Real Estate Finance Exam
Calculating PITI Example:
-A buyer is quoted a rate of 4.5% on a 30 year mortgage loan in the amount of $167,300. From the chart, the factor is found to be $5.07. -Divide the loan amount by 1000: $167,300 ÷ 1000 = 167.3 -Multiply the result by the factor: 167.3 × 5.07 = $848.21 is Principal and Interest monthly (P&I) -The factor chart makes it possible to calculate the monthly principal and interest payment. The term "house payment" typically includes a monthly payment of 1/12th of the annual taxes, homeowner's insurance and mortgage insurance (if any). -Annual Taxes = $2,750.00. The monthly tax payment is $2,750 ÷ 12 = $229.17 -Annual Insurance =$1,550.00. The monthly payment is $1,550 ÷ 12 = $129.16 -Loan payment (P&I) $848.21 -Monthly Taxes (T) $229.17 -Monthly Insurance (I) $129.16 -Total PITI $1,206.54
Lifting Clause
-A clause that gives the borrower the ability to replace the primary instrument with another without affecting the subordinate instrument's position. An example would be the refinance of an existing first lien note on a property with a second mortgage. The refinance would not change the priority of the liens, even though the refinanced first mortgage would be dated after the recording of the second.
Cross-defaulting Clause
-A clause that states that in the event of borrower default on the primary instrument, the secondary instrument automatically defaults. This protects a subordinate lienholder by allowing him or her to foreclose a property if the first lien went into default, even if the subordinate lien was not in default.
Strict Foreclosure
-A small number of states allow this type of foreclosure. -The lender files a lawsuit on the homeowner that has defaulted. -If the borrower cannot pay the mortgage within a specific timeline ordered by the court, ownership of the property is transferred directly to the mortgage holder. -Generally, strict foreclosures take place only when the debt amount is greater than the value of the property.
Judicial Foreclosure
-All states allow this type of foreclosure, and some require it. -The lender files suit with the judicial system, and the borrower will receive a note in the mail demanding payment. -The borrower then has only 30 days to respond with a payment in order to avoid foreclosure. -If a payment is not made after a certain time period, the mortgaged property is then sold through an auction to the highest bidder, carried out by a local court or sheriff's office.
TVLB Program eligibility
-Be wholly within the state of Texas. -Contain at least one acre, excluding any portion beneath a dedicated public roadway or navigable waterway or subject to frequent inundation or otherwise unusable. -Have legal, usable access to a public road. Access must be a minimum of 60 feet wide or meet the county public road width requirements, whichever is greater. "Usable" means that it can be driven on by a standard passenger car in inclement weather. -Be properly described by either a Field Note description of the tract with the Surveyor's Official Seal and Signature (original or copy) or a complete copy of the recorded subdivision plat if the description is by Lot & Block. -Not be zoned strictly for commercial use. -Not have been owned by the Veteran or spouse within the previous three years.
Processing phase
-During this phase, the loan processor will "build a file" that will be used to make an underwriting decision. The information contained in the application will be verified, and a wide range of information will be collected on the borrower and the property.
Disadvantages of ARM loans
-Early refinancing unpredictable home mortgage payments long time cost
Mortgage Banker
-Entities that provide their funds to provide mortgage financing, as opposed to commercial banks/savings associations.
Lender protection on FHA loans
-FHA loans are fully insured by the Federal Housing Administration, which is a part of the Department of Housing and Urban Development (HUD). -FHA is a mortgage insurance program that protects the lender from loss in the event of default by the borrower by insuring the full amount of the loan.
Properties eligible for FHA loans:
-FHA provides mortgage insurance on single-family, multifamily, and manufactured homes throughout the United States and its territories. -Qualifying ratios are slightly more lenient allowing borrowers to have more debt and still qualify. -LTVs are very high, allowing buyers with little money for a downpayment to purchase a property. Points on FHA loans can be paid by either the buyer or the seller.
VA Partial Entitlement
-For Veterans who have previously used entitlement and such entitlement has not been restored, the maximum amount of guaranty entitlement available to the Veteran, for a loan above $144,000 shall be 25 percent of the Freddie Mac CLL reduced by the amount of entitlement previously used (not restored) by the Veteran.
Exceptions to the "No Downpayment"
-Generally, the Veteran on a VA loan needs $0 downpayment, the loan is assumable, and it may be prepaid without penalty. If the purchase price exceeds the reasonable value of the property, a down- payment covering the difference must be made in cash from the borrower's own resources. -If a Veteran has less than full entitlement available, a lender may require a downpayment in order to meet market requirements.
Reverse Mortgage
-Homeowners who are least 62 years of age can borrow against the equity in their property -The loan becomes due upon the sale of the property or the death of the owner. -The borrower can NEVER be forced to sell the home. -This is considered the most expensive home equity loan because the debt continues to accrue or grow with interest, and heirs will inherit the property with a lien on it.
VA loan requirements
-Is based upon two separate valuations residual income and debt to income ratio you both are considered to be a guide to underwriting and will resident income is the primary consideration it must be considered along with other credit factors -Generally, the Veteran on a VA loan needs $0 downpayment, the loan is assumable, and it may be prepaid without penalty. If the purchase price exceeds the reasonable value of the property, a down- payment covering the difference must be made in cash from the borrower's own resources.
Portfolio Loan
-Loan not intended for resale on the secondary market
Savings and Loans
-Locally owned & privately managed -State or federally chartered -Receives individuals savings and uses these funds to make long term amortized loans to home purchasers
Advantages of ARM loans
-Lower interest rate higher loans falling right
Appraisal time limits
-Marketing Time - The appraiser verifies the area's listings and sales records to determine how long it is taking to sell properties: (1) under 3 months; (2) between 4-6 months or (3) over 6 months. A marketing time of over 6 months may be problematic as it indicates a slow market that creates a drag on property values.
PITI
-Principal -Interest -Monthly Taxes -Monthly Insurance
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
-Promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "to big to fail" to protect the American taxpayer by ending bailouts to protect consumers from abusive financial services practices and other purposes
Loan Originator Registration System
-Real estate license holders often refer buyers to several trusted loan originators, now universally referred to as Residential Mortgage Loan Originators (RMLOs). -The term Residential Mortgage Loan Originator is mandated by the SAFE Act. A good rule of thumb is to provide the buyer with at least three loan originators for them to consider, understanding that the buyer is free to use any loan originator that they choose. -Recent legislation has made it possible to research the background of a loan originator easily. Researching the background of a loan originator would undoubtedly be a prudent move on the part of a real estate agent. In some cases, the background research has revealed misconduct, fraud, and incompetence on the part of some RMLOs promoting services to real estate agents.
VA Loan Limits
-The VA does not impose a maximum loan amount that a Veteran may borrow to purchase a home. However, there are limits on the amount of liability VA will assume, which usually affects the amount of money an institution will extend to the Veteran. The loan limits are the amount a qualified Veteran with full entitlement may be able to borrow without making a downpayment. These loan limits vary by county, since the value of a house depends in part on its location.
Texas Veteran Land Loans
-The Veterans Land Loan Program (VLB) is the only one of its kind in the nation, allowing Texas Veterans to borrow up to $150,000 to purchase land at competitive interest rates while typically only requiring a minimum 5% downpayment for tracts one acre or more.
Chronological Age
-The actual age of the property in years. If the house is 20 years old, it has a chronological age of 20.
Effective Age
-The appraiser's estimate of the age of the house based upon its ongoing maintenance and upgrades. A house might have been well maintained and updated over the years; therefore, the appraiser might determine that a 20-year-old house might have an effective age of 10.
Closing
-The consummation of a contractual real estate transaction in which all appropriate documents are signed, and the proceeds of the mortgage loan are then disbursed by the lender
Underwriting
-The detailed process of evaluating a borrower's loan application to determine the risk involved for the lender -involves an in-depth analysis of the borrower's credit history, as well as an examination of the value and quality of the subject property. -A well- trained professional (underwriter) reviews all the information, analyzes the creditworthiness of the borrower, and renders a decision on the loan request.
Amortizing loan
-The monthly payment includes an amount that is applied first 2 inches that is due with the remainder of the loan payment being applied to the outstanding loan balance
Entitlement
-The portion of the Veteran's loan the VA will guarantee a lender
Origination
-The process of creating a new mortgage loan, including all steps taken by a lender to attract and qualify a borrower
Funding
-The process of transferring funds to a title or escrow company for disbursement
Community Reinvestment Act (CRA)
-This federal law was passed to ensure that banks would serve the needs of the community in which they were chartered to do business. -It prohibits redlining, which is the practice of refusing to provide financing in a particular area because of the location.
Power of Sale
-This type of foreclosure, also known as statutory foreclosure, is allowed by many states if the mortgage includes a power of sale clause. -After a homeowner has defaulted on mortgage payments, the lender sends out notices demanding payments. -Once an established waiting period has passed, the mortgage company, rather than local courts or sheriff's office, carries out a public auction.
Mortgage Broker
-Typically functions as a middleman between the borrower and the lender, negotiating, selling, or arranging loans to be delivered to larger investors.
Correspondent Lender
-Usually smaller in scale than mortgage bankers or brokers, these lenders typically extend loans with their funds at their own risk.
VA Loan Guaranty
-VA loans are made by a lender, such as a mortgage company, savings and loan, or a bank. VA's partial guaranty on the loan protects the lender against loss if the payments are not made, and is intended to encourage lenders to offer Veterans loans with more favorable terms. This guaranty reduces the lender's risk. Should the Veteran default on the payments, the VA will compensate the lender for any losses incurred by a foreclosure, up to the guaranty limit.
Upfront Mortgage Insurance Premium (UFMIP)
-When a loan is funded, the FHA charges this -can be paid at closing or added to the loan at funding. -Sales Price/Value × 96.5% LTV = Base Loan Amount -Base Loan Amount × 1.75% = Up Front Mortgage Insurance Premium (UFMIP)
Assumption Clause
-allows a new borrower to take over the payments on an existing loan under specified terms and conditions.
Release Clause
-allows for a portion of the loan to be paid in exchange for the lender releasing a part of the property from the mortgage. -This type of clause is often used by developers who develop raw land and sell lots to builders and individuals.
Escalation Clause
-allows the lender to raise the existing interest rate. -is usually used in an adjustable-rate mortgage, it can be used to overcome an alienation clause. -The lender will permit a loan assumption at an increased interest rate.
Contract for Deed
-also known as a land contract, is a sales contract between buyer and seller. -in the contract, the buyer agrees to make regular payments to the seller. -the seller retains legal title to the property known as title retention and the buyer acquires equitable title or equitable interest in the property. -the seller promises to convey title to the buyer when all payments have been made.
Non-Recourse Clause
-are often used by loan originators when selling loans on the secondary market. -protects the seller of the security from liability in the event of a default by the borrower. -the seller of those securities would be liable for the repayment of the loan to the secondary buyer. -commonly used in commercial lending
Subordinate Instruments
-are typically used to generate funds for the borrower. -Requirements for second mortgages are typically far higher than for a first mortgage because the subordinate lienholder's level of risk is higher since loans occupying the first lien position will be repaid first in the event of a default on the first mortgage. -A default of this nature could even lead to a subordinate lienholder receiving NO funds after the first lienholder is repaid out of foreclosure sale funds. -A second mortgage (or second deed of trust) is an instrument subordinate to the primary mortgage.
The Cost Approach
-considers how much a new structure of this size and type would currently cost to build -commonly used for unique properties for which there is little market activity, including special-purpose buildings such as churches and bowling alleys. The appraiser applies current industry and market price estimates for the underlying land, building materials and construction costs.
Blanket Mortgage
-covers more than one piece of property. -A builder may buy more than one lot in a new subdivision; he will do so with one loan.
Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act)
-designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state- licensed mortgage loan originators, and by establishing a nationwide mortgage licensing system and registry for the residential mortgage industry. -All mortgage loan originators must now be registered with the Nationwide Mortgage Licensing System and Registry (NMLSR).
Closed-end Mortgage
-for a specific dollar amount and does not allow for additional borrowing on the same note and mortgage.
Package Mortgage
-includes both real and personal property (fixtures and furnishings). -Furnished condominiums in resort areas are often sold this way.
Servicing
-includes: collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow and impound funds), remitting funds to the note holder, and following up on delinquencies.
Truth in Lending Act (TILA)
-is a U.S. federal law designed to protect consumers in credit trans- actions by requiring clear disclosure of key terms of the lending arrangement and all costs.
Texas Veterans Land Board (TVLB) Program
-is a benefit that every buyer with a military background should consider. To participate in the program, the Veteran obtains an FHA, VA, or conventional loan from a participating lender. The qualification process is the same as for any other FHA, VA, or conventional loan and is open to all honorably discharged Texas Veterans. -The primary benefit to the Veteran is that the rate on the Veteran's Land Board loan is often up to one percent below prevailing market rates.
Default
-is a breach or nonperformance of the terms of a note or the covenants of a mortgage. -Defaulting on a mortgage is costly to the lender, who adds the cost of various fees to the amount already owed by the borrower. -It also causes damage to the borrower's credit score and could lead to the loss of the property through foreclosure.
Subordination Clause
-is a clause in which a holder of a mortgage permits a subsequent mortgage to take priority. -Subordination is the act of yielding. -This clause provides that if a prior mortgage is renewed, the junior mortgage will continue in its subordinate position and will not automatically become a higher or first mortgage.
The Lock-in Clause
-is a condition of a mortgage loan that prohibits prepayment of the loan prior to a specific date. -These clauses are often used in conjunction with prepayment penalties/privileges in the same loan to allow the lender to exert a measure of control over the repayment schedule of the loan. -This is often done to preserve the lender's earning potential for a loan, especially those loans which may have a very high yield over their term.
Wraparound Mortgage
-is a method of financing that preserves the low, existing interest rate on the original note
Deed in lieu of foreclosure (DIL)
-is a mortgage modification option in which a borrower voluntarily deeds their collateral property in exchange for a release from all obligations under the mortgage. -A DIL of foreclosure may not be accepted from borrowers who can financially afford their mortgage payments.
Acceleration Clause
-is a provision in a written mortgage or note, stating that in the event of default, the entire amount of the principal becomes due and payable.
Lien
-is a right given by law to certain creditors to have debts paid out of the property of a defaulting debtor, usually through a court sale.
Collateral-Dependent Loans (Hard Money Loan)
-is a specific type of asset-based financing in which a borrower receives funds secured by the value of a parcel of real estate. -are typically issued at much higher interest rates than conventional commercial or residential property loans and are rarely issued by commercial banks or other depository institutions. -Private investors make many of these loans, generally in their local areas.
The Texas Department of Housing and Community Affairs (TDHCA)
-is an agency responsible for affordable housing, housing-related and community service programs, and the regulation of the state's manufactured housing industry.
Prepayment Privilege Clause
-is included in some loans and allows the borrower to pay off the loan before the due date without incurring penalties such as those discussed above. This clause can be advantageous to a borrower in cases where interest rates are falling, and the loan can be refinanced at a lower rate without additional cost.
VA Eligibility
-is the Veteran's entitlement to VA home loan benefits under the law, based on military service. An eligible Veteran must still meet credit and income standards in order to qualify for a VA-guaranteed loan. -Veterans who were honorably discharged AND who meet the service requirements are eligible for VA home loan benefits. -is additionally determined by the time frame in which the Veteran served and the number of days of active duty. -The Veteran must obtain a certificate of eligibility (COE).
Residual income
-is the amount of money that is left over each month after all of the borrower's major expenses are paid - including housing, taxes, and debt payments. The money that remains is usually spent on items such as groceries, gas, and other regular living expenses.
A promissory note
-is the borrower's unconditional promise to repay and includes the amount borrowed, payment amount, due date, and rate of interest. -The note is not generally recorded.
A Mortgage
-is the document that pledges the property as security for repayment of the note, is recorded in the county in which the property is located.
Physical deterioration
-is the loss in a property's value due to daily wear and tear. All properties experience this type of depreciation over time. However, with above-average maintenance and upkeep, some properties experience less than average physical deterioration. -Examples of physical deterioration that an appraiser should note on the appraisal report include a leaky roof, a badly cracked driveway, inadequate floor coverings or an overall need for repainting.
Functional Obsolescence
-is the loss in the desirability of the style, layout, or function of an element of a property over time.
Market Value
-is the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, under guidelines published by federal institutions Fannie Mae and Freddie Mac.
Loan-to-Value Ratio
-is the percentage of the lesser of the appraised value or sales price that the lender will lend. If a borrower is approved for an 80% loan, it means that the lender will loan up to 80% of the sales price or appraised value, whichever is lower. Note that the downpayment is the difference between the sales price and the LTV (100% Sales Price - 80% Loan = 20% Downpayment).
Back Ratio
-is the ratio of the borrower's total recurring monthly debts, including such obligations as the house payment, payments on all installment debts, monthly payments on all junior liens, alimony, car lease payments, and other recurring payment obligations. -36% × gross monthly income = Max. PITI and debts per month
Exculpatory Clause
-is used to limit the borrower's personal liability in the event of a default on a loan. -This clause, when included, clearly states that the liability of the borrower is limited to the property in question, protecting the borrower's other real and personal property from becoming collateral in the event of a default.
Front Ratio
-is used to qualify a borrower for a loan based upon the proposed house payment and his or her gross monthly income (GMI). -28% × gross monthly income = Max. monthly house payment
Three Loan default remedies for the lender
-judicial -power of sale -strict foreclosure.
Loan Clauses
-may be used in subordinate finance instruments to reduce the liability of the subordinate lienholder versus the first lienholder's liability.
Recasting
-or re-amortizing, a mortgage. -This process can reduce the borrower's monthly payment, thus making resolving a default situation more manageable. -In a mortgage recast for a borrower in default, lenders may lower the interest rate or extend the term of the mortgage, and in some cases, may do both. -Once the lender has implemented these modifications, the mortgage is re-amortized, which results in a reduced payment.
The Equal Credit Opportunity Act (ECOA)
-originally passed in 1974, ensures that all consumers have an equal chance to obtain credit. -covers all creditors who regularly extend credit and impacts professionals, such as residential mortgage loan originators, who are involved in granting credit.
Amortization
-paid in full
An open-end Mortgage
-permits additional borrowing on the same note and mortgage. This is a Home Equity Line of Credit or HELOC. The minimum withdrawal on this line of credit is $4,000 in Texas.
Fair housing rules and protected categories
-prohibit housing discrimination based on race, color, national origin, sex, religion, families with children, and disabilities.
Conventional Loan
-refers to a loan made with real estate as security and which does not involve government participation in the form of insuring or guaranteeing the loan. -Most conventional loans are made in anticipation of their sale to investors in the secondary market.
Alienation Clause
-reserves the right of the lender to call the note (declare the entire balance due) if the borrower sells the property without repaying the loan. -This clause is designed to prevent a purchaser from assuming the loan without the consent of the lender. -also known as the Due-On Sale Clause.
Defeasance Clause
-states that the lien is defeated when the debt is repaid.
Sales Comparison Approach
-the appraiser focuses on recent sales in determining the value of the subject. The appraiser will gather at least three comparison sales. These comparison sales are referred to as "comparables" or "comps" in the appraisal business. Some lenders require four or more comparables. These comparables are recently sold properties of a similar type, size, quality, and locale as the subject.
Adjustable Rate Mortgage
-the borrower obtains a loan for a specified term, perhaps 15 or 30 years. The loan is funded at an initial rate of interest that will remain fixed for a period. That period will vary depending on the loan product. Rate changes in an ARM are determined by increases or decreases in a funds index that is not under the control of the lender.
VA Full Entitlement
-the maximum amount of guaranty for a loan above $144,000 is 25 percent of the loan amount, regardless of the Freddie Mac Conforming Loan Limits (CLL). -However, the Blue Water Act does not change the maximum amount of guaranty entitlement available to Veterans for loans equal to or less than $144,000 regardless of the Freddie Mac CLL.
Budget Mortgage
-the monthly house payment includes principal, interest, taxes, and insurance (known as PITI). -The tax and insurance portion of the payment is held in a special account called an escrow account. It is also called an impound, trust, or reserve account.
Seller Financing
-the seller is willing to take part or all of his equity in the form of a note. If this occurs, there is a TREC-mandated addendum to be used with the transaction.
Federal Housing Administrators (FHA) Loan program
-was established in 1934 to improve the construction and financing of housing. A part of the United States Department of Housing and Urban Development (HUD), FHA provides mortgage insurance on single-family, multifamily, and manufactured homes throughout the United States and its territories.
Income Approach
-will not be used in a typical residential transaction because it applies only to income-generating rental property. -will be used when the sale is to an investor purchasing the home as a rental property.
FHA requires a down payment of:
3.5%
ad valorem taxes are...
According to value
Escrow of taxes and insurance is required for FHA loans?
Always - all FHA loans require escrow of taxes and insurance
___________ is something of value that can be pledged as security for repayment of the loan.
Collateral
A claim, lien, charge, or liability attached to and binding real property is a(n) __________.
Encumbrance
Gross Rent Multiplier (GRM)
GRM = Average Sales Price ÷ Average Monthly Rent
Forbearance
Plan that lets the borrower pay part of the delinquency each month along with the regular monthly installment.
The market where borrowers and mortgage lenders come together to create and negotiate terms of a mortgage transaction is called the ________________.
Primary Market
The _________________ exists for the purchase and sale of existing mortgages to investors.
Secondary Market
Required delivery by the lender of the closing disclosure form:
The creditor must ensure that the consumer receives the Closing Disclosure form at least three business days before the consumer closes the loan.
