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Real Estate PSA Exam > Chapter 5 - Financing > Flashcards

Chapter 5 - Financing Flashcards

1
Q

What is collateral?

A

Real or personal property upon which the lien is given to secure the borrowing

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2
Q

What is purchase money mortgage?

A

Any portion of purchase price carried by seller. Owner of property acts as lender for portion carried and accepts payment over time from buyer

Could be accomplished via promissory note and deed of Trust or mortgage, or by contract for deed. Can be any (first, second, etc.) position of mortgage

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3
Q

What is a note (or promissory note)?

A

A legal doc which creates and identifies debt. Contains borrower/lender names, amount, interest rate, date payment is due, time to repay, amount and date of final payment, address of payments, collateral, and other provisions

It is essentially an IOU and doesn’t create a lien against property of the borrower

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4
Q

What is a monetary lien or monetary encumbrance?

A

Giving another the right to repossess or foreclose against real or personal property and to sell the property to pay that debt or obligation owed to the lienholder

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5
Q

What does a note being a negotiable instrument mean?

A

A negotiable instrument is one that the lender may sell without consent from the borrower in order to liquidate the lender’s funds

Should the borrower default, the only recourse the lender has would be a suit against the borrower for specific performance

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6
Q

How are interest rates derived?

A

Long term mortgage rates are driven by the yield or the 10-year treasury bond

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7
Q

What is the prime rate?

A

The interest rate charged by banks to their most credit-worthy customers (usually the most prominent and stable business customers)

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8
Q

What does usury mean?

A

Some states determine the max interest a lender can charge on certain types of loans. If interest charged is above that amount, it is referred to as usurious and cannot be collected

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9
Q

What are discount points?

A

1% of loan amount which is considered a form of interest paid upfront instead of over the term of the loan. They are generally tax deductible

They are charged when there is a cost to receive a certain rate or to buy a rate down

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10
Q

What is hypothecation?

A

The giving of property as a security for a debt, but retaining possession and use of the property so long as the debt is being performed as agreed

Think of 30 year loan

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11
Q

What is a mortgage and who are the mortgagor/mortgagee?

A

A monetary lien against real property

Mortgagor - borrower

Mortgagee - lender

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12
Q

What is a deed of trust and who are the parties?

A

A contract which creates a monetary lien against real property (often in states west of Rocky Mountains)

1) trustor (borrower)
2) trustee (ind 3rd party lender chosen)
3) beneficiary (lender)

Trustee holds naked title to property and has been given power of sale by trustor. Beneficiary relieves funds if power of sale is used (if borrower defaults). Net effect is same as mortgage

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13
Q

What are the borrower’s obligations in a deed of trust?

A
  • Make principal and interest payments
  • Pay property taxes
  • Insure loss against fire, windstorm, and other casualties
  • Keep property in food repair
  • Make no alterations to property that would decrease value
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14
Q

What is an equity loan?

A

Often referred to as second mortgage

Typically interest only and interest rates based off of prime rate plus 1-2%. Usually done on a 30 due in 15 and must have substantial equity in home to qualify

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15
Q

What’s an impound account?

A

AKA escrow account - established to hold funds for future property taxes and casualty insurance. Lender or services is the holder of the account

Lender usually requires 15 months casualty insurance and 3-6 months property taxes collected upfront. Check for year will go to insurance with 3 months impounded

Monthly amounts moving forward will go towards next year’s premium

Done bc lender wants to make absolutely sure insurance is paid

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16
Q

What is title vs. lien theory?

A

Title theory - mortgagor gives mortgagee legal title and retains equitable title. Legal title goes to mortgagor on full debt payment

Lien theory - mortgagor retains legal and equitable title. Mortgagee only has lien on property as security of debt and would need to initiate foreclosure proceedings to obtain legal title

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17
Q

What is naked vs. legal vs. equitable title?

A

Naked - holder does not actually own property, nor may occupy or enjoy ownership rights. Holder does have right to sell under terms of agreement, such as right of trustee in deed of trust

Legal - holder legally owns property. If legal is separate from equitable, doesn’t have right to possess and enjoy ownership unless owner of equitable title fails to meet requirements

Equitable - means holder has the right to possess and enjoy all rights of ownership, but if know owns equitable, the title records will show the legal title holder as owner

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18
Q

What is a contract for deed?

A

Form of seller financing, sometimes called a land contract where the seller retains legal title but transfers equitable title to buyer

If buyer fails, seller may declare default and dispossess buyer from property and retake equitable title

If buyer performs, will get legal title at end of financing period

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19
Q

What is amortization?

A

The pattern in which principal of loan is repaid

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20
Q

What are level payment, fully amortizing loans?

A

Most common loans in residential lending where amount of loan changes over time. Amount of principal and interest payments change over time (later on more principal and less interest)

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21
Q

What is a balloon payment?

A

Amortizes at stated interest rate and term, as null amortizing loan but with early payoff

Ex. - 30 due in 30 would amortize like a 30 year mortgage schedule with entire outstanding principal due at end of year 5

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22
Q

What is a straight loan?

A

Also called a term or interest only loan. At the end of the term, principal is paid off in full. No amortization

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23
Q

What is an acceleration clause?

A

Allows lender to call all payments due if borrower defaults. Allows a foreclosure of the entire outstanding balance

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24
Q

What is an assignment clause?

A

Gives borrow notice that lender will likely be transferring mortgage or deed of trust to another party sometimes after close of loan

Lender assigns contract to an other investor in secondary market

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25
Q

Why is the due on sale (alienation) clause?

A

Lender informs borrower in advance that lender will not permit assignment of borrower’s obligations under the note, or interest in property, unless lender is paid in full

If there is a sale, the loan is due

26
Q

What is a prepayment clause?

A

Informs borrow of circumstances the lender will accept payment in part or whole before due date

27
Q

What is the assumption clause?

A

Describes under what circumstances, if any, a lender will allow another person to assume the mortgage or deed of trust. Commonly found:

  • no assumption permitted
  • assumption know with qualifying of new party
  • assumption with payment of a fee
  • no restrictions (Fully and Freely Assumable)
28
Q

What is a blanket mortgage?

A

Covers multiple parcels and is common in subdivision development financing

Loan will have partial release clause, allowing builder to pull the parcel “out from under” the blanket mortgage

29
Q

What is a package mortgage?

A

Instrument providing financing for both real estate and personal property. Personal property being major appliances, window treatments, furniture, etc.

30
Q

What is an open end mortgage or equity line of credit (HELOC)?

A

Borrow establishes line of credit secured by RE and can make draws against the line, much like using a credit card. Loan is open ended for further advances to a pre-determined amount

31
Q

What is a construction loan?

A

Usually short term (2-5 years) to build a project. Considers interim financing where draws against maximum loan is made. Lender normally inspects each phase to assure enough construction to serve as collateral. Usually interest only and are riskier, so priced accordingly

32
Q

What is a wrap around mortgage or all inclusive deed of trust?

A

Form of seller financing (purchase money mortgage) available only where there is no existing due on sale clause in original mortgage. Seller still owes on underlying (original) mortgage and makes those payments. The buyer makes payments to the seller for new amount financed as purchase money mortgage

33
Q

What is a graduated payment mortgage?

A

Most often seen when interest rates are high and borrower is not able to qualify at higher interest rate. Lender makes loan with provision that starting payments are lower than otherwise would be required for principal and interest

Borrower agrees to increase payments each year for next 2-3 years until reaching required payments. Unpaid interest is added to the unpaid balance (negative amortization)

34
Q

What is an Adjustable Rate Mortgage (ARM)?

A

Widely used in high interest era of late 1970’s to have interest rate fluctuate with lender’s cost of funds

35
Q

What are the elements in an ARM?

A

1) Index - cost of funds - cane be prime rate, T-Bill, 10 year treasury bond, LIBOR
2) Margin - profit and overhead lender wants
INDEX + MARGIN = RATE
3) Interval - frequency when interest rate can change
4) Cap - max interest rate can change at any interval. Stated in the note and won’t change
5) Ceiling and floor - lifetime cap or floor
6) Conversion - option to convert to a fixed rate at various times during loan. Most ARMs allow prepayment with no penalty
7) Reverse annuity mortgage (RAM) - designed for older homeowners who own homes free and clear, or have large equities, but don’t want to sell or cash out equity. Lender pays borrow sum each month

RAM loan is paid off up sale, death, or loan expiration

36
Q

What is the pre-qualification process?

A

Interview in person or by phone between lender and borrower

37
Q

What is the pre-approval process?

A

If lender is convinced the loan can be done, lender will prepare a pre-approval which demonstrates the borrower’s ability to qualify subject to conditions being satisfied

38
Q

What is the loan application (1003)?

A

Formal loan application when property is identified and borrower is in contract. Ask for tax return and W-2’s or 1099’s for past two years, employment info for past 2 years, copies of IDs, 30 days of pay stubs, mortgage statements and proof of insurance and taxes (for property owned), rental agreement of investment property, HOA info, asset info, divorce decrees, bankruptcy docs

39
Q

What is processing?

A

Processors verify info provided to loan officer, order appraisal and title documentation, flood certificates, insurance, employment and asset account info, missing docs, and lock rate prior to underwriting

40
Q

What is underwriting?

A

The final review decision making grocers pertaining to granting the loan

41
Q

What is closing?

A
  • Once approval from underwriting is obtained, processing will request loan docs to be sent to title who will arrange for borrower to sign
  • Borrower delivers funds to title
  • Loan docs are returned to lender for final review and wires loan funds to escrow
  • Escrow sends all docs to the county for recorder ion and the transaction is considered closed
42
Q

Who are the primary market lenders (loan originators)?

A

1) S & L’s - accepts deposits and agree to keep money safe and pay returns. Makes RE loans secured by mortgages (deed/trust) to qualified borrower’s
2) Banks - banks generally do not make loans linger than 3-5 years. Do equity lines or second mortgage financing
3) Mortgage brokers - most common loan originators. Take applications and shops for investors who make loan. If loan is made, brokers get fee for services but don’t service loan
4) Mortgage bankers - loan originators. Have own funds, but normally liquidat loans to create capital to lend again

43
Q

Who are the secondary market investors?

A

1) Large investors - HNW individuals and corps
2) Pension funds
3) Insurance companies - participate in large commercial RE loans and buyers of packaged residential loans
4) Mutual funds

44
Q

Who are the warehouses?

A

1) Federal National Mortgage Association (FNMA “Fannin Mae”) - created in 1930’s to attract private investment funds in FHA loans. Dealt with FHA and VA loans. Major warehouse of conventional loans and US gov insured FHA or guaranteed loans (VA)
2) Government National Mortgage Association (GNMA “Ginnie Mae”) - descendant of great depression 1930’s to attract max available mortgage capital into mortgage markets. Pooled individual mortgages into MBS which was backed by US gov
3) Federal Hine Loan Mortgage Corp (FHLMC “Freddie Mac”) - created in 1970 under congressional charter and is stockholder owned. Issues securities to private investors as undivided interest in mortgages Freddie owns. Has guarantees against losses in conventional loans

45
Q

What is the LTV ratio?

A

Loan being made divided by purchase price or appraisal, whichever is lower

Higher LTV means larger loan and smaller down payment

46
Q

What is a conventional loan?

A
  • Neither FHA or VA
  • Made with neither federal gov insurance nor guarantees
  • Can be originated by virtually any loan originator and may be sold to secondary markets (likely Fannie and Freddie)
47
Q

What is private mortgage insurance (PMI)?

A

With conventional loan, lender does not have gov insurance or guarantee and only had collateral of property and credit history to rely on in making decisions

PMI insures against mortgage loss. Original company was the Mortgage Guarantee Insurance Company (MGIC)

When RE appreciates, likelihood of loss decreases and may make a point when PMI is no longer needed. Fed legislation requires lender to inform buyer when this occurs (when buyer owes less than 80% LTV)

48
Q

What is an FHA insured loan?

A

Created in the 1930’s to stimulate economy

Idea for 203b loan was a private lender would make loan to qualified borrower’s and FHA would insure against loss

Introduced concept of long term, fully amortized loans (prior was 6 months to 5 years)

Does not make loans directly and interest is determined by competitive market

Loans made under HUD

49
Q

What are the elements of FHA programs?

A

1) 1 to 4 family, owner occupied
2) buyer pays MIP (upfront and monthly)
3) max loan set regionally
4) 3.5% min cash contribution
5) FHA appraisal (conditional commitment)
6) Discount points paid by either party
7) Lions are budget loans with principal, interest, taxes, and insurance (PITI) and MIP included in monthly payment
8) Qualifying
9) 30 year max
10) Can be no 2nd mortgages at close of escrow. Cannot finance min cash contribution

50
Q

What can the Rural Economic Community Development Administration (RECD) do?

A

Insure loans like FHA

Formerly known as Farmer’s Home Administration (FmHA)

51
Q

What are VA guaranteed loans?

A

Plan at end of WWII to assimilate returning veterans and help w money to purchase homes

VA doesn’t make loans but insures them

52
Q

What are the elements of a VA loan?

A

1) 1 to 4 family, owner occupied
2) 0% down (but are out of pocket expenses)
3) Buyer pays funding fee of either 2.15% for first time or 3.3% for subsequent users. Which works as MIP in FHA loan but not considered insurance premium
4) no max loan amount, max guarantee amount (first 25% up to $60k)
5) VA appraisal called Certificate of Reasonable Value (CRV)
6) discount points from either party
7) budget loans
8) assumable
9) 30 year max
10) partial guarantee can be restored in 2 ways
-sells property and pays off loan
-sells to another vet who substituted
entitlement for selling veterans entitlement
11) leftover partial entitlement if not all is used. total minus portion used

53
Q

Why do interest rates fluctuate?

A
  • gov deficits or surpluses - if plenty of funds, less need to borrow and rates are low
  • reserve requirements - more reserves less money available higher rates
  • discount rate - to spur or decrease economic growth
54
Q

What does the Truth in Lending Act (TILA) do?

A

Promotes use of consumer credit through requiring disclosures about terms and costs

Covered:

  • loans to individual consumers
  • more than 4 installment payments
  • all consumer RE loans with lien against residence
  • loan balance equals or exceeds $25k or is secured by an interest in real property or a dwelling

Disclosure - interest, loan fees, discount points, appraisal fees, mortgage guarantees/insurance costs, credit report, other

55
Q

What is the annual percentage rate (APR)?

A

1) Finance charges as a percentage when applied to unpaid balance of loan. Includes costs to obtain loan. Greater than stated interest rate unless borrowing costs were 0
2) APR must be disclosed in %
3) APR must be disclosed in dollars charged

56
Q

What are credit advertising restrictions?

A

Lenders cannot pick credit terms to advertise. Must advertise all or none

Cannot use a trigger term

57
Q

What’s the 3 business day right of recession?

A

Right to rescind credit agreement applies to:

1) creation of monetary encumbrance on personal residence including: second mortgages, refinancing, home improvement loans, transactions creating potential mechanic’s lien
2) exception: loan which finance original purchase of consumer’s personal residence doesn’t have right

58
Q

What is the Equal Credit Opportunity Act (ECOA)?

A

Prohibits discrimination on protected classes and marital status and source of income (including if from public assistance)

59
Q

What is the RE Settlement Procedures Act (RESPA)?

A

Informs parties of closing costs and charges for:

1) new first mortgages
2) 1 to 4 family homes
3) federally related - FHA/VA/RECD, federally chartered lender, federally insured lender
4) lender who makes $1mm or more in loans

Not covered:

1) seller financing under $1mm
2) land loans
3) investor or commercial loans
4) second mortgages
5) assumptions

Borrower must receive HUD booklet Shopping for Your Home Loan

Lender must provide Good Faith Estimate of Closing Closed within 3 days of loan application

60
Q

What is Uniform Settlement Statement (HUD 1)?

A

Easy to read form detailing closing costs and who is paying them

Supposed to expose kickbacks

Real Estate PSA Exam (14 decks)

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