Mortgage

What is Mortgage?
 A legal agreement by which a bank, building society,
etc. lends money at interest in exchange for taking title
of the debtor’s property, with the condition that the
conveyance of title becomes void upon the payment of
the debt

 A mortgage loan is a loan secured by real property

through the use of a mortgage note which evidences the
existence of the loan and the burden of that realty
through the granting of a mortgage which secures the
loan.

 The word mortgage is a French Law term meaning

"death contract", meaning that the pledge ends (dies)
when either the obligation is fulfilled or the property is
taken through foreclosure.
Emergence of Mortgage Industry

Prior to 1930:

 Mortgage industry did not exist.

 Schedule for the payment did not exist.

 Shorter loan tenures.

Emergence of Mortgage Industry
Depression in 1930’s

The depression had a terrible impact on the economy.

 Unemployment.

 Stock market crashed.

 Foreclosure
Emergence of Mortgage Industry
Set up of Government Organizations:

 The Federal Housing Administration (FHA)

 The Federal Deposit Insurance Corporation (FDIC)

 The Federal Savings and Loan Insurance Corporation (FSLIC)

Goal of Organizations:

 To establish a mortgage market to increase funds for lending

 To encourage home ownership

Mortgage Industry
The residential real estate lending industry
comprises of two distinct areas.

 Primary Market – is that portion of mortgage market where

origination of mortgage takes place

 Secondary Market - is that portion of mortgage market

where sale and purchase of mortgage takes place
Players in Primary Market
 Borrower – Applies for and receives a loan in form of a mortgage
with the intension of repaying the loan in full.

 Lenders – Lends money to the borrower for a specified period of

time at a specified interest rate.

 Seller – sells the property to the borrower at the market value.

 Broker – Assist the borrower in the loan selection process,

completing the loan application and direct them to the suitable
lenders to fund the mortgage.
Players in Secondary Market
 Fannie Mae (Federal National Mortgage Association)

 Ginnie Mae (Government National Mortgage Association)

 Freddie Mac (Federal Home Loan Mortgage Corporation)

 Private Investors
Role of Secondary Market in the
Economy:
 Creates liquidity.

 Facilitates
the movement of capital from
surplus regions to low capital regions.
Primary and Secondary Market
1. Prospective homebuyer applies for a mortgage loan
through a mortgage lender, mortgage broker, credit union
or even on-line. Automated underwriting systems like
Loan Prospector or Desktop Underwriter evaluate a
homebuyer’s credit, collateral and capacity to repay against
the loan requirements and responds with in minutes.

2. Mortgage lender packages the loans it has made and sells

those packages to the secondary market (Fannie Mae or
Freddie Mac). The lenders uses the proceeds of the sale to
make new loans to other homebuyers.

3. Fannie and Freddie sells notes backed by the mortgage

loans it has purchased to the securities investors. It uses the
funds from the security sales to purchase more mortgage
loans from lenders across the country.
Types of Loan
 Conventional Loan: A mortgage loan that is based
on guidelines set by private investors and is not
guaranteed or insured by an agency of the federal
or state government. Conventional loan programs
follow pricing of the secondary market for loan
products. These loans may be purchased and
securitized by Government Sponsored Entities
(“GSE”) such as Fannie Mae and Freddie Mac.

 Government Loans – Any loan that is guaranteed

by the government.
o FHA – A loan which is guaranteed by Federal Housing
Administration.

o VA (Veterans Affairs) – A low cost for U.S. veterans that is

partially guaranteed by the Department of Veterans Affairs.
Loan types based on borrower’s default
risk:
1. Prime Loan
2. Alt A Loan
3. Sub Prime Loan

 Prime Loan: A mortgage loan product that is targeted to

borrowers that carry least default risk and usually have strict
underwriting guidelines. The low default risk, or high credit
rating, of the borrower comprises of high credit score, stable
income, stable employment, and other risk mitigating factors.
These loans generally do not allow 100% financing and are
within the conforming loan limits. The strict underwriting
guidelines require the borrowers to verify their assets,
income, and employment. A Prime Loan is also known as A
Paper Loan.
Loan types based on borrower’s default
risk:
 Alt A Loan: A mortgage loan that carry more default risk than
an A Paper loan and is targeted at borrowers having less than
perfect credit. The credit score of borrowers usually range
between 620 and 720. Other features of the loan that increase the
risk are 100% financing, non owner occupied properties, limited
or no verification of income, assets, or employment. Alt A Loan
is short for Alternative A-Paper Loan.

 Sub Prime Loan: A mortgage loan that is offered to borrowers

with significant default risk. The borrower may have credit
scores ranging from 640 and lower which reflect risk factors such
as late payments, loan defaults, foreclosure, recent discharge
from bankruptcy, and others. These loans may also be offered to
borrowers with limited credit history. Sub Prime loans carry high
interest rate to cover the high likelihood of payment default.
These loans are also known as Non Prime Loans.
Loan Programs based on loan amounts:
 Conforming Loan: A mortgage loan that can be purchased or
guaranteed by Fannie Mae or Freddie Mac and which restricts
the maximum loan amount to the conforming loan limits set by
Federal Housing Finance Agency (FHFA).

 Non-Conforming Loan: A mortgage loan that does not conform

to the conforming loan limits set by FHFA or the underwriting
guidelines established by Fannie Mae or Freddie Mac. Fannie
Mae or Freddie Mac would not buy these loans. Therefore, these
loans have lower liquidity and carry higher interest rates and
origination points. Jumbo Loans are a type of non-conforming
loans which exceed the conforming loan limits set by FHFA.

 Jumbo Loan: A jumbo loan is a loan with a loan amount larger

than the limits set by the Office of Federal Housing Enterprise
Oversight (OFHEO), Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation. Currently the
limit is set at $417,000 for most areas. Special areas such as
Alaska, Hawaii, Guam, and the U.S. Virgin Islands have a higher
limit of $625,000. Because jumbo loans cannot be funded by these
two agencies, they usually carry a higher interest rate; usually
.25% to .50% higher than that of a conforming loan.
Types of Loan Products:
Loan products have been classified in different ways based
on various characteristics. Below is a description of different
loan categories.

 Fixed Rate Mortgage (FRM): A mortgage loan in which the interest

rate remains fixed throughout the life of the loan. A Fixed Rate
Mortgage offers the borrower the benefit of fixed monthly
payments with no exposure to any change in interest rates in the
market. The lender, on other hand, carries the interest rate risk.
Fixed Rate Mortgages are the most common form of mortgage
loans.

 Adjustable Rate Mortgages (ARM): A mortgage loan in which

the interest rate adjusts periodically based upon the movements
of a pre-determined index or reference rate. This allows the
lender to ensure a stable return even when the interest rate in the
market changes. However, the borrower is faced with
periodically changing monthly payments. ARM loan is also
known as Variable Rate Mortgage (VRM).
Types of Loan Products:
 Hybrid ARM: Hybrid ARM, which stands for Hybrid Adjustable
Rate Mortgage, is a mortgage loan that has interest rate fixed for an
initial term followed by adjustable interest rate for the remainder of
the life of the loan. Lenders may offer loans with an initial term as
short as 6 months to as long as 10 years. This loan pro Due to their
similarities to an ARM, many lenders do not differentiate between
ARM and Hybrid ARM.

 Home Equity Line of Credit (HELOC): A HELOC is a revolving line

of credit that is secured by the borrower’s equity in the property and
is subject to a maximum draw amount (facility limit) and a fixed
term. A borrower may choose to withdraw the entire line of credit or
a smaller amount. The lender may allow withdrawal of funds using
a credit card or checks. Interest is charged to the borrower for the
amount actually withdrawn. HELOC’s are generally adjustable rate
loan with monthly interest rate adjustments.

 Home Equity Loan (HELOAN): A HELOAN is a fixed interest rate

mortgage loan that is secured by the borrower’s equity in the
property. Generally, a HELOAN is a second lien mortgage.
Loan types based on Amortization :
 Fully Amortized Loan: A Fully Amortized Loan is designed
to pay off the principal and interest during the life of the loan
through periodic monthly payments. At the end of the loan
term there is no balance due. Fully amortizing loans are the
most common form of mortgage loans.

 Balloon Loan: A mortgage loan where the amortization

period is longer than the loan term due to which the monthly
payments will not cover the entire principal and interest and
results in a lump-sum amount to be due at the end of the loan
term. The lump-sum amount due at the end of the Balloon
mortgage is known as Balloon Payment.

 Interest Only Loan: A mortgage loan that requires the

borrower to make monthly payments that cover only the
interest on the loan, with the principal amount remaining
constant. No amortization takes place because the principal
repayment is not included in the monthly payments.
Generally, interest only portion is only for a short period and
the loan subsequently converts to a fully amortized loan.
Upon conversion the monthly payment would increase.
Loan types based on Amortization :
 Negative Amortization Loan: A mortgage loan that allows
the borrower to make periodic payments that are less than
the interest accrued in that period, which causes the principal
amount to increase over time. This is because the difference
between accrued interest and periodic payment is added to
the loan amount as principal. This causes the owner’s equity
to reduce since unpaid loan amount increases dramatically
over a period of time. Negative Amortization loans are also
called Negam loans. Pay Option ARM loans are the most
common example of loans having a negative amortization
feature.

 Reverse Mortgage: Reverse Mortgage Loan is a negative

amortization loan that is designed to allow the borrower to
utilize the equity in the home and convert into cash flows
which can be in the form of fixed monthly payment, a lump-
sum amount, or a line of credit. No repayment is due and the
loan is paid upon occurrence of specific events (death, sale of
property, etc). As per regulations in effect in the US, these
loans can be offered only to senior citizens who are 62 years
or older.
Purpose of Loan:
 Purchase : Loan taken to purchase a residential property
from some other party and acquire a title on it.

 Refinance : Loan taken on a property already owned to pay

off an existing mortgage and/or liquidate equity.

Purpose of Refinance:
 To take advantage of lower rates

 To shorten the term of the loan

 To pay off other debt obligations or make home

improvements.
Types of Refinance:
 Cash-Out Refinancing: Refinancing transaction in which the
money the borrower receives from the new loan exceeds the
total amount he uses to repay the existing first mortgage,
closing costs, points; and satisfy any outstanding subordinate
mortgage liens. In other words, a refinance transaction in
which the borrower receives additional cash he/she can use
for any purpose.

 No Cash-out (Freddie) or Limited Cash-out (Fannie): When

money received from refinance is limited to funds needed to
pay off the first mortgage, any subordinate liens used in their
entirety to acquire the subject property and reasonable
closing fees and cash the borrower receives does not exceed
the lesser of $2,000 or 2% of the loan amount.
Purpose of Loan:
 Construction to Permanent: Loan taken to pay off the
construction loan.

Construction to Permanent could be either Purchase or

Refinance.

 Purchase – Loan proceeds will pay off the construction loan

taken to purchase the lot and build the house on it.

 Refinance - Loan proceeds will pay off the construction loan

taken to build the house. Borrower must own the lot prior to
start of construction and construction loan must be in
borrower’s name.
Occupancy Categories
 Primary Residence : The primary location that a person
inhabits. It doesn't matter whether it is a house, apartment,
trailer or boat, as long as it is where you live most of the time.

 Second Home : A second home is a one-unit property owned

by an individual, occupied by the borrower for some portion
of the year, and not subject to any timesharing ownership
arrangement.

 Investment Property : Buyer purchases this property with

the intension of getting income out of it by renting it out to
other person in turn buyers makes some money and repays
the mortgage lien.
Property Type Information
Detached Housing
 PUD (Planned Unit Development) : A type of
housing project that has individually owned
homes where each owner has shared ownership of
the common areas. A monthly fees is assessed for
up keeping and maintenance of common areas.
Property Type Information
Detached Housing
 Manufactured Homes: A structure built on a
permanent chassis designed to be used as a
dwelling with or without a permanent foundation.
Property Type Information
2 – 4 unit Property:
Duplex-Dwelling with 2 units.
Triplex-Dwelling with 3 units.
Quadruaplex-Dwelling with 4 units.
Property Type Information
Attached Housing:
 Townhouse: A row house on a smaller land which
has exterior limits common to similar units
(Common Walls) and includes ownership of the
land.
Property Type Information
Attached Housing:
 Condominium: A building or housing
development where each person owns his or her
unit and shares ownership of common areas,
including the land. (Borrower has no individual
ownership of the land)
Property Type Information
Attached Housing:
 Co-Operative : A housing complex or building
where the borrower becomes a shareholder in
corporation that own the property.
Few of the Mortgage Terminology
 Borrower – One who receives funds in the form of a loan
with the obligation of repaying the loan in full with interest.

 Co-Borrower – Second or additional person equally

responsible for the payments of the mortgage.

 Loan Amount – Funds to be borrowed and repaid as per

terms of the note.

 Down Payment – The part of the purchase price which the

buyer pays in cash and does not finance with the mortgage.
Few of the Mortgage Terminology
 Sales Price – Price paid for the property as per sales contract.

 Appraised Value – Market value of the property determined by

the appraiser.

 LTV – Expressed as a percentage, the loan amount in relation to

the lower of sales price or appraised value.

 PITI – Monthly mortgage payment which includes Principle,

Interest, Taxes and Insurance.

 Escrow Account – Amount of money that the lender requires the

borrowers to keep in “Escrow Account” for the payment of taxes
and insurance.

 Loan Term – Period between commencement date and

termination date of mortgage note.
Few of the Mortgage Terminology
 Amortization – Paying out a predetermined sum (the principle)
plus interest over a fixed period of time, in equal periodic
payments, so that the principle is completely eliminated by the
end of the term.

 Bridge Loan – A loan secured by a currently owned property for

buyers who need money to close on a new home they can sell
their present home. Bridge Loans are Also known as "interim
financing", "gap financing" or a "swing loan".

 Subordinate Financing – A loan that is in second lien position

and in the event of foreclosure is paid off after the first
mortgage.

 Home Equity Loan – A loan that allows home owners to borrow

against the equity in their property.

 Guaranteed Mortgage – Loan guaranteed by some one other

than the lender or borrower. E.g. Government loans.
Few of the Mortgage Terminology
 CLTV – A ratio used by lenders to determine the risk of
default by prospective homebuyers when more than one loan
is used. In general, lenders are willing to lend at CLTV ratios
of 80% and above to borrowers with a high credit rating.

 Debt to Income Ratio (DTI) : It is the ratio calculated after

dividing the total expenses of the borrower by his/her
income.

 HTI Ratio : It is the ratio calculated after dividing the PITI of

the house by borrower’s income.
Few of the Mortgage Terminology
 Sales Contract / Purchase & Sale Agreement – A written
agreement between buyer and seller stating terms and
conditions of a sale or exchange of property Such a contract
will contain information about

 Sales Price - Price paid for the subject property as per the sales
contract.

 Earnest Money – A deposit made to bind the conditions of the

sale.

 Contribution – Typical buyers costs being paid by the seller or

other interested party to the sale.

 Alimony - Is the payment made to a spouse under a

divorce or separation agreement.
Few of the Mortgage Terminology
Closing Cost

Fees that the borrower pays to obtain a mortgage. E.g.

Origination fees, Appraisal fees, Discount Points Etc.

 Origination Fees – A service fee charged by the lender or

broker, typically 1% of the loan amount.

 Appraisal Fees – Fee charged by the appraiser to complete

the appraisal.

 Title Fees/Insurance – Fees charged by the title company to

research the title to the subject property and to insure clear
title to the borrower/mortgage holder.
Few of the Mortgage Terminology
Prepaid Items

Fees collected at closing to be held in escrow by the

mortgage servicer to fund future costs like property
taxes, interest, mortgage insurance and hazard
insurance.

 Hazard Insurance - Insurance that protects a property owner

against damage caused by fires, severe storms, earthquakes
or other natural events. As long as the specific event is
covered within the policy, the property owner will receive
compensation to cover the cost of any damage incurred.
Typically, the property owner will be required to pay for a
year's worth of premiums at the time of closing, but this will
depend on the exact details of the policy.
Few of the Mortgage Terminology
 Mortgage Insurance: This is an insurance policy designed
to protect the mortgagee (lender) from any default by the
mortgagor (borrower). It is used commonly in loans with a
loan-to-value ratio over 80%, and employed in the event of
foreclosure and repossession. This policy is typically paid
for by the borrower as a component to final nominal (note)
rate, or in one lump sum up front, or as a separate and
itemized component of monthly mortgage payment. In the
last case, mortgage insurance can be dropped when the
lender informs the borrower, or its subsequent assigns, that
the property has appreciated, the loan has been paid down,
or any combination of both to relegate the loan-to-value
under 80%. In the event of repossession, banks, investors,
etc. must resort to selling the property to recover their
original investment (the money lent), and are able to
dispose of hard assets (such as real estate) more quickly by
reductions in price.
Mortgage Cycle
Mortgage Process
 Origination – Applicant applies for a loan for
purchase or refinance of a property.

 Processing – Lender compiles / validates the loan

application package of the applicant.

 Underwriting – Lender analysis of the applicants

credit package to determine creditworthiness.

 Closing – Signing and recording of loan

documentation, and disbursement of loan funds.
Mortgage Process
 Delivery – Process of packaging and delivering the
loan to the investor.

 Servicing – Process of collecting the monthly

payment from the borrower and disbursing the
funds to pay the investors, property taxes and
insurance companies.

 Secondary Market – A system where existing

mortgages are bought and sold. It contrasts with
the primary mortgage market where mortgages are
originated.
Thank You