| A | B |
|---|
| Residential (Mass Production) | smaller $, homogenous (standardized loans), depends on borrower's income, more government involvement |
| Commercial (Custom shop) | Larger $, non-homogenous, depends on income produced by the property, less government involvement |
| Primary Mortgage Market | The origination market where borrowers and lenders negotiate mortgage terms; the creation of a capital asset |
| Loan Origination | process of creating a new loan agreement between a borrower and a lender |
| Secondary Mortgage Market | the buying and selling of existing mortgages. More prevalent in the homogeneous residential market relative to commercial. Mortgages can be held as whole loans or securitized |
| Government Sponsored Enterprise (GSE) | Ex: Fannie Mae & Freddie Mac |
| Government Insured Mortgage | insures/guarantees the lender against default or foreclosure. Higher LTV ratios. VA: can be up to 100% LTV |
| Conventional Mortgages | No government provided default insurance. Typically limited to 80% LTV. Default insurance provided through private mortgage insurance companies can allow LTV's to get up to 95% |
| Conforming conventional loan | Must conform to GSE underwriting standards: must use standard GSE documentation (application form, mortgage, note, and appraisal form). Loan cannot exceed certain %. Monthly payments can exceed certain percentage of borrower's income. Loan < 417k. These are more easily bought and sold due to their high level of liquidity and lower risk |
| Jumbo Loan | Meets all of the standards of the conforming conventional loan except for the loan's size |
| Non-conforming loan | GSE standards are NOT met |
| Private Mortgage Insurance (PMI) | Generally required on loans with LTV>80%. Usually covers the top 20% of the loan. Premium is based on the current balance |
| PMI Premium and Term | Paid up front or in addition to monthly payment. You can cancel when LTV < 80% of current property value. PMI company is required to terminate when the loan reaches 75% of the original value of the residence |
| Government-Sponsored Mortgage Programs | aids middle and lower income households in obtaining mortgages and purchase homes that would normally not qualify for a mortgage loan. Predominate approach to act through private mortgage markets. Some government programs make direct loans to home buyers |
| Federal Housing Administration (FHA) Insured Loans | A government agency that insures loans made by private lenders meet the FHA property and credit-risk standards. All lenders must be FHA-approved. Allows high LTV's (3.5% down payment). Insurance is paid by the borrower and protects the lender. Title is conveyed to US Dept. of Housing and Urban Development (HUD) in the event of foreclosure |
| Main Limitations of FHA insured loans | Max loan amount is only 65% of the conforming loan max of 417K. FHA premium is typically higher than PMI. The upfront % of the loan can be financed into the loan. Monthly premium (0.25-0.55%) |
| Term of FHA Insurance | Can cancel at 78% if premium has been paid for 5 years |
| Importance of FHA | Created in 1934 for restore confidence in mortgage market. Standardized residential mortgages. Established insurance programs to protect lenders |
| Veteran's Administration (VA) Guaranteed Loans | helps veterans obtain home mortgage loans from private lenders they may not otherwise qualify for at such favorable terms. Minimum VA = Minimum standard |
| Purchase-money mortgage | A mortgage loan where a seller lends all or part of the purchase price of a property. (Second Mortgage). |
| Package Mortgage | Has Real Estate and personal property in it |
| Home Equity Loan | A form of second mortgage with low interest rates, longer term and favorable tax status relative to consumer debt. Allows one to extract equity without refinancing the first loan. Interest in tax deductible. |
| Closed-end home equity loan | Fixed amount up front, then monthly payments |
| Open-end line of credit home equity loan | Draw funds as needed against a set max line of credit |
| Reverse Annuity Mortgage | A way for older homeowners to extract equity without having to sell their home. Significant mortality risk. |
| Interest Only (I-O) Mortgage | Mainstay prior to 1934. Pay monthly interest payments, 5-7 year term. Pay original balance at the end of each term. Can be fixed or variable rate. |
| IO Amortizing Mortgages | (Can be fixed or variable) Loan broken into 2 parts: IO loan up to 15 yrs, then payments to fully amortize. |
| Amortizing Balloon Mortgage | Payments are fixed 3-5-7 years. Amortized over 30 years. Balloon payment required at end of term (3-5-7yrs). Offers lower interest rate (Short term). Were popular because FMae & FMac would purchase them |
| Hybrid ARM | Fixed rate for the first 3 years, then interest rate is adjusted every year thereafter |
| Option ARM | (Credit Card) Allows borrower to switch along a variety of payment arrangements (e.g. switch from fully amortizing, interest only, or a minimum payment) Will neg. amort. to LTV of 125% |
| Prime Loans | A loan taken by a borrower deemed to be the most credit-worthy (High credit score, less risky, and with full required supported documents) |
| Subprime loans | Designed for borrowers with weak credit. Designed to be refinanced, typically into another SP loan |
| Alt-A Loan | Designed for borrowers with weak credit, who aren't quite subprime. Tended to be standard loans with one or two of the GSE criteria being relaxed. Higher interest rates than prime |
| Permanent Commercial Loan | Longer duration (5-10yrs), funds are distributed to borrower up front and paid back over time. Low default risk (backed by fully functioning property) |
| Construction Commercial Loan | Short term (1-3yrs) Funds distributed gradually (from lender). No payment to lender until project is complete |
