Conventional Financing Chapter 10 Quiz

Loans that meet the underwriting guidelines set by Fannie Mae and Freddie Mac.

Loans that don't meet the guidelines of Fannie Mae and Freddie Mac. They are often offered by private lenders and may have higher interest rates.

Used to assess the borrower's ability to repay the loan. It's calculated by dividing total monthly debt payments by gross monthly income.

A program allowing a buyer to make a smaller down payment on a conforming loan by having the seller or lender contribute funds to reduce the interest rate for a set period, making monthly payments more manageable.

Insurance required by lenders when the loan-to-value ratio (LTV) is high, protecting the lender against losses in case of a borrower default. Typically required for loans with an LTV greater than 80%.

A temporary reduction in interest rates for a set period, typically 1-3 years, can have level payments or graduated payments where the payments increase incrementally during the buydown period.

Fannie Mae and Freddie Mac have limits on how much a seller or another interested party can contribute towards a buydown to help a buyer, to prevent excessive influencing of the transaction.

Conventional loans with a high loan-to-value (LTV) ratio may be available for borrowers with a strong credit history and income, offering financing options for those with limited down payment funds.

Programs designed to make homeownership more attainable for low- and moderate-income individuals by factoring in income, property location, and job qualifications.

Certain conventional loans might allow for limited contributions from lenders to help cover closing costs, easing the financial burden for buyers.

Loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac. These loans are often obtained from private lenders and usually have stricter qualifying standards and higher interest rates and fees.

Loans that don't meet the underwriting guidelines set by Fannie Mae and Freddie Mac and aren't eligible for sale to these entities, except under special circumstances. These loans are often less standardized and carry a higher risk for lenders.

A type of mortgage insurance offered by private companies to protect lenders against financial losses if a borrower defaults on a loan with a high loan-to-value ratio (LTV). It typically covers a portion of the loan amount.

A fee charged by lenders on conventional loans sold to Fannie Mae and Freddie Mac. The fee is based on the risk associated with the loan, with riskier loans incurring a higher LLPA. This helps the GSEs manage their risk exposure.

The ratio of the loan amount to the appraised value of the property. For conventional loans, the traditional LTV is 80%, but borrowers may find loans with LTVs up to 97%.

A ratio that compares the borrower's monthly housing expenses (PITI payments) to their gross monthly income. This ratio represents the proportion of income dedicated to housing costs.

A policy that automatically cancels after the principal balance is repaid down to 78% of the property's original value. At the borrower's request it can be terminated once the loan balance reaches 80% of the original property value.

Manual underwriting is a process where a lender carefully reviews a borrower's financial information to determine loan eligibility, using standard income ratios to assess affordability.

The maximum debt-to-income ratio (DTI) allowed for a manually underwritten conventional loan is 36%. If the borrower's DTI exceeds this limit, they may need to find alternative financing options or reduce their debt obligations.

Factors that can compensate for a DTI above the 36% limit include a strong credit history, substantial liquid assets, a large down payment, education or training indicating earning potential, and demonstrable ability to handle a higher housing expense.

A type of buydown plan where the interest rate on the loan is reduced for the first few years of the loan term. This results in lower monthly payments during the buydown period, but payments will increase back to the original rate after the buydown ends.

A type of buydown plan where the interest rate on the loan is reduced permanently, resulting in lower monthly payments for the entire life of the loan. This is typically achieved by the seller or lender contributing funds to reduce the interest rate.

A program that assists homebuyers with lower incomes by offering affordable housing options, often in lower-income neighborhoods. These programs typically require income qualification and may also include subsidies for down payments or closing costs.

When a borrower fails to make payments on their mortgage, the lender can opt to either seize the property (foreclosure) or hand it over to the insurer and claim reimbursement for losses up to the policy amount.

Homeowners Protection Act mandates lenders to cancel PMI upon the borrower's request when the loan is paid down to 80% of the original property value, or automatically when it reaches 78% of the original value or the loan term reaches its midpoint (if payments are current).

Secondary financing involves taking out a second mortgage on a property. Lenders often impose limits on this to mitigate their risk.

Piggyback loans are a type of secondary financing where a borrower uses an additional mortgage to avoid paying for private mortgage insurance or to avoid having the loan categorized as a jumbo loan.

This ratio compares a borrower's proposed housing expenses (principal, interest, taxes, insurance) to their stable monthly income. Ideally, it should be no more than 28% of their income.

These are funds held in reserve to cover unexpected financial issues, like job loss or unexpected expenses. Ideally, borrowers should have at least two months' worth of mortgage payments in reserve after the down payment and closing costs.

When a borrower is unable to meet their mortgage payments, a lender can either seize the property (foreclosure) or hand it over to the insurer (PMI) to reimburse the lender for their losses up to the policy amount.

A program that allows buyers to make a smaller down payment by having the seller or lender contribute funds to reduce the interest rate for the life of the loan. This results in permanently lower monthly payments.