Real Estate Finance Pt II - Section 4
Adjustable Rate Loans
Adjustable rate loans (including adjustable rate mortgages [ARMs], variable rate mortgages, and floating rate mortgages) have interest rates that periodically shift according to a specific index. Often an adjustable rate mortgage will be initiated with a fixed interest rate for a period at the beginning of the mortgage's term. After that, the interest rate is regularly shifted in accordance with the particular index. Depending on the index, the interest rate can increase dramatically after the initial fixed-rate period. Lenders will usually offer initial interest rates that are lower than the standard rate for fixed-rate mortgages, making adjustable rate loans an attractive alternative.
Fixed Rate Loans
Fixed rate loans have a set interest rate for the entire term of the mortgage. This is the major advantage of using fixed rate loans. Since the borrower never has to wonder about the loan's interest rate, the borrower can budget for the entire term of the loan.
Home Affordable Refinance Program (HARP)
For homeowners who have mortgages through Fannie Mae or Freddie Mac, this program can help make payments more affordable by lowering interest rates. Borrowers who had originally signed a mortgage with an adjustable rate can convert their mortgage to a fixed rate that will stay the same over time.
Certificate of Eligibility
The Certificate of Eligibility verifies that the borrower is, in fact, allowed to receive a VA loan. To acquire a valid COE, the servicemember or veteran must have been discharged under conditions that were not dishonorable. The following are further conditions for obtaining a COE:
Department of Veterans Affairs
The Department of Veterans Affairs insures loans from qualified lenders for active members and veterans of the armed services. The VA loan program does not require the borrower to put down a down payment or buy mortgage insurance. Like the loans backed by the FHA, the VA will compensate the lender if default should occur on the loan.
Federal Housing Administration Short Refinance for Borrowers with Negative Equity (FHA Short Refinance)
The FHA Short Refinance is available to certain homeowners who may be up to date on payments but who owe more than what the home is worth. Borrowers can have at least 10% of their principal forgiven, and end up with a more affordable FHA-insured mortgage.
Hardest Hit Fund Programs (HHF)
The Hardest Hit Fund Program provides payment assistance to unemployed or underemployed homeowners. It can include principal reduction, the elimination of second liens, and help to transition out of the home to another home that is more affordable.
Home Affordable Foreclosure Alternatives Program (HAFA)
The Home Affordable Foreclosure Alternatives Program provides, by working with several national banks, the opportunity for homeowners to get out of their home and loan responsibilities with a short sale or a deed-in-lieu of foreclosure. Homeowners who use this process also can be eligible for up to $10,000 in relocation assistance.
Home Affordable Unemployment Program (UP)
The Home Affordable Unemployment Program can reduce or suspend mortgage payments for borrowers who are unemployed. Through temporary forbearance of the loan, or reducing the monthly payments to no more than 31% of the monthly income, unemployed borrowers can have a better chance to avoid foreclosure.
Construction Loans
A construction loan is a short-term loan used to finance the construction of a building. Lenders see construction loans as a risky investment for several reasons. The lender is loaning money for something that has yet to be built. The lender must also put a great deal of faith in the builder that is hired to do the construction. Poor construction or falling housing prices can leave a property with less value than the construction loan. To prevent possible disaster, the lender will usually impose some strict conditions. The contractor is usually required to be licensed and the lender will usually demand a detailed description of the construction specifications (blueprints, construction materials, etc). In addition, the lender will commonly require that an appraiser be brought in to do an estimate of the completed building's value. Finally, the borrower will be required to provide a significant down payment. The size of the down payment for a construction loan is normally between 20% and 25% of the total cost of the property purchase and construction. The funds from a construction loan are not immediately disbursed. Instead, the money is paid out in intervals known as "draws." When the draws occur varies from construction loan to construction loan. In some cases, the draws occur when certain stages of construction are completed. In other cases, the draws may only occur when the borrower requests them. The point of the draw system is to ensure that the money is being used responsibly and only for construction of the building. Some lenders will require an inspection be performed before a draw can occur.
Credit Unions
A credit union is a not-for-profit financial institution that provides deposit and lending services similar to those provided by a commercial bank. Additionally, credit unions are owned by their members, all of whom are individuals who have accounts with the credit union. Credit unions market themselves as a community and member-focused alternative to for-profit banks.
What is a Notice of Lis Pendens? A notice alerts the public that the property is the subject of a lawsuit seeking foreclosure The final step of the foreclosure process when the property is sold through an auction A judicial form of foreclosure that does not include the property sale or the statutory redemption period A notice issued by the lender to the borrower demanding full repayment of the loan
A notice alerts the public that the property is the subject of a lawsuit seeking foreclosure
What is foreclosure? A process that in which a lender attempts to repossess a property under a lien established by a mortgage An interest in a property that allows a lender to repossess a property if a loan becomes delinquent All of these are correct A loan secured by the piece of property the loan finances
A process that in which a lender attempts to repossess a property under a lien established by a mortgage
Real Estate Investment Trusts
A real estate investment trust (REIT) is an organization that owns and manages income producing real estate, real estate related assets, or both. Investors purchase stock in an REIT which, in turn, provides a means for individual investors to reap the gains from real estate investment without having to actually own the real estate or real estate-related asset. An organization must meet the following conditions in order to be classified as an REIT: Must be an entity that would normally be classified as a corporation Must be managed by a board of directors or board of trustees The shares must be fully transferable Must have at least 100 shareholders after 1 year as an REIT During the end half of the taxable year, The REIT cannot have more than 50% of its shares held by less than 6 people At least 75% of the REIT's total assets must be invested in real estate assets and cash No more than 25% of the REIT's assets can be non-qualifying securities or stock from taxable REIT subsidiaries At least 75% of the REIT's gross income must come from real estate-related sources (e.g. rents from property or interest from mortgages) Must distribute at least 90% of taxable income to shareholders as dividends
Rural Housing Guaranteed Loan
A rural housing guaranteed loan is a mortgage loan issued by a private lender but insured by the USDA. To be eligible, borrowers must be without housing, but able to afford the mortgage payments and additional fees. Borrowers can have an income of 115% of the median income for the area. This kind of loan does not have a down payment requirement.
A property has appreciated in value by an average of 13% of its original value every year for 18 years. The property was initially purchased for $70,000. What is the current property value? $93,800 $16,450,000 $233,800 $70,000
$233,800
An individual purchases a property for $287,000. The individual builds a $160,000 house on the property. Over the next 10 years, the property is allowed to depreciate a total of $126,000. What is the adjusted tax basis of the property 10 years after it was initially purchased. (Purchase Price + Improvement Value - Total Accumulated Appreciation or Depreciation = Adjusted Tax Basis) $321,000 $1,000 $161,000 $253,000
$321,000
A property generates $144,000 in gross rent every year, but has operating expenses of $87,600 a year. If the capitalization rate is 10%, what is the value of the property?Gross Operating Income - Operating Expenses = Net Operating Income), (Net Operating Income (NOI) / Capitalization Rate = Value) $564 $564,000 $120,000 $56,400
$564,000
A property owner borrows $490,000 at a 12% interest rate. How much interest accumulates in the first year? (Interest Rate = Interest / Principal) $5,880,000 $58,800 $2.44 $4,083,333
$58,800 You would times the amount borrowed by 12% since it's asking only for the FIRST YEAR. The equation given was misleading.
A property owner has a 20-year mortgage that is worth $97,500 with a 7.5% annual interest rate. What does the property owner pay in mortgage payments every month? (Mortgage Payment = Principal x Amortization Factor) (AF = [i x (1+ i)N] / [(1+ i)N - 1]) Where AF is the amortization factor i is the monthly interest (Annual Interest Rate /12 months) N is the number of monthly payments made over the mortgage term (Mortgage Term x 12 Months / Year) $600.66 $9,407.51 $8.25 $784.87
$784.87
A real estate agent receives a commission check for $4,800. If the agent has a 5.75% commission rate, what was the sale price of the house? (Sale Price x Commission Rate [expressed as a decimal] = Commission) $834.78 $27,600 $276 $83,478.26
$83,478.26
A property is sold for $800,000 in a county with a transfer tax millage rate of 12. What is the transfer tax owed by the seller? ([Assessed Value x Millage Rate] / 1000 = Transfer Taxes) $9,600 $9.60 $66,000 $800
$9,600
The Office of Public and Indian Housing Public Housing Programs
-Capital Fund -Public Housing Homeownership Programs -Mixed-Finance Public Housing -Other Public Housing Programs
According to section 86.782 of the Oregon Revised Statutes, within _______________ after the date of the trustee's sale following the foreclosure of a deed of trust, the trustee may rescind the trustee's sale and void the trustee's deed if the beneficiary accepted funds to reinstate the trust deed and obligation. 1 calendar month 10 calendar days 1 business quarter 6 calendar months
10 calendar days
A property owner borrowed $320,000 to build on a piece of land. The owner paid $25,600 in discount points to get an interest rate of 11%. What was the original interest rate? <(Loan Amount x .01) x Number of Points = Cost of Discount Points) (Interest Rate - (Number of Points x 1/8) = Adjusted Interest Rate) 10% 11.12% 26.62% 12%
12%
According to section 312.120 of the Oregon Revised Statutes, how long after a judgement of foreclosure for failure to pay property taxes does an individual have to redeem the property? 5 years 30 days 6 months 2 years
2 years
If the base side of a triangular plot measures 45' and the height line measures 12', what is the area of the plot in square feet? ([b x h] x ½ = A) 1034 square feet 540 square feet 270 square feet 1.8 square feet
270 square feet
According to section 11 of Article IX of the Oregon Constitution, for tax years beginning after July 1, 1997, a property's maximum assessed value shall not increase by more than _________ from the previous tax year. 1% 3% 10% 5%
3%
If a borrower has credit scores above 580, the required down payment on an FHA-backed loan is normally what percent of the value of the property? 5% 1% 3.5% 15%
3.5%
Typically a credit score below the following value will have more difficulty securing a mortgage loan from most financial institutions: 900 1,000 100 680
680
ORVET Home Loans Minimal Limits on Veteran Qualification
A veteran does not have to have entered the military service in Oregon to obtain an ORVET loan. In addition, the veteran is not required to have been discharged from military service into Oregon in order to access this benefit. In this case, the only requirement is that the veteran is buying a home in Oregon and the veteran is intending to occupy that home. There is, also, no minimum amount of time that a veteran must be a resident in Oregon ODVA does not sell ORVET loans to third-party servicers or investors. These kinds of loans are solely serviced by ODVA. Discount points are not offered on ORVET loans. Mortgage insurance is required on first mortgage transactions if the borrower puts down less than a 20% down payment. Mortgage insurance is required in a refinance if the borrower's equity is more than 80% of the value of the property being refinanced. The following are situations in which an ORVET home loan cannot be used: The refinancing of an existing mortgage Financing the purchase of a manufactured home in a rental park or on leased land An ORVET loan can be used to finance the purchase of a combination of a multi-unit manufactured home and the land it is on. Financing the construction of a new home An ORVET loan may be used to pay off a construction loan from another lender. Any kind of financing for a farm Any financing for a rental property A loan from the ODVA must be secured with a single-family dwelling that is also the borrower's primary residence. Furthermore, federal tax laws restrict the ODVA from lending money against any form of income-producing property.
Purchase Loans and Cash-Out Refinance Loans Important Underwriting Criteria Maximum Debt Ratio
A veteran's eligibility for a VA loan is not restricted by their total debt-to-income ratio. A lender is expected to look at a borrower with increased scrutiny if that borrower has a total debt-to-income ratio of more than 41%. In addition, a lender must provide explanation and compensating factors (e.g., minimal consumer debt, excellent long-term credit history, significant liquid assets) if they lend to a borrower with a ratio of greater than 41%.
According to section 306.255 of the Oregon Revised Statutes, county assessors shall provide and make available to taxpayers, upon request, which of the the following pieces of information? A general explanation of the manner in which to appeal the value of property An explanation of the ad valorem property tax system A general explanation of the methods of appraisal All of these
All of these
According to section 308.205 of the Oregon Revised Statutes, real market value in all cases shall be determined by methods and procedures in accordance with rules adopted by the Department of Revenue and in accordance with which of the following? The amount of money that would justly compensate the owner for loss of the property, if the property has no immediate market value The amount a typical buyer would offer that could reasonably be expected by a seller of property All of these are acceptable The amount a typical seller would accept
All of these are acceptable
According to section 86.752 of the Oregon Revised Statutes, a trustee may not foreclose a trust deed by advertisement and sale unless which of the following is true? There is a default by the grantor or other person that owes an obligation, the performance of which is secured by the trust deed All of these are correct The trust deed is recorded in the mortgage records of the counties in which the property described in the deed is situated The grantor has not complied with the terms of any foreclosure avoidance measure upon which the beneficiary and the grantor have agreed
All of these are correct
The Federal Reserve System does not directly control... -inflation. -levels of employment. -national production. -All of these are correct
All of these are correct
Which of the following is a benefit of a sale and leaseback arrangement? The seller/lessee has a good deal of power when negotiating the terms of the lease The seller/lessee retains some control over the property The buyer/lessor acquires ownership of a depreciable asset which already has a tenant All of these are correct
All of these are correct
Which of the following is an area of a real estate brokers job that requires mathematics? Commissions from Property Sales Property Assessment Mortgage Loan Evaluation All of these are correct
All of these are correct
Brief History of the VA
Although the original version of the VA was established in 1930, government support for veterans can be traced back to 1636 when the Plymouth Colony passed a law stating that soldiers disabled in war would be supported by the colony. During the Revolutionary War, in an effort to encourage enlistment, the Continental Congress began providing pensions to disabled soldiers. The next step in federal support for veterans came in 1811 when the first hospital for veterans was authorized by the government. As the 1800s went on, national assistance programs for veterans were expanded to include benefits and pensions for veterans, their widows, and their dependents. In response to the Civil War, individual states set up veterans homes which provided domiciliary care and incidental medical and hospital treatment for any disease or injury, regardless of origin.
According to section 86.774 of the Oregon Revised Statutes, at or before the time the trustee conducts the sale of a property after foreclosure of a deed of trust, the trustee shall file for recording in the official record of the county or counties in which the property described in the deed is situated which of the following affidavits with respect to the notice of sale? An affidavit of publication An affidavit of resumption An affidavit of continuance An affidavit of seizure
An affidavit of publication
Origination Fees
An origination fee, sometimes known as an underwriting fee, is a fee charged by a lender to process a new loan application. This fee is usually between .5% and 1% of the value of the loan. An origination fee is intended to pay for the time and effort that goes into determining if money should be lent to a particular borrower. The inclusion of an origination fee must be included in the loan estimate that the borrower must receive.
Banks
Banks are privately run, for-profit financial institutions that provide a number of services. They are currently the most common source of private funding for real estate transactions.
When faced with foreclosure the borrower can offer to voluntarily deed the property back to the lender. What does the borrower ask for in exchange? A new loan at a reduced interest rate Cancellation of the remaining debt Nothing None of these are correct
Cancellation of the remaining debt
How many payments can a borrower miss before the lender moves to acceleration? 6 Depends on the lender 9 3
Depends on the lender
Discount Points
Discount points are an optional fee that a borrower can pay which reduces the interest rate on a mortgage loan. Each discount point, commonly, decreases the interest rate by 1/8th to 1/4th of a percent. In other words, if a loan has a 7.5% interest rate and the borrower buys 8 discount points that are each worth 1/8th of a percentage point, the interest rate would be dropped to 6.5% (1/8 x 8 = 1). The trade off on discount points is the cost. The standard price of a discount point is 1% of the value of the loan. If the loan from our previous example has a value of $600,000, the borrower would owe $48,000 for those points. The ultimate benefit of discount points is determined by how long a borrower intends to keep a particular loan. There is a "break even" point in time, after which the borrower has saved more money than was spent on the points.
Purchase Loans and Cash-Out Refinance Loans Eligibility Other Beneficiaries
Eligibility for VA-backed loans is also possible for certain U.S. citizens who served in the armed forces of governments allied with the United States in WWII. In addition, individuals who have served as members of particular organizations may be eligible. This includes the following: Public Health Service officers Cadets at the U.S. Military Academy, U.S. Air Force Academy, or U.S. Coast Guard Academy Midshipmen at the United States Naval Academy Officers of the National Oceanic & Atmospheric Administration Merchant seamen who served in WWII
True or False: real estate brokers do not use mathematics in their occupation. False True
False
True or false: there is only one kind of mortgage that can be used to finance real estate transactions. False True
False
A mortgage secured with a deed of trust is foreclosed upon through which process? None of these answers are correct Judicial Foreclosure Foreclosure by Power of Sale Strict Foreclosure
Foreclosure by Power of Sale
Home and Property Disaster Loans
Home and property disaster loans are low-interest, long-term loans offered by the U.S. Small Business Administration (SBA) to homeowners and renters who live in declared disaster areas. Homeowners can apply for up to $200,000 in order to replace their primary residence or repair a residence to its condition before the disaster. These kinds of loans cannot be used to upgrade a residence or make additions to a residence unless it is required by a building authority or building code. The SBA, in certain situations, may refinance all or part of a mortgage (up to $200,000) if the borrower meets the following conditions: The borrower cannot get credit anywhere else The borrower has suffered damage from a disaster that is not covered by insurance The borrower intends to repair the damage Home and property and disaster loans can be increased by up to 20% of the verified losses (maximum $200,000) to protect a damaged piece of real property from a recurrence of the same kind of disaster. Secondary home and vacation homes are not eligible for home disaster loans. Renters and homeowners can borrow up to $40,000 to replace personal property that was damaged or destroyed. These loans cannot be used to replace highly expensive or irreplaceable items. Business physical disaster loans with different limits are also available.
Home Equity Lines of Credit
Home equity lines of credit operate on the same principle as a standard home equity loan. Where HELOCs differ is that the borrower can use the equity in a manner similar to a credit card. The HELOC has a spending limit and the monthly payments on the loan are based on the amount of money that is borrowed and the interest rate. However, the HELOC usually has a term, and, when the term is up, any outstanding borrowed money has to be repaid.
Purchase Loans and Cash-Out Refinance Loans Eligibility For Those Not Meeting Minimum
If a servicemember or veteran does not meet the minimum service requirements, he or she may still be eligible if the discharge due to one of the following: Hardship The convenience of the government Reduction-in-force Certain medical conditions A service-related disability
VA Funding Fees Purchase and Construction Loans Fee Chart
Interest rate reduction refinance loans (IRRRLs) have a .5% funding fee regardless of the veteran's military status or whether this is the veteran's first VA loan or a subsequent VA loan.
VA Home Loans Interest Rate Reduction Refinance Loans Eligibility
Interest rate reduction refinance loans can only be used to refinance a property on which a borrower has already used their VA loan eligibility. Additionally, the refinance must be VA-backed loan to VA-backed loan. The refinance will reuse the entitlement to a VA loan that originally used to acquire the first VA loan. Only an existing VA loan may be paid from the proceeds of an IRRRL. If the borrower has a second mortgage, the holder of the second mortgage must agree to subordinate their lien in order for the new VA-backed loan to be the first mortgage. Occupancy requirements for an IRRRL are different from other VA-backed loans. In the case of an IRRRL, the borrower only needs to certify that he or she currently or previously occupied the home on which they continue to have a mortgage.
What does an assumption clause do? It allows the borrower of a mortgage to transfer the mortgage to a new owner It allows a lender to demand immediate and full repayment of a mortgage It allows a lender to demand full repayment of a mortgage if the borrower of that mortgage transfers ownership of the property under the mortgage
It allows the borrower of a mortgage to transfer the mortgage to a new owner
According to section 310.010 of the Oregon Revised Statutes, when does each county court or board of county commissioners estimate and determine the amount of money to be raised for county purposes for the current fiscal year? November June July January
July
Jumbo Loans
Jumbo loans have a loan amount that is in excess of the standard limit for conforming loans. Since Fannie Mae and Freddie Mac do not trade in these kinds of loans, they carry additional risk for the lender. The borrower qualification requirements for jumbo loans are similar to the requirements for conforming loans with a few notable differences. Jumbo loans do not commonly include mortgage insurance. For this reason, the required down payment is normally larger than the down payment required for a conforming loan. In addition, jumbo loans are rarely issued to borrowers with a credit score of less than 700. Borrowers of jumbo loans are usually expected to have reserves in their bank accounts to cover, at least, the first six months of mortgage payments as opposed to borrowers of conforming loans who are commonly only expected to have one or two months of bank reserves.
Purchase Loans and Cash-Out Refinance Loans Important Underwriting Criteria Residual Income
Lenders of VA-backed purchase loans and cash-out refinance loans rely on a factor called residual income to determine if an individual is worth lending to. The purpose of residual income is to ensure that a borrower has enough money to pay all obligations and still cover all living expenses. By requiring a minimum or residual value, the VA is able to limit the amount of loan defaults. The residual income a borrower is required to have is based on the loan amount, the size of the borrower's family, and the part of the country the borrower lives in.
Purchase Loans and Cash-Out Refinance Loans Important Underwriting Criteria Credit Score
Lending of VA-backed loans is not restricted by the borrower's credit score. Lenders are instructed to look at the entire credit profile of the borrower when making decisions about lending to that individual.
According to section 311.405 of the Oregon Revised Statutes, all ad valorem property taxes lawfully imposed or levied on real or personal property are which of the following? Notes promissory None of these are correct Court orders Liens on such real and personal property
Liens on such real and personal property
What kind of REIT mainly operates by financing loans for real estate transactions? Cooperative REIT Hybrid REIT Equity REIT Mortgage REIT
Mortgage REIT
ORVET Home Loans
ODVA issues and finances home loans for eligible Oregon veterans. An ORVET home loan is distinctly different from a federal VA-backed home loan. In fact, an eligible veteran living in Oregon can have both an ORVET loan and VA-backed home loan at the same time. The current maximum loan amount for an owner-occupied, single family residence is $417,000. Additionally, Oregon veterans are now allowed to use this kind of loan as a lifetime benefit. Note: For 2020, the loan limits for VA backed home loans will no longer apply because the VA can now back loans that exceed the conforming loan limit. (See militarybenefits.info). Additionally, the general Fannie Mae limit for 2020 that applies to most counties in the U.S. is now $510,400. In order to be eligible for a ORVET loan, a veteran must have served on active duty with the armed forces of the United States. In addition, the veteran must fulfill one of the following conditions: Up to January 31, 1955 (i.e., if service began on or before that date), the veteran must have served more than 90 days and must have been discharged or released under honorable conditions. After January 31, 1955 (i.e., if service began after that date), the veteran must have served more than 178 consecutive days and must have been discharged or released under honorable conditions. The consecutive-day requirement is waived if the veteran served 178 days in total and was discharged or released from active duty under honorable conditions because of a service-related disability or if the veteran was since given a disability rating from the U.S. Department of Veterans Affairs. The veteran served at least one day in a combat zone and was discharged or released under honorable conditions. Veterans are also eligible if they meet one of the following conditions: The veteran has received a combat, campaign, or expeditionary ribbon or medal for service and he or she was discharged or released under honorable conditions. The veteran is receiving a non-service-related pension from the VA.
VA Home Loans Interest Rate Reduction Refinance Loans
One of the other types of loans backed by the VA is the interest rate reduction refinance loan (IRRRL). This loan is intended to lower a borrower's interest rate by refinancing an existing VA-backed loan. An IRRRL can also be used to refinance an adjustable rate mortgage (ARM) into a fixed-rate mortgage. Appraisal and underwriting are not required when a borrower applies for an IRRRL. Additionally, an IRRRL may be issued without the borrower having to put down out-of-pocket money. This is done by including all the additional costs in the new loan or by setting the new loan at an interest rate high enough to enable the lender to pay the costs. If an IRRRL is used to refinance a VA-backed ARM into a fixed rate loan, the interest rate may actually increase. Lenders are not required to issue IRRRLs to veterans and the borrower may not actually receive any cash from the loan proceeds.
So how would we find the capital gain from the sale of a piece of real estate?
Purchase Price + Improvement Value = Base Value Purchase Price + Improvement Value = Base Value Profit from Sale - Base Value = Capital Gain
What makes reproduction cost different from replacement cost? Reproduction cost is the price to exactly duplicate the original property down to the same materials and specifications Reproduction cost is the amount the property, in its current state, should sell for on the open market Reproduction cost is an approximation of the sale price for that property that can expected at that time in that market Reproduction cost is the price of a property with equal value based on the functional utility of the original
Reproduction cost is the price to exactly duplicate the original property down to the same materials and specifications
Rural Housing Site Loan
Rural housing site loans are issued in order to provide funds for the purchase and development of housing sites for low-to-moderate income families.
Rural Repair and Rehabilitation Loan and Grant
Rural repair and rehabilitation loans and grants are provided to rural homeowners with very low income. The main aim of these loans and grants is to provide borrowers with the funds to repair, improve, or modernize their homes. The money from these kinds of loans and grants also can be used to remove health and safety hazards.
Which of the following is another term for an equity loan? Title I loan Subprime loan Second mortgage A-paper loan
Second mortgage
Rural Housing Direct Loan
Section 502 direct housing loans are issued to borrowers directly by the Housing and Community Facilities Programs (HCFP). These loans are normally used to help individuals with low incomes to purchase homes in rural areas but can also be used to build, repair, renovate, or relocate a home. Borrowers must have low or very low incomes (up to 80% of the area's median income), be without housing, be able to afford monthly mortgage payments and other fees, and have a reasonable credit history but be unable to obtain credit elsewhere.
Mutual Self-Help Loans
Section 502 mutual self-help loans is mainly intended for very-low to low-income households who wish to construct their own homes. The borrowers of these kinds of loans commonly cannot buy clean, safe housing through standard means. About 65% of the construction labor is carried out by other families who participate in this program.
Seller/Owner Financing
Seller/owner financing involves the owner or seller of a property taking the place of a bank or other standard lending organization. Generally in these circumstances, the buyer and seller of the property agree to terms that include the overall price, any down payment, interest rate, payment timing, etc. The buyer takes possession of the property and the seller retains the actual title. The buyer makes payments until paying off the balance (either through completion of the payment regimen or a refinance to buy out the seller) and the title is conveyed from the seller to the buyer (or refinancing institution). To document this in writing, the buyer and the seller sign a promissory note containing the terms of the loan. The advantage of this type of financing is that the seller may be more willing to finance a buyer with a low credit rating. The owner may be able to provide financing for a property that a lending institution would not be willing to finance due to age or condition. Additionally, the seller may be more flexible on payment schedules.
Which of the following serves as an eligibility factor for obtaining an ORVET loan, along with having served on active duty with the armed forces of the United States? Served at least one day in a combat zone and was discharged or released from active duty under honorable conditions To be eligible the person only needs to have been a veteran in any standing Have served up to 178 days and have been discharged or released from active duty under dishonorable conditions The veteran cannot get credit anywhere else
Served at least one day in a combat zone and was discharged or released from active duty under honorable conditions
Public Housing Homeownership Programs
Some local public housing authorities (PHAs) have programs in place through which residents of a public housing development can achieve homeownership. PHAs use these programs to sell a public housing development, or a portion of a development, to eligible residents or resident organizations.
Capital Fund
The Capital Fund, which is administered by the Office of Capital Improvements, provides money on an annual basis for development, financing, and modernization of public housing developments. Additionally, the capital fund is also used for improvements in the management of public housing developments.
Mixed-Finance Public Housing
The Department of Housing and Urban Development uses this program to mix public, private, and non-profit funds in order to build and operate housing developments. The housing developments that are established through this program can contain a variety of housing types from public and subsidized housing to rental properties and private homes. These developments are intended for residents with differing incomes and are built to fit in with the surrounding community.
According to section 305.182 of the Oregon Revised Statutes, who may file warrants issued against any taxpayer for unpaid taxes in the Office of the Secretary of State? The Attorney General The Department of Revenue The Governor The Comptroller General
The Department of Revenue
Home Affordability Refinance Program
The Home Affordability Refinance Program (HARP) is a mortgage refinancing program for homeowners who, while current on their mortgage payments, are unable to get refinancing due to a decline in home value.
Home Affordable Foreclosure Alternatives Program
The Home Affordable Foreclosure Alternatives Program (HAFA) is designed for homeowners who cannot afford their mortgage payments and need to transition out of their mortgage and into more affordable housing. HAFA has two primary options for this transition: short sale or deed in lieu of foreclosure (DIL). A short sale is a situation where the mortgage lender allows the borrower to sell the property rapidly and for an amount that does not pay back what is still owed. If a borrower chooses to do a deed in lieu of foreclosure, the mortgage company allows the borrower to hand back the title, thereby transferring the ownership back to the lender.
Home Affordable Unemployment Program
The Home Affordable Unemployment Program (HAUP) gives an unemployed homeowner who is eligible a way to either reduce mortgage payments or suspend them for 12 months or more.
Making Home Affordable® Program
The Making Home Affordable® Program (MHA), which is a subset of the larger Troubled Asset Relief Program (TARP), was a federal program run by the U.S. Department of the Treasury which was intended to help homeowners avoid foreclosure. This was accomplished by providing a variety of modification and refinancing solutions, temporary forbearances for unemployed homeowners, or options for transitioning out of homeownership through short sales or deeds in lieu of foreclosure.
The Office of Public and Indian Housing
The Office of Public and Indian Housing (PIH) is a subsection of the Department of Housing and Urban Development (HUD) which manages and administers a multitude of housing programs. These housing programs are funded by Congress under the basic provisions of the U.S. Housing Act of 1937. The PIH's stated mission is "to ensure safe, decent, and affordable housing; create opportunities for residents' self-sufficiency and economic independence; and assure fiscal integrity by all program participants." To achieve these goals the PIH attempts to: "recognize residents as the ultimate customer; improve management and service delivery efforts through oversight, assistance, and selective intervention by highly skilled, diagnostic, and results-oriented field personnel; seek problem-solving partnerships with Public Housing Agency (PHA), resident, community, and government leadership; act as an agent for change when performance is unacceptable and the PIH judges that local leadership is not capable or committed to improvement; and efficiently apply limited HUD resources by using assessment techniques to focus the PIH's oversight efforts." The following are some of the agencies who administer PIH housing programs: Office of Native American Programs Office of Community Relations and Involvement Office of Public and Assisted Housing Operations Office of Public Housing Investments Office of Policy, Program, and Legislative Initiatives
Who is the lender of an ORVET home loan? The Oregon Department of Veterans Affairs A lender approved by the Oregon Department of Veterans Affairs None of these are correct A lender approved by the federal Department of Veterans Affairs
The Oregon Department of Veterans Affairs
ODVA
The Oregon Department of Veterans' Affairs (ODVA) is the state level department that provides programs and services for military veterans, spouses, and their families who live in the State of Oregon. The following are the major benefits and services offered by the ODVA: Counseling Conservatorship Educational Aid Emergency Grants Employment Federal Benefits ORVET Home Loans State Benefits Veterans' Discounts Veteran Service Officers
Which of the following is a part of the Making Home Affordable® Program? Small Business Administration home disaster relief loans Mutual Self-Help Loans HOPE VI The Principal Reduction Alternative
The Principal Reduction Alternative
Principal Reduction Alternative
The Principal Reduction Alternative (PRA) is designed to help homeowners with homes that have significantly less value than the homeowner owes on the home (loan-to-value ratio exceeding 115%). This program attempts to convince lenders to reduce the amount owed by a homeowner in this situation.
Second Lien Modification Program
The Second Lien Modification Program (2MP) is intended for homeowners who have had a first mortgage permanently modified under HAMP but also have a second mortgage on the same property. Lenders and servicers who participate in this program are given the tools to modify second mortgages on properties with HAMP modified first mortgages.
Section 184 Indian Home Loan Guarantee Program
The Section 184 Indian Home Loan Guarantee Program is an FHA style program through which HUD insures mortgage loans made to American Indian and Alaska Native families, Alaska villages, tribes, or tribally designated housing entities. Section 184 loans are allowed to be used for new construction, rehabilitation of a home, purchase of a new home, or refinancing. Additionally, Section 184 loans can be used for purposes regardless of location. Mortgage loans issued through this program are fully guaranteed. The maximum mortgage loan amount for a Section 184 loan cannot exceed the following: The lesser of: 150% of the current median home price or the national conforming limit (currently $417,000) as set by the Federal Housing Financing Agency The Section 184 Indian Home Loan Guarantee Program also establishes a minimum mortgage loan amount limit, or "floor," for areas with low median housing prices that do not accurately indicate the true cost of standard-quality housing. The maximum loan amount limit in an area with a loan limit "floor" is the greater of: 150% of the current median home price, or 65% of the national conforming loan limit (currently $271,050).
Title VI Tribal Housing Activities Loan Guarantee Program
The Title VI Tribal Housing Activities Loan Guarantee Program is designed to help recipients of Indian Housing Block Grants (IHBGs) who want to finance affordable housing activities but cannot gather the necessary funding without a federal guarantee. The borrower pledges future IHBG funds as security, a lender or a private investor provides the financing, and HUD insures the loan. If the borrower defaults on the loan, HUD repays the unpaid loan amount and then takes reimbursement from the future grant funds pledged by the borrower. Eligible borrowers are either of the following: A federally recognized tribe who receives IHBG funds A tribally designated housing entity that is authorized by a tribe to receive IHBG funds and is also authorized to make obligations and pledge IHBG funds as security Eligible lenders are any of the following: An FHA approved lender A VA lender A lender approved by the Department of Agriculture A lender supervised, approved, regulated, or insured by any agency of the federal government Any other lender approved by the HUD Secretary The following are eligible affordable housing activities: Indian housing assistance Housing development Housing services Housing management services Crime prevention and safety activities Model activities (with the approval of HUD)
The United States Department of Agriculture: Rural Development Single Family Housing Loans and Grants
The United States Department of Agriculture (USDA) has a series of loan, loan-guarantee, and grant programs designed to assist low-to-moderate income Americans living in rural parts of the country with homeownership.
VA
The United States Department of Veterans Affairs (or VA) is the second-largest department in the executive branch of the government. The VA provides numerous services to veterans of the various branches of the U.S. military.
What happens after a buyer pays back the debt established by a land sale contract? The buyer shares the title to the property with the selling property None of these are correct The buyer gains full ownership of the property and the seller becomes a tenant The buyer gains the full ownership of the property
The buyer gains the full ownership of the property
Job History and Savings
The buyer's job history is commonly examined when considering a buyer. This will include an examination of the jobs the buyer has held, how often the buyer has been fired, and the general income levels of the buyer's forms of employment. The buyer's savings are usually examined in order to get a more complete picture of a buyer's financial state. The following are assets and accounts that lenders examine when looking at a buyer's savings: Checking and savings accounts Gifts or grants Retirement accounts (e.g. IRA, 401K, Keogh, etc.)
Equity
The equity of a property is equal to the market value of the property after subtracting the amount of outstanding debt that is owed against the property. Outstanding debt can come from a mortgage, a loan borrowed against the property value, and liens levied on the property. Equity can be seen as the amount of money a property owner would get from selling the property, after paying off any creditors.
The Federal Reserve System buys and sells government securities in order to influence which of the following? The federal funds rate The mortgage backed security rate The short term money market rate The long term bond rate
The federal funds rate
Other Public Housing Programs
The following are other public housing programs run by the Office of Public and Indian Housing: Demolition/Disposition HOPE VI Housing Choice Vouchers (Formerly Section 8 Vouchers) Moving to Work Demonstration Operating Fund Rental Housing Integrity Improvement Project Resident Opportunities and Self-Sufficiency Neighborhood Networks
Other FHA Programs
The following are other single-family loan programs available through the FHA: Adjustable Rate Mortgages Condominium Mortgages Cooperative Mortgages Disaster Victims Mortgages Emergency Home Loan Program Energy-Efficiency Mortgages Graduated Payment Mortgages Growing Equity Mortgages Home Equity Conversion Mortgages Manufactured Home Loans (Title I) FHA Power Saver Mortgages Rehabilitation Mortgage Urban Renewal The following are multifamily loan programs run by the FHA: Rental Housing Rental housing for Urban Renewal and Concentrated Development Areas Cooperative Units Manufactured Home Parks Single Room Occupancy (SRO) Projects Two-Year Operating Loss Loans Purchase or Refinancing of Multifamily Housing Projects Rental Housing for the Elderly Housing Finance Agency Risk Sharing Program
According to section 88.100 of the Oregon Revised Statutes, what happens if the amount due for a delinquent loan, along with the costs of suit, is brought into court and paid to the clerk before a judgment in a foreclosure proceeding is given? The property owner is permitted to raise a defense or counterclaim The foreclosure suit will be suspended for 1 month Nothing; the foreclosure suit will continue as before The foreclosure suit will be dismissed
The foreclosure suit will be dismissed
The Home Affordable Modification Program
The largest program in the MHA was the Home Affordable Modification Program (HAMP). The goal of HAMP was to offer reduced, affordable, and sustainable monthly mortgage payments to homeowners at risk of foreclosure. A homeowner may have been eligible to participate in HAMP if he or she met the following conditions: The homeowner obtained the mortgage loan no later than January 1, 2009. The homeowner owes, at most, $729,750 on his or her primary residence or single-unit rental property. The homeowner owes up to $934,200 on a two-unit rental property, $1,129,250 on a three-unit rental property, or $1,403,400 on a four-unit rental property. The property has not been condemned The homeowner has had a financial hardship and is either delinquent or in danger of falling behind on his or her mortgage payments. The homeowner has sufficient and documented income that will support a modified payment. The homeowner cannot have been convicted of felony larceny, theft, fraud, money laundering, or tax evasion that was related to a mortgage or real estate transaction, within the last 10 years. To make this program work, the Treasury offered mortgage lenders and servicers a contractual agreement under which the lender would agree to modify mortgage loans in a particular fashion in return for incentive payments. Click To Enlarge Participating lenders and servicers agreed to do the following: Service all eligible loans in accordance with the rules of the program unless explicitly prohibited by contract Use the net present value (NPV) test on each eligible loan that is at risk of default or delinquent for at least 60 days The NPV test compares the amount of money the lender or servicer is estimated to collect when the loan is modified with the amount of money that is estimated to be collected if the loan is not modified. If the result shows that more money will be made if the loan is modified, the lender or servicer must offer modification. Follow a specific set of steps in order to drop the monthly payments to no more than 31% of the borrower's gross monthly income Participating lenders and servicers received the following incentive payments: $1,000 for each modification completed under HAMP An annual "pay-for-success" fee for three years if a particular borrower's monthly mortgage payment is reduced, under HAMP, by 6% or more The "pay-for-success" fee is the lesser of: $1,000 (or $83.33 per month), or 1/2 of the reduction in the borrower's annualized monthly payment. Participating investors earned a payment reduction cost share compensation payment of 1/2 of the dollar amount difference between a borrower's monthly payment (principal and interest only) under a modification calculated at 31% of the borrower's monthly gross income and the lesser of the following: The borrower's monthly payment (principal and interest only) if it were calculated at 38% of the borrower's monthly gross income The borrower's monthly payment (principal and interest only) before modification The payment reduction cost-share compensation payment was paid on a monthly basis (beginning the month following the date of a permanent HAMP modification) as long as the loan was in good standing. The compensation payment was paid out for five years or until the loan was paid off, whichever happened first. If a borrower, who had his or her payment reduced through HAMP by 6% or more, made timely payments, he or she would receive an annual "pay-for-performance" principal reduction payment. The payment was the lesser of: $1,000 (or $83.33/month) or 1/2 of the reduction in the borrower's annualized monthly payment for each month a timely payment is made. UPDATE (2020): Although HAMP and the MHA Program were discontinued as of 2017, homeowners can still utilize Flex Modification, which is a combination of HAMP and other Fannie Mae and Freddie Mac programs. However, it is only for mortgages owned by Fannie Mae or Freddie Mac and the lender must participate in the program for a borrower to qualify. Borrowers still currently in an MHA program and servicers still assisting such borrowers can continue to utilize the reporting tools on the website and consult with the Solution Center during business hours. Only applications submitted on or before December 30th, 2016 were eligible (program cutoff date; see Handbook for Servicers of Non-GSE Mortgages).
What happens if the owner of a rental property defaults on a loan established through a collateral assignment? The lender suspends the property owner's license to collect rent for up to a year The ownership of the property is turned over to one of the tenants in the rental property The lender replaces the property owner as the collector of rent until the loan is paid off Nothing happens
The lender replaces the property owner as the collector of rent until the loan is paid off
What is functional obsolescence? None of these are correct The loss of property value due to a change in the use of the property The loss of property value due to factors external to the property The loss of property value due to qualities of the property that cannot be easily changed
The loss of property value due to qualities of the property that cannot be easily changed
How is the value of a property determined through the sales comparison method? The net income generated by the property is compared to a ratio of that income and the purchase price of the property The value of the land is added to the cost of completely rebuilding the building at that location An average value is determined from public tax assessment data The sale price of similar properties in the same are compared to find an accurate estimate
The sale price of similar properties in the same are compared to find an accurate estimate
Purchase Loans and Cash-Out Refinance Loans Eligibility Spouses
The spouse of a veteran can be eligible for a VA home loan in one of the following situations: The borrower is the unmarried widow of a veteran who died while in service or died from a service-related disability. The borrower is the spouse of a servicemember who is missing in action or is a prisoner of war. The borrower is the surviving spouse of a veteran who died and the surviving spouse remarries: on or after attaining the age of 57, and on or after December 16, 2003. The borrower is the surviving spouse of a veteran who was totally disabled in a certain way. Additionally, the veteran's disability may not have been the cause of his or her death.
Types of REITs
There are three general types of REITs. Mortgage REITs mainly operate by financing loans, primarily mortgages, for real estate transactions. Alternatively, mortgage REITs may purchase a specific kind of investment product called a mortgage backed security. The main source of income for a mortgage REIT comes from the interest that accumulates on the loans that the REIT services. However, most REITs are equity REITs which means income is generated from the direct ownership and operation of income producing properties. This kind of REIT usually specializes in one type of property such as apartments or office buildings. Hybrid REITs combine the features of equity and mortgage REITs. A Hybrid REIT's income comes from both income-producing properties owned by the REIT and the interest from mortgages serviced by the REIT.
VA Home Loans Loan Limits
There is no maximum amount of money that can be lent to a borrower through a VA-backed loan. Instead, the VA used to limit the amount of loaned money that they would insure. As of 2020, the loan limits for VA-backed home loans will no longer apply across the board because the VA can now back loans that exceed the conforming loan limit. What does this mean for veterans looking to buy single family residences for their personal use? They can get VA-backed loans anywhere in the country for whatever price they might be listed at. (See militarybenefits.info or benefits.va.gov). Note that these rules are specific to the VA's participation in the loan process. VA loan rules cannot compel a lender to approve a transaction where a borrower would not qualify for a loan with that lender for other reasons. As always, the borrower must show with the VA loan that they have the capability of making all up front costs and keeping up with mortgage payments in the future. Loan limits will still apply to veterans who have multiple active VA loans or who have defaulted on a loan in the past. These limits are based on the county the property is located in. The standard maximum amount of loaned money the VA guaranteed in 2019, as set by the Housing and Economic Recovery Act (HERA) formula, was $484,350. That meant qualified VA buyers in most parts of the country could borrow up to $484,350 before needing to factor in a down payment. Now the Fannie Mae and Freddie Mac limit for 2020 that applies to most counties in the U.S. is $510,400 (national conforming loan limit). Use this FHFA spreadsheet for county limits on 2020 mortgage amounts. Numerous counties across the country have their own maximum loan amount guarantee limits. At the same time, the basic entitlement that is available to an eligible veteran is $36,000. Lenders will normally loan up to four times a veteran's entitlement without requiring a down payment, as long as the veteran has sufficient credit and income and the property's appraised value and asking price match.
Purchase Loans and Cash-Out Refinance Loans Eligibility Servicemembers and Veterans
To be eligible to obtain a VA-backed loan, the servicemember or veteran must have suitable credit, sufficient income, and, most importantly, a valid Certificate of Eligibility (COE).
Which of the following is a purpose of an escrow account? To cover the first 6 months of mortgage payments To prevent the establishment of a second mortgage To assist the refinancing of a mortgage loan To ensure that property taxes are paid on time
To ensure that property taxes are paid on time
What is the purpose of a Certificate of Eligibility? To verify that a borrower has enough money after mortgage payments to cover basic necessities None of these are correct To verify that a borrower has sufficient credit and income to afford a VA loan. To verify that the borrower is in fact allowed to receive a VA loan
To verify that the borrower is in fact allowed to receive a VA loan
True or false: Second mortgages tend to have higher interest rates than standard mortgages.
True
True or false: according to section 86.800 of the Oregon Revised Statutes, the trustee's deed to the purchaser at the trustee's sale must contain, in addition to a description of the property conveyed, a recital of the facts concerning the default, the notice given, the conduct of the sale, and the receipt of the purchase money from the purchaser. True False
True
True or false: when a mortgage is foreclosed upon through power of sale, the borrower gets a period of time to exercise the right to equity of redemption. False True
True
VA Funding Fees
Under most circumstances, a veteran who is issued a VA-backed loan will be required to pay a one-time funding fee. The fee is used to lower the taxpayer cost of the VA Home Loan Guarantee program. The VA funding fee is a percentage of the loan amount. The amount of the fee can vary based on the type of loan, the borrower's military category, whether this is the borrower's first VA loan, and if the borrower makes a down payment. The higher fee for a subsequent VA loan does not apply to subsequent purchase or construction loans or cash-out refinance loans if the veteran's only previous use of his or her VA loan entitlement was for a manufactured home loan.
Sources of Financing
When someone sets out to buy a piece of property, they will usually need someone to help cover part of the cost. The sources of financing are varied, from banks and other financial institutions to the seller of the property. Who provides the funds will affect how those funds are ultimately paid back.
Can a mortgage be pledged as security for a loan through a collateral assignment? No, unless the borrower of the mortgage give consent Yes Yes, if the mortgage if has a value of more than $50,000 No
Yes
Buyers are cautioned against signing a land sale contract with... a seller offering extended release deed a seller offering a warranty deed a lender offering a grant deed a seller offering a quitclaim deed
a seller offering a quitclaim deed
A ________ temporarily suspends the payments on the loan so that the borrower can utilize another option to satisfy the loan amount. statutory redemption deed in lieu of foreclosure forbearance short sale
forbearance
According to section 312.010 of the Oregon Revised Statutes, except as otherwise provided by law, real property within this state is subject to ___________ for delinquent taxes whenever three years have elapsed from the earliest date of delinquency of taxes levied and charged thereon. foreclosure censure destruction seizure
foreclosure
Real estate agents work with two subjects that require mathematical equations to effectively deal with:
land and money.
IN properties are those that have...
passed all repairs. These properties are eligible for FHA loans with no limitation.
According to section 307.030 of the Oregon Revised Statutes, all ________________ within the state of Oregon, except as otherwise provided by law, shall be subject to assessment and taxation in equal and ratable proportion. intangible personal property intellectual property real property conceptual property
real property
Failing to _________ for real estate can result in the lender pursuing foreclosure. lend out money ask nicely acquire insurance repay a loan
repay a loan
A _______________ is any type of mortgage that is taken out against a property that is already under a mortgage loan. first mortgage second mortgage chattel mortgage associate mortgage
second mortgage
MIP/LTV Chart
see image saved in drive
The principle of _____________ states that market value of a property is affected by the cost of obtaining an equally desirable and valuable property. diffusion conformity substitution anticipation
substitution
The ORVET home loan program is administered by... the Department of the Treasury. the Department of Housing and Urban Development. the Federal Housing Administration. the Oregon Department of Veterans Affairs.
the Oregon Department of Veterans Affairs.
Strict foreclosure is usually carried out... when the borrower has multiple liens on the same property. when the amount of debt that is owed is far greater than the value of the property. when the loan is secured by a deed of trust.
when the amount of debt that is owed is far greater than the value of the property.
Government Sources Other Federal Programs
-Refinancing Programs -Home Affordable Modification Program (HAMP) -Home Affordable Refinance Program (HARP) -Home Affordable Foreclosure Alternatives Program (HAFA) -Home Affordable Unemployment Program (UP) -Federal Housing Administration Short Refinance for Borrowers with Negative Equity (FHA Short Refinance) -Hardest Hit Fund Programs (HHF)
Origination fees are commonly between _________ of the value of the loan. .5% and 1% 10% and 15% 1% and 5% 6% and 7.5%
.5% and 1%
203K Loans
203(k) loans will only be approved for certain types of repairs. The following repairs are allowed under the 203(k) program: structural alterations and reconstruction modernization and improvements to the home's function elimination of health and safety hazards changes that improve appearance and eliminate obsolescence reconditioning or replacing plumbing; installing a well and/or septic system adding or replacing roofing, gutters, and downspouts adding or replacing floors and/or floor treatments major landscape work and site improvements enhancing accessibility for a disabled person making energy conservation improvements The property must still be worth repairing. If the building is so structurally unsound that it would cost more to repair than replace, FHA will not grant a 203(k) loan. When assessing whether a property is acceptable for a 203(k) loan, speak with an approved 203(k) consultant. 203(k) consultants are contractors and inspectors who have been certified by HUD and can assist in acquiring 203(k) loans. The HUD website keeps a list of approved 203(k) consultants on their website.
Mortgage Banks and Brokers
A mortgage bank limits its activities to originating and servicing mortgage loans. While mortgage brokers offer a similar service, mortgage banks provide their own funds to finance the loans that they originate. This kind of bank does not normally service the loans it originates. Instead, the mortgage loans it originates are sold to other parties through the secondary market. At the same time, a mortgage bank will purchase mortgage loans originated by other entities in order to earn money from the servicing fees.
Capital Markets
Capital markets are where long-term debt and equity securities are traded. Savings and investments are channeled through these types of markets from investors who supply capital to businesses, governments, and individuals who use that capital. One of the defining features of capital markets is that they are utilized to meet longer term financial needs.
Financial Markets
Financial markets are the place where individuals and organizations trade financial assets such as bonds, currencies, and other securities. Participation in the financial markets is a way for financial institutions to generate funds that can be loaned out to borrowers.
What occurs in secondary capital markets? Securities are reduced to their component financial instruments Securities are traded between investors Securities are stored Securities are created
Securities are traded between investors
UN properties are those...
which need an extensive amount of repairs. The FHA will not insure loans for these properties. Buyers would need to arrange a cash purchase or find alternative sources of financing.
Bridge Loans
A bridge loan is a short-term loan that is designed to provide funds to someone who is in the process of securing a source of longer-term funding. In the real estate market, bridge loans are used in both commercial and residential transactions. In either case, the purchaser has not acquired long-term funding for the purchase (such as a mortgage loan) and needs funds to proceed with the transaction. Say a person is buying a new home. At the same time, they are selling their old home and intend to use the proceeds to cover the down payment for the home being purchased. If the down payment is coming due and the old house has not sold yet, the person may find themselves in a bind. A bridge loan can be used to ensure that the down payment gets paid on time and purchase proceeds. Bridge loans can also be used by a person buying a property if they need to pay a debt or fee (for example, an outstanding mortgage) associated with the property they are attempting to sell in order to fund the purchase. With money tied up in the purchase, they may not have enough to cover lingering costs related to the property they are selling off. Bridge loans have terms that are typically between six months and a year and usually have higher interest rates than standard mortgage loans. Bridge loans are also uncommon since home equity lines of credit can be used to fulfill the same purpose.
Commercial (Banks)
A commercial bank primarily offers the following services: Taking in deposits from individuals Issuing loans Secured loans (mortgages) Unsecured Loans (credit cards, bank overdrafts, corporate bonds) Providing basic investment products (e.g., certificates of deposit, savings accounts) The designation of "commercial bank" is meant to distinguish this kind of institution from an "investment bank". Investment banks do not take deposits, but rather, focus on underwriting and the securities trade. This distinction became less important once commercial and investment banks were allowed to merge operations.
Credit History and Credit Score
A person's credit history is the record of debt that has been held by that person and that person's repayment of their debts. This includes the amount of credit accounts the person has open, how long the accounts have been open, and how often payments are made on time on those accounts. The summary of a person's credit history is called a credit report. Credit reports are produced by credit reporting companies with the three largest companies being TransUnion, Equifax, and Experian. A buyer's credit score, which is based on their credit history, has a significant impact on the ability of a buyer to be qualified for a loan. Even with loosened requirements on credit scores, that number is almost always looked at when a buyer is being considered. Lenders do not commonly extend standard loans to buyers with credit scores under 680. A real estate agent representing buyers should be willing to work with clients to check their credit score prior to applying for a loan and improving it if necessary. Everyone is entitled to one free credit report per year from each of the major credit reporting agencies, there are free credit reporting services online. Encourage clients to check their score and review it with them. Coach the client on taking care of any issues, such as late payments, old debts, paying down existing balances on credit cards, and correcting any inaccuracies. Clients should be encouraged to contact creditors directly and ask if they can lower interest rates and drop late payment reports. Often a creditor will be willing to work with a client to repair their credit.
Amortized and Partially Amortized (Balloon) Loans
Amortized loans are loans in which the total cost of the loan, which comprises the original amount and the total interest, is paid off in a set of scheduled payments across the term of the loan. Amortized loan payments cover both principal and the interest that accumulates. For example, a $100,000 loan that is fully amortized has a term of 5 years. The borrower makes 60 payments that each equal 1/60th of the total cost of the loan. A partially amortized loan, or balloon loan, is one in which only a portion of the loan is paid in amortized installments. The rest of the total cost of the loan is paid in a lump sum, sometimes called a balloon payment, at the beginning or end of the loan's term. Say that a loan is partially amortized for 5 years. If fully amortized the loan would have had a term of 10 years. The total cost of the loan will be $750,250. The borrower will end up paying a little under half the cost of the total loan at the end of the five years, with the other half covered by the monthly payments.
Refinancing Programs
Any discussion of real estate financing wouldn't be complete without the mention of refinancing. Refinancing usually occurs when a homeowner qualifies for a better interest rate and, planning to stay in the property for several more years, justifies the expenses associated with refinancing through the savings that will occur with the lower interest rate loan. In many homeowner financing situations, however, there is a risk that the homeowner will default on the loan and face foreclosure if the monthly payment isn't reduced. With the best interest of the nation's economy as a motivating factor, governmental programs were developed to limit the amount of real estate foreclosures. In those situations, and when certain applicant requirements are met, there are programs that can help with refinancing issues. In most cases, because they don't want to have a customer default on their loan, the mortgage company that holds the loan also can be a good resource for more information regarding government programs that the borrower may qualify for. Unless noted otherwise, the following programs are offered through a partnership between the US Department of the Treasury as well as the US Department of Housing and Urban Development and are completed through US-based financial institutions. All have eligibility requirements that must be met.
VA Home Loans Purchase Loans and Cash-Out Refinance Loans
As with other federal programs, like the Federal Housing Administration, the Department of Veterans Affairs (VA) does not issue or fund home loans. Rather, the VA insures (i.e., guarantees) loans issued by private lenders in order to encourage lenders to provide loans with favorable terms. Purchase loans and cash-out refinance loans are the standard home loans insured by the VA. Purchase loans are, unsurprisingly, used to finance the purchase of a home. Cash-out refinance loans are either used to convert the equity of a home into available funds or to refinance a non-VA loan into a VA loan. These kinds of VA-backed loans do not have a mortgage insurance premium requirement. In addition, as long as the sale price of the home does not exceed the appraised value, the borrower is not required to provide a down payment. Rules established by the VA limit the amount that the borrower can be charged for closing costs. Furthermore, lenders of VA-backed home loans cannot charge a penalty if the borrower pays the loan off early. Borrowers of VA purchase loans do not have to be first-time homebuyers. However, the home for which a purchase loan is used must be for the borrower's personal occupancy.
Bank Reserves
Depository financial institutions are required to hold a certain amount of money in reserve in case of sudden or unexpected outflows of funds. The reserves are either kept in the depository institution's vault or as a deposit in a federal reserve bank. Commonly, a private bank will hold more than the reserve requirements. One method the Fed can utilize to affect the economy is to alter the bank reserve requirement, either increasing or decreasing the amount each private bank must keep in reserve.
Lender Requirements
Different lenders and financing programs have different requirements for what qualifies a buyer for a loan. There are some general categories that are key to the qualification of a buyer. The buyer's income is one of the first things that will be examined. This will give the lender an idea of the buyer's capacity to repay the loan. When looking at income, the lender will usually look at the following: Salary or hourly wage Income from a part-time or second job Commissions, bonuses, or overtime Social Security benefits Alimony and child support Rental income Rental income will only be considered if it comes from an investment property
Home Affordable Modification Program (HAMP)
Homeowners can reduce their monthly payment to a more affordable level. This is done by either adjusting the interest rate, extending the length of the mortgage, or, in some cases, by reducing or forbearing the principal of the original loan.
National Cemetery System
In 1973, the National Cemetery System, excluding Arlington National Cemetery, was transferred from the Department of the Army and placed under the authority of the VA. This meant that the Veterans Administration was now in charge of the marking of the graves of all persons in national or state cemeteries along with running the State Cemetery Grants Program.
Insurability
In addition to assessing the borrower, FHA requires that properties being insured must pass an inspection. This inspection is similar to the inspections for properties that will receive section 8 loans. The FHA categorizes properties into four groups. -IN-Insurable -IE-Insurable with escrow -UN-Uninsurable -UK-203(k) eligible
Other Federal Programs
In addition to the Federal Housing Administration and the Department of Veterans Affairs, there are several other loan programs administered by branches of the federal government. These include programs such as the Capital Fund, which is administered by the Office of Capital Improvements, and the loan, loan-guarantee, and grant programs operated by the United States Department of Agriculture (USDA).
Private vs. Government Sources
In most cases, a buyer will obtain financing for a real estate transaction from some form of financial institution. Banks, savings and loan associations, credit unions, and real estate investment trusts are all examples of private organizations that offer funding in the form of loans. While the federal government does not actually originate loans, several federal programs provide a form of insurance for certain qualified loans. This reduces the risk of lending out the money, since the U.S. government will reimburse a lender if a borrower defaults on a government backed loan.
FHA Loans General Qualifications and Requirements
In order to qualify for an FHA-backed loan a borrower must meet some general requirements. -The borrower must have a steady employment history or have worked for the same employer for two years. The borrower must have a valid Social Security number, lawful residency in the U.S., and be old enough to sign a mortgage in their home state. -The borrower must have a housing expense ratio (costs of homeownership as compared to gross monthly income) of less than 31%. It is possible, however, if the lender can provide suitable justification, for a borrower to be approved with a housing expense ratio as high as 46.99%. -The borrower usually cannot have a total-debt-to-income ratio (total debts as compared to gross monthly income) of more than 43%. As with the housing expense ratio, it is possible, with suitable justification by the lender, for a borrower to be approved with a total-debt-to-income ratio as high as 56.99%. -In the event of a prior bankruptcy, the borrower must have been out of bankruptcy for two years and have reestablished good credit. Exceptions can be made if the borrower has not been in bankruptcy for one year, there are extenuating circumstances beyond the borrower's control, and the borrower has responsibly managed their money. -In the event of a prior foreclosure, the borrower usually must be three years beyond the foreclosure and have reestablished good credit. It is possible for an exception to be made if there were extenuating circumstances and the borrower has improved their credit.
Mobile Home Loans
Mobile home loans are designed to finance the purchase or refinancing of a manufactured home. While it is possible for buyers who are looking at purchasing a manufactured home (especially one that is securely connected to the land it sits on) to be financed through a standard home mortgage loan, most buyers will only be able to be financed through personal property loans. These loans often have a higher down payment, shorter term, and higher interest rate than a home mortgage loan. If the loan is used to secure the borrower's principal residence, the interest that is paid can usually be deducted from taxes. This may have changed since the adoption of the 2018 tax revisions.
Down Payment Assistance Program
Many lenders require that the buyer of a property put down a certain amount of money in order to qualify for a loan. This down payment is a portion of the property's cost and is used to lessen some of the risk to the lender. Down payment assistance programs are designed to help cover the costs of the down payment. The process involves a third party, sometimes backed by a charitable organization, offering money to cover a portion of the down payment. This money can be in the form of grants or supplementary loans. Down payment assistance programs are often capped according to income, as they are intended to help those of low-to-moderate income become homeowners. While some programs are federal (and we will explore those shortly) local programs exist as well, and will obviously vary according to location. It's a great idea for agents to become familiar with these programs, in order to advise clients who may have difficulty coming up with a sizable down payment or closing costs. For an example of a down payment assistance option, check out this link: FHA.com Also, check out VA lending for down payment assistance or loans without down payments. Please note that these sites are listed as examples and should not be construed as an endorsement of any specific product.
Money Laundering Concerns
Money laundering is a process used to make the proceeds from illegal activities appear to have been obtained legally. Drug smugglers, criminal cartels or organizations, and terrorists are some of the more notorious groups known to launder money in order to conceal criminal operations and to provide a source of money that cannot be traced to those criminal operations. Money laundering is commonly a three-step process. In the placement stage, the money from illegal sources (extortion, drug smuggling, insider trading, etc.) is placed into the financial system in some way. In the layering stage, the illegal money is moved through financial transactions in order to disguise the source and possibly mix the illegal funds with money from legal activities. In the final step, integration, wealth is gathered from the financial transactions involving the illegal money. Real estate can be one way to launder money. Since real estate sales can involve very large sums, it can be a way to launder a great deal of illegal gains. There are numerous possible methods.
Money Markets
Money markets comprise the segment of the financial markets that trades in short-term securities. Short-term, in this case, means that the majority of the securities traded here have lifetimes of less than a year. In fact, the assets traded in money markets can be set to mature in as short of a period as one day. The following are examples of securities that can be traded through money markets: Negotiable certificates of deposit (CDs) Treasury bills (T-bills) Commercial paper Banker's Acceptances Bills of Exchange Federal funds Short-term mortgage backed securities Money markets are used mostly by financial institutions to quickly raise funds for immediate needs or to provide a safer short-term investment. One of the disadvantages of trading through the money markets is that the returns on these kinds of securities are lower than the returns on longer-term securities.
Mortgage Insurance
Mortgage insurance is any type of insurance policy that reimburses a lender if a borrower should default on the loan. The Federal Housing Administration and the Department of Veteran's Affairs insure groups of loans for qualifying borrowers. Private companies also offer insurance for mortgage contracts, generally known as private mortgage insurance or PMI. Mortgage insurance is usually required for any mortgage loan that covers more than 80% of the purchase price of the property. The borrower is most often the party that buys the mortgage insurance even though it actually protects the lender. When a mortgage is insured, lenders are often more flexible with the required down payment, sometimes allowing the borrower to acquire the property for as little as 3% down. The amount that the borrower owes for the insurance policy is usually dependent on the size of the down payment. A typical cost is .5% of the principal.
Non-Conforming Loans
Non-conforming loans are defined by the fact that they do not fit within the standards for loans established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac are only allowed to trade in conforming loans. There are three general reasons why a loan may be considered non-conforming: The loaned amount is greater than the common maximum amount granted to finance a particular type of real estate. This kind of non-conforming loan is often called a jumbo loan. The loan is being authorized for a party that would not normally qualify for an extension of funds. In other words, a party is being lent money despite having a low credit rating that would normally disqualify the party from receiving a loan. Unusual collateral may also qualify the loan as non-conforming. Conforming loans are sometimes called "A-paper" mortgage loans. B-, C-, and D-paper mortgage loans are rankings of non-conforming loans. The greater the risk of default by the borrower, the lower in the alphabet the ranking (D-paper loans are higher in risk for the lender than B-paper loans).
Private Investors
One other source of private funding is individual investors or investment groups who are also known as hard money lenders. This usually involves an individual lending money to finance another individual's purchase of a piece of real estate. While not typical, there is a significant number of individuals and groups who will operate as a source of real estate funding. Private investors can be an alternative to financial institutions particularly for buyers who are not able to obtain conventional financing due to poor credit or the property not qualifying. However, private lending by investors is not regulated to the same degree as lending by other financial entities which does make it a riskier option. Additionally, hard money lenders tend to charge higher interest rates than financial institutions.
Money Laundering Concerns Fraud Example
Person A sells a property for a vastly inflated sum to Person B, who resells the property for its real value and appears to take a terrible loss. In fact, when they resold the property, they converted the apparent loss into a profit because the funds they invested were illegal currency. The legal profit Person A seemed to make when he sold the house to Person B is now legitimate income. More often, this type of real estate money laundering scheme is accomplished through several sales in rapid succession during which the artificially inflated price can seem less suspicious. Another method is to deposit illegal funds in an unscrupulous bank that will lend that money back to the depositor. More often, the unscrupulous bank will underwrite loans from another bank to hide the relationship. Either way, being loaned your own money (or having it loaned to a front man) to buy real estate which can be liquidated rapidly (even if sold at a loss) can turn ill-gotten gains into apparently legal assets; the real estate bought this way also can be used as a source of legitimate income by being leased or rented. Of course, the most direct means to try to launder illegal funds through real estate is simply to use those illegal funds to purchase real estate which is then sold, leased, or rented in order to generate legitimate funds. To combat this, lenders will commonly look at potential borrower's funds in an attempt to determine that the sources of those funds are legal and legitimate. A lender will often require a clear trail of documentation for large deposits of money into a potential borrower's bank accounts. The lender may require the potential borrower to produce bank statements showing the account where the money came from and the account it went into. If a donation was a gift, the lender may require an executed letter showing who gave the money and the relationship between the party gifting the money and the potential borrower. A lender often requires documentation that shows the source of any down payment and earnest money funds. In the case of earnest money deposits (deposits made by a buyer to demonstrate willingness to buy), the lender usually will demand a copy of the earnest money check, as it was made to the entity holding the deposit, and copies of bank statements showing when the funds were withdrawn from the account they came from. If the lender cannot source funds in a potential borrower's account, especially funds from cash deposits, the lender will subtract the unsourced money from the potential borrower's available funds. Funds are not normally examined for their source if they are from normal paychecks or have been in an account for more than 60 days.
Primary Markets
Primary markets are where securities are created and initially exchanged. In a primary market, investment products are directly purchased from the financial institutions that originate them. An example of a primary market exchange would be the purchase of a company's stock during an initial public offering. If financing for a real estate transaction is acquired through the primary market it means that the loan is acquired directly from a financial institution like a bank.
The Discount Rate
Private banks are also allowed to borrow from the Federal Reserve System directly. These "discount windows" have an interest rate called the discount rate. Each regional reserve bank has its discount rate set by its board of directors, subject to review by the Board of Governors. The discount window system operates as a control on the funds rate by influencing demand in the federal funds market by offering an alternative source of reserve funds. Setting the discount rate above the funds rate is intended to discourage private banks from using the discount windows and increase demand for federal funds market reserves which in turn increases the funds rate. If the discount rate is set below the funds rate, it is intended to decrease demand for federal funds market reserves and, by extension, lower the funds rate.
Qualifying Buyers
Qualifying a buyer involves ensuring that the buyer is both committed to purchasing a property and financially capable of ownership. There are several basic questions that will be asked of a potential buyer in order to determine if they are the right buyer to lend to. How long have you been looking? This question can help determine how determined a buyer actually is. If a buyer has been looking for a while, they may not be truly motivated or may have unreasonable desires that cannot be achieved. Do you need to sell your current home before you buy? This question is important because most current homeowners will need to sell the home they own in order to have funds to purchase a new home. Have you already met with a lender? If a buyer has been turned down for a loan before, it could be a signal that the buyer does not have the financial capability or responsibility to pay back loaned money. What is your financial status? What can you afford? These questions get to the heart of a buyer's financial ability. What are your needs and desires? What type of property are you looking for? How big of a property are you looking for? What is your price range? Where are you looking for property? These questions may reveal if a buyer's desires are actually attainable.
Money Laundering Concerns The Role of the Real Estate Broker
Real estate brokers can help combat money laundering by knowing their business and their clients. Real estate transactions can be classified by the amount of money laundering risk they carry. A transaction will be geographically risky if the buyer or the source of the buyer's funding come from a country with little oversight of the financial sector, weak anti-money laundering regulations, or significant political corruption. Customer risk arises mostly in commercial real estate transactions, and involves buyers with unclear interests in property. The following are other signs of customer risk: A large and unexplained distance between the location of the buyer and the location of the property Unusual involvement by third parties, especially legal entities that conceal their ownership without a bona fide reason Transaction risk mainly comes from suspicious sources or amounts of money and other oddities in the transaction. The following are things to look for that indicate transaction risk: Over- or under-valued properties Brokers should watch for properties that change hands repeatedly and/or seem to gain value more than the market would suggest. Brokers should watch for property owners who sell their property for significantly less than the property value, especially if the seller does not seem motivated to get a better price. Use of large sums of cash Brokers should take note of buyers that come to closings with actual cash. At the same time, brokers should watch out for buyers who buy a property without a mortgage if that behavior is unusual or uncharacteristic for that buyer. Purchases of property that are unusual due to the buyer's occupation or income Brokers should mainly be looking for buyers who are attempting to acquire properties that are obviously beyond their means. Rapid resale of a property This is particularly important to note if the property is resold for a much higher or lower price than it was initially purchased for. Unusual sources of funding A purchase of property without the buyer actually looking at it first If a broker has noted red flags about a customer, the broker should take some extra measures to verify the legitimacy of the customer and their intentions. In these situations the broker should: Obtain additional documentation, such as a driver's license, valid passport, or other reliable piece of identification; If a legal entity is involved in the transaction, take additional steps to identify the actual owner and make sure to confirm the owner's identity; Acquire any other information needed to understand the customer's circumstances and plans; and Communicate concerns to any legitimate lending institution involved in the transaction (lending institutions have more experience, tools, and procedures to investigate, report, or act on apparent money laundering).
Broker Commissions
Real estate professionals are normally paid a commission for assisting with a real estate transaction. The broker commission is factored as a percentage of the sale price of the property. The percentage amount of the commission is normally established in the listing agreement set up between the broker and the seller. If several brokers collaborate on a sale, they will usually split the commission based on the percentage of the sale price offered on the listing and posted by the local MLS. Commission splits do not necessarily have to be even. Commission can become complex if a client and broker do not have an exclusive arrangement. In situations where a client utilizes the services of more than one broker, the commission is normally awarded to the broker that had the greatest influence on the client either buying or selling a property. Without an exclusive contractual agreement, it is possible for a client and the commission to be stolen by another broker, especially if the client is not loyal to the one broker. The final sale price of a property commonly will include the broker commission.
Reverse Mortgages
Reverse mortgages allow homeowners over the age of 62 to use the equity of a home as the basis for a loan. One of the major qualities of a reverse mortgage is that normally the loan does not have to be repaid until the borrower either dies or for some other reason will no longer use the home as a primary residence. The FHA offers a version of the reverse mortgage, known as Home Equity Conversion Mortgages, and it is offered by numerous private financial institutions as well. To qualify for a reverse mortgage, the borrower must own the property (or have a mortgage with a very low balance) and live at the house. The amount that can be loaned through a reverse mortgage is limited by a few factors, namely the age of borrower, the current rate of interest, and the initial mortgage insurance premium. Additionally the amount is also limited by what is lower, the appraised value of the home, the sale price of the home, or the reverse mortgage limit of $625,500.
Savings and Loan Associations
Savings and loan associations (sometimes known as S&Ls or thrifts) are financial institutions that focus on taking in savings deposits and establishing mortgage loans. Savings and loan associations have long been one of the primary sources of funding for real estate purchases. S&Ls commonly have the following characteristics: Locally owned and privately managed Deposits from individuals are used to fund amortized loans (usually mortgage loans) Other loans are made to fund home construction, repairs, or refinancing State or federally chartered Individuals who deposit or borrow are members with the ability to influence operational policy
Secondary Markets
Secondary markets are where investment products (mainly securities) are exchanged between investors. The stock market and stock exchanges are principal elements of the secondary capital markets. When investment products are traded in person at a central location, the investment products are said to be exchanged through an auction market. However, investment products do not need to be traded between investors at a central location. If exchanges occur through communications networks (telephones, fax machines, the internet), the trades are said to be carried out through the dealer market. Often, loans are sold by the issuing financial institution to other financial institutions or to investing parties. The third party financial institutions or investors can bundle together multiple loans into a complicated investment called a mortgage backed security (MBS). Shares of the MBS are then sold to other investors. More on this below. Because of secondary market trades, the actual ownership of a borrower's loan may be far away from the institution that originally issued the loan.
Conventional vs. Insured
Some federal agencies like the Federal Housing Administration and the Department of Veteran's Affairs guarantee loans for real estate. Any loan backed by a federal agency is known as an insured loan. Insured loans also can refer to any loan that is guaranteed by an insurance company. In either case, the insurance company pays money to the lender should a default occur. A conventional loan is one in which the loan is not backed by any organization, federal or private. Conventional loans can technically become insured if arrangements can be made with an insurance company to back the loan.
Equity Loans
Sometimes called a second mortgage, equity loans convert the equity of a property into funds available for the owner to use. The lending agency is allowed to place a lien on the property, and the property owner can use equity that has built up to fund other expenses like college tuition, or major construction projects. Before applying for an equity loan, the homeowner should get an evaluation done of the property by a real estate professional, to determine the value of the property. For example: A property is valued at $79,000. The owner of the property still owes $10,000 on an outstanding mortgage. The equity of the property is $69,000. A lender agrees to an equity loan of $40,000. The owner now has $40,000 to use to put toward their child's college fund. However, the equity of the property is reduced to $29,000 because there is now $40,000 more in debts against the property. By shouldering more debt against the property, the owner has reduced the equity in the property by the amount of money that was loaned out. In effect, the equity of the property was turned into available funds. A standard home equity loan has a fixed interest rate and grants the money in one lump sum.
Subprime Loans
Subprime loans are loans extended to people who do not normally qualify for standard (prime) loans primarily due to lower credit ratings (below 620). Subprime loans nearly always have significantly higher interest rates than standard loans in order to compensate for the higher risk associated with such a loan. There was a huge spike in subprime mortgage loans in the years leading up to the 2008 world economic crisis; most analysts blame that crisis partly on subprime mortgage loans and the unscrupulous practice of giving such loans (when bundled and securitized) a rating far above what they merited. The number of subprime loans dropped near to zero after the 2008 crisis and have only slowly recovered; they remain far below levels they had attained in 2005-2006.
Term or Straight Loans
Term and straight loan both refer to generally similar instruments. Both types of loans have a specified time frame over which they are paid off. With a straight loan the interest is repaid in regular intervals and at the end of the term (10 years for example) the principal and the final interest payment are due. Term and straight loans are often categorized by a floating interest rate. A floating interest rate adjusts up and down with the market or a specific index.
Federal Home Loan Mortgage Corporation (Freddie Mac)
The Federal Home Loan Mortgage Corporation (more commonly known as Freddie Mac) is another privately owned and operated government-sponsored agency that operates under a congressional charter. Freddie Mac was established in 1970. The purpose for creating this entity was to provide competition for Fannie Mae and, by extension, bolster attempts to increase the availability of funding for home ownership. Freddie Mac was initially governed by the Federal Home Loan Bank Board, but that changed in 1989 when the FHLBB was abolished. After that Freddie Mac was run by an 18-member board of directors who are subject to oversight by the Department of Housing and Urban Development Freddie Mac carries out activities that are nearly identical to the activities of Fannie Mae. Freddie Mac purchases conforming loans and resells them as part of mortgage backed securities guaranteed by the company. The main difference between the two organizations is that Fannie Mae mostly buys mortgage loans from commercial banks, while Freddie Mac mostly buys them from smaller banks that are often called "thrift" banks.
FHA
The Federal Housing Administration (FHA) is a government agency that insures mortgage loans. In fact, the FHA is one of the largest insurers of mortgages in the world. The FHA was established in 1934 as part of the National Housing Act. The original intent of the FHA's actions was to regulate the interest rate and terms of mortgages that they insured. During the 1940s, the FHA was a key participant in financing housing for members of the military and veterans returning from war. In the '50s, '60s and '70s, the FHA helped spur the production of privately owned apartments for elderly, disabled, and low-income Americans. In 1965, the FHA was incorporated into the newly created Department of Housing and Urban Development where it has remained ever since. In its 85 years of operation, the FHA has insured over 47 million home mortgage loans and more than 48,500 mortgages for multifamily projects. Currently, the FHA is insuring 4.8 million single-family home mortgages and 14,500 mortgages for multifamily projects. The FHA is one of the few government agencies that is completely self-funded. However, in 2014, the FHA received $1.7 billion from the U.S. Treasury, the first such subsidy in the FHA's 85-year history. The money paid for mortgage insurance on FHA backed loans is placed in an account which is used to pay for the costs of running the program.
Federal Housing Administration
The Federal Housing Administration does not actually issue any loans. However, they do have a listing of approved lenders whose loans the FHA insures. This means that the FHA offsets some of the lender's risk by financially compensating the lender if the borrower should default. Additionally, FHA-backed loans do not require as much cash investment, and there can be greater flexibility in calculating income and payment ratios.
FHA Loans
The Federal Housing Administration does not issue or directly finance any loans. Instead, the FHA insures loans offered by approved lenders. When the FHA insures a loan, it means that the FHA will reimburse the lender for losses that result if a borrower defaults on an insured loan. By insuring loans, the FHA attempts to increase the availability of loans, especially to people with low incomes, by reducing the risk associated with lending. For people interested in homeownership, FHA loans can be an attractive option since they tend to have lower down payment requirements and less stringent qualifications for buyers to meet.
Federal National Mortgage Association (Fannie Mae)
The Federal National Mortgage Association (better known as Fannie Mae) is a privately owned, publicly traded government sponsored agency that operates under a congressional charter. Fannie Mae's purpose is to expand the secondary markets and increase the availability and affordability of funding for home purchases. Fannie Mae was established in 1938 with the aim of providing federal money to local banks in order to finance home mortgages and, by extension, increase the level of home ownership. In 1954, it was reorganized into a "mixed-ownership" corporation, meaning the federal government held preferred stock and private investors were allowed to hold common stock. Fannie Mae was made into a fully private corporation in 1968. Additionally, a portion of the company was split off to form the Government National Mortgage Association (Ginnie Mae). In 1970, Fannie Mae was given the authority to purchase mortgages that were not insured by a government agency. Fannie Mae primarily purchases loans, especially mortgages, which meet certain qualifications (conforming loans) and bundles them into MBSs. The MBSs can then be sold to investors through secondary mortgage markets. The MBS's sold by Fannie Mae are backed by the organization, making them an attractive investment. Ultimately, the company's actions provide fresh money for lending to financial institutions, and also create some amount of flexibility and liquidity in the American housing and credit markets.
The Federal Reserve System
The Federal Reserve System (the Federal Reserve or the Fed) is the central banking system for the United States. The Federal Reserve System was established in 1913 as a reaction to a series of panics and financial crisis in the first decade of the 20th century. Initially, the Fed was established to provide a remedy for bank panics, a situation where multiple banks are faced with a large portion of their customers attempting to withdraw their money at the same time (aka, "a run on the bank"). Over time, the roles and responsibilities of the Fed have changed and increased. The Fed is made up of a central board of governors located in Washington D.C. and a network of 12 regional Federal Reserve banks. The Board of Governors (also known as the Federal Reserve Board) is composed of 7 governors who are appointed to 14 year terms by the President of the United States (with confirmation by the Senate). The Board of Governors is headed by a chairman and vice-chairman, both of whom are Presidential appointees with 4 year terms. The board has a number of responsibilities from guiding federal monetary policy and analyzing domestic and international economics to exercising broad supervisory control over the financial sector and administering particular consumer protection regulations. Within the actual Federal Reserve System, the Board of Governors oversees the regional Federal Reserve banks. The regulatory powers of the board are limited to setting the reserve requirements for depository financial institutions (e.g. commercial banks, savings and loan associations, credit unions) and approving changes to the discount rate. The 12 regional Federal Reserve banks, located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco, are the operational portion of the Federal Reserve System. Reserve banks, along with the 25 associated branches, directly serve the U.S. Treasury and private banks in each reserve bank's particular region. These banks assist the Treasury by handling payments from the Treasury, assisting with the cash management and investment activities of the Treasury, and selling government securities (Treasury bills, government bonds, etc.). The reserve banks supervise private banks in each region along with storing currency and processing checks and electronic payments for those private banks. The regional reserve banks also conduct research on economic issues of regional, national, and international scope. Each of the reserve bank's activities is overseen by an internal board of directors. The president and vice president of the reserve bank are appointed by that bank's board of directors with approval from the Board of Governors. The Board of Governors along with 5 reserve bank presidents form the Federal Open Market Committee (FOMC) which is responsible for orchestrating national monetary policy. The FOMC usually meets eight times a year to discuss monetary policy. One of the goals of these meetings is to decide on the target federal funds rate. This target rate is a federal funds rate that the Federal Reserve will attempt to achieve or maintain through their efforts. The stated goal of the Federal Reserve System is to "promote maximum employment, stable prices, and moderate long-term interest rates."
Open Market Operations
The Federal Reserve System influences the federal funds rate by affecting the supply of reserves. This is accomplished by buying or selling government securities to private banks on the open market. If the Fed intends to raise the funds rate, it sells government securities to private banks. The money for these securities comes out of the bank's reserves. This effectively reduces the available supply of reserves and increases the interest rate of the federal funds market. Conversely, if the Fed intends to lower the funds rate, it purchases government securities from private banks. The money goes into the bank reserves increasing the total supply of reserves. When the supply of reserves increases, the federal funds rate goes down.
Management of the Money Supply
The Federal Reserve system cannot directly control inflation, national production, or levels of employment. Rather the Fed affects the national economy by influencing the federal funds rate, primarily by buying and selling government securities on the open market.
Government National Mortgage Association (Ginnie Mae)
The Government National Mortgage Association (Ginnie Mae) is a government owned and operated corporation that is administered as part of the Department of Housing and Urban Development. Originally part of the Federal National Mortgage Association (Fannie Mae), Ginnie Mae was split off into an independent organization in 1968 when Fannie Mae was reorganized into a private company. Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not originate, purchase, or sell securities of any kind. Instead, this organization guarantees the timely payment of principal and interest amounts from mortgage backed securities made up of government insured loans (FHA backed loans, VA backed loans, etc.). The way this works is that private organizations, who are approved by Ginnie Mae, originate and bundle government backed loans into securities. The securities are then issued as MBSs that carry a Ginnie Mae guarantee. A guarantee made by Ginnie Mae is backed by the full faith and credit of the federal government.
VA Made Cabinet-level Agency
The Veterans Administration became the Department of Veterans Affairs (a cabinet level agency) on March 15, 1989. Currently, the VA has 16 major initiatives. Eliminate veteran homelessness Enable 21st century delivery of benefits and services Automate benefits from the GI Bill Create a virtual lifetime electronic record Improve the mental health of veterans Build Veterans Relationship Management capabilities in order to enable convenient, seamless interactions Design a veteran-centric health care model with the aim of helping veterans both navigate the health care delivery system and receive coordinated care Enhance the veteran experience and veteran access to health care Ensure preparedness in order to meet emerging national needs Develop capabilities and enable systems to drive performance and outcomes Establish a strong VA management infrastructure and an integrated operating model Transform management of human capital Perform research and development to enhance the long-term health and well-being of veterans Optimize the utilization of the VA's capital portfolio by implementing and executing the Strategic Capital Investment Planning (SCIP) process Improve the quality of health care while reducing costs Transforming the delivery of health care through health informatics
Federal Funds Market
The amount of money a private bank may want to have in reserve can change from day to day. If a bank needs a short-term boost to its reserves, it can borrow from other private banks who have more reserves than they need. The federal funds market is where these short-term loans are transacted. The interest rate for these kinds of interbank loans is known as the federal funds rate, or the funds rate. The funds rate rises and falls in response to the supply and demand for reserves, rising when the demand exceeds the supply of reserves and falling when the demand for reserves is exceeded by the supply. While the Fed does not set the funds rate, actions by the Fed can have a significant influence on the behavior of the funds rate.
The Basic Home Mortgage Loan
The costs and terms of an FHA-backed home mortgage loan depend on the financial state of the borrower. While the credit score requirements on FHA loans are less strict than other mortgage loans, these kinds of loans will rarely be issued to individuals with a credit score of less than 500. Borrowers with credit scores between 500 and 579 usually cannot get FHA loans that cover more than 90% of a property's value. For borrowers with credit scores above 580, the required down payment on this kind of loan is normally 3.5% of the value of the property. Part of the trade off for such a minimal down payment is that the borrower will owe premiums for the mortgage insurance. The initial premium, the up-front mortgage insurance premium (UFMIP), is paid when the borrower receives the loan. For loans with FHA case numbers assigned on or after April 9, 2012, the UFMIP is 1.75% of the loan amount. The amount of the annual mortgage insurance premium (MIP) varies, based on the term of the loan, the amount of the loan, the amount of the loan as compared to the value of the property (loan-to-value or LTV ratio), and the date the loan's case number was assigned. The following table shows the MIP amounts for loans with case number assigned on or after January 26, 2015.
Downside of Seller Financing
The downside for buyers is that many sellers charge higher interest rates especially if a buyer requires owner financing because they are considered a higher risk due to low credit score. The downside for the seller is that they end up shouldering a good deal of risk. For this reason, it is wise for a seller to offer financing on the property only if the promissory note is secured by a first trust deed on the property. The first trust deed places the seller in first position to foreclose on the property if the buyer defaults on the loan. Also it is important to note that when a seller finances the purchase, or 'carries the note', they will have to wait to receive the proceeds from the sale of their property, sometimes for many years. For this reason, most sellers of real estate are not in a position to offer financing to the buyer. It is important that a seller who is also financing the purchase should provide the buyer with a seller financing disclosure. This document details important information, as described above, about the loan including the principal amount, the interest rate, the term of the loan, and the document that evidences the extension of credit (e.g. note and deed of trust, land sale contract, or lease option). The disclosure should also include a disclosure of the presence and nature of any optional terms that are imposed on the borrower, such as late charges, prepayment, or balloon payments.
Debt and Housing Expense Ratios
The income-to-debt ratios are significant factors that are considered when a buyer is being qualified. This means that the income of the buyer is compared to the amount of debt the buyer is paying off. A buyer who is drowning in debt is less likely to be qualified than a buyer who is relatively free of debt. The housing expense ratio compares a buyer's gross monthly income to the projected costs of homeownership (mortgage payments, escrow costs, homeowner's insurance, HOA fees, etc.). Most lenders will not lend to a buyer if homeownership costs are projected to take up more than 28% of the buyer's gross monthly income. A buyer must have a housing expense ratio of less than 31% to qualify for a loan backed by the Federal Housing Administration. The total debt-to-income ratio is used to show how much of a buyer's gross monthly income will be spent on all the buyer's outstanding debt (mortgage payments, car loans, alimony, credit card debt, etc.). Lenders commonly restrict loans to buyers who have a total debt-to-income ratio of less than 36%. FHA loans are not available to buyers who are projected to spend more than 43% of their gross monthly income to cover all their debts.
Loan Application Process
The loan application process customarily begins with selecting a lender and then meeting with one of the lending institution's loan officers. This meeting usually involves the lender explaining what loans are available, the interest rates being offered, and any discount point options that are offered. Most often, the borrower is required to fill out a standard federal form called a Uniform Residential Loan Application (URLA). The borrower will usually need to give the following information: Employment information Salary history Monthly income Assets Liabilities An affidavit stating whether the borrower intends to live on the property Authorization for the lender to take steps to verify the information In addition, the borrower may need to provide the following: W-2s Pay stubs Copies of the sales contract Tax returns Retirement or benefit income statements Bank statements It is a federal crime to falsify information on the application. Within three days of getting the complete loan application, the lender must provide the borrower with a good-faith estimate of the borrowing costs (unless the loan is rejected within that time frame). If the lender approves the loan, the borrower should receive a commitment letter which outlines the terms of the loan and the length of time certain terms will last. The commitment letter may also contain conditions that the borrower still has to meet.
LTV Ratios
The loan-to-value ratio is a way for a lender to calculate the risk associated with lending money to a party interested in purchasing a piece of property. The amount of the mortgage loan is divided by the value (or purchase price, if it is lower than the value) of the property that is being purchased in order to generate a percentage ratio. The higher the ratio, the more risky the investment is assumed to be. This is because the LTV ratio looks at how much money is being loaned compared to the value of the property being financed. The more money a lender provides to cover the cost of acquiring a property, the more risk the lender assumes. The more of the property value the buyer can self-finance, the more assurance the lender has that the loan will be paid off on time. Lenders generally will have a maximum LTV ratio. If a borrower needs more than that, they may end up paying more for the loan or may be denied any funding at all.
Programs with Different Rules
The majority of FHA single-family programs have the same rules on the amount of the MIP. The following programs have different rules concerning how much must be paid in MIP: Streamlined refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009 Title I (manufactured home loans) Home Equity Conversion Mortgages (reverse mortgages) Section 247 (Hawaiian Homelands) Section 248 (Indian Reservations) The length of time that the borrower is required to pay the annual mortgage insurance premiums is also variable depending on the LTV ratio of the FHA loan. If the LTV ratio is 90% or less, the MIP is paid for 11 years or the term of the loan, whichever is less. If the LTV ratio is more than 90%, the MIP is paid for the entirety of the loan term. The rules on how long MIP must be paid apply to most FHA single-family programs. Title I loans and Home Equity Conversion Mortgages are exempt. The limits on the amount of money that can be loaned through an FHA mortgage loan is different from state to state and county to county. The standard mortgage limits, which are used by numerous counties, are as follows: One-Family Home: $271,050 Two-Family Home: $347,000 Three-Family Home: $419,425 Four-Family Home: $521,250
Brief History of the VA Changes Continued
The next change came in 1917 as the United States was entering World War I. Congress set up a system of veteran's benefits, including compensation for disability, vocational rehabilitation for disabled veterans, and insurance for active service members and veterans. During the 1920s, veterans benefits were handled by three federal agencies: the Veterans Bureau, the Bureau of Pensions, and the National Home for Disabled Volunteer Soldiers. This changed in 1930 when the President was given Congressional approval to "consolidate and coordinate Government activities affecting war veterans." The result was the Veterans Administration. The federal agencies that had been handling veterans' affairs were incorporated as bureaus in the newly created VA. Brigadier General Frank T. Hines became the first Administrator of Veterans Affairs after serving as the director of the Veterans Bureau for seven years. By the end of World War II, there was a vast increase in the veteran population. The VA, by that time, was serving approximately 15 million veterans from WWII and approximately 4 million from WWI. In response, Congress had dramatically increased the benefits available through the VA, most important of which was the GI Bill. Additionally, the VA went through decentralization, in which more authority was given to field offices, in order to address significant restrictions and delays of services.
Down payment assistance programs provide assistance with: -The cost of an insurance policy which will cover repayment of a loan should the borrower default on payments -All of these are correct -The portion of a property's purchase cost that a buyer is required to pay up front in order to lessen a lender's risk -The cost of transfer and property taxes that must be paid when the ownership of a property changes
The portion of a property's purchase cost that a buyer is required to pay up front in order to lessen a lender's risk
Title I Loans
Title I is a program through which the Federal Housing Administration (FHA) insures loans made for the purchase or refinancing of a manufactured home, a lot for a manufactured home, or a manufactured home and the lot it sits on. The FHA does not issue or service the loan but they do cover the lender's losses if the borrower defaults. Borrowers must meet certain requirements to be eligible for a Title I loan. The borrower must have enough money to provide the minimum down payment. The borrower must intend for the manufactured home to be their primary residence. The borrower must have an income that allows for the monthly payments on the loan and other expenses. The borrower must have an appropriate site where the manufactured home will be placed. A manufactured home that is being financed by this type of loan must meet particular requirements. The manufactured home must conform to the Model Manufactured Home Installation Standards. If the manufactured home is new, it must have a 1-year manufacturer's warranty. The manufactured home must be installed on a site that meets the local standards for suitability of a site. The manufactured home must have an adequate water supply and sewage disposal facilities. A Title I loan cannot be used to finance the purchase of furniture (chairs, rugs, beds, etc.). However, the funds from this kind of loan can be used to buy built-in appliances and wall-to-wall carpeting.
IE properties are those that...
fail the FHA inspection but would pass with minor repairs. If these repairs are estimated to be less than $5,000, then the FHA can issue a loan with a repair escrow. The total FHA loan is given for the property price and the cost of repairs. The cost of repairs is put into an escrow that the lender controls. As the owner makes repairs, the lender will inspect the repairs and, if sufficient, distribute funds from the escrow to reimburse the owner. After 90 days, any money which is left in the escrow account is applied toward reducing the principal of the loan.
UK properties are...
more rare. For properties which are listed UN, the buyer may attempt to obtain a 203(k) loan. The standard FHA loan is a 203(b) loan. The 203(k) loan is only available for owner-occupied properties, i.e. the owner cannot purchase the property for investment or renting purposes. The repairs must exceed $5,000 (or else it would qualify as an IE property) but the total value must be within the FHA mortgage limit. The total value is determined by taking the lesser of the current value plus the cost of repairs, and 110% of the expected value after repairs.
