PSI Real Estate - Chapter 6: Financing
Types of Mortgages Reverse Annuity Mortgage (RAM)
1) A loan that allows older homeowners to convert part of the equity in their home to tax-free income without having to sell, give up title, or take on a new monthly mortgage payment. 2) The homeowner must be at least 62 years of age and occupy the property as his or her primary residence 3) Most of the reverse mortgages are insured by FHA under the Home Equity Conversion Mortgage program authorized by congress 4) FHA insures the lender against loss if the loan balance at termination is greater than the value of the property and guarantees the borrower that any payments due from the lender will be made, even if the lender goes out of business 5) The loan is repaid when the owner sells, transfers his or her interest, or no longer occupies the home as his or her primary residence 6) The remaining equity goes to the owner or the owner's heirs
Types of Mortgages Wraparound Mortgage (all-inclusive second deed of trust)
1) Allows the borrower who is paying an existing mortgage to obtain additional financing from a second lender 2) New lender agrees to keep up payments on the existing loan; gives the borrower a new, increased loan at a higher interest rate 3) The new lender makes payments on the original laon; the borrower makes payments to the new lender on the larger loan in an increased amount.
Sources of Real Estate Financing Sale of State Mortgage Bonds
1) Authorized by federal government 2) Lower interest rates are usually charged to low-income and moderate-income buyers 3) Usually for first-time buyers
Types of Mortgages Adjustable Rate Mortgage (ARM)
1) Contains interest-rate provision related to a selected index 2) The interest rate may be adjusted periodically (up or down). A margin is added to the index to determine the interest rate 3) ARMs can be converted to fixed-rate mortgages (FRMs). They are fixed for either 5 or 7 years and then are annually adjusted
Sources of Real Estate Financing Owner Assisted
1) Contract for deed, land contract 2) Take back second mortgage
Types of Mortgages Department of Veteran Affairs Guaranteed (DVA Loans)
1) DVA does not allow a prepayment penalty 2) A DVA loan may be assumed by a qualified nonveteran 3) DVA guarantees home loans for eligible veterans or eligible dependents with little or no down payment 4) Interest rate is set by the market 5) DVA does not charge the borrower for the guarantee; however, borrower must pay up to a 3.3% funding fee to the DVA, on any no-down payment loan, in addition to any other fees 6) Mortgaged property must be appraised by a DVA-approved appraiser 7) DVA sets a limitation on the loan amount of the veterans entitlement guarantee but will increase the guarantee to $104,250 to allow a veteran to buya house for up to $417,000 if the value of the house and the income of the veteran are high enough to justify the higher guarantee. 8) Discount points generally are negotiated between the seller and the buyer 9) In some cases, the DVA will make direct loans to eligible veterans or their dependents. 10) DVA requires appraisers to complete a Certificate of Reasonable Value (CRV); the DVA guarantee is based on either the amount of the CRV or the selling price, whichever is less. 11) National guard members and reservists with at least six years of service now are eligible for DVA-guaranteed loans
Types of Mortgages Privately Insured
1) Depending on the buyer's credit score, the buyer may obtain a conventional loan for up to 103% of the property's appraised value 2) The buyer is charged the market rate of interest plus reasonable insurance premium costs 3) The borrower's insurance protects the lender against loss on the upper 20-25% portion of the loan 4) PMI insurance premiums are made a part of the borrower's monthly payments 5) As property values rise and the loan-to-value ratio becomes 80% or less, the PMI insurance may be dropped. a) Requires either the lender's or invetor's approval and generally a new appraisal b) Insurance must generally be held for two years, and the mortgagor must have a 20% equity to request that the insurance be dropped; when the mortgagor's equity position reaches 22%, the lender is required to drop the insurance
Types of Mortgages Federal Housing Administration (FHA) Insured
1) FHA insures approved lenders against loss on loans made on new or existing one to four family housing 2) Interest rates float with the open market 3) The borrower finances an up-front FHA insurance premium of 1.50% (which may be partially refundable); borrower then pays a monthly (nonfinanceable) insurance premium (MIP) based on ½% of the mortgage amount. 4) Mortgaged property must be appraised by an FHA-approved appraiser 5) FHA does not allow a prepayment penalty 6) FHA mortgages are assumable with qualification 7) Discount points are generally used to reduce the interest rate 8) (1 point = 1% of the loan balance); these are generally negotiated between seller and buyer 9) FHA mortgage insurance makes it possible to reduce down payments to as little as 3.5% 10) FHA sets limits on the amount that may be insured. The current FHA mortgage limit for one-unit dwellings ranges from $271,050 to $729,750 depending on geographic location
Types of Mortgages Construction Loans
1) Generally short-term or interim loan to finance construction of an improvement 2) Periodic payments or draws made by the lender to the owner for work completed since the previous payment
The Money Market US Treasury
1) In effect, our nation's fiscal manager 2) Responsible for supervising the daily fiscal borrowing and spending operations of the federal government
Types of Mortgages Graudated-Payment Mortgage (only used during times of high interest rates)
1) Initial payments are low but increase over the life of the loan 2) Allows the buyer to purchase a home with monthly payments lower than those on a level payment 3) Aimed at helping first-time buyers who have increasing income potential
The Money Market General Characteristics
1) Money may be viewed as means of payment, storehouse of purchasing power, standard of value. 2) Money market is regulated by the federal government through the Federal Reserve System and the US Treasury
Sources of Real Estate Financing Mortgage Banking Companies
1) Originate loans with their own money and money belonging to other institutions and from other sources (pension funds, private individuals) 2) Service loans they originate
Types of Mortgages Conventional
1) Payment of debt based solely on the borrower's ability to pay, with security provided by the mortgage; neither insured nor guaranteed by government agency 2) Lender sets the terms subject to many of the rules established by the secondary mortgage market. Loans originated by some institutions are sold to investors in the secondary market. Other institutions keep the loans they make; which are called portfolio loans 3) Loan-to-Value Ratio depends on the borrower's credit risk and/or size of the down payment. For example, if a borrower put down 10% of a $200,000 home, then the LTV ratio would be $180,000/$200,000 = 90% 4) IF the loan-to-value ratio exceeds a given level, for example, 80%, the lender may require private mortgage insurance (PMI) 5) Internet lenders provide borrowers with another viable origination option. However, online lending can be tricky, and some counseling should be sought before borrowing mortgage money online
Sources of Real Estate Financing Life Insurance Companies
1) Prefer long-term commercial, industrial loans 2) Seek equity position in projects financed 3) Regulated by state law
Sources of Real Estate Financing Commercial Banks
1) Prefer short-term loans but have been significant participants in residential mortgage lending 2) Deposits are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor
Sources of Real Estate Financing Mutual Savings Banks
1) Primarily savings institutions in the northeastern United States 2) Active in mortgage market 3) Prefer FHA and DVA loans
The Money Market The Federal Reserve System (The Fed)
1) Regulates the flow of money through member banks by controlling reserve requirements and discount rates. 2) Tempers the economy through open-market operations
Types of Mortgages Rural Development and Farm Agency
1) Rural Development makes and guarantees housing loans to people with low incomes in rural areas in communities of 10,000 population or less 2) Farm Service Agency makes and guarantees loans to farmers and ranchers
Types of Mortgages Open-End Mortgage
1) Secures the note executed by the borrower to the lender and any future advances of funds by the lender to the borrower. 2) Terms usually restrict an increase in debt to a limit of either the original debt or a specified amount in the mortgage 3) Additional loan amounts are figured at prevailing interest rates
Mortgage Provisions Subordination Agreements
A clause that grants or permits a subsequent mortgagor to take priority in lien structure
Underwater Mortgage
A mortgage on a home in which the home is worth less than the amount owed to the bank that holds the mortgage on the home; often referred to as negative equity or an "upside down" mortgage
Theories of Mortgage Law Intermediate Theory
A number of states allow the lender to take possession of the mortgaged real estate on default
Mortgage Foreclosure and Redemption Short Sale
A procedure to prevent foreclosure that a bank uses in an effort to minimize the financial loss that would be involved in foreclosing. Lenders negotiate with lienholders for a payoff that is less than they are owed, or for the sale of real estate for an amount that is less than the full amount of the debt.
Trust Deed
A three-party instrument used in place of a mortgage in some areas of the country a) Conveys real estate as security for loan to a third party, the trustee b) Trustee holds the title on behalf of the lender, known as the beneficiary; the trustee is the legal owner, and the beneficiary is the holder of the note; the borrower retains the equitable title to the property, and the deed of the trust becomes the lien against it c) The trustee may commence a foreclosure action if the borrower (trustor) defaults; a reconveyance deed returns title to trustor when trust deed has been paid in full
Closing Statements (Settlement Statement or Adjustment Sheet)
A) Related to completion of the real estate transaction, when the seller delivers title to the byer in exchange for payment of the purchase price by the buyer B) Detailed accounting of real estate transaction; shows all funds received, all charges and credits made, all funds paid out. C) Prepared by the broker, escrow office, attorney, or any other person designated to process the details of the sale. D) Indicates how all closing costs plus prepaid and unpaid property expenses are allocated between the buyer and the seller. E) Closing statement procedures generally reflect local custom as well as state and federal laws
Types of Loans Straight or Interest-Only Loan
Allows for payments of interest only with a lump-sum payment of principal at maturity
Types of Loans Graduated Payment Mortgage
Allows for smaller payments in the early years and increased payments in the later years. Causes negative amortization by adding the early years of deferred interest to principle.
Mortgage Fraud Predatory Lending Practices
Any practice in which lenders try to coerce consumers into agreeing to loans that are unaffordable and violate industry standards. Predatory lenders often target low-income people, immigrants, and the elderly as their potential victims Examples: 1) Offering only loans with interest rates that the borrower cannot afford and including fees that are not necessary mortgage charges 2) Moving a borrower from one loan to another near the end of the payment schedule to extend interest payuments and add to the overall cost of the loan by having the borrower refinance prior to the expiration of the payment schedule, and requiring borrowers to buy more insurance than legally required or needed by the borrower.
Subordination Agreement
Changes the order or priority of the liens between two creditors
Usury
Charging a rate of interest in excess of the maximum rate allowed by state law
Mortgage Fraud Usury
Charging interest on a loan that is above the maximum rate allowed by law. Some states have a usury law that sets a maximum rate for loans, as well as rules regarding loan provisions such as prepayment penalties and late-payment charges
Types of Mortgages Blanket Mortgage
Covers more than one property or lot; generally includes a partial-release clause
Mortgage Fraud Predatory Lending Laws The Home Ownership and Equity Protection Act
Created in 1994 under truth in lending act.. Aimed at identifying potential predatory mortgage loans and limiting their terms
Mortgage Loan Mortgage
Document by which the mortgagor (borrower) places a lien on the property in favor of the mortgagee (Lender) as security for debt
Down Payment Assistance Program
Down payment assistance is available through government programs at the federal, state, and local levels as well as through charitable organizations Government grands are available to first-time home buyers as long as the family income meets the stipulated minimum, which varies according to the median income for the area as well as the number of dependents Government down payment assistance programs are generally interest free and do not require a monthly payment Some of these grants take the form of a second mortgage which does not have to be repaid until the house is sold; in many of these programs the grant will not have to be repaid if the home is owned for a specified number of years
Types of Loans Amortized Loan (Fixed Payment)
Equal monthly payments credited first to interest due, then applied to the loan balance.
Balloon Payment
Final payment of the loan; larger than previous payments and repays the debt in full
Mortgage Fraud
Fraud perpetrated through acts such as the use of identity theft and false documents, and the occasional willing or unwilling assistance of professionals in real estate. Examples: 1) Fictitious or stolen identity - false identity is used on a loan application without the true person's knowledge. 2) Inflated appraisals - an appraiser works in collusion with a borrower or lender to provide a misleading appraisal report to the lender by inaccurately stating an inflated property value Mortgage fraud is investigated by the FBI and is punishable by up to 30 years in prison, a $1 million fine, or both.
Types of Mortgages Purchase-Money Mortgage
Given by the buyer to the seller as part of the purchase price (owner financing); legal title passes to the buyer
Mortgage Provisions Acceleration Clause
If the borrower defaults, the lender has the right to declare the entire debt due and payable
Mortgage Provisions Alienation (Due-on-Sale) Clause
If the borrower sells the property, the lender has the choice of either declaring the entire debt due and payable or allowing the buyer to assume the loan
Mortgage Provisions Buying "Subject To" Versus Assuming
If the property is sold "subject to" the mortgage, the buyer is not personally liable to pay the entire debt (seller remains liable); If the buyer assumes the mortgage, he or she becomes personally liable for payment of the entire debt. The seller is secondarily liable.
Mortgage Foreclosure and Redemption Deficiency Judgement
If the property is sold and the proceeds are insufficient to pay the mortgage and foreclosure costs, the difference is a deficiency The lender usually can sue the original borrower for the difference
Types of Mortgages Permanent
In order for the borrower to qualify for a large than usual loan, discount points can be paid at closing to permanently buy down the existing interest rate. For example, if a borrower qualified to make an $1,100 PI payment, amortized over 30 years at 5.5% ($5.68 per $1,000), then the amount mortgaged would be ($1,100 divided by 5.68) $193,662. However, if the sellers paid enough discount points to permanently buy down the interest rate to 5.00% (instead of 5.5%) then the amount mortgaged would be increased to ($1,100 / 5.37) $204,842
Types of Mortgages Package Mortgage
Includes real estate and (expressly) all fixtures and appliances located on the property
Mortgage Fraud Predatory Lending Laws Truth in Lending Act
Law that requires disclosure of loan terms as well as APR
Types of Mortgages Participation Mortgage
Lender receives interest and an equity position in a project, known as equity kicker, or a percentage of the income of the property
Mortgage Foreclosure and Redemption Judicial Foreclosure
Lender sues the borrower in court; obtains judgement and court order to sell Property sold at public sale to the highest bidder
Disintermediation
Lenders experience a rapid withdrawal of funds into alternative investments which weakens the lender's position in the money market
Types of Loans Equity Loan
Loan on a home using the equity in the home as collateral for the loan, which is generally a line of credit. Equity is the difference between the value of a home and how much the homeowner owes on the home, which is usually in the form of a mortgage
Types of Loans Subprime Loans
Loans to borrowers with a weakened credit history who have a greater likelihood of default. The lender compensates for the greater risk by charging higher fees and interest rates than those on traditional loans.
Secondary Mortgage Market
Market in which loans are bought and sold after they have been originated and funded Warehousing agencies play a major role by purchasing a number of mortgage loans and assembling them into packages for resale to investors
Discount Points
Money expressed in the form of a percentage. A point equals one percent of the loan amount. For example, if two discount points were paid on a $200,000 loan, the amount would be ($200,000 x 2% = $4,000) Often the seller is asked to pay a discount point or two in order to help the buyer obtain financing
Mortgage Foreclosure and Redemption Deed in Lieu of Foreclosure
Mortgagor gives deed to mortgagee when mortgagor is in default under terms of mortgage; this allows mortgagor to avoid foreclosure
Sources of Real Estate Financing Mortgage Brokers
Originate loans for other lenders but do not service loans
Types of Loans Balloon Payment
Payments of principal and interest are paid to the lender over a relatively short period The outstanding principal balance is due in a lump sum at a predetermined future date (partially amortized loan payment plan)
Hypothecation
Pledging property as security for the loan without losing possession of it
Mortgage Foreclosure and Redemption Redemption
Process by which the borrower regains interest in the property
Arbitrage
Profitable difference between interest rates in financing arrangements such as wraparound mortgages
Mortgage Loan Note
Promise to repay debt; a negotiable instrument
Amortized Mortgage (Direct-reduction Loans)
Regular monthly payments, applied first to the interest, with the balance to the principal, over the term of the loan.
Property Insurance
Required to obtain mortgage; figured annually and often budgeted monthly Various types of polices like renters insurance (HO-4), homeowners insurance (HO-2 or HO-3), and condominium insurance (HO-6) for interior surfaces CLUE (Claim Activity and Property Damage) reports are ordered by most insurance companies on property being purchased. Insures use the report to ascertain patterns of possible future claims and adjust their insurance premiums according to risk.
Types of Mortgages Rurual Economic and Community Development
Services, makes, and guarantees loans to homeowners in rural areas
Mortgage Provisions Assignment
The Mortgagee (Lender) becomes the assignor and executes assignment to the assignee, who becomes the new owner of the mortgage and debt.
Mortgage Foreclosure and Redemption Strict Foreclosure
The court may award title to the lender
Theories of Mortgage Law Title Theory
The lender is viewed as the conditional owner of mortgaged land in some states
Mortgage Loan Mortgage Origination
The lending institution that originally qualifies the borrower, orders the appraisal, initiates the Uniform Residential Loan Application (FNMA 1003), and charges a loan origination fee
Mortgage Foreclosure and Redemption Non-Judicial Foreclosure
The mortgage generally must include a power-of-sale clause A notice of default must be recorded and a public sale advertised in the newspaper The property is sold at a public sale to highest bidder
Theories of Mortgage Law Lien Theory
The mortgage is viewed as a lien on real property in many states
Mortgage Provisions Defeasance Clause
The mortgagee is required to execute the release or satisfaction of the mortgage when the note is fully paid
Seller Financing
The seller of the real estate provides financing for the sale by taking back a secured note in the form of a purchase-money mortgage, land contract, or deed of trust
Types of Mortgages Buydowns (Temporary)
To help the borrower qualify for a loan, the seller agrees to subsidize the buyer's PI payment. For example, if the interest rate is 7% and the seller agreed to help finance a 2 - 1 buy-down loan, then the borrower would make an initial payment based on a 5% interest rate the first year and 6% the second year. The seller would subsidize the buyers' PI payment 2% of the first year (7 - 5 = 2%) and 1% the second year (7 - 1 = 6%). IN the third year the temporary subsidy goes away and the buyer's payment is based on a 7% interest rate
Sources of Real Estate Financing Savings and Loans Associations
To promote thrift and home ownership 1) Regulated on the national level by the Office of Thrift Supervision 2) Regulated on the national level by the Office of Thrift Supervision 3) Deposits are insured by the Federal Deposit Insurance Corpation (FDIC) for up to $250,000 per depositor.
Impound Account
Trust account created to set aside funds for the future needs of a property, for example, to provide funds for the payment of real estate taxes and renewal premiums for insurance
Equity
Value of the owner's interest in the property; The difference between the value of the property and all the liens on the property
Secondary Mortgage Market Major Warehousing Agencies Government National Mortgage Association (GNMA) Ginnie Mae
a) Agency designed to administer a special assistance program to work with the FNMA b) Can join forces with the FNMA in times of tight money and high interest rates; through a tandem plan, the FNMA can purchase high-risk, low-yield loans at full market rates, while the GNMA guarantees payment and absorbs the difference between low-yield and current market prices c) Authorized to purchase government insured FHA mortgages; government guaranteed VA mortgages; and government-subsidized Rural Development Mortgages from intermediaries in the secondary market
Secondary Mortgage Market Major Warehousing Agencies Federal Home Loan Mortgage Corpoation (FHLMC) - Freddie Mac
a) Government-chartered corporation created to provide secondary mortgage market for conventional loans b) Has the authority to purchase conventional, FHA, and DVA mortgages; pool them; and sell bonds in the open market with mortgages as security
Mortgage Foreclosure and Redemption Statutory Redemption
a) Occurs after public sales in some states and continues for a period of time specified by law b) The borrower may pay to the foreclosure purchaser the sale price in full plus costs
Mortgage Foreclosure and Redemption Equitable Redemption
a) Occurs prior to public sale b) If the borrower pays the amount due plus the costs prior to the public sale, the mortgage is reinstated c) If not redeemed, the property is sold at a public sale to highest bidder
Secondary Mortgage Market Major Warehousing Agencies Federal National Mortgage Association (FNMA) - Fannie Mae
a) Publicly traded corporation authorized to purchase conventional as well as FHA and DVA loans b) Raises funds to purchase loans by selling government-guaranteed FNMA bonds at market interest rates