Financing Flashcards
(110 cards)
1
Q
Mortgage Financing
A
When a borrower gives a note promising to repay the borrowed money and executes a mortgage on the real estate for which the money is being borrowed as security
2
Q
Hypothecation
A
The process of securing a loan by pledging a property without giving up ownership of the property
3
Q
Lien-Theory States
A
Those that regard the mortgage as a lien held by the mortgagee (lender) against the property owned by the mortgagor (borrower)
4
Q
Title-theory States
A
Those that regard the mortgage document as a conveyance of ownership from the mortgagor to the mortgagee
5
Q
A valid mortgage or trust deed financing arrangement requires…
A
- a note as evidence of the debt
- the mortgage or trust deed as evidence of the collateral pledge
6
Q
Promissory Note
A
what the borrower signs for the amount borrowed. This creates a personal liability for the borrower to repay the loan.
7
Q
Mortgage
A
a legal document stating the pledge of the borrower to the lender. This document pledges the borrower’s ownership interest in the real estate in question as collateral against performance of the debt obligation.
8
Q
Mortgagor
A
Borrower
9
Q
Mortgagee
A
Lender
10
Q
Deed of Trust
A
conveys title to the property in question from the borrower to a trustee as security for the loan.
11
Q
Trustor
A
Borrower
12
Q
Financial Components of a Mortgage Loan
A
- principal
- interest and interest rate points
- term
- payments
13
Q
Principal
A
The capital amount, on which interest payments are calculated
14
Q
Amortizing Loan
A
part of the principal is repaid periodically along with interest, so that the principal balance decreases over the life of the loan.
15
Q
Loan Balance
Remaining Balance
A
the remaining unpaid principal of a mortgage loan
16
Q
Interest
A
a charge for the use of the lender’s money.
17
Q
Interest Rate
A
a percentage applied to the principal to determine the amount of interest due.
18
Q
Annual Percentage Rate (APR)
A
Because the interest rate on a mortgage loan does not reflect the full cost of the loan to the borrower, federal law requires a lender on a residential property to compute and disclose this which includes other finance charges in addition to the basic interest rate in the calculation.
19
Q
Usury
A
Many states have laws against this. the charging of excessive interest rates on loans
20
Q
Points
A
From the point of view of a lender or investor, the amount loaned in a mortgage loan is the lender’s capital investment, and the interest paid by the borrower is the return earned by the invested capital. It is often the case that a lender needs to earn a greater return than the interest rate alone provides.
21
Q
Discount Points
A
to make up the difference between the interest rate on the loan and the required return. This effectively raises the yield of the loan to the lender.
22
Q
Term
A
the period of time over which the loan must be repaid.
23
Q
Payments
A
The loan term, loan amount, and interest rate combine to determine the periodic payment amount. When these three quantities are known, it is possible to identify the periodic payment from a mortgage table or with a financial calculator.
24
Q
Maker
Payer
A
A borrower who executes a promissory note
25
Payee
The lender of a promissory note
26
Negotiable Instrument
the payee may assign it to a third party. The assignee would then have the right to receive the borrower's periodic payments.
27
Mortgagor
A borrower who executes a mortgage
28
Mortgagee
The lender named in the mortgage
29
Beneficiary
Lender
30
Escrow Account
Periodic payments of taxes and insurance that are held in a reserve fund. The Real Estate Settlement Procedures Act (RESPA) limits the amount of funds that the lender can require and hold for this purpose.
31
P&I (Principal & Interest) Payment
The borrower's monthly payment to the lender for principal and interest
32
PITI
Principal, Interest, Taxes, Insurance.
The amount which also includes the escrow payment.
33
Application of Payments
The amount of each payment is applied to various items in order of priority. Unless local law provides otherwise, this order is: 1) prepayment charges; 2) escrow; 3) interest; 4) principal; 5) late charges.
34
Hazard & Property Insurance
The borrower must keep the property insured as the lender requires. Insurance proceeds, in case of a claim, are applied first to restoring the property, or, if that is not feasible, to payment of the debt.
35
Mortgage Insurance
The lender may require the borrower to obtain private mortgage insurance, or PMI. Mortgage insurance protects the lender against loss of a portion of the loan (typically 20-25%) in case of borrower default. Private mortgage insurance generally applies to loans that are not backed by the Federal Housing Administration (FHA) or Veterans Administration (VA) and that have a down payment of less than 20% of the property value.
36
Borrower Not Released: Forbearance by Lender Not a Waiver
The lender reserves the right to take future action against the borrower for default, even if the lender decides not to take immediate action. If the lender agrees to change the terms of the loan, it does not release the borrower from the original liability.
37
Alienation Clause
Due on Sale Clause
Call Clause
If the borrower sells or transfers its interest in the property without the lender's approval, the lender may demand immediate and full repayment of the loan balance. It allows the lender to prevent the assumption of the mortgage by a buyer if the borrower sells the property.
38
Acceleration
The requirement to repay the loan before the scheduled date
39
Borrower’s Right to Reinstate
If the lender holds the borrower in default under the terms of the mortgage and proceeds to enforce its rights under the document, such as by foreclosing, the borrower has the right to reinstate his or her interest by performing certain actions. This usually means paying overdue mortgage payments and any other expenses the lender may have incurred in protecting its rights.
40
Redemption Clause
gives the borrower a period of time to satisfy obligations and prevent the lender from forcing a sale of the property.
41
Release Clause
Defeasance Clause
may specify that the mortgagee will execute a satisfaction of mortgage to the mortgagor.
42
Satisfaction of Morgage
Release of mortgage and mortgage discharge.
43
Release Deed
Deed of Reconveyance
the lender as beneficiary requests the trustee to execute this deed to the borrower as trustor. This deed or satisfaction should be recorded as necessary in county records to show that the mortgagee/trustee has extinguished all liens against the property
44
Initiation of Loan Application Process
occurs when the lender receives the completed application package from the applicant. Federal law requires the lender to accept all applications and to give applicants notice concerning the disposition of the application. If the lender denies the loan application because of fraudulent information on the application form, the borrower has no claim to a refund of the application fee.
45
Loan Underwriting
the process of assessing the lender's risk in giving a loan. Mortgage underwriting includes:
- evaluating the borrower's ability to repay the loan
- appraising the value of the property offered as security
- determining the terms of the loan
46
Loan Qualification
A lender assesses risks by examining, or qualifying, both borrower and property. In qualifying a borrower, an underwriter weighs the ability of the borrower to repay the loan. This requires an analysis of whether the borrower's income, cash resources, creditworthiness, net worth, and employment stability meet the lender's standards.
47
Loan-to-Value Ratio
LTV
The relationship of the loan amount to the property value, expressed as a percentage
48
Equal Credit Opportunity Act (ECOA)
requires a lender to evaluate a loan applicant on the basis of that applicant's own income and credit rating, unless the applicant requests the inclusion of another's income and credit rating in the application.
49
ECOA Prohibitions in Mortgage Loan Underwriting
Accordingly, a lender may not:
- discount or disregard income from part-time work, a spouse, child support, alimony, or separate maintenance. Further, the loan officer may not ask whether any of the applicant's income is derived from these sources.
- assume that income for a certain type of person will be reduced because of an employment interruption due to child-bearing or child-raising. The loan officer may not ask about the applicant's plans or behavior concerning child-bearing or birth control.
- refuse a loan solely on the basis that the security is located in a certain geographical area.
- ask applicants any question about their age, sex, religion, race or national origin, except as the law may require.
- require a spouse to sign any document unless the spouse's income is to be included in the qualifying income, or unless the spouse agrees to become contractually obligated, or the state requires the signature for some purpose such as clearing clouded title.
50
Qualifying The Borrower
1. current income or assets (excluding the value of the mortgaged property)
2. current employment status
3. credit history
4. monthly payment for the mortgage
5. monthly payments being made on other loans on the same property
6. monthly payments for other mortgage-related expenses
7. other debts
8. monthly debt payments compared to monthly income (debt-to-income ratio)
51
Qualified Mortgage
one that meets the “ability-to- repay” requirements, has certain required features and is not allowed to have others. There are exceptions to these rules for certain kinds of small lenders. Issuing one of these gives the lender certain legal protections in case the borrower fails to repay the loan.
52
Not Allowed in Qualified Mortgage
- an “interest-only” period--when interest, but not principal, is being repaid
- negative amortization–when principal increases over time
- balloon payment–larger than normal payment at the end of the
loan term
- loan term longer than 30 years
- excessive upfront fees and points
53
Required in Qualified Mortgage
- monthly debt no more than 43 % of monthly pre-tax income
- limits on points
54
Valuations
Before issuing a first mortgage loan, a lender must:
- notify the borrower within three days of the loan application that a copy of any appraisal will be promptly provided
- provide the borrower with a free copy of any valuation used, including appraisal reports, automated valuation model reports, and broker’s price opinions, promptly when completed and no later than three days before closing
- provide these copies even if the loan does not close
55
High Cost Loans
When the annual percentage rate (APR) or points and fees on a home loan, home equity loan, or home equity line of credit (HELOC) exceed certain limits, special consumer protections apply. The lender must provide information in advance that explains the costs, terms, and associated fees, and get a housing counselor to certify that the borrower has received counseling about the high-cost mortgage.
56
Income Ratio
establishes borrowing capacity by limiting the percent of gross income a borrower may spend on housing costs. Housing costs include principal, interest, taxes, and homeowner's insurance, and may include monthly assessments, mortgage insurance, and utilities.
57
Income Ratio Formula
Monthly housing expense / monthly GROSS income = income ratio
To identify the maximum monthly housing expense an income ratio allows, modify the formula as follows:
monthly gross income x income ratio = monthly housing expense
58
Debt Ratio
considers all of the monthly obligations of the income ratio plus any additional monthly payments the applicant must make for other debts. The lender will look specifically at minimum monthly payments due on revolving credit debts and other consumer loans.
59
Debt Ratio Formula
Monthly housing expense + monthly debt obligations / monthly GROSS income
= debt ratio
To identify the housing expenses plus debt a debt ratio allows, modify the formula as follows:
monthly gross income x debt ratio = monthly housing expense + monthly debt obligations
60
Income Stability Factors
- how long the applicant has been employed at the present job
- how frequently and for what reasons the applicant has changed jobs in the past
- how likely secondary income such as bonuses and overtime is to continue on a regular basis
- how educational level, training and skills, age, and type of occupation may affect the continuation of the present income level in the future.
61
Gift Letter
If some of a borrower's cash for the down payment comes as a gift from a relative or friend, a lender may require this from the donor stating the amount of the gift and lack of any requirement to repay the gift.
62
Net Worth
shows a lender the depth of the applicant's cash reserves, the value and liquidity of assets, and the extent to which assets exceed liabilities. These facts are important to a lender as an indication of the applicant's ability to sustain debt payment in the event of loss of employment.
63
Loan Commitment
When a lender's underwriters have qualified an applicant and the lender has decided to offer the loan, the lender gives the applicant a written notice of the agreement to lend under specific terms.
64
Firm Commitment
a straight forward offer to make a specific loan at a specific interest rate for a specific term. This kind of commitment is the one most commonly offered to home buyers.
65
“Lock-in” Commitment
an offer to lend a specific amount for a specific term at a specific interest rate, but the interest rate is subject to an expiration date, for instance, sixty days. This guarantees that the lender will not raise the interest rate during the application and closing periods.
66
Conditional Commitment
offers to make a loan if certain provisions are met. This kind of commitment generally applies to construction loans. A typical condition for funding the loan is completion of a development phase.
67
Take-out Commitment
offers to make a loan that will "take out" another lender's loan, i.e., pay it off and replace it. The loan is most often used to retire a construction loan. The lender agrees to pay off the short-term construction loan by issuing a long-term permanent loan.
68
Regulation Z
Its provisions cover the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the act.
69
Rescission
A borrower has a limited right to cancel the credit transaction, usually within three days of completion of the transaction. The right does not apply to "residential mortgage transactions," that is, to mortgage loans used to finance the purchase or construction of the borrower's primary residence.
70
Advertising Credit Requirements of Full Disclosure
if it includes:
- a down payment percentage or amount
- an installment payment amount
- a specific amount for a finance charge
- a specific number of payments
- a specific repayment period
- a statement that there is no charge for credit
71
Noncompliance of Regulation Z
Willful violation of Regulation Z is punishable by imprisonment of up to a year and/or a fine of up to $5,000. Other violations may be punished by requiring payment of court costs, attorneys' fees, damages, and a fine of up to $1,000.
72
RESPA (Real Estate Settlement Procedures Act)
a federal law which aims to standardize settlement practices and ensure that buyers understand settlement costs.
73
RESPA revisions prohibits…
lenders from paying kickbacks and unearned fees to parties who may have helped the lender obtain the borrower's business. This would include, for example, a fee paid to a real estate agent for referring a borrower to the lender.
74
Loan Information Booklet & Loan Estimate
What RESPA requires that lenders provide a loan applicant with
75
Closing Disclosure Form
The lender must provide the estimate of closing costs within three days following the borrower's application
76
Disclosures
The Consumer Financial Protection Bureau (CFPB) requires lenders to use two specific forms to disclose settlement costs to the buyer. A lender must provide a Loan Estimate (H-24) within three days of receiving the loan application and allow the buyer to see the Closing Disclosure (H-25) three days before loan consummation. A lender must also provide a buyer with a copy of the information booklet, “Your Home Loan Toolkit,” concerning mortgage loan, closing costs and closing procedures.
77
Intermediation
funds on deposit with financial institutions are loaned out to borrowers
78
Disintermediation
the owners of the savings invest their money directly by making loans or other investments.
79
Supply and Demand for Money
Money is a limited commodity subject to the effects of supply and demand. The federal government's monetary policy controls the supply of money in order to achieve the country's economic goals. An excessive supply of money usually causes interest rates to fall and consumer prices to rise. Conversely, an excessive demand for money, such as for mortgage loans, causes interest rates to rise and prices to fall. Regulation of the money supply addresses these fluctuations with the aim to control and limit wide swings in the supply and demand cycle. These efforts, in turn, help to buffer the economy from severe inflationary or recessionary trends.
80
Regulating the money supply:
The Federal Reserve System regulates the money supply by means of three methods:
- selling or re-purchasing government securities, primarily Treasury bills
- changing the reserve requirement for member banks. The reserve is a percentage of depositors' funds that banks and other regulated financial institutions may not lend out.
- changing the interest rate, or discount rate, the system charges member institutions for borrowing funds from the Federal Reserve System central banks
81
Primary Mortgage Market
consists of lenders who originate mortgage loans directly to borrowers.
82
Primary Mortgage Market Lenders
- savings and loans
- commercial banks
- mutual savings banks
- life insurance companies
- mortgage bankers
- credit unions
83
Servicing Loans
entails collecting the borrower's periodic payments, maintaining and disbursing funds in escrow accounts for taxes and insurance, supervising the borrower's performance, and releasing the mortgage on repayment. In many cases, primary lenders employ mortgage servicing companies, which service loans for a fee.
84
Portfolio Lenders
A primary mortgage market lender may or may not sell its loans into the secondary market. Lenders that originate loans for the purpose of retaining the investments in their own loan portfolio. are less restricted by the standards and forms. imposed on other lenders by secondary market organizations. In retaining their portfolio loans, these lenders may vary underwriting criteria and hold independent standards for down payment requirements and the condition of the collateral.
85
Secondary Mortgage Market
Lenders, investors and government agencies that buy loans already originated by someone else, or originate loans indirectly through someone else
86
Secondary Market Organizations
- Federal National Mortgage Association (FNMA, or Fannie Mae)
- Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac)
- Government National Mortgage Association (GNMA, or Ginnie Mae)
- investment firms that assemble loans into packages and sell securities based on the pooled mortgages
- life insurance companies
- pension funds
- primary market institutions who also invest as secondary lenders
buy pools of mortgages from primary lenders and sell securities backed by these pooled mortgages to investors. By selling securities, the secondary market brings investor money into the mortgage market. By purchasing loans from primary lenders, the secondary market returns funds to the primary lenders, thereby enabling the primary lender to originate more mortgage loans.
87
Federal National Mortgage Association
Fannie Mae
Fannie Mae is a government-sponsored enterprise, originally organized as a privately-owned corporation. As a secondary market player, it:
- buys conventional, FHA-backed and VA-backed loans
- gives banks mortgage-backed securities in exchange for blocks
of mortgages
- offers lenders firm loan purchase commitments, provided they conform to Fannie Mae's lending standards
- sells bonds and mortgage-backed securities
- guarantees payment of interest and principal on mortgage-
backed securities
88
Government National Mortgage Association
Ginnie Mae
a division of the Department of Housing and Urban Development. Its purpose is to administer special assistance programs and to help Fannie Mae in its secondary market activities. Specifically, GNMA
- guarantees payment on FNMA high-risk, low-yield mortgages and absorbs the difference in yield between the mortgages and market rates
- guarantees privately generated securities backed by pools of VA-and FHA-guaranteed loans
89
Federal Home Loan Mortgage Corporation
Freddie Mac
a government-sponsored enterprise, originally chartered as an corporation in 1970. As a secondary market player, FHLMC buys mortgages and pools them, selling bonds backed by the mortgages in the open market. It guarantees performance on FHLMC mortgages.
90
Conventional Mortgage Loan
a permanent long-term loan that is not FHA- insured or VA-guaranteed. Market rates usually determine the interest rate on the loan. Because of the lack of insurance or guarantee by a government agency, the risk to a lender is greater for a conventional loan than for a non- conventional loan. This risk is usually reflected in higher interest rates and stricter requirements for the down payment and the borrower's income qualification. At the same time, conventional loans allow greater flexibility in fees, rates, and terms than do insured and guaranteed loans.
91
Primary Sources of Conventional Loans
banks and savings and loan associations. Other lenders include credit unions, life insurance companies, pension funds, mortgage bankers, and private individuals
92
FHA-Insured Loans
The Federal Housing Administration (FHA) is an agency of the Department of Housing and Urban Development (HUD). It does not lend money, but insures permanent long-term loans made by others. The lender must be approved by the FHA, and the borrower must meet certain FHA qualifications. In addition, the property used to secure the loan must meet FHA standards. The FHA insures that the lender will not suffer significant loss in the case of borrower default. To provide this security, FHA provides insurance and charges the borrower an insurance premium. FHA loans typically have a higher loan-to-value ratio than conventional loans, enabling a borrower to make a smaller down payment.
93
VA-guaranteed Loans
The Veterans Administration (Department of Veterans Affairs) offers loan guarantees to qualified veterans. The VA, like the FHA, does not lend money except in certain areas where other financing is not generally available. Instead, the VA partially guarantees permanent long-term loans originated by VA- approved lenders on properties that meet VA standards. The VA's guarantee enables lenders to issue loans with higher loan-to-value ratios than would otherwise be possible. The interest rate on a VA-guaranteed loan is usually lower than one on a conventional loan. The borrower does not pay any premium for the loan guarantee, but does pay a VA funding fee at closing.
94
Negatively Amortized Loan
causes the loan balance to increase over the term. This occurs if the borrower's periodic payment is insufficient to cover the interest owed for the period. The lender adds the amount of unpaid interest to the borrower's loan balance.
95
Adjustable Rate Mortgages (ARMs)
allow the lender to change the interest rate at specified intervals and by a specified amount. Federal regulations place limits on incremental interest rate increases and on the total amount by which the rate may be increased over the loan term.
96
Fixed & Graduated Payment Loans
Loans may have variable payment amounts over the term of the loan, or a single fixed payment amount. With a graduated payment mortgage, the payments at the beginning of the loan term are not sufficient to amortize the loan fully, and unpaid interest is added to the principal balance. Payments are later adjusted to a level that will fully amortize the loan's increased balance over the remaining loan term.
97
Interest-only Loans
periodic payments over the loan term apply only to interest owed, not to principal. At the end of the term, the full balance must be paid off in a lump-sum, "balloon" payment. Since these loans have no periodic principal payback, their monthly payments are smaller than amortizing loans for the same amount at the same rate of interest.
98
Buydown Loan
entails a prepayment of interest on a loan. The prepayment effectively lowers the interest rate and the periodic payments for the borrower. Buydowns typically occur in a circumstance where a builder wants to market a new development to a buyer who cannot quite qualify for the necessary loan at market rates. By "buying down" a borrower's mortgage, a builder enables the borrower to obtain the loan. The builder may then pass the costs of the buydown through to the buyer in the form of a higher purchase price.
99
Purchase Money Mortgage
the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to "take back" a note, or to "carry paper," on the property. Purchase money mortgages may be either senior or junior liens.
100
Wraparound
the seller receives a junior mortgage from the buyer, and uses the buyer's payments to make the payments on the original first mortgage. It enables the buyer to obtain financing with a minimum cash investment. It also potentially enables the seller to profit from any difference between a lower interest rate on the senior loan and a higher rate on the loan. The loan is possible only if the senior mortgagee allows it.
101
Contract for Deed
the seller retains title and the buyer receives possession and equitable title while making payments under the terms of the contract. The seller conveys title when the contract has been fully performed.
102
Home Equity Loan
The ostensible purpose of this type of loan is to obtain funds for home improvement. Structurally, the loan is a junior mortgage secured by the homeowner's equity. For some lenders, the maximum home equity loan amount is based on the difference between the property's appraised value and the maximum loan-to-value ratio the lender allows on the property, inclusive of all existing mortgage loans.
103
Package Loan
finances the purchase of real estate and personal property. For example, a package loan might finance a furnished condominium, complete with all fixtures and decor.
104
Construction Loan
finances construction of improvements. This type of loan is paid out by the lender in installments linked to stages of the construction process. The loan is usually interest-only, and the borrower makes periodic payments based on the amount disbursed so far. As short-term, high-risk financing, the interest rates are usually higher than those for long-term financing. The borrower is expected to find permanent ("take out") financing elsewhere to pay off the temporary loan when construction is complete.
105
Bridge Loan
used to cover a gap in financing between short-term construction financing and long-term permanent financing. For instance, a developer may have difficulty finding a long-term lender to take out the construction lender. However, as the construction loan is expensive and must be paid off as soon as possible, the developer may find an interim lender who will pay off the construction loan but not agree to a long-term loan.
106
Participation Loan
the lender participates in the income and/or equity of the property, in return for giving the borrower more favorable loan terms than would otherwise be justified. For instance, the borrower makes smaller periodic payments than the interest rate and loan amount require, and the lender makes up the difference by receiving some of the property's income. This type of loan usually involves an income property.
107
Permanent (Take-Out) Loan
a long-term loan that "takes out" a construction or short-term lender. The long-term lender pays off the balance on the construction loan when the project is completed, leaving the borrower with a long-term loan under more favorable terms than the construction loan offered.
108
Reverse Annuity Mortgage
a homeowner pledges the equity in the home as security for a loan which is paid out in regular monthly amounts over the term of the loan. The homeowner, in effect, is able to convert the equity to cash without losing ownership and possession.
109
Blanket Mortgage
secured by more than one property, such as multiple parcels of real estate in a development.
110
Ad Valorem
property tax levied annually on the taxable value of a property in order to help fund government and public services
