AZ - Residential and Commercial Financing

Name That Mortgage! 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.

Related to real estate financing, how much is a point?

1% of loan value

Common Mortgage Loan Options Let's review some mortgage types. Match the type of mortgage with its description. 1) The interest rate fluctuates based on the economic index to which it's tied. 2) Debt is paid off by making periodic payments toward both principal and interest. 3) The buyer has possession of the property, while the seller still holds the title.

1) Adjustable-rate mortgage 2) Amortized 3) Land contract

Loan-Related Documents A few documents change hands during the loan approval process. Which party completes which documents? 1) Loan application 2) Loan Estimate 3) Closing Disclosure

1) Borrower 2) Lender 3) Lender Although buyer's agents aren't directly involved in the loan approval process, they are required to keep the seller and seller's agent informed of the buyer's loan approval status. This is a material fact to the transaction.

Rural Development Loan Facts Based on the information about rural development loans, are these statements fact or fiction? 1) The Farm Service Agency administers rural development loan programs. 2) These government loans are available to family farms and housing in rural areas. 3) Borrowers can receive loans for no more than 96.5% of the purchase price. 4) Loans can be set for a period of 33 years (38 years for very low income individuals).

1) fact 2) fact 3) Fiction 4) fact

Which of the following is the credit score range?

300 and 850

Equal Credit Opportunity Act (ECOA)

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

Credit score

A number that signifies a borrower's credit risk to lenders

Residential 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.

Conventional loan

A primary mortgage loan that is not guaranteed or insured by any government agency

Conventional loans may be conforming or nonconforming, depending on whether they meet ______ guidelines.

Fannie Mae and Freddie Mac

From a lender's perspective, what does a credit score on the low end indicate?

Higher risk

Payment history, age of accounts, credit usage rate, and inquiries are factors considered in calculating a credit score. Which of the following is also considered?

Length of credit history

Transaction Details Look at the resource. What two types of information about the transaction are included in the application?

Loan amount Intended Occupancy

Information about which of the following is included in the Uniform Residential Loan Application?

Mortgage type

Which occupancy type is eligible for a VA loan?

Owner-occupied

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

What information about the property is included in the Uniform Residential Loan Application?

Property value

Real Estate Settlement Procedures Act (RESPA)

Protects borrowers from overcharges by requiring disclosure and prohibiting kickbacks

What type of arrangement allows the buyer to retain title to the property, but places a security interest in the property on behalf of the seller?

Purchase money mortgage

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.

Loan origination fee

The cost of making the loan; on a conventional loan, this refers to the amount of points the borrower pays

Residential 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.

Conventional or FHA? Do the following statements apply to conventional or FHA loans? 1) These loans are generally more secure because borrowers put more money down. 2) A borrower who puts down less than 20% of the loan amount may have to purchase PMI. 3) Borrowers with credit issues may still qualify for this type of loan. 4) Monthly payments are typically higher with this kind of loan.

1) Conventional 2) Conventional 3) FHA 4) FHA

Matching a Borrower to a Loan Not every buyer will want to use an FHA-insured loan, and not every buyer is eligible for a VA loan. For many buyers, the conventional loan is the best choice. Sort these borrowers to match them with the loan that best suits them. 1) Sally has reasonably good credit but only $2,000 to put toward a down payment. She has no connection to the military. 2) Stan, who's never been in the military, is selling his current home and has enough equity to make a sizable down payment on his next purchase. 3) Nicholas was dishonorably discharged from the Marines, and he has some credit issues, but he's got a good job now with a steady income. 4) Gertrude is in the Air Force, and she and her husband want to buy a home. They've got good credit, though they haven't yet saved much money.

1) FHA-insured loan 2) Conventional loan 3) FHA-insured loan 4) VA-guaranteed loan

Leverage Truths Now that you have some understanding of how leverage ratios are used to evaluate a company's value based on the debt carried, which of the following statements are true or false? 1) Martin Enterprises has a debt-to-asset ratio of 18%. Filmore Industries has a debt-to-asset ratio of 6%. Filmore Industries is a lower borrowed funds-dependent company. 2) Financial leverage ratios use the balance sheet, income statement, and cash flow statement to determine the percentage of debt used for business operation.

1) true 2) true

Financing Features Indicate whether the following statements about various financing methods are true or false. 1) In a reverse mortgage, the lender makes payments to the homeowner and slowly gains ownership. 2) Balloon loans can be paid as interest-only or partially amortized until the final balloon payment is due. 3) Bridge loans, which are also called swing loans, are typically for a long term.

1) true 2) true 3) false

Basis point

1/100th (or 0.01%) of a percentage point; often used in commercial financing

Buydown

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

Blanket mortgage

A loan in which two or more properties are pledged as collateral

What is a triggering term?

A word or phrase that, when used in advertising, requires the disclosure of all of the terms of a loan

Refinancing & Equity-Related 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 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.

Private mortgage insurance (PMI)

An insurance requirement that protects the lender when it approves a loan with more than 75% to 80% of the purchase being financed

Residential 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.

_______ are part of the loan-approval process and are responsible for completing a loan application and supplying supporting documentation.

Buyers

Loan Estimate

Disclosure a lender gives to the borrower within three days of the borrower applying for a loan; discloses loan terms, interest rate, and estimated payment

What's Included? Look at the resource. What three types of personal information about the borrower are included in the application?

Employment Income Assets

How is Regulation B related to the Equal Credit Opportunity Act?

Enforcement

Which of the following, once completed, initiates the loan process?

Loan application

What is the borrower charged for all FHA loans?

Mortgage insurance premium

What's Included? Look at the resource. What two types of information about the property are included in the application?

Occupancy Property address

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.

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.

Refinancing & Equity-Related Home Equity Line of Credit (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.

Residential Adjustable Rate Mortgage (ARM)

a mortgage with an interest rate that increases or decreases during the life of the loan

Yield-maintenance prepayment penalty

Premium charged by a lender that allows the lender to make as much or roughly as much as it would've made had the borrower seen the loan to maturity

What Kind of Loan Is It? 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.

PMI and MIP The acronyms are similar, and so are the products, but mixing them up when speaking with clients can make you appear unprofessional. Let's make sure you have them straight. Select the three items associated with private mortgage insurance.

* Associated with conventional loans * Paid until equity reaches 22% * Only required for some borrowers

What Type of Mortgage? Builder Moira has pledged all of the townhouses she's building as security for repayment of her loan. When one of the townhouses sells, there's a release clause that lets that townhouse be removed from the developer's loan without initiating a due-on-sale clause. What type of mortgage is this?

* Blanket mortgage Blanket mortgages are great for developers who buy land and divide it into smaller parcels, which is what happens with townhouses, condos, and apartment buildings.

Who's Involved? Several parties are involved in the loan approval process. Who are four of the major players in a typical financing arrangement?

* Borrower * Lender * Settlement agent * Underwriter The seller generally isn't involved in the loan approval process, unless it's a seller financing situation, which isn't common. The real estate agent isn't part of the actual lending process.

MIP and PMI Select the three items associated with a mortgage insurance premium.

* Required for all borrowers * Associated with FHA * Paid until the entire loan is paid off

VA Loan Eligibility The U.S. Department of Veterans Affairs' website outlines eligibility requirements for home loans. Take a look at the resource to read about eligibility. What three items are required to be eligible for a VA-guaranteed loan?

* Suitable credit * Sufficient income * Valid certificate of eligibility The VA won't just guarantee loans to anyone serving or who has served. There must be additional support in terms of credit and income flow. Basically, there still needs to be evidence of creditworthiness.

Facts About VA Loans VA loans can be common, depending on the location. Identify whether the following statements about VA loans are fact or fiction. 1) The U.S. Department of Veterans Affairs insures the loans. 2) The U.S. Department of Veterans Affairs guarantees the loans. 3) The borrower must be an eligible veteran, active duty military, or surviving spouse and must qualify for the loan. 4) Borrowers are not required to have a down payment. 5) Veterans can use VA loans for investment properties. 6) The loan amount may be for 100% of the CRV (VA appraisal) or 100% of the home sale price, whichever is less.

1) Fiction 2) fact 3) fact 4) fact 5) Fiction 6) fact

Pinpoint the Finance Methods The list of possible mortgage options seems to be never-ending, which is great for clients but can be a bit of a headache for real estate professionals to keep track of. Let's jog your memory by looking at a few relevant financing methods. Match the type of mortgage with its description. 1) Charges 1 to 10 points, which may be added to the loan or due at closing 2) Tougher to sell on the secondary market and more difficult for consumers to qualify for than conforming loans 3) Borrowers may take cash out up to the maximum credit amount and, as the balance is paid back, draw again up to the same limit 4) Buyer takes over the seller's loan payment upon loan qualification by lender

1) Hard money loan 2) Jumbo loan 3) Open-end loan 4) Assumption loan

Positive or Negative Effect Listed here are different activities. Based on what you've learned about credit scores so far, would these actions have a positive or negative effect on the score? 1) Missed payments 2) Short credit history 3) Maxed-out credit accounts 4) Lengthy credit history 5) On-time payment history 6) Credit accounts with low or no balances

1) Negative 2) Negative 3) Negative 4) Positive 5) Positive 6) Positive

What Does the ECOA Allow? Identify whether each of the following actions is allowed or not allowed under the Equal Credit Opportunity Act. 1) Joe applied for a mortgage loan and was charged a higher interest rate because he receives public assistance. 2) Darlene applied for a mortgage loan and was asked if she would be relying on her spouse's income to repay the debt. 3) Ruth's lender refused to consider her alimony and child support payments as income. 4) Manuel was denied a mortgage loan and not provided a reason for the rejection. 5) Alessandra is 16 and was denied credit because she is too young.

1) Not allowed 2) Allowed 3) Not allowed 4) Not allowed 5) Allowed

The Steps to Loan Approval The loan approval process consists of several steps. A few (but not all) of the steps are listed below. Can you match the tasks with the step in the process? 1) Borrower completes loan application 2) Underwriter evaluates loan application and appraisal for approval 3) Lender arranges property appraisal 4) Settlement agent receives loan documents to be signed at closing 5) Closing department or company prepares closing documents 6) Lender assembles loan application and documentation

1) One 2) Five 3) Four 4) Nine 5) Eight 6) Three In addition to receiving the loan-related documents to be signed at closing, the settlement agent also performs actions related to the title and prepares the Closing Disclosure for both the buyer and seller to review prior to closing.

Describing the FHA Loan Program Are you clear on the basics of the FHA loan program? Let's find out. Identify which of these statements are true, and which are false. 1) Borrowers apply to the FHA for a mortgage loan. 2) The FHA covers the lender against loss if the borrower defaults. 3) The FHA collects a mortgage insurance premium on each loan. 4) It's harder for borrowers to qualify for an FHA loan than for a conventional loan. 5) FHA loans are only available from FHA-approved lenders.

1) false 2) true 3) true 4) false 5) true

TRID: TILA-RESPA Integrated Disclosures New integrated mortgage loan information and disclosure forms were introduced in late 2015. Which of the following statements about TRID—the TILA-RESPA Integrated Disclosures—are true, and which are false? 1) The TRID disclosures aren't required for seller-financed transactions or cash transactions. 2) TRID documents are used for all residential mortgage loans, including home equity lines of credit and dwellings not attached to land. 3) TRID is related only to mortgage loans, so real estate professionals aren't impacted.

1) true 2) false 3) false

Loan Fee Terminology Let's see how familiar you are with the features of loan origination fees and buydowns. Determine whether each statement below is true or false. 1) A buydown is a prepayment of interest at closing to reduce the interest rate, either temporarily or permanently. 2) Mortgage brokers never use loan origination fees. 3) One advantage of a loan origination fee is it helps buyers afford more house than they could otherwise. 4) Lenders charge a loan origination fee up front to receive some immediate compensation on the loan.

1) true 2) false 3) false 4) true

The ECOA Identify whether each of the following statements about the Equal Credit Opportunity Act is true or false. 1) The purpose of the ECOA is to prevent lending discrimination. 2) The FDIC regulates the ECOA. 3) Regulation B specifies that even those with no income and a low credit score must be granted credit if they live in inner-city areas. 4) Consumers who feel they've experienced lending discrimination can file a complaint with HUD. 5) The Department of Justice can file a lawsuit under both the Fair Housing Act and ECOA.

1) true 2) false 3) false 4) true 5) true

Identify the TILA Facts Determine if each statement about Regulation Z or TILA is true or false. 1) The Truth in Lending Act requires disclosure of loan terms and costs. 2) The Truth in Lending Act prohibits lenders from discriminating based on protected class. 3) Regulation Z requires that borrowers of residential loans be given specific information related to the loan. It also regulates advertising of credit terms. 4) Regulation Z requires lenders to demonstrate that they serve the community's low- to moderate-income housing needs.

1) true 2) false 3) true 4) false

Features of an ARM Which of the following statements are true about adjustable-rate mortgages? 1) ARM interest rates can fluctuate with the national economy. 2) Lenders may adjust the rates any time interest rates rise. 3) Often, an ARM will have a below-market rate for the loan's first year.

1) true 2) false 3) true You've ARM-ed yourself with the right information about adjustable-rate mortgages. Borrowers should determine whether an ARM makes sense based on prevailing interest rates, how long they intend to keep the loan, and their risk tolerance.

Convertible mortgage

A commercial mortgage in which the lender retains the option to convert an outstanding loan balance into equity at a stipulated time

Refinancing & Equity-Related 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.

Rural development loan

A loan made for property buyers or developers in rural areas

Residential Fixed Rate Loan

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

Short-Term Balloon Loan

A loan with a lump sum payment, usually at the end of a loan period. The balloon payment on a 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.

VA loan

A mortgage in which the loan is guaranteed by the Department of Veterans Affairs Example Sheena is a former captain in the U.S. Army. She's now a single mom with two kids, and she wants to buy her first family home. She's saved about $5,000, which isn't nearly enough for a down payment on a conventional loan. But when she looks into the VA home loan program, she discovers that it offers her terms she can manage. . * Interest rates are competitive with those available through conventional financing, and are set by the lender (not the VA). * She won't have to pay private mortgage insurance (PMI), even though her LTV ratio would be much higher the 80/20 rule most conventional lenders set. * Her closing costs will be low, thanks to VA restrictions on borrower-paid closing costs, and she may be allowed to have the seller pay some of her closing costs. * She can pay off the loan early with no penalty. * If she runs into trouble making her payments, the VA might be able provide her with assistance. The VA would certainly try to help her avoid foreclosure through counseling or other types of intervention. * Guarantees the loan for the lender, removing risk related to default * 0% down payment required, though borrower may make a down payment if desired * No limits on loan amounts, but the amount the VA guarantees is limited * Residential properties with between one and four units * Borrowers will usually be required to pay a one-time funding fee * No penalty for prepayment * Available only to eligible active duty military and veterans and their spouses, and widows and widowers who haven't remarried * Borrower must qualify for the loan according to the VA guidelines. * Loan assumption limited to loans after 1988 * Assumable for qualified owner-occupants The VA directly funds loans only for housing for Native Americans living on federal trust land.

Residential 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.

FHA loan

A mortgage loan that's insured by the Federal Housing Administration; allows lower down payments (3.5%) than conventional mortgages

Closing Disclosure

A statement of final loan terms and closing costs, provided to the borrower three days prior to closing

Short-Term 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. A bridge loan is 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 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).

Which loan is a type of gap financing that is used temporarily until the consumer can obtain permanent financing?

Bridge loan

Jimmy owns a vacant piece of land. He plans to build a home on the land and then sell it. What type of loan is he most likely to acquire to finance this project?

Construction

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

Mortgage insurance premium (MIP)

FHA-insured loan version of PMI; all FHA borrowers must pay an MIP because the down payment is only 3.5%

What personal information about the borrower is included in the Uniform Residential Loan Application?

Income

With a straight mortgage, what type of payments are made up until the end of the loan term?

Interest

Which party to the loan approval process is responsible for providing the Loan Estimate?

Lender

The Barbers are looking to purchase a new home for their family of four, but they'll need to be approved for a loan. What document will they need to complete to initiate their loan process?

Loan application

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.

Short-Term 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.

Residential Interest Only Loan

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.

Which of the following factors carries the least weight when calculating a credit score?

Type of accounts

Which party to the loan approval process evaluates the loan application, the supporting documentation and data, and the property appraisal in order to make an approval recommendation?

Underwriter

Commercial Blanket mortgage

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

Refinancing & Equity-Related 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.

Residential Growing Equity Mortgage

fixed-rate mortgage with payments that increase over a specific period. Extra funds are applied to the principal so that the loan is paid off more quickly