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.
The primary mortgage market is where
The primary mortgage market is where lenders underwrite loans to borrowers seeking to purchase real property.
underwrite means to…
your lender verifies your income, assets, debt and property details in order to issue final approval for your loan.
The secondary market is where
mortgages are bought and sold.
Fannie Mae is
a government-sponsored enterprise (GSE) that purchases FHA and VA loans, as well as conventional, conforming loans. Fannie Mae packages the mortgages they buy and sells them.
The focus for Freddie Mac is
on buying conventional loans from depository institutes (although it also purchases VA and FHA loans). Buying loans from depository institutions encourages further lending by returning working capital back to the banks and essentially means the loans are insured by the U.S. government.
The Difference Between Fannie & Freddie
Today, Fannie Mae and Freddie Mac are completely independent of each other. They have the same business model and often compete with each other.
The only significant difference between Fannie Mae and Freddie Mac is the size of the financial institutions from which they purchase their mortgage loan bundles.
Fannie Mae deals with larger commercial banks, whereas Freddie Mac works with the smaller “thrift” banks. Fannie buys from the big boys, Freddie buys from the little guys.
conforming loan is
To make it easier to package and sell loans on the secondary market, Fannie Mae and Freddie Mac have certain standards for the loans they buy. A loan that meets these standards is known as a conforming loan.
The GSEs are the link between the _____ and the ______ who purchase the packaged loans. And in doing so, they are acting as intermediaries.
loan providers
investors
What Is a Government-Sponsored Enterprise, Exactly?
These special companies, called “government-sponsored enterprises” or GSEs for short, are like a weird mix of government and private businesses. They’re created by the government and are meant to help the public, but they are owned by private individuals or companies. It’s a bit like having one foot in the government world and the other in the business world. But here’s the catch: These companies are most focused on making money for their owners and investors, not necessarily on helping everyone. So, their main responsibility is to make profits for their owners.
Who is Ginnie Mae?
So, in the world of home loans, Ginnie Mae is a bit like the organizer who collects all the mortgage loans (picnic tickets) from borrowers (like you) and bundles them into “Picnic Baskets” (MBS) to attract investors (your neighbors). This helps more people like you get the funding they need to buy homes, making homeownership accessible to more folks.
The Difference Between Ginnie, Fannie, & Freddie
In other words, Freddie Mac and Fannie Mae’s loans are guaranteed by Freddie Mac and Fannie Mae, but Ginnie’s loans are guaranteed by the U.S. government. This is an important distinction to make, but one that makes sense when you remember that Freddie Mac and Fannie Mae are government-sponsored, while Ginnie Mae is government-owned!
One thing Fannie Mae, Freddie Mac, and Ginnie Mae all have in common? They all work to increase mortgage availability.
What do government-sponsored enterprises do?
Government-sponsored enterprises buy loans from lenders, increasing mortgage availability.
the major players in the secondary mortgage market and their purposes/functions:
Fannie Mae (Federal National Mortgage Association): Fannie Mae is a government-sponsored enterprise (GSE) that specializes in purchasing loans from large, commercial banks. Its main goal is to provide stability and affordability in the housing market by buying and securitizing mortgages, making it easier for banks to lend money for home purchases.
Freddie Mac (Federal Home Loan Mortgage Corporation): Like Fannie Mae, Freddie Mac is a GSE, but it specializes in purchasing loans from smaller “thrift banks” or savings and loan associations. Freddie Mac operates with a similar goal of supporting the housing market by making it easier for thrift banks to provide mortgages.
Ginnie Mae (Government National Mortgage Association): Ginnie Mae is unique among the entities listed because it’s a government-owned enterprise, not a GSE. Its primary focus is on buying loans to support housing assistance and government-backed mortgage programs. Ginnie Mae helps ensure that funds are available for these programs by securitizing the loans it purchases.
Farmer Mac (Federal Agricultural Mortgage Corporation): Farmer Mac is another GSE, but it specializes in agricultural loans. It operates similarly to Fannie Mae and Freddie Mac but focuses on making credit available for various types of agricultural real estate mortgage loans, rural housing mortgage loans, and rural utility cooperative loans.
Buyers have a right to know who the new servicer of their loan is. Whenever a loan is sold, the borrower must receive notice from the servicer within _____ days.
30
Mortgage-backed securities are
investment instruments that have mortgages as collateral. Think of it kind of like buying stocks, but instead of buying stocks in a company, you are buying stock in a bunch of people’s mortgages.
securitization is
the conversion of an asset, especially a loan, into marketable securities, typically for the purpose of raising cash by selling them to other investors.
how do MBS’s work?
Mortgage Backed Securities:
- Homebuyers sign a promissory note (aka mortgage) in exchange for a loan.
- The bank sells conforming mortgages to GSEs to get more cash to make loans.
- Mortgages are sorted into pools by the GSE according to risk (low risk, medium risk, and high risk).
- The GSE sells portions of these pools to investors. These portions are called mortgage-backed securities.
- The investors now receive the monthly payments from the homebuyers
An estoppel certificate is
is a statement of facts that is signed by the borrower who is taking out a mortgage loan. In this document, the borrower will certify:
The amount that is owed on the loan
The rate of interest
The date to which the interest has been paid
Aggregators are 🦸
next-level originators. Not only do they originate loans, but they also purchase newly originated loans from smaller originators.
security dealers are… 🕶🥃
people or firms who buy and sell securities for their own account, whether through a broker or otherwise
The Truth in Lending Act (TILA)
🍎 🍊
TILA is intended to ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably. Before TILA’s enactment, consumers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format. Consumers were basically left comparing apples to oranges. 🍎 🍊
Now, all creditors must use the same credit terminology and expressions of rates. TILA seeks to do exactly what its name implies: create truth in lending.
regulation Z is…🛞
Okay, so when we talk about TILA, what we’re actually talking about is Regulation Z. You see, TILA is a law passed by Congress. In that law, Congress gave the Federal Reserve Board (and later the CFPB) the power to administer the law. Regulation Z explains how the provisions in the law will be carried out in practical terms. 🛞
reg z rescission rights state
that if someone is using an already owned house as ocllaterol, thye can pull out of the loan within 3 days
reg z advertsing rules state
you cannot state the mortgage payment amount in advertizing
One quick reminder about what APR is. A loan’s APR is
the TOTAL cost of getting that loan, expressed as a percentage.
what is RESPA
Real Estate Settlement Procedures Act (RESPA) in 1974 as a response to abuses in the real estate settlement process, including the practice of kickbacks, referral fees, or fee splitting, which had the effect of needlessly increasing the costs of settlement services.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, named after U.S. Senator Christopher J. Dodd and U.S. Representative Barney Frank, became law. This act aimed to reform Wall Street and protect consumers from unfair financial practices. It created a new agency called the Consumer Financial Protection Bureau (CFPB) to prevent mortgage and payday loan companies from exploiting people. Dodd-Frank introduced various financial reforms, including the Volcker Rule, which restricted banks from risky investments. The law also increased the amount of money insured by banks and established real estate lending standards. Overall, Dodd-Frank was a significant effort to prevent another financial crisis.
what does the CFPB do?
Basically, the Consumer Financial Protection Bureau exists to protect borrowers from dishonest lending practices. “Know Before You Owe”
Say Hello to TRID 👋 which is…
Loan Estimate and the Closing Disclosure
The lender is obligated to deliver or mail the Loan Estimate form _________ after the lender receives the loan application from the borrower.
three business days
And, regardless of how it’s delivered, the borrower must receive the Closing Disclosure _______ before closing day.
three business days
Equal Credit Opportunity Act (ECOA)
prohibits lending discrimination on the basis of race, color, religion, national origin, sex, marital status, age, use of public assistance, or sexual orientation or gender identity.
Fair Credit Reporting Act (FCRA)
FCRA was enacted with the intention of protecting consumers from the willful and negligent inclusion of inaccurate information in their credit reports.
Fair and Accurate Credit Transaction Act (FACTA)
The Fair and Accurate Credit Transaction Act (FACTA) is an amendment to the Fair Credit Reporting Act that requires the three major credit reporting agencies to provide credit reports free of charge to consumers once every 12 months upon request. Everyone deserves to know what their credit report says. That’s not an opinion; that’s a FACTA, Makayla.
who offers a standardized, simplified way of presenting all the pertinent loan details to the borrower
TRID
who created the CFPB
dodd-frank
tightened regulations on banks and lenders in response to the 2008 subprime mortgage crisis
dodd-frank
created advertising rules for loans
TILA
the regulation that enforces TILA
reg z
what was once administered by the Federal Reserve Board, now by the CFPB
reg z
requires disclosures, including APR, for all loans
tila
what;s a mortgage apr?
included the cost of everything related to the loan including the loan itself, interest, points, and fees/miscellaneous costs
provides guidelines for updated loan disclosures, including the Loan Estimate and the Closing Disclosure
provides guidelines for updated loan disclosures, including the Loan Estimate and the Closing Disclosure
combines TILA and RESPA rules for loans
trid
prohibits lenders from asking certain questions when evaluating a credit application
ecoa
prohibits lenders from asking certain questions when evaluating a credit application
ecoa
amendment to the Fair Credit Reporting Act
fair and accurate credit transaction act
promotes the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies
fair credit reporting act
gives the consumer the right to know what’s in their credit report and dispute inaccuracies
fair credit reporting act
requires the three major credit reporting agencies to provide credit reports free of charge to consumers once every 12 months upon request
fair and accurate credit transaction act
rate lock, which is
a guarantee that they’ll give them a mortgage at a certain interest rate.
FHA loan payment-to-income ratio
cannot exceed 31%
In order to determine whether or not to approve a loan, the underwriter needs to evaluate both:
In order to determine whether or not to approve a loan, the underwriter needs to evaluate both the borrower AND the property.
Maximum LTV for conventional loans in order to avoid paying PMI:
80%
Maximum LTV for conventional loans WITH paying PMI:
95%
VA allows LTV of
100% (which means no down payment)
FHA insures loan with LTV up to
96.5% (a 3.5% down payment)
what document is the best to use for loan application
uniform residental loan application
The payment-to-income ratio for a conventional loan cannot exceed.
The payment-to-income ratio for an FHA loan cannot exceed.
The debt-to-income ratio for a conventional loan cannot exceed.
The debt-to-income ratio for an FHA loan cannot exceed.
28%
31%
36%
43%
