Chapter 17
Buydown loan
A buydown loan entails a prepayment of interest on a loan. The prepayment effectively lowers the interest rate and the periodic payments for the borrower. Buydowns typically occur in a circumstance where a builder wants to market a new development to a buyer who cannot quite qualify for the necessary loan at market rates. By "buying down" a borrower's mortgage, a builder enables the borrower to obtain the loan. The builder may then pass the costs of the buydown through to the buyer in the form of a higher purchase price.
Construction loan
A construction loan finances construction of improvements. This type of loan is paid out by the lender in installments linked to stages of the construction process. The loan is usually interest-only, and the borrower makes periodic payments based on the amount disbursed so far. As short-term, high-risk financing, the interest rates are usually higher than those for long-term financing. The borrower is expected to find permanent ("take out") financing elsewhere to pay off the temporary loan when construction is complete. temporary loan for construction
Purchase Money Mortgage
A mortgage given by the seller to the buyer to cover all or part of the sale price. Seller financing. With a purchase money mortgage, the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to "take back" a note, or to "carry paper," on the property. Purchase money mortgages may be either senior or junior liens. loans by seller to buyer for all or part of purchase price title transfers to buyer/borrower
Mortgage
A mortgage is a legal document stating the pledge of the borrower (the mortgagor) to the lender (the mortgagee). The mortgage document pledges the borrower's ownership interest in the real estate in question as collateral against performance of the debt obligation.
Package loan
A package loan finances the purchase of real estate and personal property. For example, a package loan might finance a furnished condominium, complete with all fixtures and decor. finances real and personal property
Permanent (take-out) loan
A permanent loan is a long-term loan that "takes out" a construction or short-term lender. The long-term lender pays off the balance on the construction loan when the project is completed, leaving the borrower with a long-term loan under more favorable terms than the construction loan offered. long term loan that requires construction loan
Equal Credit Opportunity Act
ECOA prohibits discrimination in lending
Reverse Annuity Mortgage
In a reverse annuity mortgage, a homeowner pledges the equity in the home as security for a loan which is paid out in regular monthly amounts over the term of the loan. The homeowner, in effect, is able to convert the equity to cash without losing ownership and possession. secures equity for cash payments while occupying property
Interest Only Loan
In an interest-only loan, periodic payments over the loan term apply only to interest owed, not to principal. At the end of the term, the full balance must be paid off in a lump-sum, "balloon" payment. Since these loans have no periodic principal payback, their monthly payments are smaller than amortizing loans for the same amount at the same rate of interest. no principal in payment
Fixed and graduated payment loan
Loans may have variable payment amounts over the term of the loan, or a single fixed payment amount. With a graduated payment mortgage, the payments at the beginning of the loan term are not sufficient to amortize the loan fully, and unpaid interest is added to the principal balance. Payments are later adjusted to a level that will fully amortize the loan's increased balance over the remaining loan term.
The major players in the secondary mortgage market are a. Fannie Mae, Freddie Mac, and Ginnie Mae. b. Fannie Mac, GMAC, and MGIC. c. Freddie Mac, FHA, and VA. d. Fannie Mac, Freddie Mac, and the Federal Reserve.
a. Fannie Mae, Freddie Mac, and Ginnie Mae.
The purpose of an income ratio in qualifying a borrower is to a. safeguard against over-indebtedness. b. compare one's earnings to one's short-term debt. c. identify the highest possible interest rate that the borrower can afford. d. quantify the borrower's assets to the fullest extent.
a. safeguard against over-indebtedness.
The key feature of an adjustable mortgage loan is that a. the interest rate may vary. b. the monthly payment increases over the life of the loan. c. the principal balance does not amortize. d. the loan term can be shortened or lengthened.
a. the interest rate may vary.
The document that provides evidence that a certain property is pledged as collateral for a loan is the a. trust deed or mortgage. b. promissory note. c. loan commitment. d. collateral acknowledgment.
a. trust deed or mortgage.
Alienation clause
aka non assumption clause and due on sales clause Stating that If you sell this property we aren't gonna allow you to have someone else take over the mortgage payments, cannot assume the loan
The Federal Reserve System regulates the money supply in which of the following ways? lending underwriting requirements a. Selling securities, printing money, and controlling lending underwriting b. Buying securities, changing the discount rate, and controlling banking reserves c. Printing money, changing interest rates, and selling T- bills d. Controlling the prime rate, trading securities, and purchasing loans
b. Buying securities, changing the discount rate, and controlling banking reserves
Which of the following is true of a loan with negative amortization? a. The loan is an interest-only loan.. b. Payments are not sufficient to retire the loan. c. The loan balance is diminishing, or going negative. d. Additional interest is being added to the monthly payment.
b. Payments are not sufficient to retire the loan. (Correct Answer)
Which of the following describes a purchase money mortgage financing arrangement? a. A bank gives a buyer a senior mortgage loan that fully covers the cost of purchasing the property. b. The buyer gives the seller a mortgage and note as part of the purchase price of the property. c. A land trust holds title to the property while the buyer makes periodic installment payments to the seller. d. The seller uses the purchase money obtained from the buyer's mortgage loan to repay the seller's outstanding loan balance.
b. The buyer gives the seller a mortgage and note as part of the purchase price of the property.
Which laws or regulations require mortgage lenders to disclose financing costs and annual percentage rate to a borrower before funding a loan? a. The Equal Credit Opportunity Act b. Truth-in-Lending laws c. The Real Estate Settlement Procedures Act d. Federal Fair Housing Laws
b. Truth-in-Lending laws
If a lender discovers that an applicant for a mortgage loan has borrowed the down payment from a relative and has to repay that loan, the lender is likely to a. refuse the application. b. adjust the applicant's debt ratio calculation and lower the loan amount. c. increase the loan amount to enable the borrower to pay off the loan to the relative d. require the borrower to make payments to an escrow account for repayment of the relative's loan.
b. adjust the applicant's debt ratio calculation and lower the loan amount.
Under the Equal Credit Opportunity Act, a lender, or a real estate agent who assists a seller in qualifying a potential buyer, may not a. tell a rejected loan applicant the reasons for the rejection. b. ask the buyer/borrower about his/her religion or national origin. c. ask the buyer/borrower to explain gaps in his/her employment history. d. use a credit report if the loan applicant disputes any information in the геport.
b. ask the buyer/borrower about his/her religion or national origin.
The Equal Credit Opportunity Act (ECOA) requires lenders to a. extend equal credit to all prospective borrowers. b. consider the income of a spouse in evaluating a family's creditworthiness. c. discount the income of a person involved in child-rearing or child-bearing. d. specialize lending activity by geographical area for improved customer service.
b. consider the income of a spouse in evaluating a family's creditworthiness.
A borrower's debt ratio is derived by a. dividing one's total debt by one's debt payments. b. dividing one's debts by one's gross income. c. dividing one's gross income by one's debts. d. dividing one's gross income by one's assets.
b. dividing one's debts by one's gross income.
The primary role of the Federal Housing Authority in the mortgage lending market is to a. guarantee loans made by approved lenders. b. insure loans made by approved lenders. c. purchase loans made by approved lenders. d. originate loans made by approved lenders.
b. insure loans made by approved lenders.
The assumability of an FHA-insured loan is a. unrestricted. b. limited by when the loan was originated and by the type of property. c. limited to owner-occupied properties. d. prohibited on all existing loans under current regulations.
b. limited by when the loan was originated and by the type of property.
The borrower in a mortgage loan transaction is known as the a. mortgagee. b. mortgagor. c. lienor. d. trustee.
b. mortgagor.
For a loan that is not backed by the Federal Housing Administration or Veterans Administration, and for which the borrower is making a down payment of less than 20%, the lender is likely require the borrower to obtain a a. subrogation agreement. b. private mortgage insurance. c. a letter of credit d. a co-signer on the note.
b. private mortgage insurance.
A buydown is a financing arrangement where a. the lender lowers the interest rate on a loan in exchange for a prepayment of principal. b. the borrower pays additional interest at the onset in order to obtain a lower interest rate. c. the lender requires the borrower to buy down the price of the property by increasing the down payment. d. the borrower pays the lender additional funds to buy down the term of the loan.
b. the borrower pays additional interest af the onset in order to obtain a lower interest rate. (Correct Answer)
The loan-to-value is an important underwriting criterion, for the primary reason that a. borrowers with no equity will default and abandon the property. b. the lender wants to ensure the loan is fully collateralized. c. a borrower can only afford to borrow a portion of the entire purchase price. d a fair amount of borrower equity demonstrates good faith.
b. the lender wants to ensure the loan is fully collateralized.
A lender who charges a rate of interest in excess of legal limits is guilty of a. redlining. b. usury. c. profit-taking. d. nothing; there are no legal limits to interest rates.
b. usury. (Correct Answer)
The primary mortgage market
banks, mutual savings banks, life insurance companies, mortgage bankers, credit originates mortgage loans directly to borrowers; savings and loans, commercial unions
The loan application
borrower provides personal and property data; supporting documentation: appraisal report, credit report, purchase contract, income and/or employment verification lenders must accept all completed applications and notify applicants about disposition of application
National Flood Insurance Act
borrowers of "federally-related loans" must obtain flood insurance if property is in designated flood-hazard area
A VA certificate of eligibility determines a. whether an individual is a veteran. b. the maximum loan amount an approved lender can give to veterans. c. how much of a loan the VA will guarantee. d. whether a lender is approved to issue VA-guaranteed loans.
c. how much of a loan the VA will guarantee.
A principal role of FNMA is to a. guarantee FHA-backed and VA-backed loans. b. insure FHA-backed and VA-backed loans. c. purchase FHA-backed and VA-backed loans. d. originate FHA-backed and VA-backed loans.
c. purchase FHA-backed and VA-backed loans.
A principal role of FNMA is to a. guarantee FHA-backed and VA-backed loans. b. insure FHA-backed and VA-backed loans. c. purchase FHA-backed and VA-backed loans. d. originate FHA-backed and VA-backed loans.
c. purchase FHA-backed and VA-backed loans. (Correct Answer)
Which laws or regulations require mortgage lenders to provide an estimate of closing costs to a borrower and forbid them to pay kickbacks for referrals? a. the Equal Credit Opportunity Act. b. Truth-in-Lending laws. c. the Real Estate Settlement Procedures Act. d. Federal Fair Housing Laws.
c. the Real Estate Settlement Procedures Act.
The three overriding considerations of a lender's mortgage loan decision are a. points, interest rate, and loan term. b. the location of the mortgaged property, the borrower's cash, and the amount of the borrower's equity. c. the ability to re-pay, the value of the collateral, and the profitability of the loan. d. the amount of the loan, the borrower's income, and the down payment.
c. the ability to re-pay, the value of the collateral, and the profitability of the loan. (Correct Answer)
A graduated payment loan is a mortgage loan where a. loan funds are disbursed to the borrower on a graduated basis. b. the interest rate periodically increases in graduated phases. c. the loan payments gradually increase. d. the loan payments gradually increase and the loan term gradually decreases.
c. the loan payments gradually increase.
At the closing of a mortgage loan a. the borrower pays off the note and receives clear title b. the lender issues a firm loan commitment. c. the parties complete all origination documents and the loan is funded. d. the borrower's loan application is complete and the file closed.
c. the parties complete all loan origination documents and the loan is funded.
In a deed of trust transaction, which of the following occurs? а. The beneficiary conveys title to a trustee in exchange for loan funds. b. The trustee conveys title to a beneficiary in exchange for loan funds. с. The trustor conveys title to a trustee in exchange for loan funds from the beneficiary. d. The trustee conveys title to a trustor in exchange for loan funds from the beneficiary.
с. The trustor conveys title to a trustee in exchange for loan funds from the beneficiary.
A distinctive feature of a promissory note is that a. it is not assignable. b. it must be accompanied by a mortgage. с. it is a negotiable instrument. d. it may not be prepaid.
с. it is a negotiable instrument.
If a borrower obtains an interest-only loan of $75,000 at an annual interest rate of 8%, what is the monthly interest payment? a. $720 b. $625 c. $42 d. $500
$500 $75,000 x .08= 6,000 $6,000/12= $500 (divided by 12 because the $75,000 is annual and its asking for monthly interest payment)
Loan to value ratio
-relationship of loan amount to property value -expressed as a percentage -80% LTV = Loan is 80% of property value Example: If a house was on market for $400,000, the loan couldn't be more than 80% of that (so it couldn't be more than $320,000 (400,000x.80=320,000))
Blanket Mortgage
A blanket mortgage is secured by more than one property, such as multiple parcels of real estate in a development. loan secured by more than one property
Bridge loan
A bridge, or gap, loan is used to cover a gap in financing between short-term construction financing and long-term permanent financing. For instance, a developer may have difficulty finding a long-term lender to take out the construction lender. However, as the construction loan is expensive and must be paid off as soon as possible, the developer may find an interim lender who will pay off the construction loan but not agree to a long-term loan. loan that 'bridges' time gap between short and long term financing
Amortizing loan
Amortization provides for gradual repayment of principal and payment of interest over the term of the loan. The borrower's periodic payments to the lender include a portion for interest and a portion for principal. In a fully amortizing mortgage, the principal balance is zero at the end of the term. In a partially amortizing loan, the payments are not sufficient to retire the debt. At the end of the loan term, there is still a principal balance to be paid off. payments include principal
Role of FNMA, GNMA, and FHLMC
FNMA buys conventional, FHA- and VA-backed loans and pooled mortgages; guarantees payment on mortgage-backed securities; GNMA guarantees payment on certain types of loans; FHLMC buys and pools mortgages; sells mortgage- backed securities
Participation loan
In a participation loan, the lender participates in the income and/or equity of the property, in return for giving the borrower more favorable loan terms than would otherwise be justified. For instance, the borrower makes smaller periodic payments than the interest rate and loan amount require, and the lender makes up the difference by receiving some of the property's income. This type of loan usually involves an income property. non occupying investor assists in down payment
Wraparound
In a wraparound loan arrangement, the seller receives a junior mortgage from the buyer, and uses the buyer's payments to make the payments on the original first mortgage. A wraparound enables the buyer to obtain financing with a minimum cash investment. It also potentially enables the seller to profit from any difference between a lower interest rate on the senior loan and a higher rate on the wraparound loan. A wraparound is possible only if the senior mortgagee allows it. this is a purchase money mortgage (PMM) where seller continues payment on underlying mortgage
Adjustable and fixed rate loans
Loans may have fixed or variable rates of interest over the loan term. Adjustable rate mortgages (ARMs) allow the lender to change the interest rate at specified intervals and by a specified amount. Federal regulations place limits on incremental interest rate increases and on the total amount by which the rate may be increased over the loan term.
Debt Ratio Qualification Formula
Monthly Gross Income x Debt ratio = Housing expenses and debts Example : $4,000/mo. x 41% = $1,640/mo. This means that $1,640 is the maximum you could afford for a housing expense and your debts.
Income Ratio Qualification Formula
Monthly Gross Income x Income ratio = Housing expenses and debts Example: $4,000/mo. x 41% = $1,640/mo. This means that without debt considered, you can afford a monthly payment of $1,640 a month.
MIP
Mortgage insurance premium- insurance in the FHA loan- insures the whole loan
Negative Amortization Loan
Negative amortization causes the loan balance to increase over the term. This occurs if the borrower's periodic payment is insufficient to cover the interest owed for the period. The lender adds the amount of unpaid interest to the borrower's loan balance. Temporary negative amortization occurs on graduated payment loans, and may occur on an adjustable rate mortgage. principal balance goes up
Real Estate Settlements and Procedures Act
RESPA standardizes settlement practices provisions: lender must provide CFPB booklet explaining loans, settlement costs and procedures; lender must provide CFPB Loan Estimate of settlement costs within three days of application; lender must provide CFPB Closing Disclosure three days before loan consummation RESPA has to do with settlements Reg Z has to do with getting honest information upfront
Truth-in-Lending and Regulation Z
Reg Z implements Truth-in-Lending Simplification and Reform Act and Consumer Credit Protection Act provisions: lender must disclose finance charges and APR prior to closing; borrower has limited right of rescission; lender must follow disclosure requirements in advertising
Home equity loan
The ostensible purpose of this type of loan is to obtain funds for home improvement. Structurally, the home equity loan is a junior mortgage secured by the homeowner's equity. For some lenders, the maximum home equity loan amount is based on the difference between the property's appraised value and the maximum loan-to-value ratio the lender allows on the property, inclusive of all existing mortgage loans. Thus if a home is appraised at $500,000 and the lender's maximum LTV is 80%, the lender will lend a total of $400,000. If the owner's existing mortgage balance is $325,000, the owner would qualify for a $75,000 home equity loan. loan collateralized by equity
Hypothecation
The process of securing a loan by pledging a property without giving up ownership of the property is called hypothecation. We give something as collateral but we continue to use it Ex: houses, cars
Lien theory state
Those that regard the mortgage as a lien held by the mortgagee (lender) against the property owned by the mortgagor (borrower) are called lien-theory states.
Title theory state
Those that regard the mortgage document as a conveyance of ownership from the mortgagor to the mortgagee are called title-theory states. Some states interpret ownership of mortgaged property from a point of view that combines aspects of both title and lien theory.
Contract for deed
Under a contract for deed arrangement, the seller retains title and the buyer receives possession and equitable title while making payments under the terms of the contract. The seller conveys title when the contract has been fully performed.
Senior and junior loans
When there are multiple loans on a single property, there is an order of priority in the liens which the mortgages create. The first, or senior, loan generally has priority over any subsequent loans. Second loans are riskier than first loans because the senior lender will be satisfied first in case of default. Therefore, interest rates on second mortgages are generally higher than on first mortgages.
Direct reduction
a fully amortized loan in which equal payments of principal and interest are made and at the end of the term, all the interest and principal will be paid. The payments are the same but the amount of interest and principal is different for each payment.
Balloon Payment Loan
a mortgage where the amortization period is longer than the term. For example, a loan is made for $200,000 with a 30 year amortization period at 6% annual interest with monthly payments and the balance must be paid off at the end of 5 years. The last payment made, when the balance is paid off, is the balloon payment. more common in commercial loans
A borrower of a $95,000 interest-only loan makes annual interest payments of $8,312.50. What interest rate is the borrower paying? a. 8.75% b. 7.29% c. .729 % d. 9.125%
a. 8.75% $8,312.50/$95,000= .0875 .0875 turned into a percentage is 8.75%
Which of the following best expresses the mechanics of a mortgage loan transaction? a. The borrower gives the lender a note and a mortgage in exchange for loan funds. b. The lender gives the borrower a mortgage and receives a note in exchange for loan funds. c. The borrower receives a note in exchange for a mortgage from the lender. d. The lender gives the borrower a note, loan funds and a mortgage.
a. The borrower gives the lender a note and a mortgage in exchange for loan funds.
One of the primary purposes for the secondary mortgage market is to a. cycle funds back to primary lenders so they can make more loans. b. issue second mortgages and sell them in the home equity market. c. lend funds to banks so they can make more loans. d. pay off defaulted loans made by primary mortgage lenders.
a. cycle funds back to primary lenders so they can make more loans. (Correct Answer)
The principal role of the Veteran's Administration in the mortgage lending market is to a. guarantee loans made by approved lenders. b. insure loans made by approved lenders c. purchase loans made by approved lenders d. loan mortgage money to veterans.
a. guarantee loans made by approved lenders. (Correct Answer)
The Equal Credit Opportunity Act prohibits a lender from a. refusing a loan because the property is located in a certain area. b. including income from self-employment in the borrower's qualifying income. c. requiring both spouses to sign the loan application form. d. refusing a loan because a borrower has a defective credit report.
a. refusing a loan because the property is located in a certain area.
A lender lends money to a homeowner and takes legal title to the property as collateral during the payoff period. They are in a a. title-theory state. b. lien-theory state. c. state allowing land trusts. d. state where hypothecation is illegal.
a. title-theory state. (Correct Answer)
Acceleration clause
acceleration of maturity date if late on a payment
Common loan structures
amortizing, negative amortizing, interest only, fixed rate, adjustable rate, senior, junior, fixed or graduated payment, balloon, buydown
Original principal:
amount borrowed capital amount borrowed on which interest payments are calculated
Mary bought a $90,000 condo with a loan of $50,000. The lender is charging 3 points. Mary must pay an advance amount of a. $150 b. $1500 c. $2700 d. $3000
b. $1500 (Correct Answer) A point is 1% of the loan amount so if the lender is charging 3 points that's 3% So $50,000 x .03% = $1,500
If a borrower's monthly interest payment on an interest-only loan at an annual interest rate of 9% is $375, how much was the loan amount? a. $40,500 b. $50,000 c. $500,000 d. $46,500
b. $50,000 (Just plugged in numbers to each option) $50,000 x .09= 4,500 4,500/12= $375 (divided by 12 because its annual asking for monthly interest payment)
A loan applicant has an annual gross income of $36,000. How much will a lender allow the applicant to pay for monthly housing expense to qualify for a loan if the lender uses an income ratio of 28%? a. $2,160 b. $840 c. $1,008 d. $720
b. $840 Income ratio equation: Monthly gross income x income ratio = affordable housing expense monthly gross income 36000/12= 3,000 So $3,000 x .28 = $840
How much is a discount point? a. .1% of the loan amount. b. 1% of the loan amount. c. 10% of the loan amount. d. It depends on the interest rate and the loan amount.
b. 1% of the loan amount.
What is a lien-theory state? a. A state in which a lienor holds legal title to a secured property. b. A state in which a mortgage is considered to be a lien against a secured property. c. A state that allows a real estate owner's creditors to record liens against the owner's property. d. A state in which a lien is considered as a conveyance.
b. A state in which a mortgage is considered to be a lien against a secured property.
Which of the following is true of an amortizing loan? a. The amount of annual interest paid is the same for every year of the loan term. b. Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears. c. Except for any points that may be paid, the interest on the loan balance is usually paid in advance. d. The interest rate is reduced each year to maintain equal payments even though the outstanding loan balance is smaller.
b. Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears.
Which laws or regulations require mortgage lenders to disclose financing costs and annual percentage rate to a borrower before funding a loan? a. The Equal Credit Opportunity Act b. Truth-in-Lending laws c. The Real Estate Settlement and Procedures Act. d. Federal Fair Housing Laws
b. Truth-in-Lending laws (Correct Answer)
The secondary mortgage market
buys existing loans to provide liquidity to primary lenders; Fannie Mae, Ginnie Mae, Freddie Mac, investment firms, life insurance companies, pension funds
The Federal Reserve's Regulation Z applies to which loans? a. All loans. b. All loans secured by real estate. c. All loans secured by a residence. d. All loans over $25,000.
c. All loans secured by a residence.
The difference between what a borrower has to pay to purchase a property and the amount a lender will lend on the property is the a. loan-to-value ratio. b. lender's profit margin. c. buyer's down payment. d. origination fee.
c. buyer's down payment.
Mortgage financing is the practice of a. buying and selling mortgages as an investment vehicle. b. lending money to real estate investors to finance the purchase of mortgages. c. using borrowed funds secured by a mortgage or trust deed to purchase real estate. d. obtaining equitable title to real estate by buying promissory notes.
c. using borrowed funds secured by a mortgage or trust deed to purchase real estate.
Interest
charge for the use of money; rate fixed or variable
What is the function of a note in a mortgage or trust deed financing arrangement? a. It is evidence of the lender's interest in the collateral property. b. It is evidence of ownership of the mortgage or trust deed. c. It contains the borrower's promise to maintain the value of the property given as collateral for a loan. d. It is evidence of the borrower's debt to the lender.
d. It is evidence of the borrower's debt to the lender.
What is a loan-to-value ratio? a. The percentage of a lender's portfolio that is composed of mortgage loans. b. The ratio of borrowed principal plus total interest to the appraised value of the collateral property. c. The ratio of a lender's return on a mortgage loan to the value of the collateral property. d. The fraction of the appraised value of the property offered as collateral which the lender is willing to lend.
d. The fraction of the appraised value of the property offered as collateral which the lender is willing to lend.
A borrower obtains a 30-year, fully amortizing mortgage loan of $30,000 at 8%. What is the principal balance at the end of the loan term? a. $1,000 b. $30,000 c. $220 d. Zero
d. Zero
A conventional mortgage loan is one that is a. backed by the Federal National Mortgage Association. b. insured under Section 203(b) of the Federal Housing Administration loan program. c. guaranteed by the Government National Mortgage Association. d. not FHA-insured or VA-guaranteed.
d. not FHA-insured or VA-guaranteed.
If a particular loan falls under Regulation Z's right of rescission provision, a. the lender has the right to change the terms of the loan within a certain period. b. the lender has the right to accelerate repayment of the loan because of a change in the borrower's credit status. c. the borrower has the right to pay off the loan ahead of schedule with no penalty. d. the borrower has a limited right to cancel the transaction within a certain period.
d. the borrower has a limited right to cancel the transaction within a certain period.
Net worth
extent to which applicant's assets exceed liabilities as a further source of reserves net worth is the difference between assets and liabilities
Seller financing
finances buyer and retains title until contract terms are met part of the purchase price; contract for deed: installment sale where seller purchase money mortgages: loans by the seller to the property buyer for all or
VA-guaranteed loans
guaranteed loans granted by VA-approved lenders to qualified veterans
Special- purpose loans
home equity, package, construction, bridge, equity participation, take-out, reverse annuity, and blanket
Annual Percentage Rate (APR)
includes interest and all other finance charges; lender must disclose on residential properties
Income qualification
income ratio and debt ratio qualify borrower's income; income ratio applied to gross income determines housing expense maximum; debt ratio takes revolving debt into account
FHA-insured loans
insured loans granted by FHA-approved lenders to borrowers who meet FHA qualifications
PMI (Private Mortgage Insurance)
is for conventional loans PMI insures the ledger in the event of a deficiency in a similar way that FHA and VA protect the lender. The lender is insured, not the borrower
Promissory note
legal instrument executed by borrower stating debt amount, loan term, method and timing of repayment, interest rate, promise to pay; may repeat other provisions from mortgage document or deed of trust; negotiable instrument assignable to a third party IOU, "I promise to repay..." primary debt instrument, personal obligation to pay
Equal Credit Opportunity Act
lender must evaluate applicant according to applicant's own income and credit information
Credit evaluation
lender obtains credit reports to evaluate applicant's payment behavior
Cash qualification
lender verifies applicant's sources of cash for down payment; extra cash enhances income qualification evaluation
Mortgage mechanics
mortgage mechanics: borrower gives lender note and mortgage; lender gives borrower funds and records a lien
Point
one percent of the loan amount, charged by lender at origination to obtain required retun 1 point = .01 x loan amount Example: Loan= $85,000 Lender charges 3 points (which is 3%) Would do $85,000 x .03 = $2,550 points charged
Term
period of time for repayment of interest and principal
Conventional loans
permanent, long-term loans not insured by FHA or guaranteed by VA (generally require about 20% down)
Mortgage loan underwriting
process of evaluating borrower's ability to repay and value of the property loan-to-value ratio: relationship of loan amount to property value, expressed percentage
Supply and demand for money
relationship between money supply and demand affects interest rates, consumer prices, availability of mortgage money Federal Reserve controls: T-bills; reserve requirement, discount rate
Loan balance
remaining unpaid principal at any point in the life of the loan
Mortgage document and trust deed
the legal documents which pledge the property as collateral for the loan may include clauses covering payment of principal and interest, prepayment, late charges, escrow for taxes and insurance, liens, insurance requirements, occupancy and maintenance, lender's rights, private mortgage insurance, inspection, and other conditions of performance
Payment
the periodic payment of interest and/or principal
Trust deed mechanics
trust deed conveys title from the borrower/trustor to a third- party trustee who holds title on behalf of the lender/beneficiary until the debt is герaid
Closing a loan
usually simultaneous with closing of real estate transaction; transfer of funds, signing of documents, escrow deposits
Loan commitment
written pledge by lender to grant loan under specific terms; firm, lock-in, conditional, take-out
