RE Finance Vocabulary

Funding

: The transferring of funds by the lender to a title company or escrow company so that they may be disbursed

Employment Effect

Employment opportunity is the biggest factor for residential real estate demand. Demand for real estate is high in areas where job opportunities are sprouting up and employment is plentiful. It's not so hard to sell a home that is a brief commute away from multiple major employers. Conversely, demand for real estate decreases in areas where the unemployment rate is high or rising.

Recession

period of reduced economic activity. Remember 2007 to 2009? Signs of recession include high unemployment, lower retail sales, and more stagnant real estate sales. It was a tough time for everyone, including real estate professionals.

Market Forces

the law of supply and demand: tax policy, money supply, interest rates. Economic activity in a slump? The Federal Reserve is more likely to reduce interest rates. Low interest rates make home purchases more affordable.

Life of a Mortgage - Step 2: Underwriting

the process of deciding the level of risk a lender would take on by offering a loan to a certain borrower for a specific property. It's a complex process that has been automated to some degree, but still requires the work of a specially trained professional. This decision about risk is made using the borrower's loan application, documents within their file, and information about the property for which the mortgage is sought.

Portfolio Lenders

very important to the commercial investor. Local banks that lend their own money and do not sell their loans on the secondary market are portfolio lenders. The portfolio lender plans to keep the loan in their portfolio for the entire term of the loan. A portfolio lender will often have less stringent requirements than national banks. Big banks may not finance an investor if they have more than four mortgages, but local banks might. Good portfolio lenders allow the investor to finance as many properties as they want, as long as they continue to qualify and have enough reserves. Portfolio lenders are invaluable to the commercial property investor. Since a portfolio lender lends their own money and does not sell their loans on the secondary market, they do not have to meet Fannie Mae lending guidelines, which allows them more flexibility. Down payment requirements and other loan terms vary and really depend on the asset type, class, and market. By shopping around at local banks, you may be able to help an investor client find flexible terms that meet their needs.

Correspondent Lender

A lender who offers loans using their own money at their own risk, generally on a smaller scale than mortgage brokers and bankers

Mortgage

A loan to purchase a home or other real estate, leverage. I.e. fund 80% and you are responsible for the remaining 20%

Credit Reports

A major component of loan processing is ordering and checking the borrower's credit reports. Not all creditors report to all three of the big national credit reporting agencies (Equifax, Experian, and TransUnion), so a single individual could have a different score from each agency. If the lender can pull all three reports, they will use the median number for their loan decision. If a person has reports from two of the agencies, the lower score will be used

Mortgage Banker

An entity or person who provides mortgage financing by using their own funds

Life of a Mortgage - Step 3: Funding

Funding happens when the lender provides the cash in the amount of the approved loan. It is the transferring of funds to a title company or escrow company so that they may be disbursed from there. Usually, the homebuyer doesn't get the keys until funding (not just closing) has occurred.

How can local governments influence real estate market economies?

Local governments can influence local real estate economies by imposing zoning policies to either encourage or slow down the growth of the community.

Life of a Mortgage - Step 1: Loan Processing

Making real estate loans carries a certain amount of risk for lenders. For this reason, lenders must have a firm grasp of a borrower's financial qualifications. During loan processing, the lender collects information from the buyer that will help determine the loan type and amount they will qualify for. The person who is seeking the loan will need to complete and submit an application to kick off the loan processing. Lenders have to consider a borrower's income, credit, debt, source of funds, and net worth. They do this by creating a file for each interested borrower containing pertinent information about them and the property. They also verify that the information provided by the borrower is actually true. You can't be too careful when loans can be for hundreds of thousands of dollars. Still, no analysis of a borrower's creditworthiness, no matter how thorough, can be enough to ensure that a loan is completely free of risk. Lenders must also consider the value of the collateral to lessen the risk. Lenders must do a thorough examination of a potential buyer's credit, income, and debt. This can help to limit a lender's risk. Unfortunately, the risk cannot be totally erased.

Closing

The consummation of a real estate transaction when all the necessary contracts are signed and the lender disburses the funds of the mortgage loan

Pre-approval

Official process of being approved by a lender to borrow a specific amount at an interest rate within a small range; a mortgage application, credit report, and supporting financial documentation are required. Practically a necessity in hot real estate markets. If a seller has multiple offers on their house, a buyer has an edge on the competition if they have material proof (in the form of a lender's pre-approval letter) of their ability to close the deal. A sure deal is often more attractive than a great offer that could fall through.

Anatomy of a Mortgage

PITI - Principal - Interest - Taxes - Insurance - T & I are held in escrow account with lender and at end of year pay T to government directly and I to I company.

Mortgage Broker

Someone who brings together a borrower and a lender in order to create a mortgage

Origination

The creation of a new mortgage

Life of a Mortgage - The Steps

The creation of a new mortgage is called origination. Mortgages can be originated by mortgage brokers, mortgage bankers, or correspondent lenders. There are many processes that take place during the creation and maintenance of a mortgage. These include processing, underwriting, closing, funding, and servicing. These actions take place in the same specific order each time.

Pre-qualification

The first step in determining "how much house" the buyer can afford and which type of loan might be best; the buyer supplies information about their financial situation to the lender, who then provides a general estimate

Capital Stack/Capital Structure

The four sources of financing: long-term debt, preferred stock, common stock, and retained earnings.

Servicing

The ongoing collection of monthly payments and maintenance of records by a loan servicer

Underwriting

The process of deciding the level of risk a lender would take on by offering a loan to a certain borrower for a specific property

Life of a Mortgage: Step 4: Loan Servicing

There is one last step in the life of a mortgage, and it usually lasts for waaaay longer than all the other steps combined. I'm talking about servicing, which is a collection of monthly payments, usually including payments on the principal, interest, taxes, and insurance, or PITI (we'll discuss PITI in more detail later in the course) — along with the maintenance of records. The loan servicer is also responsible for sending the collected funds to the note holder and contacting the borrower about any delinquencies. Additionally, the loan servicer will provide the borrower an annual statement that details the activity of the escrow account, showing the account balance and payments for property taxes, homeowners insurance, and other escrowed items.

Loan Processing

When the lender collects information and an application from the buyer that will help determine the loan type and amount they will qualify for

Prepared Buyers

When you first take on a new buyer client, make sure they connect with a lender and get pre-approved for a loan before you start picking out properties.* First-time buyers may not know about this step, or they may be poorly guessing their budget by looking at estimated monthly payments from online listings. Loan details are highly personalized, so seeing an example of the terms for someone with excellent credit who is putting 20% down can be misleading for many buyers. *You can provide them with a list of lenders to choose from, but do not insist on them using a specific lender.

Life of a Mortgage: Step 4: Closing

You know it as the end of something, or maybe just that glorious day on the calendar when a real estate deal is completed. If we're talking mortgage processes (and we are), closing is the consummation of a real estate transaction when all the necessary contracts are signed and the lender disburses the funds of the mortgage loan. The physical meeting at which the paperwork is signed for the property transfer is also called the closing.

Major players in mortgages

mortgage bankers, mortgage brokers, and correspondent lenders