Financing the Real Estate Transaction

Question 1

Loan

Answer 1

An investment by the lender

Question 2

What factors determine the interest rate of a loan?

Answer 2

1) TERM OF THE LOAN. Lower rates are charged for shorter terms.
2) TYPE OF MORTGAGE. Lower rate are offered for more assumed risk by borrower.
3) LOAN AMOUNT. Jumbo loans impact lender caps in secondary market and are therefore more costly.
4) LENDER’S COST OF MONEY.

Question 3

Credit Score

Answer 3

An analysis of factors indicative of repayment

Question 4

Five major factors analyzed in a credit score

Answer 4

1) PAST PAYMENT PERFORMANCE
2) CREDIT USE
3) CREDIT HISTORY
4) TYPES OF CREDIT IN USE
5) CREDIT REPORT INQUIRIES

Question 5

Underwriting

Answer 5

The process of analyzing the extent of risk a lender will assume in connection with a mortgage loan.

Question 6

5 Evaluation Criteria for Loans

Answer 6

1) OCCUPANCY. Owner-occupied properties receive the lowest rates.
2) INCOME.
3) ASSETS AND CASH RESERVES
4) DEBT. Mortgage should be 28% of gross income. Total debt payments: 36% of gross income.
5) LOAN-TO-VALUE

Question 7

Loan Commitment

Answer 7

LENDER’S pledge to lend a certain amount of money to an explicitly named BORROWER (or borrowers) under specific terms and for a specified length of time using a particular property as collateral.

Question 8

Regulation Z

Answer 8

An act enacted by the Federal Trade Commission (FTC) requiring institutions to inform BORROWER of the true cost of obtaining credit, including:

1) all finance charges
2) true interest rate or ANNUAL PERCENTAGE RATE (APR) before the transaction is completed

Question 9

Creditor

Answer 9

Person who extends consumer credit 25 times a year (more than 5 times a year if the transactions involve dwellings as security).

Question 10

Three Day Right of Rescission

Answer 10

The 3-day period BORROWERS have under Regulation Z to rescind the transaction by notifying the LENDER.

Question 11

Private Mortgage Insurance (PMI)

Answer 11

An insurance policy purchased by the borrower that covers the LENDER’S portion of the loan (usually the top 20% to 30%) in the event the BORROWER DEFAULTS on the loan.

Question 12

Discount Points

Answer 12

A fee charged by the LENDER on FHA-insured loans, in addition to a LOAN ORIGINATION FEE. This fee is negotiated between the buyer and seller.

Question 13

Balloon Payments

Answer 13

The final payment in a loan that carries periodic payments not large enough to fully amortize the loan. At the end of the loan, principal is still owed.

Question 14

Package Loan

Answer 14

A loan that includes both real and personal property.

Question 15

Blanket Loan

Answer 15

A loan that covers more than one parcel or lot.

Question 16

Purchase Money Mortgage (PMM)

Answer 16

A mortgage created through the seller’s agreement to finance all or part of the purchase price. It can be either a FIRST or JUNIOR LIEN depending on whether prior mortgage liens exist.