Financing Flashcards
In order to be approved for a loan, the lender asks the buyer to submit the following documents
Last two years W-2s Last 3 months Bank Statements Last 4 weeks pay stubs A list of all debts A list of all income sources
3 things lender looks for when providing a loan
Collateral, Capacity, Character
Loan to Value Ratio (LTV) formula
Loan amount divided by sale price = LTV
Capacity
ability to pay the loan back to the lender
PITI
Principal, Interest, Taxes, Insurance. Front end ratio (housing expense) shouldn’t exceed 28% of monthly income. Back end (housing plus all other long term debts) should not exceed 36%.
Character
Lender pulls all 3 credit reports and reviews them.
Verification of Deposits
Lender needs to verify borrowers downpayment and reserves( usually equal to 3 months mortgage payments). They look for seasoned money.
3 instruments used to finance the real estate
Mortgage
Deed of trust
Land contract
Mortgagee
Lender
Mortgagor
Borrower
hypothecate
Borrower retains possession of the home while the lender has a security interest.
Trust Deed
a 3 party instrument where the borrower gives a note to the lender and as security for the note conveys title to a third person called a trustee
Land Contract (Contract for Deed)
The seller retains legal title while the borrower has equitable title. The buyer receives legal title when the loan is paid off.
Promissory Note
Primary instrument in a home purchase transaction. It’s an IOU
Title Theory (Massachusetts)
Borrower transfers title to the lender usually by a mortgage deed. When the loan is paid off, title reverts to the borrower. Massachusetts is a title theory state because the lender has conditional title to the property.
Lien Theory
Borrower retains title to the real estate and gives the lender a lien on the property which is recorded at the registry of deeds.
Immediate Theory
Title remains with the borrower, however it transfers to the lender if the borrower defaults on the loan.
Federal Reserve System
central bank of the US. founded in 1913 by congress.
Duties of the Federal Reserve
- conducting the nation’s monetary policy
- Supervising and regulating banking institutions and protecting the credit rights of consumers.
- Maintaining the stability of the financial system
- Providing financial services to the us gov, public, financial institutions, official foreign institutions
Federal Reserve Banks
12 Federal Reserve banks and 25 branches make up the federal reserve system under the oversight of the board of governors in DC.
Board of governors
The fed reserve board consists of 7 governors appointed by the president and confirmed by senate.They serve 14 year staggered terms to ensure stability and continuity over time.
Federal Open Market Committee(FOMC)
The Fed’s policy making body. They meet 8 times a year
Federal Discount Rate
The FOMC determines the rate of interest member banks pay to borrow money.
Prime Rate
interest rate a bank may charge their most creditworthy or favorite customer.
Two Mortgage Markets in the US
Primary Mortgage Market, Secondary Mortgage Market
Primary Mortgage Market
the loans that are made directly to borrowers from a variety of lending sources. The direct source.
Secondary Mortgage Market
The purchasing of existing loans to different organizations.
3 types of loans provided by lenders
Conventional Loans, Private Loans, Government backed loans.
Conventional Loans
loans made without any government guarantee or insurance. Lender assumes all the risk. Usually requires 20% down payment
Private Loans(Private Mortgage Insurance)
insurance that enables the lender to provide loans with lower down payment without assuming all the risk.
Government Backed Loans
two types: FHA Loans and VA Loans
Federal Housing Administration(FHA) governed by:
Dept. of Housing and Urban Development. Also known as HUD
FHA Loan Program
insure the lender if the buyer defaults. FHA doesn’t loan money, lender utilizes a Direct Endorsement Program to provide the loan. Market Conditions determine the rates. As little as 3.5% down payment.Mortgage Insurnace Premium collected at closing. 100% of closing costs can be financed.
VA Loan
veteran must apply for Certificate of Eligibility. VA guarantees the lender. Interest rates are set by market conditions. Cert. of reasonable value issued by the appraiser. Up to 100% financing. Can use multiple times but only one at a time. A non veteran can take over a VA loan.
Fannie Mae
Federal National Mortgage Association
Private corp. that sells corp. shares and participation certificates to raise money. Participation Certificates are securities backed by a pool of mortgages. Individuals who sell securities need a securities license.
Freddie Mac
Federal Home Loan Mortgage Corp. Stockholder owned corporation chartered by congress to keep money flowing to mortgage lenders in support of home ownership and rental housing. Specializes in buying conventional, fha, and va loans and uses them as security to sell bonds and participation certificates.
Ginnie Mae
Government National Mortgage Association. A division of HUD and guarantees government assisted loans. Specializes in low income housing. Utilizes mortgage backed securities to increase the liquidity in the mortgage marketplace.
Farmer Mac
Federal Agricultural Mortgage Corp. Provides secondary mortgage market for agricultural and rural loans.
Jumbo Loans
Loans exceed the limits of Fannie Mae and Freddie Mac.
Forclosure
Lender initiates it by advertising that the property is being sold. Must advertise the date of the auction of the property for 3 weeks in a major newspaper within the county of the home.
Soldiers and Sailors Relief Act of 1940/Service Members Civil Relief Act
This act prohibits the foreclosure on a property owned by an active military service person. They can delay the foreclosure up to six months from the conclusion of their service.
Deficiency
A loan is foreclosed on and the auction brought in less than the amount needed to cover the loan amount. Former mortgager is responsible for the balance.
4 Financing Laws and Acts
Truth in Lending Law, Equal Credit opportunity act, real estate settlement procedure act, community reinvestment act.
Truth in Lending Law
Part of the Consumer Protection Act of 1968. Mandates that the lender provide the borrower with a disclosure statement indicating the total cost of the loan in percentage as well as total finance charges. Enforced by the Federal Trade Commission
Annual Percentage Rate
Includes the interest rate, points paid by the borrower, loan fees.
Trigger Terms
Advertisement including particulars of the financing. % of the down payment, down payment total, monthly payment amount, or 360 payments
Requirements of an advertisement containing a trigger term
must include amount or percentage of down payment. terms of the repayment, annual percentage rate.
3 Day right of rescission
Buyer of property in MA does NOT have 3 day right of rescission. They DO have one when they refinance an owner occupied residential property.
Equal Credit Opportunity
prohibits discrimination against any loan applicant on the basis of race, religion, age, marital status, sex, or public assistance. Lenders cannot ask questions about marital status, pregnant status, or divorce.
Real Estate Settlement Procedures Act (RESPA)
Requires the lender to disclose costs of the loan separate from financing costs. Law covers one to four unit residential dwellings for first loans. RESPA requires a special information booklet to be provided to the borrower from HUD entitled Settlement Costs and Helpful Info. RESPA requires a good faith estimate be provided to the borrower within 3 days of applying for the loan. Includes all the costs associated with purchasing the property.
Uniform Settlement Statement from HUD
central document used to disclose all the costs associated with the loan. Outlines the closing costs (credits and debits) to both the buyer and the seller. should be available one day before the closing. AKA settlement sheet or Settlement Statement. Form is signed by the seller, buyer, and settlement agent at closing.
RESPA mandates the following
- Borrower has right to review the settlement statement before closing.
- Limits placed on amount of reserves collected.
- Only 2 months taxes and insurance are allowed to be collected at closing.
- Lender cannot provide or receive kickbacks for referrals.
- Lender must justify all costs charged.
Community Reinvestment Act
Act that requires lenders to loan aggressively in urban communities utilizing attractive interest rates. `
Controlled Business Arrangement(CBA)
One stop shopping. Real estate companies offer financing, insurance, brokerage services.
Computerized Loan Origination(CLO)
Fee charged to a borrower for the access of computerized loan origination services.
Amortized Loan (Direct Reduction Loan)
Loan payed back to the lender in installments over an extended period of time. While payment amount remains consistent, each payment increases the amount credited toward the principal and reduces amount paid to interest.
Seller financing/purchase Money Mortgage
When the seller provides a loan to the buyer at a specified interest rate. Buyer makes payments directly to seller.
Second Mortgage (Junior)
subordinate to first loan.
Graduated Payment Mortgage
Have lower payments in the early years. Payment may increase after 3, 5, 7 years. Attractive to buyers who have increasing incomes.
Growing Equity Mortgage
Provides for payment increases that are applied directly to the loan principal. Allows principal to be paid off in shorter time.
Convertible Mortgage
adjustable loan that allows the borrower to convert the loan to a fixed loan in the future.
Participation
Lender may want a share of ownership in return for the loan money.
Shared appreciation mortgage
investor makes the down payment for the buyer for a share of the property
Package Mortgage
Secured by real property and personal property. furnished properties etc.
