Nmls Loan Origination Test

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SAFE Act

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Secure and Fair Enforcement for Mortgage Licensing Act- Title V of Housing and Recovery Act (2008).

Based on the need to:

-increase uniformity in licensing and registration requirements among the states

-reduce the regulatory burden of states.

-enhance consumer protection

-reduce fraud

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CFPB

Back 2

Consumer Financial Protection Bureau-

Passed in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act as a result of unregulated an irresponsible lending practice in the early 2000's. Committee put together to look after the interest of consumers.

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Actions of CFPB

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- writes, rules, supervises companies, and enforces federal consumer financial protection laws;

-restricts unfair, deceptive, or abusive acts or practices;

-takes consumer complaints;

- promotes financial education;

-researches consumer behavior;

-monitors financial markets for new risks to consumers;

-andenforces laws that outlaw discriminations and other unfair treatment in consumer finance.

Front 4

NMLS

Back 4

Nationwide Mortgage Licensing System and Registry- Mortgage licensing system developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for licensing and registering loan originators, as mandated by SAFE act.

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HUD

Back 5

US Department of Housing and Urban Development- Originally responsible for interpretation, implementation, and compliance with SAFE Act for states. Now handled by CFPB as of 2011.

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Residential Mortgage Loan

Back 6

a loan secured by a consensual security interest on a dwelling and cross-references the definition of the term “dwelling” in Section 103(v) of the Truth in Lending Act (TILA) (15 USC 1601 note). Regulation Z, which implements TILA, defines a dwelling as a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit; cooperative unit; mobile home; and trailer, if it is used as a residence. (12 CFR 1026.2(a)(19))

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TILA

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Truth in Lending Act

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Mortgage Loan Originator must:

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-have demonstrated financial responsibility, character and general fitness to warrant a determination that he will operate honestly, fairly and efficiently.

- 20 hours of NMLS approved education

-Pass National Test and individual state test developed by NMLS.

-Provide personal history and pass background check.

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UST

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Uniform State Test- Replaces the state specific test components for the states to adopt it. By passing National Test and UST an applicant can satisfy the testing requirement for licensure in states that have adopted the UST.

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FHA

Back 10

Federal Housing Administration

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The Housing and Economic Recovery Act of 2008

Back 11

enacted to modernize the FHA, prevent foreclosures, reduce fraud and enhance consumer protections. SAFE is a key component of this law.

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CSBS

Back 12

Conference of State Bank Supervisors-

required by SAFE act to establish and maintain NMLS for residential mortgage industry.

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AARMR

Back 13

American Association of Residential Mortgage Regulators-

required by SAFE act to establish and maintain NMLS for residential mortgage industry.

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Primary Mortgage Market

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In the primary mortgage market, lenders originate mortgage loans by lending funds to borrowers.

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Secondary Mortgage Market

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where mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities and sold on the equity market. Composed of investors and lenders that buy and sell real estate mortgages or guarantee loans from primary market lenders.

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Retail Lender

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A lender (e.g. bank, savings bank, credit union, mortgage lender) that interacts directly with the borrower and actually makes the loan. If the lender holds its loans, rather than selling them, it is called a portfolio lender. A retail lender can also offer loans as a wholesale lender through mortgage brokers.

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Correspondent Lender

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a smaller lender that takes applications and underwrites and funds loans either with its own money or from a line of credit with a larger lender and, immediately upon closing, sells the loan to wholesale lenders under previously agreed-upon terms.

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Wholesale Lender through a mortgage broker

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a mortgage investor that prices and funds loans applied for through mortgage brokers. After a mortgage broker processes an application, the wholesale lender has it underwritten and funded. After the loan is made, the wholesale lender will either service it (i.e., collect the loan payments from the borrower) or sell or assign servicing to another entity.

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Mortgage Lender (Banker)

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makes mortgage loans with its own funds through mortgage brokers, mortgage loan originators and loan processors who obtain and process applications from borrowers.

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Mortgage Broker

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Does not fund loans. A mortgage broker can be defined as an individual or firm that, for or in expectation of compensation or gain, obtains application information from a prospective borrower and attempts to match the borrower with a lender who is willing to make a loan based on the borrowers qualifications.

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Mortgage Loan Originator

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an individual who takes a residential mortgage loan application and/or offers or negotiates terms of a residential mortgage loan for compensation or gain on behalf of a mortgage lender or mortgage broker, or who may also be licensed as a mortgage broker or mortgage lender, as an individual.

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FNMA

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Federal National Mortgage Association, or Fannie Mae- 1938

Major participant in secondary mortgage market, created by congress to buy and sell loans.Will buy conforming conventional loans, FHA- insured loans, Department of Veterans Affairs (VA)- guaranteed loans and U.S. Department of Agriculture (USDA)- guaranteed loans. Fannie Mae also buys commercial (apartment building) loans. Taken over by government in 2008.

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FHLMC

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Federal Home Loan Morgtage Corporation, or Freddie Mac- 1970

Major participant in secondary mortgage market, created by congress to buy and sell loans. Will buy conforming conventional loans, FHA- insured loans, Department of Veterans Affairs (VA)- guaranteed loans and U.S. Department of Agriculture (USDA)- guaranteed loans. Taken over by government in 2008.

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GNMA

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Government National Mortgage Association, or Ginnie Mae- 1968

Major participant in secondary mortgage market, created by congress to only guarantee loans. This is a government corporation within HUD. Purpose is to increase the supply of credit available for housing by directing funds from the securities market into the mortgage market.

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LLPA

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Loan Level Price Adjustment-

Newer element of the Fannie Mae program. This fee is charged to lenders to compensate for certain loan features that increase the risk. The fee is passed on to borrowers in the form of an additional finance charge. A borrower with a lower down payment or lower credit score, or one who is not using the property as his primary residence or who wants a cash-out refinance, would have to pay a LLPA fee, as a percentage of his loan, at closing. Each feature adding risk increases the amount of the LLPA fee.

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Table Funding

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Under Table Funding, a broker can originate, process, close and record a loan in its own name, but the loan is underwritten by, funded by and assigned to a secondary lender at the closing table.

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Who is responsible for maintaining the NMLS?

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The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators

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The function of wholesale lenders is to provide...?

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Servicing and Pricing

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Who is responsible for determining wether states are complying with the SAFE act?

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CFPB (consumer financial protection bureau)

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Which 3 devices are typically used to secure real estate for a loan?

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1) Land Contract

2) Mortgage Contract

3) Trust Deed

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Other names for Land Contract?

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Also known as "agreement to sale", "land sales contract", "real estate contract", "installment sales contract", and "contract for deed".

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Land Contract

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a contract where the seller finances the purchase of his property for the buyer. The buyer makes payments to the seller in installments until he can pay off the entire debt, generally by refinancing, at which point he is given a deed transferring ownership of the property to the buyer. Transfer of property, and the deed itself, may be called a conveyance.

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Equitable Title

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the buyer is entitled to a deed conveying the legal title when the contract (land contract) is fully paid and performed.

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Hard Money Loan

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When a third party lender provides actual funds for the loan.

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Soft Money Loan

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When the seller finances the purchase and does not actually give the buyer any cash.

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Promissory Note

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a promise to repay the money borrowed with interest and evidence of the debt.

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A promissory note shows?

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-The payor and payee

-the amount owed

-the rate of interest and wether it is fixed of adjustable

-the due dates for payment

-loan terms

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Prepayment Privilege allows borrows to?

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prepay the loan

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Prepayment Penalty imposes what?

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an extra charge if the borrower does prepay, only for loans not backed by the government.

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A lock in clause prohibits...

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Prepayment

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An acceleration clause permits...

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Lenders to declare the entire balance of the loan due at once if the borrower defaults

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A late payment penalty imposes...

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a charge if the borrowers payment is late

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What does the Due-on-Sale clause do?

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allows lender to:

-declare the entire balance of the loan due at once 0r

- refuse to allow another person to assume the loan if the title is transferred. FHA or VA loans are assumable by qualified buyers. Fannie Mae and Freddie Mac conforming loans may or may not be assumable based on the contents of the mortgage documents and the type of transfer.

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A defeasance clause...?

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provides for release of the lien when the borrower pays off the debt.

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In order to clear the debt form public record what must happen?

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-a satisfaction or release is recorded to clear a mortgage lien, or

- a deed of reconveyance is recorded to clear a trust deed lien.

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What is a priority mortgage

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a loan that has priority over all other unsatisfied mortgages secured by the same property, generally because it was recorded before them.

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Subordinate Mortgage

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a loan that is secondary to one or more other loans on the property. Typically this is because it was recorded after another mortgage that is still outstanding, or it has a subordination clause specifying that it is lower priority.

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Power of sale provision allows a trustee to?

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foreclose and sell the property on behalf of the lender without a court order and issue a trustee's deed conveying title to the purchaser. Must be included in trust deed or mortgage.

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A right of reinstatement does what?

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allows a default borrower a period after default to stop a foreclosure by paying all past-due payments and penalties and bringing the loan current, instead of having to pay off the entire debt.

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REO

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Property the lender has acquired through a foreclosure. REO= Real Estate Owned.

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an estoppel deed is when?

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the lender accepts the deed in lieu of foreclosure and thus releasing borrower from the debt.

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a forbearance does what?

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allows a borrower experiencing temporary financial difficulty to delay his monthly mortgage payments for a short period of time. IT is often combined with other programs designed to help bring the monthly mortgage payments current after a negotiated period of time.

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A conventional loan is...?

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loans made by private parties and nongovernment lending institutions without any government insurance or government guarantee against loss for the lender.

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Conforming Loans

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Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae and Freddie Mac. FM loans have a maximum loan limit, adjusted annually, for loans they will purchase.

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Nonconforming or Jumbo Loans

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Loans to persons with satisfactory credit but that exceed this loan limit set in FM loans. Often come with higher interest rates.

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PMI

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Private Mortgage Insurance- a policy issued to provide protection to the mortgage lender in the event of financial loss due to a borrowers default that results in foreclosure. Typically necessary when loaning over 80% of home value.

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When do PMI premiums stop?

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when up 78 to 80% of the homes value at closing is paid off.

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A-Paper Loans

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Loans made to borrowers meeting Fannie Mae and Freddie Mac credit requirements. These are conforming loans.

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Loans not meeting Fannie Mae or Freddie Mac requirements are called?

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"alt-A", "B", "c", "D" paper loans, or subprime loans. They often don't meet requirements due to less than prime credit or lack of supporting documentation.

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What are factors causing a borrower to seek a loan from a subprime lender?

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-weak past credit performance

-High monthly debt payment relative to income

-lack of assets other than current income

-self employment, variable income, or desire to limit disclosure of his financial situation.

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What government programs insure and guarantee mortgage loans:

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FHA, VA, and USDA

Front 62

What are key characteristics of an FHA loan?

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-Loans made by approved lenders who meet FHA criteria.

- Lenders can charge whatever points and interest the borrower is willing to pay, aka cost of loan is negotiable.

- Lender will make loan with a very high LTV, because it is insured by FHA.

- Floor loan= 65% or nat. conforming loan limit.

-ceiling loan= 150% of " "

- Includes UFMIP and annual premiums.

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UFMIP

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Up-Front Mortgage Insurance Premium.

Typically required when dealing with FHA mortgages. Nonrefundable.

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LTV

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Loan to Value

a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home.

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HECM's

Back 65

Home Equity Conversion Mortgages

a loan that enables an individual age 62 or older to:

-convert some of the equity in his primary residence to cash to pay living expenses.

-purchase a primary residence, if he has the cash to pay the down payment and closing costs.

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203B Program

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Most popular of the FHA loan programs. This program helps finance the purchase of a 1-4 family home that the borrower intends to occupy as his residence, using a 15- or 30-year loan and a cash investment of as little as 3.5 percent of the lesser of the property value or the purchase price. Must have over 500 credit score to be eligible.

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Do you have to pay insurance on a HECM loan by the FHA?

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Yes, the HECM has a 2 percent UFMIP, a 1.25 percent annual MIP, and a loan origination fee limit of 2 percent of the first 200k plus 1 percent over 200k of value up to a cap of 6000$.

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HECM Saver

Back 68

a second option for the HECM program. this includes an initial MIP option for the purpose of lowering up front closing costs for mortgagors who want to borrow a smaller amount than would be available with a HECM standard loan. Initial MIP is 0.01% of the max claim amount and is collected at loan closing. 1.25% annual MIP is included (same as standard)

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HECM Counseling

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All owners shown on property deed, and a non-borrowing spouse, must undergo HECM counseling prior to entering an HECM contract.

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PITI

Back 70

Principal, Interest, Property Taxes, and Insurance

Front 71

When does a borrower qualify for an FHA loan?

Back 71

with monthly payments for PITI of up to 31 percent of his gross monthly income and total monthly debt of up to 43 percent of his gross monthly income. Other sources of income not federally taxed, such as social security income, military allowance, etc) can be grossed up to 25 percent in calculating the borrowers income for qualifying purposes.

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The FHA can require repairs necessary to preserve the continued marketability of the property and protect the health and safety of the occupants before doing what?

Back 72

Agreeing to insure the loan

Front 73

When is a "for Your Protection: Get a Home Inspection" notice to be given to prospective home buyers?

Back 73

at first contact. this is required by the FHA. The notice informs the buyer of the importance of a home inspection prior to purchasing a home.

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What is an Amendatory clause and when is it required? by who?

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FHA requires this clause be added when buying a home with an FHA loan. This provides that the buyer is not obligated to conclude the transaction and is entitled to a full refund of his earnest money deposit if the property is appraised at less than the purchase price.

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When is an FHA loan assumable?

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When the person assuming the loan is qualified and is an owner-occupant, i.e. not a investor.

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VA Loans

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Given by approved lenders but guaranteed by the federal Department of Veteran Affairs. The guarantee is similar to insurance, in that it covers the lender from losses associated with default/foreclosure. The difference is that the borrower is charged a nonrefundable up front funding fee. A Vet receiving VA comp for a service related disability is exempt from this fee.

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What circumstances affect the amount of a VA loan fee?

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- First time VA borrower or not

-Regular military vs. reserves or National Guard

- Puts nothing down vs puts down at least 5%

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Standard VA Loan fee for first time borrower who is a regular military veteran?

Back 78

2.15%

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How to qualify for a VA loan?

Back 79

-41 percent debt to income ratio

- Residual income method- determines whether a vet can afford living on current means after paying his fixed debts.

Easier than an FHA loan to qualify.

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Can a non veteran assume a VA loan?

Back 80

Yes, they must obtain a Certificate of Eligibility from the VA to determine their qualification.

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RHS

Back 81

The Rural Housing Services, within the USDA.

Makes financing available in rural areas through its Section 502 guaranteed loan program.

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RHS Loan Applicants Must:

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-be without adequate housing.

-have less than 20 percent liquid assets (not including retirement accounts.)

-Have a steady income of up to 115% of the median income for the area

-Have a reasonable credit history

- and be able to afford the mortgage payments, including taxes and insurance.

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Fixed Rate Mortgage (FRM)

Back 83

the interest rate and the monthly principal and interest payments stay the same for the entire loan term.

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Balloon/Reset Loan (or two-step loan)

Back 84

the interest rate and payments remain fixed for a specified term. At the end of that term, the borrower has the option to repay the loan or have its interest rate reset to the current interest rate, along with a new fixed rate and payment amount for the remainder of the loan.

Still considered a fixed rate loan.

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Adjustable Rate Mortgage (ARM)

Back 85

The initial rate for an ARM is lower than that of a fixed rate mortgage. This rate stays for a set period of time before being adjusted according to index rate, which increases or decreases periodically during the term of the loan according to an index specified in the loan agreement, plus a margin amount, which is fixed.

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Amortized Loans

Back 86

provides for periodic payments that repay the loan in its entirety by the end of the mortgage term. Many different styles of doing this.

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Amortization

Back 87

The process of paying off a loan by gradually reducing the balance through a series of installment payments.

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Partially Amortized (balloon) Mortgage

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provides some, but not total, amortization during the mortgage term. The loan term is shorter than would be needed for a typical amortized loan and thus the total loan balance is due at the end of the term.

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Negative Amortization

Back 89

When periodic installment payments on a loan are insufficient to pay all the interest due, the unpaid interest is added to the principal of a mortgage loan, causing the loan balance to increase rather than decrease.

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Interest Only Mortgage (term or straight mortgage)

Back 90

provides no amortization during the term of the loan. Interest is paid during set term and then the principal is repaid at the end of the loan term through a balloon payment.

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Construction Loans

Back 91

High interest, temporary, financing for construction projects. The building has not yet been built and only land value is available as collateral. Usually lenders ensure it is a primary mortgage and no other liens exist on the property. Loan is generally for around 75% of finished building value and is given in installments during construction. Entire loan value is due in full shortly after the completion of the work.

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Prequalification

Back 92

an estimate made by a mortgage loan originator of the amount of a loan for which buyer can qualify based on his statements regarding his financial condition.

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Preapproval

Back 93

a letter from the mortgage lender showing an estimate of the amount of a loan for which the buyer can qualify, based on verification of his income and assets.

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final loan approval is based on?

Back 94

The property he wants to buy:

-value to support the loan (appraisal)

-Marketable title (evidence by a title report)

-being in suitable conditions

The buyers being and staying creditworthy

Front 95

what information does LO need to give to underwriter to approve a loan?

Back 95

Borrower Info, Loan transaction info, property info

Front 96

When is a Uniform Residential Loan Application used?

Back 96

used when the loan is to be sold to Freddie Mac or Fannie Mae, insured by the FHA, or guarranteed by the VA. IT can be completed at an in person interview, by phone, mail, online, etc. as long as all blanks are filled in.

Also referred to as a "1003"

Front 97

What are the 4 categories of a Uniform Residential Loan Application?

Back 97

1) Type of Mortgage and Terms of Loan

2) Property Information and Purpose of Loan

3) Borrower(s) Information

4) Details of the Transaction

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Equal Credit Opportunity Act (ECOA)

Back 98

prohibits discrimination on the basis of age against a loan applicant who is of age to enter into contracts. A person cannot be denied a loan just because of his age and his retirement income in rating his application. Gender discrimination is also covered.

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VOM

Back 99

Verification of Mortgage

Front 100

VOE- Verification of Employement

Back 100

Used when processing an application to show job history, dates of employment, base pay, hours worked, etc in determine stability in giving out a loan.

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What may a self employed applicant be asked to show?

Back 101

-business license

-YTD profit-loss statement

-balance sheet

-tax returns

-IRS Form 4506

-IRS form 4506-T

-IRS Form 8821

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IRS Form 4506

Back 102

Request for copy of tax return

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IRS Form 4506-T

Back 103

Request for transcript of Tax return

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IRS form 8821

Back 104

Tax Information Authorization

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When is an Income Analysis Worksheet required and by whom?

Back 105

Fannie May and Freddie Mac require this documentation when the borrower is self employed, earns commissions or owns rental property. This helps calculate average monthly income.

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What are considered assets?

Back 106

-Real Estate owned

-vested interest in retirement fund

-net worth of business owned

-Automobiles owned

-Other assets- jewelry, collectibles, etc.

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What is considered liquid assets?

Back 107

Cash or anything easily converted to cash, such as:

- checking and savings accounts

-stocks and bonds

-cash

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What are liabilities?

Back 108

installment debts (or revolving charge accounts), real estate loans, automobile loans, alimony, child support and separate maintenance payments, any other debts. Any regular payment obligation extending for longer than 10 months will be included.

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What is a Pledged Asset?

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A pledged asset can be both a liability and an asset. I.E. they have equity in the item but do not fully own it and may still be paying month charges, such as an automobile loan.

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How does assets and liabilities affect a loan application.

Back 110

These contribute toward calculating net worth. When his liabilities exceed his assets, the applicant has a negative net worth, which is cause for rejection. The other way around could offset weaknesses in his application.

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The Electronic Signatures in Global and National Commerce Act ( June 2000)

Back 111

Addresses the validity of documents, records and signatures that are in electronic form.

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Can i borrower choose not to E-sign?

Back 112

Yes, before obtaining a consumers consent, a financial institution must provide a clear statement to the consumer informing them of other option for paper or non electric signature, fees associated, and the method of requesting such forms.

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what if a borrower does not want to disclose sex, race, and ethnicity?

Back 113

the LO must guess based on face to face interactions or surname as this info is required by the Home Mortgage Disclosure Act to aid the federal government in monitoring compliance with ECOA.

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what does loan processing entail?

Back 114

verifying information on application and supporting documents, reviewing all documents to ensure they are accurate, up to date, and match the information on the application.

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When is the loan package ready for underwriting?

Back 115

after all information about an applicant and a property has been collected and the information and documentation has been analyzed to determine its adequacy.

Front 116

Which form provides summary of information for underwriter?

Back 116

Trasmittal Summary

(usually in the form of a Uniform Underwriting and Transmittal Summary, Fannie Mae Form 1008/Freddie Mac Form 1077)

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What is Underwriting?

Back 117

The process of deciding wether to make a loan based on credit, employment, assets and other factors.

Front 118

What do underwriters look for and why?

Back 118

Underwriters asses the borrowers ability and willingness to repay the debt and the properties ability to serve as collateral for the debt. These will help them ensure marketability in the secondary market.

Front 119

What systems help evaluate a loan in underwriting?

Back 119

Freddie Mac's Loan Prospector (Freddy the prospector)

Fannie Mae's Desktop Underwriter (fanny in a seat at a desk)

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What are the four C's of underwriting?

Back 120

1) Collateral

2) Capital

3) Capacity

4) Character (credit history)

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what is collateral?

Back 121

the property used as security for the loan.

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what is capital?

Back 122

the borrowers cash and other liquid assets available to buy the house and close the plan

Front 123

Capacity

Back 123

applicants ability to make the projected loan payments

Front 124

What are negative factors on a credit report?

Back 124

-Foreclosures

-Bankruptcies

-Judgements

-Liens and slow payments/late payments

Front 125

What is the most negative thing that can show up on a credit report?

Back 125

Foreclosures, this is usually viewed as the most derogatory credit, as it shows negative experience with the same type of credit for which the applicant is applying.

Front 126

Chapter 7 Bankruptcy?

Back 126

involves liquidation of assets to cancel debts so a person can start fresh.

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Chapter 13 Bankruptcy?

Back 127

involves implementation of a payment plan over three to five years to pay of the debts.

Front 128

How long will a bankruptcy appear on a credit score? For how long after must it be reported on a 1003?

Back 128

Appear on credit score for 10 years, only need to report it in your application for 7 years. Good idea to prepare letter of explanation for the underwriter.

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Debt to income ratio

Back 129

take into account the applicants installment payments on outstanding debts (i.e. student loans, automobile loans, alimony, child support, etc.)

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Which are the three major credit systems?

Back 130

Experian Credit Score

Equifax BEACON

TransUnion EMPIRICA

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What is a credit score based on?

Back 131

-Payment History

-Amounts owed

-length of credit history

-types of credit in use

- recent attempts to obtain new credit

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How do you decide who will be the borrower and who will be the co borrower?

Back 132

Based on highest income, not highest credit score.

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What is an appraisal?

Back 133

a written report of an appraiser's informed, objective opinion or estimate of the market value of the property that is security for the loan, as of a specified date.

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USPAP- Uniform Standards of Professional Appraisal Practice

Back 134

a set of standards laid out by the Appraisal Foundation's Appraisal Standards Board when administering an appraisal.

Front 135

BPO- Broker Price Opinion

Back 135

A comparative market analysis for a property, this does not qualify as an acceptable appraisal for underwriting. Typically used by a real estate agent to estimate an appropriate sales price for an owner to list his property.

Front 136

What form do appraisers use for FHA, VA, and conforming loans?

Back 136

URAR- Uniform Residential Appraisal Report

(Fannie Mae Form 1004/ Freddie Mac Form 70)

Front 137

What is a Market Conditions Addendum?

Back 137

An additional document needed when appraising a FHA, VA, or conforming loan. Gives lender a clear idea of market trends and conditions in the neighborhood.

Front 138

Absorption Rate

Back 138

the rate at which properties for sale have been or can be sold in that area

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The Sales Comparison Approach

Back 139

bases the value of a property on the prices paid for similar, or comparable, properties in the area that have sold recently. Most reliable method for SFR and land.

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Gross adjustments

Back 140

determined by adding all individual adjustments without regard to positive or negative. For FHA and both FM loans this must not exceed 25 percent of the sales price of a comparable.

Front 141

Net Adjustments

Back 141

Adds positive and subtracts negative adjustments. For FHA and both FM loans this should not exceed 15 percent of the sales price of a comparable.

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Income Approach

Back 142

used to appraise properties that produce rental income. takes into consideration net income the owner will receive and a rate of return.

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Calculating Estimated Net Income

Back 143

Scheduled Gross income

- Vacancies

_________________

Effective Gross Income

Effective Gross Income

-Property Expenses (fixes, reserves, etc.)

___________________

Estimated Net Income (Net Operating Income)

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Capitalization Rate

Back 144

the rate of return the new owner can expect to receive, including an annual rate of return desired on the investment, and a rate of return of the investment necessary to recapture the depreciation of the improvements.

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Cost Approach

Back 145

Appraiser estimates the value of the land and the depreciated value of the improvements on the land separately, then adds the two values to arrive at an estimate of the properties total value.

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when is the cost approach most often used?

Back 146

Can be used for any property, but is most common with new buildings, where construction costs are easy to obtain.

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Replacement Cost

Back 147

the present cost of constructing a new substitute structure equal to the existing structure in quality and utility, but by using current construction methods, materials, design and layout.

Front 148

Reproduction cost

Back 148

the present cost of constructing a new substitute structure that is an exact replica of the existing structure.

Front 149

What is the most common method to estimate the cost of residential property?

Back 149

the square foot method, using the average cost per square foot of living area to construct a building of the same type and quality.

Front 150

Depreciation

Back 150

a loss in value due to any cause

Front 151

what are causes for depreciation?

Back 151

- physical deterioration

-functional obsolescence

-economic obsolescence

Front 152

How do you calculate property value in cost approach?

Back 152

Replacement/Reproduction Cost

- Depreciation

________________

Depreciation Value

Value of Land

+Depreciation Value

______________

Estimated Total Property Value

Front 153

Who is allowed to select and compensate an appraiser? who is not?

Back 153

The creditor or a third party selected by creditor must select and pay the appraiser.

The appraiser cannot be selected or compensated by a broker or real estate agent.

Front 154

How serious is the appraisal process taken

Back 154

Very serious

Front 155

What can someone involved with the loan ask of an appraiser?

Back 155

-consider additional appropriate property info

-Provide further details, substantiation or explanation

-correct errors in the report

Front 156

Which regulations mandate the lender provide a copy of the appraisal to the borrower?

Back 156

regulation B and Regulation Z

Front 157

What is the purpose of a home inspection? How does it differ form an appraisal?

Back 157

The purpose is to report structural defects.

Appraisals estimate value.

Front 158

What is a title search?

Back 158

A title search involves looking through public records to trace the conveyance and encumbrances relating to the property and to ensure that no one except the current owner has a valid claim to the property.

Front 159

When is a title search needed?

Back 159

when a title insurance company receives a request for title insurance

Front 160

what is a title commitment

Back 160

a report that contains the results of the title search. This commits the title insurer to issuing title insurance if the conditions outlined are cleared prior to closing.

Front 161

What does a standard title insurance policy cover?

Back 161

-any item affecting title that has been made a matter of public record, unless it is excluded or excepted form the coverage in the policy.

-hidden risks not disclosed in a recorded document (forgeries, missing heirs, lack of competency)

Front 162

What does an extended title insurance policy cover?

Back 162

-All parts of a standard policy and...

-items requiring an inspection of the property to discover (observable defects)

-Losses caused by unrecorded deeds and unrecorded liens

Front 163

Who conducts the closing of a loan?

Back 163

a settlement agent who is a title or escrow company or by a closing attorney.

Front 164

What is loan servicing?

Back 164

all activities performed to ensure the loan is repaid in a timely manner and to preserve the lender's legal claim to repayment.

Includes: sending statements, collecting payment, late payments, foreclosure, handling escrow accounts.

Front 165

What is a buyback or repurchase agreement?

Back 165

When a loan is sold on the secondary market these allow the loan to be returned to the original investor if:

-the borrower defaults within a specific time period

- there is evidence of loan fraud

-the loan does not comply with regulatory requirements.

Front 166

Where are existing liens and mortgages recorded?

Back 166

Schedule B or a title commitment

Front 167

The appraisal approach in which the replacement value is calculated is...?

Back 167

the cost approach

Front 168

For an appraisal of a residence, the minimum number of comparables required by the FNMA is?

Back 168

Three

Front 169

when the originating lender sells the rights to collect the payments, the price charged in the sale is called?

Back 169

a service release premium

Front 170

Where are guidelines for the professional conduct of appraisers set?

Back 170

USPAP- Uniform Standards of Professional Appraisal Practices

Front 171

in an appraisal, adjustments are made to what?

Back 171

to comparable properties

Front 172

What two ratios must a candidate satisfy in order to qualify for a loan?

Back 172

Housing Ration and Debt Ratio

Front 173

Stable monthly income

Back 173

gross monthly income from any source considered reliable and likely to continue for a sustained period

Front 174

Housing Ratio (also known as housing expense ratio or front end ratio)

Back 174

compares the applicants monthly housing costs to his gross monthly income.

Housing Ratio= Housing debts divided by gross monthly income

Front 175

PITI

Back 175

Principal, Interest, Taxes, and Insurance

Used when calculating the Housing Ratio. Includes taxes, insurance, and monthly principal and interest being paid for the mortgage loan.

Front 176

what is an appropriate estimate for monthly property tax?

Back 176

1.25%

Front 177

what is an appropriate estimate for monthly homeowners insurance?

Back 177

.25%

Front 178

What are acceptable limits for housing ratios?

Back 178

For a conforming loan, 28%

For a FHA loan, 31%

For a jumbo loan, 33%

Front 179

Debt Ratio (or Debt to income ratio, DTI, back end ratio)

Back 179

compares the applicants total fixed monthly expenses to his monthly income.

Fixed expenses, in addition to PITI, include:

-installment debts not secured by financial assets (student loan, automobile loan)

-Deferred installment debt (student loan, furniture with 12 months free)

-Minimum payments on revolving charge accounts

-Lease payments

-child support/alimony

-business debt in borrowers name

-contract payments (cell phone) sometimes included

Front 180

What is not calculated or included when calculating DTI?

Back 180

living expenses such as home phone, food, auto and health insurance, utilities, etc.

Front 181

How do you calculate DTI ratio?

Back 181

DTI= Housing costs plus liabilities, divided by gross monthly income

Front 182

what are acceptable limits for the DTI ratio?

Back 182

-Conforming loans, 36 percent

-FHA loans, 43 percent

-VA loans, 41 percent

-Jumbo Loan, 38-40%

Front 183

What are compensating factors?

Back 183

aspects of a person's financial situation that provide a reason for the lender to go outside the normal guidelines

Front 184

What are examples of compensating factors?

Back 184

-a larger down payment

-A history of like payments

- a high credit score

-a good or excellent credit history

- job security

- proof of ability to save

-employer verification of a pay raise in immediate future

-additional liquid assets

- a spouse who is returning to work

Front 185

in calculating an applicants income, when can capital gains be considered?

Back 185

the borrower owns additional capital assets.

Front 186

LTV (Loan To Value) Ratios

Back 186

the relationship of the loan amount to the value or sales price of the property securing the loan.

calculation:

LTV= Loan amount, divided by property value or sales price (whichever is less)

Front 187

WHat is a piggyback loan?

Back 187

an option that the lender may provide when a loan exceeds 80% LTV. this offer would include two seperate loans in such a fashion that neither loan will require mortgage insure, as is normal for loans above 80% lTV.

Front 188

what is a combined LTV ratio?

Back 188

when a piggyback loan is made and you use both mortgages summed together to create the loan amount for calculating ratios (CLTV)

Front 189

HELOC (home equity line of credit)

Back 189

a form of secondary financing where the loan balance plus any draw amount is used to calculate the CLTV.

Front 190

TLTV

Back 190

Total Loan To Value, used when opening two mortgages on the same property due to high LTV ratio.

Front 191

HCLTV ( High combined loan to value ratio)

Back 191

Total Loan To Value, used when opening two mortgages on the same property due to high LTV ratio.

Front 192

What does an amortization schedule show?

Back 192

the schedule of individual annual or monthly payments over the term of a level payment loan.

includes the following:

- Payment

-Principal paid

- interest paid

- remaining balance

Front 193

What does an Amortization table show?

Back 193

the monthly payment to principal and interest, the loan term, the interest rate, and the original loan amount. It will not show the allocation of principal and interest, or the additional payments to tax and insurance reserves.

Front 194

How do you calculate the monthly cost of the PMI (private mortgage insurance)?

Back 194

multiply the loan amount by the factor and divide by 12

Front 195

How can you reduce interest rates?

Back 195

payment or prepaid interest at closing, also referred to as discount points or a buydown.

Front 196

What are the two types of buydowns?

Back 196

1) Permanent

2) Temporary

Front 197

What does a permanent buydown consist of?

Back 197

a payment of discount points to lower the interest rate for the entire term of the mortgage. One discount point is equal to 1 percent of the loan amount.

Front 198

How many discount points does it generally take to reduce interest by 1% in a buydown?

Back 198

6 discount points. I.E. on a 100k loan, it would cost 6,000$.

Front 199

What are basis points?

Back 199

a way of expressing the amount of change in interest rates as a result of a buydown.

a basis point equals 1/100th of 1 percent.

Front 200

What is a temporary buydown?

Back 200

this reduces the monthly payments considerably for a short period of time and is usually paid for by a person other than the buyer. At the end of this period, the borrowers payments will be the amount computed without the buydown.

Front 201

What is a 2/1 buydown?

Back 201

- a 2% reduction to the stated note rate for the first year

- a 1 percent reduction the second year

- the fixed rate starting the third year

same formula for 3/2/1 buydown

Front 202

What is an interest rate?

Back 202

the rate at which the loan amount produces the monthly loan payment

Front 203

what is APR (annual percentage rate)

Back 203

a term established by the Truth in Lending Act to calculate the rate at which the amount financed (i.e. the loan amount less the prepaid finance costs) produces the monthly loan payment.

Front 204

What is the formula for interest?

Back 204

annual interest= percent interest x loan balance

i.e. the term 6% interest means

annual interest= 6% x loan balance

Front 205

Principal

Back 205

total outstanding debt, not including interest, but used to calculate interest monthly.

Front 206

What is a point?

Back 206

a loan fee established as a percentage of the loan amount or principal balance. One point is the same as one percent of the loan amount.

Front 207

What fees may be expressed as points?

Back 207

loan origination fee, mortgage brokers fee, discount points and yield spread premiums.

Front 208

What does a loan origination fee cover?

Back 208

the lenders cost and profit for preparing documents and providing services in processing the loan in house.

Front 209

what is a prepayment fee and when is it charged?

Back 209

could be charged with non government backed loans, it may be a percentage of the loan amount or be the amount of interest the lender would have earned for a specified period (i.e. following 6 months interest)

Front 210

what is a par rate?

Back 210

the interest rate that would be charged if there were no additions or subtractions to the rate because of discount points.

Front 211

What is a Yield Spread Premium (YSP)

Back 211

points credited for an interest rate above its par rate.

Front 212

What do negative numbers on a rate sheet mean?

Back 212

the lender will credit the borrower with a YSP to reduce his closing costs.

Front 213

what is the formula for calculating amount of loan fees?

Back 213

Loan Amount x Percentage of Fees= amount of loan fees.

Front 214

How much is 1 point worth?

Back 214

1 percent of the loan amount

Front 215

what is prorating?

Back 215

proportionally allocating an expense based upon the relative time for which a party is responsible for the expense.

For example, if a sale closed three months into the tax year, proration would allocate the sellers responsibility for the annual property tax to be one quarter and the buyers to be three quarters.

Front 216

What expenses can be prorated?

Back 216

Recurring expenses (i.e. property taxes, interest, insurance or homeowners' association assessment)

Front 217

What is the difference between 365 day prorate vs 360 day prorate?

Back 217

both divide to find daily cost. 365 day prorate accounts for every day, 360 day prorate assumes each month has 30 days regardless of reality.

Front 218

what is prepaid interest? or per diem interest?

Back 218

same thing.

the amount paid for the time between when the loan is closed and the first payment. I.E. if a loan closes on Aug 17th, the first payment would be October 1 for the month of September. The prepaid interest would cover Aug 17- Sep 1.

Front 219

annual interest calculation

Back 219

annual interest = loan amount x annual percent interest

Front 220

Prepaid interest on New Loan calculation

Back 220

daily interest x days from closing to the next month

Front 221

Interest on seller's existing loan calculation

Back 221

daily interest x days from payment to closing

Front 222

GFE (good faith estimate)

Back 222

a document provided by the LO to the borrower expressing interest rates and points offered. These are binding for given time period outlined in offer.

Front 223

What are lock in rates?

Back 223

a interest rate and point system agreed upon and guaranteed by both lender and borrower for set time period during application process.

Front 224

An escrow account

Back 224

this is a reserve payment that represents approximately 1/12 of the estimated annual hazard and flood insurance premiums and property taxes.

Front 225

when are escrow accounts required?

Back 225

- all FHA and VA loans

- conforming conventional loans for greater than 80% of the appraised property value.

- higher-priced mortgage loans secured by a first time lien on the borrowers principal dwelling.

Front 226

what are the minimum hazard insurance coverage requirements for Fannie Mae on a first lien mortgage

Back 226

-100 percent of the insurable value of the improvements, as established by the insurer, or

- the unpaid principal balance of the mortgage, as long as it equals the minimum amount required to compensate for damage or loss on a replacement cost basis.

Front 227

For 1-4 family investment properties, how much does Fannie Mae and Freddie Mac require the borrower have in reserve?

Back 227

6 months of principal, interest, and property taxes and insurance (PITI)

Front 228

What does dwelling and homeowner insurance cover?

Back 228

Losses to improvements (not land) caused by fire, windstorms, and other natural causes. It does not cover earthquakes and floods; this would require additional insurance.

Front 229

What does the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973 prohibit?

Back 229

any lender from making, increasing, extending or renewing a loan that will be benefited from a federal program in an area designated by Federal Emergency Management Agency as a Special Flood Hazard Area unless covered with special insurance for floods covering all principal costs for entire loan term.

Front 230

Who is to determine if flood zone insurance is needed?

Back 230

the originating lender

Front 231

Why may someone consider refinancing a home mortgage?

Back 231

-lowering monthly payments

-withdrawing equity to repay the previous mortgage and meet other financial expenses.

-converting an adjustable rate mortgage to a fixed rate mortgage

-stop paying the private mortgage insurance

Front 232

What do prepayment penalties do?

Back 232

prevent the borrower from refinancing as soon as interest rates drop, usually have a set time period (i.e. 5 years) before prepayment penalties will be nullified.

Front 233

What is a “soft prepayment penalty”?

Back 233

A penalty that applies only to refinancing the loan.

Front 234

in which document does a mortgage clause appear?

Back 234

the property insurance policy

Front 235

TILA

Back 235

Truth In Lending Act

Back 236

a