UNIT 20 FINANCING THE R.E. TRANSACTION Flashcards
UNIT 12 IS A COMPANION TO THIS UNIT**
-YIELD
-RISK
(PG 415 UNIT 20)
-YIELD the return or income that can be
generated
-RISK the likelihood that the investment will
lose money
Linders consider the cost of them acquiring the money and the borrowers credit worthiness.
– In addition to the credit worthiness of the borrower the interest rate that the lender charges the borrower depends on four factors:
-TERM OF THE LOAN if the money will be
repaid in a shorter time, lenders usually
charge a lower interest-rate for example 15 years
instead of 30 years
– TYPE OF MORTGAGE LOAN lenders often offer
lower initial interest rates if the borrower agrees to
assume some of the risk of future interest rate
hikes. Many adjustable rate mortgages ARM’s
have low interest rates for the first few years,
especially when compared to fixed rate
amatorized loans
- LOAN AMOUNT jumbo loans = greater risk
because so much money is secured only by only
one property
– the secondary market sets upper limits for the loan
it will buy, investors must retain the loans
exceeding this amount. In other words lenders
cannot easily recycle their money
-LENDERS COST OF MONEY lenders borrow the
money that they loan
– the interest-rate they pay fluctuate with market
conditions
– the Federal Reserves indirectly regulates the flow
of money and interest rates
– by increasing reserve requirements, the Federal
Reserve in effect limits the amount of money that
member banks can use to make loans
Most real estate licensees encourage their
buyer clients to meet with a lender (WHEN)
– based on preliminary credit application,
perspective buyers can obtain a ________ ________
– although preapprovals typically contain certain
conditions and time frames they do represent
preliminary commitments and eliminate many of
the unknown
– PREQUALIFICATION is the process by which the
lender determines the _____ ____ limit the borrower
(PG 416 UNIT 20)
-meet with a lender BEFORE looking at
properties
-perspective buyers can obtain a LOAN
PREAPPROVAL
– PREQUALIFICATION is the process by which the
lender determines the UPPER LOAN limit the
borrower take out.
CREDIT SCORES (PG 416 UNIT 20)
-One of the most important factors when
applying for a loan is a credit score
– five major factors are analyzed:
-fast payment performance – credit use – credit history – types of credit in use – credit report inquiries
CREDIT SCORES (PG 416 UNIT 20)
- UNIT 12 IS A COMPANION TO THIS UNIT***
- Scores range from:
- Credit scores affact what?
-Scores range from less than 400,up to 900
- the higher the score to lower the risk and
vice versa
- Credit scores can affect a potential buyers ability to
- get a loan,
- the interest rate a lender will charge
- can even influence the cost of homeowners
insurance
FAIR AND ACCURATE CREDIT TRANSACTION ACT (FACTA)
(PG 416 UNIT 20)
WHAT DOES FACTA REQUIRE
-FACTA equires that each of the three major
credit bureaus provides a free credit report
every 12 months upon request
-A toll-free number to assist consumers, correct
mistakes and remove disputed information from
their files unless the creditor verifies that the
information is correct
FAIR AND ACCURATE CREDIT TRANSACTION ACT (FACTA)
(PG 416 UNIT 20)
-By reviewing reports annually, consumers can monitor the reports accuracy and also spot _______
- TRUE/FALSE Credit scores are provided in the free
credit reports
-TRUE/FALSE consumers can not improve their credit scores before they make a loan applications and before looking at a property, this can only be done by a loan officer
-consumers can also spot IDENTITY THEFT
-FALSE: Credit scores ARE NOT provided in
the free credit reports, scores are available
from the credit bureau‘s for a SMALL FEE
The credit scores can give consumers a FAIRLY
GOOD IDEA of how they will be LOOKED AT by a
potential lender
– FALSE: CONSUMERS CAN improve their credit
scores before they make a loan applications and
before looking at a property (this is why they need
to get a credit score on their own, so that they can
work on fixing it themselves before they put in a
loan application)
LOAN APPLICATION (PG 416 UNIT 20)
- LOAN APPLICANTS are required to supply personal information about their_____ (4 THINGS)
- The lender will order an _________to assure that the collateral for the loan is sufficient
- The appraisal includes a legal description and information about?
APPLICANTS PERSONAL INFORMATION ABOUT THEIR
– employment
– income
– assets such as bank account information
– other financial obligations
-The lender orders and APPRAISAL to in sure that
the collateral for the loan is sufficient
-The appraisal includes a legal description and
information about
– improvements
– title
- encumbrances
– taxes
THE LOAN (PG 417 UNIT 20)
-Underwriting is a process of ANALYZING THE EXTENT of the risk a lender will assume in connection with the mortgage loan
– the lender assesses the value of collateral being pledge for the loan, and evaluates the capacity and credit worthiness of the borrow based on the following criteria:
- OCCUPANCY Lenders reserve best rates for
owners who occupy the property
-INCOME Lenders figure out if the borrowers
have enough income to support themselves and
pay for normal household expenses while making
a mortgage payment
-ASSETS AND CASH RESERVES Lenders look at
bank accounts, often asking for verification
of funds. Borrowers must be able to account for
the money in the account as BEING THEIRS and
not from someone else EXPECTING REPAYMENT - DEBT lenders prefer that housing payments (PITI)
and association fees be LESS THAN 28% of
GROSS INCOME and, when combined with other
debts LONGER THAN 10 MONTHS, LESS THAN
36% of gross income - LOAN TO VALUE AKA LTV ratio is the ratio of the
debt to the sale price or appraised value, which
ever is less
– the greater the BORROWERS steak in the
collateral, the lower the LENDERS RISK
– **if a down payment is less than 20%, lenders
frequently require some INSURANCE TO COVER
DEFICIENCIES in the case of default
AUTOMATED SCORING SYSTEMS (PG 417 UNIT 20)
-what are they?
– Name some commonly used automated systems
-what is an advantage to them?
***LENDERS MUST ALWAYS KEEP WHAT IN MIND WHEN MAKING LENDING DECISIONS ?
-Lenders often rely on AUTOMATED
SCORING SYSTEMS
- an AUTOMATED SCORING SYSTEMS should
provide an OBJECTIVE STANDARD against which
to balance the more SUBJECTIVE,
PROFESSIONAL JUDGEMENT of a loan officer
– commonly used automated systems are
– Freddie Mac’s loan prospector
– Fannie Mae’s desktop underwriter
– ADVANTAGE:
-shorten the loan approval time
- may lower the cost of processing and approving
loan
-LENDERS MUST ALWAYS KEEP WHAT IN MIND WHEN MAKING LENDING DECISIONS
– race
–color
– religion
– national origin
– sex
– age
– marital status
– SOURCE OF INCOME
– neighborhoods in which collateral is located
AKA redliningLOAN COMMITMENT (PG 417 UNIT 20)
-A loan commitment is the lenders pledge to
do what?
-The agreement between the lender and
borrower is made once (what happens)?
-The LENDERS PLEDGE to:
-lend a certain amount of money to an
explicitly named borrower, or borrowers
– under specific terms
– for a special specified length of time
– using a particular property as collateral
- The AGREEMENT IS MADE between lender and
borrower once the WRITTEN commitment letter
(from the lender), is SIGNED BY THE BORROWER
AND RETURNED TO THE LENDER, this creates a
contract BETWEEN the lender and borrower
– this also means that the BORROWER AGREES to
the lenders terms for the loan
LOAN COMMITMENTS (PG 417 UNIT 20)
-Loan commitments include a number of
conditions or contingencies that affect the lenders
fulfilling the promise of the loan.
- what are some of these contingencies or
commitments?
-an EXPIRATION DATE, meaning the lender is
NOT obligated to provide the money
AFTER THAT DATE
– COMMITMENTS/ CONTINGENCIES maybe
conditioned on events such as borrowers selling a
property
– providing TITLE INSURANCE policy at settlement
– a LOAN COMMITMENT may be withdrawn before
closing if the lender finds out that the borrowers
have ACQUIRED ADDITIONAL loans that increase
borrowers debt ratios above the mortgage
guidelines
– Licensees should ENCOURAGE their buyers to
avoid major purchases until after closing
FINANCING LEGISLATION AND REGULATION Z ( PG 418 UNIT 20)
-The federal government regulates the
lending practices of mortgage lenders through
the ______ (4 acts)
-REGULATION Z was enacted in accordance with the _________
-REGULATION Z AND THE TRUTH AND LENDING
ACT BY THE FEDERAL TRADE COMMISSION,
FTC requires a credit institutions informed the
borrowers of the TRUE COST OF OBTAINING
CREDIT.
-By giving the borrowers disclosures, they can
compare the cost of various lenders so they can
avoid uninformed use of credit.
-REGULATION Z generally applies when a credit
transaction is secured by a __________
-REGULATION Z DOES NOT APPLY TO:
-Federal government REGULATES THE
LENDING PRACTICES of MORTGAGE
LENDERS through the:
– truth in lending act
– equal credit opportunity act
– real estate settlement procedures act
– community reinvestment act
-REGULATION Z was enacted in accordance with
the TRUTH AND LENDING ACT BY THE
FEDERAL TRADE COMMISSION, FTC
-REGULATION Z generally applies when a credit
transaction is secured by a RESIDENCE
-REGULATION Z DOES NOT APPLY TO
-business
– commercial
-or agricultural loans of any amount
FINANCING LEGISLATION AND REGULATION Z ( PG 418 UNIT 20)
-UNDER THE TRUTH AND LENDING ACT, a
consumer must be fully informed of __________
________ _________ ________ BEFORE what?
-What must the finance charge disclosure
include?
-The lender must compute and disclose the
ANNUAL __________ ________
-UNDER THE TRUTH AND LENDING ACT, a
consumer must be fully informed of
ALL FINANCE CHARGES AND INTEREST RATES
BEFORE A TRANSACTION IS COMPLETED
-The finance charge disclosure must include
– loan fees
– finders fees
- service charges and points
– interest
-The lender must compute and disclose the ANNUAL PERCENTAGE RATE
FINANCING LEGISLATION AND CREDITOR (AND REGULATION Z)(PG 418 UNIT 20)
-According to REGULATION Z a creditor is a
person who
-According to REGULATION Z a creditor is a
person who EXTENDS CONSUMER
CREDIT MORE THAN 25X’S a YEAR
IF the transactions involve DWELLINGS AS A
SECURITY
-The credit MUST HAVE A FINANCE
CHARGE INVOLVED or payable in more than
FOUR INSTALLMENTS by written agreement
FINANCING LEGISLATION AND THREE DAY RIGHT OF RESCISSION (AND REGULATION Z) (PG 418 UNIT 19)
REGULATION Z STATES THAT:
- in most consumer credit transactions, the
borrower has THREE DAYS to
rescind, (cancel) the transaction by notifying the
lender
– *****the right of recession DOES NOT
APPLY TO
- OWNER OCCUPIED RESIDENTIAL PURCHASE
MONEY ON 1ST MORTGAGES
- OR DEED OF TRUST LOANS
– *****it DOES APPLY to
- REFINANCING A HOME MORTGAGE
- or to a HOME EQUITY LOAN
