Real Estate Unit 15

Front 1

Conventional loan

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Has no direct federal involvement

Are the most secure loans.

The loan-to-value ratio (LTV) is often lowest for these loans—traditionally 80%—meaning the down payment is 20%, but the LTV may be as high as 100%.

Conventional loans are not government-insured or guaranteed.

Front 2

Loans with direct federal involvement are insured by

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Federal Housing Administration (FHA) or

guaranteed by the U.S. Department of Veterans Affairs (VA).

Front 3

The real estate financing market has the following three basic components:

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The Federal Reserve System

The primary mortgage market

The secondary mortgage market

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Notes

Back 4

Under the umbrella of the monetary policy set by the Federal Reserve System, lenders that are part of the primary mortgage market originate loans that are bought, sold, and traded in the secondary mortgage market.

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Federal Reserve System (the Fed) role

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The Fed regulates the flow of money and interest rates in the marketplace through its member banks

Is to maintain sound credit conditions, help counteract inflationary and deflationary trends, and create a favorable economic climate.

Front 6

The Federal Reserve System divides the country into how many districts

Back 6

12 federal reserve districts, each served by a federal reserve bank

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Discount rate

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Is the rate the fed charges for loans made to a bank

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reserve requirements

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the minimum level of funds that an institution must maintain.

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Notes

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When the discount rate rises, interest rates on all sorts of loans will rise, making funding harder to obtain. When the discount rate is lowered, interest rates will go down, making borrowed funds easier to obtain, an incentive to businesses as well as homebuyers.

Front 10

primary mortgage market

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Is made up of the lenders that originate mortgage loans and receive income based on finance charges collected at loan closing

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How does a borrower see a loan

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From a borrower's point of view, a loan is a means of financing an expenditure;

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How does a lender see a loan

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from a lender's point of view, a loan is an investment.

Front 13

Income on a loan is realized from the following two sources:

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Finance charges collected at closing, such as loan origination fees and discount points

Recurring income, the interest collected during the term of the loan

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What is involved in servicing a loan

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1.collecting payments (including taxes and insurance, if the borrower must maintain an impound account as part of the loan agreement),

2. accounting,

3. bookkeeping,

4. preparing insurance and tax records,

5. processing payments of taxes and insurance, and

6. following up on loan payment and delinquency.

Hint 14

CABPPF

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Major lenders of home mortgage and commercial property loans include the following:

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1. Savings associations and Commercial banks (aka fiduciary lenders)

2. Insurance companies

3. Credit Unions

4. Pension funds

5. Endowment funds

6. Investment group financing

7. Mortgage banking companies

8. Mortgage brokers

Hint 15

SICPEIMM

Front 16

secondary mortgage market

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In which loans are bought and sold only after they have been funded.

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Notes

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The secondary mortgage market thus helps lenders raise capital to make additional mortgage loans and is especially useful when money is in short supply.

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pools

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Are a number of mortgage loans that are assembled into blocks

Front 19

government-sponsored enterprises (GSEs)

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Organizations created by the federal government (Fannie Mae, Freddie Mac, Farmer Mac, Ginnie Mae) to help increase loan opportunities for homebuyers.

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Fannie Mae

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was created as a government agency in 1938

Federal National Mortgage Association

has shareholders but is under the guardian of the Federal Housing Finance Agency (FHFA). It creates mortgage-backed securities using pool of mortgages as collateral; and deals in conventional, FHA, and VA loans.

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Freddie Mac

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was created in 1970 as a privately owned corporation

Federal Home Loan Mortgage Corporation,

also has shareholders and is under the guardian of FHFA. It has authority to purchase mortgages, pool them, and use them as security for bonds sold on the open market.

Front 22

Farmer Mac

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The Federal Agricultural Mortgage Corporation—a privately owned and publicly traded company established by Congress to create a secondary market for agricultural mortgage and rural utilities loans and the portions of agricultural and rural development loans guaranteed by the U.S. Department of Agriculture (USDA).

Front 23

Ginnie Mae

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Government National Mortgage Association

is entirely a government agency, a division of the Department of Housing and Urban Development (HUD), organized as a corporation but without corporate stock, that administers special-assistance programs, and guarantees mortgage-backed securities using FHA and VA loans as collateral.

Front 24

conforming loans

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Are loans that meet all of the requirements to be sold in the secondary market

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To qualify for a conventional loan under Fannie Mae guidelines, for instance,

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the borrower's monthly housing expenses, including PITI (principal, interest, taxes, and insurance), must not exceed 28% of total monthly gross income. Also, the borrower's total monthly obligations, including housing costs plus other regular monthly payments, must not exceed 36% of total monthly gross income (80% LTV loans). The maximum for total monthly obligations can be as high as 45% or 50% if the borrower meets higher credit score and reserve requirements

Front 26

Federal Housing Finance Agency (FHFA)

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Publishes the maximum loan limits for loans sold to Fannie Mae and Freddie Mac

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Nonconforming loan or jumbo loans

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Loans that exceed the state limits

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PMI Private mortgage Insurance

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Insurance provided by a private party that protects a lender against a loss in the event of a foreclosure and deficiency

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Homeowners protection act of 1998

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Requires that lenders automatically terminate the PMI payment if the borrower has accrued at least 22% in the home and is current on mortgage payments

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FHA insured loan

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are backed by the Federal Housing Administration (FHA), which is part of HUD. FHA does not make loans but insures loans made by an FHA-approved lending institution

Front 31

MIP Mortgage Insurance Premium

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An Insurance policy Premium used in FHA loans that the borrower is charged

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What happens if the seller pays more than 6% of the cost normally paid by the buyer

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The lender will treat the payments as a reduction in sales price and recalculate the mortgage amount accordingly

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Assumption rules

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A qualified buyer may assume an existing FHA insured loan

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HUD Homes Sale

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1. Accepts bids only from real estate professionals who are registered with HUD

2. properties sold as is means HUD will make no improvements

3. Hud allows early bidding for owner occupants

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VA Guaranteed Loans

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are backed by the U.S. Department of Veterans Affairs and are available to eligible veterans and spouses.

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A veteran who meets any of the following time-in-service criteria is eligible for a VA-guaranteed loan:

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90 days of active service for service people currently on active duty and veterans of at least 90 days of active service during World War II, the Korean War, the Vietnam conflict, and the Gulf War (which extends to the present time)

A minimum of 181 days of active service during interconflict periods between July 26, 1947, and September 6, 1980

Two full years of service during any peacetime period since 1980 (since 1981 for officers) or the full period (at least 181 days) for which the veteran was called or ordered to active duty

Six or more years of continuous duty as a reservist in the Army, Navy, Air Force, Marine Corps, or Coast Guard, or as a member of the Army or Air National Guard

Front 37

Certificate of Reasonable Value

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A form indicating the appraised value of a property being financed with a VA loan.

Front 38

Prepayment penalties

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As with an FHA-insured loan, the borrower under a VA-guaranteed loan can prepay the debt at any time without penalty.

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For an interest rate reduction refinancing or loan assumption, all veterans pay a VA funding fee of 0.50%. There is no funding fee for

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1. A veteran who is receiving VA compensation for a service-connected disability

2. a veteran who would be entitled to receive compensation for a service-connected disability if the veteran did not receive retirement or active duty pay, or

3. the surviving spouse of a veteran who died in service or from a service-connected disability.

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FSA loan programs fall into two categories:

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Guaranteed loans that are made and serviced by private lenders and guaranteed for a specific percentage by the FSA, and

Loans made directly by the FSA.

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The FSA offers programs to do what

Back 41

Help families purchase or operate family farms

Help families purchase or improve single-family homes in rural areas

Front 42

The Farm Credit System (Farm Credit) provides loans to

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Farmers, ranchers, rural homeowners, agricultural cooperatives, rural utility systems, and agribusinesses.

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Notes

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VA regulations allow only one active VA-guaranteed loan at a time, and a veteran may own only two properties that were acquired using VA-guaranteed loan benefits. The right to the VA-guaranteed loan benefit will never expire as long as any prior VA-guaranteed loan has been paid in full.

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Notes

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The lender sets the loan interest rate, discount points, and closing costs. Closing costs such as the VA's property appraisal, the credit report, state and local taxes, and recording fees may be paid by the veteran purchaser, the seller, or shared by both. The veteran is not allowed to pay for the termite report, unless the loan is a refinance. No commissions, brokerage fees, or buyer broker fees may be charged to the veteran buyer

Front 45

Package loan

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A real estate loan used to finance the purchase of both real property and personal property

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Package loans usually include:

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Furniture, drapes, the kitchen range, microwave oven, refrigerator, dishwasher, washer, dryer, and other appliances as part of the sales price of the home.

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Blanket loan

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A mortgage covering more than one parcel of real estate, providing for each parcel’s partial release from the mortgage lien upon repayment of a definite portion of the debt.

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Blankets loan include

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Covers more than one parcel or lot

usually used by a developer to finance a subdivision, but it can also be used to finance the purchase of improved properties or to consolidate multiple loans on a single property.

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partial release clause.

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This clause permits the borrower to obtain the release of any one lot or parcel from the blanket lien by repaying a certain amount of the loan

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wraparound loan

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allows a borrower to obtain additional financing while retaining the first loan on the property.

The second lender gives the borrower a new, increased loan at a higher interest rate and assumes payment of the existing loan.

A wraparound loan is possible only if the original loan permits it.

Front 51

open-end loan

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secures the current loan to the borrower and future advances made by the lender to the borrower.

The interest rate on the initial amount borrowed is fixed, but interest on future advances may be charged at the market rate in effect at that time

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construction loan

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Is made to finance the construction of improvements on real estate such as homes, apartments, and office buildings.

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Draws

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Is when the lender commits to a loan but disburses the funds in installment during construction

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end loanor take-out loan

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Will pay off (take out) the construction financing lender when the work is completed by paying the principal owed on the construction loan.

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Sale-and-leaseback arrangements

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While not loans, are used to finance large commercial or industrial properties

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buydown

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is a payment made at closing to reduce the interest rate on the loan

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home equity loan

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Is a source of funds that takes advantage of the equity built up in a home.

Front 58

home equity line of credit, called a HELOC

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Is junior to the original lien

the lender extends a line of credit that the borrower can use at will

Front 59

A home equity loan can be used for a variety of financial needs, such as to

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finance the purchase of an expensive item, such as a boat;

consolidate existing installment loans or credit card debt; and

pay medical, education, home improvement, or other expenses.

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The downside of a homeowners equity loan

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One downside to a HELOC is that the full amount of the line of credit will appear on the borrower's credit report, even though it is not being used.

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The upside of a home equity line of credit

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the home equity loan could eventually lead to a new first mortgage loan.

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Regulation Z

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requires that credit institutions inform borrowers of the true cost of obtaining credit

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Truth in lending act

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Federal government regulates the lending practices of mortgage lenders through Regulation Z of this act

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Notes

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The regulation does not apply to business or commercial loans or to agricultural loans of any amount.

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Notes

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Under the Truth in Lending Act, a consumer must be fully informed of all finance charges and the true cost of the financing before a transaction is completed. The finance charge disclosure must include any loan fees, finder's fees, service charges, and points, as well as interest. In the case of a mortgage loan made to finance the purchase of a dwelling, the lender must compute and disclose the annual percentage rate (APR).

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creditor, for purposes of Regulation Z,

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is any person who extends consumer credit more than 25 times each year or more than 5 times each year if the transactions involve dwellings as security.

Front 67

In the case of most consumer credit transactions covered by Regulation Z the borrower has how many days to rescind the transaction

Back 67

3 business days

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This right of rescission does not apply to

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owner-occupied residential purchase-money or first mortgage or deed of trust loans.

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This right of rescission does apply to

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refinancing a home mortgage or to a home equity loan.

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Advertisements for buydowns or reduced-rate mortgages must show

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both the limited term to which the interest rate applies and the annual percentage rate.

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If a variable-rate mortgage is advertised, the advertisement must include

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the number and timing of payments,

the amount of the largest and smallest payments, and

a statement of the fact that the actual payments will vary between these two extremes.

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Trigger terms

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Specific credit terms, such as down payment, monthly payment, and amount of finance charge or term of loan.

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Trigger terms might not be advertised unless the information includes the following information

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1Cash price

2Required down payment

3Number, amounts, and due dates of all payments

4Annual percentage rate

5Total of all payments to be made over the term of the mortgage (unless the advertised credit refers to a first mortgage or deed of trust to finance the acquisition of a dwelling)

Hint 73

5

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Equal Credit Opportunity Act (ECOA)

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prohibits discrimination in the lending process based on the credit applicant's race, color, religion, national origin, sex, marital status, age

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Fair Credit Reporting Act (FCRA)

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If a loan application is rejected, the federal requires that the lender detail the reasons for the rejection in a statement that must be provided to the loan applicant within 30 days.

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Community reinvestment act of 1977 (CRA)

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financial institutions are expected to meet the deposit and credit needs of their communities; participate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small businesses, and small farms.

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Financial institutions are periodically reviewed by one of three federal financial regulatory agencies:

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the Comptroller of the Currency, the Federal Reserve's Board of Governors, or the Federal Deposit Insurance Corporation.

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The law requires any federally regulated financial institution to prepare a statement containing

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The Geographic boundaries of its community

The types of community reinvestment credit offered, such as residential housing loans, housing rehabilitation loans, small-business loans, commercial loans, and consumer loans;

The comments from the public about the institution's performance in meeting its community's needs.

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Real estate settlement procedure act

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covers loan closings, also includes provisions that govern brokerage involvement in the loan process by means of a computerized loan origination (CLO) system,

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Desktop Underwriter,

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which reduces approval time to minutes, based on the borrower's credit report, a paycheck stub, and a drive-by appraisal of the property.

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What can automated underwriting procedures do

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Can shorten loan approvals from weeks to minutes

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computerized loan origination (CLO) system

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allows real estate professionals to assist loan applicants in surveying lenders and providing information.

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Notes on how to determine interest rates

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The answer is $102.13. There are three steps: (1) First, find the amount of interest in the first monthly payment by multiplying the annual interest rate by the original amount of the loan: Principal × rate = interest ($85,000 × 5% = $4,250). (2) Then, divide the annual interest by 12 to find the first month's interest: $4,250 ÷ 12 = $354.17. (3) Finally, subtract that interest from the amount of the regular monthly payment to find the amount available to apply to principal: $456.30 – $354.17 = $102.13.

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certificate of eligibility

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The document that sets forth the maximum loan guarantee to which a veteran is entitled to

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The Office of the Comptroller of the Currency (OCC)

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Establishes regulations and standards for fiduciary lenders.

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Fannie Mae once again became a government-owned entity in

Back 86

2008

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The Truth in Lending Act (TILA) provides penalties for noncompliance. A successful class action alleging that a creditor understated the APR and/or finance charge of the involved loans could make the creditor liable for punitive damages of

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the lesser of $500,000 or 1% of the creditor's net worth, plus attorney's fees and court costs.