Chapter 17: Finance
Closing a Loan
- Closing of a mortgage loan normally occurs with the closing of the real estate transaction. At the real estate closing, the lender typically has deposited the funding amount with an escrow agent, along with instructions for dispersing the funds. The borrower deposits necessary funds with the escrow agent, execute final documents, and receive signed copies of all Relevant documents. - title to the mortgage property is transferred and recorded according to legal procedures and effect at the time of closing. The borrower receives a package containing copies of all documents relevant to the transaction.
The Mortgage Market
- Mortgage loans provide borrowers with funds to purchase real estate. Money for mortgage is primarily comes from Kass savings of individuals, government, and businesses. This money may become available through the process of intermediation, in which funds on deposit a financial institutions are loaned out to borrowers, or disintermediation, in which the owners of the savings invest their money directly by making loans or other investments SUPPLY AND DEMAND FOR MONEY - money is a limited commodity subject to the effects of supply and demand. The federal governments monetary policy controls the supply of money in order to achieve the country's economic goals. - And excessive supply of money usually causes interest rates to fall and consumer prices to rise. Conversely, and excessive demand for money, such as for mortgage loans, because interest rates to rise and prices to fall. Regulation of the money supply addresses these fluctuations with the aim to control and limit wide swings in the supply and demand cycle.
Mechanics of a Loan Transaction
- States differ in their interpretation of who owns mortgage property. Those that regard the mortgage as a lien held by the mortgagee against the property owned by the mortgagor are called lien theory states. Those that regard the mortgage document as a convenience of ownership from the mortgagor to the mortgagee are called title theory states. A valid mortgage or trust deed financing arrangement requires: - A note as evidence of the debt - The mortgage or trust deed as evidence of the collateral pledge
FHA Insured Loan
- The Federal housing administration (FHA) is an agency of the department of housing and urban development (HUD). It does not lend money, but insures permanent long-term loans made by others. - The lender must be approved by the FHA, and the borrower must meet certain FH a qualifications. In addition, the property used to secure the loan must meet FHA standards. The FHA insures that the lender will not suffer a significant loss in the case of borrower default.
Financial Components of a Loan
- The borrower would effectively receive from the lender $96,000, and a principal and interest based on $100,000. For tax reasons, it is usually advisable for the borrower to receive the full loan amount from the lender and pay the points and a check which is separate from that used from other closing costs. As prepaid interest, points paid in this way maybe deductible on the borrowers income tax return for the year of the purchase. The borrower should seek the advice of a tax consultant concerning this matter.
Qualifying the Borrower
- The lender cannot use a temporarily low rate (introductory or "teaser" rate) to determine qualification. For an adjustable rate mortgage (ARM), the highest rate the borrower might have to pay is generally to be used. - The "ability to repay" requirements are relaxed in certain circumstances where the borrower is attempting to refinance from a risk your loan (such as an interest only loan) to a less risky one (such as a fixed rate mortgage loan).
VA Guaranteed Loans
- The veterans administration offers loan guarantees to qualified veterans. The VA, like VFH a, does not lend money except in certain areas where other financing is not generally available. - instead, the VA partially guarantees permanent long-term loans originated by VA approved lenders on properties that meet VA standards. The VAs guarantee enables lenders to issue loans with higher loan to value ratio's than would otherwise be possible. - The interest rate on VA guaranteed loan is usually lower than one on a conventional loan. The borrower does not pay any premium for the loan guarantee, but does pay a VA funding fee at closing.
High Cost Loans
- When the annual percentage rate (APR) or points and fees on a home loan, home equity loan, or home equity line of credit (HELOC) exceeds certain limits, special consumer protections apply. The lender must provide information in advance that explains because, terms, and associated fees, and get a housing counselor to certify that the borrower has received counseling about the high cost mortgage.
Net Worth
- an applicant's net worth shows a lender the depth of the applicants cash reserves, the value and liquidity of assets, and the extent to which assets exceed liabilities. These facts are important to a lender as an indication of the applicants ability to sustain debt payment in the event of loss of employment.
Types of Real Estate Loans
- conventional loans - FHA insured loans - VA guaranteed loans - common lawn structures - seller financing - special purpose loans
Cash Qualification
- since the lender lands only part of the purchase price of a property according to the lenders loan to value ratio, a lender will verify that a borrower has the cash resources to make the required down payment. - if some of the borrowers cash for the down payment comes as a gift from a relative or friend, a lender may require a gift letter from the donor stating the amount of the gift and lack of any requirement to repay the gift. - on the other hand, if someone is lending an applicant a portion of the down payment with a provision for repayment, a lender will consider this another debt obligation and adjust the debt ratio accordingly.
Common Loan Structures
- variations in the structure of interest rate, term, payments, and principal pay back produced a number of commonly recognized loan types. Among these are the following AMORTIZING LOAN - amortization provides for gradual repayment of principal and payment of interest over the term of the loan. The borrowers periodic payments to the lender include a portion for interest and a portion for the principal. In a fully amortizing mortgage, the principal balance is zero at the end of the time. In a partially amortizing loan, the payments are not sufficient to retire to debt. At the end of the loan term, there is still a principal balance to be paid off. NEGATIVELY AMORTIZED LOAN - negative amortization causes the loan balance to increase over the time. This occurs if the borrowers periodic payment is insufficient to cover the interest owed for the period. The lender adds the amount of unpaid interest to the borrowers loan balance. Temporary negative amortization occurs on graduated payment loans, and may occur on an adjustable rate mortgage. ADJUSTABLE AND FIXED RATE LOANS - loans may have fixed or variable rates of interest over the loan term. Adjustable rate mortgages (ARMS) allow the lender to change the interest rate at specified intervals and buy a specified amount. Federal regulations place limits on incremental interest rate increases and on the total amount by which the rate may be increased over the loan term. SENIOR AND JUNIOR LOANS - when there are multiple loans on a single property, there is an order of priority in the liens which the mortgages create. The first, or Senior, loan generally has priority over any subsequent loans. Second loans are riskier than the first loans because the senior lender will be satisfied first in case of default. Therefore, interest rates on second mortgages are generally higher than on first mortgages. FIXED AND GRADUATED PAYMENT LOANS - loans may have variable payment amounts over the term of the loan, or a single fixed payment amount. With a graduated payment mortgage, the payments at the beginning of the loan-term are not sufficient to amortize the loan fully, and unpaid interest is added to the principal balance. Payments are later adjusted to a level that will fully amortized the loans increased balance over the remaining loan term. INTEREST ONLY LOAN - in an interest only loan, periodic payments over the loan-term apply only to interest owed, not to principal. At the end of the tunnel, the full balance must be paid off in a lump-sum, "balloon" payment. Since these loans have no periodic principal payback, their monthly payments are smaller than amortizing loans for the same amount at the same rate of interest.
Loan Commitment
- when a lender's underwriters have qualified an applicant and the lender has decided to offer the loan, the lender a written notice of the agreement to land under specific terms. This written promise is the loan commitment. - The commitment may take a number of common forms, including a firm commitment, a lock in commitment, a conditional commitment, and a take-out commitment. FIRM COMMITMENT - A straightforward offer to make a specific loan at a specific interest rate for a specific time. This kind of commitment is the one most commonly offered to homebuyers. LOCK-IN COMMITMENT - and offer to lend a specific amount for a specific term at a specific interest rate, but the interest rate is subject to an expiration date, for instants, 60 days. This guarantees that the lender will not raise the interest rate during the application and closing periods. The borrower may have to pay points or some other charge for the lock-in. CONDITIONAL COMMITMENT - offers to make a loan if certain provisions are made. This kind of commitment generally applies to construction loans. A typical condition for funding the loan is completion of a development phase. TAKE OUT COMMITMENT - offers to make a loan that will "take out" another lenders loan, I.E., paid off and replace it. They take out a loan is the most often used to retire a construction loan. The takeout lender agrees to pay off the short term construction loan by issuing a long-term permanent loan.
Mortgage Document and Trust Deed
A borrower who execute a mortgage is a merger. The lender named in the mortgage is the mortgagee. And a trust deed, the borrower is the truster and the lender is the beneficiary. The mortgage or trust document identifies the property being given as security, giving both it's a legal description and mailing address. The document contains much of the same information as the note, including: - debt amount - loan term - method and timing of pre-payment The document does not usually provide details about the payment amount, interest rate, or charges.
Promissory Note
A borrower who executes a promissory note is the maker or payer of the note. The lender is the payee. To be properly executed, all parties who have an interest in the property should sign the note. The note sets fourth: - loan amount - loan term - method and timing of pre-payment - interest rate - borrowers promise to pay The note may also state that it is payable to The Bearer, if used with a deed of trust, or to be mortgagee, if used with a mortgage. Other items in the mortgage document or deed of trust may be repeated any promissory note, especially: - The right to pre-pay The loan balance - charges for late payment - conditions for default - notifications and cures for default - other charges
Credit Evaluation
A lender must obtain a written credit report on any applicant who submits a completed loan application. The credit report will contain the applicants History regarding: - outstanding debts - payment behavior (timeliness, collection problems) - legal information of public record (lawsuits, judgments, Bankruptcies, divorces, foreclosures, garnishments, repossessions, defaults) Problems with payment behavior and legal actions are likely to cause a lender to deny the application, unless applicant can't provide an acceptable explanation of the circumstances that caused the problem.
Qualified Mortgage
A qualified mortgage is one that meets the "ability to repay" requirements, has certified required features and is not allowed to have others. There are exceptions to these rules for certain kinds of small lenders. Issuing a qualified mortgage gives the lender certain legal protections in case the borrower fails to repay the loan. Generally not allowed: - and "interest only" period ; when interest, but not principle, is being repaid - negative amortization ; when principle increases over time - balloon payment ; larger than normal payment at the end of the loan term - loan term longer than 30 years - excessive upfront fees and points Generally Required: - monthly debt no more than 43% of monthly pretax income - limits on points Qualified mortgages include loans that can be bought by Fannie Mae or Freddie Mac or insured by government agencies, such as the department of agriculture, even if the debt ratio is higher than 43%. Also, loans that are insured or guaranteed by the department of housing and urban development, including through the Federal housing administration, or qualified mortgages on the rules issued by that agency.
Laws Affecting Mortgage Lending
ADVERTISING - any type of advertising to offer credit is subject to requirements of full disclosure if it includes: - A down payment percentage or amount - an installment payment amount - A specific amount for a finance charge - A specific number of payments - A specific repayment period - A statement that there is no charge for credit NONCOMPLIANCE -willful violation of regulation Z is punishable by imprisonment of up to a year and/or A fine of up to $5000. Other violations may be punished by requiring payment of court costs, attorneys fees, damages, and a fine of up to $1000. EQUAL CREDIT OPPORTUNITY ACT - Prohibits discrimination in extending credit based on race, color, religion, national origin, sex, marital status, age, or dependency upon public assistance. - A creditor may not make any statements to discourage an applicant on the basis of such discrimination or ask any questions of an applicant concerning these discriminatory items. A real estate licensee who assist a seller in qualifying a potential buyer may fall within the reach of this prohibition. - A lender must also inform a rejected applicant in writing of reasons for denial within 30 days.
Role of FNMA, GNMA, and FHLMC
As major players in the secondary market, the federal national mortgage association (FNM a, " Fannie may"), government national mortgage association (GNM a, "Ginnie Mae), and federal home loan mortgage Corporation (FHLMC, "Freddie Mac" ) tend to set the standards for the primary market.
VA Guaranteed Loans
BORROWER DEFAULT - The VA reimburses the lender for losses up to the guaranteed amount if foreclosure sale proceeds fail to cover the loan balance. APPRAISAL - The property must be appraised by a VA Approved appraiser. The VA issues a certificate of reasonable value which creates a maximum value on which the VA guaranteed portion of the loan will be based. The property must meet certain VA specifications. DOWN PAYMENT REQUIREMENT - The VA usually requires no down payment, although the lender may require one. MAXIMUM LOAN AMOUNT - The VA does not cap the loan amount, but it does the liability it can assume, which usually influences the amount and institution will land. The amount a qualified veteran with full entitlement can borrow without making a down payment determines the practical loan limits. This amount varies by county. The basic entitlement available to each eligible veteran is $36,000. Lenders will generally maintain maximum of four times that amount with a down payment 50 Fairway is fully qualified and the property appraisers for the asking price. - A veteran must apply for a certificate of eligibility to find out how much the VA Will guarantee in a particular situation.
Mortgage Document and Trust Deed
BORROWERS RIGHT TO REINSTATE - if the lender holds the borrower in default under the terms of the mortgage and proceeds to enforce its rights under the document, such as by for closing, the borrower has the right to reinstate his or her interest by performing certain actions. This usually means paying overdue mortgage payments and any other expenses the lender may have incurred in protecting its rights. - The clause, also known as a redemption clause, gives the borrower a period of time to satisfy obligations and prevent the lender from forcing a sale of the property. RELEASE - The lender agrees to release the mortgage or trust document to the borrower when the borrower has paid off the loan and all other sons secured by the document. The release clause, also known as a defeasance clause, may specify that the mortgagee will execute a satisfaction of mortgage (also known as release of mortgage and mortgage discharge) to the mortgagor. In the case of a deed of trust, the lender as beneficiary request the trustee to execute a release deed or deed of reconveyance to The Borrower as trustor.
Valuations
Before issuing a first mortgage loan, a lender must - notify the borrower within three days of the loan application that a copy of any appraisal will be promptly provided - provide The Barber with a free copy of any valuation used, including appraisal reports, automatic valuation model reports, and broker's price opinion, promptly when completed and no later than three days before closing - provide these copies even if the loan does not close The lender may ask for the deadline to be waived so that the copies may be delivered at closing, and may charge a reasonable fee for obtaining the valuation.
Common Loan Structures
Buydown Loan - A buydown loan entails a pre-payment of interest on a loan. The pre-payment effectively lowers the interest rate in the periodic payments for the borrower. Buydowns typically occur in a circumstance where a builder wants to market a new development to a bank and cannot quite qualify for the necessary loan at market rates. - By "buying down" A borrowers mortgage, a builder enables the borrower to obtain a loan. The builder may then pass the cost of the buydown through to the buyer in the form of a higher purchase price.
Discovery and Disclosure Requirements
Creditors are required to provide applicants with free copies of all appraisals and other written evaluation's developed in connection with an application for a loan to be secured by a first lien on a dwelling and must notify applicants in writing that copies of appraisals will be provided to them promptly.
Income Qualification
DEBT RATIO - The debt ratio considers all of the monthly obligations of the income ratio plus any additional monthly payments the applicant must make for other debts. The lender will look specifically at minimum monthly payments due on revolving credit debts and other consumer loans. The debt ratio formula is:
FHA Insured Loans
DOWN PAYMENT REQUIREMENT - The minimum down payment for a FHA loan is based on the tally of the appraised value or the sales price. The present requirement for single-family residential loans is 3.5%. MAXIMUM LOAN TERM - 30 years is the maximum length of the payment period. PREPAYMENT PRIVILEGE - The borrower has the right to pay off the loan at any time without penalty, provided the lendor is given prior notice. The lender may charge up to 30 days interest if the borrower provides less than 30 days notice. ASSUMABILITY - FHA backed loans on owner occupied properties are assumable if the buyer is qualified. Lenders and borrowers should check with FHA for current requirements. INTEREST RATE - The lender and the borrower negotiate the interest rate on an FHA loan without involvement of FHA. POINTS, FEES AND COSTS - The lender may charge discount points, a loan origination fee, and other such charges. These may be paid by buyer or seller. However, if the seller pays more than a specified percentage of these costs normally paid by buyer, the FHA may regard these as sales concessions and lower the sales price on which the loan insurance amount is based.
FHA Insured Loans
FHA MORTGAGE INSURANCE - The FHA determines how much mortgage insurance must be provided and charges the borrower and appropriate mortgage insurance premium (MIP). - The initial premium is payable at closing or is added to the borrowers loan balance and finance. Further annual premiums are charged monthly. The amount of the premium varies according to the loan term and the applicable loan to value ratio. BORROWER DEFAULT - The FHA reimburses the lender for losses due to default by the borrower, including costs of foreclosure. APPRAISAL - The property must be appraised by an FHA approved appraiser. The property must also meet the FHA's standards for tight and quality of construction, neighborhood quality, and other features. MAXIMUM LOAN AMOUNT - The FHA has set maximum loan amounts for over 80 regions. Borrowers within a region are limited to the long ceiling amount in effect for the region. In addition, the maximum loan amount is restricted by the loan to value ratios in effect. The maximum FHA backed loan a borrower can obtain will be the lesser of the regional ceiling amount for the amount dictated by the loan to value standard. Calculations are based on the lesser of sale price or appraised.
The Loan Application
FORMS - most lenders use some version of the "uniform residential loan application" promulgated by Fannie Mae. This form request the borrower to provide information about the property and the borrower. In addition, the application must include supporting documentation, as indicated in the following exhibit. COMPLETION - The application must be complete for the lender to consider it. The form must be signed and dated by the applicants and deliver it to the lending institution. The initiation of the application process occurs when the lender receives the completed application package from the applicant. Federal law requires the lender to accept all applications and to give applicants notice concerning the disposition of the application. If the lender denies the loan application because of fraudulent information on the application form, the borrower has no claim to a refund of the application fee.
FEDERAL NATIONAL MORTGAGE ASSOCIATION, OR FANNIE MAE
Fannie Mae is a government sponsored enterprise, originally organized as a privately owned corporation. - offers Linda's farm loan purchase commitments, provided they conform to Fannie may is lending standards - Buys conventional, FHA back and VA backed loans - gives banks mortgage back securities and exchange for blocks of mortgages - sells bonds in mortgage-backed security's - guarantees payment of interest and principal on mortgage backed securities
Income Qualification
INCOME STABILITY - A lender looks beyond income and debt ratios to assess and applicants income stability. Important factors are: - how long the applicant has been employed at the present job - how frequently and for what reasons the applicant has changed jobs in the past - how likely secondary income such as bonuses and overtime is to continue on a regular basis - how educational level, training and skills, age, and type of occupation may affect the continuation of the present income level in the future.
Income Qualification
Lenders want to be assured that the borrower has adequate means to make all necessary periodic payments on the loan in addition to other housing expenses and debts such as credit card payments and car payments. Most lenders used to ratios to estimate an applicants ability to fulfill a loan obligation: an income ratio, or housing ratio, and a debt ratio, or housing plus debt ratio. They also consider the stability of an applicants income. INCOME RATIO - The income ratio, or housing expense ratio, establishes borrowing capacity by limiting the percent of gross income a borrower may spend on housing costs. Housing costs include principal, interest, taxes, and homeowners insurance, and may include monthly assessments, mortgage insurance, and utilities. The income ratio formula is:
Mortgage Loan Underwriting
Loan underwriting is the process of assessing the lenders risk in giving a loan. Mortgage underwriting includes: - evaluating the borrowers ability to repay the loan - appraising the value of the property offered at security - determining the terms of the loan RISK - A lender undertakes a number of arrests in lending money. The principal wrists are that the borrower will default on repayment of the loan, and that the borrower will damage the value of the property as security. In addition, the lender runs the risk that, in the event of a foreclosure, the sales proceeds from the property will be insufficient to cover the lenders loss. QUALIFICATION - A lender assess his risk by examining, or qualifying, both borrower and property. In qualifying a borrower, and underwriter weighs the ability of the borrower to repay the loan. This requires an analysis of whether the borrowers income, cash resources, credit worthiness, net worth, and employment stability meet the lender standards. - even if borrower and property qualify, a lender may, under certain circumstances, seek further protection against risk by requiring the borrower to obtain private mortgage insurance. This is frequently the case with loans requiring a relatively small down payment, leading to a high loan to value ratio.
VA Guaranteed Loans
MAXIMUM LOAN TERM - The maximum long-term for 1 to 4 family residences is 30 years. For loans secured by farms, the maximum loan term is 40 years. PREPAYMENT PRIVILEGE - The loan may be paid off early without penalty ASSUMABILITY - VA Loans are assumable with lender approval. Usually, the person assuming the loan must have VA eligibility, and the assumption may have to be approved by the VA. INTEREST RATE - lender and the borrower negotiate the interest rate for all VA insured loans. POINTS, FEES AND COSTS - The lender may charge discount ports, origination fees of up to 1%, and other reasonable cost. These may be paid by seller or buyer, but may not be financed. The VA funding fee, however, may be included in the loan amount. OTHER VA PROGRAMS - in addition to insuring any loans to veterans, the VA may ensure loans for lenders who set up a special account with the VA. The VA may also actually lend money directly when an eligible veteran cannot find a mortgage money locally.
Anatomy of Mortgage Lending
MECHANICS OF A LOAN TRANSACTION - it is common to use borrowed money to purchase real estate. When a borrower gives a note promising to repay borrowed money and execute a mortgage on the real estate for which the money is being borrowed as security, the financing method is called mortgage financing - The term "mortgage financing" also applies to real estate loans secured by deed of trust. The process of securing a loan by pledging a property without giving up ownership of the property is called hypothecation.
Mechanics of a Loan Transaction
NOTE - In addition to executing a mortgage or trust deed, the borrower signed a promissory note for the amount borrowed. The amount of the long is typically the difference between The purchase price and the down payment. A promissory note creates a personal liability for the borrower to repay the loan. MORTGAGE - A mortgage is a legal document stating the pledge of the borrower to the lender. The mortgage document pledges the borrowers ownership interest in the real estate in question as collateral against performance of the debt obligation.
Special Purpose Loans
PACKAGE LOAN - A package loan finance is the purchase of real estate and personal property. For example, a package loan might finance a furnished condominium, complete with all fixtures and decor. CONSTRUCTION LOAN - A construction loan finance is construction of improvements. This type of loan is paid out by the lender in installments linked to stages of the construction process. The loan is usually interest only, and the borrower makes periodic payments based on the amount disbursed so far. Short term, high risk financing, the interest rates are usually higher than those for long-term financing. BRIDGE LOAN - A Bridge, or gap, loan is used to cover a gap in financing between short term construction financing and long-term permanent financing. For instance, a developer may have difficulty finding a long-term lender to take out the construction lender PARTICIPATION LOAN - In a participation loan, the lender participates in the income and or equity of the property, in return for giving the borrower more favorable loan terms than would otherwise be justified PERMANENT LOAN - A permanent loan is a long term loan that "takes out" a construction or short term lender. The long term lender pays off the balance on the construction loan on the project is completed, leaving the borrower with a long time long under more favorable times than the construction loan offered. REVERSE ANNUITY - in a reverse annuity mortgage, a home owner pledges the equity in the home security for a loan which is paid out in regular monthly amounts over the term of the loan. BLANKET - A blanket mortgage is secured by more than one property, such as multiple parcels of real estate in a development.
Mortgage Document and Trust Deed
PAYMENT OF PRINCIPAL AND INTEREST: REPAYMENT AND LATE CHARGES - The borrower must make timely payments according to the terms of the note. FUNDS FOR TAXES AND INSURANCE - unless waved by the lender or prohibited by law, the borrower must make monthly payments to cover taxes and has her insurance. If applicable, the borrower must also pay flood insurance and mortgage insurance installments. Periodic payments of taxes and insurance are held in a resource fund called the escrow account. The real estate settlement procedures Act (RESPA) that was the amount of funds the lender can require and hold for this purpose. APPLICATION OF PAYMENTS - The mount of each payment is applied to various items in order of priority. Unless local law provides otherwise, this order is: 1. Prepayment charges 2. Escrow 3. Interest 4. Principal 5. Late Charges CHARGES AND LIENS - The borrower is liable for paying any charges, liens, or other expenses that may have priority over the mortgage or trust instrument. HAZARD OR PROPERTY INSURANCE - The borrower must keep the property insured as the lender requires. OCCUPANCY, PRESERVATION, MAINTENANCE AND PROTECTION OF THE PROPERTY - The borrower must take and maintain occupancy of the property as the borrowers principal residence according to the lenders requirements. The borrower must not use or neglect the property in such a way as to impair the vendors lien on the property. This could include using the property for legal purposes, creating hazardous waste on the property, or destroying the improvements.
The Mortgage Market
PORTFOLIO LENDERS - A primary mortgage market lender may or may not sell its loans into the secondary market. Many lenders originate loans for the purpose of retaining the investments in their own loan portfolio. These loans are also referred to as portfolio loans, and lenders originating loans for their own portfolio are called portfolio lenders. - portfolio lenders are less restrictive by the standards and forms imposed on other lenders by secondary market organizations. In retaining their portfolio loans, portfolio lenders may very underwriting criteria and hold independent standards for down payment requirements in the condition of the collateral. THE SECONDARY MORTGAGE MARKET - lenders, investors and government agencies that buy loans already originated by someone else, or originate loans indirectly through someone else, constitute the secondary mortgage market. - Federal national mortgage association ( FNMA OR Fannie Mae) - Federal home loan mortgage Corp. (FHLMC, or Freddie Mac ) - Government national mortgage association ( GNMA , Ginnie Mae ) - investment firms that assemble loans into packages and sell securities based on the pooled mortgages - Life insurance companies - pension funds - primary market institutions who also invest as secondary lenders
Final Components of a Loan
PRINCIPAL - The capital amount borrowed, on which interest payments I calculated, is the original loan principal. In an amortizing loan, part of the principle is repaid periodically along with interest, so that the principal balance decreases over the life of the loan. At any point during the life of a mortgage loan, the remaining unpaid principal is called the loan balance, or remaining balance. INTEREST AND INTEREST RATE - interest is a charge for the use of the vendors money. Interest may be paid in advance at the beginning of the payment period, or in arrears at the end of the payment period, according to the terms of the note. Mortgage interest is most commonly paid in arrears. The interest rate is a percentage applied to the principal to determine the amount of interest due. The rate may be fixed for the term of the loan, or it may be variable, according to the terms of the note. A loan with a fixed interest rate is called a fixed rate loan; a loan with a variable interest rate is commonly called an adjustable rate loan. POINTS - from the point of you of a lender or investor, the amount loaned in a mortgage loan is the Linders capital investment, in the interest paid by the bar were is the return earned by the invested capital. It is often the case that a lender needs to earn a greater return than the interest rate alone provides. - A discount point is 1% of the loan amount. Thus, one point on a $100,000 loan equals $1000. The lender charges this as prepaid interest at closing by funding only the face amount of the loan minus the discount points. The borrower, however, must repay the full loan amount, along with interest calculated on the full amount.
Laws Affecting Mortgage Lending
REAL ESTATE SETTLEMENT PROCEDURES ACT A federal law which aims to standardize settlement practices and ensure the buyers understand settlement costs. Our ESPA applies to purchases of residential real estate to be financed by "federally related" first mortgage loans. Federally related loans include: - VA and FHA backed loans - other government backed or assisted loans - loans that are intended to be sold toFNMA, FHLMC, GNMA, or other government controlled secondary market institutions - loans made by lenders who originate more than $1 million per year in residential loans.
The Mortgage Market
REGULATING THE MONEY SUPPLY - The federal reserve system regulates the money supply using three methods: • selling or re-purchasing government securities, primarily treasury bills - When the federal reserve sales treasury bills, Dmoney paid for the securities is removed from the economies money supply. Conversely, when it re-purchase his treasury bills, the cash paid out to investors puts money back into the economy. • changing the reserve requirement for member banks. The reserve is a percentage of depositors funds the banks and other regulated financial institutions may not lend out. - The second control, regulating reserve requirements, effectively restricts how much money banks can put into the economy through the disbursement of loans. When the Federal Reserve raises reserve requirements, banks have less money to lend, increasing the money supply. When the Fed lowers reserve requirements, banks have more money to lend, increasing the money supply • changing the interest rate, or discount rate, the system charges member institutions for borrowing funds from the federal reserve system central banks. - The third control, perhaps the most effective, is regulation of the discount rate which member banks must pay to borrow money. If the discount rate goes up, it becomes more cost prohibitive to borrow. Therefore the money supply tightens. If the discount rate is lower, banks have an incentive to borrow more money to lend to customers.
The Mortgage Market
Secondary market loan requirements. The secondary market only buys loans that we establish requirements for quality of collateral, borrower and documentation. Since many primary lenders intend to sell their loans to the secondary market, the qualification standards of the secondary market limit and effectively regulate the kind of loans the primary lender will originate.
Financial Components of a Loan
TERM - The loan term is the period of time over which the loan must be repaid. A "30 year loan" is a loan his balance must be fully paid off at the end of 30 years. A "five-year balloon loan" is a loan his balance must be paid off at the end of five years, although it's payments may be calculated on a term of another length, such as 15 or 30 years. Such a loan is also sometimes described as a 30 year loan with a five-year "Call." PAYMENTS - The long-term, loan amount, and interest rate combine to determine the periodic payment amount. When these three quantities are known, it is possible to identify the periodic payment from a mortgage table or with a financial calculator. Mortgage payments are usually made on a monthly basis. On an amortizing loan, a portion of the payment goes to repay the loan balance in advance, and a portion goes to payment of interest in arrears.
Laws Affecting Mortgage Lending Disclosures
THE DISCLOSURES SPECIFY - settlement charges - title charges - Recording and transfer fees - reserve deposit required - tax and insurance escrow deposit required - any other fees or charges - total closing costs The disclosure forms vary, depending on loan site. Because in the closing disclosure must match those in the loan estimate with certain standards.
The Mortgage Market
THE PRIMARY MORTGAGE MARKET - consists of lenders who originate mortgage loans directly to borrowers. Primary mortgage market lenders include: - savings and loans - commercial banks - Mutual savings banks - Life insurance companies - mortgage bankers - Credit unions Mortgage brokers are also part of the primary mortgage market, even though they do not lend to customers directly. The lender assumes the initial risk of the long-term investment in the mortgage loan. Primary lender sometimes also service the loan until it is paid off. Servicing loans in sales collecting the borrowers periodic payments, maintaining and disbursing funds in escrow accounts for taxes and insurance, supervising the borrowers performance, and releasing the mortgage on repayment. In many cases, primary lenders employed mortgage servicing companies, which service loans for a fee.
Flow of a Loan Transaction
THE TRUST OF THE DEED - conveys title to the property in question from the borrower to a trustee as security for the loan. The trustee is a third-party fiduciary to the trust. While the loan is in place, the trustee holds the title on behalf of the lender, who is the beneficiary of the trust. On repayment of the loan, the borrower receives the title from the trustee in the form of a deed of reconveyance.
Laws affecting Mortgage Lending
TRUTH IN LENDING AND REGULATION Z - The consumer credit protection act, enacted in 1969 and since omitted by the truth in lending simplification and Reform Act, is implemented by the Federal Reserve's Regulation Z. Regulation Z applies to all loans secured by a residence. It does not apply to commercial loans or to agricultural loans over $25,000. It's provision to cover the disclosure of costs, the right to resend the credit transaction, advertising credit offers, and penalties for noncompliance with the act. - The Dodd Frank Wall Street reform and consumer protection act of 2010 establish the consumer financial protection bureau To protect consumers by carrying out federal consumer financial loss. These CFPB consolidates most federal consumer financial protection authority in one place, including enforcement of our ESPA, ECOA, and truth in lending. DISCLOSURE OF COSTS - Under regulation Z, a lender must disclose all finance charges as well as the true Annualized percentage rate (APR). I wonder does not have to show the total interest payable over the loan time or include in finance charges such settlement costs as fees for appraisal, title, credit report, survey, or legal work. Disclosure must be distinctly presented in writing. RESCISSION - A borrower has a limited right to cancel the credit transaction, usually within three days of completion of the transaction. The right of rescission does not apply to "residential mortgage transactions," that is, to mortgage loans used to finance the purchase or construction of the borrowers primary residence. However, state law may require a recession period and notice on these transactions as well.
Equal Credit Opportunity Act
The equal credit opportunity act (ECOA) requires a lender to evaluate a loan applicant on the basis of the applicants on income and credit rating, unless the applicant request the inclusion of another's income and credit rating in the application. In addition, a ECOA has prohibited a number of practices in mortgage loan underwriting. Accordingly, a lender may not: - discount or disregard income from part-time work, a spouse, child support, alimony, or separate maintenance. Further, the loan officer may not ask whether any of the applicants income is derived from these sources. - assume that income for a certain type of person will be reduced because of an employment interruption due to child bearing or child raising. The loan officer may not ask about the applicants plans or behavior concerning child bearing or birth control. - refuse a loan solely on the basis that the security is located in a certain geographical area. - ask applicants any question about their age, sex, religion, race or national origin, except as the law may require. - require a spouse to sign any document unless the spouses income is to be included in the qualifying income, or unless the spouse agrees to become contractually obligated, or the state requires the signature for some purpose such as clearing clouded title.
Qualifying the Borrower
The lender must rely on eight types of information to determine that the borrower has the ability to repay the loan: 1. Current income or assets (excluding the value of the mortgage property) 2. Current employment status 3. Credit history 4. Monthly payment for the mortgage 5. Monthly payments for other mortgage related expenses 6. Other debts 7. Monthly debt payments compared to monthly income (debt to income ratio) 8. Monthly payments being made on other loans on the same property
Initiating a Mortgage Loan
The process of initiating a mortgage loan begins when a borrower completes a loan application and submit it to a lender for evaluation by the lenders underwriters.
Seller Financing
The seller may provide some or all of the financing for the buyers purchase. Some of the most common method of seller financing or purchase money mortgage is, including the wraparound, and the contract for deed. PURCHASE MONEY MORTGAGE - with a purchase money mortgage, the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to "take back" a note, or to "carry paper," on the property. Purchase money mortgages may be either Senior or junior liens. WRAPAROUND - in a wraparound loan arrangement, the seller receives a junior mortgage from the buyer, and uses the buyers payments to make the payments on the original first mortgage. A wraparound enables the buyer to obtain financing with a minimum cash investment. CONTRACT FOR DEED - under a contract for deed arrangement, the seller retains title and the buyer receives possession and equitable title while making payments under the terms of the contract. The seller conveys title in the contract has been fully performed. HOME EQUITY LOAN - The ostensible purpose of this type of law is to obtain funds for home improvement. Structurally, the home equity loan is a junior mortgage secured by the homeowners equity. - for some lenders, the maximum home equity loan amount is based on the difference between the properties appraised value and the maximum loan to value ratio the lender allows on the property, inclusive of all existing mortgage loans.
Financial Components of a Loan
The value of one discount point to a lender is usually estimated to be equivalent to raising the interest rate on the loan by 1/8%. Thus, a has to charge eight points to raise the year by one percent. If a lender needs to own 7% on a loan offer that 6.5%, the number of points necessary would be figured as follows:
High Cost Loans
With high cost mortgages, lenders are not allowed to add many kinds of fees and charges to be loan amount, namely: - Prepayment penalties for early loan payoff - balloon payments - late fees larger than 4% of the regular payment - Fees for payoff statements (statements of loan balance) - loan modification fees
