Module 2 Real Estate Financing Principles Flashcards
What does the Mortgage packet consist of what?
The mortgage package consists of two very important documents:
- Promissory Note: Unconditional promise to repay the loan, detailing the amount, payment schedule, due date, interest rate.
- Mortgage: The mortgage is the pledge of the property as security for repayment of the debt. The borrower, called the mortgagor, is the one who pledges the property. The lender, called the mortgagee, receives the pledge.
What is the Primary Mortgage Market?
The market in which borrowers and mortgage lenders come together to create and negotiate terms of a mortgage transaction
What is the Secondary Mortgage Market?
The secondary market exists for the purchase and sale of existing mortgage loans to investors. It is designed to provide greater liquidity to the residential real estate market by providing a steady flow of funds from investors back into the primary market.
The secondary market investor does not lend money.
What is another name for the Promissory note ?
The promissory note is also called the note, or the real estate lien note.
What is the real estate agents role in the Mortgage Process?
- Prequalification/Preapproval of Buyers: Facilitating the assessment of the buyer’s creditworthiness.
-Discussing Loan Programs: General information on various mortgage loan options. - Answering Loan and Closing Queries: Assisting with inquiries regarding loan terms, interest, closing processes, etc.
- Providing Lender Recommendations: Suggesting potential lending institutions.
- Drafting Sales Contract: Including terms, financial conditions, etc.
- Tracking Dates and Financing Progress: From contract to close.
What happens when the borrower completes the repayment of the note ?
the lender gives the mortgage back to the borrower along with a release of lien.
What happens if the borrower fails to repay the note on time
If the borrower fails to repay the note on time and defaults on the payment of the note, the lender may foreclose on the property and sell it to satisfy the unpaid promissory note.
Not all foreclosure properties sell at the foreclosure auction. When a property fails to close at the foreclosure auction, the lender takes ownership of the property and enters the property in their financial records as an asset. The property owned by lenders this way is called Real Estate Owned or REO. The unpaid note is written off as a loss.
What happens post foreclosure
Real Estate Owned (REO):Properties unsold at foreclosure auctions are owned by the lender. Unpaid notes are written off.
What are Mortgage Theories in the U.S.?
Title Theory
Lien Theory
What is title Theory ?
In Short: Lender owns the property until the loan is paid, then transfers ownership back to the borrower.
In title theory states, the lender holds the actual title to the property until the mortgage is fully paid.
The borrower transfers legal ownership of the property to the lender for the duration of the loan. The borrower still has possession of the property and can live in it, use it, and so on, but the legal ownership remains with the lender.
If the borrower pays off the mortgage, the lender transfers the title back to the borrower, and the borrower becomes the legal owner again. If the borrower defaults, the lender already holds the title, so they can sell the property more directly to recover the money owed.
Which states have title theory?
Alaska
Arizona
California
Colorado
Nevada
Washington
Oregon
Idaho
Utah
Wyoming
Texas
Nebraska
South Dakota
Missouri
Tennessee
Mississippi
Georgia
North Carolina
Virginia
West Virginia
What is Lien Thoery ?
In Short: Borrower owns the property, lender has a legal claim (lien) on it until the loan is paid.
In states that follow the lien theory, the borrower (the person taking out the mortgage) keeps ownership of the property.
When the borrower takes out a mortgage, the lender receives a lien on the property. A lien is a legal right or claim against a property, and it ensures the lender has a way to get their money back if the borrower doesn’t make their payments.
In this setup, the borrower owns the property and can use it as they wish, but the lender has a sort of “security interest” in it. If the borrower fails to pay back the loan, the lender can tak
Which states have lien theory?
South Carolina
Florida
Louisiana
Arkansas
New Mexico
Kansas
North Dakota
Wisconsin
Iowa
Illinois
Indiana
Ohio
Kentucky
Pennsylvania
New York
New Jersey
Delaware
Connecticut
Maine
What are Residential Loan Sources?
Depository Institutions
Non-Depository institutions/ Non-Depository Mortgage Loan Originators
What are Depository Institutions?
These are your traditional banks and credit unions like Wells Fargo or Navy Federal. They hold deposits from customers (like checking and savings accounts) and can also lend out that money in the form of loans, including mortgages.
What are Non-Depository institutions?
These institutions specialize in originating and sometimes servicing mortgage loans, but they don’t accept deposits from customers.
Examples:
Quicken Loans: Now part of Rocket Companies, Quicken Loans is a notable mortgage lender that operates entirely online.
Fairway Independent Mortgage Corporation: An independent mortgage lender that provides various mortgage services.
Guaranteed Rate: Offers various loan options and operates both online and through physical branches.
loanDepot: A large non-bank lender that offers home purchase and refinance loans.
Freedom Mortgage Corporation: Specializes in VA and FHA loans.
New American Funding: An independent, family-owned lender that offers various mortgage services.
What are Loan Originators?
The primary mortgage market is made up of the businesses that lend to borrowers for the purchase of real estate.
They initiate, or originate, the loan paperwork and the cash that is transferred to buyers at a real estate closing.
What happens during the Loan Origination Process
- Origination Activities: Application, qualification, etc.
- Processing Phase: Building a loan file with documents to prove worthiness.
- Underwriting: Loan approval or denial.
- Closing: Signing documents, disbursing funds.
- Funding: Transfer of funds to a title or escrow company.
Which government agencies were created to regulate the mortgage lending industry at both the federal and state level.
HUD/FHA
VA
Fannie Mae
Freddie Mac
Ginnie Mae.
What is Fannie Mae?
In 1938, the federal government created an agency called the:
Federal National Mortgage Association
Created in order expand the secondary mortgage market by working with lenders to make more money available for home loans.
Fannie Mae was re-charted in 1968 as a privately owned and managed corporation. It operates on private capital as a self-sustaining entity.
What is Fannie Mae’s role in residential real estate lending?
It addresses imbalances of mortgage credit among regions of the United States by making funds available in capital deficient area of the country.
It allows lenders to originate mortgage loans for sale, rather than for portfolio investment.
It standardizes mortgage loans, which attracts investors who traditionally did not invest in the primary market.
What is Freddie Mac?
Freddie Mac is a federally chartered corporation, established as the Federal Home Loan Mortgage Corporation (FHLMC) in 1970 to purchase mortgages in the secondary market.
Created specifically to compete with Fannie Mae to ensure that there wasn’t a monopoly in the secondary mortgage market.
How do Fannie Mae and Freddie Mac work together ?
Both Fannie Mae and Freddie Mac buy mortgages from lenders, freeing up lenders to provide more loans. They then bundle these mortgages and sell them to investors as securities. This helps keep the mortgage market stable and helps keep interest rates down.
What was the purpose of the Federal Housing Finance Agency (FHFA) ?
On September 7, 2008, a government agency took control of Fannie Mae and Freddie Mac (Conservatorship). They did this because both companies were struggling due to a bad housing market. If these companies failed, it could’ve caused big problems worldwide, made it harder and pricier for people to get home loans, and hurt the entire economy.
What types of Mortgages do Fannie Mae and Freddie Mac Buy?
They deal with different types of mortgages, although there’s a lot of overlap.
Fannie Mae typically buys mortgages from larger commercial banks, while Freddie Mac often buys mortgages from smaller lenders.
What is Ginnie Mae?
Established in 1968, Ginnie Mae is the Government National Mortgage Association which is a wholly owned government association that operates the mortgage backed securities program designed to facilitate the flow of capital into the housing industry.
What does Ginnie Mae Do?
Ginnie Mae guarantees the timely payment on certain types of home loans, particularly those backed by other federal agencies like FHA (Federal Housing Administration) and VA (Veterans Affairs).
This means that if homeowners don’t make their payments, Ginnie Mae will ensure investors still get paid.
This guarantee makes these loans more attractive to investors, which in turn helps keep interest rates lower for homebuyers.
What is The Dodd-Frank Wall Street Reform and Consumer Protection Act?
In 2010, President Obama signed a law called the Dodd-Frank Act. This law aimed to:
Make the financial system more stable.
Make sure big companies couldn’t collapse and damage the economy (ending “too big to fail”).
Prevent the need for future taxpayer bailouts.
Protect regular people from unfair financial practices.
What is the Consumer Financial Protection Bureau (or CFPB) ?
Under Dodd-Frank, the Consumer Financial Protection Bureau or CFPB was established.
This group’s job is to keep an eye on financial companies and make sure they’re treating consumers fairly.
What is the CFPB responsible for enforcing ?
The CFPB is responsible for enforcing federal consumer financial law which includes:
Truth In Lending Act
Fair Credit Reporting Act
Real Estate Settlement Procedures Act
Equal Credit Opportunity Act
Community Reinvestment Act
Define the Truth In Lending Act
The Truth In Lending Act is a federal law that requires lenders to clearly tell you the terms and costs of a loan before you borrow money. This means they have to be upfront about things like interest rates, fees, and how much you’ll pay over time. It’s designed to help consumers understand their loans and avoid any hidden surprises.
Define the Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is a U.S. law that makes sure the information in your credit report is accurate, private, and secure. It also gives you the right to look at your credit report and fix any mistakes you find. Basically, it helps protect and ensure fairness in how your credit information is handled.
Define the Real Estate Settlement Procedures Act
What is the difference between Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA)?
Both the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA) aim to protect consumers, but they focus on different aspects of the borrowing process. Here’s a simple breakdown:
RESPA:
Focuses on real estate transactions, especially home loans.
Makes sure buyers get clear information about the costs of the home-buying process.
Requires lenders to provide detailed information about settlement (closing) costs.
Aims to prevent unfair practices like kickbacks or referral fees.
TILA:
Focuses on all types of consumer loans, not just mortgages.
Ensures borrowers understand the costs and terms of loans.
Requires lenders to disclose things like interest rates, how much a loan will cost over time, and any associated fees.
Helps consumers know what they’re getting into before borrowing money
Define the Equal Credit Opportunity Act
The Equal Credit Opportunity Act (ECOA) is a U.S. law that makes it illegal for lenders to discriminate based on race, color, religion, national origin, sex, marital status, age, or because someone receives public assistance. Simply put, it ensures that everyone has a fair chance to get credit.
Define the Community Reinvestment Act
The Community Reinvestment Act (CRA) is a U.S. law that encourages banks to help meet the needs of all community members, especially in low- and moderate-income neighborhoods. In simple terms, it pushes banks to lend and invest in their local communities, ensuring they don’t overlook or avoid certain areas.
What is the SAFE ACT?
The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act) is a U.S. law that requires mortgage loan originators (the people who help you get a mortgage) to be licensed or registered. In simple terms, it’s a rule to make sure the people handling mortgages are qualified and follow certain standards, which helps protect consumers.
what are the terms that DO NOT trigger the required disclosures (TILA)
“No down payment”
“Easy monthly payments”
“Loans available at 5% below our standard APR”
“Low down payment accepted”
“Pay weekly”
“Terms to fit your budget”
“Financing available”
What are the benefits of a buyer getting pre-qualified or pre-approved for a loan?
-Buyers are able to be more realistic when setting their pricing goals
-The buyer’s agent has a better understanding of the buyer’s ability to pay
-The buyer’s agent can avoid showing properties that the buyer cannot afford to buy
-Sellers are somewhat reassured that the buyer has sufficient income and credit to close the transaction
What are trusted loan originators called?
Residential Mortgage Loan Originators (RMLOs) as mandated by the SAFE Act.
What are Mortgage Brokers?
Mortgage brokers operate as intermediaries and work with various lenders, so they might not have a specific brand name. However, some national broker networks like LoanDepot can function as RMLOs.
What happens during Pre Qualification?
Pre-qualification is an initial step where borrowers give basic info to lenders, like income and debt. A Pre-Qualification Letter doesn’t guarantee a loan or bind either party. The lender might not have full details about the borrower yet, so factors affecting loan approval may come up later. This letter doesn’t come with a Loan Estimate. Don’t overvalue it, especially when dealing with sellers.
What happens during Pre Approval?
Pre-approval is more detailed than pre-qualification. It involves a loan application and a deeper check by the lender. A Pre-Approval Letter comes after some checks but doesn’t guarantee a final loan. Both types of letters focus on the borrower, not a specific property. Once a property is chosen, it must pass the lender’s checks, like appraisal and insurability. Neither letter ensures a finalized loan.
Why do people even bother tog get pre qualified when Pre Approval seems better ?
There are reasons someone might not choose to get pre-approved right away:
Credit Inquiry:A pre-approval usually involves a hard credit inquiry, which can temporarily lower your credit score. If not buying immediately, multiple hard inquiries over time could negatively impact the score.
Time-Consuming:The pre-approval process takes longer than pre-qualification because it requires a thorough review of financial documents, credit history, etc.
Not Ready to Commit: Some might be in the early stages of house hunting and not ready for the more official step of pre-approval.
Document Intensive: Pre-approval requires gathering and presenting detailed financial documents, which some might find cumbersome if they’re just casually considering buying.
Short Validity:Pre-approvals have an expiration, often 60-90 days. If you don’t find a house within that time, you might have to go through the process again.
Emotional Factors: Pre-approval can set specific expectations about price range. Some people might want a more open-ended search before committing to a particular price range.
Market Conditions:In less competitive housing markets, a pre-qualification might suffice.
What are the components of a complete Loan Application ?
For an application to be considered “complete” the lender must have all of the following:
Remember the requirements with the acronym “PENSIL”
P-Property Address
E-Estimated Value
N-Name of the borrower
S-Social Security Number
I-Income
L-Loan Amount
what happens after the conditional approval ?
After receiving a complete application the lender will provide the borrower with a Loan Estimate (LE)
How do lenders view a mortgage loan?
Lenders view a mortgage like an investment that pays them back over time through regular monthly payments from borrowers.
What is “yield” in terms of a mortgage loan?
Yield is the return or profit that the lender gets from the mortgage over its life. It’s influenced by the interest rate and any discount points charged when the loan is made
What are discount points?
Upfront payments that a borrower can make to lower the interest rate on the loan. One discount point equals one percent of the loan amount.
What factors influence the rate and discount points of a mortgage?
Market rates, property type, loan term, borrower’s credit score, income, and down payment.
What is a par loan?
A loan made at the current market interest rate with no discount points.
Why might borrowers shop for different mortgage deals?
Borrowers might look for a lower interest rate. Some lenders might offer a lower rate but charge discount points to make up for it.
Why do lenders charge discount points?
If a lender offers a below-market interest rate, they sell the loan to investors at a discounted price. Discount points help them recover this difference.
How are interest rate and discount points typically balanced?
The lower the interest rate a lender offers, the more likely they are to charge discount points. Conversely, a higher interest rate might have fewer fees.
What is the main goal of the Fed’s monetary policy actions?
To affect prices, employment, and economic growth by influencing the availability and cost of money and credit in the economy.
What are the three primary tools the Fed uses for monetary policy?
Open market operations, the discount rate, and reserve requirements
What is the Fed’s most flexible monetary policy tool?
Open Market Operations for buying or selling government securities.
Who sets the Fed’s monetary policy?
The Federal Open Market Committee (FOMC)
What happens when the FOMC wants to encourage economic expansion?
The FOMC directs the trading desk in New York to buy securities. This adds money to banks’ reserve accounts, potentially lowering interest rates and boosting spending
What action does the FOMC take to tighten money and credit?
It directs the New York Trading Desk to sell government securities. This reduces money in banks’ reserve accounts, potentially raising interest rates and reducing spending.
What is the Discount Rate?
The interest rate a Reserve Bank charges financial institutions to borrow funds on a short-term basis.
How does the discount rate differ from open market operations?
Unlike open market operations that interact with market forces, the discount rate is set by the Federal Reserve Banks’ directors and approved by the Board of Governors. It can affect other interest rates and signal potential monetary policy direction changes.
What are Reserve Requirements?
Banks and financial institutions are required by law to keep a certain percentage of customer deposits as a safety net. This can be held as cash or in a special account at a Reserve Bank.
Which institutions are subject to Reserve Requirements?
Commercial banks, savings banks, credit unions, and U.S. branches of foreign banks
What are the reserves used for besides being a safety net?
They are used for daily transactions like processing checks or electronic payments.
How can changing the reserve requirements affect the economy?
Increasing reserves: Less money for banks to lend, possibly slowing the economy.
Decreasing reserves: More money for lending, potentially boosting the economy.
What are other factors that can influence interest rates?
Government activities like spending, borrowing, and the overall health of the economy.
What is the Uniform Residential Loan Application?
It’s a document (also known as Fannie Mae 1003 application) used by a residential mortgage loan originator to start the loan process, collecting borrower information.
What is covered in Section 1 of the loan application?
It’s about the type of mortgage, terms of the loan (e.g., Conventional, VA, FHA, USDA, amount, payments, amortization).
What is covered in Section 2 of the loan application?
It concerns the property, purpose of the loan (purchase, refinance, construction), title details, and source of down payment.
What details are covered in Sections 3, 4, 5, and 6?
These sections contain information about the borrower, employment, income, and assets. The lender verifies the provided details using documents like bank statements, tax returns, and employment verification.
What does the borrower’s signature on the loan application represent?
The borrower promises that all provided information is truthful, acknowledges that the property will be used as security, and ensures the property’s intended use aligns with the application’s details.
What is the purpose of the section below the signature line?
It collects data about the borrower’s ethnicity, race, and sex for monitoring purposes, aiding investigations by financial regulators.
What is the Loan Estimate and why was it created?
A disclosure required by the Truth In Lending Act after a loan application. It was created in response to the 2007 financial crash for better transparency and is part of the RESPA-TILA Integrated Disclosure.
When must the Loan Estimate and Closing Disclosure be delivered to the borrower?
Loan Estimate within 3 business days of application. Closing Disclosure no later than 3 business days before closing.
What is the Fraud Enforcement and Recovery Act (FERA)?
A law from 2009 that increases penalties for federal convictions of mortgage fraud, extending the statute of limitations from 5 to 10 years and imposing fines up to $1 million.
How can mortgage fraud occur?
It can involve falsifications on the loan application by various parties, fake credit reports, or false employment and income verifications.
What is the Uniform Residential Loan Application (URLA)?
It’s the official application form (Form 1003 or “1003”) for all residential loans, central to the loan application process. It collects information about the borrower for evaluating creditworthiness.
Who released a redesign of the URLA in January 2021?
The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
What were the three main objectives for redesigning the URLA?
-Update the URLA to gather relevant industry information.
-Make the format/layout more consumer-friendly and improve usability.
-Define a MISMO compliant dataset for the URLA to promote data consistency, reduce processing costs, and increase transparency.
How is the redesigned URLA different from its predecessor?
It’s easier to read, more technology-enabled, and consumer-friendly due to collaboration with various stakeholders including lenders, trade groups, and federal agencies.
What are the five forms of the redesigned URLA?
-Borrower Information Document
-Additional Borrower Document
-Unmarried Addendum
-Lender Loan Information Document
-Continuation Sheet
What information does the “Borrower Information Document” contain?
Details about the borrower, the loan, and the property.
When is the “Unmarried Addendum” used?
For Borrowers with an unmarried status when marital status is chosen as “Unmarried” on the URLA. This helps determine how state property laws affecting creditworthiness apply.
