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.
In a loan application what personal details must be provided in Section 1: Borrower Information?
-Full Name
-Social Security Number
-Contact Details (Phone, Email)
-Date of Birth and Citizenship Status
-Marital Status (under specific federal guidelines)
-Current and Past Addresses
-Current Employer’s Details and Duration
-Past Employment Details (if current employment is less than 2 years).
Why can’t lenders ask for specific unmarried statuses beyond the given options?
Asking for details like single, widowed, or divorced violates the Equal Credit Opportunity Act.
What do borrowers need to provide to establish income?
Proof of income in the form of W-2s and/or tax returns. Specific requirements vary by program and will be communicated by the lender.
List approved sources of income for borrowers?
- Salary
- Wages
- Overtime
- Bonus
- Commissions
- Pension
- Net Rental Income
- Alimony
- Child Support
- Inheritance or Trust
- Dividend/Interest Income
- Company Car Allowance
- Military Income
- Part-Time Job
- VA Benefits
How is part time and overtime income evaluated ?
When evaluating overtime and part-time employment, the 2-3 rule is applied. The 2-3 rule means, if the borrower has been on the job for two years, it is reasonable to assume that the employment will last another three years.
What is covered in Section 2 of a loan application?
Financial Information - Assets and Liabilities.
What does the lender verify in this section
That the borrower has sufficient funds for the down payment, closing costs, and reserves for emergencies.
What details should the borrower provide for checking and savings accounts?
Name of the bank and account numbers for each account
In a loan application how should assets in stocks and bonds be listed?
With the stock name, number of shares, and approximate value.
In a loan application what info should be provided about life insurance policies?
The current cash value and the face value for each policy.
In a loan application what kind of funds should borrowers list regarding retirement?
Any funds the borrower has in retirement accounts.
What liabilities should be included in section 2 of a loan application?
All liabilities, including credit cards, other debts, leases (excluding real estate), with the creditor’s name, account number, and monthly payment.
When is a monthly installment debt generally not counted against the borrower?
When it has fewer than 10 months of payment left. However, large monthly payments that might impact the borrower’s ability to pay may still be considered.
What are other liabilities and expenses to include in section 2 of a loan application?
Alimony, child support, separate maintenance, and job-related expenses.
What is covered in Section 3 of a loan application?
Financial Information - Real Estate.
If a borrower is refinancing, where should that property be listed?
The property being refinanced should be listed FIRST.
In a loan application what details should be provided about each property?
Estimate of current value, property status, intended occupancy, monthly expenses like insurance, taxes, association dues, and rental income details.
In a loan application how should rental income be detailed?
Monthly rental income, gross monthly rental from 2-4 unit properties, and net monthly rental income.
What information about mortgages on the property is needed In a loan application?
Creditor name, account number, monthly payment, unpaid balance, and type of loan.
What is covered in Section 4 of a loan application?
Loan and Property Information.
In a loan application what details about the loan and property are required in Section 4?
Loan amount, purpose, property address, and property value.
Why is the intended occupancy significant in section 4 of a loan application?
Many loan programs are only for owner-occupants. Loan terms are more favorable for primary residences than for second homes or investment properties. Misrepresentation can be mortgage fraud.
What sources of gifts and grants should be included in section 4 of a loan application?
Relative, unmarried partner, federal agency, employer, and religious nonprofit, among others.
What is a Fixed-Rate Mortgage?
A loan where the interest rate remains constant throughout its duration. Suitable for those desiring consistent monthly payments and intending to stay in their home long-term.
Describe an Adjustable-Rate Mortgage (ARM)
A loan with an interest rate that can vary based on an index. Ideal for those planning to sell or refinance before rate adjustments or those expecting higher future earnings
What characterizes an FHA Loan?
A government-backed loan often requiring mortgage insurance. It’s primarily for first-time buyers or those with lower credit scores
Define a VA Loan
A loan supported by the Department of Veterans Affairs for veterans and active military. Suitable for qualified veterans and certain military members
What’s a USDA Loan?
Backed by the U.S. Department of Agriculture, it’s for rural/suburban buyers. Applicable for those in eligible rural areas with specific income levels
Explain an Interest-Only Mortgage
A loan where only interest is paid for a set period, then both principal and interest afterward. Suitable for those expecting higher future earnings and desiring initial lower payments
Describe a Balloon Mortgage
A loan with regular payments for a period followed by a large “balloon” payment. Ideal for those intending to sell their home before the balloon payment
What is a Jumbo Loan?
A loan exceeding standard federal agency limits. Suitable for individuals purchasing pricier homes with excellent credit and higher income.
In a loan application what is covered in Section 5: Declarations?
It contains questions about the property, the source of the loan money, and the borrower’s financial history.
In a loan application how does the borrower provide answers in this section?
They either select a ‘yes’ or ‘no’ response or use a drop-down menu for specific queries
In a loan application what must the borrower declare regarding property ownership?
If they have had a property that was foreclosed upon in the past 7 years
In a loan application what does the borrower need to declare regarding bankruptcy?
Whether they’ve declared bankruptcy in the past 7 years
In a loan application if the borrower answers ‘yes’ to bankruptcy, what further information must they provide?
The types of bankruptcy that apply, such as Chapter 7, Chapter 11, Chapter 12, or Chapter 13.
In a loan application what does Section 6 cover?
“Acknowledgments and Agreements” - It informs the borrower about their legal obligations. By signing, they acknowledge and agree to its terms.
In a loan application what is the purpose of Section 7?
“Military Service” - The borrower indicates their own or their deceased spouse’s military status, applicable for all loan types, not just VA loans
In a loan application what must a borrower indicate regarding military service?
Whether they have served in the military or are the surviving spouse of a U.S. Armed Forces veteran.
In a loan application what is the focus of Section 8?
“Demographic Information” - The borrower provides details on ethnicity, race, and sex, but has the option to decline. It’s in line with the Home Mortgage Disclosure Act requirements by CFPB.
In a loan application if the application is taken in person, how is the borrower’s demographic information noted?
Through visual observation or surname by the financial institution
In a loan application what information is captured in Section 9?
“Loan Originator Information” - Details of the individual who originated the loan. This includes both personal contact info and organization details.
What is Chapter 7 bankruptcy
“Liquidation” for individuals and businesses. Assets are liquidated to pay debts, with remaining unsecured debts typically wiped out. Gives individuals a fresh start at the cost of significant credit impact and potential asset loss. Often results in businesses closing.
What is Chapter 11 bankruptcy?
“Reorganization” mainly for businesses (sometimes for individuals with large debts). Allows the business to continue operations while reorganizing debts. The goal is a structured, profitable future.
What is Chapter 13 bankruptcy ?
“Wage Earner’s Plan” for individuals with regular income. They can keep property while repaying debts through a 3-5 year payment plan. It’s ideal for those wishing to retain assets like homes or cars.
What is Chapter 12 bankruptcy?
Tailored for “Family Farmers and Fishermen.” Similar to Chapter 13 but accommodates the specific requirements of farmers and fishermen, including seasonal income variations. Helps sustain farming or fishing operations.
What is Chapter 9 bankruptcy?
“Municipal Bankruptcy” for municipalities like cities and school districts. Provides a reorganization structure to continue functioning while restructuring and repaying creditors over time.
Define the Real Estate Settlement Procedures Act (RESPA)
A consumer protection statute from 1974. It ensures consumers receive vital information about mortgage settlement costs and protection against high charges from abusive practices
What’s the objective of RESPA?
To make borrowers more aware of settlement services costs and prohibit practices like undisclosed referral fees and kickbacks
Define the Truth in Lending Act (TILA)
Federal law from 1968 (Title I of the Consumer Credit Protection Act). Protects consumers in credit dealings, ensuring they are informed of credit terms and cost
What do TILA and RESPA have in common
Both require mortgage disclosures. For over 30 years, these disclosures had confusing, overlapping, and inconsistent forms
What was the purpose of the RESPA-TILA Integrated Disclosures Rule?
Directed by the Dodd-Frank Act, this rule integrated mortgage disclosures under TILA and RESPA. Introduced in 2013, it simplified forms for consumers and professionals
What is the Loan Estimate (LE)?
A three-page disclosure replacing the Good Faith Estimate and initial Truth in Lending Disclosure. Details key mortgage features, costs, and risks. Must be provided within three business days of application
What happens if a mortgage application is denied before three business days?
The Loan Estimate (LE) is not required
When must the Loan Estimate (LE) be provided to the borrower?
No later than three business days after receipt of the written application
When must the Loan Estimate (LE) be delivered or mailed in relation to the consummation of the transaction?
No later than the seventh business day before consummation of the transaction
What affidavit does a borrower sign at closing?
A statement certifying that information given during loan application and underwriting is true. False statements can lead to significant penalties, including prison and fines up to $10,000
What are some red flags in loan applications
Significant or contradictory changes from handwritten to typed application
Employer’s address shown as a post office box
Commute is significantly unrealistic
New house too small to accommodate occupants
Borrower is downgrading to smaller or less expensive home
Down payment in some form other than cash
Significant changes as application process proceeds
Lack of accumulation of assets compared to income
Accumulation of assets compared to income appears to be too high
Years of schooling not congruent to profession
Incomplete or inconsistent borrower information
Unsigned or undated application
Same telephone number for borrower and employer
What are some red flags in Credit Reports?
-No credit history (possible use of alias)
-Invalid or recently issued Social Security Number
-Liabilities on credit report that are not on mortgage application
-Significant differences between original and new credit report
-Also Known As (AKA) or Doing Business As (DBA) indicated
What are some red flags in Employment and Income Verifications?
-Employer’s address is a post office box, the property address or borrower’s current residence
-Company and/or employee name is not printed
Pay stub, Verification of Employment (VOE) or W-2 is handwritten
-Large employer, but check stubs are not pre-printed
Sequence of payroll check numbers does not correspond with the payroll dates
-Social Security Number is not consistent with numbers on other loan file documents
-Employer’s name & address is similar to a party to the transaction (Seller, Applicant, Originator, REALTOR®)
-Year-To-Date (YTD) earnings do not compute, do not match W-2s or pay stubs, or are in round dollar amounts
-Date of hire is weekend or holiday
-Deletions, cross-outs, or “squeezed-in” numbers
What does “fully amortized” mean?
A loan that has all the principal paid off by the end of its term
Define Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that can change based on financial market changes. The interest rate is determined by a formula: Index + Margin = Interest Rate
What are some common indicators used for ARMs?
-1 Year Constant Maturity Treasury Rate (CMT)
-11th District Cost of Funds Index (COFI)
-London Interbank Offered Rate (LIBOR)
How is the interest rate of an ARM adjusted?
The rate is based on an index and a set margin. It stays the same for a set period, then is reviewed. If the index increases, the rate increases; if it decreases, the rate decreases. Adjustments are subject to caps to protect borrowers
What is the adjustment period for an ARM?
The time period between changes in the interest rate, which can range from 1 month to several years. The ARM name, like a “1-year ARM,” indicates the adjustment period
How is the interest rate calculated for a 1-year ARM with a 2% margin and a 2.5% index?
Using the equation: Index (2.5%) + Margin (2%) = 4.5% Interest Rate
What are the two main caps in an ARM?
-Per Adjustment Cap: Limits how much the interest rate can change at each adjustment.
-Lifetime Cap: The maximum rate to which the interest can increase during the life of the loan.
List three advantages of Adjustable Rate Mortgages (ARMs)
-Lower initial interest rate (teaser rate)
-Borrowers can take out higher loans due to lower initial payments.
-Potential for interest rates to decrease if market rates fall
What are the disadvantages of Adjustable Rate Mortgages (ARMs)?
-Early refinancing charges
-Unpredictable monthly payments
-Long-term cost can be higher
-Potential confusion for borrowers.
What’s the problem with refinancing an ARM early?
There could be an early redemption penalty, especially within the first three years, which could be costly if borrowers anticipate rising interest rates
How do ARMs affect monthly payments?
Unlike fixed-rate mortgages, ARM interest rates aren’t set, leading to potentially unpredictable payments which might be difficult for those on fixed incomes
How do foreclosure rates compare between ARMs and fixed-rate mortgages?
Foreclosure rates have always been higher on ARMs than on fixed-rate deals
What is a Hybrid ARM?
An ARM with an interest rate fixed for an initial period, then adjusting periodically for the rest of the loan term. It’s a mix of fixed-rate and adjustable-rate periods
What are the benefits of Hybrid ARMs?
-Low interest rates during the initial fixed period
-Economical payments and better monthly cash flow
-Ideal for those planning to sell within 7-10 years
-Combination of safety and savings
What are the potential disadvantages of Hybrid ARMs?
-Fluctuating rates can lead to higher payments after the fixed period
-Missed opportunities if rates drop during the fixed period
-Potential mismatches in fixed-rate durations vs. market trends
What is an Interest-Only (I-O) ARM?
A payment plan where borrowers only pay the interest for a specified period (typically 3-10 years). This leads to smaller initial monthly payments, but they increase when principal repayments start
What are the advantages of Interest-Only ARMs?
-Pay Principal When Convenient (ideal for fluctuating incomes)
-Buy More House (skip starter homes)
-Invest the Cash Flow (build wealth outside of home equity)
What are the disadvantages of Interest-Only ARMs?
-Vulnerable during a real estate bubble
-Risk of rising interest rates and payment increases
-Lack of amortization can lead to financial surprises
-Full principal due at the end of the term
What’s the difference between a Hybrid ARM and an Interest-Only ARM?
A hybrid ARM has a fixed interest period followed by adjustments.
An Interest-Only ARM requires only interest payments, with the full principal due at the end of the term
What is the Adjustment Period in an ARM?
-It’s the duration between interest rate changes.
-It can be monthly, quarterly, annually, or span multiple years.
-The name, like a “1-year ARM,” signifies the adjustment frequenc
Define Margin in the context of ARMs
It’s the percent added to the index to determine the payment interest rate. Margins vary among lenders, remain fixed for the loan term, and aren’t influenced by financial market shifts
What is the fully indexed rate?
The Fully Indexed Rate is equal to the sum of the margin and the index, typically rounded to the nearest one-eighth of a percent. Formula: INDEX + MARGIN = FULLY INDEXED RATE.
What is the Discounted Initial Rate (Teaser Rate)
It’s a lower interest rate offered by the lender during the first year(s) of the loan. This reduced rate serves as an incentive to attract borrowers to ARMs
What is an Interest-Rate Cap
An Interest-Rate Cap limits the amount the interest rate can increase or decrease at each adjustment date. Rate caps control the degree of change in interest.
Define Per Adjustment Cap
It limits how much a payment can increase or decrease in subsequent adjustments. Often based on the initial rate, it applies regardless of changes indicated by the Index + Margin. Caps are usually in the 1-2% range.
What is a Lifetime Cap
It limits the interest rate increases over the entire duration of the loan, presenting a worst-case scenario and the highest possible payment. Generally, in the 5-6% range.
Define Initial Adjustment Cap
For ARMs with a fixed-rate early period, this cap is typically higher than the per adjustment cap. In many ARMs, the interest rate might increase up to 6% higher than the first-year rate.
in which situations is a fixed-rate mortgage likely the best choice?
-For borrowers planning to stay in a home long-term
-For those averse to risk
-For individuals who believe mortgage rate trends are upward
-For those who value predictable payments for easier budgeting and future planning
What is a key benefit of a fixed-rate loan?
It offers predictable monthly payments, allowing homeowners to budget and plan for the future with greater certainty.
In which situations might an ARM be the better choice?
-For buyers planning to sell the home sooner rather than later
-For those who might move before an ARM adjusts (e.g., moving within the first 5 years of a 5-1 ARM)
-For borrowers who believe the trend in mortgage rates is downward
How can a 5-1 ARM be advantageous in a specific scenario?
A buyer with a 5-1 ARM might decide to move before there’s an opportunity for a rate hike (or reduction), making the initial lower rates of the ARM more beneficial.
Define Contract for Deed loan
A type of seller financing wherein the seller retains title to the property until the balance of the note is repaid.
Budget Mortgage
A loan that includes principal, interest, taxes, and insurance in the monthly payment.
Wraparound Mortgage
Financing that preserves the low, existing interest rate on the original note with seller financing on a new note
Collateral Dependent Loan
Asset-based financing made by a private investor
Package Mortgage
A loan to finance both real property and personal property in the same loan
Balloon Mortgage/Balloon Note
A partially amortized loan with a final payment that is substantially higher than the other payments
Reverse Annuity Mortgage
Allows a homeowner who is 62 or older to borrow equity from their home without making payments
Participation Loan
A loan that has two or more lenders who share in financing and in risk of the loan
Construction to Permanent Loan
A purchase with the intent to refurbish a property would need this type of loan
What are Portfolio Loans?
Loans that banks keep and don’t sell
What are Conforming Loans?
Loans that meet Freddie Mac and Fannie Mae’s rules. They have limits on how much can be borrowed.
What are the different types of Residential Mortgages
-Conventional Loans: Standard loans not backed by the federal government.These loans often need to follow rules set by Freddie Mac and Fannie Mae if they are sold to other investors.
-Government Loans: Loans backed by the federal government (e.g., FHA, VA, USDA
Explain the difference between Conventional vs. Government Loans
-Conventional Loans: Not insured or guaranteed by the federal government
-Government Loans: Guaranteed or insured by the federal government for lender’s protection
What are some examples of Government Loans?
-FHA Loans: Backed by the Federal Housing Administration
-VA Loans: Backed by the Veterans Administration for veterans
-USDA Loans: Backed by the U.S. Department of Agriculture for rural properties
The FHA is not a lender. The FHA insures loans for lenders. The insurance protects the lender from loss in the event of the lender losing money in a foreclosure sale due to the borrower’s default on the loan. FHA insurance protects the lender by insuring the full loan amount. No matter, what the lender would lose in foreclosure, FHA pays the lender for the loss.
-Fully amortized loans
-Low down payment
-Low interest rates
-Mandatory collection of property taxes and home insurance in an escrow account
-Standards for Borrower Qualification
What are lenders mainly concerned about?
-Ability to repay the loan (financial situation)
-Willingness to repay the loan (credit history)
Explain the role of Credit Scores in Lending
-Indicates borrower’s reliability in repaying past debts
-Influences loan options and terms (e.g., interest rates, loan-to-value ratios
What is the importance of importance of Income to Debt Ratios?
Ensures borrowers aren’t overburdened with debt and can afford to repay the loan
The borrower must meet both front end and back end requirements to qualify.
What is the Front Ratio?
-Compares monthly income to proposed home costs (mortgage, taxes, insurance)
-For conventional loans, typically no more than 28% of borrower’s monthly income
Gross Monthly Income $8000
Front Ratio 28%
$8000 X .28 = $2,240
The borrower qualifies on the front end
What is the Back Ratio?
Compares total monthly debt payments (including other debts) to monthly income
Gross Monthly Income $8000
House $2150
Car $500
School $250
Credit Card $150
Total Debt $3050
$8000 X .36 = $2,880
$2,880 < $3,050
What is Private Mortgage Insurance (PMI)?
-Definition: A type of insurance for home loans.
-Purpose: Helps lenders safely loan more than 80% of a home’s value.
-When Required: On conventional loans where borrowed amount is over 80% of the home’s value.
-Coverage: Bridges the gap between a borrower’s down payment and the 80% loan threshold.
How do you calculate PMI Premium ?
The PMI premium is a function of the borrower’s credit score and the Loan-to-Value ratio and is quoted as a percentage of the loan amount, such as 0.59%. The Premium would then be:
Sales Price
$171,000 x 0.59% =
$1,008.90 per year
$1,008.90 ÷ 12 =
$84.08 per month
Private Mortgage Insurance (PMI) premiums are added to the borrower’s monthly payment.
What is MIP(Mortgage Insurance Premiums)?
FHA’s insurance, which is paid by the borrower is called Mortgage Insurance Premium, or MIP. MIP is only found on FHA loans. MIP is on all FHA loans and is paid for the entire term of the loan.
Name the two forms MIP comes in ?
-Up-Front Mortgage Insurance Premium
-Annual Mortgage Insurance Premium
What is Up-Front MIP?
Up-Front MIP is paid by the borrower when the loan is funded. It can be paid at closing as a closing cost paid by the borrower or the seller. It can also be added to the borrower’s loan.
What is Annual Mortgage Insurance Premium?
Annual Mortgage Insurance Premium is calculated annually based on the balance of the loan at the beginning of the loan and is added to the 12 monthly payments the borrower makes for the year.
What is the difference between Mortgage Insurance Premiums (MIP) and Private Mortgage Insurance (PMI)?
MIP (Mortgage Insurance Premiums) with PMI (Private Mortgage Insurance). While both use the same letters, the main difference is that PMI only applies to conventional loans, while MIP comes with FHA loans.
What is the Loan to Value (LTV)
The percentage of the lesser of the appraised value or the sales price that the lender will lend
Who qualifies for FHA Loans ?
-FHA loans are not just for U.S. citizens. Resident aliens may qualify for an FHA loan too.
-Resident aliens would receive the same loan terms as anyone else applying for an FHA loan.
-A nonpermanent resident alien may qualify for an FHA loan too. The property just must be for the borrower’s principal residence.
Which properties qualify for FHA Loans?
-Single-family residences
-Approved HUD condo projects
-PUDs (Planned Unit Development)
-1 to 4 family properties
-HUD-approved manufactured homes
-Rural property, Rural property is limited to 10 acres.
Commercial use is not permitted, and the property cannot be income-producing.
What are the non traditional credit options for FHA?
The lender could look at
-Utility Payment Records
-Rental Payments
-Automobile Insurance Payments, and
-Other Means of Direct Access form the Credit Provider
What are the different types of FHA loans ?
203 B: ( The most common), fixed-rate, 10-30 years
203 K: Purchase & Rehabilitation for 1-4 family properties
What are the FHA Ratios?
Maximum ratios of 31% front ratio and 43% back ratio. Higher ratios may be eligible with compensating factors determined by the underwriter.
What is the Texas Veterans Land Board (VLB)?
-A component of the Texas General Land Office, -Created in 1946 to administer benefits exclusively for Texas veterans.
- Administered by the State of Texas and is not related to the federal Department of Veterans Affairs (VA) program.
What are the eligibility requirements of the Texas Veterans Land Board (VLB)?
-Applicant must be at least eighteen years of age
-Must be a bonafide resident of Texas. A bonafide resident of Texas is one who is currently residing in Texas, with the intent to remain.
-Texas residents on active duty outside of the state also meet residency requirements
What are the other requirements for the Texas Veterans Land Board (VLB) loan?
-Exclusively for eligible Texas veterans
-Up to $424,100 for the home purchase
-Fixed-rate loans of 15, 20, 25 or 30 years
-Originates with a participating lender
-Must be used for the purchase of a home (no refinance)
-Home must be the veteran’s primary residence
-Home must be in Texas
-New homes must be ENERGY STAR® certified or have a HERS Index score of 75 or less
What is the Texas Department of Housing and Community Affairs (TDHCA)?
An agency responsible for affordable housing, housing-related and community service programs, and the regulation of the state’s manufactured housing industry.
