Financing: Basic Concepts and Terminology

due-on-sale clause

(also known as alienation clause)

due-on-sale clause

(also known as alienation clause) requires the borrower to repay the loan when transferring ownership to another

the trustee

(an independent third party who holds the deed of trust).

Example of Buydown

A 3-2-1____________: 3% interest rate reduction year one, 2% year two, and 1% year three; interest rate returns in full year four

promissory note

A ______________ is the borrower's promise to repay the mortgage loan. Promissory notes are negotiable instruments, which means they can be transferred to another holder. _________________ ___________________are almost always accompanied by a security instrument that pledges the financed property as collateral for the mortgage loan and gives lenders the right to foreclose if the borrower defaults on the mortgage loan. The security instrument may be either a deed of trust or a mortgage.

Jumbo Loan

A _______________ is a conventional non-conforming loan because it exceeds conforming loan limits but meets other conforming loan requirements.

Mortgage

A ________________ involves two parties: the lender and the borrower.

mortgage insurance premium (MIP)

A __________________ applies to all FHA loans for the life of the loan; it's paid as an upfront charge at closing then as an annual premium until the loan is paid off or refinanced.

fully amortized loan

A __________________ will be paid in full after the last scheduled loan payment (or sooner if the borrower makes additional principal payments during the loan term). The monthly principal and interest payment amount is the same each month. The principal portion of the payment increases each month, while the interest portion decreases

mortgage insurance premium (MIP)

A ____________________ applies to all FHA loans for the life of the loan; it's paid as an upfront charge at closing then as an annual premium until the loan is paid off or refinanced.

partially amortized loa

A _______________________ includes partial amortization over the loan term and a balloon payment at the end of the term, where the borrower pays off the loan in one lump sum.

pre-payment penalty clause

A ___________________________ permits the lender to charge a specified amount for interest lost when a borrower sells or pays off a loan early. Prepayment penalties are rare in today's mortgage market.

Bridge or Swing Loan

A bridge or swing loan is a temporary, short-term loan that provides funds until buyers can obtain permanent financing. Some borrowers who qualify financially may obtain a bridge loan when their current home hasn't yet sold but they are ready to purchase a new home. The bridge loan basically covers the down payment. A bridge loan is typically secured by the borrower's existing home. Lenders may structure the bridge loan so that borrowers make only interest payments during the loan term and then pay off the entire loan when the previous home sale closes.

non-conforming loans

A conventional loan that fails to meet Fannie Mae and Freddie Mac guidelines for credit scores, LTV, and/or loan amount is considered non-conforming. Lenders may still fund _____________ but will usually charge a higher interest rate and/or require mortgage insurance to minimize the risk.

Owner financing (installment and land contract/contract for deed)

A land contract/contract for deed requires the buyer to make installment payments to the seller for property purchase. The seller retains the title while buyer gets equitable title. A purchase money mortgage is a loan a seller issues to the buyer as part of the purchase transaction. This typically occurs in situations where the buyer cannot qualify for a mortgage through traditional means. With a wrap-around mortgage the seller holds a mortgage that wraps the new buyer's mortgage around the seller's existing mortgage. The seller continues to make payments on the first mortgage, and buyer makes payments to the seller on the wrap-around mortgage.

fixed/adjustable rate note

A special type of ARM is the _______________. It's a legal agreement that permits the borrower to convert a fixed rate mortgage to an ARM or an ARM to a fixed rate mortgage under certain conditions.

loan package analysis

After ___________________,the underwriter will recommend application approval or denial or may request more documentation

Loan Origination

Also known as Loan Point

acceleration clause

An ____________________ makes the entire debt due immediately if there's borrower default. Before a foreclosure occurs, lenders must send an Acceleration Letter to the borrower (often not sent until two to three months in default).

adjustable-rate mortgages (ARM)

An ________________________ is one in which the interest rate fluctuates based on some selected economic index.

Adjustable-rate mortgage loans

An adjustable-rate mortgages (ARM) is one in which the interest rate fluctuates based on some selected economic index. Rate adjustments are based on index rates, such as London Interbank Offered Rate (LIBOR), from which lenders determine their margins and the rate charged per adjustment. ARMs typically have a lower interest rate for an initial period of one to several years. A special type of ARM is the fixed/adjustable rate note. It's a legal agreement that permits the borrower to convert a fixed rate mortgage to an ARM or an ARM to a fixed rate mortgage under certain conditions. Negative amortization may be experienced with some ARMs. This occurs when a payment fails to cover the amount of interest due. When this happens the difference between interest owed and interest paid is added to the loan's principal.

Amortized Loans

An amortized loan is one in which the loan principal is paid down over the life of the loan. A fully amortized loan will be paid in full after the last scheduled loan payment (or sooner if the borrower makes additional principal payments during the loan term). The monthly principal and interest payment amount is the same each month. The principal portion of the payment increases each month, while the interest portion decreases. A partially amortized loan includes partial amortization over the loan term and a balloon payment at the end of the term, where the borrower pays off the loan in one lump sum.

Inflated appraisals:

An appraiser secretly works with a borrower and provides a misleading appraisal report to the lender

Equitable Title

Borrowers hold ______________, which means that they have possessory rights (can live in and use the property) and have the right to obtain legal title once they've paid the loan off.

discount points

Borrowers may choose pay ________ at closing to permanently reduce a loan's interest rate.

Straw buyers:

Conceal their real identity behind someone else's name and credit

Types of Loans

Conventional loans Conventional loans aren't government insured or guaranteed. Lenders view conventional loans as some of the most secure because they may require a down payment of 20%, thus reducing the LTV to 80% Conventional loans can be conforming or non-conforming.The Federal Housing Financing Agency (FHFA) imposes loan limits (maximum loan amounts) on the amount homebuyers may borrow. These loan limits vary by region based on the agency's determination of whether a given market is an average or a high-cost area.A conforming loan meets the loan limit and other criteria (related to borrower qualifications) that Fannie Mae and Freddie Mac set. Lenders can sell conforming loans to Fannie Mae or Freddie Mac. Homebuyers who wish to borrow more than the loan limit must make up the difference through a larger down payment or finance with a jumbo loan.A conventional loan that fails to meet Fannie Mae and Freddie Mac guidelines for credit scores, LTV, and/or loan amount is considered non-conforming. Lenders may still fund non-conforming loans but will usually charge a higher interest rate and/or require mortgage insurance to minimize the risk.A jumbo loan is a conventional non-conforming loan because it exceeds conforming loan limits but meets other conforming loan requirements.

exempt from usury laws.

Credit cards, retail installment contracts, and consumer leases are typically exempt from usury laws

Equal Credit Opportunity (The Equal Credit Opportunity Act) (ECOA)

Equal Credit Opportunity The Equal Credit Opportunity Act (ECOA) of 1974 prohibits lenders from making credit unavailable or offering less-favorable terms based on protected class status (race, color, religion, national origin, sex, marital status, or income source) vs. creditworthiness.

3.5%

FHA borrowers must pay a minimum down payment of ____________

FHA lending limit

FHA imposes a maximum loan amount (aka ______________) that it will guarantee for each borrower. These loan limits typically mimic conventional conforming loan limits. Buyers who wish to borrow more than these limits must make up the difference with their down payment.

Secondary Market

Fannie Mae, Freddie Mac, Farmer Mac, and Ginnie Mae,and lending institutions that buy loans from other lenders and investors make up the ____________

Power of Sale Clause

If foreclosure becomes necessary, a _____________ in the deed of trust permits the lender to use a non-judicial foreclosure process; e.g., the lender doesn't have to go to court to enforce foreclosure proceedings.

Judicial Foreclosure

If foreclosure becomes necessary, the lender may have to use a ____________________process; e.g., the lender must go through the courts to foreclose. If the mortgage document includes a power of sale clause, however, the lender may use a non-judicial foreclosure process.

Illegal property flipping

Illegal property flipping: Property falsely appraised at a higher value, then quickly sold, with the buyer taking the "equity" in the property

TILA/RESPA Integrated (TRID) disclosures

In addition to its prohibition on kickbacks and referral fees among service providers, RESPA requires that lenders provide written disclosures to help to make estimated and final settlement costs clear and fair to consumers. This is accomplished through the______________

Buydown

Interest pre-payment at closing to temporarily reduce interest rate, usually for a period of one to three years

$299,000

Jeffrey has accepted an offer of $299,000 for his house. The buyer is making a $50,000 down payment and the buyer's appraisal came in at $300,000. On what number will the buyer's lender base the loan-to-value ratio? _______________, Lenders use the lesser of the sales price or appraised value

Lock-In

Lenders ____________ interest rates for a period of no more than 90 days. If the closing process takes more than 90 days, borrowers may face an interest rate change

Loan Points

Lenders charge __________- (aka loan origination fees) as compensation for processing a new mortgage loan.

qualified mortgage

Lenders comply with these provisions by writing what's referred to as qualified mortgage loans. A ____________________ is a loan category that has certain affordability features. Certain loan attributes are prohibited, including:Interest-only loans or interest-only periods on a loanNegative amortization (periodic payments that aren't sufficient to completely amortize the loan by the end of the loan term)Balloon (lump sum) payments that are required at the end of a loan term to pay the loan offLoan terms of more than 30 years Qualified mortgages also must adhere to standard lending ratios and can't exceed specified amounts for up-front loan points and fees. In addition to its prohibition on kickbacks and referral fees among service providers, RESPA requires that lenders provide written disclosures to help to make estimated and final settlement costs clear and fair to consumers. This is accomplished through the TILA/RESPA Integrated (TRID) disclosures.

VA loan housing ratio (aka the front-end ratio)

Lenders ignore the front-end ratio

bridge loan

Lenders may structure the ______________ so that borrowers make only interest payments during the loan term and then pay off the entire loan when the previous home sale closes

Closing Disclosure (CD)

Lenders must provide the ______________ at least three business days before closing, provides final loan details, including the loan terms, projected monthly payments, fees and other closing costs.

Loan Estimate (LE)

Lenders must provide the ____________________ to applicants within three business days of loan application. The Loan Estimate provides buyers with the costs they are likely to pay at settlement and discloses the mortgage loan specifics, such as its key features, costs, and risks.

Example of a Buy Down

Leonard is offered a loan at 5.75%. Because he plans to be in his home for several years, he chooses to pay points up front to have the rate reduced to 5.25%. What's this an example of?

Debt ratios

Loan underwriters analyze the borrower's credit, capacity, and collateral. They'll review loan documentation to determine the borrower's ability to repay the loan (capacity), ensure that the property value is adequate to support the loan (collateral), and verify the borrower's financial ratios (credit). Lenders (and underwriters) want to see solid property values (as supported by the appraisal), strong buyer credit scores, and a steady credit and employment history. Underwriters will calculate two ratios: the housing ratio and debt ratio.The housing ratio (aka the front-end ratio) is the borrower's projected monthly housing expense (principal, interest, taxes, insurance, second liens, and association fees) divided by income. The required ratio will vary depending on loan type and lender.Conventional loan: Typically 25% - 28%FHA loan: Typically 31% - 40%VA loan: Lenders ignore the front-end ratioThe debt ratio (aka debt-to-income ratio or the back-end ratio) is the total of all the buyer's debt obligations divided by income. The required ratio will vary depending on loan type and lender.Conventional loan: Typically 33% - 36%FHA loan: Typically 43% - 50%VA loan: Typically can't exceed 41%After loan package analysis, the underwriter will recommend application approval or denial or may request more documentation.

Mortgage bankers

Make loans using in-house loan processors and underwriters

Mortgage brokers

Match consumers with lenders; don't fund loans

Credit unions:

Member-based cooperatives that take deposits, offer savings vehicles, and provide credit for auto and home loans

Commercial banks

National banks that offer consumer and business loans for resale on the secondary mortgage market National banks that offer consumer and business loans for resale on the secondary mortgage market

Points

One loan point is equal to 1% of the borrower's loan amount. Lenders charge loan points (aka loan origination fees) as compensation for processing a new mortgage loan. Origination fees are typically between 1% and 3% and typically can't be more than 3% of the loan value; these fees may be negotiable between the lender and borrower. Borrowers may choose pay discount points at closing to permanently reduce a loan's interest rate.

1%

One loan point is equal to ___________% of the borrower's loan amount.

Example of Point

One point = 1% of the loan amount; so if a lender charges two points on a $250,000 loan, the cost to purchase the discount would be $250,000 x .02 = $5,000

private mortgage insurance (PMI)

PMI Lenders may require ________________________on conventional loans when the down payment is less than 20% and loan-to-value ratio is in excess of 80%. Loans with an LTV in excess of 80% don't conform to Fannie Mae/Freddie Mac guidelines, so lenders may require PMI to offset the risk. PMI protects the lender in case of borrower default. Lenders must terminate PMI when the principal balance is scheduled to reach 78% of the original property value or when the mortgage loan reaches its originally scheduled amortization midpoint. Borrowers may request PMI termination when the principal balance drops below 80% of the loan balance. Depending on market conditions and property updates, this may permit borrowers to remove PMI earlier in the mortgage loan term.

Underwriting

Primary factors in loan _____________ include the income, debt ratio, credit score, and credit history.

PMI

Private Mortgage Insurance

index rates

Rate adjustments are based on _______________, such as London Interbank Offered Rate (LIBOR), from which lenders determine their margins and the rate charged per adjustment.

Budget Mortgages

Sam's not very good with planning for his expenses. He has a mortgage payment that includes his property taxes and property insurance (PITI), so he can knock those all out with his mortgage payment every month. Sam's also happy to know that his monthly payment will remain the same for the life of his loan. What type of mortgage does Sam have?

mortgage-backed securities (MBS)

Secondary mortgage market payers purchase lender loan packages and re-package them into___________

Security instrument clauses

Security instrument clauses The defeasance clause orders the lender or trustee to immediately release full title to the borrower once the loan is paid in full. The lender is then prevented from pursuing additional payment after the payoff. An acceleration clause makes the entire debt due immediately if there's borrower default. Before a foreclosure occurs, lenders must send an Acceleration Letter to the borrower (often not sent until two to three months in default). A due-on-sale clause (also known as alienation clause) requires the borrower to repay the loan when transferring ownership to another. A pre-payment penalty clause permits the lender to charge a specified amount for interest lost when a borrower sells or pays off a loan early. Prepayment penalties are rare in today's mortgage market.

A lien theory state

Sondra, a buyer, signs all the required mortgage documentation, and promises to make all payments to her lender. Unfortunately, Sondra falls on hard times and misses multiple payments, and the bank indicates that it is going to foreclose on her. The foreclosure proceedings are more difficult for the lender because Sondra holds the title to the land. What kind of state does Sondra live in?

Title Theory

States that use a deed of trust as the primary security instrument are referred to as ___________ states because the lender/trustee holds legal title to the property until the mortgage loan is paid in full.

Lien Theory

States that use a mortgage as the security instrument are referred to as _______________ states because the mortgage places a lien against the property it secures. The lender holds the lien, and the borrower holds legal title to the property.

Savings and loan associations:

Take savings deposits and make loans

Maybe, but they'll have to petition their lender, When the loan the loan-to-value ratio is 80% or less, PMI is automatically cancelled. Borrowers may have to petition for PMI to be cancelled and must be current on payment

The Bransons have a conventional loan for which they were required to obtain private mortgage insurance. Their local real estate market has been on fire lately, and their house is now appraised at twice their loan balance! Will their PMI be automatically cancelled?

(FHA)

The Federal Housing Administration (FHA)

FHA insured loans

The Federal Housing Administration (FHA) insures lenders against loss in case of borrower default. FHA borrowers must pay a minimum down payment of 3.5% A mortgage insurance premium (MIP) applies to all FHA loans for the life of the loan; it's paid as an upfront charge at closing then as an annual premium until the loan is paid off or refinanced. FHA loans are available to anyone who qualifies but may be more attractive to borrowers who have lower credit scores and down payments. FHA imposes a maximum loan amount (aka FHA lending limit) that it will guarantee for each borrower. These loan limits typically mimic conventional conforming loan limits. Buyers who wish to borrow more than these limits must make up the difference with their down payment.

USDA/rural loan programs

The U.S. Department of Agriculture (USDA) offers some state and local mortgage loan programs. The USDA Farm Service Agency (FSA) offers direct guaranteed loans to farmers and ranchers and for rural housing. Congressional appropriation funds these loans. Rural development loans are government loans specifically for family farms and rural home financing. They offer a longer payback period to reduce monthly payments. FSA loans can be up to 100% of the purchase price, set for 33 years (38 for very low-income borrowers), and provide loan guarantees for up to 95% of the loss of principal and interest.

VA stands for what?

The U.S. Department of Veterans Affairs (VA)

VA guaranteed loans

The U.S. Department of Veterans Affairs (VA) guarantees loans made to qualifying veterans. VA loans don't require down payments or mortgage insurance and have no pre-payment penalties. VA loan eligibility depends on the length and type of service, but in general are available to military members who have served 181 days active duty or three months during war time. Most VA lenders adhere to conventional conforming loan limits. This doesn't limit the amount that buyers may borrow, but borrowers whose loans exceed these limits must make a down payment. The VA guarantees up to a quarter of the loan limit amount should the buyer default; this minimizes risk for lenders to make up for the no-down-payment VA loan structure.

defeasance clause

The ____________________ orders the lender or trustee to immediately release full title to the borrower once the loan is paid in full. The lender is then prevented from pursuing additional payment after the payoff.

primary mortgage market

The _____________________ provides loans to borrowers (mortgagors) and is made up of several lender types:

mortgage fraud

The most common ____________________schemes are illegal property flipping, loan flipping, inflated appraisals, silent second, nominee loans/straw buyers, equity skimming, and false identity

principal, interest, taxes, and insurance and/ or(PITI)

The most common mortgage loan payment includes a portion of the principal balance, current accrued interest, and a 1/12th portion of the expected annual property tax and homeowner's insurance balances due (principal, interest, taxes, and insurance, or PITI). This may also be referred to as a budget mortgage, because it's easy to budget around the known monthly payment. Lenders place the property tax and insurance amounts collected each month in an escrow account and pay the annual tax and insurance bills when they come due.

Financing and Lending (Lending process application through closing)

The residential loan process begins with the potential borrower's loan application. Lenders may prequalify borrowers based on borrower-provided (not lender-verified) information. Lenders may preapprove borrowers based on verified loan application information. During loan processing, the lender collects information about the borrower's income and credit. Lenders also review the property's value (as the collateral for the mortgage loan), typically through the appraisal process. When a borrower has an accepted offer on a property, the full application process begins. The lender will continue the loan processing steps, likely asking for additional buyer documentation as necessary. The borrower will also select the loan product (FHA, VA, conventional, etc.) and financing terms desired. A loan processor verifies that correct information and documentation are in place, including W-2 forms or other income-verifying documents and property-related information, such as appraisals and title reports. When application materials are complete, the lender submits the loan package to underwriting. The underwriter analyzes the loan documentation and recommends approval, denial, or a conditional approval pending additional information from the buyer. When the loan is approved, the buyer is cleared to go to closing. Prior to closing, the lender and closing officer confer so the closing agent can include necessary loan information on the buyer's settlement sheet. Immediately prior to closing, the lender may run additional credit and employment reviews to verify employment and determine if the borrower has incurred additional debt. Most lenders require that borrowers maintain current fire and hazard insurance policies and that the policy name the lender as a co-insured party. If the property is located in a designated flood zone, the lender will require that borrowers maintain flood insurance. At closing, the buyer signs all loan and real estate documents. The lender funds the loan when the seller has conveyed the property. Lender funds and buyer funds (the original earnest money deposit and the down payment) combine to pay off the seller's existing mortgage loan, pay the buyer's closing expenses, and provide the balance due to the seller.Keep in mind, if a mortgaged property is being sold, the alienation (or due-on-sale) clause gives the lender (so the seller's lender for the existing mortgage) the right to declare the entire amount due (in which case the funds are used to pay off the existing mortgage) or allowing the buyer to assume the loan. A buyer's assumption of the seller's existing loan is something that must be written into the contract and the buyer would still need to be approved by the lender's underwriting process. Under an assumption arrangement, the seller's name is still on the promissory note, and the buyer promises the seller (in writing, of course) to pay the loan. In the event of default, the lender looks to both the seller and buyer. The real estate mortgage industry functions through collaboration between the primary and secondary mortgage markets.The primary mortgage market provides loans to borrowers (mortgagors) and is made up of several lender types:Commercial banks: National banks that offer consumer and business loans for resale on the secondary mortgage marketSavings and loan associations: Take savings deposits and make loansCredit unions: Member-based cooperatives that take deposits, offer savings vehicles, and provide credit for auto and home loansMortgage brokers: Match consumers with lenders; don't fund loansMortgage bankers: Make loans using in-house loan processors and underwriters Lenders in the primary mortgage market put together packages of conforming loans and sell them to the secondary mortgage market to free up funds that provide additional consumer loans. Secondary mortgage market payers purchase lender loan packages and re-package them into mortgage-backed securities (MBS). They sell the MBSs to investors.Fannie Mae, Freddie Mac, Farmer Mac, and Ginnie Mae,and lending institutions that buy loans from other lenders and investors make up the secondary market.Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs), which is a privately-held corporation that has a public purpose. GSEs are corporations that are traded on major stock market exchanges (FNMA and FMCC).Fannie Mae and Freddie Mac purchase mortgage loan packages from lenders. Ginnie Mae guarantees MBSs that are made up of government insured or guaranteed loans. Farmer Mac functions in the secondary market by buying qualified agricultural loans from lenders.

Real estate mortgage industry

The__________________ functions through collaboration between the primary and secondary mortgage markets.

Secondary mortgage market payers

They sell the MBSs to investors.

The deed of trust

Trust Deed

Conventional loan: housing ratio (aka the front-end ratio)

Typically 25% - 28%

FHA loan housing ratio (aka the front-end ratio)

Typically 31% - 40%

Conventional loan(The debt ratio (aka debt-to-income ratio or the back-end ratio)

Typically 33% - 36%

FHA loan debt ratio (aka debt-to-income ratio or the back-end ratio)

Typically 43% - 50%

VA Loan The debt ratio (aka debt-to-income ratio or the back-end ratio

Typically can't exceed 41%

CFPB/TRID rules on financing and risky loan features

Under provisions of the Dodd-Frank Act, the CFPB enforces regulations that prohibit lenders from funding higher-priced mortgage loans without regard for a borrower's ability to repay the loan. Lenders must take reasonable steps to ensure that consumers have the financial ability to repay a loan that uses a dwelling as collateral. Lenders comply with these provisions by writing what's referred to as qualified mortgage loans. A qualified mortgage is a loan category that has certain affordability features. Certain loan attributes are prohibited, including:Interest-only loans or interest-only periods on a loanNegative amortization (periodic payments that aren't sufficient to completely amortize the loan by the end of the loan term)Balloon (lump sum) payments that are required at the end of a loan term to pay the loan offLoan terms of more than 30 years Qualified mortgages also must adhere to standard lending ratios and can't exceed specified amounts for up-front loan points and fees. In addition to its prohibition on kickbacks and referral fees among service providers, RESPA requires that lenders provide written disclosures to help to make estimated and final settlement costs clear and fair to consumers. This is accomplished through the TILA/RESPA Integrated (TRID) disclosures.Lenders must provide the Loan Estimate (LE) to applicants within three business days of loan application. The Loan Estimate provides buyers with the costs they are likely to pay at settlement and discloses the mortgage loan specifics, such as its key features, costs, and risks.Lenders must provide the Closing Disclosure (CD) at least three business days before closing, provides final loan details, including the loan terms, projected monthly payments, fees and other closing costs.TRID disclosures apply to financed home purchases, most loan assumptions, refinances, and home improvement loans. Reverse mortgages, home equity lines of credit (HELOCS) and manufactured housing loans that aren't secured by real estate are exempt from TRID disclosures rules, other RESPA still otherwise applies. Most commercial and business loans are also exempt from RESPA, unless the loan is made to purchase or improve a rental property of one to four units. Predatory lending is unfair or abusive lending to buyers. Predatory lenders impose deceptive, coercive, and exploitive practices to take advantage of consumers to increase their debt while financing risky loans. Fraudulent lending practices take advantage of consumers, encourage debt, don't consider affordability, encourage multiple refinancing, hide fees from borrowers, and often occurs in the subprime loan market. The most common mortgage fraud schemes are illegal property flipping, loan flipping, inflated appraisals, silent second, nominee loans/straw buyers, equity skimming, and false identityIllegal property flipping: Property falsely appraised at a higher value, then quickly sold, with the buyer taking the "equity" in the propertyEquity skimming: When an investor receives title to a property— often by using a straw buyer—doesn't make the mortgage payments, and usually rents out the home until foreclosure occurs.Straw buyers: Conceal their real identity behind someone else's name and creditInflated appraisals: An appraiser secretly works with a borrower and provides a misleading appraisal report to the lender Usury is lending money at an excessive (illegal) rateMost states have laws designed to protect consumers from exorbitant fees and interest rates by limiting what lenders charge to reasonable amounts.Credit cards, retail installment contracts, and consumer leases are typically exempt from usury laws.

Credit history

Underwriters also look at _________ including several factors: Length of time borrowers have maintained credit Length of time borrowers have maintained good credit Late payment history Available credit used Types of credit extended (banks, credit card companies, mortgage loans

credit scores

Underwriters will review borrower _____________ to ensure they fall within the ranges outlined for a given loan product. Credit scores requirements vary depending on whether the borrower is seeking a conventional, FHA, or VA loan. impact interest rates and other loan terms.

Credit scoring

Underwriters will review borrower credit scores to ensure they fall within the ranges outlined for a given loan product. Credit scores requirements vary depending on whether the borrower is seeking a conventional, FHA, or VA loan.Individual lenders may require higher credit scores that the stated minimum scores as long as they don't do so based on any discriminatory factor.Credit scores impact interest rates and other loan terms.Conventional loans typically require credit scores of 620 and above.FHA borrowers must have a minimum credit score of 580 to qualify for a 3.5% down payment; borrowers with credit scores between 500 and 579 may have to put down as much as 10%.Borrowers with higher credit scores and other compensating factors such as cash reserves or additional income sources may qualify for higher front-end and back-end loan ratios.

Equity skimming:

When an investor receives title to a property— often by using a straw buyer—doesn't make the mortgage payments, and usually rents out the home until foreclosure occurs.

Buy Down

When buyers voluntarily pay to bring interest rates down

release of deed of trust

When the loan is paid in full, the lender issues a ___________________ and the trustee issues a reconveyance deed. The reconveyance deed is required because the trustee retains the legal property title until the loan is paid. Lenders also mark the promissory note "paid" and return it to the borrower.

A standardized measure for interest rates and other loan costs Regulation Z requires lenders to use a standardized measure for loan costs, including interest rates, which is the APR.

Which of the following best describes annual percentage rate (APR)?

Originators of commercial loans don't typically keep and service loans, although some do. Usually, they're packaged and sold on the secondary market. Originators usually package and sell the loans on the secondary market.

Which of the following statements is true about conventional loans?

FHA

____________ imposes a maximum loan amount (aka FHA lending limit) that it will guarantee for each borrower. These loan limits typically mimic conventional conforming loan limits. Buyers who wish to borrow more than these limits must make up the difference with their down payment.

Lenders and PMI (Private Mortgage Insurance)

____________ must terminate __________when the principal balance is scheduled to reach 78% of the original property value or when the mortgage loan reaches its originally scheduled amortization midpoint.

TRID disclosures

______________ apply to financed home purchases, most loan assumptions, refinances, and home improvement loans. Reverse mortgages, home equity lines of credit (HELOCS) and manufactured housing loans that aren't secured by real estate are exempt from TRID disclosures rules, other RESPA still otherwise applies. Most commercial and business loans are also exempt from RESPA, unless the loan is made to purchase or improve a rental property of one to four units.

Borrowers and PMI (Private Mortgage Insurance)

______________ may request ___________ termination when the principal balance drops below 80% of the loan balance. Depending on market conditions and property updates, this may permit borrowers to remove PMI earlier in the mortgage loan term.

Predatory lending

________________ is unfair or abusive lending to buyers. Predatory lenders impose deceptive, coercive, and exploitive practices to take advantage of consumers to increase their debt while financing risky loans. Fraudulent lending practices take advantage of consumers, encourage debt, don't consider affordability, encourage multiple refinancing, hide fees from borrowers, and often occurs in the subprime loan market

conforming loan

_________________ loan meets the loan limit and other criteria (related to borrower qualifications) that Fannie Mae and Freddie Mac set. Lenders can sell conforming loans to Fannie Mae or Freddie Mac. Homebuyers who wish to borrow more than the loan limit must make up the difference through a larger down payment or finance with a jumbo loan.

Farmer Mac

__________________ functions in the secondary market by buying qualified agricultural loans from lenders.

The Truth in Lending Act (TILA)

___________________ of 1968 requires lenders to disclose credit terms and conditions when advertising triggers loan terms, so as not to mislead consumers.

RESPA The Real Estate Settlement Procedures Act (RESPA

____________________ of 1974 is a consumer protection statute designed to protect homebuyers from unscrupulous lending and settlement practices.The Dodd-Frank Wall Street Reform Act of 2010 (Dodd-Frank Act) handed RESPA responsibility to the Consumer Protection Finance Bureau (CFPB). Licensees are prohibited from paying or receiving a fee, kickback, or anything of value based on referring customers or clients to a settlement service provider. Third-party settlement providers may compensate licensees and brokerage firms only for actual services rendered to licensees and brokerage firms. Licensees and brokerage firms may distribute service provider marketing materials (pens, calendars, etc.) with the service provider's name and contact information. Under certain circumstances, service providers may sponsor educational events for and offer continuing education credits to licensees as long as any costs traditionally borne by the licensee aren't defrayed by the event. This exemption refers to short-term events (a lunch-and learn event, for example), but not necessarily to an all-expense-paid trip to Tahiti in which a short period of time is devoted to training.

Interest

_______________is a fee paid back to a lender for the use of its money; the amount of interest paid with each mortgage payment typically decreases over the life of the mortgage. Interest rates are stated as an annual percentage; e.g., 6% interest rate is 6% for the period of one year, or .5% per month. APR (annual percentage rate) is a measure of both the interest rate and other fees associated with a mortgage loan. Lenders lock-in interest rates for a period of no more than 90 days. If the closing process takes more than 90 days, borrowers may face an interest rate change.

Financing and credit laws and rules Truth in Lending The Truth in Lending Act (TILA)

_____________of 1968 requires lenders to disclose credit terms and conditions when advertising triggers loan terms, so as not to mislead consumers. Trigger terms in ads that would require the full disclosure of all terms include down payment, payment amount, number of payments, and interest rate (other than APR). Regulation Z requires mortgage lenders to follow TILA disclosure requirements for real estate advertisements that include credit terms.

VA Lenders

adhere to conventional conforming loan limits. This doesn't limit the amount that buyers may borrow, but borrowers whose loans exceed these limits must make a down payment.

Loan underwriters

analyze the borrower's credit, capacity, and collateral. They'll review loan documentation to determine the borrower's ability to repay the loan (capacity), ensure that the property value is adequate to support the loan (collateral), and verify the borrower's financial ratios (credit). Lenders (and underwriters) want to see solid property values (as supported by the appraisal), strong buyer credit scores, and a steady credit and employment history. Underwriters will calculate two ratios: the housing ratio and debt ratio.

Fannie Mae and Freddie Mac

are Government Sponsored Enterprises (GSEs),

Budget Mortgages

are a type of amortized loan that include principal, interest, taxes, and insurance (PITI) in each amortized monthly payment.

FHA Loans

are available to anyone who qualifies but may be more attractive to borrowers who have lower credit scores and down payments.

Financing instruments

are documents that are executed (signed) when a borrower receives a mortgage loan. These instruments include a promissory note and a security instrument.

Rural development loans

are government loans specifically for family farms and rural home financing. They offer a longer payback period to reduce monthly payments. FSA loans can be up to 100% of the purchase price, set for 33 years (38 for very low-income borrowers), and provide loan guarantees for up to 95% of the loss of principal and interest.

Origination fees

are typically between 1% and 3% and typically can't be more than 3% of the loan value; these fees may be negotiable between the lender and borrower.

Conventional Loans

aren't government insured or guaranteed. Lenders view __________________ as some of the most secure because they may require a down payment of 20%, thus reducing the LTV to 80%

the trustor

borrower

Conventional loans

can be conforming or non-conforming. The Federal Housing Financing Agency (FHFA) imposes loan limits (maximum loan amounts) on the amount homebuyers may borrow. These loan limits vary by region based on the agency's determination of whether a given market is an average or a high-cost area.

VA Loans

don't require down payments or mortgage insurance and have no pre-payment penalties.

VA loan

eligibility depends on the length and type of service, but in general are available to military members who have served 181 days active duty or three months during war time.

The Federal Housing Administration (FHA)

ensures lenders against loss in case of borrower default. FHA borrowers must pay a minimum down payment of 3.5%

Ginnie Mae

guarantees MBSs that are made up of government insured or guaranteed loans.

The U.S. Department of Veterans Affairs (VA)

guarantees loans made to qualifying veterans.

the VA loan

guarantees up to a quarter of the loan limit amount should the buyer default; this minimizes risk for lenders to make up for the no-down-payment VA loan structure.

The Dodd-Frank Wall Street Reform Act of 2010 (Dodd-Frank Act)

handed RESPA responsibility to the Consumer Protection Finance Bureau (CFPB).

FHA lending limit

imposes a maximum loan amount (aka FHA lending limit)

he Federal Housing Financing Agency (FHFA)

imposes loan limits (maximum loan amounts) on the amount homebuyers may borrow. These loan limits vary by region based on the agency's determination of whether a given market is an average or a high-cost area.

Trigger terms

in ads that would require the full disclosure of all terms include down payment, payment amount, number of payments, and interest rate (other than APR).

The Federal Housing Administration (FHA)

insures lenders against loss in case of borrower default.

The deed of trust (or trust deed)

involves three parties: the trustor (borrower), the beneficiary (the lender) and the trustee (an independent third party who holds the deed of trust).

APR (annual percentage rate)

is a measure of both the interest rate and other fees associated with a mortgage loan.

Usury

is lending money at an excessive (illegal) rate Most states have laws designed to protect consumers from exorbitant fees and interest rates by limiting what lenders charge to reasonable amounts. Credit cards, retail installment contracts, and consumer leases are typically exempt from usury laws.

An amortized loan

is one in which the loan principal is paid down over the life of the loan.

The housing ratio (aka the front-end ratio)

is the borrower's projected monthly housing expense (principal, interest, taxes, insurance, second liens, and association fees) divided by income. The required ratio will vary depending on loan type and lender. Conventional loan: Typically 25% - 28% FHA loan: Typically 31% - 40% VA loan: Lenders ignore the front-end ratio

The loan-to-value ratio (LTV)

is the ratio of the loan amount to the property value (sales price or appraised value, whichever is lower); e.g., a $160,000 loan on a $200,000 home gives us an LTV of 80% ($160,000 ÷ $200,000 = .8, or 80%). Stated another way, a 20% down payment on a $200,000 loan is equal to $40,000 ($200,000 × .2 = $40,000). This gives borrowers an LTV of 80%. Lenders use LTV to determine required down payment amounts when initially writing mortgage loans or when homeowners apply for a home equity loan or a home equity line of credit. LTV may also be a factor in the loan's interest rate, payment, PMI requirement, and loan type.

The debt ratio (aka debt-to-income ratio or the back-end ratio)

is the total of all the buyer's debt obligations divided by income. The required ratio will vary depending on loan type and lender. Conventional loan: Typically 33% - 36% FHA loan: Typically 43% - 50% VA loan: Typically can't exceed 41% After loan package analysis, the underwriter will recommend application approval or denial or may request more documentation.

A bridge loan (Swing Loan)

is typically secured by the borrower's existing home

Mortgage lenders

issue a satisfaction or release of mortgage to acknowledge the borrower's loan payoff. Lenders also mark the promissory note "paid" and return it to the borrower.

FHA loans

loans that are available to anyone who qualifies but may be more attractive to borrowers who have lower credit scores and down payments.

The primary mortgage market

loans to borrowers (mortgagors) and is made up of several lender types: Commercial banks: National banks that offer consumer and business loans for resale on the secondary mortgage market Savings and loan associations: Take savings deposits and make loans Credit unions: Member-based cooperatives that take deposits, offer savings vehicles, and provide credit for auto and home loans Mortgage brokers: Match consumers with lenders; don't fund loans Mortgage bankers: Make loans using in-house loan processors and underwriters

Loans Limits

maximum loan amounts

The security instrument

may be either a deed of trust or a mortgage.

Negative amortization

may be experienced with some ARMs. This occurs when a payment fails to cover the amount of interest due. When this happens the difference between interest owed and interest paid is added to the loan's principal.

Individual lenders

may require higher credit scores that the stated minimum scores as long as they don't do so based on any discriminatory factor.

FHA borrowers

must have a minimum credit score of 580 to qualify for a 3.5% down payment; borrowers with credit scores between 500 and 579 may have to put down as much as 10%.

The USDA Farm Service Agency (FSA)

offers direct guaranteed loans to farmers and ranchers and for rural housing. Congressional appropriation funds these loans.

The U.S. Department of Agriculture (USDA)

offers some state and local mortgage loan programs.

Secondary mortgage market

payers purchase lender loan packages and re-package them into mortgage-backed securities (MBS). They sell the MBSs to investors. Fannie Mae, Freddie Mac, Farmer Mac, and Ginnie Mae,and lending institutions that buy loans from other lenders and investors make up the secondary market.

Lenders

place the property tax and insurance amounts collected each month in an escrow account and pay the annual tax and insurance bills when they come due.

PITI

principal, interest, taxes, and insurance and This may also be referred to as a budget mortgage, because it's easy to budget around the known monthly payment.

PMI (Private Mortgage Insurance)

protects the lender in case of borrower default

Fannie Mae and Freddie Mac

purchase mortgage loan packages from lender

Lenders in the primary mortgage market

put together packages of conforming loans and sell them to the secondary mortgage market to free up funds that provide additional consumer loans.

Regulation Z

requires mortgage lenders to follow TILA disclosure requirements for real estate advertisements that include credit terms.

security instrument

security instrument that pledges the financed property as collateral for the mortgage loan and gives lenders the right to foreclose if the borrower defaults on the mortgage loan

Under provisions of the Dodd-Frank Act

the CFPB enforces regulations that prohibit lenders from funding higher-priced mortgage loans without regard for a borrower's ability to repay the loan.

he beneficiary

the lender

lien theory state

the mortgage becomes a lien on the property, but title remains with the buyer. Foreclosure proceedings in a lien theory state may be more difficult for the lender due to the fact that the buyer is holding title to the land and not the lender.

ARMs

typically have a lower interest rate for an initial period of one to several years

Conventional loans

typically require credit scores of 620 and above.

Lenders

use LTV to determine required down payment amounts when initially writing mortgage loans or when homeowners apply for a home equity loan or a home equity line of credit. LTV may also be a factor in the loan's interest rate, payment, PMI requirement, and loan type.

Government Sponsored Enterprises (GSEs),

which is a privately-held corporation that has a public purpose. GSEs are corporations that are traded on major stock market exchanges (FNMA and FMCC).

Borrowers

with higher credit scores and other compensating factors such as cash reserves or additional income sources may qualify for higher front-end and back-end loan ratios.