Real Estate Financing: Loan Types/Mortgages (S5U1&2)

Question 1

Savings & Loan Associations

Answer 1

also called thrifts—specialize in taking in savings deposits and then lending out through mortgages and other loans. They’re required to keep their commercial lending at or under 20%, so they’re very much tied to consumers and mortgage loans.

Question 2

Commercial Banks

Answer 2

Bank of America, Chase, Citigroup, and the like—make consumer and business loans, offer investment products, and take deposits.

Question 3

Credit Unions

Answer 3

member-based cooperatives that provide credit for auto loans and home loans. They take deposits and offer savings vehicles, money markets, and the like. Their rates tend to be pretty competitive.

Question 4

Mortgage Bankers

Answer 4

actually do the lending. They have in-house loan processors and underwriters. Wells Fargo Mortgage is an example. Mortgage bankers can close pretty quickly because they fund their own loans, but their choice of offerings is narrow because it’s limited to their own products.

Question 5

Mortgage Brokers

Answer 5

work with multiple lenders to search for and negotiate the best deal for a particular borrower’s circumstances. They don’t loan the money out themselves, so they’re not tied to a specific suite of loan products.

Question 6

Insurance Companies

Answer 6

like Nationwide, also finance mortgage loans.

Question 7

Investment Groups

Answer 7

lend specifically to people who want to avoid conventional financing—such as other investors.

Question 8

Conventional Loans

Answer 8

• offer a broad range of loan products that vary in length and carry terms that do not include any insurance or guarantee from a federal agency.
• Buyers may get a conventional mortgage for as little as 3% down. This smaller down payment may mean that the lender will require private mortgage insurance (PMI).

Question 9

Private Mortgage Insurance (PMI)

Answer 9

covers the lender for the difference between the buyer’s actual down payment and what the lender would like to see, in case the buyer defaults.

Question 10

Conforming Loans

Answer 10

Conventional Loans that meet Fannie Mae & Freddie Mac guidelines.

Question 11

Non-Conforming Loans

Answer 11

Loans that do not meet Fannie Mae & Freddie Mac guidelines. Lenders carry more risk here so interest rates tend to be higher

Question 12

3 Types of Government Loans

Answer 12

1) Federal Housing Administration (FHA) insured loan:
2) US Dept. of Veterans Affairs (VA) guaranteed loan:
3) US Dept of Agriculture (USDA) loan

Question 13

Fannie Mae

Answer 13

(Federal National Mortgage Association or FNMA) Fannie Mae can purchase any type of loan, but primarily deals with conventional loans from commercial banks.

Question 14

Freddie Mac

Answer 14

(Federal Home Loan Mortgage Corporation or FHLMC) purchase any type of loan, but primarily deals with conventional loans from smaller lending institutions (thrifts).

Question 15

Farmer Mac

Answer 15

(Federal Agricultural Mortgage Corporation) purchases agricultural loans and loans from rural lenders.

Question 16

Ginnie Mae

Answer 16

(Government National Mortgage Association or GNMA) guarantees mortgage-backed securities (MBSs) that contain loans insured or guaranteed by a U.S. government agency.

Question 17

Amortized Loan

Answer 17

Any loan in which periodic payments go toward both principal and interest. In a typical amortized loan, most of the initial payments go toward interest, with ever-increasing amounts going toward the principal (the loan balance), until the loan is paid off. For instance, a 30-year fixed-rate loan will be fully amortized in 30 years.

Question 18

Budget Mortgage

Answer 18

A typical amortized mortgage loan that includes principal, interest, taxes, and insurance in each (usually monthly) amortized payment. A common acronym for this kind of loan is PITI (principal, interest, taxes, and insurance).

Question 19

Fixed Rate Loan

Answer 19

A loan where the principal and interest payment remains the same over the life of the loan.

Question 20

Growing Equity Mortgage

Answer 20

This is a fixed-rate mortgage where the monthly payments increase over time according to a set schedule. The interest rate remains the same, and there’s no negative amortization. The first payment is a fully amortizing payment. As the payments increase, the amount greater than a fully amortizing payment is applied directly to the principal balance, reducing the life of the term and increasing the borrower’s interest savings.

Question 21

Adjustable Rate Mortgage

Answer 21

A loan where the rate is adjusted, usually annually, based on the behavior of the economic index with which it’s associated (e.g., the consumer price index).

Question 22

Renegotiable Rate Mortgage

Answer 22

A mortgage loan alternative that allows the interest rate to be renegotiated periodically. The loan can be either long-term with periodic adjustments or short-term with more frequent rate adjustments.

Question 23

Interest Only Mortgage

Answer 23

The borrower only pays the interest on the loan for a set number of years—usually between five and seven. After the term is over, the borrower must either pay off the entire loan principal in a lump-sum payment, or will need to finance the principal through another loan. Also known as term or straight-term loan.

Question 24

Graduated Payment Mortgage

Answer 24

A payment that gradually adjusts (usually upward) based on a pre-determined schedule and amount. The initial payments are less than what would be a fully amortizing payment, which creates negative amortization. This type of payment plan can make payments easier in the beginning when income is often lower.

Question 25

Low Documentation Mortgage

Answer 25

This type of loan is designed for the self-employed or those paid on commission. A high credit score and slightly higher interest rates are characteristic of these types of loans. Since 2008, the standards for mortgage qualifying have become stringent to the point that low-doc loans are now rarely available.

Question 26

Bridge Loan (Swing Loan) Short term

Answer 26

A temporary (usually 90-day) loan that provides funds in addition to an existing loan until permanent financing can be obtained. Often used for buyers who haven’t yet sold one property, but want to purchase a new one. Best used when the buyer’s current home is already under contract.

Question 27

Construction Mortgage Short Term Loan

Answer 27

Temporary financing for construction purposes. The developer submits plans for a proposed project, and the lender makes a loan based on the property appraisal value and the construction plans. The entire loan isn’t given at once; disbursements are made at intervals as phases of construction are completed. Upon completion, the lender makes a final inspection, closes the construction loan, and converts the loan into permanent, long-term financing. Construction loans involve risk for the lender (they are essentially loaning on land, air, and a promise to build) and usually come with a higher rate.

Question 28

Balloon Loan Short Term Mortgage

Answer 28

A loan with a lump sum payment, usually at the end of a loan period. The balloon loan may be paid as an interest-only loan for a period of time and then be paid off all at once. It may also be a partially amortized loan, in which case it’s paid off through a series of amortized payments with a balloon payment at the end of the term. For example, a lender may agree to amortize the loan over a 30-year period with a balloon payment at the end of 10 years. This equates to lower monthly payments, but borrowers must be able to pay off the entire loan at the end of 10 years.

Question 29

Home Equity Loan

Answer 29

A loan from the equity of a home. If the property is owned free and clear, the home equity loan is a first mortgage. If not, it’s a second or junior mortgage. Rates on home equity loans tend to be higher than conventional loans, and their term rates shorter.

Question 30

Home Equity Line of Credit

Answer 30

Often called a HELOC, this loan isn’t used for a home’s primary financing, but is based on the equity in a home. Borrowers typically use HELOC for major purchases such as vacations, tuition, or home repairs or upgrades. The entire credit line may or may not be disbursed up front. Borrowers use what they need at a given time. Most HELOCS require a monthly interest-only payment. The balance may be paid back over time or as a lump sum (balloon payment) by the end of the term.

Question 31

Reverse Mortgage

Answer 31

Also called a reverse annuity mortgage, this is designed for those who want to use the equity in their homes to stay in their homes. With a reverse mortgage, the lender makes payments to the homeowner for a specified period of time and gains corresponding ownership.

Question 32

Blended Rate Loan

Answer 32

Usually applies during refinancing. Lender charges less than the prevailing interest rate, but more than the original interest rate. Typically used if current interest rates are higher than original rates. Benefits lender by raising the return on older loans, and benefits the borrower by allowing them to refinance and potentially take cash out while maintaining a lower interest rate than the current market provides. Some lenders will use a blended rate option for buyers assuming a previous loan. Blended loans are available on FHA, VA, and some conventional loans.

Question 33

Land Contract Loan

Answer 33

Also known as a contract for deed, land installment contract, or installment sale agreement, this is a contract between a seller and buyer in which the seller acts as the lender for the buyer, who purchases the property for an agreed-upon price. Just as with a traditional lender, the buyer makes installment payments to the seller, who retains the title to the property while the buyer gets the right of possession. Often, there’s both a down payment, and at the end of the contract, a balloon payment. When the loan balance is paid in full, the seller gives the buyer title.

Question 34

Leased with Option to Buy Owner Financed Mortgage

Answer 34

The buyer and seller negotiate a sale price, which is written into the lease. Sellers will often apply a portion of the rent toward the purchase to entice the buyers to close more quickly.

Question 35

Purchase Money Mortgage Owner Financed Mortgage

Answer 35

Seller financing in which a mortgage is given by the buyer to the seller toward the purchase price. Buyers use this as down payment financing. The seller is the mortgagee and the buyer is the mortgagor. The purchase money mortgage may be a first mortgage, a junior mortgage, or a junior wrap-around (explained below) mortgage.

Question 36

Wrap Around Mortgage Owner Financed Mortgage

Answer 36

Seller financing that wraps the new buyer’s mortgage around the seller’s existing mortgage. The seller continues to make payments on the first mortgage, and the buyer makes the payments to the seller on the wrap-around mortgage.

Question 37

Blanket Mortgage (Commercial Loan)

Answer 37

Used in commercial applications. Two or more properties are pledged as security for loan repayment. A release clause allows parcels to be removed from the lien, usually when the loan balance lowers to a specified amount.

Question 38

Package Mortgage (Commercial Loan)

Answer 38

A mortgage in which personal property is included with the real property in the sale. This might be used in the case of a furnished condominium, for instance, but it’s more commonly used in commercial real estate where business assets are included as collateral.

Question 39

Shared Equity Mortgage - Equity Sharing (Commercial Loan)

Answer 39

This is used most often in commercial lending. The borrower agrees to the lender’s participation in the net income from the commercial property or enterprise in order to obtain the loan. The lender may receive interest and a share of the profits.

Question 40

Rural Development Loans

Answer 40

Government loans for family farms & to help housing in rural areas through the Farm Service Agency. Through the Rural Housing & Community Development Service, the FSA will make direct loans of up to 100%, provide grants, and guarantee loans, primarily to low-income individuals. To keep mortgage costs low, the loans might be set up for 33 years or even 38 for those with very low incomes.

Question 41

Mortgage

Answer 41

a legally binding document that creates a lien (security interest) on a piece of property and gives the mortgagee (lender) the right to foreclose on property if the mortgagor (borrower) defaults.

Question 42

Hypothecation

Answer 42

Pledging a property as collateral. Property ownership can’t be transferred to someone else until the borrower has paid off the debt to release the lien.

Question 43

Title Theory

Answer 43

the borrower receives the deed, but the lender keeps the title and owns the house until the borrower pays off the loan.

Question 44

Lien Theory

Answer 44

the borrower holds the title and owns the house, but a promissory note signed by the borrower gives the lender the right to seize and sell the house should the borrower default.

Question 45

Promissory Note

Answer 45

a promise on the part of the borrower to repay a certain sum of money to another party under a certain set of terms.

Question 46

Mortgages - Lien Theory

Answer 46

When a mortgage is used to secure the property as collateral, the borrower holds both legal title (actual ownership) and equitable title (the right to use, occupy, and otherwise control) to the property, but the mortgage document places a lien on the property.

Question 47

Deed of Trusts - Title Theory

Answer 47

A deed of trust actually involves three parties: the borrower (or trustor), the lender (or beneficiary), and a third party (or trustee).