Unit 15-Financing Principals Flashcards
Sources of real estate financing
Savings associations Commercial banks Savings banks Insurance companies Mortgage banking companies Mortgage brokers Credit unions
Savings associations
Specialize in long-term residential loans. Must be chartered by the state or federal government. Most flexible lending institution in regard to their mortgage lending procedures. Residential mortgage loans, residential construction loans, home equity loans, mortgage-backed securities. Conventional, FHA-insured, and VA-guaranteed loans.
Commercial banks
Must be chartered by the state or federal government. Mostly short-term loans (as construction, home improvement and manufactured housing loans). Also conventional, FHA, and VA home mortgages.
Savings banks
Operate like savings associations. Issue no stock and mutually owned by their investors, the depositors themselves. Invests in loans secured by income property as well as residential real estate. Seek low-risk loan investments. FHA-insured or VA-guarantee loans.
Insurance companies
Amass large sums of money from the premiums paid by policyholders. Long-term real estate loans that finance commercial and industrial properties. Invest in residential mortgage and deed of trust loans by purchasing large blocks of government backed loans (FHA-insured and VA-guaranteed).
Mortgage banking companies
Use money borrowed from other institutions, funds of their own, or both to make real estate loans. They make loans in the name of the mortgage banker with the intention of selling them to investors either on a loan-by-loan basis or pooled together as a security. Organized as a stock company or as a wholly owned subsidiary of a bank or savings association.
Mortgage brokers
Are not lenders but often instrumental in obtaining financing. Individuals who act as intermediaries to bring borrowers and lenders together. Locate potential borrowers, process preliminary loan applications, and submit the applications to lenders. Loans closed in the name of the lender. Do not service loans.
Credit unions
Cooperative organizations in which members place money in saving accounts, usually at higher interest rates than other saving institutions offer. Short-term consumer, home improvement, longer-term first and second mortgage, and deed of trust loans.
Prequalified vs preapproved
Prequalified-The lender has estimated the maximum loan for which the applicant could qualify using the borrower’s account of earnings, outstanding debt, and savings.
Preapproved-The lender has verified income, debt, savings, and has run a thorough credit check, permitting the lender to quote a specific maximum loan amount and to assert that it would advance a loan under the terms and conditions existing at the time of loan application.
5 factors for a FICO credit score
Borrower’s payment history, amounts owed, length of credit history, types of credit used, and number of new credit applications or queries
Lender credit score requirements
Range is 300-850
FHA: min 580. Under 500 is not eligible.
Fannie Mae/Freddie Mac: at least 620 but may charge a higher rate of interest or a higher down payment if the score is under 660.
An electronic network for handling loan applications through remote computer terminals linked to several lenders’ computers. Enhances an applicants ability to comparison shop for a loan.
Computerized loan origination (CLO) system
Automated underwriting
The process of electronically evaluating a loan application and subsequently providing a recommendation for or against loan approval.
The process of electronically evaluating a loan application and subsequently providing a recommendation for or against loan approval.
Automated underwriting
4 types of payment plans
Fully amortized loans (like mortgage loans or deed or trust loans), interest-only payment, flexible payment, balloon payment (partially amortized)
Calls for periodic payments of interest, with the principal to be paid in full at the end of the loan term. Generally for home improvement, 2nd mortgages, investor loans.
Investment-only payment. AKA term loan
Generally used to enable younger buyers and buyers in time of high interest rates to purchase real estate. A mortgage makes a lower monthly payment for the first few years of the loan (typically the first five years) and larger payments for the remainder of the term, when the mortgagor’s income is expected to increase.
Flexible payment loan
When a mortgage or deed of trust loan requires periodic payments that will not fully amortize the amount of the loan by the time the final payment is due, the final payment is larger than the others. It is a partially amortized loan. Often used in seller-financing transactions.
Balloon payment
A loan that is not underwritten by a federal agency. It maybe “conforming/non-conforming”. Most are conforming loans, meeting Fannie Mae & Freddie Mac guidelines. Conforming loan limit is $453,100. Loans are non-conforming if they do it meet Fannie Mae/Freddie Mac guidelines- they may not exceed the conforming loan limit or buyers may lack sufficient credit or collateral. Borrower qualifications are more stringent than FHA/VA loans. PITI max is 28% gross monthly income. Total debts cannot exceed 36%. 43% debt-to-income ratio is the max ratio a borrower can have and still get a Qualified Mortgage.
Conventional loan
Loan-to-value (LTV) ratio
The ratio of debt to value of the property. High down payment = low LTV (loan-to-value) and low lender risk. Loan terms are based on LTV. Max LTV on a conventional loan is 95% with a 5% down payment.
Calculated by:
Loan amount / value of the property (the lesser amount of sales price or appraisal)
PMI (private mortgage insurance)
To insure a lender against borrower default and loss due to foreclosure. Requires on high LTV loans for which the borrower has invested less than 20%, that is, on loans with LTVs over 80%. Insures a certain percentage of a loan, usually 25-30%. PMI is cancelled when the loan balance is 80% or less of the original value of the property.
Discount points (conventional loan)
Represents the percentage by which the face amount of a mortgage loan is discounted, or reduced, when it is sold to an investor to make its interest-rate yield competitive in the current money market. A point is 1% if the loan amount- not 1% of the purchase price. Each point of discount raises the effective yield by 1/8 of 1%.
A charge made by the lender for the expense involved in taking the loan application and processing and closing the loan. Usually 1% of the loan amount. Not a prepaid interest. Collected in addition to any discount points.
Loan origination fee
FHA loan
Refers to a loan that is insured by the FHA (Federal Housing Administration), which operates under HUD. FHA-approved appraiser must be used. FHA doesn’t lend the money themselves.
Types of FHA loans
- Title II, Section 203(b)- construction or purchase of a home, refinance an existing mortgage debt. Provides fixed-interest rate loans for 15-30 years on one-family to four-family residences.
- Title I- home improvement and repairs and for the purchase of manufactured homes.
FHA loan qualifications
The buyer must have a housing-expense ratio (including PITI, MIP, and homeowners association dues) of no more than 31% of gross monthly income. Total-debt ratio cannot exceed 43% of gross monthly income. More lenient than conventional or VA loans.
VA-Guaranteed (GI) Loans
U.S. Dept of Veteran Affairs (VA) is authorized to guarantee loans to purchase or construct homes for eligible veterans and their spouses. Guarantees the loans to purchase manufactured homes and land on which to place them. VA loans assist veterans in financing the purchase of homes with little or no down payment. Residential property must be owner-occupied. The loan is not made by the agency but guaranteed by it. No VA limit on the amount of loan obtained. That is determined by the lender. VA limits the amount of loan it will guarantee in the event the veteran defaults on the loan. VA-approved appraiser must be used.
Entitlement vs Eligibility
Entitlement- the maximum amount the VA will guarantee. (Each veteran received $36,000)
Eligibility- the veteran’s entitlement to VA home loan benefits under the law, based on military service.
VA loan qualifications
Debt-to-income ration and residual income are considered to determine qualification. Combined total of monthly debts may not exceed 41% of the veteran-borrower’s gross monthly income. Residual income is the amount of monthly income remaining after all debts (house payment, all installment accounts, all revolving accounts, minimum payments on paid-out revolving accounts, child support, and child care), income tax, social security tax, and maintenance and utilities are deducted.
Notice of Value (NOV)
Issued by the VA after an appraisal is conducted. States the current market value. NOV places a ceiling on the amount of a VA loan allowed for the property. If the purchase price is greater than the amount cited in the NOV, the veteran may withdraw from the contract without penalty and have the earnest money refunded or pay the difference in cash at closing.
Agricultural loan programs
Under the USDA. 2 programs- Farm Service Agency & Rural Development
Provides loans to farmers and/or homeowners in rural areas.
Farm Service Agency (FSA)
Offers both direct and guaranteed loans to ou chase farmland and to construct or repair buildings and other fixtures. Guaranteed farm loans are made and serviced by local lenders and guaranteed by the FSA in the event of a borrower’s default. Uses government funds to make loans.
Rural Development (RD)
Provides both direct and guaranteed loans for the purchase or construction of single-family homes, repair existing homes, and the development of affordable rental housing. No down payment, no monthly mortgage insurance, no loan limits. Income qualifying ratios of 29%/41%
Wholly owned corporation within HUD that administers special assistance programs
Ginnie Mae
Fannie Mae
Quasi-government agency that buys pools of mortgages from lenders in exchange for mortgage-backed securities
The buyer gives the seller a note and mortgage
Purchase-money mortgage
Buydown
Temporarily lowers the initial interest rate through the payment of a limo sum of cash to the lender
Investors who buy and sell loans after funding
Secondary mortgage market
