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Real Estate > Real Estate Financing > Flashcards

Real Estate Financing Flashcards

1
Q

When a buyer receives financing, does the money always come from the same bank they applied to?

A

No

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2
Q

Portfolio Loans

A

Loans that a bank keeps & services in house.

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3
Q

Secondary Mortgage Market

A
  • Where banks sell loans to investors.
  • Mortgagor would forward payments to new owner.
  • Mortgagor doesn’t need to consent to the sale of their loan at the time of transfer, because they have already been told this could happen during closing. However, consumer needs to know when this transfer takes place so they can send their payments to the right place per the Helping Families Save Their Homes Act.
  • Per the certificate of no defense/estoppel clause, the terms of the loan must remain the same when this transfer takes place.
  • This market exists for banks to be able to replenish their reserve requirements.
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4
Q

What happened with mortgages in the 1920s?

A

Balloon mortgages were common during the “economic boom”.

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5
Q

What happened in 1929?

A

The stock market crashed.

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6
Q

What happened in the 1930s?

A

The Great Depression; Creation of FHA as part of the New Deal.

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7
Q

What happened in 1938?

A

The Federal National Mortgage Association injected liquidity into the economy through the creation of Fannie Mae. Fannie Mae created the “conventional loan” (fully amortized loans) to do away with balloon loans.

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8
Q

What happened in the 1960s?

A

Turmoil in the US brought about by war, political instability, oil embargo, & civil rights movement. Interest rates are extremely high & buyers can’t afford to purchase property.

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9
Q

What happened in 1968?

A

Creation of Ginnie Mae. They help low income households buy homes. Ginnie Mae services VA & FHA loans.

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10
Q

What happened in 1970?

A

the Federal Home Loan Mortgage Corporation (Freddie Mac) is created & services mortgages in the secondary mortgage market. They create “securitization” of loans.

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11
Q

What is the “securitization” of loans?

A

The purchase of loans and bundling them as an investment product on the stock market.

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12
Q

Today, who securitizes loans?

A

Freddie Mac, Frannie Mae & Ginnie Mae.

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13
Q

Amortization

A

Payment of debt in equal payments.

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14
Q

Debt Service

A

Payment of both debt and interest.

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15
Q

Principal

A

Amount borrowed (debt).

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16
Q

Fully amortized loans

A

Loans that are completely paid off when the last payment is made.

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17
Q

What is another term for “fully amortized loans”?

A

Direct Reduction Loans

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18
Q

PITI payment

A

Principal, Interest, Taxes, Insurance payments

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19
Q

How do fully amortized loans work?

A
  • Every month a portion of the payment goes to principal and a portion goes to interest.
  • The amount going towards principal and interest changes over the life of the loan (recalculated monthly).
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20
Q

What happens when the loan is paid back completely?

A

The loan is discharged and automatically relieves the collateral of the bank’s claim (per the defeasible clause in the mortgage).

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21
Q

Final payoff/discharge

A

Document that shows that the lender has no claims to the collateral for the debt, because it was paid in full.

22
Q

Formula for amortization loan math w/ PI table.

A

(loan amount/1000) x PI=Monthly payment.

23
Q

Formula w/o PI table to find outstanding balances after payments are made.

A

loan amount x interest rate= annual interest/12=monthly interest
Then:
PI payment-monthly interest=amount going to principal.
Then:
Loan amount-amount going toward principal=new outstanding balance

24
Q

Loans can be either be…

A

Fixed or adjustable.

25
Q

Fixed rate

A

Interest rate doesn’t change over the life of the loan.

26
Q

Adjustable rate

A
  • Interest rate is usually lower in the beginning (teaser rate or discounted rate). Interest rate adjusts based on prime rate.
  • Payment caps: If increase is higher than cap, the bank will carry it over to the next rate increase.
  • Good for those not planning on keeping the property long-term & they will save on the lower interest rate in the beginning.
  • With low interest rates in todays market, this is not as common.
  • Rates can go down as well.
27
Q

Balloon loans

A
  • Amortization period is longer than pay period.

- Balloon-unpaid principal at the end of the term.

28
Q

Straight & Simple interest loans

A
  • Interest only loans.
  • Non compounding debt calculated daily.
  • Principal paid in one lump sum @ the end of the term. –If you pay towards the principal, the monthly interest payment would go down.
29
Q

Second mortgages

A
  • Junior liens.
  • Mortgages “second in line” to get paid in the event of a foreclosure (subordination).
  • HELOC (home equity line of credit), equity line, line of credit, open end mortgage: all mean the same thing.
  • Homeowner is given line of credit based on the equity of their property (usually up to 70%).
30
Q

Graduated payment loans

A
  • “Doctor loans”.
  • Monthly payment is lower in the beginning & increases on a predetermined schedule as the homeowner makes more money.
  • Used for homebuyers w/ periodically rising incomes.
31
Q

Negative Amortization of interest

A

“Not paying enough interest: interest gets added to the loan”.

32
Q

Growing equity mortgage

A
  • Extra payments are made toward the principal.
  • Homeowner will pay off loan faster.
  • Payments increase over the life of the loan on a predetermined schedule.
33
Q

Reverse annuity mortgage

A
  • Bank makes payments to borrower (homeowner) against the equity in their home.
  • Typically not more than 60% of homes value.
  • Must be at least 62 yrs. old to use.
  • Loan plus interest must be repaid when home is sold or homeowner passes.
  • Heirs hate this because it spends their inheritance.
34
Q

What are the two types of seller financing?

A

Purchase money mortgage & Wraparound mortgage.

35
Q

Purchase money mortgage

A
  • Seller=mortgagee; borrower=mortgagor

- Seller acts as a bank/lender; buyer gives the seller a note & a mortgage.

36
Q

Wraparound mortgage

A
  • Seller “wraps” their existing debt around the borrower’s new loan.
  • Helps seller pay off their existing debt while making extra $ from seller financing arrangement.
  • Seller has their own loan that is unfinished in payment.
  • Buyer makes payments to seller; seller forwards payments to their lender.
37
Q

Which clause in a mortgage prevents seller financing?

A

Due on sale clause.

38
Q

Construction loan

A
  • Borrower receives funds in draws (stages of construction).
  • Loan typically gets replaced once construction is complete (usually by a loan take out).
39
Q

Package mortgage

A
  • Covers real & personal property.

- Common in commercial property w/ trade fixtures.

40
Q

Chattel mortgage

A

Secured by personal property only (mobile homes (not campers), large equipment).

41
Q

Blanket mortgage

A
  • Used for development of subdivisions where there are multiple lots.
  • Includes a Partial Release Clause (Each parcel would be released from the original collateral as they are sold off).
42
Q

Non-recourse loan

A
  • Borrower not personally liable for loan deficiency after foreclosure.
  • Only the property is the security for the loan.
43
Q

Bridge or Swing loan

A
  • Short term loans.

- Designed to bridge the borrower over some gap in cash flow.

44
Q

Participation mortgage

A

Lender participates as an equity partner in a development.

45
Q

Shared appreciation mortgage

A

Investor makes a down payment for a buyer in exchange for a share in property equity.

46
Q

Buy Down or Pledge Account Mortgage (PAM)

A
  • Often seen in markets where interest rates are very high.
  • Subsidiary for certain number of years to make monthly payments affordable.
  • If the seller subsidizes=called a “buy down account”.
  • If the buyer subsidizes=called a “pledge account”.
47
Q

Take over mortgages

A
  • Seller cannot do this if the original owner has a due on sale clause.
  • Subletting of a mortgage.
  • Buyer takes over the seller’s debt (as long as they qualify) & the original stays in place.
  • FHA loans that originated prior to 1989 are assumable.
48
Q

If a take over mortgage is written “subject to”

A
  • Only the original mortgagor is legally responsible for loan & is liable for any deficiency after.
  • Best for buyer.
49
Q

If a take over mortgage is written “assumption of”

A
  • Both the original mortgagor & new owner are both responsible.
  • Joint responsibility.
50
Q

If a take over mortgage is written “novation”

A
  • Sellers note is cancelled & a new note is drafted between the new buyer & the bank. Only the buyer is responsible for any deficiencies after.
  • Best for seller.

Real Estate (19 decks)

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