Chapter 4 - Financing Flashcards
(28 cards)
Can you explain the workings of private mortgage insurance to a client?
With a conventional loan, the lender does not have government insurance or guarantee and has only the collateral property and the borrower’s credit scores and history to rely upon in making the lending decision. As a result, most conventional lenders will only loan 80% of the purchase price or appraisal, whichever is less.
Do you have an understanding of Loan-to-Value and Debt-to-income ratios?
Loan to value ratio is the ratio between the loan being made and the appraised value of the property given as collateral, or the purchase price, whichever is less.
EX: If the purchase price $300,000 the appraisal comes in at $290,000, and the lender is using an 80% LTV, the lender will make a maximum loan of $232,000. ($290,0000 x .80 = $232,000; not $240,000 as the appraisal was the lower figure.)
The higher the LTV ratio, the larger the loan and the smaller the down payment required.
Calculations as the debt to income ratios and debt to housing expense ratios are done during the Pre-qualification which is an interview, in person or by phone, between the lender and the borrower. The lender will typically obtain consent and run a credit report to look for red flags.
Are you familiar with Fannie Mae, Freddie Mac, FHA and VA and how they pertain to each different loan?
THE WAREHOUSE: - The purpose of the “warehouse” system is to provide the availability of mortgage nationwide and to provide a method of allowing global funds to reach the American homeowner
Federal National Mortgage Association (FNMA “Fannie Mae”) was created in the late 1930s to provide a method of attracting private investment funds in Federal Housing Administration (FHA) loans. FNMA initially dealt in FHA and later, VA loans. Fannie Mae now is a major warehouse underwriter of conventional loans as well as U.S. government insured (FHA) or guaranteed loans (VA).
Government National Mortgage Association (GNMA “Ginnie Mae”) - A descendant of the Great Depression of the 1930’s, Ginnie Mae’s mission was to attract the maximum available mortgage capital into the American mortgage market. By pooling individual mortgages, which were backed either by U.S. government guarantees or U.S. government insurance, Ginnie Mae was able to provide a mortgage backed security which was completely backed by the “full faith and credit” of the United States government. This investment instrument allowed global investment capital to be funneled into the American housing market.
Federal Home Loan Mortgage Corporation (FHLMC “Freddie Mac”) - created in 1970, Freddie Mac operates under a congressional charter and is “stockholder owned.” Its function is to purchase qualified residential mortgages from the originators. Freddie Mac then issues a security to private investors which represent an undivided interest in the mortgages Freddie Mac owns. These securities contain a guarantee against loss to the investor. Freddie Mac deals in residential mortgages which do not contain U.S. government backed loans; these are the so called conventional mortgages.
The Federal Housing Administration (FHA) was created in the 1930’s as one of the programs intended to stimulate the economy in hopes of bringing an end to the Great Depression. The idea for the FHA 203b loan was a private lender would make the loan to a qualified borrower and the FHA would insure the lender against loss on the loan. With the “full faith and credit” of the United States government standing behind the loan, it was hoped that private lenders would be willing to make the loans, thereby meeting the needs of the home buying population and stimulating the economy. The FHA program introduced the concept of long term, fully amortizing loans. The FHA does not make loans directly. Loans are made through private lenders. The FHA does not set interest rates on FHA loans. The interest is determined by the lender to be competitive in the market. FHA does not make loans they insure them. The FHA today continues to play a major role. Under the Department of Housing and Urban Development (HUD), FHA loans remain viable financing alternative to home buyers, and in particular, first time home buyers.
Veteran’s Administration (VA) guaranteed loans - VA does not usually make loans; they guarantee them. Loans are made through private lenders. The VA may fund the loan if there is no available lender. The VA does not set interest rates on VA loans. The interest is determined by the lender to be competitive in the market.
Mr. and Mrs. Smith are purchasing their third property. The purchase price is $250,000 and their intention is to rent this property out. what is the minimum down payment required for Mr. and Mrs. Smith if they were to obtain financing?
$50,000
20% down payment is required as this is an investment, non-owner occupied, purchase.
Who is able to use a loan that is guaranteed by the Veteran’s Administration Home Loan Program?
a veteran and his spouse
The eligibility is only for the veteran.
Joe is purchasing a home for $150,000. He will be putting down $15,000 as his down payment. What is Joe’s loan-to-value ratio?
90%
The down payment is $15,000 on a $150,000 purchase which is 10% down. With 10% down, the loan must be the other 90%
What types of loans cannot contain pre-payment penalties?
FHA & VA
Government backed loans cannot contain prepayment penalties. Conventional loans are much more loosely regulated and may.
What information will you find in a mortgage “note”?
the interest rate
Remember the promissory note creates and is evidence of a debt. The note will contain borrower’s name, lender’s name, amount borrowed, interest rate, date the first payment is due and the frequency of payments thereafter, term or length of time the borrower has to repay the loan, amount of the final payment and due date if the loan is not a fully amortizing loan, address to which payments are to be sent.
The theory that states the mortgagor retains legal and equitable title while the mortgagee has only a lien on the property as security for the debt, is known as a:
title theory
Lien theory states the mortgagor (borrower) retains legal and equitable title. The morgagee (lender) has only a lien on the property as security for the debt. In order for the lender to take the property for sale, foreclosure proceedings must be initiated to obtain the legal title.
What does RESPA stand for?
Real Estate Settlement Procedure Act
Simply, RESPA stands for Real Estate Settlement Procedure Act. RESPA requires lenders to inform the parties to a covered real estate transaction what the closing costs and charges are, and which costs they pay for.
The Truth in Lending Act requires that a truth in lending form and a good faith estimate must be issued to the borrower within how many days of loan application?
3
The requirement is 3 days.
When will a conventional loan have private mortgage insurance included?
when the borrower is putting less than 20% down
When the borrower is putting less than 20% down PMI is required.
Which properties do not fall under residential mortgage guidelines?
a 6-plex apartment unit
1-4 family dwellings are considered residential properties.
What is the maximum loan amount FHA will lend in rural area?
FHA does not lend money for loans; they insure loans made by lenders.
What determines if a loan is considered first or second priority?
The order in which the notes and mortgages were recorded will determine priority.
The order the document are recorded determines priority not when they were funded or terms of the loan.
What does the FHA stand for?
Federal Housing Administration
DHA stands for Federal Housing Administration.
Impounds for a home loan serve what purpose for the lender?
assure the taxes and insurance are paid
Impounds set aside amounts for the future payments of taxes and insurance. The lender wants to be sure these are paid as taxes take priority over the lender in the event of foreclosure; and if there is catastrophic event to the property, the lender’s collateral will be significantly diminished. To avoid the borrower having to make lump sum payments for insurance or property taxes might be a benefit to the borrower, but not the lender.
Which loans are defined as conventional loans?
non-FHA or VA loans
Loans that are “conventional” are loans that are non-government loans, specifically non-FHA or VA. Loans with MIP are FHA loans and not conventional loans.
Which terms below is considered a “trigger” term per Regulation Z?
% down payment, interest rate, loan amount
All of the terms are trigger terms, and if advertised, require the disclosure of all loan terms as well as the APR.
What law provided financing to all qualified Americans and prohibited discrimination in lending practices
ECOA
Equal Credit Opportunity Act
Rual Economic Community Development Administration (RECD) formerly known as the Farmer’s Home Administration (FmHA).
The RECD is permitted to operate only in communities with less than 20,000 population.
Real Estate Settlement Procedure Act (RESPA)
administered by HUD, the primary purpose of RESPA is to inform the parties to a covered real estate transaction what the closing costs and charges are, and which costs they pay for. RESPA applies to:
new first mortgages (also refinances if it creates a new first mortgage)
on 1 to 4 family homes, and,
are “federally related” in some way
FHA, VA or RECD loans
loans by a federally chartered lender
loans by a federally insured lender
any Lender who makes $1,000,000 or more in loans
Mortgage Guarantee Insurance Company (MGIC)
The original Private Mortgage Insurance (PMI) company covers the amount above 80% LTV if the lender suffers a loss through a foreclosure sale which brings less than 80% of the purchase price or appraisal used at the time the loan was made.
What is the maximum loan amount as established by the VA?
VA does not set a maximum loan amount
VA does not set a maximum loan amount. Lenders may choose to individually, but not VA.
