Real Estate Financing Flashcards
how to calculate the LTV
the amount of the loan divided by the amount of the home
answer is in percentage form
To express the increase of equity as a percentage, you would use this formula:
first find the six ingredients
THEN:
(New equity - Initial equity) ÷ Initial equity = Percentage increase in equity
when a house has appreciated 20% over an amount of years, what percentage is that in a mathmatical equation?
120% (for some reason idk)
when finding the increase in equity over the years, what 6 ingredients do you need for the formula
- find the new FMV of the house
- find the new loan amount from the initial loan amount (subtract the “decreased” percentage from 100%)
- get the new equity
- the initial FMV of the house
- find the initial loan amount
- get the initial equity
A lender will base their maximum loan amount on the purchase price or the appraised value, whichever is ______
lower
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?
$120,000
A monthly mortgage payment will likely also involve taxes and insurance. What a PITI!
which stands for:
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.
Usury is when
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.
The word amortization is a Latin term that means “killing off.” Amortization is the process of
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.
arrears, which means
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
negative amortization, or deferred interest.
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.
Debt Service:
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.
Partially Amortized Loans (🎈):
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.
To find the non-amortized annual interest, we would use the following formula:
Principal x Interest rate
formula to find the principal
annual interest / interest rate
formula to find the interest rate
annual interest / principal
how do you find the total interest paid for amortized loans
find the total loan cost, then subtract that from the principal loan amount
an amortization table is:
a table for amortized loans that show how much money will go towards interest vs principal each month
what’s a buydown?
paying more upfront to get the interest over with and lowered down
what 4 ingredients do you need to figure out the monthly interest for amortized loan
- prinicpal loan amount
- interest rate
- loan terms
- monthly payment
how to find the amount of money going towards principal vs interest in an amortized loan
- find the amount of annual interest then divide it to be monthly interest
- find the first months principal by:
(monthly payment - monthly interest = first month principal) - subtract first month principal from the total principal loan amount to continue figure out the next months payments
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?
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).
how does a mortgage factor chart work
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
the two qualifying ratios are:
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.
for most loans, monthly payments cannot exceed ____ percent of gross monthly income
28%
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?
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.
the DTI cannot exceed _____%
38%
Solving for Debt-to-Income Ratio formula
(Monthly payment + Other debt) ÷ Monthly income = Debt-to-income ratio
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:
The borrower needs to qualify under both ratios.
Whichever ratio produced the smallest PITI amount will be the one that is used.
what are discount points?
fees the borrower pays to lower the interest rate
what are origination points
fees the lender charges for the orgination of the loan
it takes how many discount points to increase lender profit by 1%
8
1 point = __% of the loan principal
1
One discount point increases yield by
1/8%
Angeline has purchased 4 discount points for her $250,000 mortgage. How much will the points cost her?
10,000
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.
$15,000 ÷ 0.02 = $750,000
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?
$5,512.50
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?
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.
this is a reminder to go over this chapter again and do alooooooot of practice questions
promissory note:
a negotiable financial instrument that is evidence of a debt and a promise to pay that debt; may also be called a “note.”
security instrument:
secures the debt by designating the property as collateral and can either take the form of a deed of trust or a mortgage.
hypothecation
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.
what does negotiable and nonnegotiable mean in the context of a promissory note?
it is transferable vs nontrasferrable for the lender
in some states, a ___ is used instead of a promissory note
bond
an acceleration/due-on-default clause does what
makes the entire loan amount due on default of any of the ocntractural terms
right to reinstate clause
gives the borrower the right to repay any delinquent dues and get back on track before acceleration clause is enforced
alienation clause does what
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
prepayment penalty clause
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.
In North Carolina, lenders are not allowed to charge a _______ on home loans that are less than _____
prepayment penalty
$150,000
Lenders are also not allowed to charge a prepayment penalty on loans backed by the ______ or ______ in NC
FHA
VA
Defeasance/Satisfaction Clause does what
This clause addresses what happens when the terms of the loan agreement are met in full by the borrower.
explain the difference between lien theory states and title theory states and tell which one nc is under
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.
What happens with a deed of trust when the borrower pays the note in full?
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.
The _____ and ______ are the two documents that make up a mortgage loan.
promissory note
security instrument
