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National Exam > Chapter 7 > Flashcards

Chapter 7 Flashcards

1
Q

Financing concepts and components

A
  1. Methods of financing
  2. Lien theory vs. title theory and deed of trust
  3. Sources of financing – primary and secondary markets
  4. Types of loans and loan programs
  5. Mortgage Clauses
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2
Q

Methods of Financing

A
  • Mortgage loans (conventional & non conventional loans)

- Seller will offer financing

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3
Q

Conventional loan

A

is one that is neither federally insured nor guaranteed. (It is not an
FHA or VA loan.)

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4
Q

Non Conventional Loan

A

through three agencies: the Federal Housing Administration,
the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture.
All federally backed mortgage loans feature special and, in many cases, relaxed lending
guidelines and payment terms.

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5
Q

At times a seller will offer financing to buyer

A

It may be similar to a loan from any other

lender or it may be in the form of Contract for Deed.

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6
Q

Contract for Deed

A

(Installment
Contract or Land Contract or Real Estate Contract) is also an instrument for financing
the sale of real property. It is seller financing that does not transfer legal title immediately. the sale of real property. It is seller financing that does not transfer legal title immediately.
This title retention protects the seller. If the buyer defaults, the seller can regain possession.
(Eviction is cheaper and easier than foreclosure). All money up to that point is considered
rent. Contract for Deed benefits the seller. The parties are the vendor & the vendee and
both must sign. Contract for Deed is an executory contract. Contract for Deed becomes
fully executed when the final loan payment is made and the seller (vendor) delivers the deed
to the buyer (vendee).

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7
Q

Contract for Deed is an

A

Executory contract

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8
Q

Reminder:

A

An installment sale (Chapter 4) is not the same as an installment contract.

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9
Q

A note, or promissory note

A

is the instrument for the debt. It is your personal promise to
pay. It is not recorded.

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10
Q

Mortgage

A

is a pledge of real property as security for a promissory note.

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11
Q

Mortgagor

A

borrows the money and gives the mortgage as a pledge to the lender.

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12
Q

Mortgagee

A

The lender

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13
Q

The mortgage is recorded creating the

A

Lien

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14
Q

In a lien theory state

A

when a mortgage loan is used for the purchase of real property, at
closing the buyer receives the title and the lender has a lien.

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15
Q

In a title theory state at

A

closing the lender receives the title and will hold it until the lien is
satisfied or paid off.

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16
Q

In Texas we use _____ instead of a _____ mortgage

A

Deed of Trust

Traditional

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17
Q

The Deed of Trust contains a

A

Power of Sale clause that allows for non-judicial foreclosure.

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18
Q

Power of sales results in a

A

quick foreclosure

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19
Q

The Deed of Trust involves

A

three parties - the borrower or trustor, the lender or beneficiary and the trustee.

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20
Q

The trustee acts

A

a fiduciary relationship with the beneficiary. The trustee has two functions
in accordance with the Deed of Trust. He or she will release the lien when the note is
paid, or will foreclose in the event of default.

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21
Q

Sources of financing

A
  • Primary Market

- Secondary Market

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22
Q

Primary Market

A

is where consumers go to borrow money. It includes mortgage bankers,
mortgage brokers, banks, credit unions, etc. It also includes seller financing.

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23
Q

Secondary Market

A

is where lenders go for money. The secondary market exists for
the purchase and sale of existing mortgages to investors. It is designed to provide greater
liquidity to the residential real estate market by providing for a steady supply of funds from
investors. Lenders sell their loans and thus recover cash for originating more loans. Loans
qualified to be purchased in the secondary market are called conforming loans. A conforming
loan is a standardized loan written on uniform documents that meets the purchase
requirements of Fannie Mae and Freddie Mac. Both the loan amount and the borrower
characteristics are factors in determining whether a loan is conforming or non-conforming.
A non-conforming loan does not meet the secondary market guidelines. Included in this
category would be sub-prime loans.
The secondary market warehousing agencies are Fannie Mae, Freddie Mac and Ginnie
Mae. Lenders use Freddie Mac forms to ensure that loans can be sold in the secondary
market.

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24
Q

Types of loans and loan programs

A 
The non-government or conventional loan programs consist of a wide variety of types of
loans for different purposes and borrowers. These include:
- Fixed rate amortized loan
- Term Loan
- Blanket Loan
- Package Loan
- Budget Loan 
- Balloon Loan 
- Participation Loan 
- Open-end Loan 
- ARM
- Construction Loan 
- Reverse Annuity Mortgage
- Sub Prime Loans
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25
Q

Fixed Rate Amortized Loan

A

equal, regular payments of principal and interest until the

loan is repaid. Interest is paid in arrears - at the end of each payment period

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26
Q

Term Loan

A

interest only until the end of the term, when the entire principal is repaid.
This is a zero-amortization loan. This is also called a straight-loan.

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27
Q

Blanket Loan

A

covers more than one piece of property (several lots on one note). This
loan may contain a release clause allowing the borrower to obtain partial releases of
specific lots by making required lump sum payments.

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28
Q

Package Loan

A

includes real property plus personal property (a furnished condominium).

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29
Q

Budge Loan

A

includes principal, interest, taxes, and insurance in the monthly payment,
known as PITI. Many loans including FHA, VA and most amortized fixed-rate
loans are budget mortgages. Taxes and insurance are placed in an escrow account. (An escrow account can also be called an impound, trust, or reserve account.) The party
managing the escrow account is referred to as the loan servicer.

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30
Q

Balloon Loan

A

This is a partially amortized loan with a final payment substantially
larger than the others. The benefit of this type of loan is a lower interest rate. The main
disadvantage is the high cost of refinancing.

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31
Q

Participation Loan

A

Two or more lenders invest in one loan. This allows the lenders
to share the risk. Another form of participation loan allows the lenders to share in the
profitability of the property, in addition to collecting principal and interest on the loan.
If a lender collects principal and interest and shares in the profits when the property is
sold, this is called a shared appreciation mortgage

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32
Q

Open-end Mortgage

A

Permits additional borrowing on the same note. This is sometimes
called a credit card mortgage or a home equity line of credit - HELOC

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33
Q

ARM

A

adjustable rate mortgage - An ARM is a loan with an interest rate subject to
change as conditions in the market change. There are two cap rates - annual, and lifetime-
limiting the amount of change in the interest rate each year and over the life of
the loan. The rate is tied to a readily available index such as treasury bills, and will be
stated as the index + a fixed percent. For example: Treasury bills + 2%. The margin on
an ARM is the % added to the index. This loan would be a poor choice for those on a fixed
income.

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34
Q

Construction Loan

A

short term loan with funds advanced periodically during the
stages of construction. This is a term loan – interest only. The interest rate on this loan
is higher than the rate on a permanent loan

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35
Q

Reverse Annuity Mortgage

A

allows homeowners 62 years of age or older, for all borrowers
involved, to borrow against their equity without making any payments on the
amount borrowed. The lender makes periodic payments to the homeowner, based on
the equity in the property. The loan comes due when the last surviving borrower leaves
the property (due to sale of the property or death). This is the most expensive home
equity loan.

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36
Q

Sub-prime Loans

A

loans with risk based pricing - the rates are not published. Borrowers
are rated A-F where a prime borrower has an A rating. A-minus to F borrowers will
pay one to five % higher than those with good credit. This loan would be likely to have
a prepayment penalty to protect the lender from loss of interest

37
Q

The most important government or non-conventional programs include

A
  • FHA insured loan
  • VA guaranteed loan

These loans require FHA/VA-approved appraisers.

38
Q

FHA

A

the Federal Housing Administration’s primary purpose is to aid in home financing by insuring
the loan. The insurance protects the lender. It insures the whole loan amount, not just the lender’s
risk. It is paid for by the borrower. The loan requires an approved appraisal, is assumable and may be
prepaid without penalty.

39
Q

MIP (Mortgage Insurance Premium)

A

The insurance on the FHA loan. The mortgage insurance premium is paid monthly in addition to the PITI payment.

40
Q

The FHA program is overseen by

A

HUD

41
Q

There are two advantages of FHA loans

A
  1. Qualifying ratios are slightly more lenient allowing borrowers to have more debt and still
    qualify.
  2. LTVs are very high, allowing buyers with little money for a down payment to purchase a
    property. Points on FHA loans can be paid by either the buyer or the seller
42
Q

PMI

A

is private mortgage insurance. It may
be required by lenders if a borrower has less than 20% down payment. PMI allows for the purchase
of a home with a small down payment. PMI allows for high LTVs. PMI protects or insures the
lender’s exposure of risk, usually no more than 30% of the loan. PMI is found on high LTV conventional
loans.

43
Q

VA Loans

A

The Department of Veterans Affairs GUARANTEES repayment of the loan. The guarantee
is for the top 25% of the loan. The guarantee is free to the veteran and protects the lender. There is
a required funding fee and it may be paid by the buyer or seller at closing or included in the loan.

44
Q

VA Loan Continued

A

Generally, the veteran on a VA loan needs $0 down payment, the loan is assumable, and may be
prepaid without penalty. Under VA assumption, the original veteran borrower may remain liable
for the loan unless he receives a release of liability from the VA. Release of liability does not result
in restoration of entitlement unless the assumption is by a qualified veteran using his/her own entitlement.
On an assumption of a VA loan, the new borrower does not have to be a veteran, but does
need VA or lender approval.
The parents and siblings of a veteran are not eligible for a VA loan.

45
Q

The veteran must obtain a

A

Certificate of Eligibility from the VA. Once eligible, the veteran will
be issued a certificate based on ability to pay. (Certificate amount x 4 = approved maximum loan
amount). Dishonorably discharged individuals are never eligible.

46
Q

The Certificate of Reasonable Value (CRV or VA appraisal)

A

must meet or exceed the sale price. If
not, the veteran can cancel the sale, pay the difference between price and appraisal, or ask the seller
to renegotiate. He cannot force the seller to renegotiate. VA loan interest rates are set by market
conditions

47
Q

The VA must be notified prior to a foreclosure by the loan servicer on a VA loan.

A

This is a result of
the Serviceman’s Readjustment Act (The G I Bill). In addition, anyone trying to foreclose on the
property of an active duty veteran for any reason must notify the VA before the foreclosure

48
Q

Both FHA insured and VA guaranteed loans require

A

occupancy and both types of loans are

assumable.

49
Q

Mortgage Clauses

A
  • Acceleration Clause
  • Alienation Clause
  • Defeasance Clause
  • Escalation Clause
  • Prepayment Clause
  • Subordination Clause
  • Assumption Clause
50
Q

Acceleration Clause

A

a provision in a written mortgage, or note, stating that in the
event of default the whole amount of the principal becomes due and payable

51
Q

Alienation Clause

A

“Due on sale” clause states that the balance of the secured debt
becomes due if the property is sold by the mortgagor without the mortgagee’s approval.

52
Q

Defeasance Clause

A

states that the lien is defeated when the debt is repaid.

53
Q

Escalation Clause

A

allows a lender to raise the existing rate. An escalation clause is
usually found in an ARM.

54
Q

Prepayment Clause

A

a statement in a mortgage that the mortgagor can pay the entire
amount or the stated amount prior to the due date in the note. When a loan is pre-paid,
the borrower is responsible for interest up to and including the date of pay off. The penalty
is generally calculated as a percent of the loan balance.

55
Q

Subordination Clause

A

allows a lender to move to or take a lower lien position. This
clause would be found in a second mortgage, a home improvement loan, or a home
equity loan.

56
Q

Assumption Clause

A

allows a new borrower to take over the payments on an existing
loan under specified terms and conditions.

57
Q

In a straight assumption

A

the new buyer is approved, and takes over payments and liability.
This is often called a loan novation. This will not impact the seller’s credit rating.

58
Q

In an assumption “subject to”

A

the buyer takes over payments, but is not liable for the loan.
The original borrower remains liable. This can have an impact on the seller’s credit rating

59
Q

A loan processor, working for the lender, will

A

coordinate the loan from application to closing

60
Q

Lenders

will typically require at least

A

an appraisal of the property, a complete credit report and job history
of the borrower and evidence of down payment funds.

61
Q

Lenders also use qualifying or debt ratios

A

28%-36% would be typical debt ratios for conventional loans.

62
Q

The front ratio

A

28%, is the percent of
monthly gross income that can be used to pay the PITI payment on a mortgage loan. (PITI means
principal, interest, tax and insurance).

63
Q

The second or back ratio

A

36%, is the percent of monthly

gross income that can be used to the cover all consumer debt including the PITI.

64
Q

The LTV or loan-to-value ratio is

A

the loan amount as a percent of either the price or the appraised
value, whichever is lower.

65
Q

Points are associated with

A

loans

66
Q

A point is

A

one percent of the loan amount.

67
Q

There are two types of

points.

A
  • Discount Points

- Origination Points

68
Q

Discount Points

A

are prepaid interest and tax deductible. They raise the return or yield to the
lender

69
Q

Origination Points

A

are loan processing fees. They are not tax deductible. Points are paid at
closing.

70
Q

Equity

A

the difference between the market value of a property and the outstanding debt. At closing,
the buyer’s equity is the amount of the down payment. The seller’s equity is the sale price minus the
debt on the property.

71
Q

Federal Financing Regulations and Regulatory Bodies

A
  1. TRUTH-IN-LENDING OR CONSUMER CREDIT PROTECTION ACT - TILA •
    (Implemented by Regulation Z or “Reg. Z”)
  2. RESPA
  3. ??
  4. EQUAL CREDIT OPPORTUNITY ACT – ECOA
  5. COMMUNITY REINVESTMENT ACT
  6. FAIR CREDIT REPORTING ACT
72
Q

TRUTH-IN-LENDING OR CONSUMER CREDIT PROTECTION ACT - TILA •

Implemented by Regulation Z or “Reg. Z”

A

• This Act is administered by the Consumer Financial Protection Bureau - CFPB.
• It covers consumer credit for all real estate loans regardless of value, and for non-real
estate loans up to $25,000. The main purpose of the law is to allow consumers to understand
the true cost of borrowing money. The APR –annual percentage rate – tells the
borrowers the total cost of borrowing.
• Broadcast, print and internet advertising are regulated.
• Advertising which states only the cash price or the APR is permitted. If any other
credit terms are stated, full disclosure of all credit terms must be made. Credit terms
are called trigger terms or trigger words. They tell a buyer financing is available without
giving enough information. They “trigger” the need for full disclosure. Examples:
monthly payment, interest rate, term
• The APR is the effective rate of interest - what the borrower actually pays. It is usually
higher than the interest rate because it includes all charges – not just interest.

73
Q

APR

A

is the effective rate of interest. what the borrower actually pays. It is usually
higher than the interest rate because it includes all charges – not just interest.

74
Q

RESPA

A

stands for the Real Estate Settlement and Procedures Act. RESPA regulates
closings on 1-4 family residential property with federally related financing. (Apartment
complexes would not be covered.) RESPA is administered by the Consumer Financial Protection
Bureau.

• Allows any party to the transaction to choose the title company, and any party can pay
for the policy.
• Prohibits kickbacks. Rebates and referral fees are not a violation of RESPA. A rebate
is a return of a portion of the commission to a client within a transaction and may be
in any form such as cash, gift certificates, appliances, frequent flyer certificates, etc. A
referral commission may only be paid to another license holder. A small referral gift
can be given to an unlicensed person who provides a referral to a license holder. (The
TEXAS limit is $50 in value, not cash.)
• Places restrictions on requirements for tax and insurance escrow accounts – no more
than two months in advance.

75
Q

3???

A

In the past both TILA and RESPA required lenders to provide separate disclosure statements
to borrowers. In October 2015, the Truth In Lending/RESPA integrated disclosure
(TRID) went into effect. The Dodd Frank Act directed the CFPB to combine the Truth
In Lending cost of financing disclosure and the RESPA good faith estimate of closing costs
into one form - the Loan Estimate form (LE). This form must be provided by the RMLO
- Residential Mortgage Loan Originator to the consumer upon receipt of or within 3 business
days of loan application. Business days are Monday through Saturday. The borrower
must acknowledge receipt of the LE. The borrower has 10 days after he receives the LE, to
respond to the lender and indicate whether he wants to continue with the loan application
or cancel his application. The Closing Disclosure form (CD) must be received by the consumer
at least 3 business days before closing and the lender must have proof of receipt.
Any changes in the loan (APR, loan product, etc.), or any last-minute negotiations in the
contract will trigger a new 3-day waiting period for the CD.

76
Q

EQUAL CREDIT OPPORTUNITY ACT – ECOA

A

This law prohibits discrimination by lenders on the basis of sex, marital status, race, color,
religion, age, national origin, or receipt of income from public assistance programs. Lenders
can deny credit if your sole source of income is alimony, child support or a pension plan.
Child support is the most likely reason for denial (it ends). Lenders can deny traditional
financing if income is commission based. This law is administered by the Consumer Financial
Protection Bureau.

77
Q

COMMUNITY REINVESTMENT ACT

A

This law states that banks must meet the needs of the community in which they are chartered
to do business. Redlining, the refusal to lend in a particular geographic area, is
prohibited. Only banks can be guilty of redlining under this law. This law is administered
by the Consumer Financial Protection Bureau. Fair Housing Laws prohibit redlining by
insurance companies

78
Q

Redlining

A

the refusal to lend in a particular geographic area, is

prohibited.

79
Q

FAIR CREDIT REPORTING ACT

A

This law states that an applicant for a loan will be entitled to a free copy of their credit report
if they are denied a loan. This allows the borrower to determine the reason for the denial of
credit.
When an unscrupulous lender takes advantage of a consumer’s lack of knowledge regarding lending
practices, this is called predatory lending. Actions considered predatory include steering borrowers
to high rate loans, falsifying loan documents, forging signatures, changing terms at closing and
requiring credit insurance, to name a few.
Charging an interest rate higher than the legal limit is referred to as usury. Usury laws protect
consumers

80
Q

At closing where financing is involved, two processes are closing.

A
  1. Closing of the loan between the buyer and the lender. This will provide the funds for the second
  2. The closing on the property.The closing on the property is the execution of the sales contract. The closing or
    settlement on the property is now called the consummation.
81
Q

The Closing Disclosure (CD

A

is presented to divide charges and expenses between the buyer and
seller. All prorations will be shown on the CD. We usually prorate through closing day, which
means the seller pays for closing day. If we prorate to closing day, then closing day is negotiable.

82
Q

On the CD we

A

debit for debt and credit for cash. In other words, if a party owes an amount, that
will be a debit. If a party is receiving cash, that will be a credit.

83
Q

We debit the seller and credit the buyer for:

A

unpaid taxes, unearned rent and tenant security deposits.

84
Q

We debit the seller with no entry for the buyer for

A

accrued interest and existing loan payoff, and fees

necessary to furnish marketable title.

85
Q

We debit the buyer and credit the seller for

A

homeowner association fees, prepaid taxes and fuel in

the tank.

86
Q

We debit the buyer and no entry to

A

the seller for prepaid interest and charges associated with the
loan, like points.

87
Q

On the CD the buyer is c

A

credited for the loan amount and the earnest money deposit. The seller
gets credit for the sale price.

88
Q

The escrow agent or settlement agent is responsible for

A

closing the transaction as set forth in the
sales contract, or preventing closing unless both the buyer and seller agree to any changes in the
contract terms.

89
Q

Loan-related specific requirements must also be met.

A

The release of any existing
liens such as tax liens, special assessments, first mortgage lien, etc. and the payment of other closing
and settlement expenses will be handled by the escrow agent. The seller’s deed and the buyer’s money
are deposited with the escrow agent. The agent records the deed once title conditions and any other
requirements of the agreement are met, the title passes to the buyer, the seller receives his or her
funds, and the sale is completed.

National Exam (8 decks)

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