Chapter 5 CONVENTIONAL FINANCING Flashcards
1
Q
What is the goal of this chapter?
A
To introduce conventional forms of real estate financing and help find the best mortgage terms.
2
Q
What does conventional financing constitute?
A
The vast bulk of capital available for real estate owners and investors.
3
Q
Where can conventional financing be obtained?
A
From commercial banks, savings banks, pension funds, insurance companies, and other institutional lenders.
4
Q
True or False: Conventional financing must be from institutional lenders.
A
False
5
Q
What is a mortgage?
A
A document executed to give the lender money, serving as evidence of collateral for a loan.
6
Q
What does a mortgage note describe?
A
The amount owed, the method of payments, and other terms of payback.
7
Q
What is a first mortgage?
A
A document that gives the lender a right, or lien, to the title of the property pledged as security.
8
Q
What is the importance of reviewing both the mortgage and mortgage note?
A
To understand the lender’s expectations and legal implications of existing debt.
9
Q
What data is necessary for a mortgage application?
A
- Employer
- Salary
- Position or title
- Years of tenure
- Social security number
- Net worth statement
- Loan purpose
- Property details
10
Q
What is a loan origination fee?
A
A fee that may be required by the lender to process a loan application.
11
Q
What is a construction loan?
A
A loan that covers the cost of actual acquisition and development of a property.
12
Q
What is a take-out loan?
A
A permanent loan that pays off the construction loan and becomes the first mortgage.
13
Q
What does the lender require before releasing funds?
A
A recheck of the title of the property pledged as security.
14
Q
True or False: The borrower retains title to the property during the mortgage.
A
True
15
Q
What is a contract for deed?
A
An agreement where the seller retains title until the buyer completes all payments.
16
Q
Fill in the blank: A __________ is sometimes called a land contract if the property is vacant land.
A
contract for deed
17
Q
What is the primary risk for a borrower regarding a mortgage?
A
Defaulting on the obligations covered in the mortgage note.
18
Q
What does ‘arm’s length’ deal mean?
A
A transaction where the buyer and seller act independently without any conflict of interest.
19
Q
What can happen if a mortgage contains a clause that prohibits assumption?
A
The buyer may not be able to take over the existing debt as planned.
20
Q
What are points in the context of mortgages?
A
A way of expressing interest percent, with each point equal to 1% of the loan amount.
21
Q
What is an acquisition and development loan package?
A
A loan that covers both the acquisition of the site and the development costs.
22
Q
What should a borrower do if they cannot find the mortgage note?
A
They will not have the complete picture of what the lender expects.
23
Q
What happens if the borrower defaults on the mortgage?
A
The lender can exercise rights to foreclose or accelerate repayment.
24
Q
What is a contract for deed?
A
An agreement where the seller retains title to the property until the buyer has met the terms of the sale.
25
In a mortgage situation, who holds the title of the property?
The borrower holds the title and pledges it as security.
26
What happens to the title in a contract for deed?
The buyer only receives the actual title once all payments have been made according to the agreement.
27
Why do some states have specific laws for contracts for deed?
To protect buyers, as these agreements are often used by land developers and timeshare sales.
28
What is a major concern for investors regarding contracts for deed?
Sellers may sell bulk packages of contracts or go out of business, leaving buyers without a title.
29
What is recommended regarding the payback term for a contract for deed?
It is sound practice to keep the payback term to fewer than five years.
30
Why should buyers limit the use of contracts for deed to vacant land?
Because the buyer does not get title until the last payment, making it risky to build on the land.
31
What is mortgage satisfaction?
A document given to the borrower when the mortgage is paid off, indicating that the lender no longer has a claim on the property.
32
What must borrowers do with the mortgage satisfaction document?
Record it in the county records to avoid a cloud on the title.
33
What is a cloud on the title?
Any possible glitch that suggests the present owner does not have all the rights to the title.
34
What is a grace period in terms of mortgages?
The period during which a mortgage payment is due but not yet in default.
35
True or False: Not all mortgages have a grace period.
True.
36
What happens if payments are not made by the end of the grace period?
The mortgage is in default, and the lender may take action.
37
Why do lenders generally avoid foreclosure?
It is cumbersome and expensive for them.
38
What is the primary loan position?
The position the lender has in a first mortgage, which exceeds any rights of other lenders.
39
What does subordination mean in the context of mortgages?
The agreement that allows one person's rights to move ahead of another's.
40
What must be verified when taking back a mortgage?
The actual recording dates of the mortgage documents.
41
Who is the mortgagor?
The person who gives the mortgage document to the lender.
42
Who is the mortgagee?
The lender who receives the mortgage document.
43
What typically governs lending institutions?
State or federal regulations.
44
What is a loan-to-value ratio?
The percentage of the loan amount compared to the appraised value of the property.
45
What can affect a borrower's ability to secure a loan?
The borrower's credit history and credit scores.
46
What is a common reason for poor credit history?
Unpaid credit card debt.
47
What is essential to discover before asking a lender for a loan?
The lender's policy and preferences regarding loan types.
48
What is the difference between regulation and policy in lending?
Regulation is fixed, while policy can be negotiated.
49
Fill in the blank: The lender's policy is the _______ part of the lending equation.
flexible
50
Fill in the blank: Errors by lawyers or title companies can affect the _______ of a mortgage.
recording dates
51
What is the maximum loan percentage a bank may offer?
75 percent
## Footnote
This is a policy that can be negotiated, unlike regulations which are fixed.
52
How is the loan value percentage typically determined?
Based on the value of the property
## Footnote
Value can be subjective; lenders often use the lower of the contract price or appraisal.
53
What is the significance of the contract price in loan applications?
It may be used as the value by the lender
## Footnote
Lenders often prefer to see the contract price as a basis for loan percentages.
54
What was the purchase price of the industrial building in Fort Lauderdale?
$305,000
## Footnote
This price represented the true value of the land under the building.
55
What was the estimated value of the building after renovations and new use?
$525,000
## Footnote
This value was determined based on the future circumstances and use of the building.
56
What was the loan amount requested for the building purchase?
$355,000
## Footnote
This amount included the purchase price, remodel costs, loan costs, and additional funds.
57
What is the loan-to-value ratio calculated in this case?
68 percent
## Footnote
This ratio is calculated by dividing the loan amount by the estimated value of the property.
58
True or False: Lenders can impose secondary or junior loans on a property.
False
## Footnote
Standard policy prohibits secondary loans on the property at the time of the primary loan.
59
What are common repayment terms for loans over 80 percent?
Principal, interest, and escrow for taxes and hazard insurance
## Footnote
These terms are applied especially if the property is the borrower's residence.
60
What effect do competitive lenders have on loan terms?
They can lead to better loan terms for borrowers
## Footnote
The competition among lenders encourages them to offer favorable terms to attract borrowers.
61
What is the typical interest rate regulation for loans?
Established by state law
## Footnote
States set the maximum rate that can be charged, but interest rates are generally competitive.
62
How can adjustable-rate loans impact the cost to borrowers?
They can increase the total cost over time
## Footnote
Adjustments are often tied to market rates, which can rise, affecting the borrower's payments.
63
What is the difference between add-on interest rates and common interest loans?
Add-on rates can result in nearly double the cost
## Footnote
Interest on add-on loans is calculated differently, making them more expensive.
64
What is the annual cost calculation for a loan?
Interest is calculated on the principal outstanding for the term
## Footnote
This affects the overall cost of the loan and borrower payments.
65
Fill in the blank: The lender's interest is calculated as a ______ against the outstanding principal.
percentage
## Footnote
This percentage is charged annually and impacts the total interest owed.
66
What are the benefits for a borrower in paying interest annually rather than monthly?
Opportunity to earn interest on monthly savings
## Footnote
Borrowers can invest the monthly payments and earn interest, reducing their overall cost.
67
In the example, how much interest did the borrower earn by paying annually?
$682.25
## Footnote
This amount represents the interest earned on the monthly installments if kept in an account.
68
What is the impact of a property's value dropping below a favorable loan-to-value ratio?
It can complicate refinancing options
## Footnote
A decline in property value may limit borrowing options and affect loan terms.
69
What is the bonus percentage for the year due to the lack of principal payments?
0.68225 percent
70
What is the real interest rate the lender makes on the loan?
12.68225 percent
71
How do you calculate the mathematical percentage from interest and principal?
$682.25 interest divided by $100,000 principal equals 0.0068225
72
What is the first step when multiplying a number by a percentage?
Translate the percentage to a decimal by dividing by 100
73
How can interest and the method of payment affect a mortgage?
They influence the total cost of the mortgage
74
What is a key factor that can be negotiated in a mortgage?
Interest rate and payment method
75
What is negative amortization in mortgages?
A mortgage where payments do not cover the interest, increasing the principal
76
What happens to monthly payments as interest rates increase?
Combined effect of interest and principal makes for high monthly payments
77
What is an example of a negative amortization mortgage payment structure?
Payments starting at $600 and increasing over time
78
What can happen if a borrower owes more than the property's value?
Foreclosure by the lender may occur
79
What are points in mortgage lending?
Up-front fees charged by lenders to increase yield
80
How do points affect the amount received by the borrower?
Borrower receives less than the total amount borrowed
81
What are some common out-of-pocket expenses charged by lenders?
* Abstract or title review
* Credit report
* Document preparation
* Environmental inspection
* Legal expenses
* Loan origination fee
* Mortgage insurance
82
What is hazard insurance?
Insurance covering the property against disasters
83
What is mortgage insurance?
Insurance that pays back the lender if the borrower dies before the mortgage is paid
84
What does loan-to-value ratio indicate?
The relationship between the loan amount and the property's value
85
How can a borrower maximize their loan while minimizing payback costs?
By demonstrating a low loan-to-value ratio
86
What should a borrower provide to support the property's value?
Backup data to justify the real value
87
What are the sources of conventional loans?
Conventional loans come from:
* Savings banks
* Thrift savings associations
* Credit unions
* Commercial banks
* Mortgage bankers
* Mortgage brokers
## Footnote
These sources vary in their lending practices and terms.
88
What factors influence which lender to approach for a loan?
Factors include:
* Economic market fluctuations
* Lender's secondary market conditions
* Personal relationships and trust
* Lender's policies and appetite for loans
## Footnote
A lender's willingness to lend can greatly depend on their current financial situation.
89
True or False: The person you talk to at a lending institution is usually lending you their own money.
False
## Footnote
Loans are processed through institutional agents, not personal funds.
90
What is the significance of personal relationships in securing a loan?
Personal relationships impact trust and can influence the loan approval process.
## Footnote
Developing contacts in various fields can be beneficial.
91
What do loan officers aim to avoid in their lending decisions?
Loan officers aim to avoid:
* Red marks on their records
* Bad loans that reflect poorly on them
## Footnote
They are motivated to approve loans that are likely to succeed.
92
What are the six advantages of dealing with a neighborhood bank?
Advantages include:
* Local presence
* Inexpensive appraisals
* Confidence in area growth
* Attractive terms
* Better loan-to-value ratios
* Lower qualification standards
## Footnote
Local banks often have a better understanding of the community and property values.
93
Fill in the blank: Local banks often pride themselves on _______.
[community spirit]
## Footnote
This can influence their willingness to lend.
94
What do lenders look for in terms of area confidence?
Lenders look for:
* Growth potential
* Stability in deposits
* Overall economic health
## Footnote
A declining area can lead to lender closures.
95
What impact does competition among lenders have on borrowing terms?
Competition typically leads to:
* Lower borrowing costs
* Better terms for consumers
## Footnote
Borrowers should shop around to find the best deal.
96
What was a significant factor contributing to the aggressive lending posture of mortgage brokers from 2000 to 2008?
Factors included:
* Low interest rates
* Booming real estate market
* Lax lending policies
## Footnote
This environment led to risky lending practices.
97
What are the eleven effective steps to approaching and dealing with lenders?
The steps are not fully provided in the text.
## Footnote
The complete list is intended to guide borrowers in their interactions with lenders.
98
What was one of the main reasons for the market crash mentioned?
The fault lay with investors who thought the crest of the wave would never stop building
## Footnote
This illustrates the overconfidence of investors in real estate markets.
99
What is the first step in approaching lenders?
Get to know the savings and commercial banks in your area
## Footnote
This includes mortgage brokers and requires researching institutions.
100
Who should you contact first at a bank?
The president or manager of that association
## Footnote
Making a good initial contact is crucial for building a relationship.
101
What should you do to ensure you reach the correct facility when making contact?
Ascertaining that you have reached the facility you want, not a central number
## Footnote
This helps avoid frustration in communication.
102
Why is it important to win over the secretary of the president?
You will have access to the president through the secretary
## Footnote
The secretary's influence can facilitate connections.
103
What should your initial meeting with the bank president aim to achieve?
To introduce yourself as a real estate investor
## Footnote
Establishing a professional presence is key.
104
What is a good strategy for getting a loan officer recommended?
Ask the president's secretary for a recommendation
## Footnote
This builds rapport and improves your chances of being referred.
105
What should you learn about the bank's procedures?
The specific forms required for loan requests and the meeting schedule of the loan committee
## Footnote
Understanding these procedures can streamline your loan application process.
106
What information should you gather about loan requests?
Current loan rates, terms, and policies
## Footnote
Knowing these details helps tailor your loan request.
107
What should you do when preparing to submit a loan request?
Plan your submission well and ensure all documentation is complete
## Footnote
A thorough submission can lead to faster approval.
108
What is a critical aspect of making your loan requirements known?
Be specific about the amount and terms of the loan you are requesting
## Footnote
This allows for room for negotiation.
109
What should you avoid doing when submitting a loan request?
Rushing the loan committee
## Footnote
Proper timing and thoroughness are essential for approval.
110
What should you do if your loan request is turned down?
Ask the loan officer if the head of the department can explain the decision
## Footnote
This can provide clarity and insight into the decision-making process.
111
What is the importance of developing influence in your community?
It can help you in securing loans and building relationships
## Footnote
Networking with community leaders is beneficial.
112
What organizations can help you develop influence quickly?
Toastmasters International, Junior Chamber of Commerce, Rotary, etc.
## Footnote
Joining active organizations can expand your network.
113
What should you do if you are consistently turned down for loans?
Take a step back and analyze your approach
## Footnote
Understanding and adapting your strategy is crucial.
114
What is a key takeaway after being turned down for a loan?
Send a thank-you note to the loan officer and others involved
## Footnote
Maintaining professionalism can keep doors open for future opportunities.
115
What should you do if your loan application is turned down?
Replace the loan officer and send a thank-you note to express appreciation for their help
## Footnote
Avoid admitting failure in securing the loan elsewhere
116
What is a recommended way to maintain rapport with lending institutions?
Keep in touch through lunches, notes, or sharing relevant books
## Footnote
This keeps your name in front of potential lenders
117
True or False: You should openly compare offers from different lenders.
False
## Footnote
Avoid direct confrontation and comparison to maintain negotiation leverage
118
What is the recommended number of lenders to talk to when seeking a loan?
No fewer than four lenders, but do not disclose dealings with more than two
## Footnote
This helps in getting the best terms
119
What is the primary disadvantage of dealing with commercial banks for loans?
Conservative lending practices leading to lower loan-to-value ratios
## Footnote
Banks prefer to minimize risk by not exceeding 75% loan-to-value ratio
120
Fill in the blank: Commercial banks generally require the borrower to be a _______.
client of the bank
121
What is a common penalty associated with prepayment of mortgage loans?
Prepayment penalties or limitations on principal repayment
## Footnote
This can complicate selling the property later
122
What advantage do mortgage brokers provide?
They find lenders and may save time in the loan process
## Footnote
Brokers have access to a wider range of lending sources
123
What are the three basic types of Real Estate Investment Trusts (REITs)?
* Equity REIT
* Mortgage REIT
* Hybrid REIT
## Footnote
Each type serves different functions in real estate investment
124
What is a key characteristic of equity REITs?
They allow investors to own interests in real estate properties
## Footnote
Income and losses are treated like individual ownership
125
What issue did mortgage REITs face in the early 1970s?
Overzealous lending practices leading to foreclosures
## Footnote
Many mortgage REITs ended up owning properties due to failed loans
126
What is a hybrid REIT?
A mix of equity and mortgage REITs that participate in both lending and ownership
## Footnote
They often dominate the REIT market today
127
What is one of the primary motivations for insurance companies to lend money?
They must invest their cash reserves
## Footnote
Insurance companies have strong incentives to lend when they have available funds
128
What is a notable drawback of dealing with insurance companies for loans?
They require more detailed information and can be slow to approve loans
## Footnote
Time delays can be critical for borrowers needing quick funding
129
What is a common requirement for loans from insurance companies?
An MAI appraisal and extensive documentation
## Footnote
This requirement can prolong the lending process
130
What is a hybrid REIT?
A mixture of the two earlier forms of REITs, participating in projects, lending money, and taking a percentage of ownership or override on income.
131
How do REITs compare to insurance companies as lenders?
REITs and insurance companies are prime sources for funds, but REITs' access is generally remote unless you are a major borrower or developer.
132
What are pension funds and credit unions known for?
They collect massive amounts of funds and make investments to suit their charters and goals, often more accessible to fund or union members.
133
What role do large commercial transactions play in financing?
They are financed in part by stock market vendors and large financial institutions, which often seek to partner in very large transactions.
134
True or False: The U.S. government plays no role in the lending market.
False
135
What is a significant advantage of using the seller as a loan source?
There is no middleman, saving loan points and time.
136
What are some characteristics of private money lenders?
Independent lenders who seek profitable deals based on market and personal requirements; generally have high rates and limited amounts.
137
Fill in the blank: Whenever you have a loan request in excess of $100,000, you should develop a _______.
loan request package
138
What information should be included in the property section of a loan request package?
* General description
* Legal description
* Location
* Location sketch
* Aerial photo
* Location benefits
* Location drawbacks
* General statistics (demographics, average rent, traffic counts)
* General site data (legal, size, use, zoning, utilities, access, survey)
* Land value (estimated value, comparable land sales)
139
List some elements that should be included in the improvements section of a loan request package.
* Description
* General statistics (date built, year remodeled, type of construction)
* Sketch of ground floor
* Personal property inventory
* Statement of condition of property
* Replacement cost of structure
* Comparable sales of improved property
140
What should be the focus of the economics section in a loan request?
* Income
* Expense
* Net operating income
* Economic value
* Rent roll
* Sample lease
141
What are the four key steps in formulating a loan package?
* Keep sales material up to date
* Accumulate supporting documents
* Develop understanding with lenders about their preferences
* Use the package on all loan applications
142
What is a significant disadvantage of projecting income and expenses for more than two years?
No one will read them with real belief, and they are unlikely to be correct.
143
What is the importance of past records in a loan application?
They provide helpful context and must include realistic expenses, which are often more important than income.
144
True or False: REITs are generally conservative in lending practices.
False
