Chapter 7: Financing and Settlement Flashcards
The most common choice for financing real property
Mortgage loans
Conventional loan
One that is neither federally insured nor guaranteed. (It is not an FHA or VA loan.)
Non-conventional mortgage loans
the federal government insures or guarantees
non-conventional mortgage loans through 3 agencies:
- the Federal Housing Administration
- the U.S. Department of Veterans Affairs
- the U.S. Department of Agriculture
All federally backed mortgage loans feature special and, in many cases, relaxed lending
guidelines and payment terms.
Contract for Deed
Installment Contract or Land Contract or Real Estate Contract
seller financing that does not transfer legal title immediately. 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
Contract for Deed is what kind of contract?
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).
A seller is a vendor or vendee?
Vendor. Buyer is vendee.
If the vendor or vendee dies, Contract for Deed is binding on?
the heirs
Note or promissory note
the instrument for the debt. It is your personal promise to
pay. It is not recorded.
Note or promissory note
the instrument for the debt. It is your personal promise to
pay. It is not recorded.
Mortgage
a pledge of real property as security for a promissory note.
The mortgagor borrows the money and gives the mortgage as a pledge to the lender. The lender is called the mortgagee. The mortgage is recorded, creating the lien.
Lien theory state
In a lien theory state, 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.
Title theory state
at closing, the lender receives the title and will hold it until the lien is satisfied or paid off
Deed of Trust
Used by some states instead of a traditional mortgage. The deed of trust contains a “power of sale” clause that allows for non-judicial foreclosure. Power of sale results in a quick foreclosure. This non-judicial foreclosure is preferred by lenders.
The deed of trust
involves how many parties?
3 parties - the borrower or trustor, the lender or beneficiary, and the trustee.
The deed of trust
involves how many parties?
3 parties - the borrower or trustor, the lender or beneficiary, and the trustee.
The trustee has what 2 functions in accordance with the Deed of Trust?
- release the lien when the note is paid OR
- foreclose in the event of default
The trustee has what 2 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.
primary market
where consumers go to borrow money. It includes mortgage bankers, mortgage brokers, banks, credit unions, etc. It also includes seller financing.
Secondary market
The secondary market 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 a steady supply of funds from investors.
Fixed-rate amortized loan
equal, regular payments of principal and interest until the
loan is repaid. Interest is paid in arrears - at the end of each payment period.
Fixed-rate amortized loan
equal, regular payments of principal and interest until the
loan is repaid. Interest is paid in arrears - at the end of each payment period.
Term loan/ straight loan
interest only until the end of the term, when the entire principal is repaid. This is a zero-amortization loan.
Term loan/ straight loan
interest only until the end of the term, when the entire principal is repaid. This is a zero-amortization loan.
Blanket loan
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
Blanket loan
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
Package loan
includes real property plus personal property (a furnished condominium).
Package loan
includes real property plus personal property (a furnished condominium).
Budget loan
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 (AKA impound, trust, or reserve account).
Loan servicer
The party managing the escrow account
Balloon loan
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
Participation loan
2 or more lenders invest in 1 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.
Open-end mortgage
Permits additional borrowing on the same note. This is sometimes called a credit card mortgage or a home equity line of credit - HELOC
ARM - adjustable rate mortgage
A loan with an interest rate subject to
change.
How is an ARM rate determined?
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.
Construction loan
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.
Reverse Annuity Mortgage
allows homeowners 62 years of age or older 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.
Sub-prime loans
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 1 to 5 % higher than those with good credit. This loan would be likely to have a prepayment penalty to protect the lender from loss of interest.
FHA - the Federal Housing Administration
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.
The loan requires an approved appraisal, is assumable, and may be prepaid without penalty.
MIP - Mortgage Insurance Premium
What insurance on a FHA loan is referred to. It is paid monthly in addition to the PITI payment.
The FHA program is overseen by who?
HUD
The FHA program is overseen by who?
HUD
What are two advantages of FHA loans?
- Qualifying ratios are slightly more lenient, allowing borrowers to have more debt and still qualify.
- 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.
PMI - private mortgage insurance
It may be required by lenders if a borrower has less than a 20% down payment. Allows for the purchase of a home with a small down payment.
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.
VA - 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.
Are parents and siblings eligible for a VA loan?
No
Acceleration Clause
the whole amount of the principal becomes due and payable in the event of default
Alienation Clause
“Due on sale” clause. the balance of the secured debt becomes due if the property is sold by the mortgagor without the mortgagee’s approval.
*Found in Fannie Mae and Freddie Mac loans.
Defeasance Clause
the lien is defeated when the debt is repaid
Escalation Clause
allows a lender to raise the existing rate. Usually found in an ARM.
Prepayment Clause
Borrower can pay the entire amount or the stated amount prior to the due date in the note.
When a loan is prepaid, the borrower is responsible for interest up to and including the date of the payoff.
Any amount paid in excess of the monthly payment must be applied to
reduce principal.
Churning
excessive selling/lending activity to generate fees and commissions.
often done with naïve or inexperienced consumers. In some cases, the lender steps the rate down through multiple refinances. Each refinance provides only a slightly lower rate until the prearranged
rate is reached.
Subordination Clause
Allows a lender to move to or take a lower lien position.
found in a second mortgage, a home improvement loan, or a home equity loan.
Subordination Clause
Allows a lender to move to or take a lower lien position.
found in a second mortgage, a home improvement loan, or a home equity loan.
Assumption Clause
allows a new borrower to take over the payments on an existing loan
Assumption Clause
allows a new borrower to take over the payments on an existing loan
Straight Assumption
new buyer is approved and takes over the payments and liability.
often called a loan novation. Will not impact the seller’s credit rating.
assumption “subject to”
buyer takes over the payments, but is not liable for the loan - original borrower remains liable.
can have an impact on the seller’s credit rating
assumption “subject to”
buyer takes over the payments, but is not liable for the loan - original borrower remains liable.
can have an impact on the seller’s credit rating
Front Ratio Percentage
28%
Back Ratio Percentage
36%
Back Ratio Percentage
36%
LTV
The loan amount as a percent of either the price or the appraised value, whichever is lower.
LTV
The loan amount as a percent of either the price or the appraised value, whichever is lower.
A point is what percent of the loan amount?
1%
Discount Points
prepaid interest and tax-deductible. They raise the return or yield to the
lender
Origination Points
Loan processing fees. They are not tax-deductible. Points are paid at
closing
Equity
Market value of a property minus 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
Regulation Z’s TILA or Consumer Credit Protection Act
provides consumers with rights in connection with certain types of credit transactions to which it relates, including:
- a right of rescission in certain real estate lending transactions
- regulation of certain credit card practices
- a means for fair and timely resolution of credit billing disputes
Regulation Z’s TILA or Consumer Credit Protection Act
provides consumers with rights in connection with certain types of credit transactions to which it relates, including:
- a right of rescission in certain real estate lending transactions
- regulation of certain credit card practices
- a means for fair and timely resolution of credit billing disputes
Who administers TILA/Consumer Credit Protection Act?
Consumer Financial Protection Bureau - CFPB
APR
The effective rate of interest - what the borrower actually pays. Usually
higher than the interest rate because it includes ALL charges – not just interest.
(RESPA) Real Estate Settlement and Procedures Act.
Regulates closings on 1-4 family residential property with federally
related financing. (Apartment complexes would not be covered.)
Administered by the Consumer Financial Protection Bureau.
“Business Days” are what days of the week?
Monday through Saturday
“Business Days” are what days of the week?
Monday through Saturday
TILA and RESPA disclosures are now combined in what form?
Loan Estimate form (LE)
Equal Credit Opportunity Act (ECOA)
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.
Community Reinvestment Act
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.
Fair Credit Reporting Act
An applicant for a loan will be entitled to a free copy of their credit report
if they are denied a loan. Allows the borrower to determine the reason for the denial of credit.
Predatory Lending
When an unscrupulous lender takes advantage of a consumer’s lack of knowledge regarding lending
practices.
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.
Predatory Lending
When an unscrupulous lender takes advantage of a consumer’s lack of knowledge regarding lending
practices.
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.
Usury
Charging an interest rate higher than the legal limit. Usury laws protect
consumers.
This is presented to divide charges and expenses between the buyer and
seller. Prorations are also listed here.
The Closing Disclosure (CD)
On the CD, the buyer is credited for what? The seller gets credit for what?
On the CD, the buyer is credited for the loan amount and the earnest money deposit. The seller
gets credit for the sale price.
