Section 6: Financing Real Estate
The consumer works with the lender to select a loan product.
Application
There is usually no cost to the consumer.
Pre-qualification
Protects borrowers from overcharges by requiring certain disclosures and prohibiting kickbacks
Real Estate Settlement Procedures Act (RESPA)
Manuel is selling his home to Selena. He has an existing loan that he'll continue to make payments on, and he's extending credit to Selena for the balance of the purchase price. She will make monthly payments to him. What type of financing are the parties using in this transaction?
Wrap-around loan
A document that conveys an unconditional promise to pay a fixed amount (with or without interest).
negotiable instrument
Sandra retired from a career in the Navy and is ready to buy her first home, a small bungalow in a quiet neighborhood, for $169,900. Her military service gives her the benefit of Veterans Affairs (VA) loan. What's her required down payment?
$0
Divide the mortgage amount by 12 and add this additional amount to the monthly payment.
1/12 plan
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
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
The interest rate fluctuates based on the economic index to which it's tied.
Adjustable-rate mortgage
Debt is paid off by making periodic payments toward both principal and interest.
Amortized
Which of the following is a true statement about FHA financing? -An FHA loan is best for borrowers who have large down payments. -An FHA loan is usually more attractive to borrowers who have lower credit scores and down payments. -FHA loans are available to all borrowers, regardless of credit history. -FHA loans have more stringent requirements than conventional loans do.
An FHA loan is usually more attractive to borrowers who have lower credit scores and down payments.
Pay half the mortgage payment every two weeks instead of once per month.
Bi-weekly plan
Member-based cooperatives that provide credit for loans
Credit unions
This organization provides servicemembers, veterans, and their eligible surviving spouses with a wide range of homebuying services.
Department of Veterans Affairs
Bethany has agreed to purchase Derrick's property using a land contract. Who holds legal title to the property during the term of the loan?
Derrick
T or F: Conventional loans must conform to Fannie Mae and Freddie Mac guidelines.
F
Goldie and Kurt are looking at purchasing their first home. Their credit history is a little shaky and they don't have enough money saved to put down 20%. What type of loan seems most appropriate?
FHA
Lydia put the minimum 3.5% down on her $210,000 home. She'll have to pay an MIP. What type of loan does Lydia have?
FHA
Requires mortgage insurance premium (MIP)
FHA
Which entity services rural development loans?
FSA
FNMA, the Federal National Mortgage Association; a private, for profit corporation that operates under a congressional charter that buys loans in the secondary mortgage market from lenders in the primary mortgage market
Fannie Mae
Farm families financing the purchase of properties in rural areas may be able to obtain financing through this government agency if they meet certain criteria, such as income requirements.
Farm Service Agency
The Federal Home Loan Mortgage Corporation (FHLMC) which increases the availability of financing for conventional mortgages insured by the federal government by purchasing them from lenders in the primary market.
Freddie Mac
A payment that gradually adjusts (usually upward) based on a pre-determined schedule and amount.
Graduated payment
These offer buyers a wide range of homebuying support and assistance at a more local level.
Housing finance agencies
Mortgages generally contain language in which the borrower assures the lender that there are no known or undisclosed encumbrances on the title. Why is it important for the borrower to assure the lender that a title is clear of defects?
It provides a good and marketable title for the lender to sell upon foreclosure.
The buyer has possession of the property, while the seller still holds the title.
Land contract
Disclosure lender gives to the borrower within three days of the borrower applying for a loan; discloses loan terms, estimated interest rate, estimated payment, and estimated closing costs
Loan Estimate
The lender collects documentation from the consumer about income and credit, as well as the property.
Loan processing
This type of loan is designed for the self-employed or those paid on commission
Low documentation (low-doc)
What attracts borrowers to adjustable rate mortgages?
Lower initial interest rate
These allow qualified buyers to claim some of the mortgage interest they paid as a credit on their tax returns.
Mortgage credit certificates
The lender requires documentation from the borrower although no property is yet identified.
Pre-approval
Stipulates that the lender may be owed additional interest if the borrower pays the loan off prior to the full loan period.
Pre-payment penalty
The lender performs no verification of information the consumer provided.
Pre-qualification
A mortgage loan alternative that allows the interest rate to be renegotiated periodically
Renegotiable rate
Associations that accept savings deposits and offer loans
Savings and loan associations
Diana works for an organization that accepts savings deposits and then loans the funds out through mortgage and other types of loans. She must keep commercial lending under 20%. What type of lender does Diana work for?
Savings and loans
T or F: Conventional loans can vary in length and terms.
T
T or F: Originators of conventional loans often package and sell groups of loans on the secondary mortgage market.
T
T or F: Originators of conventional loans usually don't service the loans once they've been sold.
T
What would happen if a client's rate lock-in expires two days prior to closing?
The interest rate will revert to the current rates.
What can you recall about Fannie Mae and Freddie Mac? Which three of these are true? -They're government-owned enterprises. -They're publicly traded. -They're government agencies. -They buy mortgages, package them, and resell them as mortgage-backed securities. -They act as a link between banks, the government, and Wall Street
They're publicly traded. They buy mortgages, package them, and resell them as mortgage-backed securities. They act as a link between banks, the government, and Wall Street
What's the purpose of PMI?
To protect the lender in case of borrower default when the borrower has put down less than 20%
This program provides funding to low- and moderate-income families living in eligible rural areas.
USDA Rural Development Program
Which of the following best describes a home equity line of credit? -A loan in which the lender makes payments to the homeowner for a specified period of time and gains equivalent ownership -A temporary (usually 90-day) loan that provides funds in addition to an existing loan until permanent financing can be obtained -Funds received in one lump sum and frequently used for home renovations, to fund a college education, or for other major purchases -Used as an open-end account similar to the revolving credit of a credit card from which borrowers can take advances, repay money, and even borrow money again
Used as an open-end account similar to the revolving credit of a credit card from which borrowers can take advances, repay money, and even borrow money again
Can be obtained for 0% down payment
VA
Charles is selling his property to Seth. Charles is financing part of the transaction for Seth, who will make payments to Charles while Charles retains the property title. What is this an example of?
a land contract
Permits the lender to make the loan immediately due and payable if a borrower defaults.
acceleration
Allows a lender to demand immediate and full payment of all debt owed if a buyer defaults or fails to meet certain conditions that apply to the loan
acceleration clause
A mortgage with a rate that adjusts based on changes in a market index
adjustable-rate mortgage (ARM)
A provision in a mortgage that requires the loan to be paid in full by the mortgagor if a transfer of ownership takes place. This is also called a due-on-sale clause.
alienation clause
Information the consumer provides will be validated during loan processing.
application
An estimate of value as of a specific date and for a specific use
appraisal
A one-time payment, usually occurring at or near the end of a loan term, which is larger than all the other payment amounts
balloon payment
A loan in which two or more properties are pledged as collateral
blanket loan/mortgage
Backed by a promissory note
both
A temporary loan used to cover the interval between two transactions.
bridge loan
A financing technique in which the buyer obtains a lower interest rate by buying down the interest rate at the time the loan is made
buydown
Interim financing for developing land. The contract allows for disbursements of funds at specific stages of construction.
construction loan/mortgage
May require PMI for down payments less than 20 to 25%
conventional
A primary mortgage loan that is not guaranteed or insured by any government agency; can be conforming or non-conforming to Fannie Mae/Freddie Mac guidelines
conventional loan/mortgage
In an amortized mortgage, the monthly payment is the same each month. The part used to pay the principal increases each month, while the amount going toward interest ______.
decreases
Involves three parties: the borrower, lender, and trustee
deed of trust
Instructs the lender to cancel a security instrument upon full payment of a loan
defeasance clause
A material adverse condition of a property
defect
Type of prepaid interest that borrowers pay to lower a loan's interest rate
discount point
A fee charged by the lender to give the borrower a lower interest rate
discount points
Points a lender charges at closing; buyers sometimes opt to pay points to get a lower rate or to buy down the interest rate
discount points
Requires borrower to repay the loan when transferring ownership.
due-on-sale
A loan where the principal and interest payment remains the same over the life of the loan
fixed-rate loan
Private companies such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, created by the U.S. Congress to make borrowing easier and more cost effective
government-sponsored enterprises (GSEs)
These aren't repaid if the buyer meets certain requirements, such as owning and living in the home for a specific length of time.
grants
A fixed-rate mortgage in which the monthly payments increase over time according to a set schedule
growing equity mortgage
An open line of credit based on the available equity in the borrower's home
home equity line of credit (HELOC)
A loan in which the borrower's home equity is used as collateral
home equity loan
Companies that finance mortgage loans, but specialize in insurance products
insurance companies
The amount charged for use of the money
interest
The borrower only pays the interest on the loan for a set number of years—usually between five and seven
interest-only
Hank works for an organization that lends specifically to investors who want to avoid conventional financing. What type of lender does Hank work for?
investment group
A fee charged by the lender to cover the cost of processing the loan
loan origination fee
The ratio of a loan amount to the value of the property being purchased
loan-to-value ratio (LTV)
Put a portion of any bonuses, tax returns, or other extra money toward the mortgage.
lump sum plan
A title that is reasonably free and clear of encumbrances so that the average buyer would not hesitate to consummate a sale
marketable title
Involves two parties: the borrower and lender
mortgage
Mortgage insurance is due from borrowers who make a down payment of less than 20% on a home mortgage loan. It's paid by the borrower to protect the lender from losses due to potential default.
mortgage insurance premium (MIP)
A monetary penalty that's imposed on a borrower for paying off a loan before its intended term ends
prepayment penalty
Fee that's charged when a borrower pays a loan off early
prepayment penalty
Where loans are originated; they are sold on the secondary mortgage market
primary mortgage market
An insurance requirement that protects the lender when it approves a loan with more than 75% to 80% of the purchase being financed
private mortgage insurance (PMI)
essentially a promise from the borrower (the obligor) to repay a certain sum of money to another party (the lender or holder of the note, known as the obligee) under specified terms
promissory note
A form of seller financing in which a loan is given to the buyer from the seller; the buyer puts the money toward the purchase price in the form of a down payment
purchase money mortgage
The securing of a given interest rate for a specified period of time between a borrower and a lender.
rate lock
With a reverse mortgage, the lender makes payments to the homeowner for a specified period of time, and gains corresponding equity.
reverse annuity mortgage
The market for loans sold by the primary market; a secondary lender will service the loan for the consumer
secondary mortgage market
These tend to have low or zero interest rates, and the payments are deferred.
silent second
When another bill is paid off, add that amount to the mortgage payment.
snowball
All of the information about the property and borrower is analyzed, and a recommendation is made.
underwriting