and performed. If the vendee defaults, the vendor may foreclose or, depending on state statute, declare forfeiture to regain his property.
Note and Mortgage (or Trust Deed)
In the typical real estate sales transaction, the seller gives the buyer a deed at closing and the buyer gives the lender a promissory note and a security instrument (i.e., a mortgage or trust deed) that creates a lien on the property. When the seller finances the purchase and does not actually give the buyer any cash, the loan may be called a soft money loan. When a third-party lender provides actual funds for the loan, it is called a hard money loan.
The promissory note is both a promise to repay the money borrowed with interest and evidence of the debt. It shows:
- the payor and payee.
- the amount owed.
- the rate of interest and whether it is fixed or adjustable.
- the due date(s) for payment.
- loan terms, which may include:
- a prepayment privilege, which allows the borrower to prepay the loan;
- a prepayment penalty, which imposes an extra charge if the borrower does prepay. While government-backed loans (e.g., FHA and VA loans) have no prepayment penalties,
- conventional loans (i.e., loans not backed by government insurance or guarantees) may have prepayment penalties;
- a lock-in clause, which prohibits prepayment;
- an acceleration clause, which permits the lender to declare the entire balance of the loan due at once if the borrower defaults; or
- a late payment penalty, which imposes a charge if the borrower’s payment is late.
Note and Mortgage (or Trust Deed)
Mortgage or Trust Deed
The mortgage or trust deed secures repayment of the note. In lien theory states, this instrument hypothecates the property, meaning the property is pledged as security, or collateral, but the borrower retains equitable title or possession.
The borrower, in giving a mortgage to the lender, is called a mortgagor, while the lender receiving it is called a mortgagee. The borrower, in giving a trust deed to the lender, is called a grantor or trustor; the lender receiving it is called a beneficiary; and a third party with a power of sale allowing him to foreclose without going to court is the trustee.
NOTE: Because the trust deed has the same legal effect as a mortgage, the term “mortgage” is often used when referring to a trust deed.
Among the provisions of the security instrument are:
- a due-on-sale (alienation) clause, which allows the lender to:
- declare the entire balance of the loan due at once; or
- refuse to allow another person to assume the loan if the title is transferred. FHA or VA loans are assumable by qualified buyers. Fannie Mae and Freddie Mac conforming loans may or may not be assumable based on the contents of the mortgage documents and the type of transfer.
- a defeasance clause, which provides for release of the lien when the borrower pays off the debt. However, to provide public notice that the debt has been repaid and to clear it from the public record:
- a satisfaction or release is recorded to clear a mortgage lien; or
- a deed of reconveyance is recorded to clear a trust deed lien (or in some states, a mortgage).
The security instrument typically provides that monthly payments are applied in the following order:
- Principal due
- Taxes and insurance, if paid to the lender
- Late charges
- Any other amounts due
- Additional principal reduction
Primary and Subordinate Financing
A primary mortgage (first mortgage) is a loan that has priority over all other unsatisfied mortgages secured by the same property, generally because it was recorded before them.
A subordinate mortgage (junior mortgage or second mortgage) secures a loan that is secondary to one or more other loans on the property. A mortgage is a second mortgage when:
- it is recorded after another mortgage that is still outstanding on the same property; or
- it has a subordination clause specifying that it:
- has lower priority (i.e., is subordinate) even though it may have had priority based on its date of recording; or
- will remain subordinate in the event that the first mortgage is refinanced.
In the event of a foreclosure on a first mortgage, the subordinate loan will be removed as a lien even if foreclosure sale proceeds are not sufficient to pay it off. Because of this risk, such loans have higher interest rates than first loans.
Subordinate financing can be obtained:
- at the same time as a primary mortgage to finance a down payment or closing costs (as a piggyback mortgage); or
- after closing, as either a closed-end second mortgage or as a home equity loan or home equity line of credit (HELOC).
Foreclosure laws vary from state to state. If a borrower defaults on his mortgage or trust deed loan, the lender can ask the court for a judicial foreclosure and a court-ordered sheriff’s sale of the property to repay the debt. After the sale, the sheriff will issue a sheriff’s deed conveying title to the purchaser.
If included in a trust deed or mortgage, a power-of-sale provision allows a trustee to foreclose and sell the property on behalf of the lender without a court order and issue a trustee’s deed conveying title to the purchaser.
Depending on state statute, the debtor may be liable for a deficiency judgment when sale proceeds are insufficient to satisfy the debt.
Also, depending upon state statute, an owner or other person with an interest in the property may, by paying off the entire debt and court costs, exercise:
an equitable right of redemption prior to the sale, to prevent a foreclosure sale.
a statutory right of redemption following a foreclosure, to reclaim the property. If there is a statutory right of redemption, the sheriff’s deed or trustee’s deed will not be issued until the redemption period expires.
If a mortgage or trust deed has the right of reinstatement, a defaulted borrower has a period after default to stop a foreclosure by paying all past-due payments and penalties and bringing the loan current, instead of having to pay off the entire debt.
Often, the high bidder at a foreclosure sale is the lender holding the note. Property that the lender has acquired through foreclosure is called an REO, for “real estate owned.”
The lender will attempt to recover as much as it can from resale of its inventory of REOs.
Among the options available to a lender in order to prevent or avoid foreclosure are:
- acceptance of a deed in lieu of foreclosure, or estoppel deed, from a borrower facing foreclosure in return for releasing him from his debt.
- a forbearance, which allows a borrower experiencing temporary financial difficulty to delay his monthly mortgage payments for a short period of time. It is often combined with other programs designed to help bring the monthly mortgage payments current after a negotiated period of time.
Mortgage lending involves both a primary mortgage market and a secondary mortgage market. In the primary mortgage market, lenders originate mortgage loans by lending funds to borrowers by a correspondent lender or a retail lender.
A real estate loan can be originated through:
- a retail lender. This is a lender (e.g., a bank, savings bank, credit union or mortgage lender) that interacts directly with the borrower and actually makes the loan. If the lender holds its loans, rather than selling them, it is called a portfolio lender. A retail lender can also offer loans as a wholesale lender through mortgage brokers.
- a correspondent lender. This is generally a smaller lender that takes applications and underwrites and funds loans, either with its own money or from a line of credit with a larger lender, and sells the loans to wholesale lenders immediately upon closing under previously agreed-upon terms.
- a wholesale lender through a mortgage broker. This is a mortgage investor that prices and funds loans applied for through mortgage brokers. After a mortgage broker processes an application, the wholesale lender has it underwritten and funded. After the loan is made, the wholesale lender will either service it (i.e., collect the loan payments from the borrower) or sell or assign servicing to another entity.
Mortgage Lender (Banker)
A mortgage lender, or mortgage banker, makes mortgage loans with its own funds through mortgage brokers, mortgage loan originators and loan processors, who obtain and process applications from borrowers.
A mortgage broker does not fund loans. In general terms, a mortgage broker can be defined as an individual or firm that, for or in expectation of compensation or gain, obtains application information from a prospective borrower and attempts to match the borrower with a lender who is willing to make a loan based on the borrower’s qualifications.
A mortgage broker can work with a few specific lenders or offer a borrower’s application to a number of lenders. He will enter into wholesale broker agreements with these lenders. These agreements may provide remedies for the lender if the borrower immediately defaults or is found to have committed fraud.
In table funding arrangements, a mortgage broker will originate, process, and close in his own name a loan underwritten and funded by a secondary lender, but will then assign the loan to the funding lender at the closing table A mortgage broker typically does not service the loans he originates.
Mortgage Loan Originators
The term “mortgage loan originator” is used differently throughout the country and in different statutes or regulations.
Under Regulation X of the Real Estate Settlement Procedures Act (RESPA), a mortgage loan originator is defined as any person who originates the loan, including a lender or mortgage broker; the term “mortgage broker” applies to a mortgage broker or an individual who transacts loans for the mortgage brokers.
Under the SAFE Act and most state laws, the term “mortgage loan originator” applies to an individual who takes a residential mortgage loan application and/or offers or negotiates terms of a residential mortgage loan on behalf of a mortgage lender or mortgage broker for compensation or gain; or who may also be licensed as a mortgage broker or mortgage lender, as an individual. Loan originators employed by depository institutions (e.g., banks) regulated by federal agencies must be registered with the NMLS. Those working for other lenders or mortgage brokers must be licensed by the state and registered with the NMLS. This mortgage loan originator takes or receives mortgage applications, assembles information, and prepares the paperwork and documentation necessary for obtaining a mortgage loan. In the process, he may interview the borrower to determine his needs and may counsel and prequalify the borrower. He works and communicates with loan processors, underwriters, title, escrow, and lenders to ensure that the loan is processed smoothly and closes on time.
After making a loan, a lender can:
- hold it and bear the risks until the entire debt is repaid.
- warehouse it, using it as collateral for loans the lender needs from other lenders.
- sell it to another lender or investor.
- use it to back securities sold to investors.
These activities occur in the secondary mortgage market. The secondary mortgage market is where mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities and sold on the equity market. It is composed of investors and lenders that buy and sell real estate mortgages or guarantee loans from primary market lenders.
Major participants in the secondary mortgage market are three agencies created by Congress, the first two of which buy and sell loans, while the third only guarantees them:
- Federal National Mortgage Association (FNMA), or Fannie Mae, created in 1938
- Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, created in 1970
- Government National Mortgage Association (GNMA), or Ginnie Mae, created in 1968
None of these entities makes loans directly to homebuyers or has any direct contact with the public. Instead, their function is to provide a source of funds for lenders in the primary mortgage market by buying and selling mortgage loans and offering securities backed by these loans. The issuance of these securities, which represent interests in pools of mortgages, is termed securitization.
Being a loan officer with a felony
You can be a loan officer with a felony, however, there are few things you have to know. The SAFE Act provides that, among the criteria for eligibility for a license, an individual must not have been convicted of, or pled guilty or nolo contendere to, any felony in a domestic, foreign or military court within the preceding seven years; or have been convicted of a felony involving an act of fraud, dishonesty, a breach of trust, or money laundering at any time prior to application.
Being a loan officer with a conviction
Because the provision is triggered by a conviction, rather than by an extent (i.e., still existing) record of a conviction, the CFPB interprets the provision to make an individual ineligible for a mortgage loan originator license even if the conviction is later expunged. However, pardoned convictions are generally treated as legal nullities for all purposes under state law and would not render an individual ineligible. The law under which an individual is convicted, rather than the state where the individual applies for a license, determine whether a particular crime is classified as a felony.
To show he can satisfy these requirements, the applicant must furnish to the NMLS the following information concerning his identity:
- Fingerprints for submission to the FBI and any governmental agency or entity authorized to conduct a criminal history background check
- Personal history and experience, including authorization for the NMLS to obtain independent credit report information related to any administrative, civil or criminal findings by any governmental jurisdiction
Passing your NMLS license test
So when you went through above steps to be a loan officer with a felony, and you fit in those rules, you can think about passing your NMLS test now.
The mortgage loan originator must pass a national test and individual state test developed by the NMLS and administered by an approved test provider that covers ethics; federal and state law; and regulation pertaining to mortgage origination, fraud, consumer protection, the nontraditional mortgage marketplace and fair lending issues. To pass, the mortgage loan originator must achieve a test score of not less than 75 percent.
An individual may take a test three times, but to retake the exam he must wait at least 30 days after the date of the preceding test. If he fails three consecutive tests, he must wait at least six months before taking the test again.
If a mortgage loan originator was formerly licensed in a state and fails to maintain a valid license for five years or longer, the individual must retake the test and achieve a test score of not less than 75 percent in order to again be licensed as a mortgage loan originator. When determining whether a mortgage loan originator has not held a valid license for five years, any period during which the individual is a registered mortgage loan originator is not taken into account.
Prelicensing Education to Be a Mortgage Broker
Not many people know that you can be a loan officer with a felony, it’s just a matter of what type of felony it is.
To be licensed, a mortgage loan originator must complete required prelicensing education consisting of at least 20 hours of NMLS-approved education. The SAFE Act specifies that the education must include at least:
- three hours of federal law and regulations.
- three hours of ethics, including instruction on fraud, consumer protection, and fair lending issues.
- two hours of training related to lending standards for the nontraditional mortgage product (i.e., any mortgage product other than a 30-year fixed-rate mortgage) marketplace.
States may specify more hours. Some may include specific requirements or hours for education on state statutes and regulations relating to mortgage lending.
Financial Responsibility Requirements
The SAFE Act provides that states must set minimum financial responsibility requirements. This may include a minimum net worth, surety bond acquisition requirements, or establishment of a recovery fund paid into by mortgage loan originators. The CFPB has determined that states would still be in compliance with the SAFE Act if they allow companies employing more than one mortgage loan originator to fulfill the bonding requirement at the company level. This means that individual loan originators would not have to be bonded separately.
A mortgage loan originator must have demonstrated financial responsibility, character and general fitness to warrant a determination that he will operate honestly, fairly and efficiently.
License and Registration
Under the amended SAFE Act, the CFPB determines the acceptability of states’ licensing and registration systems and their participation in the NMLS. To meet the SAFE Act’s licensing requirements:
- The NMLS must develop tests and approve educational courses.
- mortgage loan originators are required to comply with testing, education and bonding requirements.
- states have to evaluate the records of thousands of applicants. To qualify for licensing or registration as a state-licensed mortgage loan originator, an applicant must meet certain minimum standards.
Exempt Individuals For Being a Mortgage Broker
Despite the broad definition of “mortgage loan originator” in the SAFE Act, there are some limited contexts where offering or negotiating residential mortgage loan terms would not make an individual a mortgage loan originator. The CFPB considers the provision in the definition that mortgage loan originators are individuals who “take an application” to imply a formality and commercial context that does not exist where:
- an individual offers or negotiates terms of a residential mortgage loan with or on behalf of a member of his immediate family. Therefore, state statutes generally exclude from licensing and registration requirements an individual who offers or negotiates terms of a residential mortgage loan only with or on behalf of an immediate family member.
- an individual seller provides financing to a buyer in the course of the sale of his own residence. The frequency with which a particular seller provides financing is so limited that the CFPB’s view is that Congress did not intend to require such sellers to obtain mortgage loan originator licenses. Therefore, state statutes generally exclude from licensing and registration requirements an individual who offers or negotiates terms of a residential mortgage loan only to the buyer, or a prospective buyer, of the seller’s residence.
- a licensed attorney, in the course of representing the client, negotiates terms of a residential mortgage loan with a prospective lender on his client’s behalf, as the attorney owes significant duties of loyalty, competence, and diligence to his client. However, if the attorney is compensated by a lender, mortgage broker or other mortgage loan originator, the definition of “mortgage loan originator” and all associated licensing and registration requirements would apply.
A state-licensed mortgage loan originator must renew his license annually by:
- continuing to meet the minimum standards for license issuance.
- satisfying the continuing education requirement of at least eight hours of courses that have been reviewed and approved by the NMLS. These hours must include:
- three hours of federal law and regulations.
- two hours of ethics, including instruction on fraud, consumer protection, and fair lending issues.
- two hours of training related to lending standards for the nontraditional mortgage product marketplace. States may require more than eight hours and may include requirements for hours of education related to state laws.