Financing

A buyer has a 30-year, $400,000 loan with a 7% interest rate. How much of the first month's mortgage payment is interest?

$400,000 × 0.07 = $28,000; then $28,000 ÷ 12 = $2,333.33

Truth in Lending Act (TILA)

1968 Requires lenders to disclose credit terms and conditions when advertising triggers loan terms, so as not to mislead consumers

Real Estate Settlement Procedures Act (RESPA)

1974 A consumer protection statute designed to protect homebuyers from unscrupulous lending and settlement practices

Ben is purchasing a home and reviewing a loan amortization chart. If the home price is $330,000 and he's financing $300,000, once he finds the factor (number that intersects his interest rate and term on the amortization chart), what number does he multiply by that factor?

300 Multiply the number of thousands in the loan by the amortization factor

A "homes for sale" magazine contains the following ad: "Cozy two-bedroom starter home, neat and clean, ready for move-in. $140,000. Low down payment and easy financing!" Which of these statements is true? A The ad complies with TILA because it doesn't contain any of the trigger terms that require full disclosure of all financing terms B The ad complies with TILA because the sales price is below the minimum that triggers full disclosure C The ad does not comply with TILA because financing terms must be provided on any residential real estate ad D The ad does not comply with TILA because it mentions financing without including all of the terms of the financing

A Regulation Z requires all financing terms to be included in an ad only if certain trigger terms are present, but "low down payment and easy financing" are not triggers

Cathy is hoping to purchase a home using a VA loan. A VA-assigned real estate appraiser is required to provide ______ for the property. A A certificate of reasonable value B A certificate of resale value C A home inspection D An appraisal report

A The certificate of reasonable value must be provided by a VA-assigned real estate appraiser

Fatima is using a VA loan to purchase a home from Sue. Sue agrees to pay Fatima's closing costs. Which of the following statements is true? A Closing costs aren't considered a seller concession B Sue can increase the sale price of the property by the same amount she is paying for Fatima in closing costs C Sue is allowed to pay no more than 50% of Fatima's closing costs D This would be a seller concession, and would be included within a 4% limit on seller concessions

A If the seller pays the buyer's closing costs, other than prepaid items or the funding fee, it isn't counted as seller concessions

Equal Credit Opportunity Act (ECOA)

A 1974 federal law that prohibits discrimination based on protected class status when providing credit

3-2-1 buydown

A 3% interest rate reduction in year one, 2% in year two, and 1% in year three; the interest rate returns in full year four

Index rate

A benchmark that a given lender selects as the basis for the adjustable rate

Non-conforming loan or jumbo mortgage

A conventional mortgage that exceeds the dollar limit Fannie Mae and Freddie Mac set Can be sold on the secondary market but isn't purchased by Fannie Mae or Freddie Mac

California typically uses what as the security instrument?

A deed of trust

Interest

A fee paid back to a lender for the use of its money Interest rates are stated as an annual percentage; e.g., 6% interest rate is 6% for the period of one year or .5% per month

Cap rate

A limit on how much the interest rate can increase

Qualified mortgage loans

A loan category that has certain affordability features Certain loan attributes are prohibited, including: -Interest-only loans or interest-only periods on a loan -Negative amortization (periodic principal payments that aren't sufficient to completely amortize the loan by the end of the loan term) -Balloon (lump sum) payments that are required at the end of a loan term to pay the loan off -Loan terms of more than 30 years

Reverse annuity mortgage (RAM)

A loan in which property owners receive payments from the bank based on the equity in their home Over time, the bank gains ownership of the property

Annual percentage rate (APR)

A measure of both the interest rate and other fees associated with a mortgage loan Lenders lock in interest rates for a period of no more than 90 days. If the closing process takes more than 90 days, borrowers may face an interest rate change

Blanket mortgage

A single mortgage that covers multiple properties

Loan underwriters

Analyze the borrower's credit, capacity, and collateral

Why do lenders charge loan points (aka loan origination fees)?

As compensation for processing a new mortgage loan Origination fees are typically between 1% and 3% and typically can't be more than 3% of the loan value

Discount points

Borrowers may choose to pay discount points at closing to permanently reduce a loan's interest rate

Term or straight-term

Borrowers only pay interest for a set term and then pay off the loan in a lump sum or through another loan

Farmer Mac

Buys agricultural loans from rural lenders and issues MBSs for sale on the secondary market

Which of the following statements is true about usury laws in California? A California's usury laws prohibit interest rates above 15% B In the case of usury, state law preempts federal law C Loans secured by real property and arranged for by a real estate broker are exempt from state usury laws D Usury laws apply only to residential mortgage loans

C Most residential real estate transactions will not be subject to usury laws because of the exemption for loans secured by real property and arranged by a real estate broker.

Which of the following is a true statement about U.S. Department of Veterans Affairs loans? A All properties are eligible B All veterans are eligible C The loan that's guaranteed will be based on either 100% of the sales price or 100% of the CRV, whichever is less D They're insured for either 100% of the sales price or 100% of the CRV, whichever is less

C When granted, the loan guarantee amount is limited by either the CRV or the sales price, whichever is lower. The VA will guarantee (not insure) up to 25% of the CRV/sales price for the lender

Which of the following tells the lender how much entitlement the veteran has available under the VA loan program?

Certificate of eligibility The COE is the final word on how much entitlement the veteran has available

The borrower pledges the property as what in the case of default?

Collateral This is called hypothecation (the pledge) and gives the lender the right to foreclose

The property is pledged as ________. This type of pledge is called _________.

Collateral, hypothecation

Package mortgage

Commonly used in commercial real estate where business assets are included as collatera This mortgage includes personal property with the real property in the sale

Secondary mortgage market

Consists of entities that purchase mortgages from originating lenders and package them into investment products for investors This frees up primary mortgage funds so lenders can make more loans Key secondary players are Fannie Mae, Ginnie Mae, Freddie Mac, and Farmer Mac

Common loan programs for residential mortgages

Conventional, Federal Housing Administration (FHA), and U.S. Department of Veterans Affairs (VA)

Rachel loves convenience. As you can imagine, she was thrilled when she was able to finance her mortgage through the same institution where she deposits her payroll checks. Which of these most likely financed Rachel's mortgage? A Insurance company B Investment group C Mortgage broker D Savings and loan

D Thrifts, or savings and loan associations, specialize in taking in savings deposits and then lending money out to consumers through mortgages and other loans

Fannie Mae and Freddie Mac

Government-sponsored enterprises (GSEs) that purchase loans that conform to their lending standards, then package them as mortgage-backed securities (MBSs) and sell them to investors

Ginnie Mae

Guarantees MBSs that contain only government-insured or guaranteed loans (FHA and VA) Considered riskier loans

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)

Handed RESPA responsibility to the Consumer Protection Finance Bureau (CFPB) The CFPB enforces regulations that prohibit lenders from funding higher-priced mortgage loans without regard for a borrower's ability to repay the loan

Loan assumption and subject to

In situations where interest rates are on the rise, buyers may want to take over (assume) a seller's existing loan

Credit scores

Individual lenders may require higher credit scores than the stated minimum scores Conventional loans typically require credit scores of 620 and above FHA borrowers must have a minimum credit score of 580 to qualify for a 3.5% down payment; borrowers with credit scores between 500 and 579 may have to put down as much as 10% Borrowers with higher credit scores may qualify for higher front-end and back-end loan ratios

Buydown

Interest pre-payment at closing to temporarily reduce the interest rate, usually for a period of one to three years

Private mortgage insurance (PMI)

Lenders may require this on conventional loans when the down payment is less than 20% and the loan-to-value ratio is in excess of 80%

TILA/RESPA Integrated (TRID) disclosures

Lenders must provide the Loan Estimate (LE) to applicants within 3 business days of loan application Lenders must provide the Closing Disclosure (CD) at least 3 business days before closing

Usury

Lending money at an excessive (illegal) rate

To find a factor on an amortization chart, you need to know the ___________ and the ______.

Length of loan and interest rate

Periodic cap

Limits the amount that interest can adjust at each adjustment period

Initial cap rate

Limits the amount that interest can adjust at the first adjustment

Lifetime cap

Limits the total amount of adjustment that can be made over the life of the loan, usually expressed as a percentage increase from the initial interest rate

Interest and payment calculations

Loan balance × interest rate = annual interest Annual interest ÷ loan balance = interest rate Annual payment ÷ loan balance = interest rate (convert to a %) Annual interest ÷ interest rate = loan balance Divide annual interest by 12 = monthly interest Monthly payment × total number payments - original loan value = total loan interest amount

Subprime loans

Loans offered to borrowers with credit ratings that don't meet the requirements for a conventional loan These loans are offered with higher interest rates (up to 5% over the current market rate) to account for the lender's level of higher risk

Primary mortgage market

Made up of lenders that originate (fund) loans directly to consumers

Farmer Mac

Makes agricultural loans possible by creating a secondary market for these loans

Conforming loans

Meets the requirements of Fannie Mae or Freddie Mac and can be sold to one of these entities Many conventional loans are also conforming loans

Which of these names is also known as the California Real Property Loan Law?

Mortgage Loan Broker Law

Conventional loans

Most common type of residential loan Borrower usually pays at least 20% of the purchase price as a down payment

Lenders lock in interest rates for how many days?

No more than 90 days If the closing process takes more than 90 days, borrowers may face an interest rate change

USDA Farm Service Agency

Offers direct loans to farmers and ranchers, funded through congressional appropriation Up to 95% of the loss of principal and interest on a qualified loan Applicants must have participated in the day-to-day management of a farm or ranch for at least 3 years Maximum loan amount is $300,000, with no minimum loan amount or down payment required

USDA Rural Development Program

Offers loans, grants, and loan guarantees for housing (and other rural needs)

Points

One loan point is equal to 1% of the borrower's loan amount

Under RESPA, licensees are prohibited from

Paying or receiving a fee, kickback, or anything of value based on referring customers or clients to a settlement service provider

Government loans

Provided by a lender but insured by the FHA or guaranteed by the VA Some government loans are offered by another government entity, such as the U.S. Department of Agriculture (USDA)

Since the FHA was established, it has taken strategic action to stabilize the mortgage market. Which of these items is one of the FHA's strategies?

Reduce lender risk by establishing borrower qualification standards

Regulation Z

Requires mortgage lenders to follow TILA disclosure requirements for real estate advertisements that include credit terms

Financing instruments

Security instruments, such as mortgages, deeds of trust, and promissory notes

Title theory

States that use deeds of trust are considered title theory states because the lender or a third party holds title to the property until the loan is paid in full The trustee holds the legal title until the loan is repaid. The borrower has equitable title, which means having the right to obtain full title when the mortgage loan is paid in full. It also gives the borrower the right to possess (live on) the property This typically means that the lender may use a non-judicial foreclosure process. A standard clause in the deed of trust is the power of sale, which gives the trustee the right to sell the property in case of default

Lien theory

States that use mortgages as the security instrument are considered lien theory states because the mortgage creates a lien against the property until the loan is paid in full The borrower holds legal title to the property even during the term of the loan This typically requires that the lender use a judicial foreclosure process if buyers fail to pay the mortgage loan

California Housing Finance Agency (CalHFA)

The CalHFA mortgage assistance program provides financing assistance for qualified low and moderate income homebuyers Available to owner-occupied purchasers of California properties

Farm Credit System (FCS)

The Federal Farm Credit Banks Funding Corporation raises money for FCS loans through the sale of securities in U.S. and international markets

Millie and Jerry are purchasing a home using their VA loan benefit. The sales price is $320,000, with 100% financing. Assuming that Jerry has a typical level of entitlement, how much of their loan does the VA guarantee?

The VA guarantees up to a quarter of the total loan amount, up to $104,250, so Millie and Jerry's loan is guaranteed for one-fourth of $320,000, which is $80,000

The deed of trust involves three parties

The borrower (trustor), the lender (beneficiary), and a neutral third party (trustee) The trustee holds title in the borrower's name until the loan is paid in full

The housing ratio (aka the front-end ratio)

The borrower's projected monthly housing expense (principal, interest, taxes, insurance, second liens, and association fees) divided by income Conventional loan: Typically 25% - 28% FHA loan: Typically 31% - 40% VA loan: Lenders ignore the front-end ratio

Promissory note

The borrower's promise to repay the loan. The lender holds this note until it's repaid Both the mortgage and the deed of trust are accompanied by a promissory note The date of the promissory note is used to determine lien priority

Purchase money mortgage

The buyer retains title to the property, but the seller takes a security interest for some or all of the purchase price The buyer makes payments to the seller Buyers may be able to combine a purchase money mortgage with a bank mortgage and the down payment

Wrap-around mortgage

The buyer's new mortgage wraps around the seller's existing mortgage, and the seller continues to make payments on the existing mortgage The buyer makes payments to the seller that cover payments for both the existing and new mortgage loans

Negotiable instruments

The holder can transfer the right to receive payment to a third party. The third party can enforce the promissory note and other loan documents in the same way the original holder could Promissory notes are negotiable instruments

What two ratios do underwriters calculate?

The housing ratio and the debt ratio

Adjustable-rate mortgages (ARMs)

The interest rate fluctuates based on the economic index

Mortgagee and mortgagor

The lender is the mortgagee and the borrower is the mortgagor

PITI

The most common mortgage loan payment includes a portion of: Principal, interest, taxes, and insurance

Fixed-rate mortgage

The principal and interest rate remain the same for the life of the loan

Loan

The process of making an application to a lender, getting the borrower and property approved, and agreeing to a specific loan product and terms

Amortized loan

The process of paying an amount in installments over time Same monthly payment amount each month Each monthly payment credited first toward monthly interest on the loan, with the remainder used to pay off a portion of the principal Over time, the principal portion increases each month, while the interest portion decreases

Loan to Value Ratio (LTV)

The ratio of the loan amount to the property value (sales price or appraised value, whichever is lower) LTV = (loan amount ÷ value) × 100 a $160,000 loan on a $200,000 home has an LTV of 80% ($160,000 ÷ $200,000 = .8, or 80%) Stated another way, a 20% down payment on a $200,000 loan is equal to $40,000 ($200,000 × .2 = $40,000). This gives borrowers an LTV of 80%

Land contract (contract for deed)

The seller retains title to the property until the buyer repays the loan in full The buyer has possession and equitable title during the repayment period The holders of equitable title have the right to future full ownership of the property once they meet certain conditions (in this case, loan payoff) Recording the land contract in the land records offers protection for the buyer's interest in the property

The debt ratio (aka debt-to-income ratio or the back-end ratio)

The total of all the buyer's debt obligations divided by income Conventional loan: Typically 33% - 36% FHA loan: Typically 43% - 50% VA loan: Typically can't exceed 41%

Home equity line of credit (HELOC)

This is a line of credit based on available equity, which homeowners use as an open-ended account

Construction loan

This is used as temporary financing for construction The loan is based on lender review of plans for improvement and an appraisal

Home equity loan

This loan is based on the equity in a home It can be a first mortgage (if the home is fully owned) or a second mortgage

Bridge or swing loan

This temporary (usually 90-day) loan provides funds until permanent financing can be obtained

Why do lenders use LTV?

To determine required down payment amounts when initially writing mortgage loans or when homeowners apply for a home equity loan or a home equity line of credit

The Federal Housing Administration is part of the ______.

U.S. Department of Housing and Urban Development The FHA has been part of HUD since 1965

Predatory Lending

Unfair or abusive lending to buyers Considered predatory when it's more than 5% over the current market rate

By financing a real estate purchase, borrowers take advantage of leverage -

allowing them to control a large investment with a minimal down payment

Sales price - down payment - earnest money deposit =

amount to be financed

The down payment is calculated as a percentage of the sales price based on the

lender-required loan-to-value ratio (LTV)

Amount paid for points =

loan amount × number of points (followed by a % sign).

Amount of down payment + earnest money deposit + loan amount being assumed or obtained =

sale price

The lender uses the property as

security for the loan