Mortgages Flashcards
conforming vs nonconfirming conventional loans
In short, conforming loans follow the rules and are more common and affordable, while non-conforming loans don’t follow all the rules, can be larger, but may come with extra challenges and costs.
FHA vs VA cs USDA loans explained
FHA loans: The FHA does not lend money, but insures loans made by approved lenders. The borrower offsets the cost of the FHA guaranteeing their loan by paying a mortgage insurance premium or MIP for short. Fun fact: The FHA program is funded solely by MIP payments and does not rely at all on taxpayer money. One advantage of an FHA loan is that it allows for assumption, or transferring the mortgage to another qualified borrower.
VA loans: The VA does not lend money, but it guarantees loans to qualified veterans. The borrower does not pay MIP because these loans are guaranteed by the Veterans Administration. The borrower does, however, pay a VA funding fee at closing.
USDA Loans: The U.S. Department of Agriculture (USDA)’s Rural Housing Service makes and guarantees loans to low-income buyers who want to purchase or build homes in rural areas. This is one case where the government does actually make loans. Borrowers who qualify for this program can borrow 100% of the purchase price of the home from the Rural Housing Service. The Rural Housing Service also guarantees loans made by approved lenders.
Graduated payment mortgages (GPM):
a fixed-rate mortgage that has a lower initial interest rate in its first years, but includes gradual increases each year
Adjustable-rate mortgages (ARM):
a mortgage with an interest rate that can be adjusted based on fluctuations in the cost of money
entitlement in VA loans
VA guarantees part of the loan to help veterans become homeowners.
residual income is
the income left after deducting all debts
how much does the VA program pay of the loan
25%
Index Rate
The number that changes after the initial fixed period.
Index Links
Most ARMs are linked to benchmarks like LIBOR, cost of funds, or Treasury bill yields.
ARM Margin
A fixed percentage added to the index rate.
Example: If the margin is 3%, the borrower pays 3% plus the index rate.
Margin is usually negotiable, and higher margin means lower index rate (and vice versa).
In simple terms, an ARM is
a loan with a changing interest rate. The initial rate is low, then it adjusts based on an index and margin. Borrowers should choose wisely.
A periodic rate cap
limits the change in interest rate between adjustment periods.
A lifetime cap, or, ceiling
limits the increase of interest over the life of the loan.
payment caps
“Negative amortization”
is like a snowball of debt. When you don’t pay enough on your loan, the unpaid interest gets added to what you owe, making your debt bigger and harder to pay off. It’s like having a snowball that gets bigger as it rolls downhill, and it can be a real problem with certain loans. So, it’s important to avoid it if you can.
Graduated-Payment Mortgage (GPM):
This is like a loan for people who expect their income to grow in the future. At the start, you pay less, but your payments increase over time until they reach a fixed amount. It’s like starting with a small slice of cake and gradually getting a bigger piece.
Term Mortgage (Straight Loan):
This is a short-term loan where you only pay the interest each month, not the actual loan amount. At the end, you owe the full loan amount in one chunk. It’s like ordering a pizza but only paying for the cheese each month, and then you have to pay for the whole pizza later.
Growing-Equity Mortgage (GEM):
In this loan, your interest rate stays the same, but your payments increase. As you pay more, you own more of the house. It’s like starting with a small plant and watching it grow into a big tree.
Buydown Mortgage:
You pay extra upfront to lower your interest rate and monthly payments. Someone (maybe you or another party) buys down your interest rate. It’s like paying extra at the entrance of an amusement park to get discounted rides inside.
Balloon Mortgage:
You make monthly payments as if you have a long loan term, but at the end, you owe a big lump sum (the balloon payment). It’s like borrowing a toy for a week, but if you don’t return it on time, you have to pay for it all at once.
Open-end Mortgage Loan:
Think of it like a credit card for your house. You can borrow more money later without getting a new loan, just like you can make more purchases on your credit card without applying for a new one.
Construction Mortgage Loan:
Imagine you’re building a sandcastle. You get buckets of sand (money) in stages as your castle (house) goes up. When it’s finished, you pay back all the buckets you borrowed.
Package Mortgage Loan:
It’s like buying a fully-loaded pizza. You not only get the pizza (the house) but also all the toppings (furniture, appliances) as part of the deal.
Bridge Mortgage Loan:
are short-term loans typically taken out for a period of two weeks to three years, while the borrower works to attain larger or longer-term financing.
Blanket Mortgage Loan 🛌
Imagine you have a big security blanket that covers all your teddy bears (properties). If you can’t pay, the blanket gets taken away along with all your teddy bears.
Sale and Leaseback:
Picture selling your bike (house) to your friend and then renting it back. You still get to ride it, but your friend owns it now. This way, you get some cash but still enjoy your bike.
Home Equity Loan:
It’s like taking a loan using your treehouse (home equity) as collateral. If you can’t repay, you might have to give up your treehouse.
Home Equity Line of Credit (HELOC):
Think of it as a magical money well in your backyard (home equity). You can scoop out money as needed, but there’s a limit to how much you can scoop, and you pay for what you take out.
Seller Financing - The Helping Hand:
Imagine you want to buy a cool skateboard, but you don’t have enough money. The skateboard shop owner (seller) sees your passion and offers to lend you some cash in addition to your allowance (bank loan). You agree to pay them back over time. In this case, the skateboard shop owner is like the seller offering financing to help you buy the skateboard.
Exemption 1 (must meet all of the following) for seller financing
The seller originates financing for only one property in a 12-month period.
The seller is a person, state, or trust.
The seller has not constructed or acted as a contractor for a residence on the property.
The financing does not result in negative amortization.
The financing is fixed rate, or does not adjust for the first five years.
Exemption 2 (must meet all of the following) for seller financing
The seller originates financing for no more than three properties in a 12-month period.
The seller is a person or organization (partnership, corporation, association, cooperative, trust, estate, government unit, or proprietorship).
The seller has not constructed or acted as a contractor for a residence on the property.
The loan is fully amortizing.
The financing is fixed rate, or does not adjust for the first five years.
The seller has determined that the borrower has the ability to repay the loan according to its terms.
In North Carolina, a seller who provides a borrower with a purchase money mortgage is not entitled to a ________-.
deficiency judgement
Purchasing Subject to Seller’s Existing Mortgage - Slipstream Buying:
Think of this like riding a tandem bike. You’re pedaling, but your friend is sitting in the front seat (the seller is still responsible for the loan). You’re helping move the bike forward by making payments directly to the lender. If you stop pedaling (miss payments), your friend might have to take over (pay the debt), and that’s not fun for them. It’s like teamwork, but it can be risky if someone doesn’t hold up their end.
Short Sale - Bargain Shopping:
Short Sale - Bargain Shopping:
Imagine you’re at a yard sale, and you find a cool toy (the property) that used to cost $20 (the outstanding loan balance). But the seller (the borrower) really needs money, so they agree to sell it to you for just $15. You want to buy it, but you have to ask the seller’s mom (the lender) if it’s okay. If she says yes (lender approves the sale), you get the toy for a great deal, and the seller gets some money, avoiding a yard sale disaster (foreclosure).
Portfolio Lenders
Portfolio lenders are usually a bank or other institution that originates mortgage loans and then keeps the debt in a portfolio of loans.
What’s the difference between mortgage bankers and mortgage brokers?
Mortgage bankers are essentially direct lenders. They work for financial institutions (banks or mortgage companies) that have the funds to lend to borrowers. These institutions provide the money for mortgage loans.
Mortgage brokers act as intermediaries between borrowers and lenders. They do not lend their own money but instead help borrowers connect with lenders. Mortgage brokers work with multiple lenders and have access to a variety of loan products. They help borrowers shop for loans by gathering their financial information and presenting it to different lenders to find the best terms and rates.
Intermediation
is the name for the process of creating a go-between in the economic process. In the financial system, commercial banks are the intermediaries – they collect and hold much of the funds that move between the government and consumers.
Disintermediation
removes the middle man, or the intermediary, from the transaction. In real estate terms, this amounts to the money going directly from investor to borrower without passing through all the usual channels of banks, mortgage brokers, and mortgage bankers.
