Real Estate Finance Flashcards
(190 cards)
1
Q
In the familiar phrase, a ready, willing, and able buyer, the word able means able to pay. Since few buyers have sufficient financial resources to allow them to pay cash for the entire purchase price of a
property, most buyers pay for real property through one form or another of ____ _________.
A
debt financing
2
Q
The ______ ______ was a carefully structured pyramid of lords, knights, vassals, and serfs which gradually evolved into the ________ ______ of land
ownership and which allowed ownership in ___ ______, that is, the private ownership of real property.
A
feudal system
freehold system
fee simple
3
Q
We now have the ________ ______ of land ownership which allows individuals to own land absolutely, without obligation to political superiors.
A
allodial system
4
Q
In time, it became possible for the borrower to petition a court of equity or a church court (chancery) for an extension of his loan. The borrower, in a phrase still in use today, could hope to be allowed an
“_________ _____ of __________”, that is, additional time within which to pay his debt.
A
equitable right of redemption
5
Q
This promise to repay and its specific conditions and stipulations are contained in the central instrument of the loan agreement, the __________ ____. It is proof of the debt.
A
promissory note
6
Q
Therefore, the promise to repay has been traditionally backed up by some sort of security arrangement, a second loan instrument with which the borrower pledges an interest of one kind or another in the property he is financing to the
lender. The pledged property is called __________.
A
collateral
7
Q
Most states follow what is known as the ____ ______ (the lender holds a lien), but some follow the _____ ______ (the lender holds the title), and a few use a mixture of both concepts.
*In Louisiana, the title is in the borrower’s name, but the lender has a lien.
A
Lien theory
title theory
8
Q
In the _____ _____, the lender receives a limited form of legal title to the pledged property. The borrower is held to have conveyed, or alienated, limited legal title to the lender. This conveyance is valid as long as the mortgage debt is unpaid. Paying off the debt is said to ______ the conveyance.
A
title theory
defeat
9
Q
_______________ of _____ ______:
1. Lender’s rights are manifested by contract for deed.
2. Lender remains the legal owner of the property until the debt is paid.
3. Borrower retains equitable rights in the property.
A
Characteristics of Title Theory
10
Q
The ____ ______ is used in most states, including Louisiana. A lien simply confers the legal right to attach a claim against a property, to go into court, if necessary, to enforce that claim, and to secure whatever compensation the court deems just and appropriate. In states which apply the lien theory to real property
pledged as collateral, the borrower is said to ___________ title to the lender. It means that the lender is given a lien against the borrower’s collateral property and, if default occurs, the lender can file foreclosure proceedings in order to recover his interest in the property.
A
Lien theory
hypothecate
11
Q
_______________ of ____ ______:
1. Borrower’s and lender’s rights are described in a promissory note and mortgage agreement.
2. Borrower holds legal title with the lender having a lien or security interest.
3. The defaulted borrower is allowed to retain possession, title and rights in the property until the lien is
perfected by foreclosure.
4. Borrower, after default, may have equitable right of redemption. After foreclosure sale, borrower may
have statutory period of redemption.
A
Characteristics of Lien Theory
12
Q
In the _____ ______, the borrower deeds his property to the lender. The mortgage conveys title to the borrower when the
property is paid for. In the ____ ______, the borrower gives only a lien right to the lender. The borrower retains title to the property.
A
title theory
Lien theory
13
Q
A few states have adopted a _____ or intermediate ______ of collateral property midway between the lien and the title
theories. In these states, the mortgage is considered to be a lien, but if the borrower defaults, title is conveyed to the
lender. It is important to notice that even though there are these differing theories of collateral property, that under
either theory, or a mixture of these theories, the borrower actually retains possession of the mortgaged property until the debt is paid off, at which time the mortgage is said to be ________.
A
mixed theory
defeated
14
Q
_________ and _____ _____ are security instruments that creates a lien, or in other words, it is a document that makes property security for the repayment of a debt. This collateral interest is created on behalf of the lender. The participants of a real estate loan are the _________ and the _________. The ________ is a person or entity who makes a mortgage, the borrower. The borrower conveys a lien on his or her
property to another person, bank or other institution. The _________ is the party receiving the mortgage, the lender. The lender receives a lien on the borrower’s property as security for the debt.
A
Mortgages
trust deeds
mortgagor
mortgagee
15
Q
________ of a ________:
1. The provisions of the agreement.
2. Legally competent parties.
3. Mutual consent.
4. Exchange of consideration.
5. Legal purpose.
A
Elements of a Mortgage
16
Q
The _________ ____ is the borrower’s personal, unconditional promise to repay the loan. This promise can be found in clause #1 of the specimen note which follows. The borrower’s promise to repay is construed to be an unconditional promise, that is, it makes the note a negotiable instrument, one which
may be assigned freely by the lender to another party, in much the same way as a check can be endorsed to make it payable to another party. It is important to remember that it can be a debt instrument without a mortgage. If so, it is an _________ ____. A signature loan is one having no mortgage and no collateral.
A
promissory note
unsecured note
17
Q
The note contains the name of the borrower and the lender, the amount of the borrower’s debt (loan principle), and the specifics of arrangements for repayment: the rate of interest, which cannot exceed the usury rate, the amount and number of monthly installments, and the duration of the loan - its time of beginning and ending.
A
Promissory Note Clause # 1
18
Q
The late pay clause, is self-evident. This clause both encourages the borrower to make his payments on time and compensates the lender for delays in receiving his expected payments.
A
Promissory Note Clause #2
19
Q
The note is termed the ____________ ______, and is included in the promissory note as well as the mortgage. It gives the lender the right to demand payment in full of the entire unpaid debt in the event of default. Without this clause the lender would have to go into court month by month to collect a delinquent borrower’s obligation. This process could conceivably last as long as the duration of the loan itself. The lender avoids the possibility of having to go through this process by incorporating the
acceleration clause. Once the borrower defaults, his entire debt comes due automatically.
A
Promissory Note Clause #3
acceleration clause
20
Q
The Interest Escalation clause, pushes the interest rate up to the highest rate allowed by law if default occurs and the debt is accelerated. (The practice of charging more that the legally allowable
interest is termed _____)
A
Promissory Note Clause #4
usury
21
Q
This is the __________ _____ or the __________ _______ ______. (This clause is absent in FHA
and VA loans). Many notes include a penalty for prepayment or restrict loan prepayment, following the legal reasoning that the lender has contracted to perform no more and no less than stated in the note. Since accepting payments larger than their agreed upon amount or before their due dates in effect deprives the lender of a portion of the interest which the borrower has promised to pay, lenders protect their yield through the _________ _______ ______. To asses a penalty fee, the fee is based on a percentage of the unpaid loan balance if the note is paid in advance of its maturity date. Prepayment penalties are usual in the first few years of existence of the note. If the borrower is not permitted to pay off
any or all of the loan’s balance before the regularly scheduled payment dates, the prepayment penalty clause is called a ____-__ ______.
A
Promissory Note Clause #5
prepayment clause
prepayment penalty clause
lock-in clause
22
Q
This clause is especially important in that it joins the promissory note to the mortgage or trust deed agreement. Without this clause, the promissory note would be a personal loan agreement. With it, the note is supported, or secured, by the mortgage, the borrower’s actual pledge of real property which backs
up his promise to pay.
A
Promissory Note Clause #6
23
Q
The ________ __________, that is, the mortgage or trust deed, gives the lender legal recourse in the event of the borrower’s failing to meet his obligations as contained in the promissory note, and they also contain certain covenants regarding how the borrower may or may not use the collateral property. Though
mortgages and trust deeds are similar in purpose, they differ in many respects
A
security instrument
24
Q
The ________ is a contract between the borrower and the lender. The borrower is referred to as the _________, and the lender is referred to as the _______. The borrower is the giver of his pledge of his property as collateral. He gives a lien or sometimes a title interest in it to the lender. The lender’s lien or title interest allows him to foreclose if the borrower defaults.
A
mortgage
mortgagor
mortgagee
25
In the mortgage agreement, the mortgagor (borrower) is said to __________ an interest in his property to the mortgagee (lender). To ___________ an interest in real property is to pledge a specific property as collateral without actually giving up possession or the other rights associated with ownership. The
mortgagee's rights allow him to go into court and obtain a judgment against the
mortgagor in the event of his default.
hypothecate
26
In order to give notice of the lien, the mortgage must be ________ at the office of the county or parish ________ in which the property is located.
recorded
recorder
27
A real estate mortgage always requires an accompanying promissory note that is identified by the legal action of a ______.
notary
28
When the mortgagor's debt is completely satisfied, the mortgagee cancels the note by executing a ____________ of _________, which cancels the debt and defeats any interest the mortgagee has had in the
collateral property. Like the mortgage itself, the satisfaction should be recorded to insure its legal effectiveness.
satisfaction of judgment
29
Because mortgage law varies from state to state and mortgage practice is partially a matter of the needs and preferences of the various lenders and borrowers, there is no such thing as a "________" mortgage
form.
standard
30
________ Of a ________:
Clause #1: contains date, place and names of parties.
Clause #2: amount of mortgagor's debt and schedule of payments.
Clause #3: the ________ ______, pledging the collateral property to the mortgage. In lien theory states, this clause will read "________ and ______"; in title theory states, it will read "________ and _____".
Clause #4: legal description of mortgaged property, also listing any personal property included in the mortgage.
Clause #5: the ________ of _____ ______, affirms that mortgagor holds good and clear title to the property and has the right to convey it.
Clause #6: the __________ ______ removes the mortgage when the debt is paid.
There may also be an __________ ______ which gives the lender the right to increase the rate of interest during the length of the mortgage.
Elements of a Mortgage
Granting Clause
mortgage and pledge
mortgage and grant
Warranty of Title clause
Defeasance clause
escalation clause
31
Covenant to pay _____ and _______ _______.
taxes and special assessments
32
_________ _______ obligates the borrower to maintain adequate hazard insurance to protect the property. In some mortgages called ____ _________ (principle, interest, taxes, and insurance), the mortgagor agrees to assign a certain portion of each monthly payment for insurance and taxes. These funds are placed in escrow accounts.
Insurance covenant
PITI Mortgages
33
________ of ____ _______ is a covenant against waste. This means keeping the property in good repair, not allowing it to go to ruin.
Covenant of good repair
34
________ _______ _______ prohibits the mortgagor from removing any property covered by the mortgage.
Covenant against removal
35
________ _________ ________ permits the mortgagee to inspect the property to determine whether the mortgagor is keeping the property in good repair.
Property inspection covenant
36
__________ ______, also known as ___ on ____ ______, makes the mortgage non-assumable by giving
the lender the following rights:
a. right to demand payment in full.
b. right to investigate credit of and approve any buyer who wishes to assume the mortgage.
c. allows lender to raise the interest rate on alienated property above that of the original loan.
Alienation clause
Due on Sale clause
37
________ ______, provides for a receiver to oversee the operations of income producing properties while in foreclosure. This prohibits a borrower from collecting rents while neglecting to pay property taxes, and perform maintenance, etc. In trust deeds, this clause is called the __________ of _____ ______.
Receiver clause
assignment of rents clause
38
______ ____ ______, applies to owner occupied residences in foreclosure.
Owner's rent clause
39
_____________ ______, is a feature of certain types of mortgages. It gives the lender's permission for a subsequent lender to assume first mortgage lien rights. That is, if the mortgage goes into foreclosure, the
holder of a second, or junior mortgage can take first priority for satisfaction of his claim at the foreclosure proceedings. The most common instance of subordination occurs in the sale of vacant land. Frequently, such a transaction is carried out with owner financing.
Subordination Clause
40
If the buyer plans to build on the property, he may require ____________ _________, and to obtain a construction loan, it is essential that the owner financing
contain a subordination clause, since lending institutions are only permitted to make first mortgages in this type of situation. In this instance, subordination actually works to the first lender's advantage, since the lender may be able to sell the property for a greater price than he could before.
construction financing
41
Like the mortgage, the _____ ____ is an instrument that is employed to pledge an interest in real property in exchange for a loan or other consideration. However, unlike the mortgage, the _____ ____ involves not two, buy three parties. The borrower is the _______, the lender is the ___________, and the added third party is the _______.The _______ is an impartial party appointed to oversee the trust agreement. They may be a private
institution, such as a title company, or it may be a private person.
trust deed
trustor
beneficiary
trustee
42
The _________ of the _____ ____:
1. The owner of a property (trustor) transfers title to a third party (trustee) in exchange for a loan or other
consideration from the lender or beneficiary. The borrower or trustor executes both a promissory note and
a trust deed. The borrower's signature is required on both documents.
2. The trustee holds the title for the benefit of the lender or beneficiary to secure the loan the lender has made to the trustor.
3. The trust deed is said to convey "bare" or "naked" title which is held by the third party, the trustee. As long as the trustor does not go into default, he retains full legal rights to the property. The trust deed conveys along with the title, a power of sale. If the trustor does not pay his debt, the trustee may sell the property and turn the proceeds of the sale over to the lender.
4. When the trust deed is paid off, the trustee must give the trustor a ____ of __________ which transfers the title back to the original owner. (The clause of reconveyance is similar to the defeasance clause in a mortgage)
The Mechanics of the Trust Deed
deed of reconveyance
43
If the borrower or trustor does default, the beneficiary conveys the trust deed to the trustee and instructs him to sell the property. Because of the trust deed's _____ of ____ ______, the property can be sold
without the necessity of going through the court action of a foreclosure.
Power of Sale Clause
44
The primary difference between a ________ and a _____ ____ is that a mortgage creates a lien and a deed conveys title. The clauses and covenants of the trust deed are basically similar to those of a mortgage. However, it should be noted that three parties must be named in the trust deed as opposed to two in the
mortgage. The trust deed also contains a power of sale clause, warranty to title clause, reconveyance clause, acceleration clause, receiver clause, and owner's rent clause.
mortgage and trust deed
45
________ for ____ , also known as the ___________ ____ ________, ___________ _____ ________, _________ to ______, and in Louisiana, Bond for Deed.In this type of financing, the sale and financial agreement are generally in one document. The buyer gives a downpayment plus a promissory note and mortgage or trust deed in exchange for certain rights to the
seller's property. No third party lender need be involved. The buyer does not receive full title until the terms of the contract have been met. The seller delivers the deed when all of the payments have been made. The purchaser, however, has all of the privileges of ownership in the meantime.
Contract for Deed
Installment Land Contract
Conditional Sales Contract
Agreement to Convey
46
The _____ ________ of a ________ for ____are:
1. A description of the deed for the property.
2. Conditions of the sale, such as purchase price and terms of the loan.
3. The buyer is responsible for paying taxes and insurance.
4. Signatures of both parties, dated and notarized.
5. Escrow provisions and prepayment privilege.
6. Protections for the seller, such as the right to declare entire purchase price due if buyer defaults.
The basic elements of a contract for deed
47
________ _____ _______ also known as a ________ _____ _____ ____.The seller accepts a promissory note and mortgage or trust deed from the buyer in partial or complete payment for the property. The buyer in turn receives legal title to the property and all the accompanying
rights of ownership. In effect, the property becomes the buyer's collateral for the loan.Purchase money agreements may be either first or second mortgages. If a first purchase money mortgage is executed simultaneously with a deed to the property, the purchase money mortgage has first claim against the property, superseding any homestead rights which might normally prevail in the state in
which the property is located. The primary difference between the purchase money mortgage and the contract for deed is that, in the contract for deed, the seller retains legal title to the property until part or all of the debt is paid. Until this time the buyer holds equitable title only. With the purchase money mortgage, the buyer receives full legal title at the time of sale.
Purchase Money Mortgage
Purchase Money Trust Deed
48
___________: If the borrower fails to meet the obligations of the mortgage, the lender has the right to foreclose on the
collateral property and sell the property to redeem the debt. Under the method termed ______ ___________, if the amount received from the sale exceeds the borrower's debt, the lender profits. This method has gradually been modified to treat the borrower more fairly. Under the practice which has evolved, ___________ by ____, the lender is required to refund to the borrower any profit realized on the sale of the foreclosed property. If the lender is unable to recover his full interest in the collateral property, he may, in some states, be permitted to seek a __________ ________ against the borrower in order to recover the remaining debt. The __________ ________ allows the lender to attach and seize the borrower's unsecured personal and real property to make up the difference between the amount realized at the foreclosure sale and the borrower's remaining outstanding obligation. However, if the buyer has acquired the property "subject to" an existing mortgage he cannot have a __________ ________entered against him.
Foreclosure
strict foreclosure
foreclosure by sale
deficiency judgment
49
____ of _____ __________: Because of the trust deed's "_____ of ____" ______, the property can be sold without the necessity of going through the court action of a foreclosure. The lender or its trustee has the right to sell the collateral property upon default, rather than having to file expensive legal proceedings. The trust deed also eliminates the _________ ______ of __________. The deed of trust is the most common form of ____ __________. The lender/beneficiary notifies the trustee in writing of the delinquency of the trustor/borrower and instructs the trustee to start foreclosure proceedings. A 90 day
notice is forwarded to the trustee and the sale is advertised in the newspaper. The trustee or any junior lienholders have the right to bring the loan up to date with payment of delinquent payments plus accrued collection costs, delinquency fees, etc.
Deed of Trust Foreclosure
power of sale clause
statutory period of redemption
sale foreclosure
50
Upon default, the property is sold at the Sheriff's sale and proceeds, up to the amount of the debt, go to the lender.
Mortgage Foreclosure
51
____ with ____________: Louisiana permits this type of foreclosure. If the property does not sell for the full amount owed, the creditor may obtain a deficiency judgment for the amount owed by the borrower
above the proceeds of the sheriff's sale. The debtor has the right to bid for the property only if the bid equals at least two-thirds of the appraised value.
Sale with Appraisement
52
____ without ____________: If no appraisal has been made, the lender forfeits the right to obtain a deficiency judgment.
Sale without Appraisement
53
____ in ____ of ___________, also known as a "friendly foreclosure". Under this process the borrower, "sells" the property to the lender in return for the lender canceling the note. The lender does not retain the
right of a deficiency judgment if the property sells for less than the borrower owed.
* In Louisiana, this process is called dation en paiement.
Deed in Lieu of Foreclosure
54
Foreclosure may take place by either ________ _______ or _________ _______. _________ _______ is much quicker because it does not have to go through the judicial process. It already includes a waiver of
notice, that is, the legal delay of foreclosure have been waived.
ordinary process
executory process
55
_________ _____ of __________ If the borrower's property is in foreclosure, he may elect to redeem it in one of two possible ways, depending on the practice of his own state.
Borrower's Right of Redemption
56
_________ __________ - occurs during the period of time after the borrower goes into default but before the actual foreclosure sale. During this period, the borrower, or other lien holder, can redeem the property by paying the current indebtedness. If the mortgage contains an acceleration clause, the entire debt mayhave to be paid in order to redeem the property.
Equitable redemption
57
_________ ______ of __________- occurs after the actual foreclosure sale. Depending on the state, the borrower may have up to two years to redeem his property by paying off the debt in full, and he may be
permitted to remain in possession of the property. During this period, the court may appoint a receiver to pay operating costs, collect rents, and otherwise look after the property. The time limit for statutory redemption varies from state to state.
*In Louisiana there is no statutory redemption except for tax sales which is 3-5 years..
Statutory rights of redemption
58
Foreclosure by power of sale is referred to as ___-________ ___________. The borrower is allowed only a period of reinstatement, extending only to the time the property is sold.
non-judicial foreclosure
59
Parties of a Mortgage
Mortgagor and Mortgagee
60
Parties of a Trust Deed
Trustor, Beneficiary and Trustee
61
Security of Agreement of Mortgage
Mortgage ( may require a lien, title or mixture)
62
Security of Agreement of Trust Deed
Deed in Trust
63
Default Provision of Mortgage
Equitable Right of Redemption, Statutory Rights in some states
64
Default Provision of Trust Deed
Equitable or Statutory Rights of Redemption depending on state.
65
Default of Mortgage
Court foreclosure: deficiency
66
Default of Trust Deed
Power of Sale or Judicial Foreclosure
67
Remedy of Mortgage
Judgments allowed in some states
68
Remedy of Trust Deed
Deficiency judgment in some states
69
Release of Collateral of Mortgage
Via "release of mortgage"
70
Release of Collateral of Trust Deed
via "reconveyance" or "deed of reconveyance"
71
Loans may be divided into two general categories:
A. ____________ _____
B. __________ ______ _____
A. Conventional Loans
B. Government Backed Loans
72
Non-government backed loans are called ____________ _____. Until the Depression and the resulting new deal legislation, all loans were ____________. The lender's only protection against the borrower's default
was the lender's own skill in underwriting the loan, and ultimately, the value which might be realized from selling the collateral property at a foreclosure sale.
conventional loans
conventional
73
The process of determining the risk a lender is incurring by lending a sum of money to a certain borrower to finance a particular property is referred to as ____________, or ____ _____________.
underwriting
loan qualification
74
When underwriting a loan, the lender concentrates on three areas:
1. ________
2. ________
3. ________ of the _______.
1. borrower
2. property
3. location of the property.
75
In __________ the ________, a variety of factors are taken into consideration
including income, character, expenses, savings and other assets, occupation, income stability, length of time at current employment, and desire to repay. Standard procedure is to obtain a credit report from which the lender determines the borrower's credit history. The lender usually uses a ratio of 2 1/2 to 1 in
verifying the ability to repay the loan. In other words, the purchaser should be able to afford a home loan that is 2 1/2 times as large as his or her annual gross income.
evaluating the borrower
76
__________ the ________: An appraisal and title report are usually ordered to establish the property's present value and to uncover any unsatisfied liens or other encumbrances against it. The appraisal
establishes the fair market value of the property, which may or may not be the same as the purchase
price.
Evaluating the Property
77
_________ the ________: The lender takes into consideration such factors as the presence of adequate utilities, street paving and proximity to schools, churches, shopping and recreational facilities. ________ ____________, that is, forces outside the property itself which cause a decline in its value, is also considered.
Evaluating the location
Economic obsolescence
78
Note however, that federal legislation prohibits the lender from refusing to make a loan on a property
based solely on undesirability of the location. In the past, some lenders have systematically discriminated against certain neighborhoods by use of a practice termed _________.
redlining
79
____ to _____ _____: This is the term used to describe the relationship between the amount of the down payment and the amount of the loan. To find the LTVR, divide the amount of the loan by either the appraised value or the selling price, whichever is less.
Example: Fred wishes to purchase a property for $95,000. The appraised value is $98,000. The bank will lend Fred $85,500.
What is the LTVR?
LOAN AMOUNT divided by Sales Price = $85,500 divided by $95,000 = .90, or 90% LTVR
Loan to Value Ratio
80
Before the Depression, _____ were extremely conservative, ranging from 40% to 60%. However, conventional loans of today normally have an ____ of 80%. The reason for this change is the use of
public and private loan insurance and guarantee programs.
LTVR's
81
Your ____-to-______ _____ is all your monthly debt payments divided by your gross monthly income. This number is one way that lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.
debt-to-income ratio
82
To calculate your ____-to-______ _____ you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.
Example: If you pay $1500 a month for your mortgage, $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly are $2000. If your gross monthly income is $6000, then your ____-to-______ _____ is 33%. In most cases 43% is the highest ratio a borrower can have and still get qualified mortgage.
debt-to-income ratio
83
____________ ____ ________: Generally, any loan approved for more than 80% LTVR must have _______ ________ _________ (PMI). The borrower pays an insurance premium for an insurance policy which covers the top portion of the loan proceeds advanced over and above the standard 80%. This insurance covers the potential deficiency in proceeds which the lender might experience after foreclosure and sale of the collateral.
Conventional Loan Insurance
private mortgage insurance
84
There are two type of government-backed loans: ___ _______ _____ and __ __________ ___
FHA Insured Loan & VA Guaranteed Loans
85
The federal government created the ___ in 1934, as an alternative to conventional lending practices when it became apparent that conventional lenders were unable to cope with extreme fluctuations in the economy. The ___ is entirely self-supporting and operates over fifty programs providing assistance to
homeowners and other borrowers. It is important to note that government backed loans, including VA, are exempt from the federal usury law. (Usury laws set the maximum interest rate that can be charged.)
FHA
86
The FHA rarely provides mortgage funds directly to borrowers; the FHA does not build houses and the FHA does not set interest rates. Rather, the FHA is a large _______ ________ ________ ______. FHA
loans are insured by the federal government through the __________ of _______ and _____ ___________ (HUD). The FHA insures lenders against loss from borrower default. As the mortgage
industry continues to change, FHA loans have taken on greater significance. In the first half of fiscal year 2008, for example, FHA-insured loans made up approximately ¼ of the mortgage insurance market. A year later, FHA-insured loans had more than a 60% share of the mortgage insurance market.
federal mortgage insurance agency
Department of Housing and Urban Development
87
The FHA’s main objective is to assist in providing housing opportunities for low- and moderate-income families. The Federal Housing Administration does not have income limits to determine who is eligible for FHA assistance. Anyone who is a U.S. citizen, permanent resident, or non-permanent resident with a work visa and who meets the lending guidelines can obtain a loan. The FHA does, however, set a _______ _______ amount that it will insure.
maximum mortgage
88
Note that lenders who make FHA-insured loans must first be approved by ___. Mortgage brokers who wish to originate FHA loans should also apply for some category of ___ approval. A non-approved
mortgage broker cannot receive any fee for the processing and origination of an FHA-insured mortgage. ___ does allow non-approved mortgage brokers to receive fees for counseling the borrower under certain circumstances, however.
HUD
89
____________ for ___ _______ _____:
Downpayment of at least 3.5% of the purchase price, but closing costs can be included in the loan
Borrower is charged a mortgage insurance premium
Property must be appraised by an approved FHA appraiser
Maximum mortgage limits are set for various regions of the country
Borrower must meet standard FHA credit qualifications
Includes financing for manufacture or factory-built housing
Requirements for FHA Insured loans
90
The FHA’s ______ ________ _________ ____ (MMI) provides a function similar to private mortgage insurance companies: Insuring private lenders against losses caused by borrower defaults on FHA-insured loans.
Mutual Mortgage Insurance Fund
91
Under the plan, lenders approved by the FHA either submit applications from prospective borrowers to the regional HUD Homeownership Center for approval or may act as ______ _________. ______ _________ (DEs) are lenders authorized to underwrite their own FHA loan applications. They are responsible for the
entire mortgage process, through closing, and perform underwriting functions themselves (credit examination, appraisal review, etc.). When a ______ _________ approves and closes a loan, the application for mortgage insurance is then submitted to the FHA.
Direct Endorsers
92
___ ___________ _________: The FHA established guidelines for approving borrower and property, as well as other loan regulations, for FHA loans; and their regulations have the force and effect of law. These guidelines generally apply to
all standard ___ ___(_) loans on single-family homes. Other FHA loan types may have different guidelines or additional criteria.
FHA Underwriting Standards
FHA 203(b)
93
As you’ll see, the main difference between FHA loans and conventional loans is that FHA loans have more liberal income __________ _________. When evaluating an application for an FHA loan, underwriters
or lenders also look at the borrower’s ______ _______, ______, and ___ _____ – just as for conventional loans, however they can be more lenient. For example, while an underwriter would fee more secure if the borrower has sufficient cash (net worth) to pay the down payment and closing costs on an FHA loan, the
entire down payment may be a non-repayable gift from a relative.
qualifying standards
credit history, income, and net worth
94
Also, while the FHA typically allows more ___________ when evaluating a borrower’s past situations and difficulties, many lenders impose minimum credit score requirements when approving a borrower.
flexibility
95
The FHA is also less stringent when it comes to a borrower’s level of income. While no _______ or _______ income is required for an FHA loan, the borrower must have sufficient income to service the
debt on the home mortgage and all other credit obligations. This is determined by _______ _______ and _____ ____ _______ ______ that are slightly higher than those allowed for conventional loans.
minimum
maximum
housing expense
total debt service ratios
96
A borrower’s _______ _______ _____ is the relationship of the borrower’s total monthly housing expense to income, expressed as a percentage.
housing expense ratio
97
The lender uses a top ratio and a bottom ratio in deciding what a borrower can afford in _______ ________. The top ratio is calculated by dividing the borrower's new monthly mortgage payment by his monthly gross income. Typically this ratio should not exceed 28%. The bottom ratio is equal to his new monthly mortgage payment plus his monthly debt divided by his gross income per month. Typically this ratio should not exceed 36%
housing expenses
98
FHA considers a borrower’s income adequate for a loan if the proposed total mortgage payment does not exceed 31% of gross stable monthly income. Although this is higher than allowed for conventional loans, FHA’s maximum mortgage payment includes _________,
________, _____, and _________ (PITI) as well as any monthly homeowners association dues.
principal, interest, taxes and insurance
99
When you know a borrower’s stable monthly income, you can multiply that by the _______ _______ _____ to determine the maximum monthly housing expense the borrower can afford. For example, if a borrower has a stable monthly income of $3,200, the maximum housing expense on an FHA loan would be $992 ($3,200 X .31).
housing expense ratio
100
An FHA loan requires a down payment of at least 3.5% of the home’s purchase price or appraised value, whichever is less. The minimum down payment can be a non-repayable gift from a relative or a borrower may qualify for a down _______ __________ _____.
payment assistance grant
101
___ permits no pre-payment penalties or lock-in clauses on its insured loans.
___ only insures first mortgages.
___ loans can be assumed without an interest increase.
Effective for loans made after 1989, the person assuming the loan must be able to qualify.
FHA
102
Lenders will only permit those loans that have a "subject to transfer" clause to be taken over through a formal assumption process. They can also be sold in the secondary mortgage market. To qualify for FHA financing, the property must meet _______ ________ _________ and the buyer must be qualified.
minimum property standards
103
________ _________ _______ (MIP) – not to be confused with PMI for conventional loans- is required for all FHA loans, regardless of down payment size. You may also see this described as UFMIP, or _______ ________ _________ _______. For most FHA programs, the MIP has an initial premium and an annual premium. The initial MIP on a new home purchase is 1.75% of the loan amount for 30-year loans, with and annual premium of 0.55% of the outstanding loan balance, divided into 12 monthly payments.
Mortgage Insurance Premium
upfront mortgage insurance premium
104
The 15-year mortgage has the added benefit of a lower annual MIP. The initial MIP premium for new purchases is 1.75% of the loan amount, but the annual premium is on _.__% of the outstanding loan balance divided into 12 equal monthly payments.
0.25%
105
Some borrowers may be eligible for a ______ of a portion of the MIP at the termination of the loan; for example, a borrower who refinances an FHA loan after three years.
refund
106
FHA Loan in Review:
____ _________ qualifying standards. It’s generally easier for borrowers to qualify for FHA loans because higher debt ratios are allowed (31/43).
______ ________ _________. FHA scrutinizes houses to determine if they will need any obvious major repairs so borrowers don’t need to spend money fixing them.
___ ____ ________. FHA down payments are often lower than conventional loans, and although minimum down payments can’t be borrowed, they can be gifts.
___ is ________. For high LTV loans, an upfront mortgage insurance premium is cheaper than private mortgage insurance, and the MIP initial premium can be financed, ever over FHA limits.
____-____ _____. Most FHA loans are for 30 years, keeping payments lower.
_____ are _________. FHA loans may be assumed, with FHA completing a credit check and approving the new borrower for loans made after December 15, 1989.
__ __________ _______. FHA loans may not contain prepayment penalties, but borrowers may have to pay an extra month’s interest if the loan is paid off after the premium due date.
Less stringent
Higher property standards
Low down payments
MIP is required
Long term loans
Loans are assumable
No prepayment penalty
107
________ ______________ __________ _____: This program was established in 1944 to aid veterans or their surviving spouses in obtaining financing for the purchase or construction of owner-occupied homes and farms. This financing is also available for owner-occupied mobile homes and condominiums.
Veterans Administration Guaranteed Loans
108
FHA and VA loans are not really loans at all. They are loan insurance. While FHA loans are insured, VA loans are _________. Veteran borrowers pay no insurance premium on VA loans VA loans do not
require a downpayment and are therefore considered to be 100% financing.
guaranteed
109
The loan guarantee amount which the veteran is eligible to receive on a VA loan is referred to as his ___________. There are a few ways in which a person can have two VA loans at once. The second VA loan must be used to purchase a second primary residence. To be eligible, you must have enough ___________ and income to qualify for both houses.
entitlement
110
To determine what portion of a mortgage loan the VA will guarantee, a veteran must apply for a ___________ of ___________. This certificate establishes the maximum guarantee entitlement of the veteran.
The VA will also issue a ___________ of __________ _____ (CRV) for the property being purchased stating the current market value based on a VA-approved appraisal.
certificate of eligibility
certificate of reasonable value
111
There is no VA limit on the ______ of the ____ a veteran can obtain. The VA limits the amount of the ____ it will _________. If a mortgagor defaults on a VA loan, the VA will pay the lender a set amount toward the remaining balance after foreclosure sale. After the property has been foreclosed, the VA may elect to make full restitution to the lender and take title to the property.
amount of the loan
loan it will guarantee
112
VA loans made before March 1, 1988, are freely assumable, although an assumption processing fee will be charged. For loans made after that date, the VA must approve the buyer and the assumption
agreement. The original veteran borrower remains personally liable for the repayment of the loan unless the VA approves a _______ of ________.
release of liability
113
The dollar amount of ________ paid is calculated as a percentage of the loan's principle. ________ is always calculated on a yearly basis. To calculate the amount of ________ in any given month, multiply the ________ rate by the principle balance and divide by twelve.
Example: Mary has a loan balance of $25,000 as of June 1st. Her interest rate is 10%. What is the amount of interest due on the loan for June?
$25,000 X 10% = $2,500
$2,500/12 = $208.33 (interest for month of June)
You can then figure the amount of principle reduction for June by subtracting the monthly interest from the monthly note.
Example: If Mary's monthly note is $285.00, by how much is her principle reduced for the month of
June?
$285.00 - $208.33 = $76.67
Interest
114
To calculate the total ________ which will be paid on a standard amortized loan, multiply the amount of each payment by the total number of payments, then subtract the face value of the loan from the total amount of principle and interest paid.
Example: Mary secures a mortgage for $75,000 at 9% interest for 30 years. Her monthly notes are
$728.60. How much interest will Mary have paid at the end of the 30 years?
$728.60 X 360 months = $262,296.00 (principle and interest)
$262,296 - $75,000 = $187,296 (interest)
interest
115
_______ ______, also known as ____ ____________ _______, are used to lower the interest rate on the loan while increasing the yield to the lender. _______ ______ can be thought of as ___-____ ________, as they
are paid as a lump sum at the time of closing. The amount paid for the ________ ______ is equal to 1% of the loan amount for each point paid.
Example: A loan is obtained for $100,000. The buyers will be paying 2 discount points.
$100,000 X 2% = $2,000
Example: A house sold for $150,000. The buyer obtains an 80% loan and is paying 2 discount points. How much cash will he need to bring to the closing?
$150,000 X 80% = $120,000 (loan amount)
$150,000 - $120,000 = $30,000 (down payment)
$120,000 X 2% = $2,400 (cost of points)
$30,000 + $2,400 = $32,400 (cash needed at closing)
Discount points
rate equalization factors
Discount points
pre-paid interest
discount points
116
A _______ ________covers several properties, but each may be released from the mortgage separately. A _______ _______ ______ drafted into the mortgage permits each parcel to be released from the mortgage as it is sold. This is the type of mortgage that is usually used by a
developer constructing tracts of homes.
Blanket Mortgage
partial release clause
117
A _______ ________ is secured by both real and personal property, that is, both movables and immovables. This type of loan is commonly used to finance new homes along with major household appliances
package mortgage
118
The ____-______ ________ is used for owner financing and is originated by a second lender combining equity and money owed into a second mortgage. In a common
____-______ transaction, a second lender agrees to assume payments on the borrower's original loan and also to lend the borrower the additional funds he requires. The ____-______ ____ may be at a higher interest rate than the original loan, but still below the current market rate.
wrap-around mortgage
wrap-around
wrap-around loan
119
____________ _____ are used for building or repairing either residential or commercial property and is a type of _______ _________. The loan is committed for the total cost of the construction project, but is paid out in draws at regular intervals after each stage of construction has been completed. Interest is paid only on the total amount of disbursements. ____________ _____ are generally made for periods of three years or less.
Construction loans
interim financing
Construction loans
120
______ _________ Other forms of owner financing which were mentioned earlier are the ________ _____ ________ and the ___________ ____ ________, or ____ for ____.
Seller Financing
purchase money mortgage
installment Land Contract, bond for deed
121
____ and _________ arrangements are used to finance large commercial or
industrial properties. The land and building, usually used by the seller for business purposes, are sold to
an investor, such as an insurance company. The real Estate is then leased back by the buyer to the seller, who continues to conduct business on the property as a tenant. The buyer becomes the lessor, and the original owner becomes the lessee. This enables a business firm with money invested in the real estate to free that money so it can be used as working capital.
Sale and Leaseback
122
_________ _______ ________: Payments on a graduated loan start small and become larger as the mortgage goes on. For example, in a thirty year graduated payment loan, payments for the first ten years may be based on a forty year amortization, payments for the next ten years on a twenty-five year
amortization schedule, and payments for the last ten years on a twenty year schedule. GPM's are generally used for commercial loans enabling a new business to defer a portion of their mortgage payments in the expectation of increased income in the future. In some GPM's, the borrower pays only
interest for the first few years.
Graduated Payment Mortgage
123
The ____ ___ ____: In this type of loan the borrower increases his existing mortgage to the original amount. This is, in effect, a way of borrowing against your equity without taking out a second mortgage.
This usually results in the borrower having a higher monthly note since the full amount must be repaid by the original expiration date of the loan.
The Open End Loan
124
______ is the difference between the current loan balance and the current value of the property. For example, if you a have a loan balance of $50,000 and a current appraised value of $75, 000, then you have $25,000 ______.
Equity
125
_______ ________ are tailored for older homeowners, retired, or near retirement,
who own a home free and clear and wish to use some of the equity they have in their home. Regular monthly payments are made to the borrower based on the equity the homeowner has invested in the
property. The loan is eventually paid from the sale of the property or from the borrower's estate upon his or her death.
Reverse mortgage
126
A _______ is a way of temporarily lowering the initial interest rate on a mortgage or deed of trust loan. By "pre-paying" some of the interest to the lender on the borrower's behalf, one can "___ ____" the original interest rate for a period of time. Typical _______ arrangements reduce the interest rate by 1 to 3 percent over the first one to three years of the loan.
buydown
127
The __________ ____ ________, or ________ ____ ________, is one in which the interest rate fluctuates according to some external index, such as the open market interest rate, prime lending rate, or consumer price index. Normally, the rate is adjusted once a year and can not change more than 2% in any one year period. There is also a ceiling or upper limit on the interest rate, and a lower limit.
adjustable rate mortgage
variable rate mortgage
128
________ ____ or ____ ____: This loan, also known as the ________ ____ ____, calls for payments of interest only for the term of the loan. At the end of the term, the entire sum of the principle is due in one balloon payment plus any remaining interest.
Straight Loan or Term Loan
straight term loan
129
_____ _________ ____: Also known as the direct reduction loan, this loan type features a schedule of equal payments consisting of both principle and interest. This is normally a long term loan, up to thirty years. The portion of the monthly payment that is applied toward the principle increases each month, and
the amount applied toward the interest decreases each month. In other words, as the loan matures, more and more of each payment is applied toward the principle, so that, in the beginning you are paying mostly interest, and at the end of the loan, you are paying mostly principle.
Fully Amortized Loan
130
_________ _________ ____: This type of loan is known as the _______ _________ ____ or the
____________ ____ ________. Payments are typically calculated over a 20 or 30 year amortization period with a loan term of 5 years. The partially amortized loan is repaid in regular installments of principle and interest, but one or more payments is a balloon payment, that is, a payment larger than the loan's regular payment amounts. The effect of the balloon payments is to reduce the amount of the regular payments.
Partially Amortized Loan
limited reduction loan
renegotiable rate mortgage
131
The ____________ ________ is used to determine the monthly payment including principal and interest for loans at a given interest rate and a given term or length of the loan. To use the chart, first find the interest rate, then go to the years column and find the amortization factor. Multiply the amortization factor times the number of thousands that is being borrowed-this will give you the monthly payment including principal and interest.
Amortization Schedule
132
____ ___________ ____ are not
prepaid interest. They are paid to the lender and are usually 1 percent of the loan amount.
Loan Origination Fees
133
_____________ _______
1. Savings and Loans
2. Commercial Banks
3. Mutual Savings Banks
4. Life Insurance Companies
Sources of Financing
INSTITUTIONAL Lenders
134
___-_____________ _______
Mortgage brokers do not use their own funds. They find money to lend, acting as intermediaries between the borrower and the lender. He has nothing to do with servicing the loan.
Mortgage bankers set up loan transactions using their own capital, and also service the loan.
Pension funds
Trust funds
Private individuals
Foreign investors
University and hospital endowment funds, credit unions
Sources of Financing
Non-Institutional Lenders
135
The _________ ________ ______ facilitates the buying and selling of mortgages that have been made by the primary mortgage market. Any time a lender takes over a loan that he himself did not originate, he is engaging in _________ ________ ______ activity. The secondary lender buys mortgages from primary lenders, thereby supplying him with the cash needed to originate more new loans.
secondary mortgage market
136
_______ ________ ________ ___________ (FNMA): Nicknamed "______ ___", the original purpose of this program was to establish a market for the buying and selling of government insured mortgages and thereby to assist holders of certain residential mortgages. FNMA deals in conventional and FHA and VA backed loans. In September 2008, ______ ___ became a government-owned enterprise. Until that time it was a privately owned corporation that issued its own stock.
Federal National Mortgage Association
Fannie Mae
137
__________ ________ ________ ___________ (GNMA): Known as "______ ___", this organization is sponsored and administered by the federal government and is under the auspices of the department of Housing and Urban Development. GNMA acquires loans for urban renewal projects, housing for the
elderly, and other federal housing programs which assist low and moderate income households.
Government National Mortgage Association
Ginnie Mae
138
_______ ____ ____ ________ ___________ (FHLMC): "_______ ___" was founded in 1971 to allow savings and loans liquidity for their mortgage assets. FHLMC buys mortgages from these institutions and
supplies them with cash to originate new mortgages. Like FNMA, Freddie Mac is now a government-owned enterprise that provides a secondary market for mortgage loans, primarily conventional loans.
Federal Home Loan Mortgage Corporation
Freddie Mac
139
________ _________ ________ ___________ (MGMC): "______ ___" is a private organization which specializes in buying and selling mortgages and is financed entirely by private funds.
Mortgage Guarantee Mortgage Corporation
Maggie Mae
140
______ ___ (formerly the Federal Agricultural Mortgage Corporation, is similar to Fannie Mae and Freddie Mac except that it deals with agricultural loans. ______ ___ purchases agricultural loans from original lenders and issues guaranteed mortgage-backed securities
Farmer Mac
141
The ____ _______ ______ (FSA), formerly the Farmers Home Administration is a federal agency of the Department of Agriculture. The FSA offers programs to help families purchase or operate family farms. It also provides loans to help families purchase or improve single family homes in rural areas.
Farm Service Agency
142
In 1968, the _______ ________ __________ ___ was passed because of problems with
consumer confusion regarding interest charges, points, misleading advertising practices, and confusion as to the actual cost of consumer credit.
Federal Consumer Protection Act
143
A portion of this legislation, Title I, known as The _____ In _______ ___(TILA), is enforced by __________ "_".
Truth in Lending Law
Regulation Z
144
__________ _ establishes guidelines for three aspects of the lending process:
1. Disclosure of Loan Cost
2. Borrower's Right of Rescission
3. Fair Advertising Practice
Regulation Z
145
Real estate loans for personal, family, and agricultural purposes are covered by __________ "_". Business and commercial loans are not covered.
Regulation Z
146
The _____ in _______ ___ requires that the lender provide the borrower with a formal disclosure statement containing the following items:
Date finance charge will begin to accrue
Annual percentage rate (APR)
Number of monthly payments
Due date of payments
Prepayment penalties
Balloon payments
Default and delinquency charges
Legal description of property
Amount of credit which will be made available to the borrower
Credit sales, cash price and total unpaid balance
Truth in Lending Law
147
The ____-_____ ____ ______ ______ and ________ __________ ___ of ____ transferred most of the Federal Reserve’s responsibilities for enforcing TILA to the new ________ _________ __________ ______ (CFPB).
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Consumer Financial Protection Bureau
148
Under the _____ in _______ ___ consumers must be fully informed of all finance charges and the true cost of financing before a transaction is completed.
Truth in Lending Act
149
Under the Truth in Lending Act consumers must be fully informed of all finance charges and the true cost of financing before a transaction is completed.
Advertising
150
The APR, or ______ __________ ____ is calculated based on all charges rather than the interest rate alone.
annual percentage rate
151
The ____ ______ __________ __________ ___ RESPA applies to any residential real estate transaction involving a new first mortgage loan. The purpose of RESPA is to ensure that the buyer and the seller are both fully informed of all settlement costs.
Real Estate Settlement Procedures Act
152
____-_____ __________ ___________
For more than 30 years, Federal law has required lenders to provide two different disclosure forms to consumers applying for a mortgage. The law also has generally required two different forms at or shortly
before closing on the loan. Two different Federal agencies developed these forms separately, under two Federal statutes: the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA). The information on these forms is overlapping and the language is inconsistent. Not surprisingly, consumers often find the forms confusing. It is also not surprising that lenders and
settlement agents find the forms burdensome to provide and explain.
TILA-RESPA Integrated Disclosures
153
The Dodd-Frank Act direced the Bureau to integrate the mortgage loan disclosures under TILA and RESPA. The first new form (the ____ ________) is designed to provide disclosures that will be helpful to
consumers in understanding the key features, costs, and risks of the mortgage for which they are applying. This form will be provided to consumers within:
_____ business days after they submit a loan application.
The Loan Estimate Form
Three business days
154
The ____ ________ ____ replaces two former Federal forms. It replaces the Good Faith Estimate desingedby HUD under RESPA and the Truth in Lending disclosure designed by the Federal Reserve System (the Board) under TILA. The ____ ____________ also incorporates new Disclosures required by Congress under the Dodd-Frank Act. The form must be presented to the application withing 3 days after application is made.
Loan Estimate form
155
The second form (the _______ __________) is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. This form will be provided to consumers
____ business days before they close on the loan.
Closing Disclosure
three business days
156
The _______ __________ ____ replaces the former form used to close a loan, the HUD-1, which was designed by HUD under RESPA. It also replaces the revised Truth in Lending disclosure designed by the Board under TILA. The _______ __________ ____ contains additional new Disclosures required by the Dodd-Frank Act and a detailed accounting of the settlement transaction.
Closing Disclosure form
157
The forms use clear language and design to make it easier for consumers to locate ___ ___________, such as interest rate, monthly payments, and costs to close the loan. The forms also provide more
information to help consumers decide whether they can afford the loan and to compare the cost of different loan offers, including the cost of the loans over time.
key information
158
In developing the new ____ ________ and _______ __________ forms, the Bureau has reconciled the differences between the existing forms and combined several other mandated disclosures, such as the
appraisal notice under the Equal Credit Opportunity Act and the servicing application disclosure under RESPA.
Loan Estimate
Closing Disclosure
159
______: The creditor must give consumers the Closing Disclosure form to consumers so that they receive it at least _____ business days before the consumer closes on the loan.
Timing
three business days
160
If the creditor makes certain significant changes between the time the _______ __________ form is given and the closing, the consumer must be provided a new form and an additional _____-business-day waiting period after receipt of the new form. These changes include:
changes to the APR above 1/8 of a percent for most loans (and 1/4 of a percent for loans with irregular payments or periods),
changes the loan product, or
adds a prepayment penalty to the loan
Closing Disclosure
three business day
161
Less significant changes can be disclosed on a revised Closing Disclosure form provided to the consumer at or before closing, without ________ the _______.
delaying the closing
162
__________ to the ____
The final rule applies to most closed-end consumer mortgages.
It does not apply to:
home equity lines of credit (HELOC)
reverse mortgages
mortgages secured by a mobile home
mortgages secured by a dwelling that is not attached to real property (in other words, land).
loans made by a creditor who makes five or fewer mortgages in a year.
Exemptions to the Rule
163
The _____ ______ ___________ ___ (ECOA) prohibits discrimination in the lending process based on the applicant’s race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
Note that the applicant must be of legal age. Credit applications may only be considered on the basis of:
Income
Stability of the source of income
Net worth
Credit rating
The Equal Credit Opportunity Act
164
If credit is denied the ____ ______ _________ ___ (FCRA) requires that the lender must provide the applicant with a statement detailing the reasons for rejection within 30 days.
Fair Credit Reporting Act
165
The role of the _______ _______ ______ is to maintain sound credit conditions, help counteract inflationary and deflationary trends and create a favorable economic climate. It divides the country into twelve federal districts, each served by a federal reserve bank. All nationally chartered banks must join the _______ _______ and purchase stock in its district reserve banks.The _______ _______ regulates the flow of money and interest rates in the marketplace indirectly, through
its member banks, by controlling their reserve requirements and discount rates.
The Federal Reserve System
Federal Reserve
166
___ __________ Homeowners may deduct from their gross income:
mortgage interest payments on most first and second homes
real estate taxes (but not interest paid on overdue taxes)
certain loan origination fees
loan discount points (whether paid by buyer or seller)
loan prepayment penalties
Tax Deductions
167
_______ ____ is the profit realized from the sale or exchange of an asset, including real property. It is figured as the adjusted basis of the property (initial cost plus any physical improvements minus any
depreciation) minus its net selling price. To stimulate investment, Congress at various times has allowed part of a taxpayer's _______ ____ to be free from income tax.
Capital Gain
168
Current tax law specifies what percentage of _______ _____ is taxable as income. To determine the taxable amount, an investor multiplies the total _______ ____ by the current percentage.
capital gains
169
Real estate investors can _____ taxation of capital gains by making property exchanges. A property owner will incur tax liability on a sale only if additional capital or property is also received. Note that the tax is ________ not eliminated. When the property is sold the capital gain will be taxed.
defer
deferred
170
All or part of the gain on the sale of a personal residence is exempt from immediate taxation if another
residence is bought and occupied within __ ______ (before or after) the sale of the old residence.
24 months
171
An unmarried individual may exclude from income up to $250,000 of gain realized on the sale or exchange or a residence. The individual must have owned and occupied the residence for an
aggregate of at least ___ of the ____ years before the sale or exchange. The exclusion can be used on a continuing basis – but not more frequently than once every two years. Effective for sales and
exchanges after May 6, 1997, this exclusion replaces the one-time $125,000 exclusion for taxpayers age 55 or older.
two of the five
172
For married individuals, the excludable gain is increased to $500,000 if ______ ________ and if:
Either spouse meets the ownership test
Have lived in the house for at least 2 out of the last 5 years
The house is their primary residence
filing jointly
173
Neither spouse is ineligible by virtue of a sale or exchange of a residence within the last ___ years
two
174
____ ___-________ ________
1. under Section 1031 of the IRC, real estate investors can defer taxation of capital gains by making a property exchange.
2. a property owner may exchange one property for another property and have tax liability on the sale only if additional capital or property is received.
3. tax on an exchange is deferred rather than eliminated.
4. properties involved in exchange must be of like kind.
5. "like kind" refers to any real property to be held for income purposes or investment; it excludes dealer property and residences.
6. additional capital or personal property included in a transaction to even out the
exchange is considered boot; the party receiving boot is taxed at the time of the
exchange.
1031 tax-deferred exchange
175
__________ of _________ or _______ - agreement among brokers to divide their markets and refrain from competing for each other's business; division may take place on a geographic basis or on a certain price range of homes.
Allocation of customers or markets
176
_____ ______ - conspiracy among brokers to set prices for their services, rather than
negotiate such fees.
Price fixing
177
__________ - two or more businesses conspire against other businesses to reduce competition.
Boycotting
178
People violating the _______ _________ ___ may be found guilty of a felony punishable by a maximum $100,000 fine and three years in prison.
Sherman Antitrust Act
179
In a civil suit a _____ found guilty of violation of the Sherman Antitrust Act will be liable for 3 times the actual damages plus attorney's fees and costs.
broker
180
_______ __________ and ____ ________ ___ ___ (IRC Section 1445)
A. Ensures that nonresident aliens and foreign corporations pay U.S. income tax based on gains from the disposition of U.S. real property interest
1. in real property located in the U.S.
2. in any domestic corporation that was a U.S. real property holding corporation during the period that the taxpayer held the interest after June 18, 1980, or at any time during the five year period ending on the date of the disposition of the property, if earlier.
B. A transferee of any U.S. real property interest is required to withhold a tax equal to 10 percent of the amount realized by the foreign transferor on the disposition of the property.
C. If a transferor's or transferee's agent fails to furnish the notice required, the agent, for example, a broker, is required to withhold in the same manner as would be required of the transferee, except that the agent's liability is limited to the amount of compensation that he or she derives from the transaction.
D. A buyer or other transferee of a U.S. real property interest and any corporation, partnership or fiduciary required to withhold tax must file an ___ ____ ____ to report and transmit the amount withheld.
E. Buyers or other transferees of a U.S. real property interest also must file an ___ ____ ____-_ to show the amount withheld.
F. Generally, the amount required to be withheld with respect to any disposition of a U.S. real property interest cannot exceed the amount of the transferor's maximum tax liability.
G. Brokers involved in listing or selling a U.S. real property interest for nonresident aliens or foreign corporations should contact the IRS to establish the appropriate procedures.
Foreign Investment and Real Property Tax Act (IRC Section 1445)
IRS Form 8288
IRS Form 8288-A
181
The promise to repay a debt along with conditions and stipulations is contained in the:
a. deed
b. promissory note
c. lien
d. title
b. promissory note
182
The clause that allows the lender to demand payment in full of the entire debt in the event of default.
a. prepayment
b. lock in
c. acceleration
d. hypothecation
c. acceleration
183
The clause which removes the mortgage when the debt is paid is the:
a. acceleration
b. granting
c. escalation
d. defeasance
d. defeasance
184
Which of the following is/are forms of owner financing?
a. installment land contract
b. contract for deed
c. bond for deed
d. all of the above
d. all of the above
185
PMI, or Private Mortgage Insurance covers:
a. the top portion of the loan proceeds over and above the standard 80%.
b. the full loan amount
c. the top 20% of the loan.
d. the top 10% of the loan.
a. the top portion of the loan proceeds over and above the standard 80%.
186
In which type of loan must the borrower apply for a certificate of eligibility?
a. FHA
b. VA
c. conventional
d. any loan above 80%
b. VA
187
A partially amortized loan with a balloon payment would have a _______ monthly payment than a fully amortized loan.
a. higher
b. lower
b. lower
188
Which of the following is/are secondary mortgage lenders?
a. FNMA
b. GNMA
c. FHLMC
d. all of the above
d. all of the above
189
The Loan Estimate Form must be presented to the borrower:
a. Within 3 days after applying for the loan
b. Within 3 days of the date of closing
c. Within 3 days before applying for the loan
d. Within 3 days after the date of closing
a. Within 3 days after applying for the loan
190
In a 1031 tax exchange, capital gains tax on the sold property is:
a. eliminated
b. reduced
c. deferred
d. evaded
c. deferred
