Real Estate Finance Flashcards
Gross Rent Multiplier
Average Sales Price/ Average Monthly Rent
Back Ratio Formula
- 36% x Gross Monthly Income
- Max PITI and debts per month
Front Ratio Formula
- 28% x Gross Monthly Income
- Max Monthly House Payment
Closing amounts can sometimes be paid by either party. What MUST be paid by the borrower?
Down payment
Market Value
Most probable price property should bring in competitive and open market
Ad Valorem Taxes
- According to value
- Assessed value
Origination
process of creating a loan
Underwriting
evaluating loan application to determine risk
Funding
transferring funds to title or escrow
Servicing
collecting payments, maintaining records, collecting taxes, remitting funds and following up on delinquencies
Approaches to Appraisal
- Sales Comparison
- Cost Approach
- Income Approach
Sales Comparison
focused on recent sales in area
Cost Approach
how much a new structure of size and type would currently cost
Income Approach
- uses the income the property generates to estimate fair value
- net income/capitalization rate
Acceptable sources for gift funds
- Relative
- Domestic Partner
- Fiance
- Not from party to transaction
Processing
build file to be used in underwriting
FHA Max LTV
96.5%
Fixed Rate
- Rate does not change
- Fully amortized
Adjustable Rate Mortgage
Rate changes
Advantages of ARM Loans
- Higher loans
- Lower interest rate
- Falling rates
Disadvantages of ARM Loans
- Early Refinancing
- Unpredictable payments
- Long-term Cost
- Confusion
Balloon Note
- Principal amortized over time
- Balance due before loan fully amortized
- Lower interest
Construction to Permanent
- Interest only based what you use
- Less than 1 year, paid on withdraws
- Unused portion used towards principal
- The transfers to permanent mortgage
Collateral-Dependent Loans (Hard-Money Loans)
- Higher rates
- Not based on income, but value of land
Blanket Mortgage
Covers more than one property
Package Mortgage
Includes both real and personal property
Budget Mortgage
Monthly payment includes PITI
Wraparound Mortgage
- Low interest rate
- Seller financing
- New loan takes secondary lien, original not repaid
Open-End Mortgage
- Additional borrowing on same not
- Home Equity Line of Credit
- Minimum withdrawal is $4,000
Closed-End Mortgage
No additional borrowing
Seller Financing
Seller takes part of equity as note
Reverse Mortgage
- At least 62 years old
- Due upon death or sale
Lifting Clause
Replace primary instrument without affecting subordinate positions
Cross-Defaulting Clause
If default on primary, secondary also defaults
Prepayment Privilege Clause
Borrower can pay off loan before it is due with no penalties
Lock-In Clause
Prohibits prepayment prior to specific date
Alienation (Due on Sale) Clause
Balance due when borrower sells property
Release Clause
Release part of property when portion of loan is paid
Subordination Clause
Permits a subsequent mortgage to take priority
Exculpatory Clause
Limit personal liability on default, other real and personal property cannot be collateral
Non Recourse Clause
Protects seller of security from liability due to default
Acceleration Clause
In default, principal becomes due
Escalation Clause
Lender can increase interest rate
Assumption Clause
New borrower can take over loan
Defeasance Clause
Lien is defeated when debt repaid
Texas Veteran’s Land Board Program Eligibility
- Be in texas
- At least one acre
- Legal, usable access to public road
- Properly described by field note description of tract or copy of recorded subdivision plat
- Not zoned for commercial use
- Not owned by same veteran or spouse for past 3 years
Texas Veterans Land Loan Program (VLB)
- Up to $150,000 to purchase land
- Minimum 5% down payment
Up-Front Mortgage Insurance Premium
- FHA Loans
- Covers in case of default
- Paid at closing can be added to funding
- Can cause loan to exceed appraised value
- 1.75%
FHA Down Payment
As low as 3.5%
Mortgagee
Lender
Mortgagor
Borrower
Contract for Deed
- Land contract
- Deed conveyed when all payments made
- No lender, seller financing
Foreclosure Excesses and Deficiencies
- Excess is given to debtor
- If short, lender can sue borrower
Useful Life
Number of years estimated to be in service
Effective Age
Appraiser’s estimate of the house based on maintenance
Chronological Age
Actual age of property
Depreciated Age
27.5 years
Index Rate
- Instrument lender uses for measuring changes in interest
- 1 Year Constant Maturity Treasury Rate (CMT)
- 11th District Cost of Funds Index (COFI)
- London Interbank Offered Rate (LIBOR)
Prime Rate
- Best interest rate lenders can extend
- 3.25%
Initial Rate
Rate offered at beginning of loan
Cap Rate
Highest limit interest rate can increase
Promissory Note
Borrower’s unconditional promise to repay
Mortgage
Pledges the property as security for repayment
Point
1% of loan amount
Loan to Value Ratio
- Percentage of value/price lender is willing to lend
- Sales Price- Down Payment= Loan Amount
Foreclosure
Legal procedure of selling property to satisfy note
Lien
Right given to creditors to have debts paid out from property
Closing Disclosure Delivery
- 3 days before closing
- If changes must have 3 day waiting period
Primary Mortgage Market
Borrowers and lenders come together to negotiate terms
Secondary Mortgage Market
- Sale of existing mortgages to investors
- Provides greeted liquidity
Amortization
Monthly payment is applied to interest first
Community Reinvestment Act (CRA)
prohibits redlining and ensures banks serve needs of community in which they do business
Dodd-Frank Act
- Established Consumer Financial Protection Bureau
- Promote financial stability by improving accountability and transparency
- Ending bailouts
Secure and Fair Enforcement for Mortgage Licensing Act
- Enhance consumer protection and reduce fraud by establishing minimum standards for licensing and registration of loan originators
- Must be registered with Nationwide Mortgage Licensing System and Registry
Appraisal Marketing Time Limits
-Over 6 months, can drag on property values
Fair Housing Protected Categories
- Race
- Color
- National origin
- Sex
- Religion
- Families with children
- Disabilities
Required in FHA Loans
Escrow account, regardless of LTV
Judicial Foreclosure
- Lender files suit with judicial system
- Borrower receives note demanding payment
- Sold in auction by local court or sheriff’s office
Power of Sale
- Statutory Closure
- Lender sends notice
- Public auction
Non-Judicial Foreclosure
Borrower pre-authorizes sale of property in default
Strict Foreclosure
- Lender files lawsuit
- Ownership transferred directly to mortgage holder
- Debt is greater than value of property
Portfolio Loan
Loans not sold in secondary market
Conventional Loan
- Real estate as security
- Does not involve government
- Most sold on secondary market
Calculation of Monthly Payments Using Factor Charts
- Divide loan amount by 1000
- Multiply by factor
Margin
Percent added to index to calculate payment interest rate
Fully Indexed Rate
Index + Margin
Adjustment Period
Period length between interest rate and monthly payment change
Discounted Initial Rate
Lower rate during first year
Interest- Rate Caps
Limit rate can increase or decrease per adjustment
Per-Adjustment Cap
Limit payment can increase or decrease per adjustment
Lifetime Cap
Interest rate limit over life of loan
Initial Adjustment Cap
Limit rate change on first adjustment
Subordination Instruments
- Higher rates
- Typically generate funds
- Behind another lien
Nationwide Mortgage Licensing System
Residential Mortgage Loan Originators must be registered
Forbearance
- Suspending payments
- Repay part of delinquency per month
Recasting
- Re-amortizing
- Reduces monthly payment
- Lower interest rate or extend term
Deed in Lieu
- Borrower deeds property in exchange for release from mortgage
- Not accepted if they can afford payments
Home Affordable Foreclosure Alternatives (HAFA) Program
- Short sale or Deed in Lieu
- Provide relocation assistance
Eligibility for HAFA
- Documented financial hardship
- No new home in last 12 months
- Less than $729,750
- Mortgage obtained before 2009
- No felony conviction
Streamlined Modification Program (SMP)
- Refinance existing loan
- Missed 3 or more payments before 2008
- No have filed for bankruptcy
Home Affordable Modification Program (HAMP)
- Refinance to reach 31% front ratio
- Verge of default
- Mortgage before 2009
- Up to $729,750
- No convictions in past 10 years
USDA’s Special Loan Servicing
Rural homeowners can lower payments to no more than 31% front ratio
How governments can fund capital improvements/investments
- Selling bonds
- Exempt from tax
- Municipal, industrial, mortgage revenue, equipment
Fannie Mae
-Formerly known as Federal National Mortgage Association (FNMA)
privately-owned
-Exclusively on secondary market
-Helps accomplish following objectives
-Addresses imbalance of mortgage credit by making funds available to capital deficient areas
-Allows lenders to originate mortgages for sale
-Standardizes mortgage loans
Ginnie Mae
- Government National Mortgage Association
- Promote homeownership
- Issue securities with payments guaranteed
- Does not sell securities it just insures them
Freddie Mac
- Stockholder-owned to increase supply of funds for lenders
- Sells its own securities
- Participation Certificates
- Unconditionally guarantee loans
Farmer Mac
- Provide secondary market for agricultural loans
- Agricultural Credit Act of 1987
- Guarantees payment
- Two programs
- 1- purchase loans
- 2- purchase portions of loans guaranteed by USDA
VA Loan
- Partial guarantee
- Assumable
- No prepayment penalty
- No max loan amount
- Limit max amount with no down payment and liability based on entitlement
- Seller concessions no more than 4%
VA Qualification
Residual income and debt-to-income ratio
VA Eligible Purposes
- Buy/build home
- Improve home
- Refinance
- Cash-out refinance
- Reduce interest
- Convert from ARM to fixed- rate
- Purchase condo
- Purchase farm
FHA Loans
- Ratios more lenient
- LTVs high 96.5%, low down payment 3.5%
- Fully-amortized
- Low interest
- Insures full loan amount
FHA Eligible Properties
- single/multi family
- Manufactured homes
FHA Administrator
Department of Housing and Urban Development
Encumbrance
- Claim attached to real property
- Diminishes rights of owner
Texas Department of Housing and Community Affairs (TDHCA)
- Affordable housing
- Regulation of manufactured home industry
- Low to moderate income populations
