UNIT 20 FINANCING THE R.E. TRANSACTION Flashcards
(40 cards)
UNIT 12 IS A COMPANION TO THIS UNIT**
-YIELD
-RISK
(PG 415 UNIT 20)
-YIELD the return or income that can be
generated
-RISK the likelihood that the investment will
lose money
Linders consider the cost of them acquiring the money and the borrowers credit worthiness.
– In addition to the credit worthiness of the borrower the interest rate that the lender charges the borrower depends on four factors:
-TERM OF THE LOAN if the money will be
repaid in a shorter time, lenders usually
charge a lower interest-rate for example 15 years
instead of 30 years
– TYPE OF MORTGAGE LOAN lenders often offer
lower initial interest rates if the borrower agrees to
assume some of the risk of future interest rate
hikes. Many adjustable rate mortgages ARM’s
have low interest rates for the first few years,
especially when compared to fixed rate
amatorized loans
- LOAN AMOUNT jumbo loans = greater risk
because so much money is secured only by only
one property
– the secondary market sets upper limits for the loan
it will buy, investors must retain the loans
exceeding this amount. In other words lenders
cannot easily recycle their money
-LENDERS COST OF MONEY lenders borrow the
money that they loan
– the interest-rate they pay fluctuate with market
conditions
– the Federal Reserves indirectly regulates the flow
of money and interest rates
– by increasing reserve requirements, the Federal
Reserve in effect limits the amount of money that
member banks can use to make loans
Most real estate licensees encourage their
buyer clients to meet with a lender (WHEN)
– based on preliminary credit application,
perspective buyers can obtain a ________ ________
– although preapprovals typically contain certain
conditions and time frames they do represent
preliminary commitments and eliminate many of
the unknown
– PREQUALIFICATION is the process by which the
lender determines the _____ ____ limit the borrower
(PG 416 UNIT 20)
-meet with a lender BEFORE looking at
properties
-perspective buyers can obtain a LOAN
PREAPPROVAL
– PREQUALIFICATION is the process by which the
lender determines the UPPER LOAN limit the
borrower take out.
CREDIT SCORES (PG 416 UNIT 20)
-One of the most important factors when
applying for a loan is a credit score
– five major factors are analyzed:
-fast payment performance – credit use – credit history – types of credit in use – credit report inquiries
CREDIT SCORES (PG 416 UNIT 20)
- UNIT 12 IS A COMPANION TO THIS UNIT***
- Scores range from:
- Credit scores affact what?
-Scores range from less than 400,up to 900
- the higher the score to lower the risk and
vice versa
- Credit scores can affect a potential buyers ability to
- get a loan,
- the interest rate a lender will charge
- can even influence the cost of homeowners
insurance
FAIR AND ACCURATE CREDIT TRANSACTION ACT (FACTA)
(PG 416 UNIT 20)
WHAT DOES FACTA REQUIRE
-FACTA equires that each of the three major
credit bureaus provides a free credit report
every 12 months upon request
-A toll-free number to assist consumers, correct
mistakes and remove disputed information from
their files unless the creditor verifies that the
information is correct
FAIR AND ACCURATE CREDIT TRANSACTION ACT (FACTA)
(PG 416 UNIT 20)
-By reviewing reports annually, consumers can monitor the reports accuracy and also spot _______
- TRUE/FALSE Credit scores are provided in the free
credit reports
-TRUE/FALSE consumers can not improve their credit scores before they make a loan applications and before looking at a property, this can only be done by a loan officer
-consumers can also spot IDENTITY THEFT
-FALSE: Credit scores ARE NOT provided in
the free credit reports, scores are available
from the credit bureau‘s for a SMALL FEE
The credit scores can give consumers a FAIRLY
GOOD IDEA of how they will be LOOKED AT by a
potential lender
– FALSE: CONSUMERS CAN improve their credit
scores before they make a loan applications and
before looking at a property (this is why they need
to get a credit score on their own, so that they can
work on fixing it themselves before they put in a
loan application)
LOAN APPLICATION (PG 416 UNIT 20)
- LOAN APPLICANTS are required to supply personal information about their_____ (4 THINGS)
- The lender will order an _________to assure that the collateral for the loan is sufficient
- The appraisal includes a legal description and information about?
APPLICANTS PERSONAL INFORMATION ABOUT THEIR
– employment
– income
– assets such as bank account information
– other financial obligations
-The lender orders and APPRAISAL to in sure that
the collateral for the loan is sufficient
-The appraisal includes a legal description and
information about
– improvements
– title
- encumbrances
– taxes
THE LOAN (PG 417 UNIT 20)
-Underwriting is a process of ANALYZING THE EXTENT of the risk a lender will assume in connection with the mortgage loan
– the lender assesses the value of collateral being pledge for the loan, and evaluates the capacity and credit worthiness of the borrow based on the following criteria:
- OCCUPANCY Lenders reserve best rates for
owners who occupy the property
-INCOME Lenders figure out if the borrowers
have enough income to support themselves and
pay for normal household expenses while making
a mortgage payment
-ASSETS AND CASH RESERVES Lenders look at
bank accounts, often asking for verification
of funds. Borrowers must be able to account for
the money in the account as BEING THEIRS and
not from someone else EXPECTING REPAYMENT - DEBT lenders prefer that housing payments (PITI)
and association fees be LESS THAN 28% of
GROSS INCOME and, when combined with other
debts LONGER THAN 10 MONTHS, LESS THAN
36% of gross income - LOAN TO VALUE AKA LTV ratio is the ratio of the
debt to the sale price or appraised value, which
ever is less
– the greater the BORROWERS steak in the
collateral, the lower the LENDERS RISK
– **if a down payment is less than 20%, lenders
frequently require some INSURANCE TO COVER
DEFICIENCIES in the case of default
AUTOMATED SCORING SYSTEMS (PG 417 UNIT 20)
-what are they?
– Name some commonly used automated systems
-what is an advantage to them?
***LENDERS MUST ALWAYS KEEP WHAT IN MIND WHEN MAKING LENDING DECISIONS ?
-Lenders often rely on AUTOMATED
SCORING SYSTEMS
- an AUTOMATED SCORING SYSTEMS should
provide an OBJECTIVE STANDARD against which
to balance the more SUBJECTIVE,
PROFESSIONAL JUDGEMENT of a loan officer
– commonly used automated systems are
– Freddie Mac’s loan prospector
– Fannie Mae’s desktop underwriter
– ADVANTAGE:
-shorten the loan approval time
- may lower the cost of processing and approving
loan
-LENDERS MUST ALWAYS KEEP WHAT IN MIND WHEN MAKING LENDING DECISIONS
– race
–color
– religion
– national origin
– sex
– age
– marital status
– SOURCE OF INCOME
– neighborhoods in which collateral is located
AKA redliningLOAN COMMITMENT (PG 417 UNIT 20)
-A loan commitment is the lenders pledge to
do what?
-The agreement between the lender and
borrower is made once (what happens)?
-The LENDERS PLEDGE to:
-lend a certain amount of money to an
explicitly named borrower, or borrowers
– under specific terms
– for a special specified length of time
– using a particular property as collateral
- The AGREEMENT IS MADE between lender and
borrower once the WRITTEN commitment letter
(from the lender), is SIGNED BY THE BORROWER
AND RETURNED TO THE LENDER, this creates a
contract BETWEEN the lender and borrower
– this also means that the BORROWER AGREES to
the lenders terms for the loan
LOAN COMMITMENTS (PG 417 UNIT 20)
-Loan commitments include a number of
conditions or contingencies that affect the lenders
fulfilling the promise of the loan.
- what are some of these contingencies or
commitments?
-an EXPIRATION DATE, meaning the lender is
NOT obligated to provide the money
AFTER THAT DATE
– COMMITMENTS/ CONTINGENCIES maybe
conditioned on events such as borrowers selling a
property
– providing TITLE INSURANCE policy at settlement
– a LOAN COMMITMENT may be withdrawn before
closing if the lender finds out that the borrowers
have ACQUIRED ADDITIONAL loans that increase
borrowers debt ratios above the mortgage
guidelines
– Licensees should ENCOURAGE their buyers to
avoid major purchases until after closing
FINANCING LEGISLATION AND REGULATION Z ( PG 418 UNIT 20)
-The federal government regulates the
lending practices of mortgage lenders through
the ______ (4 acts)
-REGULATION Z was enacted in accordance with the _________
-REGULATION Z AND THE TRUTH AND LENDING
ACT BY THE FEDERAL TRADE COMMISSION,
FTC requires a credit institutions informed the
borrowers of the TRUE COST OF OBTAINING
CREDIT.
-By giving the borrowers disclosures, they can
compare the cost of various lenders so they can
avoid uninformed use of credit.
-REGULATION Z generally applies when a credit
transaction is secured by a __________
-REGULATION Z DOES NOT APPLY TO:
-Federal government REGULATES THE
LENDING PRACTICES of MORTGAGE
LENDERS through the:
– truth in lending act
– equal credit opportunity act
– real estate settlement procedures act
– community reinvestment act
-REGULATION Z was enacted in accordance with
the TRUTH AND LENDING ACT BY THE
FEDERAL TRADE COMMISSION, FTC
-REGULATION Z generally applies when a credit
transaction is secured by a RESIDENCE
-REGULATION Z DOES NOT APPLY TO
-business
– commercial
-or agricultural loans of any amount
FINANCING LEGISLATION AND REGULATION Z ( PG 418 UNIT 20)
-UNDER THE TRUTH AND LENDING ACT, a
consumer must be fully informed of __________
________ _________ ________ BEFORE what?
-What must the finance charge disclosure
include?
-The lender must compute and disclose the
ANNUAL __________ ________
-UNDER THE TRUTH AND LENDING ACT, a
consumer must be fully informed of
ALL FINANCE CHARGES AND INTEREST RATES
BEFORE A TRANSACTION IS COMPLETED
-The finance charge disclosure must include
– loan fees
– finders fees
- service charges and points
– interest
-The lender must compute and disclose the ANNUAL PERCENTAGE RATE
FINANCING LEGISLATION AND CREDITOR (AND REGULATION Z)(PG 418 UNIT 20)
-According to REGULATION Z a creditor is a
person who
-According to REGULATION Z a creditor is a
person who EXTENDS CONSUMER
CREDIT MORE THAN 25X’S a YEAR
IF the transactions involve DWELLINGS AS A
SECURITY
-The credit MUST HAVE A FINANCE
CHARGE INVOLVED or payable in more than
FOUR INSTALLMENTS by written agreement
FINANCING LEGISLATION AND THREE DAY RIGHT OF RESCISSION (AND REGULATION Z) (PG 418 UNIT 19)
REGULATION Z STATES THAT:
- in most consumer credit transactions, the
borrower has THREE DAYS to
rescind, (cancel) the transaction by notifying the
lender
– *****the right of recession DOES NOT
APPLY TO
- OWNER OCCUPIED RESIDENTIAL PURCHASE
MONEY ON 1ST MORTGAGES
- OR DEED OF TRUST LOANS
– *****it DOES APPLY to
- REFINANCING A HOME MORTGAGE
- or to a HOME EQUITY LOANFINANCING LEGISLATION AND ADVERTISING (AND REGULATION Z)
(PG 418 UNIT 20)
-REGULATION Z has STRICT REGULATIONS of real
estate advertising in all media
including_____(7 ITEMS LISTED) that refer to
mortgage financing terms
- General phases like FLEXIBLE TERMS AVAILABLE
CAN OR CAN NOT be used?
- THE APR which is calculated based on ALL
CHARGES rather than JUST THE INTEREST
RATE ALONE must be _______
-REGULATION Z has STRICT REGULATIONS
of real estate advertising in all media
including
-NEWSPAPERS
-FLYERS
-SIGNS
-BILLBOARDS
-WEBSITES
-RADIO AND TV ADS
-DIRECT MAILINGS
- General phases like FLEXIBLE TERMS AVAILABLE
CAN be used, HOWEVER any details given must
comply with the act
- THE APR which is calculated based on
ALL CHARGES rather than JUST THE
INTEREST RATE ALONE must be STATEDFINANCING LEGISLATION AND ADVERTISING (AND REGULATION Z)
(PG 418 -419 UNIT 20)
- BUYDOWNS OR REDUCED RATE MORTGAGES
MUST SHOW both the limited term to which the
interest rate applies and the APR
-if a VARIABLE RATE MORTGAGE is
advertised, the advertisement must include:
- VARIABLE RATE MORTGAGE advertisement must include:
-NUMBER AND TIMING of payments
– amount of the LARGEST AND SMALLEST
payments
– statement to the fact that the ACTUAL
PAYMENT WILL VARY BETWEEN THESE TWO
EXTREMES
FINANCING LEGISLATION AND ADVERTISING (PG 419 UNIT 20)
-TRIGGER TERMS REFERS TO:
– if any of these credit terms (TRIGGER
TERMS) are used the advertisement must include
all of the following information:
-TRIGGER TERMS REFERS TO specific credit
terms such as
- down payment
– monthly payment
– dollar amount of the finance charge
– term of the loan
– if any of these credit terms are used the
advertisement must include ALL OF THE
FOLLOWING INFORMATION
-Cash price
– required down payment
– number, amount, and due dates of all payments
– annual percentage rate
– total of all payment to be made over the term of
the loan, (unless the advertised credit refers to a
first mortgage to finance acquisition of a dwelling
FINANCING LEGISLATION AND PENALTIES
(PG 419 UNIT 20)
PENALTIES (AND REGULATION Z)
-REGULATION Z penalties for noncompliance
– the penalty for violation of administrative order
enforcing REGULATION Z is _______for each
____the violation continues
-unfair and deceptive practice may result in
fines of up to _______
- in addition, a creditor could be held liable to a
consumer for ______THE AMOUNT OF THE
MAXIMUM FINANCE CHANGE, for A MINIMUM
of $100 and a MAXIMUM of $1000, plus COURT
COSTS, ATTORNEYS FEES, AND ANY ACTUAL
DAMAGES
-WILLFUL VIOLATION is a misdemeanor punishable
by a fine of up to $________, _______YEAR
imprisonment or both
– the penalty for violation of administrative order
enforcing REGULATION Z is $10,000 for
each DAY the violation continues
-unfair and deceptive practice may result in fines of
up to $10,000
-in addition, a creditor could be held liable to a
consumer for TWICE THE AMOUNT OF THE
MAXIMUM FINANCE CHANGE, for A MINIMUM
of $100 and a MAXIMUM of $1000, plus COURT
COSTS, ATTORNEYS FEES, AND ANY ACTUAL
DAMAGES
-WILLFUL VIOLATION is a misdemeanor punishable by a fine of up to $5000, ONE YEAR imprisonment or both
EQUAL OPPORTUNITY ACT (PG 419 UNIT 20) AND ALSO FOUND IN UNIT 17
-WHAT IS THE ECOA?
-IT IS ENFORCED BY?
-THE ECOA PROHIBITS DISCRIMINATION
BASED ON WHAT
(**NOTE:UNIT 17 LISTED 7, THIS UNIT
LISTS 8 DISCRIMINATION FACTORS)
- APPLICANTS NEED TO BE CONSIDERED
ONLY ON THE BASIS OF?
- WHAT ARE THE 2 REASONS THE
CREDITOR MAY CONSIDER AGE?
- WHAT IS A LENDER NOT ALLOWED TO ASK?
- APPLICATIONS MUST BE ACCEPTED/REJECTED
WITHIN
- IF DENIED WHAT MUST THE CREDITOR
PROVIDE?-EQUAL CREDIT OPPORTUNITY ACT
- THE ECOA IS THE FEDERAL TRADE
COMMISSION
-RACE
-COLOR
-RELIGION
-NATIONAL ORGIN
- SEX
-MARITAL STATUS
-AGE
-DEPENDENCE ON PUBLIC ASSISTANCE
(HANDICAPPED)*** NOT MENTIONED
IN UNIT 17
- applicants need to be considered on the bases of
INCOME, NET WORTH, JOB STABILITY AND
CREDIT RATING
-if the applicant is TO YOUNG TO SIGN A
CONTRACT
- the creditor MAY consider age when
determining if income will drop due to
RETIREMENT
– May not ask questions about a SPOUSE, unless the
spouse is also applying for credit
– they also may not discount the WOMANS income
or assume that she will leave the workforce to
raise children
– Applications must be excepted/rejected WITHIN
30 days of completing the applications
- if denied, the creditor must provide the specific
reason for rejection
COMMUNITY REINVESTMENT ACT
AKA CRA
(PG 419 UNIT 20)
-The responsibility of financial institutions to help meet community needs for _________and ________income housing
– 1977 Congress passed the _________ ________ ___, (CRA)
– financial institutions are expected to:
- meet the deposit and credit needs of
their__________,
-____________AND ______ in local community
development, and rehabilitation projects
- participate in ________ ________for housing, small
business, and small farms
-The responsibility of financial institutions to
help meet community needs for LOW and
MODERATE income housing
– 1977 Congress passed the COMMUNITY
REINVESTMENT ACT, CRA
– financial institutions are expected to:
-meet the deposit and credit needs of their
COMMUNITIES,
-PARTICIPATE AND INVEST in local community
development, and rehabilitation projects
- participate in LOAN PROGRAMS for housing,
small business, and small farms
COMMUNITY REINVESTMENT ACT
AKA CRA
(PG 420 UNIT 20)
-THE LAW IN PERTAINING TO THE COMMUNITY REINVESTMENT ACT requires federally supervised financial institutions to prepare a statement containing:
-the geographic boundaries of its
community
– the type of community reinvestment
credit offered such as:
-residential housing
-housing rehabilitation
- small business
- commercial
- consumer loans
-comments from the public about the institutions
performance in meeting its community needs
-Financial institutions are periodically reviewed by one of four federal financial supervisory agencies:
(PG 420 UNIT 20)
-Comptroller of the Currency
–Federal Reserves Board of Governors
– Federal Deposit Institution Corporation
– or the office of THRIFT SUPERVISION
- The institutions must post a public notice that their
community reinvestment activities are SUBJECT
TO FEDERAL REVIEW and must also make the
results of these reviews PUBLIC
