Section 13: Real Estate Financing Basics Flashcards
also called thrifts this association specializes in taking in savings deposits and then lending out through mortgages and other loans. They’re required to keep their commercial lending at or under 20%, so they’re very much tied to consumers and mortgage loans.
Savings and loan associations
Bank of America, Chase, Citigroup, and the like make consumer and business loans, offer investment products, and take deposits and are called what
Commercial banks
are member-based cooperatives that provide credit for auto loans and home loans. They take deposits and offer savings vehicles, money markets, and the like. Their rates tend to be pretty competitive.
credit unions
_________ actually do the lending. They have in-house loan processors and underwriters. Wells Fargo Mortgage is an example.
Mortgage bankers
_________ work with multiple lenders to search for and negotiate the best deal for a particular borrower’s circumstances. They don’t loan the money out themselves, so they’re not tied to a specific suite of loan products.
mortgage brokers
An insurance requirement that protects the lender when it approves a loan with more than 75% to 80% of the purchase being financed
private mortgage insurance (PMI)
FNMA, the Federal National Mortgage Association; a private, for profit corporation that operates under a congressional charter that buys loans in the secondary mortgage market from lenders in the primary mortgage market
(Conventional loans from commercial banks)
Fannie Mae
The Federal Home Loan Mortgage Corporation (FHLMC) which increases the availability of financing for conventional mortgages insured by the federal government by purchasing them from lenders in the primary market.
(Conventional loans from smaller institutions)
Freddie Mac
Private companies such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, created by the U.S. Congress to make borrowing easier and more cost effective
government-sponsored enterprises (GSEs)
Loans that don’t meet Fannie Mae or Freddie Mac guidelines are called what
non-conforming loans.
The two most common types of government loans are what
Federal Housing Administration (FHA)-insured and U.S. Department of Veterans Affairs (VA)-guaranteed loans
this type of loan Requires mortgage insurance premium (MIP)
FHA
purchases agricultural loans and loans from rural lenders.
farmer Mac
guarantees mortgage-backed securities (MBSs) that contain loans insured or guaranteed by a U.S. government agency. Does not purchase loans.
(Mortgage-backed securities (MBSs); loans insured by a U.S. government agency)
Ginnie Mae
Any loan in which periodic payments go toward both principal and interest. In a typical amortized loan, most of the initial payments go toward interest, with ever-increasing amounts going toward the principal (the loan balance), until the loan is paid off
Amortized loan
A typical amortized mortgage loan that includes principal, interest, taxes, and insurance in each (usually monthly) amortized payment. A common acronym for this kind of loan is PITI (principal, interest, taxes, and insurance).
Budget mortgage
A loan where the principal and interest payment remains the same over the life of the loan
fixed-rate loan
A fixed-rate mortgage in which the monthly payments increase over time according to a set schedule
growing equity mortgage
A loan where the rate is adjusted, usually annually, based on the behavior of the economic index with which it’s associated (e.g., the consumer price index). The margin is the number of percentage points added to the index to determine the rate and is constant throughout the life of the mortgage; the index value is the variable. If the index is 5% and the margin is 2%, the fully indexed rate is 7%. If the index is 8%, the margin is still 2%, so the indexed rate is 10%
adjustable-rate mortgage (ARM)
A mortgage loan alternative that allows the interest rate to be renegotiated periodically. The loan can be either long-term with periodic adjustments or short-term with more frequent rate adjustments.
Renegotiable rate:
The borrower only pays the interest on the loan for a set number of years—usually between five and seven. After the term is over, the borrower must either pay off the entire loan principal in a lump-sum payment, or will need to finance the principal through another loan. Also known as term or straight-term loan.
Interest-only
A payment that gradually adjusts (usually upward) based on a pre-determined schedule and amount. The initial payments are less than what would be a fully amortizing payment, which creates negative amortization. This type of payment plan can make payments easier in the beginning when income is often lower.
Graduated payment:
This type of loan is designed for the self-employed or those paid on commission. A high credit score and slightly higher interest rates are characteristic of these types of loans. Since 2008, the standards for mortgage qualifying have become stringent to the point that low-doc loans are now rarely available.
Low documentation (low-doc)
A government-backed combination loan to combine a home purchase with home repair by allowing the borrower to buy and renovate a fixer-upper property with one loan.
rehab loan
A temporary (usually 90-day) loan that provides funds in addition to an existing loan until permanent financing can be obtained. A _______ is often used for buyers who haven’t yet sold one property, but want to purchase a new one. Best used when the buyer’s current home is already under contract.
Bridge loan (swing loan)
Temporary financing for construction purposes. The developer submits plans for a proposed project, and the lender makes a loan based on the property appraisal value and the construction plans
Construction mortgage
: A loan with a lump sum payment, usually at the end of a loan period. The balloon payment on a loan may be paid as an interest-only loan for a period of time and then be paid off all at once
ballon loan
A loan from the equity of a home. If the property is owned free and clear, the home equity loan is a first mortgage. If not, it’s a second or junior mortgage. Rates on home equity loans tend to be higher than conventional loans, and their term rates shorter.
home equity loan
Home equity line of credit
Often called a HELOC, this loan isn’t used for a home’s primary financing, but is based on the equity in a home. Borrowers typically use HELOC for major purchases such as vacations, tuition, or home repairs or upgrades.
Also called a reverse annuity mortgage, this is designed for those who want to use the equity in their homes to stay in their homes. With a reverse mortgage, the lender makes payments to the homeowner for a specified period of time and gains corresponding equity.
Reverse mortgage:
Usually applies during refinancing. Lender charges less than the prevailing interest rate, but more than the original interest rate. Typically used if current interest rates are higher than original rates. Benefits lender by raising the return on older loans, and benefits the borrower by allowing them to refinance and potentially take cash out while maintaining a lower interest rate than the current market provides.
Blended rate loan
Also known as a contract for deed, land installment contract, or installment sale agreement, this is a contract between a seller and buyer in which the seller acts as the lender for the buyer, who purchases the property for an agreed-upon price
Land contract
Used in commercial applications. Two or more properties are pledged as security for loan repayment in a blanket loan
Blanket mortgage
Lender (actually a third party) holds legal title, and can use non-judicial foreclosure (lender has title).
Title theory
Lender holds a lien on the property, but not title, and therefore must use judicial foreclosure (lender has lien).
Lien theory
In a mortgage, the property is used as collateral for the loan. What’s the term for the process of pledging something as collateral?
Hypothecation
the main difference between Loan pre-qualification and Loan pre-approval are what
qualification is free and the lender dose not verify information approval requires a application fee and information is verified
The ratio of a loan amount to the value of the property being purchased
Ex. If a loan to value ratio exceeds 80%, the borrower will likely have to purchase private mortgage insurance for the lender.
loan-to-value ratio (LTV)
To calculate the Loan-to-Value (LTV) ratio, divide the loan amount by the property’s appraised value (or purchase price, whichever is lower) and then multiply by 100 to express it as a percentage
EX: Charlie and Wendy are purchasing a property with a sales price of $350,000. They’ll be financing $335,000. What’s their LTV ratio?
95.7
to figure out his equity, we take the appraised amount of the home and subtract the amount still owed on the mortgage to find the amount of ________.
equity
How is the monthly principal and interest payment calculated using an amortization chart?
Loan amount / $1,000) x factor from amortization chart
What’s the purpose of PMI?
To protect the lender in case of borrower default when the borrower has put down less than 20%
MIP is required for FHA loan regardless down payment size and PMI is required for what type of loan if the downpayment is under 20%
conventional
PMI automatically terminates when LTVR reaches ______%
78
What do property taxes in a mortgage payment pay for?
The cost of public services as a percentage of the property value
In an amortized loan, the interest portion of the mortgage payment generally ______ over the life of the loan. decreases or increases
decreases
what act prohibits creditors from discriminating against protected classes or asking for certain types of information
The Equal Credit Opportunity Act (ECOA
what act is meant to provide the public and elected officials with sufficient information to enable them to determine whether financial institutions are fulfilling their obligations to serve the housing needs of the communities and neighborhoods in which they’re located.
The Home Mortgage Disclosure Act (HMDA)
what act requires lenders to meet the needs of their communities by investing in development and rehabilitation efforts, especially those that enable low- and moderate-income individuals and families to afford a home.
The Community Reinvestment Act (CRA)
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
