Conventional Loans/Financing
[Pages:30]Chapter 4: Conventional Loans/Financing
Chapter 4
Conventional Loans/Financing
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
Chapter 4: Conventional Loans/Financing
Chapter Objectives
? Identify the characteristics of a conventional loan
? Define amortization ? Identify different types of conventional loans ? Recognize the use of private mortgage
insurance ? Contrast conforming and nonconforming
loans ? Describe methods of secondary financing
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
Chapter 4: Conventional Loans/Financing
Conventional Loans and Financing
? Conventional Loans
? Made by a bank or institutional lender; not insured/guaranteed by government
? Most conform to GSE guidelines to sell in secondary market; called a conforming loan
? Traditional Conventional Loan
? Long-term: maximum of 30 years ? Fully amortizing: total payments over life of a loan pay
off entire balance of principal and interest due at end of term ? Fixed-rate: interest rate, but not necessarily payment, remains constant for the duration of the loan
12 CFR 1026,?1026.43(e)
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
Chapter 4: Conventional Loans/Financing
Conventional Loans and Financing
? 15-Year Mortgage Loans
Advantages
Disadvantages
Lenders give better interest rate
Shorter term = less risk
Payments higher
Higher payments consume financial
Total interest paid
resources that might be
about one-third less
invested/earn higher
than 30-year at the
rate of return
same interest rate
Borrower's income tax
Borrower has full
deduction declines
ownership in half the
more quickly
time
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
Chapter 4: Conventional Loans/Financing
Conventional Loans and Financing
? Bi-Weekly Payment Plan
? Fixed-rate mortgage set up like 30-year conventional loan
? Regular monthly payments; monthly amortization schedule
? Payments every two weeks ? Usually paid off in about 22 to 26 years, instead
of 30 years, depending on the interest rate charged
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
Chapter 4: Conventional Loans/Financing
4.1 Knowledge Check
1. A _____ loan is BEST defined as a loan that meets the criteria necessary to be sold in the secondary market.
A. conforming B. conventional C. fixed rate D. nonconforming
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
Chapter 4: Conventional Loans/Financing
4.1 Knowledge Check
2. A self-liquidating loan
A. requires a balloon payment to be made at the end of the loan term.
B. is one where the borrower's monthly payments reduce the principal balance of the loan over the term of the loan.
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
Chapter 4: Conventional Loans/Financing
Conforming vs. Nonconforming Loans
? Conforming Loans
? Meet Fannie Mae / Freddie Mac standards; can be sold on the secondary market
? Qualifying Guidelines
? 28% total housing expense ratio ? 36% total debt-to-income ratio ? Borrowers must qualify under both ratios ? Borrowers should have 2 months of reserves
? Nonconforming Loans
? Do not meet standards and cannot be sold to Fannie Mae / Freddie Mac
? Can be sold to other secondary markets
Mortgage Lending Principles & Practices (10th Edition) 01/03/20
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