Real Estate Chapter 16

straight loan

(aka invest only loan or term loan) is a nonamortized loan that essentially divides the loan into two amounts to be paid off separately. the borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term.

amortized loan

(direct reduction loan) partially pays off both principal and interest, regular and periodic payments are made over a term of years, 15 or 30, and at the end the full amount is reduced to 0.

Servicing loans

-collecting payments (including insurance and taxes), accounting, bookkeeping, preparing insurance and tax records, processing payments of taxes and insurance, and following up on loan payment and delinquency

Income on the loan is from 2 sources

-finance charges (collected at closing such as loan origination fees and discount points) and recurring incomes (the interest collected during the term of the loan)

Agricultural loan program

Farm Service Agency (FSA) offers programs to help families purchase or operate family farms. Farmer Mac (like fannie mae and freddie mac)

private mortgage insurance

PMI - this helps obtain a mortgage loan with a lower down payment. the borrower purchases an insurance policy that provides the lender with funds in the event the borrower defaults on the loan

advertising

TILA provides strict regulation of real estate advertisements in all media that refer to mortgage financing terms. the APR -which is calculated based on all charges rather than the interest rate alone- must be stated.

A buyer borrowed $85,000 to be repaid in monthly installments of $823.76 at 11.5% annual interest. How much of the buyer's first-month payment was applied to reducing the principal amount of the loan?

The answer is $9.18. $85,000 × 0.115 = 9,775 ÷ 12 = $814.58; $823.76 ‒ $814.58 = $9.18.

If a lender agrees to make a loan based on an 80% LTV ratio, what is the amount of the loan if the property appraises for $114,500 and the sales price is $116,900?

The answer is $91,600. $114,500 × 0.80 = $91,600.

A borrower obtains a $100,000 mortgage loan for 30 years at 7.5% interest. If the monthly payments of $902.77 are credited first to interest and then to principal, what will be the balance of the principal after the borrower makes the first payment?

The answer is $99,722.23. $100,000 × 0.075 = $7,500 ÷ 12 = $625 interest; $902.77 ‒ $625 = $277.77; $100,000 ‒ $277.77 = $99,722.23.

A borrower wants to negotiate a $113,000 loan. Which of these loan terms would he need to accept to pay the least amount of interest over the life of the loan?

The answer is 9% amortized over 15 years. The lender credits each payment first to the interest due, then to the principal amount of the loan. As a result, while each payment remains the same, the portion applied to repayment of the principal grows quicker with fewer years and the interest due declines as the unpaid balance of the loan is reduced.

Which law requires that all advertising that references mortgage financing terms contain certain disclosures?

The answer is Truth in Lending Act. The Truth in Lending Act (TILA) provides strict regulation of real estate advertisements in all media that refer to mortgage financing terms.

A buyer purchased a home for cash 30 years ago. Today, the buyer receives monthly checks from a mortgage lender that supplement her income. The buyer MOST likely has obtained

The answer is a reverse mortgage. A reverse mortgage allows people 62 or older to borrow money against the equity they have built in their home. The money may be used for any purpose, and the borrowers may opt to receive the money in a lump sum, fixed monthly payments, an open line of credit, or other options.

In a loan that requires periodic payments that do not fully amortize the loan balance by the final payment, which term BEST describes the final payment?

The answer is balloon. When the periodic payments are not enough to fully amortize the loan by the time the final payment is due, the final payment is larger than the others—this is called a balloon payment.

A developer received a loan that covers five parcels of real estate and provides for the release of the mortgage lien on each parcel when certain payments are made on the loan. This type of loan arrangement is called a

The answer is blanket loan. A blanket loan covers more than one parcel or lot. It is usually used to finance subdivision developments. A blanket loan usually includes a partial release clause, which permits the borrower to obtain the release of any one lot or parcel from the lien by repaying a certain amount of the loan.

The primary activity of Freddie Mac is to

The answer is buy and pool blocks of conventional mortgages. The Federal Home Loan Mortgage Corporation, usually called Freddie Mac, is a government-sponsored enterprise that provides a secondary market primarily for conventional loans.

A buyer purchased a new residence for $175,000. He made a down payment of $15,000 and obtained a $160,000 mortgage loan. The builder of the house paid the lender 3% of the loan balance for the first year and 2% for the second year. This represented a total savings for the buyer of $8,000. What type of mortgage arrangement is this?

The answer is buydown. A buydown is a way to temporarily (or permanently) lower the initial interest rate on a mortgage or deed of trust loan. Perhaps a homebuilder wishes to stimulate sales by offering a lower-than-market rate, or a first-time residential buyer may have trouble qualifying for a loan at the prevailing rates.

Which of these is NOT a participant in the secondary market?

The answer is credit unions. In the secondary market, various agencies purchase existing mortgages from banks and savings associations and assemble those mortgages into packages. Such agencies include Fannie Mae, Ginnie Mae, and Freddie Mac.

A home is purchased using a fixed-rate, fully amortized mortgage loan. Which statement regarding this mortgage is TRUE?

The answer is each mortgage payment amount is the same. Under a fully amortized loan, the mortgagor pays a constant amount, usually monthly. The lender credits each payment first to the interest due, then to the principal amount of the loan. As a result, while each payment remains the same, the portion applied to repayment of the principal grows and the interest due declines as the unpaid balance of the loan is reduced.

Which of these is the difference between the market value and any mortgages the borrower has on the property?

The answer is equity. Equity is the interest or value that an owner has in property over and above any indebtedness.

Which statement is TRUE regarding the Truth in Lending Act (TILA)?

The answer is finance charges that must be disclosed include loan fees, service charges, and discount points. The finance charge disclosure must include any loan fees, finder's fees, service charges, and points, as well as interest. With proper disclosures, borrowers can compare the costs of various lenders and avoid the uninformed use of credit.

When the Fed raises its discount rate, which is likely to happen?

The answer is interest rates will rise. Federal Reserve member banks are permitted to borrow money from the district reserve banks in order to expand their lending operations. The discount rate is the rate charged by the Fed when it lends money to its member banks. When the Fed discount rate is high, bank interest rates are high. When bank interest rates are high, fewer loans are made and less money circulates in the marketplace.

A buyer purchased a residence for $195,000. She made a down payment of $25,000 and agreed to assume the seller's existing mortgage, which had a current balance of $123,000. The buyer financed the remaining $47,000 of the purchase price by executing a mortgage and note to the seller. This type of loan by which the seller becomes the mortgagee is called a

The answer is purchase money mortgage. A purchase money mortgage (PMM) is a note and mortgage created at the time of purchase when the seller agrees to finance all or part of the purchase price and consists of a first or junior lien, depending on whether prior mortgage liens exist.

In order to assist a prospective buyer who lacked a down payment on their property, a married couple agreed to "take back paper" at the closing for a part of the purchase price. The document MOST likely used would be a

The answer is purchase money mortgage. A purchase money mortgage (PMM) is a note and mortgage created at the time of purchase when the seller agrees to finance all or part of the purchase price and consists of a first or junior lien, depending on whether prior mortgage liens exist. Often called seller financing or owner financing, a PMM is often used when the buyer does not qualify for a typical lender loan.

Funds for FHA loans are usually provided by

The answer is qualified lenders. FHA loans must be made by FHA-approved lending institutions.

Which characteristic of a fixed-rate home loan that is amortized according to the original payment schedule is TRUE?

The answer is the amount of interest to be paid is predetermined. The payment in an amortized loan (also called a direct reduction loan) partially pays off both principal and interest. The most frequently used plan is the fully amortized loan (also called a level-payment loan). Under such a plan, the mortgagor pays a constant amount, usually monthly. The amount of the constant payment is determined from a mortgage factor chart.

Which of these BEST defines the secondary market?

The answer is where loans are bought and sold after they have been originated. In the secondary market, various agencies purchase existing mortgages from banks and savings associations and assemble those mortgages into packages. Securities that represent shares in these pooled mortgages are then sold to investors or other agencies.

mortgage insurance premium (MIP)

a borrower is charged this for all FHA loans. the up front premium is charged at closing and can be financed into the mortgage loan

buydown

a way to temporarily (or permanently) lower the initial interest rate on a mortgage or deed of trust loan. if a homebuilder wants to create more sales by offering lower than market rate, a lump sum is paid in cash to the lender at closing. the payment offsets the interest rate and monthly payments during the mortgage's first few years.

insurance companies

accumulate large sums of money from premiums paid by policyholders. part of this money is held in reserve to satisfy claims and cover operating expenses, much of it is free to be invested in profit earning enterprises such as long term real estate loans.

growing equity mortgage (GEM)

aka rapid payoff mortgage. uses a fixed interest rate, but payments of principal are increased according to an index or a schedule.

reverse mortgage

allows people 62 or older to borrow money against the equity they have built in their home.

index

an undeterminable economic indicator that issued to adjust the interest rate in the loan.

real estate settlement procedures act (RESPA)

applies to any residential real estate transaction involving a new first mortgage loan. it is designed to ensure that buyer and seller are fully informed of all settlement costs.

mortgage brokers

are not lenders. they are intermediaries who bring borrowers and lenders together.

sale leaseback arrangements

are used to finance large commercial or industrial properties. the land and building usually used by the seller for business purposes, are sold to an investor.

credit unions

cooperative organizations whose members place money in savings account, routinely originate longer term first and second mortgage and deed of trust loans.

blanket loans

covers more than one parcel or lot, usually used to finance subdivision developments.

Increasing reserve requirements raises rates

decrease money flow, slows economy and purchases, and slows inflation

wraparound loans

enables a borrower with an existing mortgage or deed of trust loan to obtain additional financing from a second lender without paying off the first loan. the second lender gives the borrower a new increased loan at a higher interest rate and assumes payment of the existing loan.

adjustment period

establishes how often the rate may be changed, whether is it monthly, quarterly or annually.

Thrifts, savings associations, and commercial banks

fiduciary lenders, thrift is a generic term for the savings associations.

Adjustable rate mortgages (ARMs)

generally originate at one rate of interest then fluctuate up or down during the loan term, based on some objective economic indicator.

Ginnie Mae

government national mortgage association, it administers special assistance programs and guarantees mortgage backed securities using FHA and VA loans as collateral. The Ginnie Mae pass-through certificate is a security interest in a pool of mortgages that provides for a monthly pass-through of principal and interest payments directly to the certificate holder.

Fannie Mae

government sponsored enterprise that provides a secondary market for mortgage loans, dealing in conventional, Federal Housing Administration (FHA) and Department of veteran affairs (VA) loans.

Freddie Mac

government sponsored enterprise that provides a secondary market primarily for conventional loans

credit history

in addition to credit scores underwriters consider two to seven years of potential buyer's repayment history, especially rent or mortgage loans. a payment is considered late if it is more than 30 days past due. they also look for bankruptcies, judgments, and foreclosures.

package loan

include real and personal property, usually includes furniture, drapes, kitchen ranges, refrigerator, dishwasher, washer, dryer, freezer.

Decreasing reserve requirements lowers rates

increases money for loans, stimulates market, and increases inflation

purchase money mortgages

is a note and mortgage created at the time of purchase when the seller agrees to finance all or party of the purchase price and consists of a first or junior lien, depending on whether prior mortgage liens exist. is often used when the buyer does not qualify for a typical lender loan

investment group financing

large real estate projects, such as highrise apartment buildings, office complexes, and shopping centers are often financed as joint ventures through group financing arrangements like syndicates, limited partnerships, and real estate investment trusts.

rate caps

limit the amount the interest rate may change. most ARMs have 2 types of caps -periodic and aggregate.

periodic rate cap

limits the amount the rate may increase at any one time

aggregate rate cap

limits the amount the rate may increase over the entire life of the loan

construction loan

made to finance the construction of improvements on real estate such as homes, apartments, and office buildings.

Primary mortgage market

made up of the lenders that originate mortgage loans. These lenders make money available directly to borrowers

Federal Reserve System

maintains sound credit conditions, helps counteract inflationary and deflationary trends and creates a favorable economic climate. It is divided into 12 districts, each served by a federal reserve bank. The fed regulates the flow of money and interest rates in the marketplace through its member banks by controlling reserve requirements and discount rates.

endowment funds

many commercial banks and mortgage bankers handle investments from endowment funds, the endowments of hospitals, universities, colleges, charitable foundations and other institutions provide a good source of financing for low risk commercial and industrial properties.

truth in lending act (TILA)

often called regulation Z, requires that credit institutions inform borrowers of all finance charges and the true interest rate before a loan is complete

nonrecourse loans

one in which the borrower is not held personally responsible for the loan. the lender has no recourse against the borrower personally in the event of default. these loans are common in commercial and investment real estate transactions.

mortgage banking companies

originate mortgage loans with money belonging to insurance companies, pension funds, and individual funds of their own. they make real estate loans with the intention of selling them to investors and receiving a fee for servicing the loans. generally organized as stock companies

equal credit opportunity act (ECOA)

prohibits lenders and others who grant or arrange credit to consumers from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, martial status, age, dependence on public assistance.

home equity loans

provide a source of funds using the equity built up in a home. the original loan remains in place and the home equity loan is junior to the original lien.

the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE act)

requires that each individual state must license and register mortgage loans originators (MLO's) an MLO is anyone who for compensation or expectation of compensation takes a residential mortgage loan by phone or in person.

open end loans

secures a note executed by the borrower to the lender. it also secures any future advances of funds made by the lender to the borrower. is often a less costly alternative to a home improvement loan.

trigger terms

specific credit terms, such as down payment, monthly payment, dollar amount of the finance charge, or term of the loan

loan to value (LTV) ratio

the LTV is the ratio of debt to value of the property (the sale price or the appraisal value, whichever is less). the lower the ratio of debt value, the higher the down payment by the borrower.`

VA guaranteed loans

the VA is authorized to guarantee loans to purchase or construct homes for eligible veterans and their spouses (including unmarried spouses of veterans whose deaths were service related), VA loan is something of a misnomer, the VA does not lend the money, rather it guarantees loans made by lending institutions approved by the agency

credit scores

the higher the credit score the lower of the risk to the lender

margin

the interest rate is usually the index plus a premium. the margin represents the lender's cost of doing business.

the VA also issues a certificate of reasonable value

the issued CRV for the property being purchased. it states the property's current market value based on a VA approved appraisal and places a ceiling on the amount of a VA loan allowed for the property

FHA insured loans

the term FHA loan refers to a loan that is insured by that agency. the FHA insurance provides security to the lender in addition to the real estate

community reinvestment refers to the responsibility of financial institutions to help meet their communities' needs for low income and moderate income housing.

under 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, and participate in loan programs for housing, small businesses and small farms.

pension funds

usually have large sums of money available for investment, mostly handled by mortgage bankers and mortgage brokers.

secondary mortgage market

various agencies purchase existing mortgages from banks and savings associations and assemble those mortgages into packages called blocks or pools.

Federal Deposit Insurance Corporation (FDIC)

various government regulations (which include fund, reporting, and insurance requirements)are intended to protect depositors

conventional loans

viewed as most secure loans because their LTV ratios are often lowest. usually the ratio is 80% of the value of the property or less because the borrower makes a down payment of at least 20%

balloon payment loans

when the periodic payments are not enough to fully amortize the loan by the time the final payment is due, the final payment is larger than the others. a partially amortized loan because principal is still owed at the end of the term

conversation option

which permits the mortgagor to convert from an adjustable-rate to a fixed-rate loan at certain intervals during the life of the mortgage.

the mortgagor is protected from unaffordable individual payments by the payment cap

which sets a maximum amount for payments