Financing Flashcards
Primary Mortgage market
Provides loans to borrowers (mortgagors) and is made up of several lender types: Commercial banks Savings and loan associations Credit unions Mortgage brokers Mortgage bankers Savings and Loan Associations
Power of Sale Clause
If foreclosure becomes necessary, a power of sale clause in the deed of trust permits the lender to use a non-judicial foreclosure process; e.g., the lender doesn’t have to go to court to enforce foreclosure proceedings.
VA loan eligibility
length and type of service, but in general are available with 181 days active duty or three months during war time.
Debt ratio
The total of all the buyer’s debt obligations
divided by income.
Conforming loan
A conforming loan meets the loan limit and other criteria (related to borrower qualifications) that Fannie Mae and Freddie Mac set. Lenders can sell conforming loans to Fannie Mae or Freddie Mac. Homebuyers who wish to borrow more than the loan limit must make up the difference through a larger down payment or finance with a jumbo loan.
How long can a lender lock a rate
90 Days max.
Title Theory
States that use a deed of trust as the primary security instrument are referred to as title theory states because the lender /trustee holds legal title to the property until the mortgage loan is paid in full. Borrowers hold equitable title, which means that they have possessory rights (can live in and use the property) and have the right to obtain legal title once
they’ve paid the loan off.
VA loan features
VA guaranteed loans No down payments nec No mortgage insurance No prepayment penalties The VA guarantees up to a quarter of the loan limit
Usury
Lending money at an excessive (illegal) rate
State laws seek to deter
Credit cards, retail installment contracts, and consumer leases are typically exempt from usury laws.
Wrap-around mortgage.
Type of seller financing: seller holds a mortgage that wraps the new buyer’s mortgage around the seller’s existing mortgage. The seller continues to make payments on the first mortgage, and buyer makes payments to the seller on the wraparound
mortgage.
Financing instruments
Financing instruments are documents that are executed (signed) when a borrower receives a mortgage loan. These instruments include a promissory note and a security instrument.
Four players in the Secondary Loan Market
Fannie Mae, Freddie Mac, Ginnie Mae, Farmer Mac
The Truth in Lending Act (TILA) - When passed and what it does.
1968/requires lenders to disclose credit terms and conditions when trigger terms used: down payment, payment amount, number of payments, and interest rate (other than APR).
Regulation Z requires mortgage lenders to follow TILA
The Equal Credit Opportunity Act ( ECOA) – year passed and what it does
1974 / prohibits lenders from making credit unavailable or offering less favorable terms based on protected class status (race, color, religion, national origin, sex, marital status, or income source) vs. creditworthiness.
Two ratios used by underwriters
housing ratio (aka the front-end ratio) debt ratio (aka debt-to-income ratio or the back-end ratio)
Illegal property flipping
Mortgage fraud: Property falsely appraised at a higher value, then quickly sold, with the buyer taking the “equity” in the property
Due on Sale Clause
A due-on-sale clause (also known as alienation clause) requires the borrower to repay the loan when transferring ownership to another.
Closing disclosure
Lenders must provide at least three business days before closing, provides final loan details, including the loan terms, projected monthly payments, fees and other closing costs.
Mortgage bankers
Make loans using in-house loan processors and underwriters
Negative amortization
Negative amortization may be experienced with some ARMs. This occurs when a payment fails to cover the amount of interest due. When this happens the difference between interest owed and interest paid is added to the loan’s principal.
defeasance clause
The defeasance clause orders the lender or trustee to immediately release full title to the borrower once the loan is paid in full. The lender is then prevented from pursuing additional payment after the payoff.
Typical credit scores required by loan type
Conventional – 620+.
FHA w/3.5% down: 580+
FHA w/10% down 500-579
Borrowers with higher credit scores and other compensating factors such as cash reserves or additional income sources may qualify for higher front-end and back-end loan ratios.
Housing ratio
The borrower’s projected monthly housing expense (principal, interest, taxes, insurance, second liens, and association fees) divided by income.
When must lenders terminate PMI?
Lenders must terminate PMI when the principal balance is scheduled to reach 78% of the original property value or when the mortgage loan reaches its originally scheduled amortization midpoint. Buyers may request elimination at 80 percent.
The deed of trust (or trust deed)
The deed of trust (or trust deed) involves three parties: the trustor (borrower), the beneficiary (the lender) and the
trustee (an independent third party who holds the deed of trust).
Mortgage brokers
Match consumers with lenders; don’t fund loans
Government Sponsored Enterprises (GSEs),
Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs), which is a privately-held corporation that has a public purpose. GSEs are corporations that are traded on major stock market exchanges (FNMA and FMCC). Fannie Mae and Freddie Mac purchase mortgage loan packages from lenders.
TRID Rules apply to…and exempt from…
Financed home purchases, most loan assumptions, refinances, and home improvement loans, loans to purchase or improve rental property with 1-4 units.
Exempt: Reverse mortgages, home equity lines of credit (HELOCS) and manufactured housing loans that aren’t secured by real estate most commercial and business loans.
Must all foreclosures in Lien Theory States undergo judicial foreclosures?
Nope. If the mortgage document included a power of sale clause, the lender can do non-judicial foreclosure.
MBS
Mortgage backed security: bundled loans/debts that can be bought and sold. Investors can purchase a share and get payouts similar to bonds. Ginnie Mae provides insurance for these.
TILA/RESPA Integrated (TRID) regarding loan estimate (LE)
Loan Estimate (LE) w/n 3 busin days of appl and 7 busn days before closing
LE revisions can trigger another 3 biz day discl. and at least 4 biz days b4 closing.
Mortgage
A mortgage involves two parties: the lender and the borrower. The mortgage places a lien against the property it secures.
Commercial Banks
National banks that offer consumer and business loans for resale on the secondary mortgage market
Non-conforming Loan
A conventional loan that fails to meet Fannie Mae and Freddie Mac guidelines for credit scores, LTV, and/or loan amount. Lenders may still fund non-conforming loans but will usually charge a higher interest rate and/or require mortgage insurance to minimize the risk.
Jumbo Loan
a conventional non-conforming loan because it exceeds conforming loan limits but meets other
conforming loan requirements.
partially amortized loan
includes partial amortization over the loan term and a balloon payment at the end of the term,
where the borrower pays off the loan in one lump sum.
Ginnie Mae
From invespedia: Government National Mortgage Association refers to a federal government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities (MBSs) issued by approved lenders. The association is commonly known as Ginnie Mae and is abbreviated to GNMA. Ginnie Mae’s assurance allows mortgage lenders to obtain a better price for MBSs in the capital markets.
Ginnie Mae is not a GSE because it’s a fully owned government corporation.
Credit history factors that underwriters examine
- Length of credit
- Length good credit
- Late payment history
- Available credit used
- Types of credit extended (banks, credit card companies, mortgage loans).
Typical Debt Ratios underwriters demand by loan type
Conventional loan: Typically 33% - 36%
FHA loan: Typically 43% - 50%
VA loan: Typically can’t exceed 41%
Savings and Loan Associations
Take savings deposits and make loans
Qualified mortgage
CPSB rules for lenders to prevent risky loans
- No Interest-only loans or interest-only periods
- No Negative amortization
- No Balloon
- Must adhere to standard lending ratios
- Can’t exceed specified amounts for up-front loan points and fees.
Inflated appraisals
Mortgage Fraud: An appraiser secretly works with a borrower and provides a misleading appraisal report to the lender.
Farmer Mac
A stockholder-owned, publicly traded company that was chartered by the United States federal government in 1988 to serve as a secondary market in agricultural loans such as mortgages for agricultural real estate and rural housing. Farmer Mac functions in the secondary market by buying qualified agricultural loans from lenders.
CFPB mission
Enforces regulations that prohibit lenders from funding higher-priced mortgage loans without regard for a borrower’s ability to repay the loan.
Ensures that lenders must take reasonable steps to ensure that consumers have the financial ability to repay a loan that uses a dwelling as
collateral.
Straw buyers
Mortgage Fraud: Conceal their real identity behind someone else’s name and credit.
Predatory lending
Unfair or abusive lending to buyers. deceptive, coercive, and exploitive practices to take advantage of consumers to increase their debt while financing risky loans.
land contract/contract for deed
A type of seller financing. Requires the buyer to make installment payments to the seller for property purchase. The seller retains the title while buyer gets equitable title.
Promissory Note
A promissory note is the borrower’s promise to repay the mortgage loan. Promissory notes are negotiable instruments, which means they can be transferred to another holder.
Credit unions
Member-based cooperatives that take deposits, offer savings vehicles, and provide credit for
auto and home loans
judicial foreclosure
In Lien Theory states, foreclosures go through courts, unless mortgage document includes a power of sale clause, however, the lender may use a non-judicial foreclosure process.
FHA loan features
1 - Insures lenders
2 - 3.5% down
3 - A mortgage insurance premium, for the life of the loan, upfront fee and annual fee (collected monthly) until refi or paid off.
4 - FHA imposes a maximum loan amount (aka FHA lending limit)
What do lenders in lien theory states provide when a loan is paid off?
A satisfaction or release or
mortgage and a reconveyance deed
The reconveyance deed is required because lenders retain the legal property title until the loan is paid. Lenders also mark the promissory note “paid” and return it to the borrower.
Bridge loan
a temporary, short-term loan
typically secured by the borrower’s existing home.
Some times interest only
Pay off when sell first home
When a floating rate is locked, what must a lender do
Send the borrower a new loan estimate.
fully amortized loan
paid in full after the last scheduled loan payment (or sooner if the borrower makes additional principal payments during the loan term). The monthly principal and interest payment amount is the same each month. The principal portion of the payment increases each month, while the interest portion decreases.
Security Instrument
Promissory notes are almost always accompanied by a security instrument that pledges the financed property as collateral
for the mortgage loan and gives lenders the right to foreclose if the borrower defaults on the mortgage loan. The security
instrument may be either a deed of trust or a mortgage.
acceleration clause
An acceleration clause makes the entire debt due immediately if there’s borrower default. Before a foreclosure occurs, lenders must send an Acceleration Letter to the borrower (often not sent until two to three months in default).
fixed/adjustable rate note
Special type of arm loan. It’s a legal agreement that permits the borrower to convert a fixed rate
mortgage to an ARM or an ARM to a fixed rate mortgage under certain conditions
Release of Deed of Trust
Mortgage lenders issue a release of deed of trust to acknowledge the borrower’s loan payoff. Lenders also mark the promissory note “paid” and return it to the borrower.
Rural development loans
Rural development loans are government loans specifically for family farms and rural home financing. They offer a longer payback period to reduce monthly payments.
FSA loan terms
FSA loans can be up to 100% of the purchase price, set for 33 years (38 for very low-income borrowers), and provide loan guarantees for up to 95% of the loss of principal and interest.
Equity skimming
Mortgage Fraud: When an investor receives title to a property- often by using a straw buyer-doesn’t make the mortgage payments, and usually rents out the home until foreclosure occurs.
Lien Theory
States that use a mortgage as the security instrument are referred to as lien theory states because the mortgage places a lien against the property it secures. The lender holds the lien, and the borrower holds legal title to the property.
RESPA rules
- No kickback fees to lenders for referrals
- Computerized loan origination (CLO) services may provide services to consumers for a fee, so long as the fee is disclosed on closing statements.
- Can only get compensated for actual services provided to settlement providers
- Can give away pens with logo and do educational events w/food (lunch and learn) but not trips.
Purchase money mortgage
Seller financing. This typically occurs in situations where the buyer cannot qualify for a mortgage through traditional means.
VA loan limits
Most VA lenders adhere to conventional conforming loan limits. This doesn’t limit the amount that buyers may borrow, but
borrowers whose loans exceed these limits must make a down payment.
Regulation Z
Requires mortgage lenders to follow TILA disclosure requirements for real estate advertisements that include credit terms.
secondary mortgage market
Lenders in the primary mortgage market put together packages of conforming loans and sell them to the secondary mortgage market to free up funds that provide additional consumer loans.
Typical Housing Ratios underwriters demand by loan type
Conventional loan: Typically 25% - 28%
FHA loan: Typically 31% - 40%
VA loan: Lenders ignore the front-end ratio
subordination agreement
The priority of existing mortgages and other liens against the property are determined (and paid off) by the order in which they were recorded. A subordination agreement can be used to change this priority order.
reconveyance deed
What lenders provide to homeowners when loan is paid off. Also called Satisfaction or release.
The Real Estate Settlement Procedures Act (RESPA) – year passed and does what?
1974 / A a consumer protection statute designed to protect homebuyers from unscrupulous lending and settlement practices. Sets rules to limit risky loans, no kickbacks, adds disclosures lenders must do.
budget mortgage
The most common mortgage loan payment includes a portion of the principal balance, current accrued interest, and a 1/12 portion of the expected annual property tax and homeowner’s insurance balances due (principal, interest, taxes, and insurance,
or PITI).
USDA Farm Service Agency (FSA) loans
offers direct guaranteed loans to farmers and ranchers and for rural housing. Congressional appropriation funds these loans.
The Dodd-Frank Wall Street Reform Act
2010 / It handed RESPA responsibility to the
Consumer Protection Finance Bureau (CFPB); designed to prevent lenders from doing risky loans.
Three types of conventional loans
Conforming, non-conforming, Jumbo
