1. Mr. Smith has an annual gross income of $60,000 and pays $400 per month on pa
ID: 2779543 • Letter: 1
Question
1. Mr. Smith has an annual gross income of $60,000 and pays $400 per month on payments towards an auto loan. He would like a buy a house, but unsure how large of loan he could qualify for. What is the maximum size of loan Mr. Smith could qualify for if a lender requires a totaldebt ratio less than or equal to 45% to originate a 30year FRM loan at 6% with 1 point?
2. What is the main attraction of a FHALoan for some borrowers over conventional financing?
3. You have been offered a $535,000 30year FRM loan at 5.28% with 2 points of originations fees to purchase a $600,000 house, but the lender requires you to pay $400 per month in PMI until the LTV is less than 80%. What is the APR and EBC of the loan if you plan to prepay after 7 years? What is the incremental cost of the $55,000 if the lender is willing to offer the same loan terms if the balance was $480,000 with no PMI?
4. What is the main difference between Yield Maintenance Fees and Defeasance?
Explanation / Answer
Total debt ratio = 45%
Gross income = 60,000 per annum
auto loan = 4800 per annum
Maxmium loan = 45% * 60,000 = 27,000
Maximum loan to buy the house = 27,000 - 4,800 = 22,200
2) Main attraction of FHA laon
1. Smaller down payment
2. easier approval than conventional laons
3. More flexible guidelines for credit scores
4) More foregiving of bankruptcy and foreclosure.
A considerable advantage of defeasance over yield maintenance is that there is no floor. When the average yield on the substitute collateral is higher than the coupon on the loan, it is cheaper to purchase securities to cover the loan’s remaining interest and principal payments than to hold the loan.
Conversely, a drawback to defeasance is the complexity of the transaction and the required fees the borrower will incur. The process typically takes 20 to 30 days and can require $50,000 to $100,000 in legal fees.
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