Types Of Mortgage Loans and Home Loans Explained 2018


Conforming and Noncomforming 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 nonconforming loans. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have a higher interest rate than conforming loans.

Insured 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.

 

Government-Related Loans

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 which 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

Definition

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)

Property Size

LowCost Area Floor

HighCost Area Ceiling

One Unit

$271,050

$625,500

Two Units

$347,000

$800,775

Three Units

$419,425

$967,950

Four Units

$521,250

$1,202,925

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

Insurance

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 loans with FHA case numbers assigned on or after June 3, 2013, the FHA collects the annual MIP for the maximum duration permitted under statute.

  • 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)
Note
The FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home. For streamline refinances without appraisals, the FHA uses the original appraised value of the property to calculate the LTV.

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)

 

Term

LTV

Previous

New

≤ 15 yrs ≤ 78% No annual MIP

11 years

≤ 15 yrs 78.01% – 90% Canceled at 78% LTV

11 years

≤ 15 yrs > 90% Canceled at 78% LTV

Loan term

> 15 yrs ≤ 78% 5 years

11 years

> 15 yrs 78.01% – 90% Canceled at 78% LTV & 5 yrs

11 years

> 15 yrs > 90% Canceled at 78% LTV & 5 yrs

Loan term

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.

LTV

Previous MIP

New MIP

≤ $625,500

≤ 95%

130 bps

80 bps

≤ $625,500

> 95%

135 bps

85 bps

> $625,500

≤ 95%

150 bps

100 bps

> $625,500

> 95%

155 bps

105 bps

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.

LTV

Previous MIP

New MIP

≤ $625,500

≤ 90%

45 bps

45 bps

≤ $625,500

> 90%

70 bps

70 bps

> $625,500

≤ 78%

45 bps

45 bps

> $625,500

78.01 – 90%

70 bps

70 bps

> $625,500

> 90%

95 bps

95 bps

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).

 

203(b) Program

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:

  1. convert some of the equity in his primary residence to cash to pay living expenses; or
  2. 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:
    • dies;
    • 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.

Property

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:

  1. the FHA does not insure the condition of the property.
  2. 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.

Resale

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.

 

Eligibility

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.

For Example
If the Freddie Mac limit is $417,000, a veteran with full eligibility can get a loan of up to $417,000 without a down payment. The VA will guarantee the lender $104,250 (25 percent) against his loss in the event of default. If the borrower wanted to buy a home for $450,000, the VA would still only guarantee up to $104,250 of the loan. The borrower would need a 25 percent down payment on the balance of the price above $417,000.

If the borrower wanted to buy a $200,000 home, the lender would be guaranteed $50,000 against loss by the VA.

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:

  1. The prior property has been sold and the VA loan has been paid in full.
  2. 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.
  3. One time only, the applicant has repaid the prior VA loan in full without disposing of the property securing that loan.
  4. 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.
  5. 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.

For Example
For a 7/23 loan, the borrower’s payments are based on a 30-year term, but he has to pay off the loan in seven years or have the rate reset to a new fixed rate, which will require a new payment amount for the remaining 23 years. Even though this type of loan has two rates, it is considered a fixed-rate loan.

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.

Amortized Loans

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.

For Example
A $20,000 loan is made with an interest rate of 9 percent per year. Payments are based on amortization schedule of 30 years, but the loan has a term of only five years. The 30-year amortization schedule keeps the payments affordable at $162.92 per month. However, after five years, the borrower would have to pay off the entire outstanding principal balance of about $19,176 in one lump-sum balloon payment. This could be described as a 360/60 loan, indicating payments based on 360 months of amortization with a term of only 60 months. It could also be described as a 30/5 loan, indicating a term of five years with 30-year amortization.

Negative Amortization

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.

Interest-Only Loans

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 Loans

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.

What are Land Contracts in Mortgages and Trust Deeds


Land Contracts

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.

Promissory Note

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:

  1. a due-on-sale (alienation) clause, which allows the lender to:
    1. declare the entire balance of the loan due at once; or
    2. 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.
  2. 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:
    1. a satisfaction or release is recorded to clear a mortgage lien; or
    2. 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:

  1. Interest
  2. Principal due
  3. Taxes and insurance, if paid to the lender
  4. Late charges
  5. Any other amounts due
  6. 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

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.

Who is a Correspondent Lender


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:

  1. 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.
  2. 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.
  3. 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.

Mortgage Broker

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:

    1. Federal National Mortgage Association (FNMA), or Fannie Mae, created in 1938
    2. Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, created in 1970
    3. 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.

Can I Be a Loan Officer With a Felony?


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:

  1. The NMLS must develop tests and approve educational courses.
  2. mortgage loan originators are required to comply with testing, education and bonding requirements.
  3. 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.

License Renewal

A state-licensed mortgage loan originator must renew his license annually by:

  1. continuing to meet the minimum standards for license issuance.
  2. 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:
    1. three hours of federal law and regulations.
    2. two hours of ethics, including instruction on fraud, consumer protection, and fair lending issues.
    3. 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.
Note
This is one fewer hour than the number of hours in ethics required for prelicensing education.