Financing Programs Overview

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Questions and Answers

A longer loan term generally results in smaller monthly payments but more total interest paid over the term.

True

Conventional loans are exclusively backed by government sponsorship.

False

Amortization refers to how interest is paid off over the loan term.

False

Seller financing can include various types and methods that assist buyers with purchasing a home.

True Signup and view all the answers

A balloon payment is a type of financing that requires a lump-sum payment at the end of the loan term.

True Signup and view all the answers

What is the standard repayment period for most mortgage loans?

30 years Signup and view all the answers

Which of the following best describes a fully amortized loan?

Monthly payments include both principal and interest, fully paying off the loan. Signup and view all the answers

What effect does a longer loan term generally have on total interest paid?

More total interest paid due to extended repayment duration. Signup and view all the answers

Which financing option is NOT typically a government-sponsored loan?

Conventional loans Signup and view all the answers

What is a characteristic of partially amortized loans?

They require a balloon payment at the end of the term. Signup and view all the answers

Match the following loan features with their descriptions:

Repayment period = Years borrower has to repay the loan Amortization = How principal and interest are paid off over the loan term Loan-to-value ratio = Percentage of the property's value that is borrowed Fixed interest rate = Interest rate that remains the same throughout the loan term Signup and view all the answers

Match the following types of loans with their characteristics:

Conventional loans = Not government-backed and can be sold on the secondary market FHA-insured loans = Government-sponsored loans backed by the Federal Housing Administration VA-guaranteed loans = Loans guaranteed for eligible veterans and active-duty service members Cal-Vet loans = Loans offered to veterans in California for home purchase Signup and view all the answers

Match the following seller financing methods with their explanations:

Wraparound mortgage = Seller offers a new mortgage that includes the existing loan Lease option = Buyer leases the property with an option to purchase later Seller carryback = Seller finances part of the purchase price for the buyer Land contract = Buyer pays for the property in installments while the seller retains the title Signup and view all the answers

Match the following loan terms with their respective advantages:

Longer loan term = Smaller monthly payments but more total interest paid Shorter loan term = Building equity faster and reducing total interest costs Partially amortized loan = Has a balloon payment due at the end of the term Interest-only loan = No principal payments during the term or for a certain time Signup and view all the answers

Match the following terms related to loan payments with their definitions:

Principal = The amount borrowed or the original amount of the loan Interest = The cost of borrowing money expressed as a percentage Balloon payment = A large payment due at the end of a loan term Monthly payment = The regular payment amount made by the borrower Signup and view all the answers

Study Notes

Financing Programs

Loan features:
- Repayment period (loan term): The length of time to repay the loan, typically 15-40 years. Longer terms mean lower monthly payments but higher total interest. A 30-year term has been common, but lenders offer terms from 10-40 years. Longer terms mean lower monthly payments but more total interest. Shorter terms mean faster equity build-up and lower total interest, but may be harder to qualify for. A longer loan term means smaller monthly payments but more total interest. A shorter term builds equity quicker and has lower overall interest, but makes qualification more difficult.
- Amortization: How the loan's principal and interest are paid off monthly over the loan term. Most loans are fully amortized (completely paid off). Some are partially amortized with a lump-sum balloon payment due at the end. Interest-only loans have no principal payments (in basic type, borrower pays only interest, so the entire principal is due at the end).
- Loan-to-value ratio (LTV): The ratio of the loan amount to the home's value. Lenders use LTV to set maximum loan amounts (higher LTV means a larger loan and smaller downpayment). Lower LTVs are less risky. Higher LTVs lead to larger loan amounts and smaller downpayments. Lower LTVs are less risky for lenders.
- Secondary financing: Additional financing for downpayments or closing costs (e.g., from a seller, another lender). Primary lenders usually have restrictions. Usually used for paying down payments and closing costs.
- Loan fees: Interest, and points (1% of loan amount). Two types of points: loan origination fees (administrative charge for loan processing), and discount points (increase lender's yield/profit for lower interest rates).
- Interest rates: Can be fixed (constant throughout the loan term) or adjustable (ARM). ARMs periodically adjust based on market interest rates. Key ARM features include note rate (initial rate), index, margin (difference between market rate and ARM rate), adjustment periods (rate and payment), caps (limitations on rate and payment increases), and conversion options (to a fixed-rate loan). Hybrid ARMs are combinations of fixed and adjustable rates (e.g., 3/1 ARM fixed for 3 years then adjustable annually).
- Loan features and terminology:
  - Note rate: Initial interest rate for an ARM.
  - Index: Statistical report used to measure market changes.
  - Margin: Difference between index rate and interest rate charged.
  - Rate caps: Annual or life-of-loan limits on interest increases to protect borrowers from payment shock.
  - Payment caps: Limit payment increases.
  - Negative amortization cap: Limits the amount of unpaid interest added to the principal to prevent balance increases. Most ARMs are structured to avoid negative amortization.
  - Conversion option: Allows a borrower to change from an ARM to a fixed-rate loan.

Conventional Loans

Definition: Loans not made or guaranteed by a government agency.
Portfolio loans: Loans kept by the lender, not sold on the secondary market.
Conforming loans: Meet uniform underwriting standards; can be sold on the secondary market (e.g., Fannie Mae or Freddie Mac).
- Conforming Loan Limits: Yearly adjusted maximum loan amounts based on regional median housing prices.
Nonconforming loans (jumbo loans): Only meet lender's own underwriting standards; harder to sell on the secondary market.
Characteristics:
- Loan amounts: Subject to conforming loan limits. Jumbo loans exceed limits. Higher priced homes often need conventional loans.
- Loan-to-value ratios (LTVs): Typical ratios up to 95%, but stricter standards and higher rates apply for LTVs over 90%. Lower LTVs are less risky.
- Private Mortgage Insurance (PMI): Usually required if LTV is over 80%. Covers lender loss up to policy amount. Cancellable under conditions (balance at 80% or 78% with no delinquencies). Homeowners Protection Act enforces cancellation conditions and timing.
- Risk-based loan fees: Almost all secondary market loans have Loan Level Price Adjustments (LLPAs) for riskier loans.
- Secondary financing: Lenders usually impose restrictions.
- Prepayment penalties: Not standard but may be included. California restricts prepayment penalties in 1-4 unit residential loans to the first 5 years.
- Underwriting: Lenders consider debt-to-income ratios, income ratios, and other factors like down payments, income, and credit score to minimize risk.
- Methods to make loans more affordable:
  - Interest buydowns: Reduction in interest rate and payments (like discount points) for a period (permanent or temporary). Temporary buydowns reduce payments early but may rise later.
  - Low-downpayment programs: Financing for less than a 5% down payment from the buyer, with the balance from other sources.
  - Low-initial payments: Hybrid ARMs, interest-only mortgages.

Government-Sponsored Loan Programs

FHA-insured loans: Insured by the Federal Housing Administration.
- Characteristics: Lower cash investment and easier to qualify for often due to lower income requirements, but require mortgage insurance and other requirements. Typically requires lower down payments and easier eligibility compared to conventional loans, but comes with various mortgage insurance requirements.
VA-guaranteed loans: Guaranteed by the Department of Veterans Affairs.
- Characteristics: Often allow 100% financing. No mortgage insurance (also not limited by income), but require eligibility as a veteran and appropriate occupancy; generally easier to qualify for. Often have no down payment requirements.
Cal-Vet loans: California state program with specific eligibility, income, and loan amount conditions.

Seller Financing

Seller financing: When the seller helps finance the buyer's purchase. Includes purchase money mortgages (seller extends credit), and land contracts (buyer has equitable title).
Advantages: Can help buyers who can't qualify for traditional loans, may save financing costs, and sometimes offer tax benefits for the seller.
Concerns: Risk for the seller that buyer cannot repay, tax concerns for the seller, and how much immediate sale cash is needed, and the priority of the seller's lien if buyer defaults.
Types of seller financing:
- Seller second: Buyer mostly finances with an institutional loan, seller finances a portion of the downpayment.
- Primary seller financing: No institutional loan; possible for unencumbered (free of liens) or encumbered (with first mortgage) property. Wraparound loan (seller extends credit for the amount needed for the purchase less any downpayment and pays down the first mortgage with buyer payments.).
- Lease/option: Gives buyer time to get funds.

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Description

This quiz provides a comprehensive overview of financing programs, including key loan features such as repayment terms, amortization, and loan-to-value ratios. Understand the different aspects of loans and how they impact home financing decisions. Test your knowledge on secondary financing and loan fees to prepare yourself for real estate transactions.