Chapter 10 - Real Estate Practice - Financing Programs
Va guaranteed loan secondary financing
A VA borrower can use secondary financing to cover the downpayment or closing costs if he doesn't have enough cash. HOWEVER: the total financing can't exceed the property's appraised value, the buyer must qualify for the payments on both loans, and any conditions placed on the second loan can't be more stringent than those that apply to the VA loan.
VA-guaranteed loan underwriting standards
A VA loan applicant must qualify under both the income ratio method and the residual income method. The applicant's debt to income ratio should not exceed 41%.The residual income method is used to determine whether the applicant will have sufficient cash flow for other expenses after paying the mortgage payment and other monthly obligations.
Secondary financing
A borrower may use secondary financing to cover part of the downpayment or closing costs of a loan.Secondary financing may be provided by the same lender, the seller, or a third party.The borrower typically must be able to qualify for the combined monthly payment for both the primary and secondary loans.
Government sponsored loan
A buyer who gets a loan that isn't insured by the FHA, guaranteed by the VA, or sponsored by some other federal, state, or local government agency.
Conventional loans
A buyer who gets a loan that isn't insured by the FHA, guaranteed by the VA, or sponsored by some other federal, state, or local government agency. Conventional conforming loans are subject to conforming loan limits, which are set by the Federal Housing Finance Agency, the agency that oversees Fannie Mae and Freddie Mac. These limits apply to loans for one- to four-unit dwellings. The conforming loan limits are based on median housing prices nationwide and may be adjusted annually to reflect changes in median prices.At the time of writing, the conforming loan limit for single-family homes in most parts of the country is around $550,000—but again, these limits change yearly. In areas with significantly higher than average housing costs, the limit may be over $800,000.
Federal Housing Administration (FHA)
A federal agency established in 1934 to increase home ownership by providing an insurance program to safeguard the lender against the risk of nonpayment. Currently part of Housing and Urban Development (HUD).
Fixed rate loans
A fixed-rate loan has an interest rate that stays the same throughout the loan term. For instance, a 30-year fixed-rate loan that begins at 6.5% interest will remain at 6.5% for all 30 years of the loan term, even if market interest rates go up or down during that time.
Level payment temporary buydowns
A level payment buydown involves an interest reduction that stays the same during the buydown period. For instance, a level payment buydown might reduce the buyer's interest rate by 2% during the first two years of the loan; the buyer would then pay the note interest rate for the remainder of the loan term.
fully amortized loan
A loan consisting of equal, regular payments satisfying the total payment of principal and interest by the due date.A fully amortized loan is repaid within a set period of time with regular monthly payments. Each monthly payment is for the same amount, and includes both a principal portion and an interest portion.
Nonconfirming loan
A loan that does not met the criteria set forth by secondary market lenders such as Fannie Mae is non-conforming loan.
Loan-to-Value Ratio
A loan's loan-to-value ratio (LTV) states the relationship between the loan amount and the value of the house being purchased.A loan with a low LTV is less risky than one with a high LTV; because the borrower has made a large investment in the property, default is less likely.
Contract for Deed
A means by which the seller passes possession but retains title to the property until the total or a substantial portion of the purchase price is paid. Installment contract. The two parties here are the vendor (owner) and the vendee (buyer). Contract for deed is faster, less costly transaction than purchase money mortgage. Also, foreclosure not required in case of default.
Purchase Money Mortgage
A mortgage given by the seller to the buyer to cover all or part of the sale price. Seller financing. The buyer will pay the seller in installments, instead of paying the entire purchase amount up front.
Repayment period
A mortgage loan's repayment period is the number of years the borrower has in which to repay the loan. The repayment period is also called the loan term. The length of the repayment period affects both the amount of the monthly payment and the total amount of interest paid over the life of the loan.
Negative Amortization Cap
A negative amortization cap limits the amount of unpaid interest that can be added to the principal balance. Typically, a negative amortization cap limits the total amount the borrower can owe to 125% of the original loan amount.
Housing expense to income ratio
A percentage that measures a loan applicant's proposed mortgage payment against her stable monthly income. For FHA cannot exceed 31%.
Prepayment penalties
A prepayment penalty is a charge imposed on the borrower if he pays off all or part of the loan's principal before it is due. Prepayment penalties are rare in loans on residential property. Some lenders offer incentives such as reduced loan fees or a lower interest rate in exchange for the inclusion of a prepayment penalty.
VA guaranteed restoration of entitlement
A veteran who has used his full entitlement to get a VA loan can get another VA loan only if his entitlement is restored.Entitlement is restored if the first loan is repaid, or if another eligible veteran agrees to assume the loan and substitute her entitlement for the seller's entitlement.
Real Estate Contract
A written promise to pay, by the buyer, and a written promise to deliver a deed, by the seller. Sometimes a seller may choose to use a real estate contract instead of a promissory note and mortgage or deed of trust in the sale. A real estate contract allows the buyer to take immediate possession of the home, but the buyer doesn't get legal title until the full purchase price is paid.
Caps on increases
ARMs include interest rate caps and other caps that limit how much the borrower's payments can increase. A borrower should make sure these limits provide sufficient protection against sharply rising rates and steep payment increases that can cause default. Most ARMs have two kinds of rate caps. One kind limits how much the interest rate can increase in any one adjustment period. The other limits how much the interest rate can increase over the entire life of the loan. Common rate caps are 2% per year and 6% over the life of the loan.
ARM checklist
Adjustable-rate mortgages are complicated. If your buyers want an ARM, you can help them understand some key issues. Encourage them to ask the lender or mortgage broker the following: What will the initial interest rate be? How often will the interest rate change? How long is the first rate adjustment period? How often will the payment change? Is there a limit to how much the interest rate can be increased? Is there a limit to how much the payment can be increased at any one time? Does the loan allow negative amortization? Can the loan be converted to a fixed-rate loan?
VA guaranteed loan assumption release of liability
After a VA loan is assumed, the original veteran borrower will remain liable for the loan unless he gets a release of liability from the VA. To get a release of liability, the following conditions must be met: the loan payments must be current, the new buyer must be an acceptable credit risk, and the new buyer must assume the veteran's obligations on the loan.
Seller financing benefits
Although it can be complicated, seller financing can make the property more marketable—especially when interest rates are high. The seller doesn't have the overhead of a bank and can offer a below-market rate and still make money. Seller financing can also open the property to buyers who wouldn't qualify for institutional financing. First, seller credit can be considerably less expensive than a bank loan, since the seller won't charge a loan origination fee and, as mentioned, can ask a lower interest rate. Also, the seller might agree to accept a smaller downpayment than an institutional lender would require. This means that the buyer has to come up with less money at closing. More attractive property = higher selling price.
Amortization
Amortization refers to how the principal and interest on a loan are paid during the repayment period. Most mortgage loans are fully amortized.
Mortgage insurance premiums
An FHA borrower pays both a one-time premium and annual premiums.The one-time premium can be financed over the loan term. The annual premium is paid in monthly installments, and may be canceled after 11 years if the original LTV was 90% or less.
VA guaranteed loan residual income analysis
An applicant's residual income is monthly gross income less payroll taxes (income taxes, social security, and Medicare), the monthly shelter expense, and the other recurring obligations.
Mortgage (deed of trust)
An interest in real property given to a lender as security for the repayment of a loan. Collateral for the promissory note.
Interest only mortgages
An interest-only mortgage allows the borrower to make interest-only payments during a specified initial period.Then the borrower must begin repaying the principal, with interest, amortized over the remainder of the loan term.
Conventional Loans LTV
As mentioned earlier, the traditional loan-to-value ratio for conventional loans is 80%—meaning the borrower will make a 20% downpayment. Lenders often make loans with a higher LTV but, as we'll discuss, typically apply stricter standards. Lenders typically charge higher loan fees and higher interest rates for higher-LTV loans and apply stricter qualifying standards. And borrowers who get conventional loans with LTVs above 80% must buy private mortgage insurance, which we'll discuss next.
Low income programs
Borrowers with incomes that are below the median for a metropolitan area, or who are buying in a targeted low-income neighborhood, may be eligible for loan programs that offer increased debt to income ratios.
Jumbo loans
Conventional loans that exceed the conforming loan limits. For these loans, lenders usually charge higher interest rates and fees and apply stricter underwriting standards. Jumbo loans are generally ineligible for sale to Fannie Mae and Freddie Mac.
Revolving debt
Credit card and charge accounts are called revolving debts. With this type of debt, the amount owed each month is variable, and the account is not supposed to be paid off by a specific date. The lender will typically use the minimum monthly payment owed on each revolving account in calculating a loan applicant's debt to income ratio.
Discount points
Discount points increase the lender's immediate yield on a loan. In exchange for a lump sum payment up front, the lender makes the loan at a lower interest rate. In other words, the lender "discounts" the loan for a flat fee. The lower interest rate means that the borrower's monthly payment will be lower, which makes it easier for the borrower to qualify for the loan.
Margin
Every ARM has a margin, which is the difference between the index rate and the interest rate the lender charges the borrower. The margin is essentially the lender's profit from the loan. A typical margin is two to three percentage points. For example, suppose the current index rate is 5% and the lender's margin is 2%. So the lender charges the borrower 7%. The 2% margin is the lender's income from the loan.
FHA Underwriting Standards
FHA qualifying standards are less stringent than conventional financing standards.An FHA loan applicant's fixed payment to income ratio should not exceed 43%, and his housing expense to income ratio should not exceed 31%.Ordinarily, no cash reserves are required, and gift funds or secondary financing from close family members may be used to help close the transaction.
Conventional loan underwriting credit worthiness rules
Fannie Mae requires a minimum credit score of 620; Freddie Mac may allow a score below 620, depending on the program, but will charge higher fees.
203b loan
Focused on moderate to low income buyers. owner occupied, 15 or 30 year loan term, first lien position, mortgage insurance, low downpayment, lower qualifying standards (than conventional), with no prepayment penalty.
Gift funds
If the buyer doesn't have enough cash to pay the downpayment and the closing costs and still have the required reserves, the buyer's parents or some other relative may be willing to donate the necessary cash. Lenders call this type of donation gift funds. A number of rules apply to the use of gift funds. First, the donor generally has to be the buyer's relative or fiance, or possibly the buyer's employer or a nonprofit organization. Second, the lender must receive a letter from the donor stating that the funds are a gift and don't need to be repaid. Third, the buyer generally must make a downpayment of at least 5% of her own funds.
Buydowns
In a buydown arrangement, the seller (or a third party) pays a lump sum at closing to the buyer's lender so that the lender will charge the buyer a lower interest rate.A buydown may be permanent or temporary.
FHA loan fees
In addition to an origination fee, an FHA borrower may have to pay discount points as well, depending on the policy of the individual lender.
Loan fees
In addition to interest, a lender will charge a borrower loan fees.Almost all mortgage loans involve an origination fee that covers the administrative costs of processing the loan.Discount points (the other type of loan fee) increase the lender's yield from the loan. Lenders often charge discount points in exchange for a lower interest rate for the borrower.
Private Mortgage Insurance (PMI)
Insurance provided by a private carrier that protects a lender against a loss in the event of a foreclosure and deficiency. If a borrower defaults on a loan covered by PMI, the lender may foreclose on the property. If the foreclosure sale results in a loss, the lender can file a claim with the insurance company to cover the loss up to the policy amount. If the value of the investment eventually increases, lowering the LTV, the purchaser of insurance may request to cancel the PMI
Mortgages with lower initial payments
Many home buyers, especially first-time buyers, are starting out in their careers. They may have limited incomes and high debts from student loans, but expect their incomes to increase steadily. If these buyers can obtain a loan with lower initial payments and larger payments later, they may be able to afford a more expensive house than they otherwise might.
Low downpayment mortgages
Many lenders have special conventional programs that allow downpayments of less than 5%.Some of these require a small downpayment from the borrower's own funds, while others allow all of the funds to come from other sources.
Cal vet loans characteristics
Maximum loan amount=$1M, LTV = 97% Funding fee = borrower pays around 1-3%. The only other fees are property appraisal and credit check. Interest rate - fixed by the state Loan term = 30 years (also 15 - 20) Occupancy by owner Flood and fire Insurance reduced Calvet loan cannot be assumed.
Conventional loan due on sale / alienation clauses
Most conventional loans contain due-on-sale or alienation clauses; this means the buyer can't assume the seller's loan without the lender's permission. The lender will evaluate the new buyers to make sure that they are creditworthy. However, when a conventional loan is assumed, the lender usually increases the loan's interest rate to the current market rate. (As you'll see, the rate isn't increased when an FHA or VA loan is assumed.) Raising the interest rate largely defeats the purpose of assuming a loan, so assumption of conventional loans is fairly rare.
Conventional loans secondary financing
Most lenders let a borrower use secondary financing with a conventional loan, but impose restrictions to reduce the risk of the borrower getting overextended and defaulting on the primary loan. For instance, many lenders require that the repayment term on a secondary loan cannot be less than five years. A loan with a shorter term would probably require a balloon payment during the early years of the primary loan when the risk of default is greatest.
Low-downpayment mortgages
Often the problem for home buyers—especially first-time buyers—is a lack of cash for the downpayment, closing costs, and cash reserves. However, many lenders offer special conventional loan programs that let borrowers make smaller downpayments and receive cash from alternative sources. The alternative sources of funds may include gifts or unsecured loans from relatives, employers, public agencies, nonprofit organizations, or private foundations. More than one source may be used to assemble the funds. In addition, these programs often further reduce the borrower's need for cash at closing by requiring only one month's mortgage payment in reserve, or even having no reserve requirement at all.
Conversion option
One feature that can alleviate that discomfort is a conversion option. A conversion option allows the borrower to convert the ARM to a fixed-rate loan under certain circumstances (for example, during the first five years of the loan). Conversion is usually less expensive than refinancing.
Hybrid ARM
Other two-tiered ARMs are available, such as 5/1 ARMs. The first number represents the number of years before the first rate adjustment, and the second number indicates that subsequent adjustments will happen once a year. These are sometimes called hybrid ARMs, because they are a cross between adjustable-rate and fixed-rate mortgages. A hybrid ARM may be an ideal loan for a buyer who plans to sell or refinance before the first rate adjustment, since the initial interest rate is usually significantly lower than for a fixed-rate loan.
Seven basic loan features
Repayment period, amortization, loan to value ratio, secondary financing, loan fees, fixed or adjustable interest rate
Purchase money mortgage
Seller financing usually takes the form of a purchase money mortgage, where the seller extends credit to the buyer--often called 'carrying back the loan.'The buyer signs a promissory note and a mortgage or deed of trust, then makes installment payments to the seller. (Alternatively, a land contract may be used.)
Seller primary financing
Seller is main or only source of financing. If unencumbered, negotiation straightforward b/c seller is primary lien.
Unemcumbered property
Seller owns the properaty free and clear - it's not encumbered by a mortgage or deed of trust.
Seller methods to help finance a loan
Seller primary, Seller secondary, Seller wraparound, Buydowns, Equity Exchange, Lease / option
Negative amortization
Some ARMs have both a mortgage payment cap and an interest rate cap. Others have only an interest rate cap, or only a payment cap. If the ARM has a payment cap but no rate cap, the borrower may run into negative amortization. Negative amortization occurs when unpaid interest is added to the loan's principal balance. Usually, a loan's principal balance declines steadily over the loan term. But negative amortization makes the loan balance go up instead of down. The borrower can end up owing the lender more money than the original loan amount. if negative amortization is a possibility, the ARM usually includes a negative amortization cap.
Index
The ARM's index is the statistical report the lender has chosen to use as a measure of changes in the cost of money, so that the interest rate on the loan can be adjusted accordingly. The lender may use any of several available indexes, such as the weekly auction rate of Treasury bills, or the Eleventh District cost of funds index.
Cal-vet loans
The Cal-Vet program helps veterans buy farms and one-unit residential properties.Cal-Vet loans require a downpayment unless the borrower qualifies for a VA guaranty, and there are maximum loan amounts.The interest rate and fees are generally low, and LTV ratios between 95% and 97% are common.
Effective income
The FHA's term for stable monthly income is effective income. Effective income is the applicant's gross income from all sources that can be expected to continue for the first three years of the loan term.
Federal Housing Administration
The Federal Housing Administration (FHA) is an agency within the Department of Housing and Urban Development.The FHA does not originate loans, but rather provides mortgage insurance for loans made by banks and other lenders.FHA programs are targeted at low- and middle-income home buyers.
Loan level price adjustment (LLPA)
The LLPA "makes up" for the increased risk associated with the transaction. Creditors pass LLPAs on to consumers in the form of higher interest rates. In addition to the standard origination fee, most conventional borrowers will be charged a loan-level price adjustment (LLPA) if the loan is going to be sold to Fannie Mae or Freddie Mac. Note that the LLPA isn't a separate fee charged at closing; instead, it's rolled into the interest rate (raising the rate very slightly).
Debt to income ratio
The debt to income ratio measures the relationship between the loan applicant's monthly income and all monthly obligations, including the housing expense.The benchmark maximum debt to income ratio for conventional loans is 36%.
Debt to income ratio
The debt to income ratio measures the relationship between the loan applicant's stable monthly income and his total monthly debt. This monthly debt consists of the proposed housing expense (including the PITI payment: principal, interest, taxes, hazard insurance, and any mortgage insurance or homeowners association dues), plus any other recurring obligations as listed in the box on the right. Required by Fannie Mae.
Housing expense to income ratio
The housing expense to income ratio considers only the applicant's proposed monthly PITI payment as a percentage of the applicant's monthly income.The benchmark maximum housing expense to income ratio for conventional loans is 28%.
VA guaranteed loan Income ratio method
The income ratio method is the same as the debt to income ratio we've discussed earlier. Generally, a VA borrower's debt to income ratio shouldn't exceed 41%. The vet must also qualify under the residual income method, which uses a table of minimum incomes instead of a ratio.
Mortgage payment adjustment period
The interest rate charged on a loan affects the amount of the monthly payment. So an ARM also has a mortgage payment adjustment period, which sets how often the lender can change the amount of the borrower's monthly payment. Usually, the payment adjustment period coincides with the interest rate adjustment period. For example, an ARM with a one-year rate adjustment period is likely to have a one-year payment adjustment period, too. If the interest rate on the loan is adjusted, the lender will also adjust the mortgage payment.
ARM key features
The key features of an ARM include the note rate, the index, the margin, the rate adjustment period, the mortgage payment adjustment period, caps on increases, and the conversion option.
VA Guaranteed loan underwriting standards
The lender analyzes the veteran's income using two methods: the income ratio method and the residual income method.
Note rate
The note rate is simply the ARM's initial interest rate. It is referred to as the note rate because it is the interest rate stated in the promissory note for the loan.
Mortgage insurance premiums (MIP)
The one-time premium is sometimes called the "upfront premium." Either the borrower or the seller can pay the one-time MIP at closing (the buyer can also have the premium added to the loan amount). Currently, the upfront insurance premium is 1.75% of the loan amount. MIP cancelled after 11 years for 90%LTV.
Baloon payment
The payment of the entire principal amount at the conclusion of an interest-only loan.
Housing expense to income ratio
The ratio, expressed as a percentage, that results when a borrower's housing expenses are divided by his/her monthly income. Not to exceed 28% for conventional loans.
FHA buydown
The seller or another party may pay discount points to reduce the interest rate and help the loan applicant afford the loan. But no matter how large a temporary buydown actually is, the FHA will qualify the applicant using the note rate.
Low income programs
There are many conventional loan programs aimed at helping low- or moderate-income buyers. Generally, borrowers can qualify for one of these programs if their stable monthly income is lower than the median for their area. These programs may allow a maximum debt to income ratio of 38% or even 40% without compensating factors, and may have no maximum housing expense to income ratio. They may also have lower downpayment requirements or lower interest rates. Conventional low-downpayment programs may also be available for certain kinds of public employees such as public school teachers, police officers, and firefighters. These loans help first responders and others afford housing in the communities they serve, rather than being priced out into distant areas.
Silent wrap
To avoid triggering the due-on-sale clause, a buyer and seller may occasionally try to do a "silent wrap" by keeping the lender in the dark about the sale, but this can easily backfire. Real estate agents should never get involved in silent wraps.
VA Loan Eligibility
To be eligible for a VA loan, a veteran must have served a minimum amount of continuous active duty.The veteran must have a Certificate of Eligibility from the VA. Minimum service is from 90 days to 24 months of active duty.
Standard Ratio
To qualify for a conventional loan, the loan applicant's total monthly obligations (including the proposed mortgage payment) generally must not exceed 36% of her stable monthly income. In other words, the maximum acceptable debt to income ratio is 36%. 1/.36 = 2.7xmonthly income
VA-guaranteed loans
VA loans are guaranteed by the Department of Veterans Affairs, which will reimburse lenders for losses resulting from a borrower's default.Characteristics of VA loans include no downpayment requirement, lenient qualifying standards, no mortgage insurance, and no maximum loan amount.
California veterans farm and home purchase program (cal-vet)
Veterans who live in California may also be eligible for a loan to buy a single-family residential or farm property through the California Veterans Farm and Home Purchase Program, better known as the Cal-Vet program. The California Department of Veterans Affairs administers this program. The Cal-Vet program and the federal VA program are quite similar, but one or the other may offer some advantage depending on the veteran's situation.
Permanent Buydown
When points are paid to a lender to reduce the interest rate and loan payments for the entire life of the loan
Temporary Buydown
When points are paid to a lender to reduce the interest rate and payments early in a loan, with interest rate and payments rising later.
Rate adjustment period
While an ARM enables the lender to adjust the borrower's interest rate to reflect current market rates, the lender can't simply change the borrower's rate whenever there's any change in market rates. The rate adjustment period limits how often the lender has the right to make an adjustment. Depending on the loan, the rate adjustment period might be six months or three years or some other time period. ARMs are labeled by the frequency of their adjustment period: for example, an ARM that's adjusted annually is called a one-year ARM. With a one-year ARM, at the end of each year, the lender checks the index. If the index rate has risen, the lender increases the borrower's interest rate. If the index rate has fallen, the lender must decrease the borrower's interest rate. Many ARMs have a two-tiered rate adjustment structure. These ARMs have a longer initial period before the first rate adjustment can occur, followed by more frequent rate adjustments after that. For instance, a lender might structure an ARM so that the first adjustment doesn't occur until three years into the loan, followed by a rate adjustment each year from there on. This is called a 3/1 ARM and it's quite common.
Graduated temporary buydown
With a graduated payment buydown, the reduced interest rate increases in steps, usually each year. A common graduated payment plan is the 3-2-1 buydown, which calls for a 3% reduction in the interest rate in the first year of the loan, a 2% reduction in the second year, and a 1% reduction in the third year. In the fourth year of the loan, the buyer will begin paying the note rate.
Adjustable rate loans
With an ARM, the lender can periodically adjust the loan's interest rate so that it reflects current market rates. the borrowers initial rate is set according to the market rate when the loan is originated. The loan's interest rate is then tied to one of several indexes, and future interest rate adjustments are based on the upward and downward movements of the index. For the most part, mortgage lenders offered only fixed-rate loans until the early 1980s. Then key interest rates went up dramatically, so that many prospective buyers were priced out of the housing market. In addition, rapid fluctuations in interest rates left many lenders uncomfortable about loaning money at a fixed rate for 30 years. Adjustable-rate mortgages (ARMs) were introduced in response to both of these problems.
Installment debts
With an installment debt, the repayment schedule has a definite beginning and ending date and the monthly payment is a fixed amount. An installment debt is ordinarily counted as part of the loan applicant's recurring obligations only if more than ten payments remain to be made.
Homeowners Protection Act (HPA)
a federal law that requires lenders to disclose to borrowers when the borrowers' mortgages no longer require PMI.
partially amortized loan
a loan with a series of amortized payments followed by a balloon payment at maturity
promissory note
a written promise to pay a specified amount of money on demand or at a definite time. The promissory note is evidence of debt.
Wraparound Loan
aka all-inclusive deed. involves a first mortgage and a second mortgage. The first mortgage, called the underlying mortgage, is the seller's mortgage. The seller doesn't pay off this underlying mortgage at closing, nor does the buyer assume the mortgage. Instead, the buyer takes the property "subject to" the underlying mortgage. This means the seller remains primarily responsible for making the payments on the underlying mortgage. The buyer gives the seller a downpayment, and the seller finances all the rest of the purchase price, securing this financing with another mortgage—the wraparound mortgage. Each month, the buyer makes a payment on the wraparound mortgage to the seller, and the seller then uses part of the buyer's payment to make the monthly payment on the underlying mortgage.For wraparound financing to work, the underlying loan cannot have a due-on-sale clause.If there is a due-on-sale clause, the lender will probably require the seller to pay off the loan, or else arrange for an assumption when he sells the property to the buyer. Escrow accounts used to pay seller and bank and avoid seller not paying the bills to the bank.
Fixed payment to income ratio
an FHA loan applicant's fixed payment to income ratio can't exceed 43% where fixed payments include principal, interest, property taxes, hazard insurance, mortgage insurance premiums, homeowners dues. Recurring charges include child support payments, installment debts, revolving credit accounts.
Monthly shelter expense
borrower's proposed PITI payment plus maintenance and estimated utilities.
FHA minimum cash investment
cash investment of 3.5% (LTV = 96.5%). Credit scores of 580 or above. 500-579 limited to 90% LTV with 10% cash investment.
A lease option for a house
combination of a lease and an option to purchase. The seller leases the property to a prospective buyer for a set period of time. The seller also gives the buyer an option to purchase the property at a stated price during the lease period.
Buydown
financing made available by a builder or seller to a potential new-home buyer at well below market interest rates, often only for a short period. The seller does not actually have to come up with any cash to pay for a buydown. Instead, the amount of the buydown is simply deducted from the seller's net proceeds during closing and transferred to the lender. A buydown plan benefits the buyer in two ways. First, the buyer's monthly payments are lower than they would otherwise be. Second, the lender may qualify the buyer on the basis of the reduced payments, making it easier for the buyer to qualify for the loan. Buydowns are most commonly used when interest rates are high and potential buyers might otherwise be priced out of purchasing a house.
Priority of payments
first is property tax and special assessments. Second is primary lien. Third is secondary lien. If buyer fails to pay property tax, the government can foreclose in a "tax foreclosure sale"
Equity exchange
instead of requiring the buyer to pay the downpayment entirely in cash, the seller accepts some other asset—such as recreational property, a car, or a boat—as all or part of the downpayment. Again, this kind of transaction enables the buyer to close the sale with significantly less cash.
Seller second
it's the seller who provides secondary financing.it's one of the most common forms of seller financing.With a seller second, the buyer pays most of the purchase price with an institutional loan, and the seller finances some of what would normally be the buyer's downpayment with a second mortgage. Seller financing is subordinate to institutional investor.
Mortgage rate cap
limits how much a borrower's monthly payment amount can increase
Points
loan fees paid to a lender and computed as a percentage of a loan. Two common forms of loan fees are origination fees and discount points.
VA Loan characteristics
loan upto 100% CRV, Verteran may pay above CRV VA guarantees loan origination fee charged by lender, usually 1% no downpayment reqed avg 30 years loan guarantee may be used more than once
Interest rate cap
on an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan
Origination fees
origination fee is another way banks make money on a loan besides interest. An origination fee is charged in almost every mortgage loan transaction, except for "no-fee" loans, which charge a slightly higher interest rate over the loan term instead. It may be called a service fee, administrative charge, or simply a loan fee. The buyer usually pays the loan fee.
Loan Assumption
the transfer of loan obligations to a purchaser of the mortgaged property
Deed of Trust (Trust Deed)
utilized in California, it replaces a mortgage used instead of a mortgage deed. Collateral for the promissory note.
Impound Account
A bank account maintained by a lender for payment of property taxes and insurance premiums on the security property; the lender requires the borrower to make regular deposits, and pays the expenses out of the account. Also called a reserve account or escrow account.
baloon payment
A large payment due at the end of the contract term.
Conventional Loan Cash Reserve Requirements
Conventional loan applicants generally need at least two months' worth of mortgage payments in reserve after making the downpayment and paying all closing costs—high LTV loans may require three months. Having even more funds in reserve tends to strengthen an application; conversely, having less funds weakens it.
Federal home loan programs
FHA-insured loan program, VA-guaranteed loan program, California's state sponsored Cal-vet program
