Section 10: Delaware Financing Processes and Types

Advantages and Disadvantages of Installment Sales Contracts

-The buyer doesn't have enough money saved for a traditional down payment. (Advantage for buyer) -The seller can avoid paying federal capital gains all at once and can pay them through percentage payments each year. (Advantage for seller) -If the buyer is unable to make the payments, the seller can keep all the proceeds received up until that point and repossess the property. (Seller pro/buyer con) -The buyer doesn't have ownership in the property until it is completely paid off. (Disadvantage for buyer)

Caroline's monthly mortgage payment includes principal, interest, taxes, and insurance. She has a 30-year mortgage at a consistent 3.75% interest. What type of loan does she have?

A budget mortgage. Because it includes principal, interest, and prorated taxes and insurance, it allows her to "budget" for her housing expenses.

Short-Term Loan Types: Bridge loan (swing loan ):

A temporary (usually 90-day) loan that provides funds in addition to an existing loan until permanent financing can be obtained. Often used for buyers who haven't yet sold one property, but want to purchase a new one. Best used when the buyer's current home is already under contract.

Residential Loan Types: Budget Mortgage

A typical amortized mortgage loan that includes principal, interest, taxes, and insurance in each (usually monthly) amortized payment. A common acronym for this kind of loan is PITI (principal, interest, taxes, and insurance).

Match the type of mortgage with its description. The interest rate fluctuates based on the economic index to which it's tied.

Adjustable-rate mortgage

Savings and loans associations

Also called thrifts-specialize in taking in savings deposits and then lending out through mortgages and other loans. They're required to keep their commercial lending at or under 20%, so they're very much tied to consumers and mortgage loans.

Residential Loan Types:Amortized Loan

Any loan in which periodic payments go toward both principal and interest. In a typical amortized loan, most of the initial payments go toward interest, with ever-increasing amounts going toward the principal (the loan balance), until the loan is paid off. For instance, a 30-year fixed-rate loan will be fully amortized in 30 years.

Commercial banks

Bank of America, Chase, Citigroup, and the like-make consumer and business loans, offer investment products, and take deposits.

Loan Term

Borrowers should consider how long they plan to be making mortgage payments when deciding on the loan term. A 30-year mortgage may have a lower monthly payment, but what will happen if the loan term extends beyond the period during which the borrower will have a steady income? Conversely, a couple purchasing a retirement home may prefer a 15-year mortgage in order to have no mortgage payment when they plan on living on a fixed income.

Bridge loans, which are also called swing loans, are typically for a long term. (T/F)

False

Lenders may adjust the rates any time interest rates rise. (T/F)

False

Of the institutions listed, which of these is viewed only as a secondary mortgage market player?

Fannie Mae

Insures loans

Federal Housing Administration

Owner Financed: Wrap-around mortgage

Seller financing that wraps the new buyer's mortgage around the seller's existing mortgage. The seller continues to make payments on the first mortgage, and the buyer makes the payments to the seller on the wrap-around mortgage.

ARM Rate Examples

Here is one example of an ARM's rates: -Initial rate: 5% -Margin: 2.25 (won't change) -Index: 4.75 (can go up or down) To find out what the fully indexed interest rate will be each month, simply add the margin to the associated index.

Final termination

If borrowers are current on payments, the lender must terminate PMI one month after the loan reaches the midpoint of its amortization schedule, even if the LTV isn't yet 78%. This is most likely to occur for borrowers who start out with a negatively amortized loan (interest only) or some sort of balloon payment.

Private Mortgage Insurance (PMI)

If the lenders threshold exceeds the lender's threshold of 75% to 80%, the lender may require the borrower to purchase private mortgage insurance (PMI). Though there are some conventional loan products with much lower down payments that don't require PMI. Insurance provided by a private carrier that protects a lender against a loss in the event of a foreclosure and deficiency. PMI covers the lender for the difference between the buyer's actual down payment and what the lender would like to see, in case the buyer defaults. Some mortgage programs permit a lower down payment with no required mortgage insurance. These programs may carry higher interest rates, though, so buyers must compare monthly payment amounts, interest rates, and total cost over the life of the loan.

Match the type of mortgage with its description. The buyer has possession of the property, while the seller still holds the title.

Land contract

What could be a consequence if there were no secondary mortgage market?

Lenders might not have funds available to make new loans to the public.

Which method is when lenders collect origination fees, discount points, and monthly interest payments from borrowers

Loan Origination

Which method is when lenders collect mortgage payments, processes tax and insurance payments, and prepares records for other lenders

Loan servicing

Conventional and Government loans

Mortgage loans are usually either conventional or government loans, such as FHA-insured (Federal Housing Administration) or VA-guaranteed (U.S. Department of Veterans Affairs).

What are mortgage backed securities?

Mortgage-backed securities (MBSs) are bonds that are secured by home and other real estate loans. They're also known as "asset-backed securities." MBSs are created when several such loans, which usually have similar characteristics, are grouped, or pooled, together, and then sold. The majority of MBSs are sold to government agencies or government-sponsored enterprises; others are sold to security firms or to private firms. For example, let's say Bank USA offers home mortgages. It could gather, say, $15 million worth of home mortgages, and then sell that pool to Freddie Mac (a federal government agency) or to Fannie Mae (a government-sponsored enterprise).

What Are the Benefits of Interest-Only Loans?

Small monthly payment for the first few years

Residential Loan Types: Interest-only

The borrower only pays the interest on the loan for a set number of years-usually between five and seven. After the term is over, the borrower must either pay off the entire loan principal in a lump-sum payment, or will need to finance the principal through another loan. Also known as term or straight-term loan.

Owner Financed: Lease with option to buy

The buyer and seller negotiate a sale price, which is written into the lease. Sellers will often apply a portion of the rent toward the purchase to entice the buyers to close more quickly. A unilateral contract between property owner and lessee in which the owner and lessee agree on a sales price and (usually) a portion of lease or rent payments go toward the purchase price. The lessee may or may not choose to exercise the option to buy, but the owner must allow exercise of the option based on the agreed-upon terms.

Equitable Title

The interest held by a seller under a contract for deed or an installment contract; the equitable right to obtain absolute ownership to property when legal title is held in another's name. Equitable title is actually what any buyer holds to a property once a sales contract has been agreed upon. The contract is executory before it is fully completed. During this time, the seller retains possession and title and the buyer has equitable title.

A Word About Mortgage Insurance

The primary difference between the mortgage insurance for a conventional loan versus an FHA loan is that the borrower pays MIP for the entire life of the FHA loan. PMI on a conventional loan can be eliminated when the value of the property reaches at least 80% of the loan balance or when the loan reaches its mid-life point. Borrowers must carefully weigh the differences between loan products, including the cost of mortgage insurance over the loan's life, when evaluating which loan product is best for them.

Loan-to-Value Ratio (LTV)

The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral.

The secondary mortgage market serves a very important role in real estate finance. What statement best describes that role?

The secondary market purchases loans from primary lenders and helps keep credit available to loan originators.

Purchase Money Mortgage (PMM)

The seller carries a portion (or sometimes all) of the loan for the buyer.

Mortgage bankers

They actually do the lending. They have in-house loan processors and underwriters. Wells Fargo Mortgage is an example. Mortgage bankers can close fairly quickly because they fund their own loans, but their choice of offerings is narrow because it's limited to their own products.

Residential Loan Types: Growing equity mortgage

This is a fixed-rate mortgage where the monthly payments increase over time according to a set schedule. The interest rate remains the same, and there's no negative amortization. The first payment is a fully amortizing payment. As the payments increase, the amount greater than a fully amortizing payment is applied directly to the principal balance, reducing the life of the term and increasing the borrower's interest savings.

Commercial: Shared equity mortgage (equity sharing )

This is used most often in commercial lending. The borrower agrees to the lender's participation in the net income from the commercial property or enterprise in order to obtain the loan. The lender may receive interest and a share of the profits.

ARM interest rates can fluctuate with the national economy. (T/F)

True

Guarantees loans

VA loan

Credit unions

are member-based cooperatives that provide credit for auto loans and home loans. They take deposits and offer savings vehicles, money markets, and the like. Their rates tend to be pretty competitive.

Mortgage bankers and mortgage brokers are

both concentrate on mortgage lending.

The primary mortgage market is the

direct-to-borrower side of the market, and includes both commercial (institutional) and private lenders.

A conventional loan

is one that doesn't require special financing, such as an FHA or VA loan (which are types of government loans). These are also often called commercial loans (but this doesn't mean that it's for a commercial product). Conventional lenders offer a broad range of loan products that vary in length and carry terms that do not include any insurance or guarantee from a federal agency. Rarely, originators will hold onto and service a conventional loan from start to finish. Usually, though, conventional loans are bundled together and sold on the secondary mortgage market.

A conforming loan is defined as one

one that conforms to Fannie Mae and Freddie Mac guidelines.

The secondary market makes the primary market possible by giving primary lenders a

place to sell their loans to obtain funds to make new loans.

Primary Mortgage Market

the mortgage market in which loans are originated, consisting of lenders such as commercial banks, savings associations, and mutual savings banks. A primary lender may be your hometown bank, a national chain bank, a private mortgage lender, or any one of several other lenders.

VA Loans

-A VA loan is another type of government loan that is strictly available to members and former members of the armed services. VA loans are guaranteed by the U.S. Department of Veterans Affairs. -Veterans can pay as little as nothing down, and the VA doesn't allow lenders to require mortgage insurance.

What is a bridge loan?

-A temporary loan that provides additional funds to an existing loan until permanent financing can be obtained. -A loan that may be used to purchase a new home when the existing home sale hasn't yet closed

An installment sales contract is attractive to a buyer who:

-Can't obtain regular financing -Doesn't have enough money saved for a traditional down payment

Lenders in the primary mortgage market make money by:

-Collecting finance charges at closing, such as loan origination fees and/or discount points -Collecting interest payments from the borrower -Collecting mortgage payments -Processing tax and insurance payments -Preparing insurance and tax records

A primary lender may be your hometown bank, a national chain bank, a private mortgage lender, or any one of several other lenders. Examples include:

-Commercial banks -Savings and loan associations -Mortgage brokers and bankers -Credit unions -Pensions -Sellers

Conventional Loans

-Conventional lenders offer a broad range of loan products that vary in length and carry terms that do not include any insurance or guarantee from a federal agency. -Rarely, originators will hold onto and service a conventional loan from start to finish. -Usually, though, conventional loans are bundled together and sold on the secondary mortgage market. -At one time, buyers had to make up to a 20% to 25% down payment to qualify for a conventional loan. -In today's market, few buyers come to the transaction with that kind of money saved. -Buyers may get a conventional mortgage for as little as 3% down. -This smaller down payment may mean that the lender will require private mortgage insurance (PMI) . -PMI covers the lender for the difference between the buyer's actual down payment and what the lender would like to see, in case the buyer defaults. -Some mortgage programs permit a lower down payment with no required mortgage insurance. -These programs may carry higher interest rates, though, so buyers must compare monthly payment amounts, interest rates, and total cost over the life of the loan.

Money to issue more loans helps keep:

-Credit Flowing -Costs of borrowing DOWN -Ease of borrowing UP

Non-Confirming Loans are loans that

-Don't meet all qualifying guidelines set by Fannie Mae and Freddie Mac. -Frequently are "jumbo loans," above the loan limit for government-backed loans.

FHA Loans - Mortgage Insurance Premium (MIP)

-FHA financing is popular because borrowers with lower credit scores and smaller down payments (as little as 3.5%) can still get a mortgage loan. -The Federal Housing Administration insures loans for lenders that meet certain underwriting criteria. -Borrowers must pay a mortgage insurance premium (MIP) for the life of the mortgage loan, so it's wise to encourage them to weigh all of their options before deciding which type of loan works best for them.

Secondary Mortgage Markets include

-Fannie Mac -Freddie Mac -Ginnie Mac -Farmer Mac -Fed Home Loan Bank and investors through mortgage-backed securities.

Government loan (mortgage)

-Government loans include participation from a federal agency as an originating, insuring, or guaranteeing party. The two most common types of government loans are Federal Housing Administration (FHA)-insured and U.S. Department of Veterans Affairs (VA)-guaranteed loans. Other government loans include loans provided by the U.S. Department of Agriculture (USDA) , or through state or local homebuyer programs. -A buyer can put down as little as 3.5% for an FHA loan, and VA loans don't require a down payment or mortgage insurance, plus there's no pre-payment penalty. -The reason lenders don't mind the lower down payment is that the gap in the down payment is covered by the governmental entity-it's either insured by the FHA or guaranteed by the VA. Not having to plunk down tens of thousands of dollars makes government loans attractive to a lot of buyers, especially first-time homebuyers, who won't have equity from a previous home to access. -Borrowers with lower credit scores (minimum 580) may qualify for an FHA loan when they wouldn't qualify for a conventional or VA loan, which may require a score of at least 620. -Because of the ultra-low down payment and lower credit requirements with FHA loans-and therefore the increased risk to the lender and the FHA-buyers have to pay a mortgage insurance premium (MIP) , which is similar to PMI, but unique to FHA loans.

Conforming Loans meet all qualifying guidelines set by Fannie Mae and Freddie Mac, which include:

-Loan amount -Down payment requirements -Loan-to-value ratio -Housing debt-to-income and/or total debt-to-income ratios

In what two ways does the original bank that issued the loan make money from a MBS?

-Originating the loan -Servicing the loan

What are the characteristics of low documentation mortgage?

-Rarely available today due to more stringent mortgage qualifying standards -Designed for self-employed or commission-based borrowers who have a less consistent, or more difficult to prove, income source A low doc (low documentation) mortgage still generally requires documentation of the borrower's ability to repay a loan. The documentation is different because with a standard mortgage, the borrower has inconsistent income.

Primary lenders include:

-Savings and loan associations -Commercial banks -Credit unions -Mortgage bankers and mortgage brokers -Insurance companies -Investments groups

Mortgage Insurance Premium (MIP)

-The FHA insurance that the borrower is charged with a percentage of the loan as a premium. -Borrowers pay a portion of the MIP at closing; the remaining premium is prorated and built into the monthly mortgage payments. FHA doesn't set a maximum sales price or focus solely on borrowers with lower credit scores and smaller down payments. There is a maximum loan amount, however, so borrowers must pay anything above that in cash.

Non-Conforming Loan

-The loan amount is over the Fannie Mae/Freddie Mac loan limit, but a jumbo loan can still be a conventional loan, and the FHA does actually insure jumbo loans for qualified borrowers. Make sense? Let's keep going and it will all gel soon enough. -A loan unable to be sold to Fannie Mae or Freddie Mac - for example a sub-prime loan

What are the steps that shows the process a loan goes through to get from the primary to the secondary mortgage market?

1. Lending institutions market their loan to the secondary market. 2. A secondary mortgage market institution purchases the loan. 3. Loans are packaged into a mortgage-backed security (MBS). 4. Investors purchase shares of the MBS. 5. Money received from investors is used to purchase additional loans.

Installment Sales Contracts

A contractual agreement in which the buyer pays the seller the purchase price over time in a series of installments until the buyer has paid the contract in full, and the seller turns over the deed to the buyer There are times when a seller will offer financing to the buyer, often because the buyer can't qualify for traditional financing, but sometimes because the seller would prefer to receive the proceeds from the sale over time rather than in one lump sum. The seller retains the deed until the full amount is paid; this is the seller's assurance that the buyer will pay (because if not, the seller retains ownership).

Refinancing & Equity-Related Loan Types: Home equity loan

A loan from the equity of a home. If the property is owned free and clear, the home equity loan is a first mortgage. If not, it's a second or junior mortgage. Rates on home equity loans tend to be higher than conventional loans, and their term rates shorter.

Residential Loan Types: Fixed-rate loan

A loan where the principal and interest payment remains the same over the life of the loan.

Residential Loan Types: Adjustable rate mortgage (ARM )

A loan where the rate is adjusted, usually annually, based on the behavior of the economic index with which it's associated (e.g., the consumer price index). The margin is the number of percentage points added to the index to determine the rate and is constant throughout the life of the mortgage; the index value is the variable. If the index is 5% and the margin is 2%, the fully indexed rate is 7%. If the index is 8%, the margin is still 2%, so the indexed rate is 10%. An adjustable rate mortgage with a lifetime cap has a maximum rate that may be charged at any point over the life of the mortgage. So if an ARM has an interest rate of 5% and a lifetime cap of 7%, the maximum that may be charged is 12%. Lifetime caps are part of the mortgage's interest cap structure, which includes an initial, periodic, and lifetime cap. The initial cap is the value that limits the amount that interest can adjust at the mortgage's first interest rate adjustment. The period cap (or periodic cap) limits the amount the rate can adjust at subsequent adjustment dates. An adjustable rate loan is typically an amortized loan.

Short-Term Loan Types: Balloon loan

A loan with a lump sum payment, usually at the end of a loan period. The balloon loan may be paid as an interest- only loan for a period of time and then be paid off all at once. It may also be a partially amortized loan, in which case it's paid off through a series of amortized payments with a balloon payment at the end of the term. For example, a lender may agree to amortize the loan over a 30-year period with a balloon payment at the end of 10 years. This equates to lower monthly payments, but borrowers must be able to pay off the entire loan at the end of 10 years.

Commercial: Package mortgage

A mortgage in which personal property is included with the real property in the sale. This might be used in the case of a furnished condominium, for instance, but it's more commonly used in commercial real estate where business assets are included as collateral.

Residential Loan Types: Renegotiable rate

A mortgage loan alternative that allows the interest rate to be renegotiated periodically. The loan can be either long-term with periodic adjustments or short-term with more frequent rate adjustments.

Roy and Alyssa's mortgage calls for regular PITI payments for three years and then a lump sum payment at the end of the three-year period. What kind of mortgage loan do they have?

A partially amortized (balloon) mortgage. A different twist would be if Roy and Alyssa were making interest-only payments and then made a lump sum payment at the end of a period of time. This would still be a balloon loan, but it wouldn't be partially amortizing because they'd made no payments toward principal.

Residential Loan Types: Graduated payment

A payment that gradually adjusts (usually upward) based on a pre-determined schedule and amount. The initial payments are less than what would be a fully amortizing payment, which creates negative amortization. This type of payment plan can make payments easier in the beginning when income is often lower.

Refinancing & Equity-Related Loan Types: Reverse mortgage

Also called a reverse annuity mortgage, this is designed for those who want to use the equity in their homes to stay in their homes. With a reverse mortgage, the lender makes payments to the homeowner for a specified period of time and gains corresponding ownership.

Refinancing & Equity-Related Loan Types: Land contract

Also known as a contract for deed, land installment contract, or installment sale agreement, this is a contract between a seller and buyer in which the seller acts as the lender for the buyer, who purchases the property for an agreed-upon price. Just as with a traditional lender, the buyer makes installment payments to the seller, who retains the title to the property while the buyer gets the right of possession. Often, there's both a down payment, and at the end of the contract, a balloon payment. When the loan balance is paid in full, the seller gives the buyer title.

Match the type of mortgage with its description. Debt is paid off by making periodic payments toward both principal and interest.

Amortized

Why an ARM Changes

An adjustable rate mortgage (ARM) originates at a specific interest rate, but that rate fluctuates during the loan's term, based on a specific economic indicator (such as the index of the London Interbank Offered Rate [LIBOR] or the U.S. Treasury Rate). The interest rate changes mean the mortgage payments also fluctuate accordingly. Keep in mind that the lender has nothing to do with the rate itself. The lender may set an introductory rate as outlined below, and will set the terms of the mortgage including when the rate adjusts. But the rate itself is tied to the broader economic indicator.

Insurance companies,

An example is Nationwide, also finance mortgage loans.

Borrower-Requested Termination

Borrowers may request that lenders terminate PMI when the principal balance on the loan is scheduled to reach 80% of the home's original value. Borrowers must be current on payments and have a good payment history; they must request the termination in writing and may be required to prove that no junior liens on the property exist. Borrowers may have to provide evidence, such as an appraisal, that the property value meets an 80% LTV. This process can take several years, of course, because payments are primarily interest in the beginning. If the market is appreciating, however, or if borrowers have made substantial improvements to the property, they may reach this point earlier in their loan term.

How Installment Contracts Work- Installment Sales Contract

Buyers will contract to pay the seller the purchase price over time in a series of installments. As the buyer pays these installments over time, the buyer begins to pay off the property. Once the buyer's paid off the contract, the seller turns over the deed to the buyer. This type of sale is called an installment sales contract or an installment land contract (the terms are used interchangeably). During this process, the seller retains legal title of the property (ownership interest enforceable by law, including the right to transfer the property) while the buyer is said to have equitable title (financial or "equitable" interest, which is the right to use and enjoy the property and to obtain legal title).

Federal agencies don't participate in insuring or guaranteeing the loan

Conventional Loan

Underwriting Process

Loans go through thisprocess no matter which lender is used, because lenders aren't going to dole out thousands upon thousands of dollars without getting to know you first. Underwriting is a complex process and varies depending on whether the originator intends to sell the loan, but in simple terms, underwriting is the process used to decide if a particular loan is likely to be repaid. The first computerized underwriting system was introduced in 1999, and other systems have been introduced since then. Even with these automated underwriting systems, the underwriting process still boils down to human evaluation (imagine that!) of a borrower's potenti

Refinancing & Equity-Related Loan Types: Home Equity Line of Credit

Often called a HELOC, this loan isn't used for a home's primary financing, but is based on the equity in a home. Borrowers typically use HELOC for major purchases such as vacations, tuition, or home repairs or upgrades. The entire credit line may or may not be disbursed up front. Borrowers use what they need at a given time. Most HELOCS require a monthly interest-only payment. The balance may be paid back over time or as a lump sum (balloon payment) by the end of the term.

Government Sponsored Enterprises (GSEs)

Organizations created by the federal government (Fannie Mae, Freddie Mac, Farmer Mac, Ginnie Mae) to help increase loan opportunities for homebuyers.

PMI Termination

PMI may terminate automatically or at the borrower's request under certain circumstances.

Conventional Loans and Private Mortgage Insurance

PMI protects the portion of a mortgage loan not covered by the down payment. It shields the lender if foreclosure becomes necessary. Lenders figure that if borrowers have more of their own money at stake, they're less likely to default. In addition, the higher the down payment, the less the lender has to get out of the property at a foreclosure sale in order to break even.

Which method is when lenders sells the flow of principal and interest to investors

Packaging and selling loans

In which market do lenders that originate real estate loans operate?

Primary mortgage market

Secondary Mortgage Market

Private mortgage market lenders may retain and service loans for the life of the loan term, or sell them to this mortgage. A market for the purchase and sale of existing mortgages, designed to provide greater liquidity for mortgages; also called the secondary money market.

Institutions that purchase loans, package them into mortgage-backed securities, then sell these to investors may commonly be referred to as ______.

Secondary market players

Owner Financed: Purchase money mortgage

Seller financing in which a mortgage is given by the buyer to the seller toward the purchase price. Buyers use this as down payment financing. The seller is the mortgagee and the buyer is the mortgagor. The purchase money mortgage may be a first mortgage, a junior mortgage, or a junior wrap-around (explained below) mortgage.

What attracts someone to the potential ups and downs of an ARM?

Sometimes, an ARM offers an interest rate that is, for a certain period of time (typically from three to 10 years), lower than that of a fixed-rate loan. However, as soon as that initial time period has passed, the ARM adjusts to its fully indexed rate (the margin plus the index). The mortgage note will contain the applicable details regarding how and when, and most importantly to many people, how much the interest rate will change. Most ARMs include a feature that allows borrowers to convert the loan to a fixed-rate loan during a specific period of the mortgage. This is known as a convertible feature.

Short-Term Loan Types: Construction mortgage

Temporary financing for construction purposes. The developer submits plans for a proposed project, and the lender makes a loan based on the property appraisal value and the construction plans. The entire loan isn't given at once; disbursements are made at intervals as phases of construction are completed. Upon completion, the lender makes a final inspection, closes the construction loan, and converts the loan into permanent, long-term financing. Construction loans involve risk for the lender (they are essentially loaning on land, air, and a promise to build) and usually come with a higher rate.

Automatic Termination

The PMI Act of 1998-the Homeowner's Protection Act-requires lenders of loans created after 1998 to automatically cancel PMI when the borrower's equity is scheduled to reach 22% (an LTV of 78%), based on the original value (the lower of the purchase price or appraised value). Borrowers must be current on payments for this to occur.

Investment Groups

They lend specifically to people who want to avoid conventional financing-such as other investors.

Mortgage brokers

They work with multiple lenders to search for and negotiate the best deal for a particular borrower's circumstances. They don't loan the money out themselves, so they're not tied to a specific suite of loan products.

Residential Loan Types: Low documentation (low-doc )

This type of loan is designed for the self-employed or those paid on commission. A high credit score and slightly higher interest rates are characteristic of these types of loans. Since 2008, the standards for mortgage qualifying have become stringent to the point that low-doc loans are now rarely available.

Balloon loans can be paid as interest-only or partially amortized until the final balloon payment is due. (T/F)

True

In a reverse mortgage, the lender makes payments to the homeowner and slowly gains ownership. (T/F)

True

Often, an ARM will have a below-market rate for the loan's first year. (T/F)

True

Commercial: Blanket mortgage

Used in commercial applications. Two or more properties are pledged as security for loan repayment. A release clause allows parcels to be removed from the lien, usually when the loan balance lowers to a specified amount.

Refinancing & Equity-Related Loan Types: Blended rate loan

Usually applies during refinancing. Lender charges less than the prevailing interest rate, but more than the original interest rate. Typically used if current interest rates are higher than original rates. Benefits lender by raising the return on older loans, and benefits the borrower by allowing them to refinance and potentially take cash out while maintaining a lower interest rate than the current market provides. Some lenders will use a blended rate option for buyers assuming a previous loan. Blended loans are available on FHA, VA, and some conventional loans.

A seller will traditionally allow an installment sales contract to avoid paying

federal capital gains tax all at once; instead, it's paid through percentage payments from annual installment sale proceeds. One strong disadvantage to this type of arrangement for the buyer is that the buyer doesn't have ownership in the property until it's completely paid off. With a traditional mortgage, if you pay on it over time, even if you can no longer make your payments, you can usually sell it for a profit, or at least a return of your equity. Not so with an installment sales contract: The seller may receive many thousands of dollars-even hundreds of thousands of dollars-from a buyer, and if the buyer becomes unable to make payments, the seller can keep all of the proceeds received up until that point and repossess the property. State laws may restrict the ways this type of seller financing is used due to the potential for abuse.