Chapter 11 - Lending Practices Flashcards
Term Loan
Requires interest payments only until the last day of its life
- 3-5 years
- Borrower agrees to pay interest on loan every 6 months
- Agrees to repay the entire loan amount upon maturity
Amortized Loan
Loan requiring periodic equal payments that include both interest and partial repayment of principal
Variables on an Amortization Table
1) Frequency of payment
2) Interest Rate
3) Maturity
4) Amount of the loan
5) Amount of the periodic payment
* If you know 4 variables, you can figure out the 5th
What are amortization tables used for
Used to determine the amount of loan a borrower can support
Impound or Reserve account
an account into which the lender places monthly tax and insurance payments (aka Escrow)
Balloon Loan
Any loan in which the final payment is larger than the preceding payments
- Final payment called balloon payment
- Gives the borrower 3-5 years to find a cheaper and long term financing elsewhere
Partially Amortized Loan
A portion of the debt is paid with regular monthly payments, then a balloon payment on the loan maturity date
Advantage: Payments are smaller
Disadvantage: Large payment may be borrowers downfall
Loan Balance Table
Shows the balance remaining to be paid on an amortized loan
Loan-to-Value Ratio (L/V or LTV ratio)
A percentage reflecting what a lender will lend divided by the sale price or market value of the property (whichever is less)
- Prevents lenders from over lending on a property just because the borrower overpaid for it
Equity
The market value of a property less the debt against it
Point
1% of the loan amount
Origination Fee
- The expenses a lender incurs in processing a mortgage loan
- Upfront fee charged by lender to process a new loan application
Discount Points
- Points charged to raise the lender’s monetary return on a loan
- Each point of discount raises the effective yield by about 1/8 of 1%
Effective Yield
A return on investment calculation that considers the price paid, the time held and interest rate
Tight Money
Periods where discount points are most often charged
- Mortgage money is in short supply
Loose Money
Periods when lenders have adequate funds to lend are are actively seeking borrowers
Conventional Loans
Real estate loans that are not insured by FHA or guaranteed by the VA
Federal Housing Administration (FHA)
- Purpose of encouraging new construction as a means of creating jobs
- Offered to insure lenders against losses due to nonrepayment when they have loans on both new and existing homes
- Charged borrower an annual insurance fee of about 0.5% of the balance owed to the loan
Simple Assumption
- The property is sold and the loan is assumed by the buyer without notification tot he FHA or its agents
- Seller remains fully liable to the FHA for full repayment
Formal Assumption
The property is not conveyed until the new buyer’s creditworthiness has been approved by the FHA or its agents
- Once a buyer assumes the loan, the seller may obtain a full release of liability from the FHA
Up-Front Mortgage Insurance Premium (UFMIP)
- A one time charge by FHA for the insuring of a loan
- 1% of the loan amount
FHA Loan Requirements
1) 2 years of steady employment (preferable with same employer)
2) The last 2 years income should be the same or increasing
3) The borrowers credit report should typically have less than two 30-day late payments in the past 2 years - with a minimum score of 620
4) If borrower has declared bankruptcy it must be at least 2 years old with perfect credit since the bankruptcy discharge
5) If borrower has been through foreclosure proceedings, it must be at least 3 years old with perfect credit since
6) The new mortgage payment should be about 30% of the gross income before taxes
***requirements are the most flexible. Easiest type of real estate mortgage loan to qualify for
Department of Veteran Affairs (VA)
Government would be held liable for a portion of the first mortgage real estate loans made to veterans
- Objective to allow a veteran to buy a home with no cash down payment
VA Loan Requirements
Must have completed:
- At least 24 months
- The full period of ordered active duty (90 day during wartime & 180 day during peacetime)
Needed to Obtain:
- Certificate of eligibility
- A copy of veteran’s discharge papers
Certificate of Reasonable Value (CRV)
Reflects the estimated value of the property as determined by the VA staff appraiser
VA Fixed-Rate Loans
- Up to 30 years
- No prepayment penalty
- No due-on-sale clause
VA Loans
- In the event of default or foreclosure, the veteran is required to repay the VA on the loan
- If property is sold and buyer assumes VA loan, veteran is still financially responsible if the buyer defaults
To be release from liability in a VA loan
- Loan payment must be current
- Prospective purchasers must meet credit worthiness standards held by VA
- Prospective purchaser must assume full liability for repayment of the loan - including indemnity liability to the VA
Funding Fee
Private Mortgage Insurance (PMI)
- Insures lender against foreclosure loss
- Only up to 20-25% of loan
A loan where the principal is all repair but the final payment is larger than any of the previous payments on the loan is an example of a
Balloon Note
The last day of a loan’s life is known as the
Maturity date
The amount of each periodic payment needed to amortize a loan in a given time can be determined by consulting a
Amortization Table
When a loan is fully amortized…
Principal payments are scheduled so that the entire principal is repaid by the loan’s maturity date
A buyer borrowed money to purchase a home under terms which require him to make monthly payments which included loan amortization plus 1/12 of the insurance premium and annual real property tax. What is this type of loan called?
A budget loan
The relationship between the amount of money a lender is willing to loan and the lender’s estimate of the market value of the property that will serve as security is called
the loan-to-value ratio
A borrower wants to know what portion of a 30 year, fully amortized loan would be paid off by the 4th year of the loan’s life. she should consult a
Loan to balance table
Would a higher or lower interest rate be more effective in reducing interest paid by the borrower for mortgage loan repayments?
The higher the interest rate, the more effective earlier mortgage loan repayments would be in reducing interest payments.
Compared to monthly payments, biweekly payments of one-half of the monthly payment will
shorten the life and amount of interest paid over the life of the loan
A lender will make a loan on a residential property at an 80% loan-to-value ratio. The house is appraised at $98,000, but the actual sales price is $96,000. What would be the cash down payment?
$96,000 x 80% = $76,800
$96,000 - $76,800 loan = $19,200 down payment
The difference between a property’s market value and the debts against it is known as
Owner’s equity
The loan origination fee stated to a purchaser for setting up a loan may be charged as a percentage of the loan or
An itemized billing for expenses incurred by the lender
Discount points on mortgage loans will tend to do what during periods of tight money
Increase
When a lender charges discount points to make a loan, the
Yield to the lender will increase
Does the FHA operate at the taxpayers expense?
No, it charges borrowers a mortgage insurance premium
The premium for FHS mortgage insurance is based on what?
The loan amount
Regarding the loan amount the FHA will insure. The maximum FHA -insured loans…
Change from time to time as average sales prices increase and the amount that the FHA will insure varies city by city
Both FHA & VA loans are assumable
with prior approval
Does the FHA rules allow for a junior mortgage on the property at loan origination?
No
The FHA has played a major role in
Formulating loan qualification criteria and the imposition of minimum construction standards
Does the FHA lend money
NO. They only insure loans
Under the VA loan guarantee programs,
the VA loan guarantee is a substitute for the protection normally provided a lender by a down payment requirement
A home-selling veteran who took out a VA loan can be sure of being relieved of liability to the loan by
Requiring the buyer to obtain new financing.
Because of loan default losses being suffered by the VA, the VA now charges new VA borrowers
a one-time funding fee when the loan is made
A buyer purchased a home for $90,000 and secured a 90% L/V loan which was protected by a private mortgage insurance, the premium for which was 1/2 of 1% for the first year and 1/4 of 1% annually thereafter. What is the premium for the first year?
$90,000 x 90% = $81,000
$81,000 x .005 = $405
The Rural Housing Service Administration makes loans on farms and rural homes as well as
Guaranteeing loans on farms and rural homes.
