Unit3 + Unit 4: Finance and Credit Laws
Calvin purchased a house for $220,000, financing $200,000 using a 30-year conventional mortgage at 4% interest. His monthly payment is $955, including both principal and interest. The annual property taxes are $1,400 and the combined annual insurance premium is $900. What's Calvin's PITI payment each month?
$1,146.67 995+ (1400+900/12)
The lender will charge a one-and-a-half-point origination fee and two loan discount points. What will be the total due for points on a $115,000 loan?
$4,025
How is interest paid per month calculated?
(Principal x interest rate) / 12
Loan Origination Fee
A fee charged by the lender to cover the cost of processing the loan
Discount points
A fee charged by the lender to give the borrower a lower interest rate
Which of the following is an action borrowers take to temporarily lower the interest rate on their mortgage loan?
Buydown
Which of these lender actions are considered predatory?
Giving a consumer a loan that is too expensive for her to pay off Encouraging a borrower to keep refinancing to earn money from the fees
During periods of inflation, what are you likely to see?
Higher interest rates
Truth in Lending Act (TILA)
to safeguard the consumer in the use of credit by requiring full disclosure of the terms and conditions in any offers of credit.
Charlie and Wendy are purchasing a property with a sales price of $350,000. They'll be financing $335,000. What's their LTV ratio?
95.7%
Which of the following is most susceptible to a predatory lender?
A borrower with poor credit
The Morgans are about to close on their home. They're meeting with the lender to complete all the necessary paperwork. They've requested that none of their demographic information be shared with anyone. Which act would they need to be made aware of?
Home mortgage disclosure act
ECOA
Lists protected classes against whom lenders may not discriminate when making credit unavailable
In addition to reducing settlement costs, RESPA helps protect the consumer by requiring clarity around settlement fees. The borrower in a real estate transaction must receive certain disclosures. Which two of these are the names of the disclosure forms related to RESPA?
Loan Estimate and Closing Disclosure forms in the stack of paperwork at most of your closings.
How is the amount of a loan payment that's applied to principal calculated?
Monthly principal and interest payment - interest paid per month
How do you calculate total interest paid?
Monthly principal and interest payment x total number of payments — original loan amount
Pre-qualification
No cost to consumer + The lender performs no verification of information the consumer provided.
Bo's real estate ad states: "Custom homes for sale with scenic mountain views. Easy financing and low down payments." What else must be included in the ad in order for it to comply with TILA?
Nothing
How do you calculate the new principal balance?
Original principal — amount of payment applied to principal
What is amortization?
Paying off a loan over time
A temporary buydown may be structured in many ways, but one common method is a 3-2-1 buydown. Which two of the following statements are true of interest rates in a 3-2-1 buydown?
Reduced by 3% the first year, 2% the second year, and 1% the third year Set to full interest rate in the fourth year
Tilly's lender explains to her that ____________ requires that she be provided with a disclosure statement within three days of receiving her loan application.
Regulation Z
What is TRID?
TILA-RESPA Integrated Disclosures
Once property value is determined, the lender assesses the borrower's creditworthiness. Lenders look at lots of criteria and information. Which documents that a borrower submits would a lender likely review to determine whether a borrower is a good credit risk? Select all that apply.
Tax returns W-2 Pay stub Bank statement
Straw buyers
The borrower's identity is concealed behind someone else's name and credit history.
Mortgage credit certificates
These allow qualified buyers to claim some of the mortgage interest they paid as a credit on their tax returns.
Grants
These aren't repaid if the buyer meets certain requirements, such as owning and living in the home for a specific length of time.
Housing finance agencies
These offer buyers a wide range of homebuying support and assistance at a more local level.
Silent second
These tend to have low or zero interest rates, and the payments are deferred.
Department of Veterans Affairs
This organization provides servicemembers, veterans, and their eligible surviving spouses with a wide range of homebuying services.
USDA Rural Development Program
This program provides funding to low- and moderate-income families living in eligible rural areas.
How long does the borrower have to pay private mortgage insurance?
Until the borrower reaches a 22% equity position
fraudulent "silent second"
When the borrower takes a second mortgage on the property without informing the lender holding the first mortgage
Real Estate Settlement Procedures Act (RESPA)
creates a level playing field for real estate licensees and protects consumers from increased costs due to illegal kickbacks and referral fees among settlement service providers helps make settlement costs more affordable by preventing undisclosed fees and prohibiting illegal fees, such as kickbacks for referrals
Equity
in reference to property, is the difference between a home's appraised value and the debt owed on it.
Lock-In / Rate Lock or rate commitment
is a tool by which a lender will commit to a specific rate and certain points and hold that commitment for a set period of time.
Home grant / Gift
money that doesn't have to be paid back as long as the buyer meets certain requirements
Which of the following is a characteristic of predatory lending?
Making loans the consumer can't afford
A lender is charging Clem, the borrower, two points to buy down the interest rate on his loan. Clem's borrowing $250,000. What's the dollar value of the points he'll pay?
$5000 bec $250k x .02
In light of economic conditions, lenders consider borrower credit and property value. Property value is important because it factors into the loan-to-value ratio (LTV) calculated by the lender. Let's say the buyer and seller agreed to a sales price of $90,000, but the property appraised at $100,000. What value would the lender use to calculate LTV?
$90,000 sale price
How is the monthly principal and interest payment calculated using an amortization chart?
(Loan amount / $1,000) x factor from amortization chart
Which two of the following are possible loan origination fee percentages borrowers might expect to incur?
1% 3%
Underwriting
All of the information about the property and borrower is analyzed, and a recommendation is made.
HMDA
Allows review of lending data to evaluate where mortgages are given and where they are not
Which two of these statements are true about calculating LTV?
An 80/20 means that 80% of the loan has been financed. The smaller the LTV ratio (lower percentage), the more comfortable the lender is likely to be with the investment.
Inflated appraisal
An appraiser secretly works with a borrower and provides a misleading appraisal report to the lender.
Which are eligibility requirements a potential buyer may encounter when applying for down payment assistance? Select all that apply.
Credit score minimum Household income threshold Property must be primary residence Property location
In an amortized loan, the interest portion of the mortgage payment generally ______ over the life of the loan.
Decreases
Callum is working with Darby, who received an honorable discharge from the Air Force. Callum is preparing to discuss options for down payment assistance with Darby. Which of the following would be Callum's best resource for information for this specific client?
Department of Veterans Affairs
Leonard is offered a loan at 5.75%. Because he plans to be in his home for several years, he chooses to pay points up front to have the rate reduced to 5.25%. What's this an example of?
Discount points
Celia was obtaining a conventional loan, and she put $50,000 down as a down payment. Why might her lender also require her to obtain private mortgage insurance?
Her down payment of $50,000 isn't at least 20% of the purchase price.
Lending is especially impacted by inflation. What two things are you likely to see during inflationary periods?
Higher rates Fewer buyers
Application
Information the consumer provides will be validated during loan processing. The consumer works with the lender to select a loan product.
What two numbers do you need to use an amortization chart?
Interest rate and term (15 years, 30 years, etc.)
What's the purpose of the Equal Credit Opportunity Act?
It requires lenders to make credit equally available to all creditworthy applicants, regardless of the applicant's protected class status.
Lock in risks
Lock-ins limit a borrower's ability to take advantage of falling interest rates. Lock-ins can have additional lender fees based on the length of the lock-in. The longer the time period, the higher the fees. Borrowers should factor in natural delays and select a lock-in period accordingly. Lock-ins are effective for a set period of time. If the lock expires before the loan closes, rates will be charged at the current market rate.
Locking rates benefits
Lock-ins protect against rising interest rates and potentially higher payments. Lock-ins protect against a borrower initially qualifying for a loan and then being denied because higher interest rates caused higher payments, pushing the borrower over the debt limits. Lock-ins can be set up with a locked rate and locked points, locked rates and floating points, or floating rates and floating points, which gives the borrower the ability to take advantage of falling rates. Lock-in periods are usually 30-60 days, which gives the lender time to complete the loan processing. Some lenders offer longer lock-in periods, even up to 120 days.
Vince Parker is purchasing a home for $150,000. He puts 10% down on a conventional loan. Will he be required to obtain PMI or MIP?
PMI-bec. he's applying for a conventional loan and is unable to put at least 20% down toward the purchase.
CRA
Requires lenders to invest in development and rehabilitation of the communities they serve
Tilly is applying for a loan so she can buy the home of her dreams. She protects herself by making sure she understands the facts and her responsibilities regarding a mortgage. Meanwhile, TILA protects Tilly by ___________.
Requiring lenders to make full disclosure of the terms and conditions in any offers of credit
Which of these homeowners are upside down on their mortgage?
The Morrisons paid $280,000 for their home, using a loan of $250,000. They've paid $15,000 on their loan. The home currently appraises for $230,000.
What would happen if a client's rate lock-in expires two days prior to closing?
The interest rate will revert to the current rates.
Loan processing
The lender collects documentation from the consumer about income and credit, as well as the property.
pre-approval
The lender requires documentation from the borrower although no property is yet identified.
Illegal property flipping
The property is purchased, falsely appraised at a higher value, and then quickly sold.
What's the purpose of PMI?
To protect the lender in case of borrower default when the borrower has put down less than 20%
A home grant is money that doesn't have to be paid back as long as the buyer meets certain requirements.
True
As the interest portion of the mortgage payment decreases, more of the payment goes toward principal.
True
Borrowers will pay an upfront premium when they close on the loan and annual premiums for the life of the loan.
True
Both the buyer and the home must meet eligibility requirements, as specified by the chosen DPA program.
True
Mortgage credit certificates allow qualified buyers to claim some of the mortgage interest they paid as a credit on their tax returns.
True
"upside down"
paid on his mortgage for several years, he has no equity in it, and in fact, he owes more on it than it's worth.
What four components make up PITI?
principal, interest and insurance, and taxes