Chapter 11 (part 2)
Whats a blanket mortgage? Who uses this method?
- A blanket mortgage or loan is a type of financing agreement in which the party is able to use a single transaction to purchase more than one piece of real estate. - This type of financial instrument is commonly used with builders and developers who plan to purchase a large amount of land and then divide it among several locations —> land is used as collateral —> when a home is built and purchased by the ultimate home buyer, the property is no longer under the blanket mortgage
Whats a loan commitment?
- A mortgage commitment or loan commitment letter is sent to the borrower outlining the specifics of the loan.
What is Pre-Approval?
- A process whereby a loan officer takes information from a borrower and makes a tentative assessment of how much the lending institution is willing to lend them.
Whats Pre-qualification?
- A process whereby a loan officer takes information from a borrower and makes a tentative assessment of how much the lending institution is willing to lend them.
Whats an underwriter?
- An individual at a lending institution who determines credit worthiness in order to qualify an applicant for a loan.
How's an FHA loan differ from a conventional loan? (5 main points)
- FHA loans only require a 3.5% down payment - require a lower credit score of 580 —> conventional loans usually require 620 - only looks at the debt to income ratio rather than total income for a borrower —> debt to income ratio must be no more than 43% - this home must be the primary residence of the borrower (must be occupied) - these borrowers must pay the mortgage insurance premium (MIP) for the life of the loan
How does private mortgage insurance work (PMI)? Who's it protect? How much does it cost?
- It works by providing the mortgage lender with reimbursement up to a certain level for the home loan if the home buyer defaults on the loan. This type of insurance only pays the lender if and when the home itself is not worth enough to pay the lender for the total amount lost, if the home must go through the foreclosure process. - protects the lender - costs between one-half % and 1 % of the mortgage loan each month
What do lenders base the LTV on?
- Lenders will base LTV on the appraised value of the home, or the sale price of the home, whichever of the two is less
What % can be made up for the value of the property?
- Loans can be made up to 95% of the value of the property - most of the time it is much lower at around 75 to 80%
What is a buydown?
- Obtaining a lower interest rate by paying additional points to the lender. - here the seller (which is sometimes the home builder), will make a payment to the lending company on behalf the buyer. —>they do this to lower the buyer's mortgage interest rate, which allows the seller to increase the purchase price of a home to compensate the cost
What acronym helps you remember the monthly components of a monthly mortgage payment?
- PITI - P: principal -I: Interest - T: Taxes I: Insurance
Where does money come from for buyers? 4 options
- Savings and loan associations are no longer one of the largest sources of funds, but they remain a common option nonetheless - FHA and VA loans as well
What is the uniform loan application? When is it used? Who developed this form?
- The 1003 mortgage application form, which is commonly referred to as the Uniform Loan Application, is the industry standard for applying for a home loan. —> borrower must complete this document when applying for a loan - Fannie Mae
What is the Veterans affairs (VA) loan program? How are these loans backed?
- The United States Department of Veterans Affairs provides individuals who have served in the Armed Forces and their families with the ability to obtain affordable, easier access to a home mortgage loan - these loans are backed by the federal government
How do insurance companies fund home loans? What type of insurance company is likely to invest in larger projects such as commercial developments or multi-family properties? How can a borrower connect with an insurance company for a lending source? —>how are these companies governed?
- The hundreds of insurance companies available today often do their mortgage lending through local mortgage brokers as well as some mortgage bankers - life insurance companies invest in larger projects such as commercial developments and multi family properties - not directly, they can inquire about insurance investors through their mortgage brokers and/ or bankers —> governed by state laws
Yield def?
- The interest earned by an investor on an investment (or by a bank on money it has loaned). Also, called return.
Whats is the loan to value ratio (LTV)? When it used? Whats a high LTV mean?
- The loan to value ratio is an important tool for lenders to consider when assessing the amount of risk a borrower presents to the lender - used when determining if a lender should provide a loan for the purchase of a home or any type of real estate - The higher the LTV, the higher the risk
Whats a conventional loan? How do these lenders hedge the risk? Why are these types of loans higher risk for lenders?
- These are financial loans given by banks and other financial institutions to borrowers for the purchase of a home —>Conventional loans are neither issued nor guaranteed by any federal agency or the government. Should the borrower default, unlike other types of loan offers, these loans present no promise to the lender for financial help. As a result of this, lenders will require stricter financial requirements. - these lenders hedge the risk by requiring a 20% down payment on the home purchase and borrowers must also pay for private mortgage insurance (PMI) - these are higher risk loans because there is no federal backing
What are packaged loans?
- This type of loan is used when a buyer wishes to purchase real property and personal property in one transaction.
How can veterans qualify for VA loans?
- To obtain a VA loan, individuals must meet specific eligibility requirements. The first step is to obtain a Certificate of Eligibility, or COE —>This comes directly from the Veterans Affairs Office. —>In short, it verifies that the individual has served in the Armed Forces, currently actively serving or has been honorably discharged, and has served enough time to earn credit.
Whats a second mortgage? Aka what? Whats the benefit?
- aka a junior lien - a second mortgage is a type of property-secured loan taken out on the portion of a home that's not under mortgage. - Second mortgages offer benefits to homeowners because they tend to be significantly less expensive in terms of interest and annual percentage rates.
What's a credit union and how's it differ from a traditional bank?
- credit unions are non-profit driven and are owned by members of the organization —> the members are the ones who obtain the loans and signup for accounts —> they offer mortgages only to those who are members —>these unions determine the criteria for qualifying to become a member, such as being a member of a specific labor industry or religious organization —> these unions can use brokers to help them find borrowers for their mortgage loan products. (Members can also borrow directly from the union) - credit unions differ from traditional banks in their business model
Whats the equal credit opportunity act?
- forbids lending decisions to be made based on race, color, religion, sex, marital status, a person's age, national origin, or whether or not they receive any type of public assistance.
What are the benefits of a VA loan?
- home buyers do not need a down payment to purchase a home - lower interest rates with less risk because its backed by the fed - these loans have limits on closing costs —> the funding fee charged on the loan can also be rolled into the loan itself
How do lenders make money?
- lenders make profit through interest - and origination fees
Whats an installment land sales contract? Whats it sometimes called? What clause is included?
- often called a land contract or termed as articles of agreement - The home buyer agrees to make payments that include the purchase price of the home along with interest payments, over a set amount of time. - In this situation, the buyer takes possession of the home once the contract is put into place. However, the home seller will hold the legal title to the property until the contract terms are met —> its a good option for those who cannot obtain a traditional loan —> sellers benefit as well due to the chance to profit off interest - installment contracts will have a forfeiture clause, which allows the seller to end the contract at any point in which the buyer stops making payments (gives the buyer less protection)
Whats the fair housing act?
- places specific restrictions on making loans to buy, build, repair or otherwise improve a place to live, selling or renting a place to live, selling, brokering, or appraising a residential property. It also forbids discrimination based on race, color, religion, sex, national origin, familial status, or handicaps. These are called protected classes.
What factors to lenders consider when charging interest?
- term of the loan -type of loan - loan amount -the lenders cost to borrow money —>the key interest rate set by the federal reserve
Whats a lease-option?
- the tenant is able to ultimately purchase the property but does not have to sign a contract for sale at the time of entering into the agreement —> here, he or she enters into what is called an option agreement. That is, the buyer is a tenant and occupies the property. The seller maintains the ownership of the property. However, the tenant maintains the right to buy the property at a specifically agreed upon price during the lease term in exchange for a fee that's pay to the seller (which is often called an option fee).
Who establishes the strict guidelines for conventional loans lending?
- these are established by the Federal National Mortgage Association (Fannie Mae) and - as well as the federal home loan mortgage corporation (Freddie Mac)
Whats a wrap around loan? What type of financing is this?
- these are more common with homes that have a current outstanding loan on them - More clearly, this is a type of secondary financing. The seller of the property will provide a junior mortgage on the property which "wraps around" the current loan. —> The buyer will make loan payments that are enough to repay the existing loan as well as the seller's loan to the home buyer - this enables buyers who are unable to obtain traditional loans —> this tends to be more expensive
How do investment groups offer funding? What do they most often invest in?
- they do not lend directly to the home buyer —> here, a variety of investments place money in real estate related loans, including pension funds, finance companies, real estate investment trusts and others - most often in loan packages rather than single loans
Whats a purchase money mortgage? What are the benefits?
- this type of loan is used where the home buyer cannot qualify for a typical mortgage loan - In this situation, the loan is issued to the home buyer by the seller of the property. It is a component of the purchase transaction. The home buyer typically provides the seller with a down payment on the purchase. The seller may obtain a credit report of the buyer and he or she sets the terms of the financing - fewer closing costs, fewer administration fees, less time in the application process
What's an FHA loan? Whats the goal of this loan? How is the government involved?
- type of mortgage loan, not issued by the federal housing administration - but is insured by them - the goal of this loan is to provide access to home lending to those who may not otherwise qualify - If a home buyer obtains an FHA loan and defaults on it, the federal government covers some of those losses, limiting the impact on the lender.
Whats a Real Estate Investment Trust?
- works like a mutual fund where the investors in the organization pool money together to purchase real estate
How do constructions loans work? What are the 2 types?
1.) Construction to permanent loan: is a form in which the lender pays for the construction and then rolls that cost into a traditional mortgage once the home is complete. —>This is the most common types of construction loan used today. 2.) stand-alone construction loan: Here, the lender will advance the money for the construction of the home. —> Then, once the construction is complete, the home buyer obtains a mortgage to pay the construction debt. - The big difference here is that with a construction to permanent loan, there's just one closing process (which translates into lower costs).
What are the 3 main types of mortgage loans? Whats the most common?
1.) fixed-rate mortgage: monthly payments remain constant, interest rate remains the same throughout the entire term —> principal in each monthly payment increases over the term of the loan until fully amortized —> *this is the most common type of mortgage* 2.) Interest-only mortgage: is an interest only mortgage, the monthly mortgage payments consist entirely of interest (no principal)n and remains constant —> the loan does not amortize over the term —> riskier than fixed-rate 3.) Adjustable Rate Mortgage (ARM): the initial monthly mortgage payments are calculated as if the loan is a 30 year fixed-rate mortgage —> monthly mortgage payment increases once the interest rate adjusts and until the interest rate cap is reached —> this is the RISKIEST type because mortgage payment changes at an unpredictable rate, making it hard to budget
What are the 2 main types of mortgage companies a buyer is likely to come in contact with? How's the first one differ from the second?
1.) the mortgage broker: these brokers serve to bring the borrower and the lender together —> they are paid a fee for their service (typically 1% of the amount of the loan, aka origination points) —>this persons job is to find the funding for a client based on their financial profile and need to borrow —> these brokers have a large pool of options available that typical borrowers do not have (can shop around for the best loan fro the buyer) 2.) the mortgage banker: are middlemen, but go a step further than mortgage brokers —> actually work for the bank —>they can make mortgage loans as brokers do —>they can also package those loans together and then sell them to 3rd party investors ——>this includes selling them back to primary and secondary investors
What is a mortgage banker?
A middleman that packages and sells loans to third parties, but also manages payments.
What's less expensive, a broker or a credit union?
Credit unions don't have middlemen, which can reduce costs.
Your home buyer has a credit score of about 600. What type of loan should they apply for?
FHA loans require credit scores of at least 500
Whats a Lease-purchase option?
Has 2 separate contracts: 1.) The first is a type of tenant lease that provides the buyer with the ability to live in the home for a specific amount of time 2.) The second component is an obligation defining specific goals for both the buyer and seller to define the sale of the property. —> The buyer is contracted to purchase the property as defined in the document. After a set amount of time, the buyer owns the property. In these conditions, the seller maintains ownership of the home.
With a low-down payment, is a savings and loan association best for a borrower?
It may be one option, but these loans tend to offer only 95 percent of the home loan as financing
Jamie hasn't secured home insurance yet and closing is approaching. Is this a problem?
It's likely to be a condition to closing the loan.
Will a borrower need to pay closing costs on his VA loan?
Maybe, but these are often paid by the seller and are typically lower. - VA loans allow for up to 4% in seller concessions, which may cover all closing costs in some transactions.
Are commercial banks a good bet for your buyer who wants to sit down and talk to an agent?
No, they could be located nationwide and typically don't have actual branches.
What is the collateral in a blanket mortgage?
The land itself.
'Who has more protection in a land sales contract?
The seller - who has the ability to take possession of the home again quickly. -.The seller is protected because they can take back title to the property if the buyer defaults on the loan.
