Principles & Practices: Module 7 (Chapter 12, Overview Real Estate Finance)

Buydown

Additional funds in the form of points paid to a lender at the beginning of a loan to lower the interest rate and monthly payments.

Buydowns

additional funds in the form of points paid to a lender at the beginning of a loan term to lower the interest rate and monthly payments. In order to understand buydowns, it is necessary to understand the concept of discount points.

EXAMPLE: Conventional Financing: 80%

A buyer wants to purchase a house that costs $100,000—he needs a 20% down payment, or $20,000. An 80% conventional loan means that he can borrow 80%, or $80,000, of the sale price of the home, assuming the home appraises for $100,000 or more. If the house appraises for less than $100,000—for example, $95,000—he can borrow only 80% of the appraised value. In this case, if he moves forward at the asking price of $100,000, he needs to come up with the difference as part of his down payment: $95,000 x 20% = $19,000 + $5,000 = $24,000 down payment

Alienation Clause

A contract clause that gives the lender certain stated rights when there is a transfer of ownership in property. Also called a due-on-sale clause.

Loan Origination Fee

A fee charged by a lender to cover the administrative costs of making a loan, usually based on a percentage of the loan amount (1% = 1 point).

Federal Housing Administration (FHA)

A government agency that insures mortgage loans.

Veterans Administration (VA)

A government agency, part of the U.S. Department of Veteran's Affairs, that guarantees mortgage loans for eligible veterans.

Discount Points: Charging Points

A lender may charge: - 2 points as a loan origination fee (a fee charged by a lender to cover the administrative costs of making a loan, usually based on a percentage of the loan amount). - 3 points as a closing fee. - 6 additional points as discount points for the borrower to get a lower interest rate. The buyer is paying the lender an additional 11% (2 + 3 + 6) of the loan amount for various fees and services. Only six (6) points are actually discount points, which lower the interest rate, but they are all called "points."

Conventional Loan

A loan that is not insured or guaranteed by a government entity.

Which would NOT be a reason for charging points? a. The borrower wants to lower the interest rate. b. The broker wants to make extra commission. c. The lender wants a bigger yield. d. The lender wants extra loan origination fees.

B. The lender is the beneficiary of mortgage points, not the broker. Points increase the lender's yield and are a way of charging origination fees. A borrower may decide to pay points to lower the interest rate. You can think of points as a sort of prepaid interest: The borrower pays more at closing, but less for the life of the loan.

** A discount point costs 1% of the a. appraised value. b. down payment. c. loan amount. d. sale price.

C. A point is 1% of the loan amount. So if a lender charges 3 points on a $200,000 loan, the borrower owes $6,000 in points.

EXAMPLE: Discount Points

On a $100,000 loan, the borrower would have to pay an additional $1,000 for every point the lender charged.

Credit unions

a source of home equity and home improvement loans.

TILA Advertising: Some examples of terms that DO NOT trigger the required disclosures are:

- "No down payment" - "12% Annual Percentage Rate loan available here" - "Easy monthly payments" - "VA and FHA financing available" or "100 percent VA financing available" - "Terms to fit your budget"

Assumption of Conventional Loans: When requesting an assumption, the lender may? (Name Them)

- Accept the assumption and leave the loan terms intact. - Accept the assumption but charge an assumption fee and/or increase the loan's interest rate. - Not allow the assumption and call the note (demand full payment of a loan immediately). To do so, a call provision clause must be stated in the note or mortgage. Real estate agents should encourage their clients to consult the lender, an attorney, or other individual who is qualified to advise on this matter. Agents should not give buyers and sellers advice on the assumption of a loan unless it is a certainty! Also, agents should not take chances when writing offers that call for assumptions of existing mortgages; after a sale, it is too late to find out what a lender can or will do.

TILA Advertising: The "triggering" terms for real estate advertisements include: (Name Them)

- Amount of the down payment (e.g., "20% down") - Amount of any payment (e.g., "Pay less than $700 per month") - Number of payments (e.g., "Only 360 monthly payments") - Period of repayment (e.g., "30-year financing available'') - Amount of any finance charge (e.g., "1% finance charge'')

TILA Advertising: If triggering terms are used in advertisement, all these disclosures must be made (Name Them)

- Amount or percentage of down payment - Terms of repayment - Annual percentage rate, using that term spelled out in full, and whether the rate may increase (e.g., for ARMs)

Government Financing: The two basic government finance programs are loans insured by the (name them)

- FHA (Federal Housing Administration) - VA (Veterans Administration).

FHA Loans vs. Conventional Loans: Name the differences

- FHA loans require that the borrower make a minimum 3.5% cash investment (down payment) with no secondary financing. The actual down payment may vary according to current FHA guidelines. - Mortgage insurance (MIP) is required on all FHA loans, regardless of down payment size. - FHA loans are assumable (with credit checks for loans made after December 1, 1986). - FHA loans do not have prepayment penalties.

Freddie Mac issues its own mortgage-backed securities, which are backed by the conventional mortgages it purchases. Freddie Mac purchases mortgages through the following programs: (Name Them)

- Immediate delivery program: The lender must deliver the mortgages that Freddie Mac has agreed to purchase within 60 days. Failure to deliver can mean a seller will be banned from further Freddie Mac sales for two years. The immediate loan delivery program can involve either whole loan purchases or participation purchases. - Forward commitment purchase program: Commitments are made for six- and eight-month periods, but the sale and delivery of mortgages is at the option of the lender. There is a non-refundable commitment fee payable to Freddie Mac.

TILA Disclosure Statement (Name Everything Included in Disclosure Statement)

- Lender's name - Amount financed - Notice of the right to receive an itemization of the amount financed - Total finance charges Finance charges expressed as an APR - Number, amount, and due dates of payments - New payment, late payment, and prepayment provisions - Description and identification of the security (e.g., mortgaged property) - Whether the loan may be assumed

Traditional conventional loans (the type with which most borrowers are familiar) typically have the following characteristics: (name them)

- Long Term—Generally have total payments spread out over 25-30 years, and today, even 40-year home loans are available. Long-term loans of 25-40 years provide homebuyers with a reasonable payment and the security to choose if and when to refinance. Another option is the 15-year mortgage. These save homebuyers money because over the life of the mortgage, the total payments on a 15-year mortgage are about one-third less than a 30-year mortgage at the same interest rate. - Fully Amortized—Have payments applied to principal and interest (as opposed to interest-only loans). A fully amortized loan is one where the total payments over the life of a loan will pay off the entire balance of principal and interest due at the end of the term. Even though the payment stays the same for the life of the loan, the amounts applied to principal and interest are adjusted each month. If all payments are made on time, the loan will be paid off with the last scheduled payment. - Fixed Rate—Loans with an interest rate that remains constant for the duration of the loan. This is both good and bad for the borrower and the lender. Of course, the biggest advantage to a borrower is that he does not need to worry about increasing rates; if rates decrease enough, he can refinance. From the lender's perspective, there is a guaranteed rate of return but the rate is locked in for 30 years, even if interest rates rise during that time.

FHA Loans vs. Conventional Loans: Name the advantages

- Low down payments - Assumable loans (with credits checks for loans made after December 1, 1986) - Less stringent qualifying requirements - No prepayment penalties

VA-Guaranteed Loans: Advantages

- May be obtained with no down payment - Secondary financing is permitted - Assumable, provided the assumer is qualified - No prepayment penalties - Do not require MIP or PMI (although there is a variable funding fee, which may be financed)

Other types of real estate lenders that make loans for residential mortgages or buy mortgages as part of their investment portfolio include: (name them)

- Mutual savings banks - Real estate investment trusts (REITs) - Life insurance companies - Pension plans - Private individuals (e.g., seller financing, investors)

Non-Conforming Loans: The two main reasons loans get classified as nonconforming are (Name Them)

- Size of the loan - Credit quality of the borrower

Secondary Financing: For conventional loans, the primary lender often insists on certain conditions with secondary financing from any source, some of which include: (name them)

- The buyer must make a 5% down payment from his own funds. - The buyer must be able to afford the payments on both the first mortgage and second mortgage. - The secondary financing must have regularly-scheduled payments (payments can fully amortize the debt, partially amortize the debt, or pay interest only).

VA Loans: veterans who sell property with a VA loan that will not be paid off at closing be aware they can be released from liability on the loan only if the following conditions are met (Name Them)

- The loan must be current. - The buyer must be an acceptable credit risk. - Buyer must agree, in writing, to assume liabilities & obligations of the veteran, including indemnity obligation. - The VA must issue a release. The seller's veteran entitlement for future VA loans can be restored only if the buyer is a veteran who agrees to substitute his entitlement for that of the selling veteran and all other conditions for release of liability are met.

ARMs: Expect clients to ask some of these questions about ARM financing (Name Them)

- What will my interest rate be? - How often will my interest rate change? - How often will my payment change? - Is there a limit to how much my interest rate can increase? - Is there a limit to how much my payment can increase at any one time? - What is the probability of runaway negative amortization? - Can my ARM be converted to a fixed-rate loan?

Financial Disclosures / Truth in Lending Act (TILA) disclosures are required in 2 areas: (name them)

1. When lenders offer credit/funds to borrowers but before the transaction is consummated 2. When credit terms are advertised to potential customers

VA Loans Provisions: Certificate of Eligibility

A Certificate of Eligibility (COE) is issued by the VA to those who qualify for VA loans. This is required by a lender to establish the amount and status of the veteran's eligibility under the VA loan guaranty program.

Buydown Plans

A buydown is when additional funds, in the form of points, are paid to the lender at the beginning of a loan to lower the interest rate and monthly payments. The buydown is an easy way to make loans less expensive. By lowering the buyer's monthly mortgage payments, the buyer is able to qualify for the loan easily because the lender evaluates the buyer on the basis of the reduced payment. Sellers, builders, or any party—including buyers—can make a lump sum payment to the lender at the time the loan is made to buydown the interest rate. The money paid to the lender is used to reduce the borrower's payments early in the loan (temporary buydown) or throughout the life of the loan (permanent buydown).

Alienation Clause ("due-on-sale clause" or "acceleration clause")

A contract that gives the lender certain stated rights when there is a transfer of ownership in property (e.g., declare the entire loan balance immediately due and payable). The lender may also exercise other rights stated in the contract like raising interest rates or charging assumption fees. To determine if a loan is assumable, always ask the lender or a real estate attorney.

Bi-weekly Mortgage

A fixed-rate mortgage set up like a standard 30-year conventional loan. Main difference, payments are made every 2 weeks instead of every month. This alternative financing saves interest because 26 payments are made each year, equal to one extra monthly payment. Because of this, bi-weekly loans are usually paid off in about 20 to 21 years instead of 30 years. However, they do require more servicing for lenders, and they can be an extra burden for borrowers. Many regular monthly loans allow borrowers to make extra payments, but it requires discipline on the part of the borrower to maintain a schedule of voluntary extra payments.

Reverse Mortgages (home equity conversion mortgages)

A homeowner mortgages her home and, in return, receives a monthly check from the lender. Reverse equity mortgages are designed to help elderly homeowners achieve financial security or other financial goals by converting their home equity into cash. A reverse mortgage borrower must be over age 62 and own a home with little or no outstanding mortgage.

ARMs: General Brochure (CHARM Booklet)

A lender may comply with this requirement by giving the loan applicant a booklet called The Consumer Handbook on Adjustable Rate Mortgages, which is prepared by the Federal Reserve and the Federal Home Loan Bank Board. Lenders sometimes refer to this as the CHARM booklet. - Consumer - Handbook - Adjustable - Rate - Mortgages

Conforming Loan

A loan that meets Fannie Mae/Freddie Mac standards and can be sold on the secondary market.

EXAMPLE: TILA Disclosure - APR (Annual Percentage Rate)

A loan with an 11% interest rate may have an APR of 11.5%, representing the total cost of the loan, including all finance charges spread over the life of the loan. Even though different interest rates may apply during the loan term (e.g., ARMs), the loan still has only one APR. The APR and other required disclosures are made to the borrower in the form of a disclosure statement.

Amortized Loan

A loan with payments applied to principal and interest.

Adjustable Rate Mortgage (ARM)

A mortgage that permits the lender to periodically adjust the interest rate to reflect fluctuations in the cost of money.

ARMs: Index

A statistical report that is generally a reliable indicator of the approximate cost of money. Several acceptable indexes are published periodically that are easily available to lenders and borrowers. However, Fannie Mae began purchasing ARMs using the Cost of Funds Index, or COFI, (i.e., the average interest rates that savings and loans pay for deposits and other borrowings), making this index more widely used for ARMs.

Seller Financing (2 of 3): Purchase Money Mortgages & Assumptions

A. Purchase Money Mortgages - mortgage given by a buyer to a seller to secure part or all of the money borrowed to purchase property. The seller retains a mortgage as security and title passes to the buyer. B. Unencumbered Property - property for which the seller has clear title, free of mortgages or other liens. This is the simplest form of purchase money mortgage financing; the buyer and seller negotiate the amount and terms of financing and have documents drawn up. Purchase money financing may take any of the forms listed earlier (e.g., adjustable rate mortgages) with almost no limits. C. Assumptions - one party agrees to take over payments of another party's debt, with the terms of the note remaining the same. The property is still security for the loan, but the buyer becomes primarily liable for repayment.

** The annual percentage rate (APR) is a. both the interest rate and fees being charged on the loan. b. the fees being charged on the loan only. c. the interest rate being charged on the loan only d. neither the interest rate nor the fees being charged on the loan.

A. The APR is a key disclosure. It indicates the total cost of financing, including the interest rate as well as the fees and other lender charges.

Seller Financing (3 of 3): Wraparound Financing & Purchase Money Second Mortgage

A. Wraparound Financing - Is when a seller keeps an existing loan and continues to pay on it while giving the buyer another mortgage. Essentially, the buyer pays the seller, who in turn pays the original mortgage lender, so the seller can pass on the low interest rate of the existing mortgage even if the buyer cannot or will not directly assume the loan. Sometimes this is done instead of an assumption to get around alienation clauses (which limit the loan's assumability); but, if a lender learns of this arrangement, the alienation clause can be enforced. B. Purchase Money Second Mortgage - Is in a second lien position(a seller finances only part of the sale of real estate for the buyer with the seller retaining a second mortgage as security). This second mortgage is always inferior to a primary lender's position, so the primary lender gets paid first if there is a foreclosure. If a buyer can get financing from a primary lender or there is an assumable loan, the seller may still need to provide financing if the buyer does not have enough for a down payment or cannot borrow enough to buy the property.

Land Contracts: Advantages & Disadvantages (Name Them)

Advantages - Freedom from institutional loan qualifying standards - Deferral of income taxation - Flexibility of terms Disadvantages - Can't be resold to Fannie Mae, although a few private secondary market investors may be willing to buy them

Assumptions: A loan is not assumable if it contains (name them)

Alienation Clause (also called a due-on-sale clause or an acceleration clause), which is a contract that gives the lender certain stated rights when there is a transfer of ownership in property (e.g., declare the entire loan balance immediately due and payable). The lender may also exercise other rights stated in the contract like raising interest rates or charging assumption fees. To determine if a loan is assumable, always ask the lender or a real estate attorney.

Truth in Lending Act (TILA)

An Act that requires lenders to disclose credit costs in order to promote informed use of consumer credit.

Assumption of Conventional Loans

Assumption is when one party (the buyer) takes over responsibility for the loan of another party (the seller) and the terms of the loan or note remain unchanged. Usually lender approval is needed in addition to a release (a document in which one gives up a legal right). Without a release, the original party (seller) remains secondarily liable for the loan. Loan assumption is often not possible with loans written today. When approving a new buyer, lenders try to protect their interests and may want to change interest rates, charge fees, or change the loan terms.

A buydown means the a. buyer purchased mortgage insurance. b. lender charged extra points to lower the interest rate. c. lender had special rates because of the Community Reinvestment Act. d. seller helped the buyer with a down payment.

B. A buydown allows a borrower to pay points to reduce the rate early on or for the life of the loan. There are a number of buydown plans, some permanent and some temporary.

Which residential lending secondary market organization is the largest? a. Federal Home Loan Mortgage Corporation b. Federal National Mortgage Association c. Federal Reserve Board d. Government National Mortgage Association

B. The Federal National Mortgage Association, better known as Fannie Mae, is the nation's largest investor in residential mortgages.

** Which element of an adjustable rate mortgage determines whether the interest rate goes up or down? a. cap b. index c. margin d. period

B. The interest rate on an ARM can move up or down based on the movement of a specific index, a statistical report that is generally a reliable indicator of the approximate change in the cost of money. The index is something that neither the lender nor the borrower has any influence over.

Secondary Market Quality Control (1 of 2)

Both Fannie Mae and Freddie Mac, along with other secondary market agencies, have been actively involved in developing underwriting standards for mortgage loans. The standards include such items as loan-to-value (LTV) ratios and income-expense ratios. It is important to understand that these underwriting standards assure a uniform quality control. This inspires confidence in purchasers of the mortgage-backed securities. The purchasers know the mortgages backing the securities must be of a minimum quality, thus lessening their risk in investing in properties they cannot view or assess themselves.Without the assurance of these underwriting standards, someone in Utah would be unlikely to invest in sight-unseen property in Ohio.

** Which lender practice is outlawed by the Federal Fair Housing Act? a. blockbusting b. conversion c. redlining d. steering

C. A lender cannot refuse to make loans secured by property in a certain neighborhood because of the racial or ethnic composition of the neighborhood. This prohibited act is called redlining. While blockbusting and steering are prohibited by the Fair Housing Act, those are violations more likely to be committed by real estate licensees.

** Which is NOT a characteristic of adjustable rate mortgages? a. An index is stated in the contract that will determine the interest rate adjustment. b. The lender will add a margin to the index to determine the interest rate. c. Negative amortization can never occur because of federal regulations. d. The rate or payment changes can be capped.

C. Negative amortization can occur when the balance on an ARM grows if payments do not keep up with the rate change. While there are indeed federal regulations that protect consumers against negative amortization, it can still occur, which is one of the reasons why an ARM can be risky.

** The purpose of private mortgage insurance is to a. share all of the lender's risk of default by insuring the entire loan amount. b. share none of the lender's risk of default by checking the borrower's credit. c. share some of the lender's risk of default by insuring part of the loan amount. d. take over all of the lender's risk of default by servicing the loan.

C. Private mortgage insurance (PMI) is offered by private companies to insure a lender against default on a loan by a borrower. When insuring a loan, the mortgage insurance company shares part of the lender's risk— the upper portion of the loan that exceeds the standard 80% loan-to-value ratio.

A conforming loan is one that follows the? a. criteria and guidelines of the lender making the loan. b. criteria established by the FHA and VA. c. criteria established by national secondary market investors—primarily Fannie Mae and Freddie Mac. d. Truth in Lending Act.

C. While FHA-insured and VA-guaranteed loans may indeed be conforming, it is the criteria of the secondary market that determines whether or not a loan is conforming or nonconforming. Lenders can decide whether or not they want to offer nonconforming loans or follow those secondary market guidelines.

ARMs: Interest Rate Cap

Caps are limits. An interest rate cap places a limit on the number of percentage points an interest rate can be increased during the term of a loan. This is one mechanism that lenders use to limit the magnitude of payment changes that occur with interest rate adjustments and helps to protect borrowers from large increases. Today, most ARMs have caps of some kind.

**A fully amortized loan means that the loan will be paid off in a. equal monthly installments over 30 years. b. equal monthly installments with a balloon payment. c. monthly installments covering interest only. d. monthly installments that pay off the entire balance during the loan term.

D. A fully amortized loan is one where the total payments over the life of a loan will pay off the entire balance of principal and interest due at the end of the term. Even though the payment stays the same for the life of the loan, the amounts applied to principal and interest are adjusted each month. If all payments are made on time, the loan will be paid off with the last scheduled payment.

** Joe wants to buy a $100,000 home with a conventional loan but cannot come up with the required minimum 5% down payment he needs from his own cash reserves. Joe has also used up his VA loan eligibility. What option does Joe have? a. ask the seller for secondary financing b. buy more PMI (private mortgage insurance) c. pay more points at closing to lower the interest rate d. start looking at cheaper houses

D. The VA loan is not an option if he has no eligibility. And if he cannot get a loan from a lender, paying more points or PMI is not an option. Secondary financing comes from another lender, not the seller. His best bet is to look for a more affordable house.

** An advertisement for a home says, "Low Down Payment." What other disclosures are required? a. the annual percentage rate b. the terms of repayment only c. both the annual percentage rate and the terms of repayment d. neither the annual percentage rate nor the terms of repayment

D. The phrase "low down payment" does not trigger the requirement for any additional required disclosures.

Which is NOT a function of the secondary market? a. buying and selling mortgages of primary lenders b. establishing loan standards c. giving primary lenders a place to invest surplus funds d. making loans to low-income families

D. The secondary market does not make loans. Instead, the secondary market buys and sells the mortgages of primary market lenders, allowing lenders the opportunity to invest surplus funds. An important by-product of secondary mortgage markets is the standardization of loan criteria.

ARMs: Disclosures

Disclosures must be provided to the borrower when the loan application is made or before payment of any nonrefundable fee, whichever occurs first. The lender must give the borrower advance notice of any change in payment, interest rate, index, or loan balance. Such disclosures must be given at least 25 days, but not more than 120 days, before a new payment level takes effect. The lender must also give the borrower an example, based on a $10,000 loan, showing how the payments and loan balance would be affected by changes in the index to be used.

Discount Points: Effect

Discount points add to the lender's yield. The lender's yield (also called lender's return) is the total amount of money that a lender can make from a loan. When figuring the lender's yield, the source of the money does not matter. The lender is interested in the total amount of money—the total yield—it will make from the loan. If the lender can get more cash from a borrower at the beginning of the loan via discount points, the lender can give the borrower a lower interest rate and lower monthly payments because the lender's total yield will be the same. Remember: When the lender is figuring its yield, early money from points counts just like money received over time from monthly payments. The lender has the points figured, so the yield is the same regardless of which option the borrower picks.

VA Loans Provisions: Loan Eligibility

Eligibility for VA loans is based on the length of continuous active service in the U.S. Armed Forces. Eligibility is determined by the DD-214 (commonly called Discharge Papers or Report of Separation). The DD-214 is issued by the Department of Defense to all military personnel who saw active duty service or received active duty training for more than 90 days. The DD-214 identifies the veteran's condition of discharge, thus establishing eligibility for benefits. The DD-214 cannot be downloaded, viewed, or requested online. Federal law requires all requests for a veteran's records and information be submitted in writing. Standard Form 180 is used to request a duplicate DD-214. Some non-veterans may also qualify, such as spouses of veterans who died on active duty or who are MIA (Missing In Action).

FHA ARM Loans

FHA ARM loans are limited to one- to four-family dwellings and condominium units. Using an ARM with an FHA mortgage does not affect maximum mortgage limits, LTV ratios, MIP, or borrower qualifications. ARM loans are also restricted to owner-occupants. There is only one FHA ARM plan available.

Secondary Market Quality Control (2 of 2)

Finally, because the secondary market performs such an important function in providing liquidity of mortgage funds, the standards set by the secondary market have a large influence on lending activities in the primary market. For Example: Once secondary agencies began accepting adjustable rate mortgages (ARMs), 15-year fixed-rate mortgages, and convertible ARMs, these types of financing became more readily available in the primary market. Lenders were more willing to make these kinds of loans when they knew the loans could be sold to the secondary market. In contrast, option ARMs and no documentation/no qualification loans are not being purchased by the secondary market; therefore, due to the tightening of mortgage qualifications, these types of financing are virtually nonexistent today.

TILA Disclosure: APR (Annual Percentage Rate)

For residential mortgages, the most important disclosure required is the annual percentage rate (APR). The APR is the relationship between the cost of borrowing money and the total amount financed, represented as a percentage. If the buyer must pay points and a loan fee, the APR will be higher than just the interest rate. Lenders of residential mortgages must make required TILA disclosures no later than three business days after the lender receives the buyer's written application. Most lenders give the applicant the disclosure statement when applying for a real estate loan. If any of the estimated figures change over the course of the transaction, new disclosures must be made before settlement.

Conventional Financing: 80%

For years, the 80% conventional loan has been the standard conventional loan. An 80% conventional loan means that the loan-to-value ratio (LTV) is 80% of the appraised value or sale price of a property, based on whichever is less. The LTV is the amount of money borrowed divided by the value (or price) of the property. With this type of loan, the buyer makes a 20% down payment and obtains a 30-year, fixed-rate conventional loan for the balance of the purchase price.

FHA Standard Section 203(b) Loans

HUD limits maximum loan amounts for 203(b) loans; the maximum loan amount depends on the median range of housing costs in a particular community. Different loan ceilings apply for single-family and two-, three-, or four-unit dwellings. Limiting the maximum loan amount ensures that FHA loans help low- and middle-income families. Check with local lenders for current maximum loan amounts, which change periodically to reflect area housing costs.

Conventional Financing: 90%

If a buyer does not have enough money for a 20% down payment but still wants a conventional loan, he can try to get a 90% conventional loan with a 10% down payment. The 90% conventional loan became possible with the advent of private mortgage insurance (which we will discuss shortly). The qualifying standards for 90% conventional loans tend to be more stringent, and lenders adhere to those standards more strictly even though the loan is insured. Down Payment. For a 90% loan, the buyer must make a 10% down payment with at least half of the down payment (5%) from his own cash reserves. The rest of the down payment may be a gift from a family member, equity in other property traded to the seller, or credit for rent already paid under a lease/purchase. Interest Rates and Fees. A 90% loan usually has the same interest rate as an 80% loan (although it may be higher, based on the borrower's credit situation). A 90% loan also has a private mortgage insurance (PMI) premium, making it more expensive than an 80% loan, both in closing costs and monthly payments.

Land Contract with Assumption of Existing Mortgage

If a seller does not want to remain liable for mortgage payments, but the buyer cannot (or will not) refinance the debt, the buyer may be able to assume the seller's mortgage and pay the balance of the sale price under a land contract. In this arrangement, the buyer becomes liable to the lender for payment of the mortgage and separately liable to the seller for the land contract. The buyer makes one payment to the lender and another payment to the seller. This is attractive if the mortgage is at a lower interest rate; plus, the seller is relieved of responsibility for making the payments to the original lender (but often, the seller is secondarily liable if the new buyer defaults, so ask the lender).

ARMs: Conversion Option

In an ARM means the borrower has the right to convert from an adjustable rate mortgage to a fixed-rate mortgage. ARMs with a conversion option usually: - Limit the time period to choose the conversion option. - Charge a fee for conversion. - Have a higher interest rate than a straight ARM. Fannie Mae/Freddie Mac Guidelines for ARMs. Fannie Mae and Freddie Mac have established stricter LTV guidelines for ARMs than for fixed-rate loans. Fannie Mae and Freddie Mac LTV ratios may not exceed 95% and require owner occupancy for all ARMs.

ARM Elements: Name the many elements to ARM loans:

Index Margin Rate adjustment period Mortgage payment adjustment period Interest rate cap (if any) Mortgage pay cap (if any) Negative amortization cap (if any) Conversion option (if any)

ARMs: Index & Margin Formula

Index + Margin = Adjustable Interest Rate the Borrower Pays on the Loan

EXAMPLE: ARMs: Index & Margin Formula

Index + Margin = Adjustable Interest Rate the Borrower Pays on the Loan For Example: If the current index value is 4.25% and the lender's margin is 2%, the current ARM interest rate will be 6.25%.

Land Contracts

Is a real estate installment agreement where the buyer (vendee) makes payments to the seller (vendor) in exchange for the right to occupy and use the property, but no deed or title is transferred until all, or a specified portion, of the payments have been made.

Land Contracts: Unencumbered Property

Is property for which the seller has clear title, free of mortgages or other liens. A land contract is simplest when it is made by a seller who owns his property free and clear. The seller negotiates terms and the interest rate of the contract, along with any down payment, and has documents drawn up. Land contracts may contain any of the financing elements discussed earlier (e.g., ARMs).

ARMs: Negative Amortization Cap

Is when a loan balance increases because of deferred interest when payments do not cover the interest portion of the loan. A negative amortization cap functions much like a cap on mortgage payments and interest rates. Negative amortization is most likely to occur when there are frequent rate changes (e.g., every six months) and infrequent payment adjustments (e.g., every three years).

Seller Financing (1 of 3)

Is when a seller extends credit to a buyer to finance the purchase price of the property. Sometimes, the only way sellers can make a deal is to finance all or part of the purchase price themselves. Seller financing can be instead of, or in addition to, the buyer obtaining a loan from a third party, such as an institutional lender. Of course, the seller must not need all cash immediately from the sale. The seller is taking a risk, but this may enable the property to be sold, maybe even at a higher price because a seller can: - Charge below-market interest rates. - Offer financing to a buyer considered a credit risk by other lenders since a seller is not bound by institutional policies on loan ratios, interest rates, or qualifying standards.

Land Contracts to an Existing Mortgage

It is rare to find a seller whose property does not have a mortgage lien. If this is the case, the existing mortgage(s) must be taken into account. The simplest way to do this is to make the contract subject to the existing mortgage. This means that the buyer takes the property, along with the mortgage, without being personally liable. The land contract can be written for the full purchase price, but the buyer's property rights under the contract are subject to the rights of the seller's mortgagee. The seller remains liable to make payments on the loan, so the land may be foreclosed if the seller defaults. This is an obvious problem for buyers, so most land contracts allow buyers to make payments directly to the lender. The Ohio Real Estate Finance textbook discusses ways to ensure that payments are kept current.

Regulation Z

It regulates the disclosure of these items in written disclosures concerning all finance charges and related aspects of credit transactions. It does not set limits on interest rates or other finance charges imposed by lenders

EXAMPLE: Non-Conforming Loans

Jumbo loans exceed the maximum loan amount established by Fannie Mae and Freddie Mac for conforming mortgage loans. The current loan limit is $417,000 on a single-family home (it is higher on two-, three-, and four-family homes) and changes occasionally, so these jumbo loans are considered nonconforming loans.

EXAMPLE: Secondary Mortgage Markets (2 of 3)

Later, Tenth Bank finds itself in a different situation. The local community is still doing well so Tenth Bank has many customers placing deposits in the bank, but there is little activity in the real estate market. With this surplus of deposits, Tenth Bank may have trouble finding enough local investments to buy with a high enough return. In this case, Tenth Bank could buy real estate mortgage loans on the secondary market. Since Tenth Bank would then hold real estate investments from all over the country, Tenth Bank would not need to worry as much about a downturn in the local real estate market because it is holding loans from other areas, as well.

ARMs: Regulation Z

Lenders offering residential financing, including ARMs, must comply with federal guidelines under Regulation Z of the Truth in Lending Act requiring certain disclosures be made to borrowers. The rules require that: - A general brochure be given to borrowers. - Certain specific disclosures be made if relevant to the specific ARM program. - The annual percentage rate (APR) be disclosed.

FHA-Insured Loans

Loans insured by the federal government through the Department of Housing and Urban Development (HUD). The Federal Housing Administration (FHA) is a government agency under HUD that actually insures the loans. The FHA's primary function is to insure loans. The FHA rarely provides mortgage funds to borrowers and does not build homes. The FHA is a federal mortgage insurance agency. The FHA's Mutual Mortgage Insurance Plan (MMIP) provides a function similar to private mortgage insurance companies, insuring private lenders against losses caused by borrower defaults on FHA-insured loans (up to maximum loan guarantee amounts, which vary by county).

PMI Premiums: Option #1

Monthly mortgage insurance is easy to calculate and, in time, can be canceled; thus reducing the monthly mortgage payment. Example: If the sale price of a home is $100,000, on a 90% LTV 30-year fixed mortgage, the PMI can be calculated using the rate card. Let's use the Fannie Mae/Freddie Mac required 25% coverage, at a rate of 0.62%: $100,000 = Sale Price $90,000 = Loan Amount (90% LTV) $90,000 Loan Amount x 0.0062 (Rate Card Factor) $558 Annual PMI Cost Then, determine the monthly PMI cost. $558 Annual PMI Cost ÷ 12 Months $46.50 Monthly PMI Cost So, $46.50 is added to the borrower's monthly mortgage payment. Although the previous example shows only a fixed-rate mortgage, the rate card shows that private mortgage insurance companies also insure ARMs. (The chart is intended only as a guide).

Point

One percent of the loan amount. Points are charged for any reason, but are often used for buydowns (where they may also be called Discount Points). Points are used to increase the lender's yield on a loan.

PMI Premiums: Option 2

Option #2 A one-time PMI premium is offered by some private mortgage insurance companies, with no renewal fee. Combining the initial premium and renewal premiums into one single payment allows the buyer to finance the PMI premium, thus no extra cash is required at closing and monthly payments are often lower than if the premium is added to the regular mortgage payment.

PMI Premiums: Option 3

Option #3 No PMI premium, but a higher interest rate is another approach to paying PMI. Basically the borrower pays the lender a higher interest rate on the higher risk loan. This allows the money to be deducted as interest on a borrower's federal income tax. Most lenders call this a Lender-Paid PMI (LPMI) loan. The lender then buys PMI coverage for itself and when the home is in a better equity position, it cancels the PMI coverage. The borrower continues to pay the slightly higher interest rate, usually 0.25% to 0.5% higher. The advantage is this usually results in a lower monthly payment for the borrower than a traditional PMI-type loan.

Discount Points: Purpose

Simply put, discount points can help lenders and buyers get what they want. Discount points have traditionally been associated with FHA and VA loans, but points for conventional loans are becoming more common. While who pays points is open to negotiation, in most cases, the seller pays points to reduce the buyer's interest rate, which makes the property more marketable. It is far easier to sell a property if the interest rate is affordable. When points are paid to reduce the buyer's interest rate, it is called a buydown.

EXAMPLE: Secondary Mortgage Markets (3 of 3)

Tenth Bank is considering some new home mortgage requests. However, based upon the borrowers and the property, the loans seem riskier. Tenth Bank is slow to approve these loans because, if they do not meet the criteria of the secondary markets, Tenth Bank must hold the loans and would be unlikely to be able to sell them to the secondary market. This situation helps to stabilize the local real estate market because it discourages banks from making too many risky loans. Furthermore, the standardized criteria helps Tenth Bank feel fairly secure in the mortgage investments it buys on the secondary market from other areas of the country, even though it may never see the actual borrowers and properties it is helping to finance.

EXAMPLE: Secondary Mortgage Markets (1 of 3)

Tenth Bank is in an area of town that is booming. Businesses are coming to the area, and lots of people are moving here. Many of these people are looking to purchase a home and have come to Tenth Bank to borrow money. Trouble is, most of Tenth Bank's deposits are already tied up in real estate loans. But, by selling its current home mortgage loans in the secondary market, Tenth Bank can get additional funds to make new loans. Tenth Bank and its customers are happy, and the effects of a potential credit crunch in the local real estate market are moderated.

Financial Disclosures / Truth in Lending Act (TILA): Coverage of the Act (Explain What it Covers)

The Act applies to lenders who offer or extend credit to consumers (people, not companies) for personal, family, or household purposes. The Act covers all real estate loans made to consumers, regardless of amount, if the loan is not business related.

VA Loans Provisions: Certificate of Reasonable Value

The Certificate of Reasonable Value (CRV) is a document issued by the VA that states the value of the subject property based on an approved appraisal. The CRV (or the sale price, whichever is less) establishes the maximum mortgage amount a veteran may have on a VA-guaranteed loan for that property. Although the VA does not limit a home's purchase price, if the price of the property exceeds the CRV, the veteran must make up the difference in cash to buy that property. The loan amount cannot exceed the CRV.

VA-Guaranteed Loans

The Veterans Administration (VA) Home Loan program is for veterans, active duty military personnel (referred to here as veterans), and certain members of the Reserves and National Guard. VA loans are guaranteed by the government and can be used to buy single-family homes or multi-family residences with up to four units. If purchasing a single-family home, the veteran must intend to occupy it as his primary residence. If purchasing a multi-family dwelling, the veteran must occupy one of the units. There are no investor loans guaranteed by the VA.

How ARMs Work

The borrower's interest rate is determined initially by the cost of money at the time the loan is made. Once the rate is set, it is tied to one of several widely recognized and published indexes; thus, future interest rate adjustments are based on the upward & downward movements of the index. If the selected index rises, the lender has the option of increasing the borrower's interest rate or leaving it the same; but if the index falls, a reduction in the rate is mandatory

ARMs: Margin ("spread")

The difference between the index value and the interest rate charged on an ARM. In essence, this is the lender's gross profit that must also be used to cover the lender's expenses.

Secondary Mortgage Markets: Explain how they work.

The function of secondary markets is to buy and sell the mortgages of primary market lenders. Loans are bought and sold for several reasons. The primary and secondary markets are both trying to maximize the returns on their investment dollars. As interest rates increase, it is more profitable to sell off older loans that have lower interest rates so the lender has new money to lend again at higher interest rates. Buying and selling mortgages can also make more funds available to be loaned again, thus stabilizing local real estate markets. Let's look at how this works: 1. When secondary market players buy mortgages from primary lenders, such as local banks, the banks then have more money to lend again to other potential homeowners in the area. 2. When local banks invest surplus funds in real estate investments from other regions of the country that may be going through different phases of a real estate cycle, the effects of local real estate cycles can be moderated. 3. An important by-product of secondary mortgage markets is the standardization of loan criteria. Any changes implemented by secondary mortgage markets become requirements around the country for those wanting to sell mortgages on the secondary market. All of these functions serve to make local real estate markets more stable.

ARMs: Rate Adjustment Period

The interval at which a borrower's interest rate changes with ARMs. The interval can range from monthly to ten years; the most common rate adjustment period is every year.

ARMs: Mortgage Payment Adjustment Period

The intervals at which a borrower's actual principal and interest payments are changed. These changes do not necessarily have to coincide with rate adjustments.

VA Loans Provisions: Loan Guaranty Amount

The maximum guaranty amount (entitlement) determines how much guaranty assistance a veteran can get on a VA loan. The current maximum loan guaranty amount is $104,250. With the VA providing this loan guaranty amount up to 25% of the purchase price, a veteran can buy a home costing up to $417,000 with no down payment (e.g., $417,000 x 0.25 = $104,250). A veteran wishing to buy a more expensive home must make a down payment for the portion above $417,000.

EXAMPLE: VA Loans Maximum Guaranty

The maximum guaranty amount is still used to determine the entitlement, so the guaranty amount for the original loan must be subtracted from the maximum guaranty amount for the new loan For Example: A veteran used $24,000 of his entitlement on a previous loan, which cannot be restored, and wants to purchase a home for $299,000 where the county loan limit is $417,000. - $417,000 x 25% = $104,250 Maximum Guaranty - $104,250 - $24,000 = $80,250 Entitlement Available - $80,250 ÷ $299,000 = 26.84% Guaranty - $80,250 x 4 = $321,000 Maximum Loan Amount with 25% Guaranty Since the proposed loan amount will be less than $321,000, the lender will receive a 25% VA guaranty on the loan of $299,000. A down payment should not be required.

Freddie Mac (Federal Home Loan Mortgage Corporation)

The primary function of Freddie Mac is to help savings and loans acquire additional funds for lending in the mortgage market by purchasing the mortgages they already held. Freddie Mac may deal in FHA, VA, and conventional mortgages. While Fannie Mae emphasizes the purchase of mortgage loans, Freddie Mac also actively sells the mortgage loans from its portfolio, thus acting as a conduit for mortgage investments. The funds generated by the sale of the mortgages are then used to purchase more mortgages. Freddie Mac was created in 1970 as a nonprofit, federally chartered institution controlled by the Federal Home Loan Bank System. Freddie Mac, like Fannie Mae, is currently under the conservatorship of the Federal Housing Finance Agency (FHFA). Freddie Mac does not guarantee payment of its mortgages.

Ginnie Mae (Government National Mortgage Association)

The primary functions of Ginnie Mae are to promote investment by guaranteeing the payment of principal and interest on FHA and VA mortgages through its mortgage-backed securities program, and to serve low- and moderate-income homebuyers. It also provides assistance to the Department of Agriculture's. Ginnie Mae was created in 1968 as a government-owned corporation operating under the Department of Housing and Urban Development (HUD). Ginnie Mae also provides "special assistance" financing for urban renewal and housing projects, with below-market rates to low-income families.

Real Estate Industry is impacted by (P-E-G-S). What is (P-E-G-S)?

The real estate market is influenced by a number of - physical - economic - governmental - social factors - (P-E-G-S)

Annual Percentage Rate (APR)

The relationship between the cost of borrowing and the total amount financed, represented as a percentage.

Annual Percentage Rate (APR)

The relationship between the cost of borrowing money and the total amount financed, represented as a percentage. Regulation Z disclosures regarding the APR cannot be made based solely on an ARM's initial rate. The disclosure of the APR must be based on the initial rate plus the lender's margin, and should reflect a composite annual percentage rate based on the lower rate for a certain number of years and the higher rate for the remaining years on the loan term. Since all lenders must calculate the APR the same way, the composite APR lets consumers comparison shop for rates among different lenders.

Rural Housing Loans

This program, supported by the federal government's borrowing power, guarantees interest and principal mortgage payments to mortgage holders.

Calculating Buydowns

To accurately determine buydown rates, a quote should be obtained from the lender.

TILA: Right to Rescind

Under the Act, consumers have the right to rescind any credit transaction where a security interest (mortgage) is given in their principal residence, except for the initial purchase or construction of a home. For Example: - Consumers can rescind home equity loans, home improvement loans, refinances, etc. ✅ The right to rescind extends until midnight of the third business day after a transaction closes. Lenders must inform consumers of their right to rescind using a separate document

Conventional Financing: 95%

When a conventional buyer does not have enough money for a 10% down payment but still wants a conventional loan, he may qualify for a 95% conventional loan with a 5% down payment. This higher loan-to-value ratio of 95% requires owner occupancy. Down Payment. For a 95% loan, a buyer must make the 5% down payment from his own cash reserves, without using secondary (owner) financing or gifts. Interest Rates and Fees. A 95% loan usually has the same interest rate as an 80% or 90% loan (although it may be higher, based on the borrower's credit situation). Typically, the PMI premium is higher, making a 95% loan more costly than a 90% loan.

Negative Amortization

When a loan balance grows because of deferred interest.

negative amortization

When a loan balance increases, rather than decreases, because payments do not cover the interest on the loan.

VA Loans Provisions: Partial Eligibility

When a veteran has unused entitlement, the remaining eligibility may be used for a new loan. Note: A veteran may not have more than one VA loan at a time and may not own more than two homes at the same time that were acquired with VA loans.

EXAMPLE: PMI, How Mortgage Insurance Works

When insuring a loan, the mortgage insurance company shares part of the lender's risk, but only part of the risk. The insurer does not insure the entire loan amount but rather the upper portion of the loan— the loan amount that exceeds the standard 80% LTV. The amount of coverage can vary but is typically 20% - 25% of the loan amount. In the event of default and foreclosure, the insurer will take over the property or allow the lender to sell the property. Either way, the lender can make a claim for reimbursement of actual losses (if any) up to the face amount of the policy. Losses incurred by the lender take the form of unpaid interest, property taxes and hazard insurance, attorney's fees, costs of preserving the property during the period of foreclosure and resale, and the expense of selling the property

Assumption

When one party takes over responsibility for the loan of another party and the terms of the loan or note remain unchanged. (Usually lender approval is needed. A release is needed or the original party remains secondarily liable for the loan.)

Option

an agreement to keep open an offer to purchase or sell property for a predetermined period of time at a predetermined price. The property owner (the optionor) leases the property to the prospective purchaser (the optionee) for a specific term (e.g., one year) with the provision that part of the rent payments be applied to the purchase price if the tenant decides to buy before the lease expires. This can be done if a buyer wants to "try out" the property, cannot qualify for a loan now, or wants to have the option as a speculative investment

Non-Conforming loans

do not meet Fannie Mae/Freddie Mac underwriting standards and cannot be sold to Fannie Mae or Freddie Mac. There are other secondary markets where nonconforming loans can be sold, however. Lenders with the option of keeping loans in their portfolios (mostly banks and S&Ls) can, within the limits of the law, deviate from the standards set by the secondary market.

Prepayment penalties

fees a lender charges the borrower for paying off a loan early. In the past, conventional lenders charged penalties for early loan repayment to discourage it, but most lenders today would rather have the money to reinvest. Standard Fannie Mae and Freddie Mac notes and mortgages do not have prepayment penalties, and they are prohibited in FHA and VA loans.

Commercial Banks

financial institutions that provide a variety of financial services, including loans.

Savings and Loan Associations

financial institutions that specialize in taking savings deposits and making mortgage loans. Traditionally, the major real estate lending institutions were the S&Ls, investing roughly 75% of their assets in single-family mortgages. They were able to dominate local mortgage markets even though commercial banks had more assets to invest because deposits placed with S&Ls were savings deposits that were less subject to immediate withdrawal than demand (checking) deposits held by banks. S&Ls follow Fannie Mae qualifying standards

Homeowners Protection Act of 1998 (PMI Cancellation)

for all loans made after July 29, 1999, lenders must automatically cancel PMI when a home has been paid down to 78% of its original value, provided the borrower is not delinquent. The law also requires lenders to give borrowers an initial disclosure regarding PMI cancellation rules, and annual disclosures reminding borrowers of their PMI cancellation rights.

Mortgage Companies

institutions that function as intermediaries between borrowers and lenders. They may originate and service loans on behalf of large investors (e.g., insurance companies, pension plans, Fannie Mae).Since these large investors often operate on a national scale, they have neither the time nor the resources to understand the particular risks of local markets, or to deal with the day-to-day management of the loans.

conventional loan

is any loan not insured or guaranteed by a government agency.

Private mortgage insurance (PMI)

is offered by private companies to insure a lender against default on a loan by a borrower. As previously mentioned, PMI is what made 90% and 95% loans possible. Prior to PMI, lenders would loan only 80% of the property value because it was thought that a 20% down payment was the incentive needed for the borrower to keep mortgage payments current. The lender felt comfortable that, in the event of default, a foreclosure sale would yield 80% of the original sale price (or appraised value), recovering the original loan amount. PMI evolved to compensate the lender for reduced borrower equity, making loans easier for borrowers and safer for lenders. Both Fannie Mae and Freddie Mac also require third-party insurance on home loans with less than 20% down payments

Primary Mortgage Market Lenders

lenders who make mortgage loans directly to borrowers.

Government Financing

means that real estate loans are insured, guaranteed, or sponsored by government programs. (Do not confuse this with government involvement in the secondary mortgage markets!)

Conforming loans

meet Fannie Mae/Freddie Mac underwriting standards and can be sold on the secondary market. Lenders try to make many of their loans conforming loans because they like the option of being able to liquidate (sell for cash) their real estate loans on the secondary market if they need more funds.

Discount Points

paid to a lender to make up the difference between the current market interest rate and the rate given to a borrower on a note. Discount points increase a lender's return on loans with lower-than-market interest rates, allowing the lender to give the borrower a loan with a lower interest rate. Discount points are also called discounts or points. The term point is short for percentage point. A point is one percent of the loan amount.

Adjustable Rate Mortgages (ARMs)

permits the lender to periodically adjust the interest rate so it reflects fluctuations in the cost of money. With an ARM, the borrower is affected by interest rate movements: If rates climb, payments go up; if they decline, payments go down. ARMs are made primarily by banks and mortgage companies. ARMs are popular alternative financing tools because they can help borrowers qualify more easily for a home loan, or qualify for a larger home loan.

ARMs: Mortgage Payment Cap

places a limit on the amount a mortgage payment can increase. This cap can be a yearly amount or an amount over the life of the loan. This is another mechanism that lenders use to limit the magnitude of payment changes that occur with ARMs because unrestricted increases could create hardships for many borrowers. Some lenders use both rate and payment caps to keep payment adjustments within a manageable range for the borrower.

Secondary Mortgage Markets

private investors and government agencies that buy and sell real estate mortgages. The main difference between primary and secondary markets is that secondary markets buy real estate loans as investments from all over the country, whereas the primary mortgage market is typically local in nature (with local lenders making local loans to potential homeowners).

Truth in Lending Act (TILA)

requires lenders to disclose consumer credit costs in order to promote informed use of consumer credit. The idea is to let consumers know exactly what they are paying for credit, which will enable them to compare credit costs and shop around for the best credit terms

securitization

the act of pooling mortgages, then selling them as mortgage-backed securities.

Fannie Mae (Federal National Mortgage Association)

the nation's largest investor in residential mortgages. Fannie Mae was created in 1938 as the first government-sponsored secondary market institution. It was originally formed as a government-owned corporation but, in 1968, it became a stockholder-owned corporation. However, on September 6, 2008, developments in the housing market required the Director of the Federal Housing Finance Agency (FHFA) to "shore up" the operations of Fannie Mae by appointing the FHFA as its conservator. Fannie Mae can purchase conventional mortgages as well as FHA and VA mortgages and has consistently been ranked as one of the top ten largest businesses in the world. Fannie Mae funds its operation by securitization—the act of pooling mortgages, then selling them as mortgage-backed securities. Conventional loans may be guaranteed by Fannie Mae with full and timely payments of both principal and interest. Fannie Mae buys mortgages or interests in a pool of mortgages from lenders. Lenders who wish to sell loans to Fannie Mae must own a certain amount of stock in Fannie Mae. In this way, both the lender and Fannie Mae own interest in the loans. Loans sold to Fannie Mae are usually serviced by the originating lender or another mortgage servicing company. Fannie Mae pays a service fee to lenders who continue to service the loans.

Secondary Financing

when a buyer borrows money from another source (sometimes the primary lender) to pay part of the purchase price or closing costs. This is another way a buyer can get a conventional loan without having a 20% down payment (sometimes referred to as 80-10-10 loans).

Seller Financing: Lease / Option

when a seller leases property to someone for a specific term, with an option to buy the property at a predetermined price during the lease term. The lease/option plan is comprised of two elements: - Lease: contract where one party pays rent to other in exchange for possession of real estate. - Option: contract giving one party the right to do something w/in designated time, w/out obligating him to do it. Obviously, a lease/option is not the equivalent of a sale, but there is at least a good possibility that a sale will eventually take place.

Permanent Buydown

when points are paid to a lender to reduce the interest rate and loan payments for the entire life of the loan. When a buyer's interest rate is permanently lowered by a buydown, the lender will write that interest rate into the promissory note.

Temporary Buydown

when points are paid to a lender to reduce the interest rate and payments early in a loan, with both rising later. When interest rates are high, temporary buydowns are a popular way to reduce payments early in the loan. Many buyers feel they can grow into a larger payment, but need time to get established.

Conventional Financing: Traditional

when real estate is paid for or financed with a conventional loan.