Flashcards in unit 13 Deck (19):
Reduction of Principal on a loan balance of an amortized loan
If the loan is $115,000 at 10% interest for 30 years and the payment is $1009.21 per month (P &I), what is the principal balance after one payment?
If you remember the steps –Multiply – divide – subtract – subtract, you will have no difficulty in amortizing a loan.
Determine the annual amount of interest paid, based on the loan balance.
$115,000 x 10%= $11,500 interest per year. Divide by 12 to get monthly interest $11,500 ÷ 12= $958.33 per month interest.
Subtract $958.33 from the total monthly payment of $1009.21= $50.88 is the amount of the first monthly principal payment.
What is the monthly balance after the second payment? To get the second month's interest payment,
Subtract the first month's principal payment. $115,000- $50.88 which leaves a loan balance at the beginning of the second month of $114,949.12.
Take $114,949.12 x 10%=11,494.91. Divide by 12 to get monthly interest = $957.91
Subtract $957.91 from the principal and interest payment of $1,009.21. The principal paid is $51.30
Subtract $51.30 from the balance of $114,949.12=$114,897.82
Types of Mortgages
Amortized means to "put to death", from the French word mort, meaning death. An amortized loan is one where regular monthly principal and interest are paid throughout the whole loan period.
For example, a loan of $350,000 is obtained at 8% interest for 30 years. The monthly P& I would be $2,568.18 per month. This would mean that during the 360 months of the loan (30 years x 12 months per year) the payment would remain at $2,568.18 per month. This is also known as a fully amortized, fixed rate mortgage.
An amortized loan will pay off the loan with interest over the lifetime of the loan.
When payments are made on an amortized mortgage the interest is the highest part of the payment. Over time as payments are made, the amount of interest decreases in the payment as the amount of the principal payment increases. At the mid-point of the mortgage payoff, the principal and interest payment will be the same, at which point the principal will be the highest part of the payment.
Amortized mortgages may be paid monthly, or bi-monthly. Making a bi-monthly payment can shorten the time a mortgage is paid off – i.e. a 30 year mortgage would be paid off in 15 years.
Partially Amortized Mortgage
Borrowers also use a partially amortized mortgage. This is called a balloon payment loan.
At the end of the time period of a balloon payment, the final payment is huge so the buyer must be prepared to pay the balance or refinance with a new loan before the final payment is due. This is sometimes used by borrowers who are using the loan for a short term until they inherit a large sum of money or have other financial gains.
Small payments at the beginning, one large payment at end of time period!
Sometimes called an ARM (for adjustable rate mortgages), this type of loan means that the interest rate can fluctuate up or down. It is always tied to some type of financial index; increases are capped for each period and for the term of the loan.
The interest rate of the loan is usually the index plus a premium called the margin. The rate of interest on the loan goes up or down, depending on the index, margin, period of adjustment and caps.
Periodic caps limit the amount of interest rate that may be charged during any one adjustment period. For example, if the loan has a 2% cap, it can only go up 2% during any one adjustment period, or down a maximum of 2%.
A life time cap is over the period of the loan, usually 5, 10, 15, or 30 years. If the life time cap is 5% the maximum the loan can go up or down during the life of the loan is 5%.
Most adjustable loans have both periodic and lifetime caps, which limit interest rate increases. It is possible to have negative amortization. If the payment is not high enough to cover the fully indexed amount, the mortgage balance can increase so that the balance is more than the original loan. Some companies provide teaser rates for the first year.
These loans may have higher caps, in the second year, the additional unpaid interest increases either the mortgage balance or the payment. All borrowers should be made aware of any negative amortization loan, ask about it and understand it, or completely avoid it.
As discussed previously, this type of mortgage is usually a fixed rate mortgage loan with payments every two weeks instead of monthly. The purpose of this type of loan is to save interest, and pay down the loan faster. If the borrower has the cash to do this, it is a very workable plan if the objective is to pay off the loan.
Home Equity Loan
Many times the home owner will wish to borrow against the equity of the home in order to make major capital repairs, like an addition or a new roof or pay off bills. A home equity loan allows the borrower to use the home equity and place a second loan in a junior position in order to get cash. The amount that can be borrowed depends on the lender. The borrower should be certain that he can afford the double payments (both the first and second) and can afford the cost of getting the new loan.
Great care should be used by the borrower not to borrow more money on equity that the borrower can handle since a foreclosure on the second deed (the home equity loan) can result in foreclosure of the first as well. If the borrower cannot make the payments, he could lose his home.
This type of loan is used in resort areas a great deal, since the mortgage includes the fixtures, appliances and other personal property in the same loan. These loans are used primarily in business opportunities wherein a commercial store or restaurant has personal property that are a part of that business
Land Contract is an installment contract or a contract for deed. The parties are called vendor (seller) and vendee (buyer). The buyer does not get legal title until the final payment is made. (Discussed in Session 12).
Purchase Money Mortgage: or Part Purchase Money: This is a mortgage given as part of the buyer's consideration for the purchase of real property. A Purchase Money Mortgage is delivered at the same time that the real property is transferred as a simultaneous part of the transaction. For example, the buyer assumes a first mortgage of $50,000, makes a $20,000 down payment in cash, and receives a second mortgage called a purchase money mortgage from the seller for $15,000 for a shorter term. The seller's second mortgage is a part purchase money mortgage.
Blanket Mortgage: is a loan on several pieces of property. Blanket mortgages contain a partial release clause. This clause is one where the mortgagee agrees to release certain parcels from the loan of the blanket mortgage upon payment by the mortgagor of a certain sum of money. A developer could use this type of mortgage so that as lots are sold, he could repay part of the mortgage without having to repay all of it.
Reverse Annuity Mortgage: Senior citizens over the age of 62 can benefit from this mortgage. The lender makes payments to the homeowner each month based upon the accumulated equity rather than giving the money as a lump sum. The loan must be repaid upon the death of the owner or the sale of the property. Sometimes this is advantageous to the senior citizens who own their own home, who are house rich and cash poor. Care must be taken to find out all about this type of loan. The discount points and other fees on this loan can be unusually high.
The Federal Housing Administration (FHA) insures loans for lenders of real property made by qualified or approved lending institutions. The Department of Housing and Urban Development (HUD) oversees the FHA. If a buyer wants to obtain an FHA loan, a licensee should send them to a qualified lender, such as a savings & loan or a bank. Following are the requirements to receive an FHA loan:
FHA loans require a down payment as low as 3.5%. This down payment may be a gift if needed by the buyer but not a loan. Since these loans may be obtained for such a low down payment, the borrower is charged a one-time insurance premium at closing. This insurance provides security to the lender in addition to the real estate in case of borrower default. The one-time charge is paid at closing regardless of any down payment by the borrower or some other party (seller) and may be rolled into the loan amount. This charge is called an Up Front Mortgage Insurance Premium (UFMIP). For loans made with a low down payment, the FHA also charges the borrower an insurance amount with each payment until the loan to value ratio falls to 78%. The insurance is called MIP or Mortgage Insurance Premium.
Lenders may charge points to increase their yield. Either the borrower the seller, or both can pay them. Each point is 1% of the loan amount. A discount point is pre-paid interest.
No prepayment penalties are allowed on FHA loans.
Loans are assumable with certain qualifying conditions depending upon when the original loan was obtained. The mortgaged real estate must be appraised by an approved FHA appraiser.
FHA regulations set minimum standards for the type and construction of buildings and credit-worthiness of borrowers. FHA does NOT build homes nor does it lend money itself. The term "FHA Loan" refers to a loan that is insured by the Federal Housing Administration. FHA loan limits are based upon the area where the property is located.
The ratios that FHA uses are different than that of conventional lenders. FHA uses a Housing Expense ratio (HER) to determine if a buyer is qualified for the loan. The gross monthly income times 29% is for the housing payment and 41% is for all obligations. Because this a federal program, the ratios, rules and interest rates change often. The real estate professional is advised to check with local lenders on the ratios and the maximum sale price.
Common FHA loan Programs
Some commonly used programs:
Section 203 (b) is a fixed rate program. It is the mostly widely used of all FHA programs. It requires minimum down payment and closing costs.
234 (c) - for loans on condominiums (Condominiums MUST be FHA certified for these loans)
245- Graduated Payment Plan Mortgage
203K- allows the purchaser to borrow enough money to rehabilitate a property. (this program will be retired in 2015)
FHA Reverse Mortgage – Owners 62 years of age or older
FHA also has 251-an adjustable Rate Mortgage Program (ARM).
Loan Assumption – FHA loans are assumable, however the rules have been modified through the years. Loans before December 1986 required no pre-approval. Loans acquired after this date require a creditworthiness process for the buyer assuming the loan. Local FHA offices determine specific closing costs which will be borne by the buyer.
The Veterans Administration (VA) will guarantee that a loan made by an approved lending institution will be paid.
The veteran must have served 181 days active service in the military since 1940.
The VA requires that a veteran assumes liability for the loan. If a veteran does not pay the mortgage as agreed there will be a foreclosure.
The property must be owner-occupied for at least one year.
A qualified veteran may borrow up to 100% of the loan with no down payment.
Veteran must first apply for a Certificate of Eligibility in order to obtain a VA loan.
The house must qualify with an appraisal and is issued a Certificate of Reasonable Value.
The amount of the loan is limited to the amount shown on the Certificate of Reasonable Value.
Loans may be assumed by non-veterans, but veterans may still liable.
VA will lend money in rural areas where there is no financial institution available.
Points can be paid by either the seller or the buyer.
VA does not allow prepayment penalties to be charged if a veteran pays off a loan early.
If a veteran has died his/her widow or widower may be eligible for a VA loan. In order to be eligible for a VA loan, the widow or widower may not be married again at the time of application.
If a loan is assumed by another veteran and the seller has used all of his/her eligibility, the seller cannot use his/her eligibility again, unless he is given a novation because he/she will still be liable for the loan.
FHA and VA will allow buyer to pay more than appraised value, if they pay the difference in CASH.
The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities.
VA loans allow veterans to qualify for loan amounts larger than traditional Fannie Mae / conforming loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills.
The maximum VA loan guarantee varies by county. As of 1 January 2012, the maximum VA loan amount with no down payment is usually $417,000, although this amount may rise to as much as $1,094,625 in certain specified "high-cost areas".
Once a VA loan is paid in full or the member sells the property and frees the loan, they may re-apply for another VA loan.
Conventional loans are neither guaranteed nor insured by the federal government. Loans are made by local lenders through savings and loans, mortgage brokers, mortgage bankers, banks and credit unions.
A minimum down payment of 20% must be made. Most loans are packaged by the lenders and sold in the secondary market to the Federal Home Loan Mortgage Corporation. Assumptions of these loans are rarely allowed; almost all of the loans contain an alienation clause. Prepayment clauses in the loans will depend on what type of loan is used- adjustable, fixed etc.
Conventional Insured Loans
Unlike the conventional loans listed above, these loans require less than 20% down payment but they also require mortgage insurance which protects the lender (not the home buyer!).
PMI (Private Mortgage Insurance) is charged at the beginning of the loan and may also be part of the monthly payment so the payment becomes PITI, Principle, Interest, Taxes, Insurance and PMI Insurance. The mortgage insurance is purchased from a private company, not the federal government. Both the real estate professional and the buyer should understand that PMI is to protect the lender from default of the buyer, not insure the buyer's life.
Typical payment of Conventional Insured:
Principal and interest payment
$980 per month
Conventional Insured Loans
HUD’s mission is to create strong, sustainable, communities and quality affordable homes for all. HUD is working to strengthen the housing market to boost homeownership. HUD. The Department of Housing and Urban Development (HUD) oversees the FHA. Private Mortgage Insurance (PMI) is insurance provided by a private insurer that protects the lender against loss in the event of a foreclosure and deficiency.
Largest private insurer is M.G.I.C. (MORTGAGE GUARANTEE INSURANCE CORPORATION).
The amount a lender will loan is generally based on the appraised value for loan purposes or the sale price, whichever is lower. The Loan to Value Ratio (LTV) is a percentage of the amount borrowed in relation to the property sales price or appraised value, whichever is lower. This is an important percentage because it expresses the party most at risk. For example on a $300,000 purchase price, a buyer with a 10% down payment has $30,000 invested and the lender has $270,000 invested. The LTV is 90%: $270,000/$300,000 = .90 or 90%.
Remember, whether an FHA, VA or conventional loan is made to a consumer, the lender and/or investor:
Is concerned with the current and future value of the property.
Is concerned with the income and income potential of the loan applicant.
Is concerned with the attractiveness of other investments that could be made for a better return.
A lender or investor is really not interested or concerned with the loan applicant's need of financial assistance.
qualifying for a loan
A qualified buyer is one who has demonstrated the financial capacity and credit worthiness required to afford the asking (or agreed upon) price. Before submitting an offer to buy, some buyers become pre-qualified or pre-approved with a lender for a loan up to a certain amount. Assessing the buyers’ price range depends on three basic factors: stable income, net worth and credit history
Qualifying the Buyer
Ability to repay the loan- Uniform Residential Loan Application
Mortgage to income ratio – The ratio between the monthly housing expense and stable monthly income or a Total Obligation Ratio of income to total expenses.
Liquid savings, checking, certificates of deposit etc.
Other (personal property, real estate)
Revolving and installment accounts
Child support and alimony payments
Pledged assets, unsecured loans
Debt Coverage ratio – The ratio of annual net income to annual debt service. For example, a lender may require that a qualified corporate borrower have net income of 1.5 times the debt service of the loan being approved.
Explanation of derogatory items (judgments, late payments, tax liens etc.)
Mortgage history rating
Besides the buyer needing to be qualified to purchase real estate, the property also has to qualify.
qualifying for a loan
Qualifying the Property
Type of property (residential, commercial, agricultural)
Actual age/Effective age/Remaining economic life
Condition (repairs and predications)
Special clearances (code compliance, well and septic certifications etc.)
Qualifying the Title
Abstract and opinion - A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The abstract of title does not guarantee or ensure the validity of the title of the property. It is a condensed history that merely discloses those items about the property that are of public record. It does not reveal such things as encroachments and forgeries. Chain of Title - The recorded history of matters that affect the title to a specific parcel of real estate, such as ownership, encumbrances and liens, usually beginning with the original recorded source of the title. The chain of title shows the successive changes of ownership, each one linked to the next so that a "chain" is formed.
Title insurance- A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Title insurance protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title.
All of these above issues must be to the satisfaction of the lender. In other words, for the title to qualify the abstract, chain of title, and the title insurance policy must meet the standards of the lender.
Primary Sources of Home Financing
Savings and Loans - Specialize in long term residential loans. They are one of the largest lenders of residential funds. They may be either federally or state chartered. They are part of the Federal Home Loan Bank system. Deposits must be insured for at least $100,000.
Banks - Make short term loans. They are becoming more active in home mortgage loans, FHA, and VA. Examples of short term loans are: Automobile, mobile home, and household loans.
Insurance companies - Prefer large commercial projects, but will make residential loans. They like to have an equity position. They are sometimes partners with developers. This type of lending is called:
Participation financing - A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate.
Mortgage Loan Originators – The Dodd Frank Wall Street Mortgage and Consumer Protection Act created criteria for those who take or assist applications and negotiate terms of mortgages. Mortgage Loan originators who finance any federally related transactions must be registered with the Nationwide Mortgage Licensing System (NMLS). Tthose originators who are not required to be registered with the Nationwide system must be licensed through the Florida Office of Financial Regulation
Mortgage Brokers - A person, corporation, or firm not otherwise in banking or finance, which negotiates, sells, or arranges loans for compensation. They do not finance loans.
Mortgage Bankers provide their own funds for loans. Sometimes this person or entity services the loan as well.
Private individuals such as sellers financing their own properties or private investors, through mortgage brokers. Sellers who finance more than one property in a two year timeframe may be required to register as a Mortgage Loan Originator.
Local governments for bond programs such as community improvement money.
secondary mortgage market
Secondary Mortgage Market
The purpose of the secondary mortgage market is to provide liquidity (funds) for the primary market (institutional lenders). The promissory note is considered to be PERSONAL PROPERTY (readily negotiable) that can be bought and sold. Lenders sell their "Paper" or notes in the secondary mortgage market to free up money so they can make more loans.
The Secondary Mortgage Market is the market in which these notes are exchanged and funds are provided directly to institutional lenders. Secondary market participants are known as warehousing agencies because they purchase mortgage loans, and assemble them into one or more packages of loans which may be held or resold to investors.
Major warehousing agencies in the Secondary Mortgage Market are:
Federal National Mortgage Association or Fannie Mae - (FNMA) - Born out of the great depression, the purpose of FNMA was to buy existing loans from banks thus freeing up cash so that more loans could be made. The American dream of homeownership resulted from this agencies ability to move money in the market. Sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor. Fannie Mae was established in 1938 for the purpose of purchasing FHA loans from loan originators to provide some liquidity for government insured loans.
Quasi Government Corp - was government when originally formed, but is now a private corporation
Buys FHA loans, VA loans, and conventional loans
Referred to as "Fannie Mae"
Largest purchaser in secondary market
Government National Mortgage Association or Ginnie Mae - (GNMA) - Ginnie Mae is controlled by an agency of the Department of Housing and Urban Development. This is a mortgage subsidy program offered by Congress from time to time through the Government National Mortgage Association. When assistance is needed, GNMA is authorized to purchase certain mortgages at below market interest rates so that borrowers can be granted low interest loans. GNMA then sells these loans in the secondary market at deep discounts, the discount loss being the amount of the subsidy.
Buys FHA loans or VA loans
Referred to as "Ginnie Mae"
secondary mortgage market
Federal Home Loan Mortgage Association (Freddie Mac)
BUYS CONVENTIONAL LOANS
created by Congress in 1970
The Federal Housing Financing Agency is the regulator. The real estate professional must be able to recognize these three major players in the secondary market by their full names, nick names and initials.
A non-conforming loan is a loan that fails to meet bank or secondary market criteria for funding. Reasons include the loan amount is higher than what would be a “conforming loan limit” (for mortgage loans), lack of sufficient credit, the unorthodox nature of the use of funds, or the collateral backing it. In many cases, non-conforming loans can be funded by hard money lenders (investors), or private institutions/money. A large portion of real-estate loans are qualified as non-conforming because either the borrower's financial status or the property type does not meet bank guidelines. Non-conforming loans can be either A-paper (riskier than a prime loan, or subprime loans.
The flexibility of private money can allow for a much wider range of deals to be funded, although more detailed and substantive collateral and documentation may be required by a lender.
Mortgage fraud is a crime where one misrepresents or omits information on a mortgage loan application to obtain a loan or a larger loan than what may have been loaned had the lender known the truth about a property. According to a Forbes magazine article in 2011, Florida had 27% of the mortgage fraud cases in the United States.
Here is an example of a mortgage fraud case: Jerry is a buyer who wants to purchase a property and make money. He offers to buy Ben’s place which is valued at $115,000 and listed at that price. Jerry tells Ben’s sales associate that he would like to purchase Ben’s House for $145,000 (the $115,000 price and $30,000 cash for him to fix up the house). Jerry says he will provide an appraiser to create the price for the house and will set up the title company for the sale. He says this is a great deal for the sales associate, as she will get a bigger commission with the higher price.
The sales associate writes the contract for a sale at the price requested by the buyer, the buyer’s appraiser appraises the property for the contracted amount, and the bank finances the loan. It ends up that the buyer, Jerry, has used someone else’s identity and credit to secure the loan, he takes the difference between the sale price and the loan, then doesn’t make any payment to the bank.
In United States federal courts, mortgage fraud is prosecuted as wire fraud, bank fraud, mail fraud and money laundering, with penalties of up to thirty years imprisonment. In the state of Florida, Mortgage fraud may be charged as a second or third degree felony with up to 15 years imprisonment. Mortgage fraud has increased over the past few years, especially in purchasing of short sale properties and using simultaneous closings to hide fraudulent sales.
Mortgage fraud is not to be confused with predatory mortgage lending, which occurs when a consumer is misled or deceived by agents of the lender. However, predatory lending practices often co-exist with mortgage fraud – this is one of the reasons that new mortgage loan practices have been implemented in the U.S.
laws regarding fair credit and lending procedures
Laws regarding fair credit and lending procedures
Equal Credit Opportunity Act (ECOA)
Prohibits discrimination in loan underwriting on the basis of sex, marital status, race, religion, age or national origin.
Prohibits discriminatory treatment of income from alimony, child support, public assistance, or part-time employment;
Prohibits inquiry about, or consideration of, child bearing plans or potential for child bearing.
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) was created to ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs.
RESPA applies to all residential real estate closings that involve an institutional lender.
RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. HUD's Office of RESPA and Interstate Land Sales is responsible for enforcing RESPA.
RESPA does not apply to loans secured by mortgaged property larger than 25 acres, installment land contracts, contracts for deed, construction loans, or home improvement loans.
RESPA prohibits kickbacks or unearned fees paid to lender for referring customers to insurance agencies, etc.
R E S P A K (a memory tool to help you remember that RESPA prohibits KICKBACKS to real estate licensees).
TILA-RESPA Integrated Disclosure Rule (TRID)
Lenders must give a copy of the booklet, “Your home loan toolkit” to every person at the time of application for a loan.
Lenders must provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application.
A Closing Disclosure, a form designed to detail all financial particulars of a transaction, must be delivered to the borrower at least three days before closing. The actual time frame is based on the method of delivery. The settlement agent must also provide the seller with the Closing Disclosure, which may be done at consummation.
Both RESPA and TRID are administered by the Consumer Financial Protection Bureau (CFPB).
Consumer Credit Protection Act: Truth In Lending Law: (Regulation Z)
The purpose of this law is DISCLOSURE. The law requires lenders to disclose to buyers the true cost of obtaining credit so that the borrower can compare the costs of various lenders. The regulation requires that the consumer be fully informed of all finance charges, as well as the true annual interest rate, before a transaction is consummated. The truth in lending law does not control interest rates; does not control costs to close a transaction. Truth In Lending applies to residential loans, federally related 1-4 family properties, non -commercial, and family farms.
Commercial transactions are not covered under the Truth in Lending law
Two major sections of Truth In Lending
Annual Percentage Rate (A.P.R.)
Advertising - all terms listed in column B must be disclosed if ANY ONE of the triggering terms in Column A is advertised.
Amount or percentage of down payment
The amount or percentage of down payment
Amount of any installment
Terms of repayment
Finance charge in dollars or that there is no charge for credit
Annual percentage rate and if increase is possible
Number of installments
Total finance charge
Period of repayment
Total # of payments and due dates