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Real Estate Exam 4

Real Estate Exam 4 - Real Estate Exam 4 CH 11 Residential...

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Real Estate Exam 4 CH 11 Residential Mortgage Types and Borrower Decisions Residential Mortgages Mortgage loan types Conventional mortgages FHA mortgages –federal housing mortgages VA mortgages Home equity loans Mortgage decisions Mortgage choice Amount to borrow (vs. equity/cash) Refinancing Two markets: primary and secondary Primary Mortgage Market- the supply side Where mortgage loans are created (“originated”) The players… Mortgage banks Mortgage brokers
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Commercial Banks Credit Unions Secondary Mortgage Market Where loans are sold to investors Wholesale market used by lenders Dependent upon loan “securitization” “Mortgage backed securities” (“MBS”) Key players: government-sponsored enterprises (“GSE”) Fannie Mae Freddie Mac Conventional Mortgage Loans Oldest/traditional form- kind of a default loan Any home mortgage loan not insured or guaranteed by an agency of the government Typically a level payment mortgage (“LPM”) Lender risk derived from different maturities and borrower differentiation Revolutionized in 1940s by private mortgage insurance (PMI) Many new varieties of “conventional” loans in recent years The Language of Conventional Mortgage Loans
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“Conforming loan” meets the requirements for purchase by GSEs (Freddie Mac or Fannie Mae): Standard note form Standard mortgage/DOT form Standard appraisal Minimum creditworthiness of borrower (credit score) Maximum LTV (80% w/out PMI) Size limit (no “Jumbo Loans”) Interest rate advantage due to liquidity (at least .25%) “Non-conforming loan” does not meet GSE requirements in some respect PMI-Private Mortgage Insurance Protects lender against losses due to default Generally required for loans over 80% of appraised value (“LTV”) Protects lender for losses up to 20% of loan (i.e., it insures the top 20% of the loan) Example mortgage insurance premiums (“MIP”): 2.5% of loan in single up-front premium
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0.5% annual premium (paid monthly w/ payments) Effect: Lowers amount you can borrow/buy because you can only afford so much payment and payment now used in part to pay PMI Cancellation allowed if loan balance falls to 80% of current appraised value of home and borrower is in good standing Typically borrower has to provide updated appraisal to prove current value
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