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- CONVENTIONAL LOANS:
- LOANS that are NOT GUARANTEED by a GOVERNMENT AGENCY
- made by INSTITUTIONS or INDIVIDUALS
- if a CONVENTIONAL LOAN is SOLD to GOV'T AGENCY, it's STILL CONVENTIONAL
- this course provides a GENERAL BACKGROUND - LENDERS' POLICIES vary
- divided into different TYPES depending on LOAN-TO-VALUE RATIO (LTV)
- LTV = LoanAmount / MIN(SalesPrice, AppraisedValue)
- 80% is MOST COMMON but 90% and 95% are also made
- these DIFFER in the FOLLOWING WAYS...
- HAVE MORTGAGE INSURANCE or NOT:
- INTEREST RATE CHANGES:
- DISCOUNT POINTS CHANGE:
- ESCROW PAYMENT FOR TAXES and INSURANCE or NOT:
- is SECONDARY FINANCING ALLOWED:
- ALL CONVENTIONAL LOANS require a DOWN PAYMENT:
- MINIMUM is 20% for an 80% LTV LOAN WITHOUT PRIVATE MORTGAGE INSURANCE
- MINIMUM is 5% for a 95% LTV LOAN WITH PRIVATE MORTGAGE INSURANCE
- DETERMINED by the AMOUNT the LENDER APPROVES
- the HIGHER the LTV the MORE FAVORABLE because it's a LOWER DOWN
- KEY DIFFERENCE is PRIVATE MORTGAGE INSURANCE (PMI)
- protects LENDER from BORROWER DEFAULTING
- 80% LOANS: usually NOT required because 20% DOWN is enough INSURANCE
- but as LTV INCREASES and DOWN DECREASES LENDER RISK INCREASES
- PMI is purchased by the BORROWER for the LENDER
- usually ONLY for AMOUNT ABOVE 80%
- usually CHARGED for 90% and 95% LTV LOANS and NOT for 80%
- one provider is the MORTGAGE GUARANTEE INSURANCE CORP (MGIC)
- typically UPFRONT PREMIUM PAID at CLOSING, then a MONTHLY PREMIUM
- stops when LTV goes below 80%
- MAXIMUM LOAN AMOUNT:
- determined by LENDER
- both FANNIE MAE and FREDDIE MAC set MAXIMUMS bought in SECONDARY MKT
- loans that EXCEED these are "JUMBO" or "NON-CONFORMING" LOANS
- usually have HIGHER INTEREST RATES and DIFFERENT ORGANIZATION
- INTEREST RATES:
- set by NEGOTIATION for CONVENTIONAL LOANS
- FHA and VA used to be REGULATED but NO LONGER SO - NOW NEGOTIATED
- HIGHER RISK loans generally have HIGHER INTEREST
- FIXED RATE: SAME INTEREST RATE for the LIFE of the LOAN
- DISCOUNT POINTS:
- PAID by BORROWER to make LOAN MARKETABLE in SECONDARY MARKET
- historically FHA and VA only, but NOW common with CONVENTIONAL
- also used to obtain LOWER INTEREST RATES
- HIGHER RISK loans, like 90% and 95% loans, carry HIGHER POINTS
- may be PAID by BUYER or SELLER or BOTH
- LOAN TERM:
- NEGOTIABLE
- for RESIDENTIAL usually 30 year, but 15 is becoming popular
- CLOSING COSTS:
- remember FIXED and VARIABLE cost from a previous lesson
- in real life, check with lender
- may be PAID by BUYER or SELLER
- ESCROW ACCOUNT:
- for 90% and 95% LOANS...
- BORROWER usually required to pay TAXES, INSURANCE, PMI into
an ESCROW account
- in 80% LOANS BORROWER usually is given a choice
- PAID as a part of the MONTHLY PAYMENT (1/12 at a time)
- established at CLOSING
- SECONDARY FINANCING:
- if BORROWER does NOT have enough for DOWN PAYMENT
- MORTGAGE(S) that are SUBORDINATE to the FIRST MORTGAGE
- SOURCES: BANKS, FINANCE COs, INDIVIDUALS, SELLER(PurchaseMoneyMort)
- usually CONDITIONS are...
- BORROWER MUST put up at least 10% of the SALE PRICE
- SECOND MORTGAGE <= what the BORROWER puts up
- usually only 80% LTV LOANS qualify
- LOAN PROCESSING:
- time varies but it's in the range of 4 to 6 WEEKS
- CONVENTIONAL usually require LESS TIME than FHA and VA
- APPRAISALS:
- CONVENTIONAL LOANS require APPRAISALS
- usually made AFTER LOAN APPLICATION and SIGNED SALES CONTRACT
- MADE by LENDER'S staff or PAID APPRAISER
- usually made BY the LENDER and NOT made AVAILABLE to BORROWER
- AFTER APPRAISAL...
- usually does NOT require REPAIRS unless STRUCTURAL DAMAGE
- PMI may require COSMETIC repairs
- SOME LENDERS, NOT ALL, may require TERMITE CERTIFICATION LETTER
- MUST STATE either TERMITES are NOT THERE or EXTERMINATED
- OCCASIONALLY SALES CONTRACT is CONTINGENT on APPRAISAL being
>= SALES PRICE
- if condition NOT MET, BUYER MAY...
- request RETURN of EARNEST MONEY
- PAY DIFFERENCE as ADDITIONAL DOWN PAYMENT
- OBTAIN LARGER LOAN (and PMI)
- RENEGOTIATE PRICE (MOST LIKELY - uncommon to pay > appraisal)
- have APPRAISAL RECONSIDERED
- NO standard procedures - use as a LAST RESORT
- ELIGIBLE PROPERTIES:
- CONVENTIONAL LOANS are AVAILABLE for MOST RESIDENTIAL PROPERTIES
- LOCATION: SHOULD BE...
- PAVED STREETS
- APPROPRIATE ZONING
- other homes in neighborhood should be SIMILAR VALUE
- NOT be near FACTORIES or COMMERCIAL AREAS
- CONDITION:
- NOT POOR CONDITION
- some LENDERS have AGE and SIZE REQUIREMENTS
- some LENDERS have MINIMUM and MAXIMUM
- 80%, 90% and 95% are NOT EXACTLY those percentages
- just that they will have DIFFERENT CHARACTERISTICS
- if < 80% it's called 80%
- if BT 80% and 90% it's called 90%
- if BT 90% and 95% it's called 95%
- EXAMPLE: consider a $82,000 SALE PRICE and $6,000 is put DOWN
$82,000 - $6,000 = $76,000
$76,000 / $82,000 = 92.7%
so it's considered a 95% LOAN
- DOWN PAYMENT:
- many times the BUYER wants the SMALLEST DOWN PAYMENT and MAX LOAN
- 80, 90, 95% will DETERMINE the LOAN AMOUNT
- Step 1: determine the DOLLAR AMOUNT of LOAN
like 80% of $76,400 is $61,120
SOME LENDERS ROUND to NEAREST $100, so $61,100
- so ALWAYS ROUND !DOWN! to NEAREST $100
- insures your CONTRACT will be OK
- EXAMPLE: SalePrice is $110,500 with a 90% CONVENTIONAL LOAN
- $110,500 X .90 = $99,450
- $99,400 (rounded down)
- LoanAmount = $99,400
- Step 2: SalePrice - LoanAmount = DownPayment
so DownPayment = $110,500 - $99,400 = $11,100
- PRIVATE MORTGAGE INSURANCE (PMI):
- CONVENTIONAL LOANS ONLY
- usually REQUIRED on 95% and 90% and sometimes on 80%
- PROTECTS LENDER against BORROWER DEFAULT on CONVENTIONAL LOANS
- PREMIUM is usually CALCULATED as a PERCENTAGE of LOAN AMOUNT
- CHARGED to BORROWER when LOAN is ORIGINATED but...
- can be PAID by BUYER or SELLER
- when SELLER PAYS PMI, MUST BE in CASH at CLOSING
- when BUYER PAYS PMI, may be PAID in ANY of THREE WAYS...
- CASH at CLOSING
- FINANCED with MORTGAGE PAYMENTS
- a LITTLE of BOTH
- HOW CALCULATED - DEPENDS ON WHETHER paid in CASH or FINANCED:
- IN CASH:
- SAME WHETHER SELLER OR BUYER PAYS
- VARIES in REAL LIFE - we'll use 90%-2% and 95%-2.5%
- PMI = LoanAmount X PMIPercentage
- Step 1: RawLoanAmount = SalePrice X LTV... like...
$88,500 X .90 = $79,650
- Step 2: LoanAmount - Rounded Down RawLoanAmount
$79,650 to $79,600
- Step 3: PMIPremium = LoanAmount X PMIPercentage
PMIPremium = $79,600 X .02 = $1,592
- FINANCED:
- we'll use a STANDARD FACTOR - varies in REAL WORLD
- StandardFactor = 1/4% or .0025
- DO NOT CONFUSE with the 2.5% or .025 from before
- then we'll DIVIDE by 12 for MonthlyPayment
- EXAMPLE: for a $66,900 SalePrice using a 95% LTV CONVENTIONAL LOAN
$66,900 X .95 = $63,555
$63,555 ROUNDS DOWN TO $63,500
$63,500 X .0025 = $158,75
$158,75 / 12 = $13.23
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