Unit 20

Question 1

loan

Answer 1

investment by the lender. Lender evaluates yield and risk.
Yield- the return or income that can be generated.
Risk- Likelihood the investment will lose money.

Question 2

Inters rate depends on (4 factors)

Answer 2

• Term of the loan: lower interest rate if the money will be repaid in a shorter time.
• Type of mortgage loan: Lower initial interest rate if the borrower agrees to assume some of the risk of future interest rate hikes.EX adjustable rate mortgages
• Loan amount
• Lenders cost of money: Lenders must borrow the money that they loan. Interest rates fluctuate with market conditions.

Question 3

Fair and Accurate Credit Transaction Act (FACTA)

Answer 3

Requires that each if the 3 major credit bureaus provides free credit report every 12 months upon request.

Question 4

Loan Application

Answer 4

Loan applications are required to submit personal info about their employment, income, assets, and other financial info. The lender wants assurance that collateral for the loan is sufficient so it will order an appraisal.

Question 5

Underwriting

Answer 5

Process of analyzing the event of risk a lender will assume in connection with a mortgage loan. The lender assesses the value of the collateral and evaluates the capacity and credit worthiness of the borrower based on

• occupancy
• income
• assets and cash revenues
• debt
• Loan to value: ratio of debt to the sale price or appraised value whichever is less.

Question 6

Loan Commitment

Answer 6

Lenders pledge to lend a certain amount of money to an explicitly named bower under specific terms and for a specified length of time using a particular property collateral. The commitment letter is in writing and once signed by the borrower it is returned to the lender.

Question 7

Regulation z

Answer 7

Enacted pursuant to the truth in lending act by the federal trade commission. It requires that credit institutions inform borrowers of true cost of obtaining credit. Applies when a credit transaction is secured by a residence. It does not apply to business, commercial or agricultural loans of any amount.

Question 8

Truth in Lending Act

Answer 8

A consumer must be fully informed of all finance charges and the true interest rate before a transaction is completed. The finance charge disclosure must include any loan fees, finders fees, service charges, and points and interest.

Question 9

Creditor

Answer 9

person who extends consumer credit more than 25 times a year or more than 5 times a year if the transaction involve dwellings as security. The credit must be subject to a finance charge or payable in more than 4 installments by written agreement.

Question 10

Three- day Right to Rescission

Answer 10

The borrower has 3 days in which to cancel the transaction by notifying the lender. It does not apply to owner occupied residential purchase money or first mortgage or deed of trust loans. It does apply to refinancing a home mortgage or to a home equity loan.

Question 11

Penalties for noncompliance for regulation z

Answer 11

Violation of an administrative order is 10,000 for each day violation continues
deceptive practices get up to 10,000
creditor may be liable to a consumer for twice the amount of the finance charge for a min of 100- 1,000
willful violation is a misdemeanor punishable by a fine of up to 5,000 or one years imprisionment.

Question 12

Equal Credit Opportunity Act

Answer 12

• cannot discriminate against credit applicants
• must inform the applicant of the principal reason for the denial or termination of credit.
• denial must be in writing within 30 days
• borrower is entitled to a copy of the appraisal report if they paid for an appraisal.

Question 13

Community reinvestment act

Answer 13

responsibility of financial institutions to help meet the needs for low and moderate income housing.
financial institutions are expected to meet the deposit and credit needs of their communities; participate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small businesses, and small farms.

law requires any federally supervised financial institution prepare a statement w/

• def of geographic boundaries
• identification of the types of communities reinvestment credit offered
• comments from public about the institutions performance in meeting community needs.

reviewed by federal financial supervisory agencies. Reviews are public.

Question 14

Conventional Loan

Answer 14

Any loan that is not government insured or guaranteed.. Most secure loan because the loan to value ratio is lowest. Traditionally the ratio is 80% of the value of the property or less, the borrower makes a down payment of 20% or more.

• to qualify for France Mae the bowers monthly housing expenses including PITI must not exceed 28% of the total monthly gross income. Borrowers total monthly obligations must not exceed 36% of of total monthly gross income= conforming loan- eligible to be sold in secondary market

Question 15

Private mortgage Insurance PMI

Answer 15

Borrowers can obtain a conventional loan with a lower down payment through PMI. The buyer purchases an insurance policy that provides the lender with funds in the event that the borrower defaults on the loan. This allows the lender to assume more risk so that the loan to value ratio is higher than for other conventional loans.

• PMI protects the top portion of the loan against borrower default
• 22% equity to drop PMI

Question 16

FHA Insured Loan

Answer 16

Operated under HUD
Neither builds homes or lends money
Refers to a loan that is insured by an agency.
FHA insurance provides security to the lender in addition to the real estate. Insures lenders against lost from borrower default.
- Popular FHA program is Title II section 203 (b) fixed interest rate loans for 10 years to 30 years on one to four family residences.
- Borrower is eligible for 96.5% financing

Question 17

Requirements for FHA Insured Loans

Answer 17

• Payment of 3.5% of the purchase price
• shared a mortgage insurance premium MIP
• must be appraised by an approved FHA appraiser (6 months)
• FHA sets max mortgage limits
• Borrower must meet credit qualifications
• Financing also available for manufactured and factory homes.

Question 18

Good neighbor program

Answer 18

HUD offers an incentive of up to 50% list price reduction in order to assist law enforcement, teachers, and firefighters in certain designated revitalization areas.
must sign a second note for discounted amount
3 year occupancy requirement
No interest or payments required for the discount

Question 19

VA Guaranteed Loan

Answer 19

The US Department of Veterans Affairs is authorized to guarantee loans to purchase or construct homes for eligible veterans and their spouses. Include manufactured homes.
Eligibility (Veteran applies for certificate of eligibility):
- 90days of active service for veterans of WWII, Korean War, Vietnam conflict, and Persian Gulf war
- 181 days of active service during inter conflict periods between July 26th 1947- September 6, 1980
- 2 full years of service during any peace time period since 1980 for enlisted and 1981 for officers
- 6 or more years of continuous duty as a reservist in the army, navy, Air Force, marine corps, or coast guard or air national guard
- 90 continuous days of service for those currently on active duty
VA assists veterans in financing the purchase of homes with little to no down payments at market interest rates.
Owner must live on the property.

Question 20

Farm Service Agency (FSA)

Answer 20

Federal agency of the US Department of Agriculture.
Helps families purchase family farms and single family homes in rural areas (fewer than 10,000 people)
- Guaranteed loans made and serviced by private lenders and guaranteed for a specific percentage by the FSA
- Loans made directly by the FSA

Question 21

Farm Credit System

Answer 21

Provides loans to farmers, ranchers, rural home owners, agricultural cooperatives, rural utility systems, and agribusinesses.

• Do not take deposits
• funds raised through system wide bonds and notes in the nations capital markets.

Question 22

Farmer Mac

Answer 22

Government sponsored enterprise that operates similarly to Frannie Mac and Freddie Mac but in the context of agricultural loan.

• long term credit and stable interest rates
• pools or bundles agricultural loans from lenders for sale as mortgage backed securities.

Question 23

Adjustable rate mortgage ARMs

Answer 23

Originate at one rate of interest and then fluctuate up or down during the loan term based on objective economic indicator.

• Index is an indeterminable economic indictor that is used to adjust the interest rate in the loan (tied to us treasury securities)
• Usually the interest rate is the index rate plus the premium called the margin. The margin represents the lenders cost of doing business.
• Rate caps: periodic (limits the amount the rate may increase over a year) and life of the loan (Limits the amount the rate may increase over the entire life of the loan).
• adjustment establishes how often the rate may be changed
• Mortgagor is protected from unaffordable individual payments by the payment cap
• Can converse from adjustable to fixed at certain intervals

Question 24

Balloon Payment

Answer 24

Final payment. It is larger than the other payments.

Question 25

Growing Equity Mortgage (Rapid payoff mortgage)

Answer 25

uses a fixed interest rate but payments of principal increase according to an index or a schedule. the total payment increases and the loan is paid off more quickly.
used when the borrowers income is expected to keep pace with the increasing loan payments.

Question 26

Reverse Annuity Mortgage

Answer 26

Allows people 62 or over to borrow money against the equity they have built. Equity diminishes as the loan amount increases. The money can be used for anything. The borrower is charged a fixed rate of interest and no payments until the borrower sells, defaults, moves or dies.
-Good for people with no kids

EX) FHA home equity conversion mortgage

Question 27

Purchase money mortgage (PMM)

• seller financing
• Owner financing

Answer 27

Seller agree to finance all or part of the purchase price and consists of a first or junior lien depending on weather prior mortgage liens exist.
Used when the buyer does not qualify for a typical lender loan.
Payments are made to the seller. if the buyer stops making payments the seller has recourse to foreclose on the property.

Question 28

Package loan

Answer 28

Includes real property and personal property. Popular with developers and purchasers of condominiums.
- furniture, appliances ect.

Question 29

Blanket Loan

Answer 29

Covers more than one parcel or lot. Used for subdivision developments.
- Partial release clause: Permits the borrower to obtain the release of one lot or parcel from the lien by repaying certain amount of the loan.

Question 30

Wraparound Loan

Answer 30

enables a borrower with an existing loan to obtain additional financing from a second lender without paying off the first loan. Larger loan and higher interest rate and assumes payment of the existing loan.

Question 31

Open end loan

Answer 31

secures a note executed by the borrower to the lender. Secures any future advances of funds made by the lender to the borrower.
- Less costly home improvement loan

Question 32

Construction Loan

Answer 32

made to finance the construction of improvement os real estate

• draws: payments made to general contractor or the owner for the part of the construction work that has been completed since the previous payment.
• Short term interim financing
• Borrower only pay interest on the money that has been dispersed
• Borrower is expected to arrange for a permanent loan: end loan or take out loan to Pau the lender when the work is complete.

Question 33

Sale and leaseback

Answer 33

Arrangements are used to finance large commercial or industrial properties. Leased back by the investor to the seller who continues to conduct business on the property as a tenant.
- Buyer becomes the lessor and the owner becomes the leasee

Question 34

buydown

Answer 34

lowers the interest rate on a mortgage loan
lump sum is paid in cash to the lender at closing.
1-3% over the first one to three years of the loan then the rate rises.

Question 35

Home Equity Loans

Answer 35

source of funds using the homes equity. Junior to the original lien.
alternative to refinancing.
- Finance purchase of an expensive item
- Consolidate existing installment loans or credit card debt
- Pay medical education home improvement expenses
3 day right of recision

Can be a fixed loan amount or an equity line of credit.