Conventional Financing Chapter 10 Quiz

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Questions and Answers

Conventional loans always require a 20% down payment.

False (B)

Loans that meet Fannie Mae and Freddie Mac guidelines are known as conforming loans.

True (A)

Risk-based loan fees can be used to compensate for a higher loan-to-value ratio.

True (A)

Private mortgage insurance is never cancellable once the loan is originated.

False (B) Signup and view all the answers

Buydowns can be used to lower the effective interest rate on a mortgage.

True (A) Signup and view all the answers

What is the primary purpose of private mortgage insurance (PMI)?

To protect the lender against financial loss if the borrower defaults. (C) Signup and view all the answers

A PMI policy must be automatically canceled when the loan's principal balance is paid down to what percentage of the property's original value?

78% (C) Signup and view all the answers

Which type of buydown has payments that may change over time?

Graduated temporary buydown (C) Signup and view all the answers

If a borrower defaults on a loan with PMI, what is the primary function of the insurance company?

To pay the difference between the outstanding balance and the foreclosure sale proceeds, up to the policy amount. (D) Signup and view all the answers

What is a common factor that determines eligibility for affordable housing programs?

Income level (C) Signup and view all the answers

What is the primary factor that determines if a conventional loan requires Private Mortgage Insurance?

The loan-to-value ratio. (A) Signup and view all the answers

Which of the following property types are typically eligible for a conventional loan that can be sold to Fannie Mae or Freddie Mac?

Site-built homes, manufactured homes, and townhouses (D) Signup and view all the answers

A borrower is seeking a loan for a property they intend to rent out to tenants. Which type of loan would this be categorized as?

Investor loan (B) Signup and view all the answers

What is typically the standard amortization period for conventional loans?

30 years (C) Signup and view all the answers

What does private mortgage insurance (PMI) typically cover?

25% to 30% of the loan amount (D) Signup and view all the answers

What is the standard maximum debt-to-income ratio for a manually underwritten loan?

36% (D) Signup and view all the answers

What occurs in a temporary buydown?

The borrower's payments are subsidized for a period of time. (B) Signup and view all the answers

A loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac is known as a what?

Jumbo loan (A) Signup and view all the answers

When two individuals apply for a mortgage, which credit score is typically used by underwriters?

The lowest of their credit scores (D) Signup and view all the answers

Which of the following is an eligibility criteria for an affordable housing program?

Property's location or job of the borrower (D) Signup and view all the answers

Study Notes

Learning Objectives

Students will be able to distinguish between conforming and nonconforming loans.
Students will be able to list key features of conventional loans.
Students will understand conforming loan limits and why they are important.
Students will summarize the concept of risk-based loan fees.
Students will be able to explain when private mortgage insurance is needed and when it can be canceled.
Students will discuss restrictions commonly placed on secondary financing.
Students will be able to calculate debt-to-income ratio and housing expense-to-income ratio (PITI) ratios.
Students will list compensating factors that may justify loans with higher ratios.
Students will describe ways to make a loan more affordable, such as buydowns and accelerated payment plans.

Suggested Lesson Plan

Students will review the previous chapter, "Qualifying the Property," by completing Exercise 10.1.
Students will receive a brief overview of Chapter 10, "Conventional Financing," and review the learning objectives for the chapter.

Conforming and Nonconforming Loans

Conforming loans comply with Fannie Mae and Freddie Mac underwriting guidelines.
Nonconforming loans do not follow these guidelines.
Nonconforming loans cannot be sold on the secondary market and usually have more stringent qualifying standards and higher rates or fees.
Nonconforming loans may be considered "jumbo loans" when they exceed conforming limits.

Conventional Loan Characteristics

Property types and owner-occupancy: loans can be for principal residence (up to four units) or a second home (with no more than one unit), including site-built homes, manufactured homes, townhouses, condos, and co-ops.
Loan amounts: conforming loan limits are set annually; higher costs are present in high-cost areas such as Alaska, Guam, Hawaii, and the Virgin Islands.
Repayment periods: loans can range from 10 to 40 years, with 30 years being the standard; 15-year loans are also common.
Amortization: most conventional loans are fully amortized.
Loan-to-value ratios: a 80% ratio is typical, but higher LTVs up to 97% are possible with additional fees and more stringent underwriting.
Loan fees and interest rates: subject to risk-based loan-level price adjustments (LLPA); generally, riskier loans have higher fees and rates based on a borrower's credit history and the proposed LTV.
Private mortgage insurance (PMI): is required for loans with LTVs over 80%, although can be canceled when the loan balance reaches 78% or 80% of the original value, depending on the lender and contractual agreement.
Loan Characteristics include: Property types, Loan amounts, Repayment periods, Amortization, Loan-to-value ratios, Loan fees and interest rates, Private Mortgage insurance (PMI), Secondary financing.

Qualifying Standards

Evaluating risk factors: assess creditworthiness and loan-to-value ratio.
Income analysis: determine debt-to-income ratio and housing expense-to-income ratio (PITI) ratios.
Available funds: consider reserves to cover expenses beyond the minimum, often 2 months of payments, but this can be more depending on qualifying standards and risk analysis.

Buydowns Plans

Temporary buydowns: lower interest rates for a specific period via points.
Permanent buydowns: lower interest rates for the entire life of a loan, reducing monthly mortgage payments using points from the seller or third party.

Conventional Low-Downpayment Programs

Designed for buyers with limited funds.
Can utilize alternate or outside loan sources or contributions to closing costs, but restrictions and requirements may apply.
Lender contributions to closing costs may be permitted based on the program.

Secondary Financing

Restrictions may apply (e.g., borrower must qualify for total combined payments, minimum downpayment requirements, no balloon payments for a specific number of years, specified payment schedules).

Exercises

Answers to specific examples are included.

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Description

Test your understanding of Chapter 10 on Conventional Financing. This quiz covers key concepts such as conforming and nonconforming loans, conventional loan features, and calculations involving debt ratios. Get ready to demonstrate your knowledge on affordable loan strategies and mortgage insurance.