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FI 534 Exam 2 > Exam 2 > Flashcards

Exam 2 Flashcards

0
Q

Difference between LONG-TERM MORTGAGE and BALLOON NOTE MORTGAGE?

A
  • LT= SET interest rate; 20-30 year loan
  • Balloon(Bank Loan)= still get 20-30 year loan interest rate but bank requires you to RE-DO note every 5 or 7 years and update for current interest rate
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1
Q

What is the difference between the majority of our mortgages?

A

Loan with a real estate backing

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2
Q

Basic Information in a Promissory Note

A
  1. Principal
  2. Interest Rate (APR)
  3. Recourse/Nonrecourse
  4. Penalties
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3
Q

Other necessary information is a promissory note & define.

A
  1. Security/Collateral- real estate regardless of loan
  2. Application of Payments - if you get behind on
    pmts, must pay fee + interest (1st)
  3. Loan Assumability-take on someone else’s debt,
    must have a lot of cash
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4
Q

List the different mortgage Clauses (promissory note inclusions) & provide examples.

A
  1. Acceleration–happens when you default on loan, if you can’t pay bills we will foreclose
  2. Assignment–ok to sign loan to someone else
  3. Alienation–$ Due when you SELL the home
  4. Escrow–trust for ppty taxes & insurance (if you put down large down pmt, don’t have to have)
  5. Prepayment–can prepay your loan earlier without penalty
  6. Subordination–if you get another mortgage, it will be subordinate to this
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5
Q

Why recourse promissory note?

A

Land/Commercial/Construction has MORE risk

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6
Q

FORECLOSURE terms:

A
  1. Default
  2. Equitable Right of Redemption
  3. Judicial Foreclosure
  4. Statutory Right of Redemption
  5. Deficiency Judgement
  6. Short Sale
  7. Deed in Lieu of Foreclosure
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7
Q

Three types of Bankruptcy:

A
  • Chapter 7 = “Fresh Start”
  • Chapter 11 = “CORPORATE Bankruptcy”
  • Chapter 13 = “INDIVIDUAL Bankruptcy”
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8
Q

Chapter 7 Bankruptcy

A

“FRESH START”

  • ALL debt forgiven
  • foreclose real estate
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9
Q

Chapter 11 Bankruptcy

A

“CORPORATE Bankruptcy”

  • DEBTS > $1 million
  • Restructuring, keep real estate

= CREDITORS approve the plan

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10
Q

Chapter 13 Bankruptcy

A

“INDIVIDUAL Bankruptcy”

  • Restructuring, keep real estate (start paying back)
  • if you pay this plan for 3 yrs, unsecured debt goes away

=COURT approves the plan

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11
Q

Typical RESIDENTIAL loans

A
  1. Conventional Loans= NOT gov’t backed/insured
  2. Federal Housing Administration Loans= guarantee loans for ppl who can’t get conventional loans
  3. Veterans Administration Loans = guarantee loans of qualified veterans (do NOT lend $)
  4. USDA Rural Housing Loans
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12
Q

What does “LTV” mean?

A

Loan To Value

LTV = Loan/Value

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13
Q

What is the “MAXimum” LTV that many conventional lenders prefer?

A

80% LTV with 20% down

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14
Q

Can a conventional mortgage have higher LTVs?

A

Yes, 85-97% mortgages (put as little as 3% down)

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15
Q

What is Private Mortgage Insurance for?

A

When you don’t have 20% down

-pay default on loan of PMI amt.

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16
Q

When do we pay PMI?

A

Payed when > 80% LTV

-PMI = amount between LTV & borrowed amount

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17
Q

Who provides PMI?

A

-their down insurance companies, mortgage guarantee, AIG

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18
Q

How do people avoid PMI?

A
  1. Put 20% down
  2. Get 2nd mortgage (Higher Interest Rate)
  3. Get a gov’t backed/insured mortgage
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19
Q

Federal Housing Department- how much do borrowers INVEST?

A
  1. 5%

- more expensive (premiums upfront & monthly)

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20
Q

How does the Veterans Administration determine funding fees?

A

-how much down payment you put down
AND
-how many times you’ve gotten a VA loan (only want you to get once)

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21
Q

What LTV can veterans borrow under the program?

A

100%

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22
Q

What is the maximum loan amount for a VA loan?

A

$417,000

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23
Q

Do any veterans NOT have to pay the funding fee?

A

Yes, disabled veterans from fighting and widowers of veterans

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24
Q

Why does the VA require funding fees?

A

To make up for default losses

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25
Q

What LTV can be borrowed under the USDA rural development?

A

100%

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26
Q

What is the MAX loan term for USDA Rural Development?

A

38 to 40 yr. loans

-longer term to decrease the payments

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27
Q

Principal

A

The amount you have to take out for a promissory note

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28
Q

Interest Rate (APR)

A

Cost to the Borrower

Yield to the Lender

APR= Annual Percentage Rate

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29
Q

Recourse loan v. NONrecourse

A

RE=They can come after your other assets
- commercial or construction

NON=CanNOT come after your other assets
-home loan

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30
Q

Penalties

A

Pre-payment penalties=paying off mortgage early

-Common on commercial loans b/c short term notes

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31
Q

First Mortgage vs. Second Mortgage

A

1st=lowest interest rate, gets paid back 1st if foreclosure

2nd=highest interest rate, fixed pmt + upfront $

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32
Q

Why would someone get a 2nd mortgage?

A

Mortgage interest deduction, other debt

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33
Q

HELOC & it’s 3 criteria

A

Home Equity Line of Credit (like a credit card)

  1. Lowest interest rate, but VARIABLE rate
    • more risk involved
  2. You can “draw” on it (amt.’s can be different)
  3. Bank can cut you off (DEMAND Clause)
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34
Q

How would the mortgages get paid for a $250,000 home if FORECLOSED?
Mortgages:
1st=$200,000
2nd=$50,000

Scenarios:
A) Bought at $200,000
B) Bought at $225,000
C) Bought at $275,000

A

See Notes.

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35
Q

Default Foreclosure

A

120 days behind on pmts

  • lawyer advertises you in paper for month, then sell home on first Tuesday of next month
  • court ordered foreclosure
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36
Q

Equitable Right of Redemption (Foreclosure)

A

30 days to catch up & make pmts to keep home

-haven’t already lost home

37
Q

Judicial foreclosure

A

Court orders foreclosure

38
Q

Statutory right of redemption (Foreclosure)

A

12 months to buy your house back
(pay fees, foreclosure price, & any improvements)
-tax foreclosure =3 years

  • can pay someone to give statuary right away
  • discourages real estate investors
39
Q

Deficiency judgment (Foreclosure)

A

-court ordered

  • judgement loan=$200,000
  • sheriff sale=$180,000
  • DEFICIENCY=$20,000 (difference)
40
Q

Short sale (foreclosure)

A

Value has gone down, the bank agrees to take less $ than the loan (very common)

41
Q

Deed in Lieu of Foreclosure & benefits to a lender and home owner

A

Giving the home back to the lender

-Home Owner = doesn’t hurt credit as bad as
foreclosure
-Lender = they can resell the home and save
foreclosure expenses

42
Q

Where would you get a house loan? Commercial loan?

A

HOUSE loan = Mortgage company

COMMERCIAL loan = Bank

43
Q

Types of Conventional Loans

A
  • Fixed Rate Mortgage
  • Balloon Note
  • ARM
44
Q

What types of people get USDA rural development loan & why does the government lend these types loans?

A

People that live in rural(poor) areas
-medium income or less

-gov’t lends them b/c they want the rural areas to go away

45
Q

Benefits of USDA rule development loans:

A

1.SUBSIDY
–Poor enough, government will pay part of your
pmt for you

  1. FORBEARANCE
    –if you lose your job, gov’t will stop pmts and not
    foreclose till you get another job
46
Q

SBA Commercial Loans

A

Small Business Administration

  1. Very LOW closing costs
  2. Very HIGH prepayment penalties
  3. SBA charges a guaranty and service fee
47
Q

What is a CMBS?

A

Securitized commercial loan-sold off from bank to investors

48
Q

What is a CDC loan?

A

Certified Development Company (bank loans)

-2 notes with less down

49
Q

What is Farm Credit or Agricultural Credit? Max amount of loan?

A
  • provides long term loans on rural acreages

- may loan up to 90% on LAND (higher loan than going to the bank)

50
Q

Types of Loans (to calculate)

A
  1. Fixed Rate Mortgage
  2. Balloon Note
  3. Construction Loan
  4. Adjustable Rate Mortgage (ARM)
51
Q

Fixed Rate Mortgage

A
  • Mortgage term (time period) and the interest rate are FIXED = pmt stays the same
  • time periods = 15, 20, 30 yr loans
52
Q

Are interest rates higher or lower on longer mortgages such as a 30 year loan? If so, why?

A

Higher on 30 yr loan

  • more risk of default (term risk)
  • liquidity risk
53
Q

Why would you want a fixed rate mortgage?

A

Interest rate could potentially go up and you would have higher payment if rate was it fixed

54
Q

Balloon Note

A

Mortgage pmts cover a short period of time

  • Term= 2, 3, 5, 7 years
  • Interest is fixed or variable
55
Q

Why would a lender issue a balloon note?

A

Because there is LITTLE interest rate risk

56
Q

Why would a buyer get a Balloon Note?

A
  1. Couldn’t qualify at mortgage company
  2. Commercial mortgage
  3. Expect interest rates to drop
  4. Plan on living somewhere short-term (less expensive)
57
Q

How are balloon notes amortized?

A

Over a period, then refinanced at end of term

58
Q

Who issues balloon notes?

A
  • Commercial banks

- mortgage lending branch

59
Q

Our interest rates higher or lower on balloon notes?

A

Higher, varies based on back though

60
Q

Construction Loan

A

Mortgage covering a fixed very short period of time

  • terms=6, 9, 12 months
  • interest rate can be fixed or variable
61
Q

Pay off options for a construction lien

A
  1. Pay interest in full at the END. (Class calculation)
  2. Pay interest MONTHLY over the term
  3. Interest is added to the original loan at the end of the construction while converting the loan to a permanent mortgage
62
Q

What is a “takeout commitment” that is involved in the construction loan process?

A

Give security to banks

63
Q

Who makes construction loans?

A

Commercial banks

64
Q

How is loan money given to the borrower in a construction loan? What are draws?

A

Money given in Stages
Draws=amts from the stages

Ex:

1) $60,000 Foundation
2) $60,000 Framing
3) $80,000 “Turn Key” or Final

Total Draws = 3

65
Q

Adjustable Rate Mortgages

A

Mortgage covers a fixed period of time

  • terms=5, 15, 20, 25, 30 years
  • interest is variable and attached to an index over the loan term
  • each time the interest rates “adjusts”, the pmt changes on the mortgage
66
Q

Why an ARM for a lender?

A

NO interest risk

67
Q

Why an ARM for a borrower?

A
  1. Expect interest rates to go down
  2. Living somewhere short-term
  3. Have NO chance (generally you have a choice)
68
Q

Difference between contract interest rate and effective cost of the loan?

A

Contract interest rate is the nominal rate

Effective cost (APR)–pay more than the stated interest rate

69
Q

Types of loan fees (Closing Costs)

A

1) Originator Fees- always paid, go to the ppl who make mortgage loans

2) Discount Fees-pay $ up front to discount the interest rate
- bad b/c average person refinances 1 per every 4 years(no benefit)

70
Q

Types of Originator Fees

A
  1. Originator Fee = loan officer (commission)
  2. Processing/Documentation Prep Fee = admin. work
  3. Underwriter Fees = approve the loan (salary)
71
Q

How much are closing costs for a mortgage?

A

3%+ (can be up to 4 or 5%)

72
Q

What is a prepayment penalty and what type of mortgages should you pay them on?

A

Paying off mortgage early and on commercial loans

73
Q

What is mortgage refinancing?

A
  • changing your mortgage
  • very costly (3%+ every time)

*refinance if you save at lease 1%

74
Q

Why do borrowers refinance?

A
  1. Lower payments
  2. Lower interest rate
  3. Lower the term
  4. “Cash-out” refinance (fix house)
  5. “Debt Consolidation”
75
Q

Define valuation

A

Value of physical property and the legal rights of ownership in the real estate

76
Q

The 2 terms that reference an appraisal

A
  1. The PROCESS by which an appraiser reaches certain conclusions
  2. The WRITTEN REPORT that the conclusions are stated upon
77
Q

What is market value and what does the definition assume?

A

Value for average buyer or seller; most probably sales prices
(Do NOT care about the business value)

-assumes an “arms length” transaction (parties are INDEPENDENT)

78
Q

How are values considered arms length? (Developing a sales price)

A
  1. Buyer and seller are typically MOTIVATED (reason to buy or sell)
  2. Both parties are well informed and acting in their BEST INTERESTS
    (knowledge of the market)
  3. The property has a reasonable EXPOSURE time on the market
  4. Payment is made in cash or financial agreements that are COMPARABLE.
  5. CREATIVE financing or sales concessions did NOT affect the price
79
Q

When would business value = market value?

A

Apartments (rent)

80
Q

Define Investment Value

A

Value of an investment; value to YOU (not avg. buyer/seller)

81
Q

Define Assessed Value

A

Value used for property taxes

82
Q

Define Liquidation Value

A

Discounting market value; quick sale value (foreclosure)

83
Q

Define Book Value

A

Cost - Depreciation

84
Q

Define Business Value

A

Value of the business (based on rent); includes other assets than just real estate

85
Q

Two ways to examine property to determine the “Highest & Best Use”

A
  1. As IMPROVED

2. As if VACANT

86
Q

Direct Cost vs. Indirect Cost

A

Direct = actual building or the structure

Indirect = NOT building or structure
–overhead, surveys, engineering

87
Q

Three types of Depreciation

A
  1. PHYSICAL Deterioration–every day wear & tear
  2. FUNCTIONAL obsolescence–dated, not in favor
    –EX. air conditioning, windows, 1 bathroom
    (^Depreciated by how much it takes to fix it)
  3. EXTERNAl Obsolescence–factors outside your own ppty
    –EX. house by train tracks or a land fill
    (^depreciated by benchmarking based on houses in the area)
88
Q

COST approach uses

A
  1. Special purpose commercial properties (only 1 use)
  2. New residential homes
  3. Fire or hazard insurance purposes
89
Q

Sales Comparison approach uses

A
  1. Residential Homes
  2. Land or Lot appraisals
  3. Commercial properties in an active market
90
Q

Why use the sales comparison approach for land?

A
  • It doesn’t have cost (can’t use cost approach)

- it usually doesn’t rent (can’t use income approach)

91
Q

Direct vs. Indirect Capitalization

A

Direct = convert SINGLE year’s cash flow estimate into an indicator of value

Indirect=convert a STREAM of income estimates, including reversion from resale, into an indicator of value. (DCF Analysis)

FI 534 Exam 2 (1 decks)

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