Finance Exam

Math calculation - points

1 point = 1 % of the loan amount.

Ad valorem taxes

Ad valorem (according to value) taxes are assessed based upon the assessed value of the property and the current tax rate. The assessed value for tax purposes is determined by the taxing authority and may be well above or below the value based upon a real appraisal. Assessed value should never be used as a reliable estimate of market value.

How governments can fund capital improvements/investments

Bonds may be categorized by their method of repayment, redemption, or by the intended use of the funds raised in a bond sale. Government entities regularly sell bonds to fund major capital investments.

The elements in the PITI payment

Bringing it all together, we have the total house payment of principal, interest, taxes and insurance

Loan clauses

Clauses may be used in subordinate finance instruments to reduce the liability of the subordinate lienholder versus the first lienholder's liability. This reduction of liability may come in the form of various clauses, including: • Lifting clause: A clause that gives the borrower the ability to replace the primary instrument with another without affecting the subordinate instrument's position. An example would be the refinance of an existing first lien note on a property with a second mortgage. The refinance would not change the priority of the liens, even though the refinanced first mortgage would be dated after the recording of the second. • Cross-defaulting clause: A clause that states that in the event of borrower default on the primary instrument, the secondary instrument automatically defaults. This protects a subordinate lienholder by allowing him or her to foreclose a property if the first lien went into default, even if the subordinate lien was not in default.

Prohibited lender behavior under the Community Reinvestment Act vs Dodd-Frank

Community reinvestment act prohibits redlining by banks Dodd-Frank: The official purpose of the law is to "promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices and for other purposes."

FHA loan requirements regarding down payments

Down payments as low as 3.5%

Terminology - useful life, effective age, chronological age, depreciated age

Effective Age - The appraiser's estimate of the age of the house based upon its ongoing maintenance and upgrades. A house might have been well maintained and updated over the years; therefore, the appraiser might determine that a 20-year-old house might have an effective age of 10. Chronological Age - The actual age of the property in years. If the house is 20 years old, it has a chronological age of 20. Depreciation is the reduction in the value of a property from causes such as deterioration or obsolescence. Types of depreciation include physical deterioration, functional obsolescence, and external obsolescence. The appraiser then subtracts depreciation from the new cost to determine the depreciated value of the structure.

FHA loan requirements regarding escrow of taxes and insurance

Escrows are required for all transactions regardless of LTV along with monthly insurance payments The cost of the mortgage insurance is passed along to the borrower in the form of a Mortgage Insurance Premium (MIP). The borrower pays two premiums, an up-front premium at closing, and an annual premium. When a loan is funded, the FHA charges an Up-Front Mortgage Insurance Premium (UFMIP). The UFMIP can be paid at closing or added to the loan at funding. The UFMIP can be added to the loan even if it causes the loan to exceed the appraised value of the property. The annual premium is based on the loan-to-value ratio (LTV), and is added to the borrower's monthly payment.

FHA loan advantages vs VA

FHA Advantages: 1. Qualifying ratios are slightly more lenient allowing borrowers to have more debt and still qualify. 2. LTVs are very high, allowing buyers with little money for a down payment to purchase a property. Points on FHA loans can be paid by either the buyer or the seller. VA Advantages:

Math calculation - GRM

GRM (Gross Rent Multiplier) = Average Sales Price ÷ Average Monthly Rent

LTV - calculation

LTV = Mortgage amount / appraised property value

Definitions - portfolio loan vs conventional loan

Loans that are not sold in the secondary market are called portfolio loans because the lender holds the loan in his or her investment portfolio. Government loans include FHA, VA, and USDA loans. All other loans are known as conventional loans and are loans that have no federal government guarantees or insurance. Most conventional loans are made in anticipation of their sale to investors in the secondary market.

Strict Foreclosure

Strict Foreclosure: A small number of states allow this type of foreclosure. In strict foreclosure proceedings, the lender files a lawsuit on the homeowner that has defaulted. If the borrower cannot pay the mortgage within a specific timeline ordered by the court, ownership of the property is transferred directly to the mortgage holder. Generally, strict foreclosures take place only when the debt amount is greater than the value of the property.

Loan originator registration system

The SAFE Mortgage Licensing Act was designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators, and the establishment of a nationwide mortgage licensing system and registry for the residential mortgage industry. All residential mortgage loan originators must now be registered with the Nationwide Mortgage Licensing System and Registry (NMLSR).

FHA LTV's

The maximum loan-to-value ratio on an FHA loan is 96.5%.

Texas department of housing and community affairs (TDHCA)

The mission of the Department is to serve the state's extremely low to moderate-income populations. Funding priority is given to those populations most in need of services: extremely low, very low, and low-income households and individuals. The Department accomplishes this mission by acting as a conduit for federal grant funds for housing and community services. However, because several major housing programs require the participation of private investors and private lenders, TDHCA also operates as a housing finance agency. In addition, TDHCA serves as a financial and administrative resource that helps provide essential services and affordable housing opportunities to Texans who qualify for this assistance based on their income level. Finally, the Department is a resource for educational materials and technical assistance for housing, housing-related, and community services matters.

VA loan requirements

Veterans who were honorably discharged AND who meet the service requirements are eligible for VA home loan benefits. Eligibility is additionally determined by the time frame in which the veteran served and the number of days of active duty. The veteran must obtain a certificate of eligibility (COE).

Closing amounts can sometimes be paid by either party. What MUST be paid by the borrower?

While some expenses may be paid in the form of a seller contribution or other means, the borrower actually must have the funds for the downpayment on hand. The source of the downpayment may not be a loan of any kind.

Amortization/amortizing - definition

a type of loan with scheduled, periodic payments that are applied to both the loan's principal amount and the interest accrued. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount.

Contract for Deed - features

also known as a land contract, is a sales contract between buyer and seller. In the contract, the buyer agrees to make regular payments to the seller. The seller retains legal title to the property, known as title retention, and the buyer acquires equitable title or equitable interest in the property. In the contract, the seller promises to convey legal title to the buyer when all payments have been made

Market Value

is the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, under guidelines published by federal institutions Fannie Mae and Freddie Mac.

Definitions - mortgage vs note

• A promissory note, which is also known as a real estate lien note, is the borrower's unconditional promise to repay and includes the amount borrowed, payment amount, due date, and rate of interest. The note is not generally recorded. • A mortgage, which is the document that pledges the property as security for repayment of the note, is recorded in the county in which the property is located

Definitions - lien vs foreclosure

A lien is a right given by law to certain creditors to have debts paid out of the property of a defaulting debtor, usually through a court sale. A lienholder does not own the property that is encumbered. Instead, the holder has an interest that, in some cases, may result in the foreclosure of the property. Foreclosure: Foreclosure is the legal procedure whereby the secured property may be sold to satisfy the unpaid promissory note. While the process varies from state to state, all states provide that the property be sold in a public auction. If the property fails to sell at the auction, ownership will transfer to the lender. Any excess money left over from the forced sale is given to the debtor. In the event of a shortage, the lender may sue the borrower for a Deficiency Judgment.

Foreclosure - deficiency vs excess funds

Deficiency Judgement: When a property is foreclosed, it is typically sold at auction, which can result in an unpaid balance or deficiency, on the original mortgage, as the amount the property sold for may not be sufficient to pay the balance in full. In these cases, lenders may seek a deficiency judgment on the foreclosure through a motion filed with the courts. Borrowers who receive a deficiency judgment have several options at their disposal, including the filing of a motion to overturn the judgment, requesting an exemption from the original lienholder, or in extreme cases, declaring bankruptcy. It is highly recommended that borrowers consult an attorney if faced with these circumstances. While FHA loans are exempt from deficiency judgments, they may be made for VA-guaranteed loans, although the VA discourages this. Many states have found that deficiency judgments do not represent a viable means of lender loss recovery, and have removed the option to seek them. Excess Funds: If a foreclosure sale results in excess proceeds, the lender doesn't get to keep that money. The lender is entitled to an amount that's sufficient to pay off the outstanding balance of the loan plus the costs associated with the foreclosure and sale—but no more. Generally, the foreclosed borrower is entitled to the extra money; but, if there were any junior liens on the home, like a second mortgage or HELOC, or if a creditor recorded a judgment lien against the property, those parties get the first crack at the funds. Then, any proceeds left over after paying off these liens belong to the former homeowner.

Limits on title/encumbrances - terminology

Encumbrance: A claim, lien, charge, or liability attached to and binding real property. Encumbrances place limitations on the property owner. EX of encumbrances: liens, easements, encroachments, restrictions, and leases. A lien is a right given by law to certain creditors to have debts paid out of the property of a defaulting debtor, usually through a court sale. A lienholder does not own the property that is encumbered. Instead, the holder has an interest that, in some cases, may result in the foreclosure of the property. Common examples of liens include: • Mortgages and Trust Deeds • Tax Liens • Judgments • Mechanics and Materialman's (M&M) liens

Fair Housing Rules and protected categories

Federal Fair Housing statutes prohibit housing discrimination based on race, color, national origin, sex, religion, families with children, and disabilities.

Front and back qualifying ratios and calculations

Front Ratio: used to qualify a borrower for a loan based upon the proposed house payment and his or her gross monthly income (GMI). The house payment is the monthly payment of principal, interest, taxes, and insurance (PITI). In conventional lending, a front ratio of 28% means that the house payment (PITI) cannot exceed 28% of the borrower's gross monthly income. 28% × gross monthly income = Max. monthly house payment Back Ratio: the ratio of the borrower's total recurring monthly debts, including such obligations as the house payment, payments on all installment debts, monthly payments on all junior liens, alimony, car lease payments, and other recurring payment obligations. In conventional lending, it is usually 36%. Both ratios must be satisfied. The income of the borrower is also critical, and the lender will verify all sources of income and evaluate both their reliability and longevity. 36% × gross monthly income = Max. PITI and debts per month

VA loan terminology - guaranteed, qualification, eligibility, entitlement

Guaranteed: VA loans are made by a lender, such as a mortgage company, savings and loan, or a bank. VA's partial guaranty on the loan protects the lender against loss if the payments are not made, and is intended to encourage lenders to offer veterans loans with more favorable terms. This guaranty reduces the lender's risk. Should the veteran default on the payments, the VA will compensate the lender for any losses incurred by a foreclosure, up to the guaranty limit. Qualification: Approval for a VA loan is based upon two separate evaluations: residual income and debt-to-income ratio. Both are considered to be a guide to underwriting, and while residual income is the primary consideration, it must be considered along with other credit factors. Eligibility: is the veteran's entitlement to VA home loan benefits under the law, based on military service. An eligible veteran must still meet credit and income standards in order to qualify for a VA-guaranteed loan. A lender cannot make a VA guaranteed loan to an ineligible applicant under any circumstances. Entitlement: The portion of the veteran's loan the VA will guarantee a lender

Features of an ARM

In an adjustable-rate mortgage, the borrower obtains a loan for a specified term, perhaps 15 or 30 years. The loan is funded at an initial rate of interest that will remain fixed for a period. That period will vary depending on the loan product. Rate changes in an ARM are determined by increases or decreases in a funds index that is not under the control of the lender. Adjustment Period - The interest rate and monthly payment change every month, three months, six months, 1 year, 3 years, 5 years, or 7 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1-year ARM, and the interest rate and payment can change once every year; a loan with a 3-year adjustment period is called a 3-year ARM. Index - The index is what the lender uses as an instrument for measuring changes in interest rates. It is the lender's barometer of change in interest rates. One of the significant protections offered to borrowers who accept an ARM loan is that any change in the rate of interest must be tied to the change in the index. As the index rate moves up, so does the interest rate charged by the lender to the consumer resulting in higher monthly payments to the borrower. As the index rate moves down, the interest rate charged by the lender to the consumer goes down, resulting in lower monthly payments to the borrower. The index and resulting rate move up and down with fluctuations in financial markets

Approaches to appraisal

In the sales comparison approach, also known as the market data approach, the appraiser focuses on recent sales in determining the value of the subject. The cost approach to the market value of the property considers how much a new structure of this size and type would currently cost to build. The cost approach is commonly used for unique properties for which there is little market activity, including special-purpose buildings such as churches and bowling alleys. The appraiser applies current industry and market price estimates for the underlying land, building materials and construction costs. The income approach will not be used in a typical residential transaction because it applies only to income-generating rental property. The income approach will be used when the sale is to an investor purchasing the home as a rental property. Reconciliation is the final step in the appraisal process, in which the appraiser weighs the estimates of value received from sales comparison, cost, and income approaches to arrive at a final estimate of the market value of the subject property. Because the three approaches to value examine very different criteria, their values will be different, sometimes by a wide margin.

Rates on an ARM - Index, Prime, Initial, Cap

Index - The index is what the lender uses as an instrument for measuring changes in interest rates. It is the lender's barometer of change in interest rates. One of the significant protections offered to borrowers who accept an ARM loan is that any change in the rate of interest must be tied to the change in the index. As the index rate moves up, so does the interest rate charged by the lender to the consumer resulting in higher monthly payments to the borrower. As the index rate moves down, the interest rate charged by the lender to the consumer goes down, resulting in lower monthly payments to the borrower. The index and resulting rate move up and down with fluctuations in financial markets. Discounted Initial Rate (teaser rate) - The lender offers a lower interest rate during the first year or more of the loan. These interest rate concessions are used as incentives to attract borrowers to ARM products.

Judicial vs non-judicial foreclosure/power of sale

Judicial Foreclosure: All states allow this type of foreclosure, and some require it. T he lender files suit with the judicial system, and the borrower will receive a note in the mail demanding payment. The borrower then has only 30 days to respond with a payment in order to avoid foreclosure. If a payment is not made after a certain time period, the mortgaged property is then sold through an auction to the highest bidder, carried out by a local court or sheriff's office. Power of Sale: This type of foreclosure, also known as statutory foreclosure, is allowed by many states if the mortgage includes a power of sale clause. After a homeowner has defaulted on mortgage payments, the lender sends out notices demanding payments. Once an established waiting period has passed, the mortgage company, rather than local courts or sheriff's office, carries out a public auction. The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below.

Appraisal time limits and the effect of a slow market

Marketing Time - The appraiser verifies the area's listings and sales records to determine how long it is taking to sell properties: (1) under 3 months; (2) between 4-6 months or (3) over 6 months. A marketing time of over 6 months may be problematic as it indicates a slow market that creates a drag on property values.

Loan terminology - origination, funding, underwriting, servicing

Origination: The process of creating a new mortgage loan, including all steps taken by a lender to attract and qualify a borrower Funding: The process of transferring funds to a title or escrow company for disbursement is called funding. When a loan is approved, the lender issues a commitment to make the loan at specified terms. At funding, the lender funds the loan by forwarding sufficient cash. A mortgage banker uses his money or a line of credit to fund loans when the final closing conditions have been satisfied. Underwriting: The detailed process of evaluating a borrower's loan application to determine the risk involved for the lender - involves an in-depth analysis of the borrower's credit history, as well as an examination of the value and quality of the subject property. A well trained professional (underwriter) reviews all the information, analyzes the creditworthiness of the borrower, and renders a decision on the loan request. Servicing: includes collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds), remitting funds to the note holder, and following up on delinquencies.

Clauses in a mortgage

PREPAYMENT PRIVILEGE CLAUSE The prepayment privilege clause is included in some loans and allows the borrower to pay off the loan before the due date without incurring penalties such as those discussed above. LOCK-IN CLAUSE The lock-in clause is a condition of a mortgage loan which prohibits prepayment of the loan prior to a specific date. ALIENATION (DUE ON SALE) CLAUSE The alienation clause reserves the right of the lender to call the note (declare the entire balance due) if the borrower sells the property without repaying the loan. This clause is designed to prevent a purchaser from assuming the loan without the consent of the lender. The alienation clause is also known as the Due-On Sale Clause RELEASE CLAUSE When included in a loan instrument, a release clause allows for a portion of the loan to be paid in exchange for the lender releasing a part of the property from the mortgage. SUBORDINATION CLAUSE The subordination clause is a clause in which a holder of a mortgage permits a subsequent mortgage to take priority. Subordination is the act of yielding. This clause provides that if a prior mortgage is renewed, the junior mortgage will continue in its subordinate position and will not automatically become a higher or first mortgage. EXCULPATORY CLAUSE The exculpatory clause is used to limit the borrower's personal liability in the event of a default on a loan. This clause, when included, clearly states that the liability of the borrower is limited to the property in question, protecting the borrower's other real and personal property from becoming collateral in the event of a default. NONRECOURSE CLAUSE Nonrecourse clauses are often used by loan originators when selling loans on the secondary market. A nonrecourse clause protects the seller of the security from liability in the event of a default by the borrower. ACCELERATION CLAUSE An acceleration clause is a provision in a written mortgage or note, stating that in the event of default, the entire amount of the principal becomes due and payable. ESCALATION CLAUSE An escalation clause allows the lender to raise the existing interest rate. (usually seen in ARMs) ASSUMPTION CLAUSE An assumption clause allows a new borrower to take over the payments on an existing loan, under specified terms and conditions. DEFEASANCE CLAUSE A defeasance clause states that the lien is defeated when the debt is repaid

Primary market vs secondary market

Primary Mortgage Market: is made up of the businesses that lend to borrowers for the purchase of real estate. They are often referred to as loan originators because they initiate, or originate, the loan paperwork, and the cash that is transferred to buyers at a real estate closing. Primary market lenders include savings and loans, commercial banks, mutual savings banks, mortgage companies, credit unions, individuals, or any person or business that provides cash for someone seeking a mortgage. The Secondary Market exists for the purchase and sale of existing mortgages to investors. It is designed to provide greater liquidity to the residential real estate market by providing for a steady supply of funds from investors. The secondary market is the market wherein loan originators such as mortgage bankers and brokers can sell their loans and thus recover cash for originating more loans. Secondary market investors do not lend money; they purchase mortgage notes as investments to earn a return. The return is called a yield, and it represents the money earned on an investment.

Finance laws and provisions - Dodd-Frank, SAFE ACT, Community Reinvestment Act

SAFE ACT: The Secure and Fair Enforcement for Mortgage Licensing Act is designed to enhance consumer protection and reduce fraud. The Federal SAFE Act required each state to enact SAFE legislation or defer to the U. S. Department of Housing and Urban Development (HUD) for such regulation. State SAFE legislation must be compliant with the federal SAFE Act, and HUD was charged with the responsibility of monitoring compliance. Dodd-Frank: The official purpose of the law is to "promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices and for other purposes." • Providing consumers with understandable disclosures. • Protecting consumers from unfair, deceptive or abusive acts and discrimination. • Reducing unnecessary regulatory burdens. • Enforcing the federal consumer laws in a manner that does not discriminate against depository institutions. • Promoting the maintenance of a competitive consumer marketplace. Community Reinvestment Act: A significant federal law that affects lenders is the Community Reinvestment Act. This federal law was passed to ensure that banks would serve the needs of the community in which they were chartered to do business. It prohibits redlining. Redlining is the practice of refusing to provide financing in a particular area because of the location. The act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate-income neighborhoods, consistent with safe and sound operations. It was enacted by Congress in 1977 and was substantially revised in May 1995.

Subordination/subordinate

Subordinate finance instruments are used in real estate transactions for a variety of purposes. These instruments may fill a vital role in a transaction but remain secondary to the primary finance instrument, such as a conventional mortgage loan. For example, a buyer may need assistance with a cash downpayment. This assistance is often given in the form of a purchase-money loan from the seller (referred to as a carryback loan, as the seller is 'carrying back' a portion of the sales price of the property), which becomes subordinate to the primary instrument, the mortgage loan. Another example is the use of these instruments by developers to complete and pay for various improvements to a development, such as roads, streetlights, or neighborhood clubhouses. Interest rates on subordinate instruments are typically much higher than the market rates for primary instruments, due to increased risk on the part of the lender. Despite this, most loan originators participate in the subordinate market, and even sell subordinate securities on the secondary market, in the same manner as primary finance instruments. These subordinate instruments are typically used to generate funds for the borrower.

TVLB program features

Texas Veterans Land Board (VLB) The Texas Veteran's Land Board Housing Assistance Program is a benefit that every buyer with a military background should consider. To participate in the program, the veteran obtains an FHA, VA, or conventional loan from a participating lender. The qualification process is the same as for any other FHA, VA or conventional loan, and is open to all honorably discharged Texas veterans. The difference is that the loan is sold to the Texas Veteran's Land Board (VLB), as opposed to a secondary market purchaser such as Fannie Mae or Freddie Mac. The primary benefit to the veteran is that the rate on the Veteran's Land Board loan is often up to one percent below prevailing market rates. To be eligible for VLB financing, the land must: • Be wholly within the state of Texas. • Contain at least one acre, excluding any portion beneath a dedicated public roadway or navigable waterway or subject to frequent inundation or otherwise unusable. • Have legal, usable access to a public road. Access must be a minimum of 60 feet wide or meet the county public road width requirements, whichever is greater. "Usable" means that it can be driven on by a standard passenger car in inclement weather. • Be properly described by either a Field Note description of the tract with the Surveyor's Official Seal and Signature (original or copy) or a complete copy of the recorded subdivision plat if the description is by Lot & Block. • Not be zoned strictly for commercial use. • Not have been owned by the veteran or spouse within the previous three years