Real Estate Finance

Question 1

Private Financing Sources

Answer 1

Banks, savings and loan associations, credit unions, and real estate investment trusts are all examples of private organizations that offer funding in the form of loans.

Question 2

Blanket Mortgage

Answer 2

A blanket mortgage, also called a blanket loan, is a mortgage that covers funding for more than one piece of property. A developer who is building a subdivision of houses could use just such a type of loan for the entirety of the project and then subdivide them to create individual parcels, houses to be sold one at a time as they are built.

Question 3

Open-end Mortgage

Answer 3

An open-end mortgage allows for the borrower to borrow more money on the original loan amount up to a certain limit.

Question 4

Package Mortgage

Answer 4

Package mortgages are secured by real estate and include the personal property and furniture into a ‘package’ which is the purchase price of the house.

Question 5

Wraparound Loan

Answer 5

The wraparound loan, or a “wrap,” is a form of creative financing, that may or may not be allowed with a homeowner’s original loan. It is a secondary loan for real property, that ‘wraps around’ the first loan, without paying it off.

The lender extends to the homeowner a junior mortgage which wraps around and exists in addition to any superior mortgages already secured by the property. The homeowner then pays the total amount for both loan payments to the second lender, who also then pays the first.

These are not commonly used because the first loan might carry a due-on-sale clause which stipulates that the outstanding balance of the loan may be called due (repaid in full) upon sale or transfer of ownership of the property used to secure the note. So, if a homeowner does acquire any type of secondary loan on the same property, the first mortgage holder might call in the entirety of the first loan.

Question 6

Discount Points

Answer 6

A discount point fee is a fee charged by the lender equal to 1 percent of the loan amount.

Question 7

Origination points

Answer 7

Fees paid to the lender to compensate the loan company or bank for evaluating, processing, and approving a mortgage.

Question 8

Banks

Answer 8

Banks are privately run, for-profit financial institutions that provide a number of services, including mortgage lending. They are currently the most common source of private funding for real estate transactions.

Question 9

Commercial Bank

Answer 9

A commercial bank primarily offers the following services:

• Taking in deposits from individuals
• Issuing loans
  Secured loans (mortgages)
  Unsecured Loans (credit cards, bank overdrafts, corporate bonds)
• Providing basic investment products (e.g., certificates of deposit, savings accounts)

Question 10

Mortgage Bank

Answer 10

A mortgage bank limits its activities to originating and servicing mortgage loans.

While mortgage brokers offer a similar service, mortgage banks actually finance the loans they originate with their own money.

Question 11

Savings and Loan Associations

Answer 11

Savings and loan associations (sometimes known as S&Ls or thrifts) are financial institutions that focus on taking in savings deposits and establishing mortgage loans.

Savings and loan associations have long been one of the primary sources of funding for real estate purchases.
S&Ls commonly have the following characteristics:

• Locally owned and privately managed
• Deposits from individuals are used to fund amortized loans (usually mortgage loans)
• Other loans are made to fund home construction, repairs, or refinancing
• State or federally chartered
• Individuals who deposit or borrow are members with the ability to influence operational policy

Question 12

Credit Unions

Answer 12

A credit union is a not-for-profit financial institution that provides deposit and lending services similar to those provided by a commercial bank. Additionally, credit unions are owned by their members, all of whom are individuals who have accounts with the credit union.

Credit unions market themselves as a community- and member-focused alternative to for-profit banks.

Question 13

Real Estate Investment Trusts

Answer 13

A real estate investment trust (REIT) is an organization that owns and manages income producing real estate, real estate related assets, or both.
Investors purchase stock in a REIT which, in turn, provides a means for individual investors to reap the gains from real estate investment without having to actually own the real estate or the real estate related asset.
An organization must meet the following conditions in order to be classified as a REIT:

• Must be an entity that would normally be classified as a corporation
• Must be managed by a board of directors or board of trustees
• The shares must be fully transferable
• Must have at least 100 shareholders after 1 year as a REIT
• During the end half of the taxable year, The REIT cannot have more than 50% of its shares held by less than 6 people
• At least 75% of the REIT’s total assets must be invested in real estate assets and cash
• No more than 25% of the REIT’s assets can be non-qualifying securities or stock from taxable REIT subsidiaries
• At least 75% of the REIT’s gross income must come from real estate related sources (e.g., rents from property or interest from mortgages)
• Must distribute at least 90% of taxable income to shareholders as dividends

Question 14

Types REITs

Answer 14

Mortgage REITs mainly operate by financing loans, primarily mortgages, for real estate transactions. Alternatively, mortgage REITs may purchase a specific kind of investment product called a mortgage-backed security. The main source of income for a mortgage REIT comes from the interest that accumulates on the loans that the REIT services.

However, most REITs are equity REITs which means income is generated from the direct ownership and operation of income producing properties. This kind of REIT usually specifies in one type of property such as apartments or office building.

Hybrid REITs combine the features of equity and mortgage REITs. A Hybrid REIT’s income comes from both income producing properties owned by the REIT and the interest from mortgages serviced by the REIT.

Question 15

Insurance Companies

Answer 15

Insurance companies are not thought of as traditional mortgage lenders, they have become just that. While still keeping a portion of finances back for insurance claims and expenses, insurance companies also look to back commercial properties, some estimates suggest that up to a third of their resources are invested there.

Insurance companies look to the long-term nature of commercial lending, offering upwards of 25 fixed-year terms. Insurance companies also support the secondary mortgage market, which will be covered later in this course.

Question 16

Manufactured Home Loans

Answer 16

Manufactured home loans are designed to finance the purchase or refinancing of a manufactured/mobile home. While it is possible for buyers who are looking at purchasing a manufactured home (especially one that is securely connected to the land it sits on) to be financed through a standard home mortgage loan, most buyers will only be able to be financed through personal property loans.

These loans often have a higher down payment, shorter term, and higher interest rate than a home mortgage loan. If the loan is used to secure the borrower’s principal residence, the interest that is paid can usually be deducted from taxes.

Question 17

Early Payoff Penalty

Answer 17

Sometimes a loan will have an early payoff penalty, generally from 2-4% of the loan. These penalties are meant to discourage refinancing that keeps lenders from earning maximum profits from their loans. Encourage your buyers to be aware of these provisions in their contracts, especially if they plan to refinance at some point during the life of the loan.

Question 18

Amortized Payment Plans

Answer 18

Most mortgages and deeds of trust loans are fully amortized loans which, remember, means loans that are paid back over the term of the loan (generally in years, such as a 15-year or 30-year loan) through a specific number of equal payments. The borrower pays a consistent amount throughout the life of the loan. With each payment a borrower makes, the principal is reduced and their equity in the property increases.

Question 19

Flexible Payment Plan

Answer 19

A flexible payment plan, or flexible payment loan, often appeals to new borrowers/prospective homeowners. In these plans, the borrower pays a lesser amount for the first years of the plan, often scheduled at five years, and then a higher monthly amount in the last portion of the loan, by which point the homeowner is expected to have higher earnings that could support a higher payment.

Question 20

Balloon Payment

Answer 20

Balloon payments happen when the mortgage requires monthly payments that do not amortize the amount of the loan by the time the final loan payment is due, which then makes the final payment larger than the others, in other words, a balloon payment.

A common use for balloon payments is during seller-financing transactions. However, in a traditional loan, if the borrower/homeowner has been making only interest payments on their loan, they may have a balloon payment left to make on the principal at the end of the life of their loan.

Question 21

Interest-Only Payment

Answer 21

Interest-only loans, also called term loans, are similar to balloon payment loans in that the borrower periodically makes interest payments and then at the end of the term of the loan, pays off the rest of the principal with one large payment.

Question 22

Biweekly Payment Plan

Answer 22

A biweekly mortgage payment plan is a mortgage for which one-half payment of the total mortgage amount is made every other week instead of the usual total monthly payment made once per month. This way the homeowner makes 26 biweekly payments of half the amount, that is, the equivalent of thirteen monthly payments per calendar year instead of the usual twelve. This accelerates the loan payoff schedule by approximately six years. If a homeowner can afford this payment schedule, it grows equity faster and pays off the mortgage faster without costing the homeowner any more in points or other lender fees.

Question 23

Construction Loan

Answer 23

A construction loan, also called interim loan, is basically a mortgage to build a house. Often, it is a short-term loan and the terms include a provision that repayment of the loan does not begin until the house is built.

Question 24

Conventional

Answer 24

A conventional loan is one in which the loan is not backed by any organization, federal or private. Conventional loans can be insured through Private Mortgage Insurance (PMI), which is available at varying costs depending on your market and provider. Many lenders require PMI if more than 80% of the property value is financed.

Question 25

FHA

Answer 25

The Federal Housing Administration (FHA) is under the umbrella of the Department of Housing and Urban Development (HUD) and is not a conventional lender, nor a builder. They are the largest mortgage insurer in the world, as well as regulating the housing industry business.

Question 26

Adjustable-Rate Mortgages (ARMs)

Answer 26

Adjustable-rate mortgages are mortgages whose interest rate paid on the outstanding balance varies according to a particular benchmark, a standard which investors choose to gauge the performance of their portfolio, and could be markers such as the S&P 500 or other market index that is appropriate to the type of investment. In these types of loans, because of the benchmark, the payments may be adjustable as well.

Question 27

Buydown Mortgage

Answer 27

In a buydown mortgage, the interest rate is lower than market rate because the borrower paid an up-front charge to obtain a lower rate on a new mortgage. This process is often referred to as “buying down the interest rate.” Most lenders will allow a borrower to “buy down the interest rate” in order for them to have a lower monthly payment. This way the lender gets the cash up front, and the borrower gets a lower payment and an overall lesser interest rate for a predetermined time or the life of the loan.

Question 28

Reverse Mortgages

Answer 28

A reverse mortgage, also called a home equity conversion mortgage (HECM), is a type of home loan for homeowners aged 62 years or older that requires no monthly mortgage payments but basically pays them out of the equity in their home. The homeowner/borrowers are still responsible for the property taxes and homeowner’s insurance.

Question 29

The Closing Disclosure

Answer 29

The closing disclosure combines and replaces the final Truth-in-Lending disclosure and the HUD-1. This document must be given to the borrower at least 3 business days before the consummation. Consummation is not the same as the closing or settlement.

Question 30

HUD-1

Answer 30

The HUD-1 (a.k.a., the closing sheet or the settlement form) was the other disclosure form mandated by RESPA. It was a itemized listing of all the fees and charges owed by the buying/borrowing and selling parties in a real estate transaction.