Real Estate Finance Flashcards
Pre-Qualification
The first step in determining “how much house” the buyer can afford and which type of loan might be best; the buyer supplies information about their financial situation to the lender, who then provides a general estimate
Pre-Approval
Official process of being approved by a lender to borrow a specific amount at an interest rate within a small range; a mortgage application, credit report, and supporting financial documentation are required
Mortgage broker
Someone who brings together a borrower and a lender in order to create a mortgage
Mortgage banker
An entity or person who provides mortgage financing by using their own funds
Correspondent lender
A lender who offers loans using their own money at their own risk, generally on a smaller scale than mortgage brokers and bankers
Loan processing
When the lender collects information and an application from the buyer that will help determine the loan type and amount they will qualify for
Underwriting
The process of deciding the level of risk a lender would take on by offering a loan to a certain borrower for a specific property
Funding
The transferring of funds by the lender to a title company or escrow company so that they may be disbursed
Servicing
The ongoing collection of monthly payments and maintenance of records by a loan servicer
Employment opportunity is the biggest factor for
residential real estate demand.
A housing bubble is created when property values
increase too quickly.
Leverage
The use of a relatively small amount of money in order to get a much bigger loan for purchasing real estate
Cost approach
Method of estimating the value of a property by determining how much it would cost to completely replace it and then subtracting from that value to account for depreciation
Income approach
Method of estimating the value of a property based on the amount of income it could produce for its owner
Conforming loan
A loan that has been made according to the guidelines that will allow the loan to be sold on the secondary market
Non-conforming loans
A loan that does not meet the guidelines to be sold on the secondary market
Mortgage Insurance Premium (MIP):
Required insurance to protect the lender in the event of borrower default on an FHA loan
Private Mortgage Insurance (PMI):
Insurance that protects the lender in the event of borrower default on a conventional loan
In hypothecation, the borrower maintains their
ownership of the asset and has free reign to use and enjoy it.
The secondary market is made up of:
Fannie Mae Freddie Mac Ginnie Mae Federal Home Loan Bank Private investors Life insurance companies
A home mortgage gets passed on to a servicer for ongoing management. What exactly does that servicer do?
Collects the homeowner’s payments every month
Maintains the escrow account (if the borrower has to or chooses to have one) for annual expenses, like taxes and home insurance
Contacts the borrower about late payments or defaults
Answers questions the borrower may have about the loan
Mortgage servicing companies can even buy home insurance on the borrower’s behalf if they fail to attain or maintain coverage. This is called
force placed insurance, and it’s not ideal for the customer
FHA insurance requires an
upfront fee (called the Up-front Mortgage Insurance Premium, or UFMIP) in addition to a monthly fee.
The Texas Real Estate Commission (TREC) provides an addendum for the parties to negotiate seller
financing (the Seller Financing Addendum).
TREC provides an addendum to help the buyer and seller negotiate the terms of an
assumption (the Loan Assumption Addendum).
Private investors (lenders) may have higher interest rates or unusual terms compared to banks. This type of lending is called
“hard money” lending.
Types of credit lines include, but are not limited to:
Balloon Loans: Usually last for 3 to 15 years and are indexed against a Treasury index
Real Estate Loans: Secured by other real estate you own. Usually you can borrow up to 75% against the value of the property for a term of between 10 and 20 years
Short Term Loans: Secured loans for a term of one year or less
Asset Based Loans: Secured by your professional or perhaps your personal assets
Term Loans: Usually made by traditional lenders and secured for a fixed term that is at least partially determined by the investor’s income statements and projections
Equipment Loans: Secured by business equipment and against which you can usually borrow 60-80% of the value of the equipment for the projected life of the equipment
The purpose of the SAFE Act is to protect consumers across the country from
fraud by defining minimum licensing and registration standards for mortgage loan originators.
Expansion
The economic phase in which market activity really picks up (businesses start hiring again, people are investing in real estate)
Hyper supply
The economic phase in which supply catches up with (and then surpasses) demand; the first warning sign is an increase in vacant or unsold property
Recession
A period in which economic activity drastically declines and stays declined for more than six months
Economic bubble
Forms when the value of something (typically real estate or stocks) grows so much that its market value is higher than its actual value
Housing affordability
Compares median household income to the income needed to purchase a median-priced home
Inflation
A general rise in prices as the result of a decrease in the dollar’s purchasing power
the four major phases of the real estate market cycle. They are
recovery, expansion, hyper supply, and recession.
Recovery is the phase that follows
A recession
Distinguishing characteristics of a recovery phase include:
High unemployment (but it’s not getting any worse)
Lots of home foreclosures
People have seen the damage caused by recession and are afraid to buy homes (even though it’s arguably a good time to “buy low”)
Government lowers interest rates to encourage investments
With expansion, Businesses are
hiring more, and people tend to view real estate as a good investment again.
Signs of expansion include:
Most available properties have been bought or rented, driving vacancy rates down
Rent and home prices are rising
Construction for new homes and commercial buildings starts
hyper supply phase, in which supply catches up with (and eventually surpasses)
demand.
Hyper supply is marked by:
Crazy high prices
Lots of building projects going on
Vacancies start to rise
recession, starts when occupancy
falls below average (specifically, the long term average that evens out cycle changes).
Classic symptoms of recession include:
High unemployment
Decreased spending by consumers and businesses
Less investment in new buildings, factories, and equipment
Land prices are at their lowest
Decreased interest rates
there is a handy tool called the Housing Affordability Index that allows us to gauge
the affordability (and therefore demand) of housing in the real estate market.
Housing Affordability Index compares
median household income to the income needed to purchase a median-priced home. One is published monthly by the National Association of REALTORS.
Market
A theoretical construct that isolates the selling and purchasing of any one particular commodity from the economy as a whole
Demand
Consumers’ ability and willingness to buy a good or service at a certain price
Supply
An amount of a commodity that is available based on the willingness and ability of sellers in a given market to sell that commodity
Legal tender
United States coins and currency good for all debts, public charges, taxes, and dues
The federal reserve act
The 1913 act that created the Federal Reserve
The federal reserve
Centralized United States bank created to conduct monetary policy and stabilize the U.S. economy
Monetary policy
A term used to refer to the actions of central banks to achieve big, macroeconomic policy objectives
The purpose of the bank is fourfold:
Conduct the monetary policy of the United States
Supervise and regulate financial institutions for the protection of the consumer
Maintain the financial system’s stability
Provide services to the government, to financial institutions, and to the public
The President of the United States nominates seven people to serve on the
Board of Governors for 14-year terms, and the Senate confirms the president’s nominations.
the president appoints a chairman and vice chairman of the board from the
Seven nominees
The job of the Board of Governors is to set the
discount rate and the reserve requirement for member banks. Additionally, the board forms a proper part of the 12-member Federal Open Market Committee (FOMC).
The FOMC is in charge of the Fed’s
open-market operations, such as the purchase and sale of government securities.
Congress established maximum employment and price stability as the macroeconomic objectives for the Federal Reserve; they are sometimes referred to as the
Federal Reserve’s dual mandate.
Fiscal policy decisions are determined by the
Congress and the Administration; the Federal Reserve plays no role in determining fiscal policy.
Federal Open Market Committee (FOMC):
The Federal Reserve’s policy-making body, which is charged with overseeing the federal government’s open market operations
Open Market Operations:
Adjustments to the supply of money implemented by the Federal Reserve to influence the interest rate
Discount Rate:
The interest rate at which the Fed lends money to its member banks
The reserve requirement
Requirement that all depository institutions (not just member banks) keep a certain percentage of their funds in the regional Reserve bank
Securities
Any financial asset that can be traded, including futures, stocks, mortgage loans, and options
The top monetary policy-making body for the Federal Reserve is the
Federal Open Market Committee (FOMC), which is charged with overseeing the federal government’s open market operations.
Liquidity describes cash or assets that can be converted to
Cash quickly
Fed’s three instruments for implementing its monetary policy by influencing the money supply:
The discount rate
The reserve requirement
Open-market operations
The Fed typically has one of two goals in mind when buying and selling securities:
Reach a targeted amount of reserve balances held at the Reserve
Reach a targeted federal funds rate
Money laundering
Financial transaction in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources, or nature of their illicit activities by funneling the money through otherwise legitimate business transactions
Shell companies
Companies that don’t have any real operation, but exist as vehicles for business transactions
In 1789, Congress established the United States Department of the Treasury to manage
The governments revenue
The Treasury Department maintains systems that are critical to the nation’s financial infrastructure, such as:
Borrowing the necessary funds to run the federal government
Collecting revenue
Producing coins and currency
Disbursing payments to the American public
Through the Office of Terrorism and Financial Intelligence (TFI), the Treasury tracks
crimes such as money laundering.
Illegal financing red flags
Geographic risk
Customer risk
Transaction risk
As part of this broad response to the housing crisis, Treasury, under TARP, established two central programs,
Making Home Affordable® (MHA) and the Hardest Hit Fund® (HHF).
MHA helped over 1.8 million families obtain mortgage
relief and avoid foreclosure.
MHA expired in December 2016.
The Hardest Hit Fund® was created to provide targeted aid to families in states hit hard by the
economic and housing market downturn.
The participating states were chosen either because they are struggling with unemployment rates at or above the national average or steep home price declines greater than 20 percent since the housing market downturn.
Where’s the Mint?
U.S. Mint branches are located in:
Washington D.C. Philadelphia, Pennsylvania Denver, Colorado West Point, New York Fort Knox, Kentucky
1933 Banking Act:
Depression-era federal act that created the Federal Deposit Insurance Corporation
Glass-Steagall Act:
Part of the 1933 Banking Act that prevents investment banks from taking deposits and preventing commercial Federal Reserve members banks from various risky behaviors
Dodd frank
Federal Act passed as a result of the housing bubble and financial crisis that resulted in the most significant financial reforms to the American banking system since the post-Great Depression legislation
Federal Home Loan Bank Act of 1932:
Extended $125 million in credit to savings and loan institutions and created the Federal Home Loan Bank System, setting up the twelve regional banks
Community Investment Program (CIP):
Program operated by each FHLBank that offers below-market-rate loans to members for long-term financing for housing and economic development that benefits low- and moderate-income families and neighborhoods
The purpose of the Federal Home Loan Bank System is to
The System provides members with access to:
support residential mortgage lending and related community investment through its member financial institutions.
Reliable, economical funding and technical assistance
Special affordable housing programs
the Federal Home Loan Bank System is composed of
11 Federal Home Loan Bank Districts.
LDP
Limited Denial of Participation
Public Housing
Housing provided for people with low incomes, subsidized by public funds
Subsidized housing
Government sponsored economic assistance programs aimed at alleviating housing costs and expenses for people with low to moderate incomes
Ginnie Mae
Government National Mortgage Association; a government owned enterprise that promotes homeownership
The Housing and Urban Development Act of 1970 introduced the federal
Experimental Housing Allowance Program (EHAP) and the Community Development Corporation, authorizing larger outlays for housing subsidy programs and rent supplements for moderate-income households.
The largest part of Section 8 is the
Housing Choice Voucher program, which pays a large portion of the rents and utilities of about 2.1 million households.
Regulation M:
Prevents manipulation by individuals with an interest in the outcome of an offering, and prohibits activities and conduct that could artificially influence the market for an offered security
Volcker Rule:
Federal regulation prohibiting banks from conducting certain investment activities with their own accounts, also limits their ownership of and relationship with hedge funds and private equity funds, also called covered funds
CFPB:
Consumer Financial Protection Bureau; works to protect consumers from unfair, deceptive, and abusive practices
Administrative Procedure Act:
Governs the way administrative agencies of the federal government may propose and establish regulations
MARS: Mortgage Assistance Relief Services, makes it
illegal to charge upfront fees and requires specific disclosures in ads and when you forward a lender’s offer to a homeowner
What TILA Covers
Each of the following loans is covered by the act if the loan is to be repaid in more than four installments or if a finance charge is made:
Real estate loans
Loans for personal, family, or household purposes
Consumer loans for $25,000 or less
Note: TILA does NOT cover business loans.
TILA makes sure to:
Protect consumers against inaccurate and unfair credit billing and credit card practices
Provide consumers with rescission rights
Provide for rate caps on certain dwelling-secured loans
Impose limitations on home equity lines of credit and certain closed-end home mortgages
The TILA act has two principal regulations, referred to as
Regulation M and Regulation Z.
RESPA explicitly “prohibits anyone from giving or accepting a
fee, kickback, or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan.”
Gramm-Rudman Act, allowed bank to
engage in trading profitable derivatives that they sold to investors.
the interbank rate is the rate of
interest charged on short-term loans made between banks.
The Dodd-Frank Wall Street Reform and Consumer Protection Act provided
common-sense protections, creating a new consumer watchdog to prevent mortgage companies and pay-day lenders from exploiting consumers.
The Dodd-Frank Act includes a large group of financial reforms, including:
The Volcker Rule
Regulation of derivatives
Creation of the Consumer Financial Protection Bureau
Creation of the Office of Credit Ratings
The Consumer Financial Protection Bureau, or CFPB
Was to develop and enforce clear and consistent rules for the financial marketplace and hold financial firms to higher standards.
These are the primary goals of the CFPB:
Create easier-to-use mortgage disclosure forms
Improve consumer understanding
Aid in comparison shopping for the borrower
Prevent surprises at the closing table, a.k.a. “Know Before You Owe”
The SAFE Act says that state-licensed mortgage loan originators must:
Pass a written qualified test
Complete pre-licensure education courses
Take annual continuing education courses
Submit fingerprints to the Nationwide
Mortgage Licensing System (NMLS) for submission to the FBI for a criminal background check
Provide authorization for NMLS to obtain an independent credit report (for state-licensed MLOs)
The Administrative Procedure Act, or APA.
governs the way administrative agencies of the federal government may propose and establish regulations.
The basic scope of the APA is to:
Require agencies to keep the public informed of their organization, procedures, and rules
Provide for public participation in the rule making process
Establish uniform standards for the conduct of rule making and adjudication
Define the scope of judicial review
Mortgage Assistance Relief Services,
Here are the key rules of MARS, according to the Federal Trade Commission:
It’s illegal to charge upfront fees.
You must clearly and prominently disclose certain information before you sign people up for your services.
If you advise someone not to pay their mortgage, you must clearly and prominently disclose the negative consequences that could result.
Don’t advise customers to stop communicating with their lender or servicer.
You must disclose key information to your customer if you forward an offer of mortgage relief from a lender or servicer.
Don’t misrepresent your services.
The Foreign Investment in Real Property Tax Act of 1980, or FIRPTA addresses real estate transactions by
Non-citizens
HFA, Housing Finance Agencies
the many government agencies dedicated to providing fair housing standards and practices
TDHCA: Texas Department of Housing and Community Affairs,
responsible for homeownership, affordable rental housing, community and energy assistance programs and activities serving primarily low-income Texans
MCC: Mortgage Credit Certificate,
a certificate issued by certain state or local governments that allows a taxpayer to claim a tax credit for some portion of the mortgage interest paid during a given tax year
TSAHC: Texas State Affordable Housing Corporation, offers
home down payment assistance programs, including first-time homebuyer grants for Texas families
VLB: Texas Veterans Land Board, finances
land, home loans and home improvement loans for Texas veterans and active military members who are eligible under VLB requirements
Although state HFAs have their own state-run programs, they rely heavily on three federally authorized programs administered by NCSHA:
Mortgage Revenue Bonds (MRB)
The Low Income Housing Credit
The HOME Investment Partnerships Program (HOME)
The USDA works to do lots of great things for the agricultural industry, including:
Meet the needs of farmers and ranchers
Promoting agricultural trade and production
Assuring food safety
Protecting natural resources
Fostering rural communities
Ending hunger everywhere
The USDA has a program called the
Rural housing program
The USDA has a program called the Rural Housing Program. This program seeks to improve and build housing and community facilities in rural areas. It offers loans, grants, and loan guarantees for things like:
Single- and multi-family housing Child care centers Fire and police stations Hospitals Libraries Nursing homes Schools First responder vehicles and equipment Housing for farm laborers
The USDA Single Family Housing Programs give
direct loans or loan guarantees to help low- and moderate-income rural Americans buy safe and affordable housing in rural areas.
The Multi-Family Housing Programs offer loans to provide affordable rental housing for
very-low-, low- and moderate-income residents, the elderly, and persons with disabilities.
The Community Facilities Programs provide loans, grants, and loan guarantees for
essential community facilities in rural areas.
Section 502 Loans, commonly known as Single Family Housing Direct Home Loans, are loans that
help low- and very-low-income applicants get decent and safe housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability.
USDA Farm Loan Types
There are many types of FSA loans.
Direct Operating Loans: These loans are used to buy things like livestock and feed, farm equipment, fuel, farm chemicals, and insurance. They can cover family living expenses, be used to make minor improvements or repairs to buildings and fencing, and go toward general farm operating expenses.
Microloans: Microloans are operating loans meant be put toward the needs of small and beginning farmers, non-traditional, specialty crop and niche type operations. They ease some of the requirements and offer less paperwork.
Direct Farm Ownership Loans: These loans are used to do things like purchase or enlarge a farm or ranch, construct a new or improve existing farm or ranch buildings, and for soil and water conservation and protection purposes.
Guaranteed Loans: Guaranteed loans allow lenders to extend credit to family farm operators and owners who don’t qualify for standard commercial loans. Farmers receive credit at reasonable terms to finance their current operations or to expand their business; financial institutions receive additional loan business and servicing fees, as well as other benefits from the program, like protection from loss.
Youth Loans: Youth loans are used by young people participating in clubs like 4-H clubs or FFA to finance educational, income-producing, agriculture-related projects. (Oh, to be young and in loans!)
Minority and Women Farmers and Ranchers Loans: These loans encourage full participation from minority and women family farmers by targeting a portion of direct and guaranteed farm ownership and operating loan funds for minority and women farmers to buy and operate a farm or ranch.
Beginning Farmers and Ranchers Loans: These loans provide credit opportunities to eligible family farm and ranch operators and owners who’ve been in business less than 10 years. Aw, newbies!
Emergency Loans: These are designed to assist farmers and ranchers recover from any production or physical losses suffered from drought, flooding, other natural disasters or quarantine.
Native American Tribal Loans: These loans are a resource for Tribes to acquire land interests within tribal reservations or Alaskan communities. The loans can be used to advance and increase current farming operations, provide financial prospects for Native American communities, increase agricultural productivity, and preserve cultural farmland for future generations.
A Real Estate Mortgage Investment Conduit (REMIC) is an investment vehicle that:
Holds commercial and residential mortgages in trust
Assembles said mortgages into pools based on risk
Then issues bonds (securities) on these pools to sell to investors in the secondary mortgage market
Savings and Loan Associations (S&Ls):
Originally established by the government for the purpose of offering long-term, single-family home loans
Commercial Banks:
Institutions that provide financial services to the general public and businesses
Financial Stability Oversight Council (FSOC):
This group of 15 members monitors the stability of the financial system, looks for risks in the system, and addresses those risks.
Consumer Financial Protection Bureau (CFPB):
The name kind of says it all. This agency’s job is to protect consumers in the realm of the financial sector. They do this by requiring lending institutions to have clear documentation regarding their transactions.
Net Negative:
A condition in which liabilities on a policy exceed its assets; negative net worth can occur because the policyholder borrowed too much money or because the value of assets declined
If you have a permanent life insurance policy, you can take out a loan against your life insurance to
Purchase real estate
Self-Directed IRA:
An individual retirement account that allows for alternative investments (like real estate) that traditional IRAs do not
Holding Cost:
The investor’s cost of owning a property (including taxes, insurance, and utilities) for the time period before it is sold
Price-to-Earnings Ratio (P/E):
A common method of predicting the price of a stock that tells an investor how much dividend they will receive per dollar of stock purchased
There are three types of REITs:
Equity REITs: Trusts that hold income-producing properties
Mortgage REITs: Trusts that extend credit to the owners of real estate
Hybrid REITs: a combination of both equity REITs and mortgage REITs
The Real Estate Bond Process
Here’s how it works:
An individual gets a mortgage to buy a home.
As per usual, the lender sells the mortgage to a government-sponsored enterprise (GSE) or investment bank on the secondary market.
The mortgage is packaged with other loans and bonds are issued.
Some of the interest paid by the homeowners becomes the yield earned by bondholders.
Hard Money Loan:
An asset-based loan in which a borrower receives funds secured by real property; typically issued by private investors or companies
Affirmative easement
An easement that gives people the right to use someone else’s personal property for a specific purpose
Negative easement
An easement that prohibits a property owner from performing an otherwise legal activity on their own property
Serviant Estate
The party that has the burden of granting the other party access in an easement
Dominant estate
The party that is gaining access to the servient estate’s land in an easement
Easement Appurtenant:
An easement that applies to the land regardless of the owner
Easement in Gross:
An easement that applies to the person or entity, not the specific land
Floating easement
An easement that does not have a clearly marked, fixed location to which access is granted
Express Easement:
An easement created by a written agreement between two or more parties
Implied easement
An easement created as a logical feature of the land
Prescriptive easement
Easement created when a dominant party has been using the servient party’s land continually, out in the open, for a statutory amount of time
Security interest
A legal claim of collateral in exchange for a loan
Second mortgages count as non-
purchase-money security interest liens, as do loans that are taken out with valuable property used as collateral (i.e., a pawn shop).
Security instruments
Document that gives lenders a claim to a borrower’s real property as collateral in order to secure a loan (mortgage or deed of trust)
Acceleration clause
Clause in a security instrument (mortgage/deed of trust) which makes the entire loan amount due immediately upon default
Equitable interest
A secondary and lesser interest in a property than the ownership interest with which it is associated.
Lien theory state
Principle where mortgagors (borrower) retain legal and equitable rights to their property; mortgagee (lender) has a lien on the property until payment of loan
Title theory principle
Principle where the trustor (borrower) conveys the legal title to the lender (or another party) and the borrower retains equitable title and right of possession until payment of loan
The promissory note specifies:
The amount of the debt
The rate of interest
The date on which interest charges are to begin
The amount and terms of repayment
The actual deed of trust has several requirements. These include:
The trustor is to keep the property covered with property insurance and to pay the annual taxes.
Sometimes the beneficary will collect the taxes and insurance payment monthly as an escrow payment.
The trustor must occupy and continue to occupy the property as their primary residence.
The trustor must maintain the property and not use it for any illegal activity.
The alienation clause says that if the trustor sells the property, the beneficiary must be paid in full. (Conventional loans cannot be assumed. FHA and VA Deeds of Trust do not have an alienation clause and can be assumed with qualifying.)
If the loan defaults and the beneficiary posts the property for foreclosure, the trustor has the right to reinstate the loan by certain actions (according to state law) up until the day of foreclosure. This is called the right of redemption. There is no right of redemption in Texas on mortgage foreclosures once the foreclosure takes place.
A warranty deed has the following components:
Grantor Grantee Consideration Granting clause Habendum clause Limitations Legal description Exceptions and reservations Grantor’s signature Acknowledgment Delivery and acceptance
A granting clause is a
formal statement declaring that the grantor wishes to convey their current interest at that time.
Sometimes the granting clause is called
words of conveyance.
there are two ways in which a deed can meet the grantor’s signature requirement:
- Signature by Mark: A grantor who cannot sign their literal name may sign a deed that adequately conveys title using a “mark.” Most states allow one to sign a deed using a mark, providing two or more witnesses see the grantor’s execution of the deed and sign the deed as witnesses. Generally, one of the witnesses will print the grantor’s name on the deed and the grantor will mark the deed next to their printed name.
- Signature by an Attorney-in-Fact: Most states permit an attorney-in-fact, one acting under power of attorney, to sign deeds on behalf of the grantor. An attorney-in-fact is an individual who, through specific written authority, may execute legal documents on behalf of a grantor.
Executors contracts
contract that has not yet been fully performed (both sides have not yet completed their obligations)
Contract for deed
An executory contract in which the seller keeps the title upon sale; the buyer gets the title after making payments over a period of years
contracts for deed, lease-purchases, and lease options have been considered executory
Contracts
In Texas, contracts for deed and lease purchase agreements with an option to purchase are executory contracts. These forms must always be drawn up by
An attorney
Mortgage subordination agreement
A legal document used to sort out situations when there are two mortgages on a home, and the homeowner wants to refinance the first mortgage
Wraparound mortgage
An arrangement in which the seller of a property extends a mortgage to a buyer; the seller maintains their original loan and continues to pay it while also receiving mortgage payments from the buyer
Prepayment privilege
Provision that allows a borrower to pay off their loan early
Lock-in clause
provision that prohibits a borrower from making early payments on a loan for a specified period of time
Due-On-sale clause
A clause stating that if a property is sold, then the mortgage must be repaid in full
Assumption loan
loan that is transferred (assumed) by another party, usually the buyer, with the full acknowledgment and consent of the lender
Subject-to loan
A loan that gives the buyer the title to the property but lets the seller’s financing remain in place
Assignment
The transference of obligations in a contract from one party to another
Exculpatory clause
clause that relieves the borrower of personal liability to repay the loan
Non-recourse clause
clause that prohibits a lender from seizing any property outside of the property that the loan was secured with
Recourse clause
A clause that states that if a lender still has a deficit after seizing the secured property, then they have the right to seize other assets of the buyer
Amortized
Describes a loan that is to be paid off with equal monthly payments that contribute to both principal and interest; payments will be credited first to the interest, with any remainder credited to the principal
Negative amortized
Occurs when the loan payment(s) are not sufficient to cover the interest due, causing the unpaid interest to be added to the principal balance
Float-to-Fixed Rate Loan:
Loan that has an initial interest rate determined by a margin and an index, and after the initial float rate period the loan converts to a fixed-rate loan
If the loan starts at a rate of 4% and the maximum rate is 10%, the worst case scenario rate will be 10%. Will that be sustainable for their budget?
What’s the difference between a P&I payment at 4% and one at 10%?
$100,000 loan at 4% –> the P&I payment is $477.42
$100,000 loan at 10% –> the P&I payment is $877.57
Like an ARM, float-to-fixed rate loans have
initial interest rates determined by a margin and an index.
Sometimes float-to-fixed rate loans are known as
Hybrid ARMs
An 80-10-10 loan, also known as a
piggyback loan, is really two mortgages in one.
Cancellation Date:
Date when the borrower can apply to have PMI cancelled; occurs when the amortization schedule reaches 80% or the principal is paid down to 80% of the original value
Equity Stripping:
The lender makes a loan based upon the equity in your home, whether or not you can make the payments. If you cannot make payments, you could lose your home through foreclosure.
Bait-and-switch schemes:
lender may promise one type of loan or interest rate but without good reason, give you a different one. Sometimes a higher (and unaffordable) interest rate doesn’t kick in until months after you have begun to pay on your loan.
Loan Flipping:
A lender refinances your loan with a new long-term, high cost loan. Each time the lender “flips” the existing loan, you must pay points and assorted fees.
Packing:
You receive a loan that contains charges for services you did not request or need. “Packing” most often involves making the borrower believe that credit insurance must be purchased and financed into the loan in order to qualify.
Hidden Balloon Payments:
You believe that you have applied for a low-rate loan requiring low monthly payments only to learn at closing that it is a short-term loan that you will have to refinance within a few years.
Participation Agreement:
The agreement that governs the sale of a portion of an interest in an existing loan, plus the rights and obligations of the seller and buyer of an interest
Participation Fee:
A monthly servicing fee based on the outstanding principal balance of the loan and the participant’s percentage share of any expenses incurred by the lender in connection with the enforcement of the loan
Benchmark:
A figure that allows investors to compare how a given mortgage is doing compared to other similar types of mortgages based on qualities like risk and investment type; also known as the index
Flipping:
Type of loan fraud in which a property is purchased and then quickly resold at a value that is artificially inflated by false appraisals
Buyer Rebates:
Illegal money transfer during the transaction that causes money to go back to the buyer, either at or after closing, without the knowledge of the lender
Government-Backed Loans:
Loans that are insured by the Federal Housing Administration (FHA), guaranteed by the Veterans Administration (VA), provided by the U.S. Department of Agriculture (USDA), or provided by special programs created by individual states or local jurisdictions
Mortgage Insurance Premium (MIP):
A borrower-paid insurance required for FHA loans, in order to insure lender in case of borrower default/foreclosure
The FHA program was created in
1934, as a result of the Great Depression (it became a part of HUD after HUD’s creation in 1965).
Basic FHA Loan Requirements
Here are the requirements to qualify for an FHA loan:
Two years of steady employment, preferably with same employer
Last two years’ income should be the same or increasing
Credit report should typically have less than two 30-day late payments in last two years, with a minimum credit score of 580 or higher (or in some cases, no credit score is required at all)
Bankruptcies must be at least two years old, with good credit since discharge
Foreclosures must be at least three years old, with no 30-day late payments since
The new mortgage payment should be approximately 30% of the borrower’s gross (before taxes) income
Streamline Refinance:
An option for borrowers who want to take advantage of low interest rates, get out of an adjustable rate mortgage (ARM) or graduated payment mortgage (GPM)
Direct Endorsement:
When a lender has the authority to approve FHA loans in-house without submitting the file to the FHA regional office for prior approval
The Department of Veterans Affairs (VA) is authorized to
guarantee loans to purchase or construct homes for eligible veterans and their spouse.
Property Valuation:
The process of developing an opinion of value for real property, usually at market value
D.U.S.T.:
An acronym for the characteristics of value (demand, utility, scarcity, transferability)
Residential Mortgage Credit Report (RMCR):
Report containing information needed to underwrite a loan to sell on the secondary market
Fair Credit Reporting Act (FCRA):
Legislation that promotes accuracy, fairness, and privacy of consumer information in the files of consumer reporting agencies
Uniform Residential Loan Application:
Standard application used by banks to determine someone’s ability to secure a mortgage loan
Uniform Residential Appraisal Report (URAR):
Form used in real estate appraisal to allow for standard reporting and analysis of single-family homes or single-family homes with an accessory unit
Consummation:
The point at which the consumer becomes contractually obligated to the creditor on the loan
Servicer:
The company to which mortgage payments are sent
Initial Escrow Account Statement has to be supplied at settlement or within
45 days of settlement
Title Plant:
A collection of privately owned and maintained title records
Title Commitment:
A pre-closing document that lists all of the terms, conditions, and exclusions of the title policy; a “preview” of the final title insurance policy
Owner’s Policy of Title Insurance:
Policy that insures the buyer against title defects.
Acceleration Clause:
States that whenever there is a breach of contract on the part of the borrower, the lender may make the entire amount of the loan due immediately
Moratorium:
A suspension of loan payments for a period of time
Recasting:
Changing the terms of the loan
Deed in Lieu of Foreclosure:
An alternative to foreclosure in which the defaulting borrower voluntarily transfers the property title to the lender
Redemption Period:
Period of time after a home has been sold at a foreclosure sale when the former owner can reclaim it by paying the outstanding mortgage balance and all costs incurred during the foreclosure process
Strict foreclosure differs from a regular foreclosure by eliminating the borrower’s
redemption rights (both equitable and statutory).
Deficiency Judgment:
Requires the defaulted borrower to pay any remaining balance owed to the lender, generally after the sale of a foreclosed property
Equitable Redemption:
Occurs before the sale (auction) of a property; allows defaulting debtors to pay the defaulted portion of the debt (and costs the lender incurred) in order to reinstate the loan and prevent a foreclosure sale
Statutory Redemption:
A specified period in which debtors are allowed to recover their property after a foreclosure sale
