Unit 12: Real Estate Financing Flashcards
The Federal Reserve
Responsible for monetary policy. Seeks to adjust the availability and cost of money so there is steady economic growth with minimum unemployment and inflation in check
The Federal Reserve three basic Controls
1) Discount Rate- Rate charged to banks
2) Reserve Requirements- Money banks are required to reserve.
3) Open Market Transactions- buying and selling bonds.
Lower discount rate
Stimulates the Economy
Higher discount rate
Slows the Economy
Lower reserve requirement
Stimulates the Economy
Higher reserve requirement
Slows the Economy
If Federal Reserve buys government bonds
Stimulates the Economy
If Federal Reserve sells government bonds
Slows the Economy
Loan Points
Points are percentages of the loan. 1 point= 1% of loan amount
Discount Point
Monies paid at the time of loan origination allow the borrower a rate of interest less than originally offered by the lender. Therefore, discount points could be considered prepaid interest.
Origination points
Are fees to cover administrative loan costs and lender compensation.
Primary Mortgage Market
the initial origination of the loan
Secondary Mortgage Market
refers to the resale of existing mortgages and trust deeds.
Portfolio Loan
Loans that the lender keeps (does not sell)
Conforming Loans
Meet the Fannie Mae and Freddie Mac purchase criteria.
Institutional Lenders
Major commercial banks, savings associations, and life insurance companies.
Commercial Banks
Offers a wide variety of loans
Commercial Banks have been a major source for:
Construction Loans
Fannie Mae and Freddie Mac
quasi-governmental organizations that participate in the secondary mortgage market.
Life Insurance Company Loans
Large Loans of $3M and up
Participation Loan
Insurance companies sometimes demand an equity position as a limited partner as a condition of making a loan.
Private Mortgage Insurance (PMI)
PMI is a monthly fee (insurance) that is paid when you have one loan that is greater than 80% of the value of the property.
Noninstitutional lenders
Mortgage bankers or mortgage brokers who are private individuals.
SAFE Act
Requires licensing for mortgage loan originators and an NMLS endorsement.
Subprime loan
Alt-A loans. Loans that don’t meet typical underwriting guidelines.
Seller Carryback Financing
The seller is acting as a lender. The seller takes a security interest in the property and can foreclose on the property if not paid. For example, a property listed for 350k. The buyer secures financing for 300K and the seller agrees to finance the rest with interest.
Mortgage Loan Broker
Middlemen who bring together individual lenders and borrowers.
Conventional Loans
a loan that does not involve the government.
3 Government Loan Types
Loans that are insured by the government
1) FHA- Insured Loans
2) VA- Guaranteed Loans
3) CalVet Loans
Federal Housing Administration (FHA)
Meant to encourage homeownership
FHA Loan, borrower must have a minimum down payment of:
3 1/2%
CalVet Loan
The state of California buys the house and sells it to you on a land contract.
Open-End Loan
Home Equity line of credit. Allows the borrower to receive additional loan money up to an agreed amount, using the same trust deed or mortgage as security.
Blanket Loan
The borrower uses more than one parcel of property as security.
Release Clause
The document that allows a partial reconveyance of separate parcels of property on prepayment of a portion of the loan
Construction Loan
(Made by Commercial Bank) is also known as an interim loan. This is an unamortized loan, usually for three years or less that are given until permanent financing is in place.
Take-out loan
This is permanent financing that takes out (replaces) short-term financing such as gap or construction loans.
Packaged Loan
A loan that includes personal property, as well as real property.
Wraparound Trust Deed
Also called “all-inclusive trust deed” (AITD). An existing loan is not disturbed. The seller continues the payments on the existing mortgage or trust deed while giving the borrowers a new, increased loan, usually at a higher interest rate. The new loan is for the amount due on the existing loan plus the amount of the seller’s equity being financed. To use a Wraparound loan, the underlying loan must not have a due-on-sale clause.
Due on sale clause
(Alienation Clause) Accelerates loan payments, making the entire loan amount due upon sale. These are enforceable by lenders.
Gap Loan
(Bridge Loan) Short-term loans, such as loans between construction loans and the take-out loan (permanent financing).
Fixed-Rate Loans
Fixed-rate long term amortized loans
15 year vs. a 30-year loan
- Less interest paid under the 15 year
- Significantly higher payments
Interest-only loan
(Straight Note) Doesn’t have any amortization. Only paying interest, not principal. Payments are lower.
80-20 Loan
Two loans for the entire purchase price. 80% on the first loan and 20% on the second. Avoids PMI because you don’t have a loan greater than 80%.
Reverse Mortgage
Over 62 with a decent amount of equity. Meant for equity-rich, cash-poor individuals.
Adjustable-rate mortgage (ARM)
Rate changes periodically, usually in relation to an index with payments going up and down accordingly.
Two Types of interest-rate caps
1) Periodic Cap- Limits the interest rate increase or decrease from one adjustment period to the next.
2) Lifetime Cap- Overall cap that limits the interest rate increase over the life of the loan.
Negative Amortization
Payments sometimes do not cover all the interest due on a loan. This means the mortgage balance is increasing.
Computerized Loan Origination
The computer program evaluates and determines if the borrower is qualified for the loan.
5 Steps of the financing process
1) Qualifying the Borrower
2) Qualifying the Property
3) Approving and Processing the Loan
4) Closing the Loan
5) Servicing the Loan
Qualifying the Borrower
Lenders look at:
1) Character
2) Capacity
Character
1) Late Payments
2) Negative Credit Information
3) How long credit has been established
4) Amount of credit used versus credit available
5) Length of time at present residence
6) Employment History
Capacity
1) Can the borrower afford the payments
2) Will the borrower make the payments on time.
Qualifying Ratios
Front end and back end ratios.
Collateral
Refers to the value of the security of the loan.
RESPA
Real Estate Settlement Procedures Act. Requires a good faith estimate that is originated by the lender and given to the borrower within 3 business days. This only applies to residential 1-4 unit properties. Prohibits a kickback.
Predatory Lending
(Prohibited by CA Law) Loans are made to homeowners by finance companies, real estate brokers, and residential mortgage lenders without considering the borrowers’ ability to repay.
What type of mortgage has compound interest?
Reverse Mortgage
Margin
The difference between the interest rate of an index and the rate charged by a lender under an adjustable-rate mortgage.
A lender who believes interest rates will be rising significantly will LEAST be interested in what type of loan?
30 Year fixed-rate mortgage
A danger that an adjustable-rate mortgage poses to a buyer is:
higher payments if interest rates increase.
ARM Interest Rate=
Index+margin
An adjustable-rate loan index of 6% at the time a loan is made. The margin for the loan is 2.5%. With a 5% lifetime cap, the highest the interest rate could go is
13.5%
A convertible ARM is a loan that can be changed to:
A Fixed Rate Loan
A buyer intends to sell a house within two years. The buyer would prefer
A loan with no pre-payment penalty, low initial loan costs, and an assumable loan
