Section 6: Financing Real Estate

The consumer works with the lender to select a loan product.

Application

There is usually no cost to the consumer.

Pre-qualification

Protects borrowers from overcharges by requiring certain disclosures and prohibiting kickbacks

Real Estate Settlement Procedures Act (RESPA)

Manuel is selling his home to Selena. He has an existing loan that he'll continue to make payments on, and he's extending credit to Selena for the balance of the purchase price. She will make monthly payments to him. What type of financing are the parties using in this transaction?

Wrap-around loan

A document that conveys an unconditional promise to pay a fixed amount (with or without interest).

negotiable instrument

Sandra retired from a career in the Navy and is ready to buy her first home, a small bungalow in a quiet neighborhood, for $169,900. Her military service gives her the benefit of Veterans Affairs (VA) loan. What's her required down payment?

$0

Divide the mortgage amount by 12 and add this additional amount to the monthly payment.

1/12 plan

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

A budget mortgage

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

A partially amortized (balloon) mortgage

The interest rate fluctuates based on the economic index to which it's tied.

Adjustable-rate mortgage

Debt is paid off by making periodic payments toward both principal and interest.

Amortized

Which of the following is a true statement about FHA financing? -An FHA loan is best for borrowers who have large down payments. -An FHA loan is usually more attractive to borrowers who have lower credit scores and down payments. -FHA loans are available to all borrowers, regardless of credit history. -FHA loans have more stringent requirements than conventional loans do.

An FHA loan is usually more attractive to borrowers who have lower credit scores and down payments.

Pay half the mortgage payment every two weeks instead of once per month.

Bi-weekly plan

Member-based cooperatives that provide credit for loans

Credit unions

This organization provides servicemembers, veterans, and their eligible surviving spouses with a wide range of homebuying services.

Department of Veterans Affairs

Bethany has agreed to purchase Derrick's property using a land contract. Who holds legal title to the property during the term of the loan?

Derrick

T or F: Conventional loans must conform to Fannie Mae and Freddie Mac guidelines.

F

Goldie and Kurt are looking at purchasing their first home. Their credit history is a little shaky and they don't have enough money saved to put down 20%. What type of loan seems most appropriate?

FHA

Lydia put the minimum 3.5% down on her $210,000 home. She'll have to pay an MIP. What type of loan does Lydia have?

FHA

Requires mortgage insurance premium (MIP)

FHA

Which entity services rural development loans?

FSA

FNMA, the Federal National Mortgage Association; a private, for profit corporation that operates under a congressional charter that buys loans in the secondary mortgage market from lenders in the primary mortgage market

Fannie Mae

Farm families financing the purchase of properties in rural areas may be able to obtain financing through this government agency if they meet certain criteria, such as income requirements.

Farm Service Agency

The Federal Home Loan Mortgage Corporation (FHLMC) which increases the availability of financing for conventional mortgages insured by the federal government by purchasing them from lenders in the primary market.

Freddie Mac

A payment that gradually adjusts (usually upward) based on a pre-determined schedule and amount.

Graduated payment

These offer buyers a wide range of homebuying support and assistance at a more local level.

Housing finance agencies

Mortgages generally contain language in which the borrower assures the lender that there are no known or undisclosed encumbrances on the title. Why is it important for the borrower to assure the lender that a title is clear of defects?

It provides a good and marketable title for the lender to sell upon foreclosure.

The buyer has possession of the property, while the seller still holds the title.

Land contract

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

Loan Estimate

The lender collects documentation from the consumer about income and credit, as well as the property.

Loan processing

This type of loan is designed for the self-employed or those paid on commission

Low documentation (low-doc)

What attracts borrowers to adjustable rate mortgages?

Lower initial interest rate

These allow qualified buyers to claim some of the mortgage interest they paid as a credit on their tax returns.

Mortgage credit certificates

The lender requires documentation from the borrower although no property is yet identified.

Pre-approval

Stipulates that the lender may be owed additional interest if the borrower pays the loan off prior to the full loan period.

Pre-payment penalty

The lender performs no verification of information the consumer provided.

Pre-qualification

A mortgage loan alternative that allows the interest rate to be renegotiated periodically

Renegotiable rate

Associations that accept savings deposits and offer loans

Savings and loan associations

Diana works for an organization that accepts savings deposits and then loans the funds out through mortgage and other types of loans. She must keep commercial lending under 20%. What type of lender does Diana work for?

Savings and loans

T or F: Conventional loans can vary in length and terms.

T

T or F: Originators of conventional loans often package and sell groups of loans on the secondary mortgage market.

T

T or F: Originators of conventional loans usually don't service the loans once they've been sold.

T

What would happen if a client's rate lock-in expires two days prior to closing?

The interest rate will revert to the current rates.

What can you recall about Fannie Mae and Freddie Mac? Which three of these are true? -They're government-owned enterprises. -They're publicly traded. -They're government agencies. -They buy mortgages, package them, and resell them as mortgage-backed securities. -They act as a link between banks, the government, and Wall Street

They're publicly traded. They buy mortgages, package them, and resell them as mortgage-backed securities. They act as a link between banks, the government, and Wall Street

What's the purpose of PMI?

To protect the lender in case of borrower default when the borrower has put down less than 20%

This program provides funding to low- and moderate-income families living in eligible rural areas.

USDA Rural Development Program

Which of the following best describes a home equity line of credit? -A loan in which the lender makes payments to the homeowner for a specified period of time and gains equivalent ownership -A temporary (usually 90-day) loan that provides funds in addition to an existing loan until permanent financing can be obtained -Funds received in one lump sum and frequently used for home renovations, to fund a college education, or for other major purchases -Used as an open-end account similar to the revolving credit of a credit card from which borrowers can take advances, repay money, and even borrow money again

Used as an open-end account similar to the revolving credit of a credit card from which borrowers can take advances, repay money, and even borrow money again

Can be obtained for 0% down payment

VA

Charles is selling his property to Seth. Charles is financing part of the transaction for Seth, who will make payments to Charles while Charles retains the property title. What is this an example of?

a land contract

Permits the lender to make the loan immediately due and payable if a borrower defaults.

acceleration

Allows a lender to demand immediate and full payment of all debt owed if a buyer defaults or fails to meet certain conditions that apply to the loan

acceleration clause

A mortgage with a rate that adjusts based on changes in a market index

adjustable-rate mortgage (ARM)

A provision in a mortgage that requires the loan to be paid in full by the mortgagor if a transfer of ownership takes place. This is also called a due-on-sale clause.

alienation clause

Information the consumer provides will be validated during loan processing.

application

An estimate of value as of a specific date and for a specific use

appraisal

A one-time payment, usually occurring at or near the end of a loan term, which is larger than all the other payment amounts

balloon payment

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

blanket loan/mortgage

Backed by a promissory note

both

A temporary loan used to cover the interval between two transactions.

bridge loan

A financing technique in which the buyer obtains a lower interest rate by buying down the interest rate at the time the loan is made

buydown

Interim financing for developing land. The contract allows for disbursements of funds at specific stages of construction.

construction loan/mortgage

May require PMI for down payments less than 20 to 25%

conventional

A primary mortgage loan that is not guaranteed or insured by any government agency; can be conforming or non-conforming to Fannie Mae/Freddie Mac guidelines

conventional loan/mortgage

In an amortized mortgage, the monthly payment is the same each month. The part used to pay the principal increases each month, while the amount going toward interest ______.

decreases

Involves three parties: the borrower, lender, and trustee

deed of trust

Instructs the lender to cancel a security instrument upon full payment of a loan

defeasance clause

A material adverse condition of a property

defect

Type of prepaid interest that borrowers pay to lower a loan's interest rate

discount point

A fee charged by the lender to give the borrower a lower interest rate

discount points

Points a lender charges at closing; buyers sometimes opt to pay points to get a lower rate or to buy down the interest rate

discount points

Requires borrower to repay the loan when transferring ownership.

due-on-sale

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

fixed-rate loan

Private companies such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, created by the U.S. Congress to make borrowing easier and more cost effective

government-sponsored enterprises (GSEs)

These aren't repaid if the buyer meets certain requirements, such as owning and living in the home for a specific length of time.

grants

A fixed-rate mortgage in which the monthly payments increase over time according to a set schedule

growing equity mortgage

An open line of credit based on the available equity in the borrower's home

home equity line of credit (HELOC)

A loan in which the borrower's home equity is used as collateral

home equity loan

Companies that finance mortgage loans, but specialize in insurance products

insurance companies

The amount charged for use of the money

interest

The borrower only pays the interest on the loan for a set number of years—usually between five and seven

interest-only

Hank works for an organization that lends specifically to investors who want to avoid conventional financing. What type of lender does Hank work for?

investment group

A fee charged by the lender to cover the cost of processing the loan

loan origination fee

The ratio of a loan amount to the value of the property being purchased

loan-to-value ratio (LTV)

Put a portion of any bonuses, tax returns, or other extra money toward the mortgage.

lump sum plan

A title that is reasonably free and clear of encumbrances so that the average buyer would not hesitate to consummate a sale

marketable title

Involves two parties: the borrower and lender

mortgage

Mortgage insurance is due from borrowers who make a down payment of less than 20% on a home mortgage loan. It's paid by the borrower to protect the lender from losses due to potential default.

mortgage insurance premium (MIP)

A monetary penalty that's imposed on a borrower for paying off a loan before its intended term ends

prepayment penalty

Fee that's charged when a borrower pays a loan off early

prepayment penalty

Where loans are originated; they are sold on the secondary mortgage market

primary mortgage market

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

private mortgage insurance (PMI)

essentially a promise from the borrower (the obligor) to repay a certain sum of money to another party (the lender or holder of the note, known as the obligee) under specified terms

promissory note

A form of seller financing in which a loan is given to the buyer from the seller; the buyer puts the money toward the purchase price in the form of a down payment

purchase money mortgage

The securing of a given interest rate for a specified period of time between a borrower and a lender.

rate lock

With a reverse mortgage, the lender makes payments to the homeowner for a specified period of time, and gains corresponding equity.

reverse annuity mortgage

The market for loans sold by the primary market; a secondary lender will service the loan for the consumer

secondary mortgage market

These tend to have low or zero interest rates, and the payments are deferred.

silent second

When another bill is paid off, add that amount to the mortgage payment.

snowball

All of the information about the property and borrower is analyzed, and a recommendation is made.

underwriting