Any loan that is not backed by the Federal government is known as a conventional loan. This means that the lender is exposed to a possible loss if they have to foreclose on the mortgagor of financed real property.
Less Governmental Regulation - Because the Federal Government are not going to provide insurance or directly guarantee the loan, there are less Federal regulations that have to be followed by the lender. The only Federal regulations that the lender has to contend with are the standard loan regulations when using Federal Funds for loans.
Lender Sets Policy -The lender is limited by their charter and banking laws. If the lender is Federally chartered, the lender has to follow the regular Federal lending regulations. If they are State chartered, they have to follow the State lending regulations. Other than these minor areas, the lender is able to set their own lending practices regarding the financing of real property.
Lender's LTV is Lower - Since these loans are without insurance or any government guarantees, the Loan to Value Ratio (LTV) will be much lower. The maximum percentage is 80-97%. This means the buyer has to put 20-3% down in order to obtain a conventional loan. If the purchaser/borrower can't come up with 10-20% down, conventional loans do allow secondary loans to finance part of the remaining difference. These secondary loans are exactly that. If foreclosure ensues, the conventional loan would have to be paid in full first and if there are moneys left over, the secondary loans would be paid off next.
Lender Fully At Risk (not insured/guaranteed) - Because the lender is taking on additional risk under conventional loans, the interest rates charged by the lender will be higher.
Private Mortgage Insurance
Remember, the Federal Government does not provide insurance or guarantees to the lender of conventional loans. Private Mortgage Insurance PMI program that can be purchased by the borrower to insure a conventional loan. The cost of the insurance is usually paid by the borrower/home owner on a monthly basis with the mortgage payment.
PMI - Private Mortgage Insurance is similar to FHA insured loans. PMI protects the lender against foreclosure losses if the borrower defaults on the mortgage.
Risk Reduced - If the borrower/home owner agrees to buy PMI, the lender can increase the LTV to as high as 97%.
Lender Advantage - With the use of PMI, the lender has the advantage of conventional interest rates (higher) PLUS foreclosure protection in the event that the borrower/home owner defaults on the mortgage payments.
MGIC - The largest private insurer is the Mortgage Guarantee Insurance Corporation or MGIC. It is often times called "Magic Insured Loans."
Term of Loan - The PMI program has the following characteristics:
We will now look at the various types of lenders who provide conventional loans for home mortgages and trust deeds.
Commercial Banks - A commercial bank is one that provides all the services that we need in our daily lives. The main emphasis is to provide checking, credit card services, and savings accounts. A commercial bank will also provide commercial loans for business. Their main area of loan services is personal loans for our automobile, boat, home improvement, etc.
Offering Mortgages - In the past, commercial banks did not actively participate in providing financing for the purchase of a home. After the Reagan years, with all the deregulation of the banking community, Savings and Loans started providing checking services and commercial banks started providing more mortgage programs. Today, the commercial banks are very active lenders in the home mortgage business.
Federal or State Chartered - A commercial bank can be chartered (authorized) under the jurisdiction of the State where it is located OR it can be chartered under the Federal Government. The choice is usually based on expenses and the length of the time that the bank has been in existence.
Federally Chartered - The Federal Charter is usually chosen when the commercial bank wishes to complete banking across State boundaries. The Federal Charter is more expensive and the regulations are greater.
Commercial banks can offer the following forms of loans:
FHA and VA - FHA and VA loans for home mortgages. The commercial bank has to be authorized by the appropriate agency in order to do so. The commercial bank can provide insured FHA loans as well as guaranteed VA loans for residential housing.
Conventional Loans - Conventional loans are utilized by commercial banks on a considerable basis. This is especially true for home and auto loans.
Building (Interim) Construction Loans - Commercial banks also provide what are called Building (Interim) Loans to finance home construction. These loans are very high interest loans and for short term periods of time. The loan exists only during the construction period of a new home. When the completed home is sold, the proceeds pay off the Building (Interim) Loan.
Vacant Land - Some commercial banks will offer loans on vacant land. Buying land without plans of construction is considered speculation by some commercial banks. A bank would certainly finance the land purchase if a residence is to be built on the land within a few years.
The following are the characteristics of mortgages issued by lenders for the purchase of residential housing:
Alienation Clause - Pretty much all mortgage loans have an Alienation Clause, which prevents any of these loans from being assumable by a purchaser in the future. The lenders pretty much want to deal one-on-one with buyers. They don't want an old mortgage to be assumed by someone they know nothing about.
Discount Points - The lenders actively participate with discount points which allows them to negotiate the actual interest rate that they provide the borrower.
1st Mortgages - Commercial banks like to issue 1st mortgages only; first priority at foreclosure. They do not like to issue 2nd mortgages UNLESS it is a home equity loan for cars, furniture, bill consolidation, etc. These home equity loans are high interest loans that give them a better rate of return.
FIRREA, the legislation enacted to bail out the savings and loan industry resulted in all of the following EXCEPT:
A) bankruptcy of the FSLIC
B) criminal prosecution of all those responsible
C) dissolution of the Federal Home Loan Bank Board
D) standardized certification of real estate appraisers
Funds for conventional loans are received from:
A) mutual funds
B) private parties and non-governmentally backed loans from lending institutions
C) the Federal National Mortgage Association
D) the Homeowner's Loan Corporation
From a lender's point of view, the most important consideration when granting a conventional loan is the:
A) risk of default
B) availability of mortgage money by the borrower
C) need for mortgage money by the borrower
D) neighborhood where the mortgaged property is located
Life insurance companies mortgage holdings are greatest in:
A) farm loans
B) conventional residential loans
C) large commercial and apartment building loans
D) FHA and VA loans
The 2008 economic depression was triggered in part by the real estate________________.
A) bubble bursting
C) predatory lending practices
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