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Exam Prep - Ch 7
Financing and Settlement
| Question | Answer |
|---|---|
| Mortgage loans | - The most common choice for financing real property. - Mortgage loans fall into two broad categories – conventional and non-conventional loans |
| Conventional Loans | - Private source - 20% down - PMI insures 12%-36% - 3% down (lowest) - Appraisal - Ratios - 28/36% |
| Government - FHA | - owner occupied/ assumable/ PITI - 3.5% down - MIP 100% insured - UFMIP 1.75% - Annual MIP .85% - FHA Appraisal - Ratios 31/43% |
| Government - VA | - owner occupied/ assumable/ PITI - 0% - 25% Free Guarantee - Funding fee 2.3-3.6% - Certificate of Eligibility - Eligibility / DD214 - Cert of Reasonable Value - Ratios 41% back - Ginnie Mae |
| A conventional loan | Neither federally insured nor guaranteed. (It is not an FHA or VA loan.) |
| In an effort to encourage homeownership, the federal government insures or guarantees non-conventional mortgage loans through three agencies: | - Federal Housing Administration (FHA), - U.S. Department of Veterans Affairs - U.S. Department of Agriculture All federally backed mortgage loans feature special and, in many cases, relaxed lending guidelines and payment terms. |
| Seller Financing | Contract for Deed (Installment Contract or Land Contract, Real Estate Contract or Mortgagee's Executory Contract) - This title retention protects the seller |
| Contract for Deed (parties are the vendor & the vendee, and both must sign) | - Executory contract. Becomes fully executed when the final loan paym't is made, & seller/vendor delivers the deed to the buyer/vendee. - If the vendor/vendee dies, binding on the heirs. - An installment sale is not the same as installment contract. |
| Lien theory vs. title theory and deed of trust | A note, or promissory note, is the instrument for the debt. It is your personal promise to pay. |
| A note, or promissory note | Is the instrument for the debt. It is your personal promise to pay. It is not recorded. |
| Mortgage | Is a pledge of real property as security for a promissory note. The mortgagor borrows the money and gives the mortgage as a pledge to the lender. The lender is called the mortgagee. |
| In a lien theory state | When a mortgage loan is used for the purchase of real property, at closing, the buyer receives the title, and the lender has a lien. |
| In a title theory state | At closing, the lender receives the title and will hold it until the lien is satisfied or paid off. |
| Some states use a Deed of Trust instead of a traditional mortgage | The deed of trust contains a “power of sale” clause that allows for non-judicial foreclosure. |
| The primary market | is where consumers go to borrow money |
| The secondary market | is where lenders go for money. The secondary market exists for the purchase and sale of existing mortgages to investors. |
| A conforming loan | is a standardized loan written on uniform documents that meet the purchase requirements of Fannie Mae and Freddie Mac. A non-conforming loan does not meet the secondary market guidelines. (including sub-prime loans) |
| The secondary market warehousing agencies are | Fannie Mae, Freddie Mac, and Ginnie Mae. Lenders use Freddie Mac forms to ensure that loans can be sold in the secondary market. |
| Conventional loan programs | Fixed rate amortized loan Term loan Blanket loan Package loan Budget loan Balloon loan Participation loan Open-end mortgage ARM Construction loan Reverse annuity mortgage Sub prime loan |
| Fixed rate amortized loan | - Equal, regular payments of principal and interest until the loan is repaid. Interest is paid in arrears - at the end of each payment period. - With each payment the amount toward the principal increases and the interest decreases. |
| Term loan | Interest only until the end of the term, when the entire principal is repaid. This is a zero-amortization loan. This is also called a straight-loan |
| Blanket loan | - covers more than one piece of property (several lots on one note). This loan may contain a release clause allowing the borrower to obtain partial releases of specific lots by making required lump sum payments. |
| Package loan | Includes real property plus personal property (a furnished condominium). |
| Budget loan | Includes principal, interest, taxes, and insurance in the monthly payment, known as PITI. Many loans, including FHA, VA, and most amortized fixed rate loans, are budget mortgages |
| Balloon loan | This is a partially amortized loan with a final payment substantially larger than the others. |
| Participation loan | Two or more lenders invest in one loan. |
| Open-end mortgage | Permits additional borrowing on the same note. This is some times called a credit card mortgage or a home equity line of credit - HELOC. |
| ARM | Adjustable rate mortgage - An ARM is a loan with an interest rate subject to change as conditions in the market change |
| Construction loan | Short-term loan with funds advanced periodically during the stages of construction. |
| Reverse annuity mortgage | Allows homeowners 62 years of age or older, for all bor rowers involved, to borrow against their equity without making any payments on the amount borrowed. |
| Sub-prime loans | loans with risk-based pricing - rates not published. Borrowers are rated A-F, (prime borrower has A rating). A-minus to F borrowers will pay 1to 5% higher > those with good credit. Prepayment penalty to protect the lender from loss of interest |
| MIP - mortgage insurance premium | The insurance on the FHA loan The mortgage insurance premium is paid monthly in addition to the PITI payment. |
| VA - The Department of Veterans Affairs GUARANTEES repayment of the loan | The guarantee is for the top 25% of the loan. |
| VA entitlement. | If a veteran pays off their loan, their entitlement is restored. If a non-veteran assumes a VA loan, the veteran’s entitlement is tied up until a refinance or sale occurs |
| VA eligibility | The parents and siblings of a veteran are not eligible for a VA loan. |
| VA Certificate of Eligibility | The veteran must obtain a Certificate of Eligibility from the VA Once eligible, the veteran will be issued a certificate based on ability to pay. Dishonorably discharged individuals are never eligible. |
| CRV or VA appraisal | The Certificate of Reasonable Value (CRV or VA appraisal) must meet or exceed the sale price |
| Serviceman's Readjustment Act (The G I Bill). | The VA must be notified prior to a foreclosure by the loan servicer on a VA loan. This is a result of the Serviceman's Readjustment Act (The G I Bill). |
| Mortgage clauses: Acceleration clause | A provision in a written mortgage, or note, stating that in the event of default, the whole amount of the principal becomes due and payable. |
| Alienation clause | “Due on sale” clause states that the balance of the secured debt becomes due if the property is sold by the mortgagor without the mortgagee’s approval. An alienation, or due on sale clause will be found in Fannie Mae and Freddie Mac loans. |
| Defeasance clause | States that the lien is defeated when the debt is repaid. |
| Escalation clause | Allows a lender to raise the existing rate. An escalation clause is usually found in an ARM. |
| A prepayment penalty can also minimize or prevent the practice of ____________. | CHURNING. (Churning is excessive selling/lending activity to generate fees and commissions.) |
| Subordination clause | Allows a lender to move to or take a lower lien position. This clause would be found in a second mortgage, a home improvement loan, or a home equity loan. |
| Assumption clause | Allows a new borrower to take over the payments on an existing loan under specified terms and conditions |
| In an assumption “subject to,” the buyer takes over the payments, | ... but is not liable for the loan. The original borrower remains liable. In the event of a future foreclosure, this can have a negative effect on the seller's credit rating |
| Debt ratios for conventional loans | 28%-36% The front ratio - 28%, is the % of monthly gross income that can be used to pay the PITI payment on a mortgage loan. - The back ratio - 36%, is the %of monthly gross income that can be used to cover all the consumer debt, including the PITI. |
| The LTV or loan-to-value ratio | The loan amount as a percent of either the price or the appraised value, whichever is lower |
| Discount points | Prepaid interest and tax-deductible. They raise the return or yield to the lender. Origination points are loan processing fees. |
| Equity | The difference between the market value of a property and the outstanding debt. |
| TILA | TRUTH-IN-LENDING OR CONSUMER CREDIT PROTECTION ACT - This Act is administered by the Consumer Financial Protection Bureau - CFPB. |
| RESPA stands for the Real Estate Settlement and Procedures Act | It is implemented by Regulation X). RESPA regulates closings on 1-4 family residential property with federally related financing. Apartments would not be covered (commercial) |
| Loan Estimate form (LE) | Must be provided by the RMLO/ Residential Mortgage Loan Originator to the consumer upon receipt of or w/in 3 biz days of loan app. (Sat count) Borrower has 10 days after receipt of LE to to indicate to lender whether he wants to continue with loan app |
| The Closing Disclosure form (CD) | Must be received by the consumer at least 3 business days before closing, and the lender must have proof of receipt. |
| EQUAL CREDIT OPPORTUNITY ACT – ECOA | This law prohibits discrimination by lenders on the basis of sex, marital status, race, color, religion, age, national origin, or receipt of income from public assistance programs. |
| The escrow agent or settlement agent | Is responsible for closing the transaction as set forth in the sales contract or preventing closing unless both the buyer and seller agree to any changes in the contract terms. |
| RESPA | Real Estate Settlement and Procedures Act |
| Trigger terms | Interest rate Down payment Fees Payment Terms |
| Exempt terms (ok in advertising) | Cash price APR (interest rates + fees) |
| Regulation Z applies to: | All real estate loans |
| Under RESPA, is Saturday considered a business day? | Yes |
| Redlining against Community Reinvestment Act | the practice of refusing to lend or insure in a certain geographic area, usually minority inhabited (applies insurance and lenders) |
| Proration | crediting / debiting each party to the real estate transaction their amount of HOA dues, taxes. Property taxes are paid at the end of the year, HOA dues are paid in advance. |
| Earnest money | Is a credit to buyer at closing |
| ECOA (EQUAL CREDIT OPPORTUNITY ACT) | This law prohibits discrimination by lenders on the basis of sex, marital status, race, color, religion, age, national origin, or receipt of income from public assistance programs |
| Usury | Charging an interest rate higher than the legal limit is referred to as usury |
| TRID | Truth In Lending/RESPA integrated disclosure (TRID) went into effect. |
| LE | The Dodd-Frank Act directed the CFPB to combine the Truth In Lending cost of financing disclosure and the RESPA good faith estimate of closing costs into one form - the Loan Estimate form (LE). |
| Predatory lending | When an unscrupulous lender takes advantage of a consumer’s lack of knowledge regarding lending practices |
| We debit the seller and credit the buyer for | We debit the seller and credit the buyer for: unpaid taxes, unearned rent, and tenant security deposits |
| We debit the seller with no entry for | We debit the seller with no entry for the buyer for accrued interest and existing loan payoff and fees necessary to furnish marketable title |
| Title officer | – researches the history of a property to identify potential problems, claims, or discrepancies that may interrupt a sale. |
| Escrow officer | – focuses on preparing information gathered on properties and completing the necessary paperwork, including tax forms required for the transaction to take place. The escrow officalso manages the funds in the escrow account. |
Created by:
deidresj
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