Real Estate Finance Ch7.
Using standard Fannie Mae/Freddie Mac qualifying ratios of 28/36, a couple with a combined annual income of $80,000.00 would be allowed what total amount to cover all housing expense plus long term debt?
$80,000.00 ÷ 12 = $6,666.67 × 36% = $2,400.00.
Balloon Payment
A final payment of a mortgage loan that is considerably larger than the required periodic payments because the loan amount was not fully amortized.
Buydown
A financing technique used to reduce the monthly payments for the first few years of a loan. Funds in the form of discount points are given to the lender by the builder or seller to buy down or lower the effective interest rate paid by the buyer, thus reducing the monthly payments for a set time.
Lease Option
A lease under which the tenant has the right to purchase the property either during the lease term or at the end.
Streamlined Modification Program ( SMP)
A loan modification program initiated in 2008 for at-risk borrowers with Fannie Mae and Freddie Mac loans.
Interest-Only Loans
A loan that only requires the payment of interest for a stated period of time with the principal due at the end of the term.
Reverse Annuity Mortgage (RAM)
A loan under which the homeowner recipes payments based on the accumulated equity; payment may be monthly, a lump sum, or established as a line-of-credit. The loan must be repaid at a prearranged date, upon the death of the owner, or upon the sale of the property. The FHA reverse mortgage is called a Home Equity Conversion Mortgage (HECM)
Fixed-Rate Loan
A loan where the interest rate stays constant for the life of the loan.
Adjustable-Rate Mortgage (ARM)
A mortgage loan that has an interest rate that is changed (adjusted) periodically based upon an index agreed to between a borrower and a lender.
Blanket Mortgage (Portfolio Loan)
A mortgage secured by pledging more than one property as collateral.
Point
A percentage of the principal loan amount charged by the lender. Each point is equal to 1% of the loan amount.
Package Mortgage
A real estate loan used to finance the purchase of both real property and personal property, such as in the purchase of a new home that includes carpeting, windows coverings, and major appliances.
Completion Bond
A security bond posted by a landowner or developer to guarantee that a proposed development will be completed according to specifications, free and clear of all mechanics' liens.
Homeowners Insurance
A standardized package insurance policy that covers a residential real estate liability, and other common risks.
Draws
A system of payments made by a lender to a contractor as designated stages of a building's construction are completed.
Home Equity Line of Credit (HELOC)
A version of a home equity loan where the borrower can draw down from an established line-of-credit amount, only paying interest on the amount of funds withdrawn.
Internal Revenue Code Section 1031
Allows recognition of gain of tax purposes to be postponed by exchanging like kind income-producing properties.
Margin
Each lender adds a margin percentage rate to the index at every adjustment period to derive the new note rate. the margin rate may not change throughout the life of the loan.
Impound Funds/escrow funds
Funds collected by the lender along with mortgage payment to pay for property taxes and homeowners insurance.
Escrow Funds
Funds collected by the lender to pay property taxes and homeowners insurance; also called Impound Funds in some states.
I = P × R × T
I: Interest P: Principal R: Rate T: Time Simple Interest
Simple Interest
I=PRT I: Interest P: Principal R: Rate T: Time
Qualifying Rate
If the initial loan rate is is low but is expected to increase in the near future, the borrower may not be able to make the higher payments. lenders ma require a borrower making less than 20% down payment to qualify at the maximum second-year rate.
The owner of a 15-acre parcel of land, a local real estate developer, the owner of a construction company, and the president of a savings association are making plans for a new shopping center to be located near the edge of town. They are MOST likely entering into a
In a joint venture, each party brings individual expertise to a specific project.
An individual has agreed to buy a farmhouse for $60,000.00. He will pay $500.00 per month rent for one year with a credit back to him of $200.00 per month, payable at time of settlement on the property. The buyer and the seller Have executed
In a leas-purchase, financial negotiations are often entered into prior to the final settlement.
Hazard Insurance
Insurance that only covers physical hazards to the property.
Subprime Lenders
Lenders specializing in loans for less than credit-worthy borrowers; blamed for much of the financial crisis starting in 2007 due to adjustable-rate loans that borrowers were not able to make payments on when the ARM reset after two or three years.
Negative Amortization
Less than Interest-Only loan payments, which cause the balance of a loan to increase by the amount of the deficient interest.
Boot
Money or property given to make up any difference in value or equity between two properties in a 1031 exchange.
Private Mortgage Insurance (PMI)
Mortgage insurance issued by companies not associated with the federal government.
Traditionally, the MOST popular type of mortgage loan is?
Most people like the security of a Fixed-Rate Loan and the lower monthly payment of a 30-year loan compared to a 15-year loan.
A couple is purchasing a $300,000 home. In order to avoid paying private mortgage insurance, they have opted for an 80/15/5 split loan. Their second mortgage will be in the amount of.
On the 80/15/5 split loan, the first mortgage will be $240,000.00, second mortgage $45,000.00, and down payment of $15,000.00.
Manufactured Housing
Prefabricated homes built in a factory and transported to a lot for installation.
Ad Valorem
Property taxed according to its value.
Initial Rate
Sometimes called the teaser rate, it will always be below the market rate in order to attract borrowers to this type of loan.
Note Rate
The calculated rate is the adjusted rate (index plus margin), imposed from time to time at the adjustment period.
Stop Date
The date on which the entire principal balance on a term loan must be paid.
An individual is selling her home to a young couple. The couple has agreed to pay her $10,000.00 as down payment. They will also pay her a total of $6,000.00 per year at 8% interest for ten years. The young couple and the seller have transacted which of the following?
The installment sale may provide a tax advantage for the individual.
Funds are dispersed on a construction loan
The lender disperses funds as the work is completed to protect the lender's interest.
Interest Rate Factor
The number of dollars it takes to pay down $1,00.00 of a loan based on the interest rate and term of the loan.
Predatory Lending
The practice of charging excessive interest rates and fees to unsuspecting borrowers.
Lease Purchase
The purchase of real property, the consummation of which is preceded by a lease, usually long-term, that is typically done for tax or financing purposes.
Loan-To-Value (LTV) ratio
The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral.
Right of First Refusal
The right of a person to have the first opportunity to either purchase or lease a specific parcel of real property.
Amortization
The systematic repayment of a loan by periodic installments of principal and interest over the entire term of the loan agreement.
Adjustment Periods
This indicates the frequency of interest rate adjustments with concomitant payments.
Which condition is NOT required in an Internal Revenue Code Section 1031 exchange? a) Properties exchanged must be held for productive use in a trade or business. b) Properties exchanged must be of like kind. c) Properties exchanged must be of equal value. d) Properties must actually be exchanged.
Under IRS Section 1031, equal value is not necessary, but equities in the property must be balanced.
Split Loan/Piggy-back loan
When a second mortgage is taken out in order to avoid private mortgage insurance.
Piggy - Back Loan/Split Loan
When the borrower takes out a first and second mortgage simultaneously in order to avoid private mortgage insurance (there is no PMI as long as the first mortgage is 80% or less).
Current legislation requires that private mortgage insurance be automatically dropped when the equity position reaches what percentage of the property's original value?
When the equity reaches 22% of the original value, the PMI must be droped.
A subprime lender is one who
is not necessarily predictor but do make it possible for those with poor credit to obtain a mortgage loan, although at a higher - than - market interest rates.
Interest Rate Caps
most variable rate loans include an annual cap applied to the adjusted interest rate. this cap limits interest rate increases or decreases over a stated period of time and varies from lender to lender and ranges from one to two percentage points per year.
Interest rate factor
represents the dollars required to pay off $1,000.00 of a loan for a set number of years on a fully amortized loan that will be paid off at the end of the loan term.
An adjustable-rate mortgage based on a LIBOR index of 4%, with a margin of 2%, note rate of 6%, and initial rate of 3.5% with 2/6 caps, could increase to what rate in a five-year period?
the 2/6 cap limits to 6 the increase over the life of the loan: 3.5 + 6 = 9.5%.
Refinancing is generally worth considering when
the cost of refinancing should be recoverable in two years.
Index
the index is the starting point to adjust borrower's applicable interest rate. lenders must use an index that is readily available to the borrower but beyond the control of the lender.
An elderly couple has lived in their home for more than 30 years. The husband and the wife are both in their 70 and have experienced extremely large medical bills. They desperately need cash. A feasible solution for them could be
the reverse annuity mortgage would provide the couple with income.