Section 13: Real Estate Financing Basics Flashcards
What are conforming loans
Loans that meet Fannie Mae and Freddie Mac guidelines
What does Freddie Mac and Fannie Mae do?
They operate within the secondary market, acting as a sort of link between banks, the government, and Wall Street. They buy thousands of mortgages from banks and other lenders, repackage them into mortgage-backed securities, then sell them on the secondary market
What are non-conforming loans?
Loans that do not meet Fannie Mae or Freddie Mac guidelines.
As a result, they’re riskier loans with higher interest rates
VA Loan down payment and PMI
0% down and they do not require PMI
PMI on conventional vs. FHA
FHA loans require PMI for the life of the loan
PMI on a conventional loan can be eliminated when the value of the property reaches at least 80% of the loan balance.
What is a land contract?
When a land contract is used to finance the sale, the seller holds legal title to the property until the loan has been repaid, at which point the title is given to the buyer.
What type of loan is neither guaranteed nor insured by government agencies?
Conventional
What’s one benefit of a rural development loan?
Its optional longer term means a lower monthly payment
What is a wrap-around loan?
The seller’s mortgage remains in place, but the seller is
receiving payments from the new buyer and is therefore financing the purchase.
What is a purchase money mortgage?
Purchase money mortgages allow the buyer to retain title to the property, but the seller has security interest in the property.
Mortgage bankers vs. Mortgage brokers
Mortgage bankers - do the lending. In-house loan processors and underwriters
Mortgage brokers - work with multiple lenders to search for the best deal for their borrowers
What is a convertible ARM loan?
An ARM loan that can be converted to a fixed-rate loan during a specific period of the mortgage.
Title theory state
In a title theory state, the lender holds the legal title to the property (usually through a third-party trustee) until the loan is paid off. This makes it easier for the lender to foreclose.
Who has legal title to a financed property in a lien theory state?
The borrower.
The borrower is the legal owner and has the right to possess and control the property. The lender has the right (after a loan default) to take possession of the property through foreclosure.
What type of foreclosure is commonly used when a deed of trust is the security instrument?
Non-judicial
Acceleration clause in a mortgage
Gives the lender the right to make all money owed immediately due and payable if the borrower defaults.
If a negotiable instrument is transferrable, it must be….
Signed.
To be transferrable, a negotiable instrument must be in writing, be payable on demand or at a definite time, contain a promise or order to pay, state a specific or fixed sum of money, and be signed.
Lien theory vs. Title theory
Lien theory: Lender holds a lien on the property, but not title, and therefore must use judicial foreclosure (lender has lien).
Title theory: Lender (actually a third party) holds legal title, and can use non-judicial foreclosure (lender has title).
Mortgager/Borrow duties and rights
Right To:
* Possess property during mortgage term
* Equity of redemption
* Receipt of title upon paying mortgage in full
* Release of lien upon paying mortgage in full
Duties
* Pay the debt
* Pay real estate taxes
* Replenish escrow funds if they run low
* Pay charges and assessments against the property
* Keep the property in good condition
* Maintain property and hazard insurance
Mortgagee/Lender Rights and duties
Right to:
* foreclose on property if mortgagor defaults
* Possess property (after foreclosure) if mortgagee is purchaser at sale
* Assign or transfer the mortgage
Duties
* Deposits and keeps escrow funds (for prepaid taxes and insurance) safe in a lending institution
* Use the escrow funds to pay the escrow items
What is a negotiable instrument?
means that the holder may transfer the right to receive
payments to a third party, and that third party may enforce the promissory note and the other loan documents. A non-negotiable instrument must include a clause noting it’s non-negotiable and transfer isn’t permitted.
Bydowns
a lump sum prepayment of interest to the lender at closing that buys down the interest rate to below the buydown market rate, either temporarily (e.g., for the first one to three years) or permanently (for the life of the loan). Most buydowns are temporary.
Calculation that describes the amount being borrowed compared to the value of a property
Loan-to-value
How long does the borrower have to pay private mortgage insurance?
Until the borrower reaches a 22% equity position
What is the Community Reinvestment Act (CRA)?
Requires lenders to meet the needs of communities by investing in development and rehab efforts.
What is the Equal Credit Opportunity Act (ECOA)?
In response to discriminatory practices toward protected classes and not on their credit-worthiness.
What is the Real Estate Settlement Procedures Act (RESPA)?
Protects consumers against abusive lending practices and ensures timely and disclosure of settlement costs.
Eliminates kickbacks and referral fees
Your buyer clients, the Thompsons, told you about a problem they ran into with the lender that handled their mortgage. The Thompsons, who are African American, were given less favorable loan terms than a white couple they know who used the same lender. You know the Thompsons have excellent credit. Which act should you make them aware of?
Equal Credit Opportunity Act
The Real Estate Settlement Procedures Act protects consumers by…
Eliminating illegal kickbacks and referral fees among settlement service providers and requiring lender disclosures as part of a residential real estate transaction involving credit.
What is the Truth in Lending Act (TILA)?
Reqwuires lenders to make disclosures that allow consumers to compare the costs of making a purchase using credit or cash.
Which practice involves talking the consumer into refinancing over and over so a lender can charge fees?
Loan flipping
Ted’s property is in foreclosure, but he has some equity in his property. An investor suggests that she and Ted enter into a sales contract for a substantially higher price than the investor would actually pay. The investor pockets the cash and allows the house to be foreclosed on. What sort of scheme is this?
Equity Skimming
Truth in Lending Act (TILA) requires lenders to:
Lenders are required to disclose the annual percentage rate, total principal and interest, finance charges, and amount financed.
