Real Estate Financing

Question 1

how to calculate the LTV

Answer 1

the amount of the loan divided by the amount of the home

answer is in percentage form

Question 2

To express the increase of equity as a percentage, you would use this formula:

Answer 2

first find the six ingredients
THEN:
(New equity - Initial equity) ÷ Initial equity = Percentage increase in equity

Question 3

when a house has appreciated 20% over an amount of years, what percentage is that in a mathmatical equation?

Answer 3

120% (for some reason idk)

Question 4

when finding the increase in equity over the years, what 6 ingredients do you need for the formula

Answer 4

1. find the new FMV of the house
2. find the new loan amount from the initial loan amount (subtract the “decreased” percentage from 100%)
3. get the new equity
4. the initial FMV of the house
5. find the initial loan amount
6. get the initial equity

Question 5

A lender will base their maximum loan amount on the purchase price or the appraised value, whichever is ______

Answer 5

lower

Question 6

An 80% LTV on a property with an appraised value of $350,000 and a purchase price of $400,000 would require a downpayment of how much?

Answer 6

$120,000

Question 7

A monthly mortgage payment will likely also involve taxes and insurance. What a PITI!

which stands for:

Answer 7

principal, interest, taxes, and insurance.

Combined, these costs equal a monthly (mortgage loan) payment. So, just to be clear, the monthly mortgage loan payment is made up of the principal and interest, and in most cases, it also includes a monthly payment toward annual property taxes and homeowner’s insurance.

Question 8

Usury is when

Answer 8

lenders illegally lend money at unfair interest rates. Usury laws prohibit lenders from charging borrowers excessively high rates of interest on loans. They are generally regulated and enforced at the state level. Most states have usury laws that set limits on interest rates.

Question 9

The word amortization is a Latin term that means “killing off.” Amortization is the process of

Answer 9

paying off a debt/mortgage in regular installments based on a fixed payment schedule.

If the borrower makes all their monthly payments in full and on time, the loan will be completely paid off with the last scheduled payment.

Fully amortized loans usually have higher payment amounts than other types. However, they are consistent in the amount that has to be paid.

Question 10

arrears, which means

Answer 10

which means the payment occurs at the end of a period to compensate for charges accrued during that time. So, the borrower is paying for what they already owe instead of paying for what they will owe

Question 11

negative amortization, or deferred interest.

Answer 11

These are a bit tricky. If your monthly payment isn’t enough to cover the interest (and definitely not the loan’s real cost), the extra interest gets added to what you owe. That means your debt keeps growing, and it’s not good for borrowers.

Question 12

Debt Service:

Answer 12

This is a fancy way of saying how much money you need each month to cover both the real cost of your loan (principal) and the interest. It’s crucial to know this so you can figure out if you can afford to buy a home.

Question 13

Partially Amortized Loans (🎈):

Answer 13

With these loans, you still pay a bit for the loan and the interest every month, but there’s usually a bigger payment waiting at the end, like a surprise balloon payment. That balloon payment makes sure you pay off the rest of the loan.

Question 14

To find the non-amortized annual interest, we would use the following formula:

Answer 14

Principal x Interest rate

Question 15

formula to find the principal

Answer 15

annual interest / interest rate

Question 16

formula to find the interest rate

Answer 16

annual interest / principal

Question 17

how do you find the total interest paid for amortized loans

Answer 17

find the total loan cost, then subtract that from the principal loan amount

Question 18

an amortization table is:

Answer 18

a table for amortized loans that show how much money will go towards interest vs principal each month

Question 19

what’s a buydown?

Answer 19

paying more upfront to get the interest over with and lowered down

Question 20

what 4 ingredients do you need to figure out the monthly interest for amortized loan

Answer 20

1. prinicpal loan amount
2. interest rate
3. loan terms
4. monthly payment

Question 21

how to find the amount of money going towards principal vs interest in an amortized loan

Answer 21

1. find the amount of annual interest then divide it to be monthly interest
2. find the first months principal by:
   (monthly payment - monthly interest = first month principal)
3. subtract first month principal from the total principal loan amount to continue figure out the next months payments

Question 22

Victoria took out a $350,000 amortized loan at 5.5%. She has monthly payments of $1,987. How much will she pay in interest on her second payment?

Answer 22

First, figure out Victoria’s annual interest payment by multiplying $350,000 x 5.5%. This gives you an annual interest payment of $19,250. Next, divide $19,250 by 12 to get a monthly interest payment of $1,604 (rounded). Subtract $1,604 from the monthly payment of $1,987 to get the first month’s principal payment of $383. The first payment paid $383 towards the principal. So the principal balance for the second payment would be $350,000 - $383, which equals $349,617. With that new principal balance, you are able to find the amount paid in interest the second month by multiplying 5.5% x $349,617 and dividing that number by 12 to get $1,602 (rounded).

Question 23

how does a mortgage factor chart work

Answer 23

you look at the interest rate
you find the year term (15 or 30)
you multiply that number in the column by the amount of 1,000s in the loan amount (250,000 = 250 thousands)
the answer is the monthly payment amount

Question 24

the two qualifying ratios are:

Answer 24

Payment-to-income ratio (also known as housing expense ratio or housing expense-to-income ratio)

Debt-to-income ratio (also known as debt service ratio or total debt service-to-income ratio)

Here’s a math tip: Anytime you see a ratio, such as loan-to-value ratio or payment-to-income ratio, replace that “to” with a division sign, and that will give you your formula.

Question 25

for most loans, monthly payments cannot exceed ____ percent of gross monthly income

Answer 25

28%

Question 26

Rory makes $5,000 a month and is looking at a condo with a monthly mortgage payment of $1,500.

Can he come in under a 28% payment-to-income ratio?

Answer 26

First, solve for payment-to-income ratio. Here’s the formula for that: Monthly payment ÷ Monthly income = Payment-to-income ratio. So, in Rory’s case, $1,500 ÷ $5,000 = 0.3 or 30%. So, Rory would not come in under a 28% payment-to-income ratio.

Question 27

the DTI cannot exceed _____%

Answer 27

38%

Question 28

Solving for Debt-to-Income Ratio formula

Answer 28

(Monthly payment + Other debt) ÷ Monthly income = Debt-to-income ratio

Question 29

Calculating the payment-to-income ratio and the debt-to-income ratio will most likely give you two different numbers. That being the case, there are two things to know:

Answer 29

The borrower needs to qualify under both ratios.

Whichever ratio produced the smallest PITI amount will be the one that is used.

Question 30

what are discount points?

Answer 30

fees the borrower pays to lower the interest rate

Question 31

what are origination points

Answer 31

fees the lender charges for the orgination of the loan

Question 32

it takes how many discount points to increase lender profit by 1%

Answer 32

8

Question 33

1 point = __% of the loan principal

Answer 33

1

Question 34

One discount point increases yield by

Answer 34

1/8%

Question 35

Angeline has purchased 4 discount points for her $250,000 mortgage. How much will the points cost her?

Answer 35

10,000

Question 36

Katarina is buying a house. She is paying for 2 discount points, which will cost her $15,000. How much is Katarina’s loan principal? Reconfigure the formula and plug in the knowns and the unknowns.

Answer 36

$15,000 ÷ 0.02 = $750,000

Question 37

A property is under contract for $175,000 with a 10% down payment. How much will be paid at closing for 2.5 discount points and 1 point origination fee?

Answer 37

$5,512.50

Question 38

Hope took out a $400,000 amortized loan at 3%. She has monthly payments of $2,000. How much will she pay in interest on her second payment?

Answer 38

First find the annual interest by multiplying $400,000 by 0.03 to get $12,000, then divide that amount by 12 to get the first month’s interest payment of $1,000. Subtract $1,000 from $2,000 to get the first payment of $1,000 paid towards the principal. So the principal balance for the second payment would now be $399,000. Multiply that new principal balance by 0.03 and divide by 12 to get the second month’s interest payment of $997.50.

Question 39

this is a reminder to go over this chapter again and do alooooooot of practice questions

Question 40

promissory note:

Answer 40

a negotiable financial instrument that is evidence of a debt and a promise to pay that debt; may also be called a “note.”

Question 41

security instrument:

Answer 41

secures the debt by designating the property as collateral and can either take the form of a deed of trust or a mortgage.

Question 42

hypothecation

Answer 42

the pledging of an asset (for our purposes the asset is property) to secure a loan without giving up control of the asset. Put a different way: Hypothecation allows a borrower to get a loan and the lender to have security that they will be paid back.

Question 43

what does negotiable and nonnegotiable mean in the context of a promissory note?

Answer 43

it is transferable vs nontrasferrable for the lender

Question 44

in some states, a ___ is used instead of a promissory note

Answer 44

bond

Question 45

an acceleration/due-on-default clause does what

Answer 45

makes the entire loan amount due on default of any of the ocntractural terms

Question 46

right to reinstate clause

Answer 46

gives the borrower the right to repay any delinquent dues and get back on track before acceleration clause is enforced

Question 47

alienation clause does what

Answer 47

gives the lender the right to demand the full loan amount when the property is sold. this prevents the loan from being assumed by the new buyer of the property

Question 48

prepayment penalty clause

Answer 48

which requires the borrower to pay a penalty for paying off the loan early. Lenders do this to make up for the unearned interest payments they would have received from the borrower.

Question 49

In North Carolina, lenders are not allowed to charge a _______ on home loans that are less than _____

Answer 49

prepayment penalty
$150,000

Question 50

Lenders are also not allowed to charge a prepayment penalty on loans backed by the ______ or ______ in NC

Answer 50

FHA
VA

Question 51

Defeasance/Satisfaction Clause does what

Answer 51

This clause addresses what happens when the terms of the loan agreement are met in full by the borrower.

Question 52

explain the difference between lien theory states and title theory states and tell which one nc is under

Answer 52

In a lien theory state:

The borrower holds the title to the property.

The preferred security instrument is a mortgage.

The mortgage creates a lien on the property.

North Carolina is considered a title theory state.

In a title theory state:

The title of the home is held by a trustee.

The preferred security instrument is a deed of trust.

The lender can foreclose without going to court.

Question 53

What happens with a deed of trust when the borrower pays the note in full?

Answer 53

When a deed of trust is used and the note is paid in full, the lender authorizes the trustee to execute what is known as a deed of reconveyance or deed of release. As with mortgage satisfaction, this also needs to be recorded to clear the title.

Question 54

The _____ and ______ are the two documents that make up a mortgage loan.

Answer 54

promissory note
security instrument