Exam 2 Flashcards
(92 cards)
0
Q
Difference between LONG-TERM MORTGAGE and BALLOON NOTE MORTGAGE?
A
- LT= SET interest rate; 20-30 year loan
- Balloon(Bank Loan)= still get 20-30 year loan interest rate but bank requires you to RE-DO note every 5 or 7 years and update for current interest rate
1
Q
What is the difference between the majority of our mortgages?
A
Loan with a real estate backing
2
Q
Basic Information in a Promissory Note
A
- Principal
- Interest Rate (APR)
- Recourse/Nonrecourse
- Penalties
3
Q
Other necessary information is a promissory note & define.
A
- Security/Collateral- real estate regardless of loan
- Application of Payments - if you get behind on
pmts, must pay fee + interest (1st) - Loan Assumability-take on someone else’s debt,
must have a lot of cash
4
Q
List the different mortgage Clauses (promissory note inclusions) & provide examples.
A
- Acceleration–happens when you default on loan, if you can’t pay bills we will foreclose
- Assignment–ok to sign loan to someone else
- Alienation–$ Due when you SELL the home
- Escrow–trust for ppty taxes & insurance (if you put down large down pmt, don’t have to have)
- Prepayment–can prepay your loan earlier without penalty
- Subordination–if you get another mortgage, it will be subordinate to this
5
Q
Why recourse promissory note?
A
Land/Commercial/Construction has MORE risk
6
Q
FORECLOSURE terms:
A
- Default
- Equitable Right of Redemption
- Judicial Foreclosure
- Statutory Right of Redemption
- Deficiency Judgement
- Short Sale
- Deed in Lieu of Foreclosure
7
Q
Three types of Bankruptcy:
A
- Chapter 7 = “Fresh Start”
- Chapter 11 = “CORPORATE Bankruptcy”
- Chapter 13 = “INDIVIDUAL Bankruptcy”
8
Q
Chapter 7 Bankruptcy
A
“FRESH START”
- ALL debt forgiven
- foreclose real estate
9
Q
Chapter 11 Bankruptcy
A
“CORPORATE Bankruptcy”
- DEBTS > $1 million
- Restructuring, keep real estate
= CREDITORS approve the plan
10
Q
Chapter 13 Bankruptcy
A
“INDIVIDUAL Bankruptcy”
- Restructuring, keep real estate (start paying back)
- if you pay this plan for 3 yrs, unsecured debt goes away
=COURT approves the plan
11
Q
Typical RESIDENTIAL loans
A
- Conventional Loans= NOT gov’t backed/insured
- Federal Housing Administration Loans= guarantee loans for ppl who can’t get conventional loans
- Veterans Administration Loans = guarantee loans of qualified veterans (do NOT lend $)
- USDA Rural Housing Loans
12
Q
What does “LTV” mean?
A
Loan To Value
LTV = Loan/Value
13
Q
What is the “MAXimum” LTV that many conventional lenders prefer?
A
80% LTV with 20% down
14
Q
Can a conventional mortgage have higher LTVs?
A
Yes, 85-97% mortgages (put as little as 3% down)
15
Q
What is Private Mortgage Insurance for?
A
When you don’t have 20% down
-pay default on loan of PMI amt.
16
Q
When do we pay PMI?
A
Payed when > 80% LTV
-PMI = amount between LTV & borrowed amount
17
Q
Who provides PMI?
A
-their down insurance companies, mortgage guarantee, AIG
18
Q
How do people avoid PMI?
A
- Put 20% down
- Get 2nd mortgage (Higher Interest Rate)
- Get a gov’t backed/insured mortgage
19
Q
Federal Housing Department- how much do borrowers INVEST?
A
- 5%
- more expensive (premiums upfront & monthly)
20
Q
How does the Veterans Administration determine funding fees?
A
-how much down payment you put down
AND
-how many times you’ve gotten a VA loan (only want you to get once)
21
Q
What LTV can veterans borrow under the program?
A
100%
22
Q
What is the maximum loan amount for a VA loan?
A
$417,000
23
Q
Do any veterans NOT have to pay the funding fee?
A
Yes, disabled veterans from fighting and widowers of veterans
24
Why does the VA require funding fees?
To make up for default losses
25
What LTV can be borrowed under the USDA rural development?
100%
26
What is the MAX loan term for USDA Rural Development?
38 to 40 yr. loans
-longer term to decrease the payments
27
Principal
The amount you have to take out for a promissory note
28
Interest Rate (APR)
Cost to the Borrower
Yield to the Lender
APR= Annual Percentage Rate
29
Recourse loan v. NONrecourse
RE=They can come after your other assets
- commercial or construction
NON=CanNOT come after your other assets
-home loan
30
Penalties
Pre-payment penalties=paying off mortgage early
-Common on commercial loans b/c short term notes
31
First Mortgage vs. Second Mortgage
1st=lowest interest rate, gets paid back 1st if foreclosure
2nd=highest interest rate, fixed pmt + upfront $
32
Why would someone get a 2nd mortgage?
Mortgage interest deduction, other debt
33
HELOC & it's 3 criteria
Home Equity Line of Credit (like a credit card)
1. Lowest interest rate, but VARIABLE rate
- more risk involved
2. You can "draw" on it (amt.'s can be different)
3. Bank can cut you off (DEMAND Clause)
34
How would the mortgages get paid for a $250,000 home if FORECLOSED?
Mortgages:
1st=$200,000
2nd=$50,000
Scenarios:
A) Bought at $200,000
B) Bought at $225,000
C) Bought at $275,000
See Notes.
35
Default Foreclosure
120 days behind on pmts
- lawyer advertises you in paper for month, then sell home on first Tuesday of next month
- court ordered foreclosure
36
Equitable Right of Redemption (Foreclosure)
30 days to catch up & make pmts to keep home
-haven't already lost home
37
Judicial foreclosure
Court orders foreclosure
38
Statutory right of redemption (Foreclosure)
12 months to buy your house back
(pay fees, foreclosure price, & any improvements)
-tax foreclosure =3 years
- can pay someone to give statuary right away
- discourages real estate investors
39
Deficiency judgment (Foreclosure)
-court ordered
- judgement loan=$200,000
- sheriff sale=$180,000
- DEFICIENCY=$20,000 (difference)
40
Short sale (foreclosure)
Value has gone down, the bank agrees to take less $ than the loan (very common)
41
Deed in Lieu of Foreclosure & benefits to a lender and home owner
Giving the home back to the lender
-Home Owner = doesn't hurt credit as bad as
foreclosure
-Lender = they can resell the home and save
foreclosure expenses
42
Where would you get a house loan? Commercial loan?
HOUSE loan = Mortgage company
COMMERCIAL loan = Bank
43
Types of Conventional Loans
- Fixed Rate Mortgage
- Balloon Note
- ARM
44
What types of people get USDA rural development loan & why does the government lend these types loans?
People that live in rural(poor) areas
-medium income or less
-gov't lends them b/c they want the rural areas to go away
45
Benefits of USDA rule development loans:
1.SUBSIDY
--Poor enough, government will pay part of your
pmt for you
2. FORBEARANCE
--if you lose your job, gov't will stop pmts and not
foreclose till you get another job
46
SBA Commercial Loans
Small Business Administration
1. Very LOW closing costs
2. Very HIGH prepayment penalties
3. SBA charges a guaranty and service fee
47
What is a CMBS?
Securitized commercial loan-sold off from bank to investors
48
What is a CDC loan?
Certified Development Company (bank loans)
-2 notes with less down
49
What is Farm Credit or Agricultural Credit? Max amount of loan?
- provides long term loans on rural acreages
| - may loan up to 90% on LAND (higher loan than going to the bank)
50
Types of Loans (to calculate)
1. Fixed Rate Mortgage
2. Balloon Note
3. Construction Loan
4. Adjustable Rate Mortgage (ARM)
51
Fixed Rate Mortgage
- Mortgage term (time period) and the interest rate are FIXED = pmt stays the same
- time periods = 15, 20, 30 yr loans
52
Are interest rates higher or lower on longer mortgages such as a 30 year loan? If so, why?
Higher on 30 yr loan
- more risk of default (term risk)
- liquidity risk
53
Why would you want a fixed rate mortgage?
Interest rate could potentially go up and you would have higher payment if rate was it fixed
54
Balloon Note
Mortgage pmts cover a short period of time
- Term= 2, 3, 5, 7 years
- Interest is fixed or variable
55
Why would a lender issue a balloon note?
Because there is LITTLE interest rate risk
56
Why would a buyer get a Balloon Note?
1. Couldn't qualify at mortgage company
2. Commercial mortgage
3. Expect interest rates to drop
4. Plan on living somewhere short-term (less expensive)
57
How are balloon notes amortized?
Over a period, then refinanced at end of term
58
Who issues balloon notes?
- Commercial banks
| - mortgage lending branch
59
Our interest rates higher or lower on balloon notes?
Higher, varies based on back though
60
Construction Loan
Mortgage covering a fixed very short period of time
- terms=6, 9, 12 months
- interest rate can be fixed or variable
61
Pay off options for a construction lien
1. Pay interest in full at the END. (Class calculation)
2. Pay interest MONTHLY over the term
3. Interest is added to the original loan at the end of the construction while converting the loan to a permanent mortgage
62
What is a "takeout commitment" that is involved in the construction loan process?
Give security to banks
63
Who makes construction loans?
Commercial banks
64
How is loan money given to the borrower in a construction loan? What are draws?
Money given in Stages
Draws=amts from the stages
Ex:
1) $60,000 Foundation
2) $60,000 Framing
3) $80,000 "Turn Key" or Final
Total Draws = 3
65
Adjustable Rate Mortgages
Mortgage covers a fixed period of time
- terms=5, 15, 20, 25, 30 years
- interest is variable and attached to an index over the loan term
- each time the interest rates "adjusts", the pmt changes on the mortgage
66
Why an ARM for a lender?
NO interest risk
67
Why an ARM for a borrower?
1. Expect interest rates to go down
2. Living somewhere short-term
3. Have NO chance (generally you have a choice)
68
Difference between contract interest rate and effective cost of the loan?
Contract interest rate is the nominal rate
Effective cost (APR)--pay more than the stated interest rate
69
Types of loan fees (Closing Costs)
1) Originator Fees- always paid, go to the ppl who make mortgage loans
2) Discount Fees-pay $ up front to discount the interest rate
- bad b/c average person refinances 1 per every 4 years(no benefit)
70
Types of Originator Fees
1. Originator Fee = loan officer (commission)
2. Processing/Documentation Prep Fee = admin. work
3. Underwriter Fees = approve the loan (salary)
71
How much are closing costs for a mortgage?
3%+ (can be up to 4 or 5%)
72
What is a prepayment penalty and what type of mortgages should you pay them on?
Paying off mortgage early and on commercial loans
73
What is mortgage refinancing?
- changing your mortgage
- very costly (3%+ every time)
*refinance if you save at lease 1%
74
Why do borrowers refinance?
1. Lower payments
2. Lower interest rate
3. Lower the term
4. "Cash-out" refinance (fix house)
5. "Debt Consolidation"
75
Define valuation
Value of physical property and the legal rights of ownership in the real estate
76
The 2 terms that reference an appraisal
1. The PROCESS by which an appraiser reaches certain conclusions
2. The WRITTEN REPORT that the conclusions are stated upon
77
What is market value and what does the definition assume?
Value for average buyer or seller; most probably sales prices
(Do NOT care about the business value)
-assumes an "arms length" transaction (parties are INDEPENDENT)
78
How are values considered arms length? (Developing a sales price)
1. Buyer and seller are typically MOTIVATED (reason to buy or sell)
2. Both parties are well informed and acting in their BEST INTERESTS
(knowledge of the market)
3. The property has a reasonable EXPOSURE time on the market
4. Payment is made in cash or financial agreements that are COMPARABLE.
5. CREATIVE financing or sales concessions did NOT affect the price
79
When would business value = market value?
Apartments (rent)
80
Define Investment Value
Value of an investment; value to YOU (not avg. buyer/seller)
81
Define Assessed Value
Value used for property taxes
82
Define Liquidation Value
Discounting market value; quick sale value (foreclosure)
83
Define Book Value
Cost - Depreciation
84
Define Business Value
Value of the business (based on rent); includes other assets than just real estate
85
Two ways to examine property to determine the "Highest & Best Use"
1. As IMPROVED
| 2. As if VACANT
86
Direct Cost vs. Indirect Cost
Direct = actual building or the structure
Indirect = NOT building or structure
--overhead, surveys, engineering
87
Three types of Depreciation
1. PHYSICAL Deterioration--every day wear & tear
2. FUNCTIONAL obsolescence--dated, not in favor
--EX. air conditioning, windows, 1 bathroom
(^Depreciated by how much it takes to fix it)
3. EXTERNAl Obsolescence--factors outside your own ppty
--EX. house by train tracks or a land fill
(^depreciated by benchmarking based on houses in the area)
88
COST approach uses
1. Special purpose commercial properties (only 1 use)
2. New residential homes
3. Fire or hazard insurance purposes
89
Sales Comparison approach uses
1. Residential Homes
2. Land or Lot appraisals
3. Commercial properties in an active market
90
Why use the sales comparison approach for land?
- It doesn't have cost (can't use cost approach)
| - it usually doesn't rent (can't use income approach)
91
Direct vs. Indirect Capitalization
Direct = convert SINGLE year's cash flow estimate into an indicator of value
Indirect=convert a STREAM of income estimates, including reversion from resale, into an indicator of value. (DCF Analysis)
