Neighborhood Housing Services of NYC NHS Continuing Education Training Lending Training Workshop

Neighborhood Housing Services of NYCNHS Continuing Education TrainingLending Training Workshop The Lending BasicsThursday, March 6th , 2008

Introduction Course Description: • The workshop will be a comprehensive review of key elements of the mortgage finance industry including: • The key players • The basics of loan product options • The pros and cons to various loan programs • The understanding of non traditional products • The types of loan documentation • Understanding amortization and negative amortization • How lenders price loans and a general understanding of loan disclosures and loan documents.

Laws that Protect the Consumer • Equal Credit Opportunity Act • Fair Housing Act • Truth in Lending Act • Fair Credit Reporting Act • Fair Credit Billing Act • Fair Debt Collection Practices Act • Many States have similar laws 17

Mortgage Providers • Banks and Savings and Loans • Mortgage Lenders • Credit Unions • USDA Rural Development • Government Agencies • Nonprofit Organizations

The Role of the Mortgage Broker • Why engage a mortgage broker? • Convenience • Perception of trusted advisor • Accessibility to more lending products • Independent contractor • Not a loan originator • Liaison between borrowers and lenders • Chose a mortgage broker wisely

How Mortgage Brokers Earn their Income Fees paid by the borrower • Broker points • Application fees • Other processing fees • Yield Spread Premium • Required disclosures

Difference Between Pre-qualification and Pre-approval • The difference between prequalification and pre-approval • Reasons and advantages • The down payment plays a role in both  11

Applying For a Mortgage Loan Steps involved in obtaining a Mortgage Loan • Initial documents • Prime and Subprime Mortgage Loans • Risk based pricing • Mortgage options • Legal documents at closing Refer to charts-  36

Applying for a Mortgage Loan • Mortgage application [Form1003 Fannie Mae Standard] • Personal financial information • Preliminary Good Faith Estimate • Truth in Lending – Cost of buying on credit • Commitment letter  18

The Mortgage Payments and Other Costs of Homeownership • Principal • Interest • Taxes • Insurance • Private Mortgage Insurance 18 & 19

Additional Costs of Homeownership • Closing costs • Moving expenses • Reserve funds • Home maintenance • Home Owners Association Dues if property is a condominium or located in a PUD

Understanding Ratios • Housing Ratio – generally no greater than 33% • If the monthly gross income is $2,500 the maximum housing expense should be no more than $825 • $2,500x 33% = $825 • Total Debt to Income Ratio – generally no greater than 38% • Maximum combination of the mortgage and other revolving and long-term debt should be no more than 38% of the gross monthly income • If the monthly gross income is $2,500, the maximum total debt, including the mortgage should be no more than $950 • $2,500 x 38% = $950

Conforming Conventional Loans Affordable Loan Programs Traditional Loan Programs Source: Fannie Mae – Subject to change  20

Government Loan ProgramsFHA, VA, and USDA mortgages Government Insured Loans • FHA Loan Limits State of New York Mortgage Finance Agency (SONYMA) Limits according to county. See website for targeted and non-targeted areas Source: US Department of Housing and Urban Development – Subject to change  24 & 25

Fixed Rate Mortgages The most popular mortgage loan is the traditional fixed rate mortgage • Interest rate does not change over the term of the loan • Fully amortized • Equal payments • Most typical – 15 and 30 years terms • Some lenders offer 40 years programs

Sample Fixed Rate Loan Amortization Chart • Refer to Amortization Handout

Advantages & DisadvantagesFixed Rate Mortgage Loans • Advantages • Fixed interest rate for the life of the loan • Terms of 15, 30 and 40 years • Monthly payments remain the same • Loan fully amortizes • Disadvantages • Loan must be refinanced to obtain a different rate (in falling markets) • Higher initial rate compared to ARMs • No flexibility in payment options – must make the fully amortizing payment  21

Adjustable Rate Mortgage Loans (ARM) • Interest rate fluctuates • Payment can change • Caps limit fluctuations • Hybrids – with fixed periods  22, Chart  23

Sample - ARM Rate Changes This example assumes a 1 Year ARM; $150,000 loan amount, 3% down payment, $500 in lender fees, and two discount points. A 4% initial rate was offered at loan origination with a 4.274% APR.  23

APR!Check the Annual Percentage Rate • This number includes the interest charged plus any points and all lender fees • A low interest rate loan product may sound great, be sure to see if there are multiple points and lender fees that make the total APR much higher. • The bigger the difference between the interest rate and the APR, the more you are paying in fees and other costs • Remember, the buyer always pays the costs; either upfront or in the form of a higher rate.

Subprime Mortgage Loans • What are subprime mortgage loans? • Conventional mortgage loans originated by Lenders and Mortgage companies to serve borrowers that do not qualify for prime loans due to past and present credit problems or other risk factors • Because of the risk involved in lending, subprime loans may have higher interest rates and may be more costly to the consumers.  24

Is a Subprime Mortgage Rate Good for You? • Depend on the borrower’s present situation • Name acceptable situations • Don’t want to lose a good buying opportunity • Can afford higher monthly payments • Committed to improve credit profile • Be able to refinance to a prime rate in the future  24

What is Risk-based Pricing? • Loans rely on what is commonly referred to as risk-based pricing • Risk factors affecting the loan rate • Credit score • Credit history • Loan to value ratio • Debt to income ratio • Income history  24

Beware of Predatory Lending • Are subprime loans predatory? • NO • Every industry has “bad apples” • Beware of unethical lenders, mortgage originators, contractors, appraisers and others involved in the home financing process • “Knowledge is empowering”  24

Other Mortgage Options: Advantages & Disadvantages • Interest Only • Pro - Small monthly payments • Con - Balance does not decrease • Pay Option • Pro – Choose monthly payment option • Con – ARM loan, possible negative amortization • Balloon-Payment Mortgages • Pro – Small monthly payment • Con – Possible negative amortization  23

Non-Traditional Mortgage Products • What are they? • Residential mortgage loan products that allow the customer to defer repayment of principal or interest, including but not limited to an interest-only mortgage loan product • Negative amortization mortgage loan products  21

Negative Amortization Mortgages Let’s review the handout with a sample of a negative amortization mortgage. • Advantages • Disadvantages • Could this type of loan be good? Refer to negative amortization handout

Full vs. Reduced Documentation • Full documentation • Reduced documentation sample: • 30 yr. fixed rate loan of $300,000 might cost 0.75% or a $2,250 up front payment • You can increase the interest rate instead of paying the upfront payment by adding 0.375% to the interest rate or an additional $77 per month ($27,720 over 30 years) • Always compare Annual Percentage Rates  24

Options to Lower the Interest Rate • Buy-down interest • Prepayment penalty

Typical Add-on Fees  27

Pricing Exceptions - Overages • Often times Lenders set a base price which Loan Officers utilize to price their loans. • The price above or below the base price is considered a pricing exception. • Generally, Lenders limit the amount of positive pricing exceptions which are otherwise known as “overages” • “Overages” increase the cost of the loan

Pricing Exceptions - Underages • Sometimes Loan Officers price loans below the base price and these are known as an “underage” • “Underages” decrease the cost of the loan • Since the price you were quoted may be based on a pricing exception • It is important to negotiate interest rates as well as your points and fees

Legal Documents at Closing • Final 1003 [Fannie Mae Standard Mortgage Application] • Mortgage • Promissory Note • Affidavits • Deed • Title Insurance • Title Abstract • Survey • Escrow Analysis • Homeowners Insurance  29

Legal Documents Review – Hand outs • Final Truth in Lending [TILA] • Final Good Faith Estimate • HUD 1  29

Thank you! For your attention during the class and for sharing your experience and prior knowledge. Hope that what you learned here today will help you to continue improving the quality of life of the families you serve. Marcia

Neighborhood Housing Services of NYC NHS Continuing Education Training Lending Training Workshop