Real Estate Test - Chapter 4

Front 1

4.1 - Leverage

Back 1

When someone chooses to finance the bulk of a purchase.

Front 2

4.1 - Negative Cash Flow

Back 2

A risk when leveraging that prop. value will fall causing rents to fall below the cost of the finance payments.

Front 3

4.1 - LTV Ratio

Back 3

Loan-to-Value ratio.

Risk factor used by lenders.

The 1st mortgage divided by the lesser of (1) appraised value or (2) purchase price

Front 4

4.1 - Points

Back 4

1% of the loan amount

Used by lenders to measure discount charges and other costs such as origination fees and PMI premiums.

Front 5

4.1 - Origination Fee

Back 5

A fee the lender charges to cover the cost of processing a loan.

Front 6

4.1 - Discounts

Back 6

A form of prepaid interest paid to a lender to decrease the rate on the loan.

Front 7

4.1 - Broker Commissions

Back 7

The commission earned by a broker

Front 8

4.1 - Private Mortgage Insurance

Back 8

PMI

Insurance for high LTV loans.

Insures the lender.

Front 9

4.1 - Homeowners Protection Act

Back 9

HPA

1998

Requires lenders to provide certain disclosures to borrowers, including when they hit 80%.

Does not apply to FHA or VA loans.

Front 10

4.1 - Loan Process

Back 10

1. Aplication

2. Loan Processing

3. Underwriting Analysis

4. Loan Approval, Funding, Closing

Front 11

4.1 - Loan Prequalification -vs- Preapproval

Back 11

PreQual. assumes info is correct and gives an estimate.

PreApp. verifies the info and may require a fee.

Front 12

4.1 - Loan Processing

Back 12

The process of assembling all of the neccessary info to assess the risk.

Standard is "Form 1003"

Exposes the "3 C's of Credit" - Capacity, Character, Collateral

Front 13

4.1 - Character

Back 13

The borrowers willingness/desire to fulfill obligations

Front 14

4.1 - FICO

Back 14

Fair Isaac Corporation

Front 15

4.1 - PITI

Back 15

Monthly housing expenses: Principle, Interest, Taxes, Insurance

Front 16

4.1 - Front-End Ratio

Back 16

PITI Ratio

Monthly housing expenses divided by monthly gross income.

Front 17

4.1 - Back-End Ratio

Back 17

LTD Ratio

Total monthly expenses divided by monthly gross income.

Front 18

4.1 - Loan Processer Propety Info

Back 18

Loan Processor will order these reports:

1. Prelim Title Report (legal desc., current owner, liens, etc.)

2. Appraisal

3. Propety Due Diligence (verifying no other claims, assessments,recent mechanics liens, etc.)

Front 19

4.2 - Straight Loan

Back 19

Also referred to as Term Loan or Interest-Only Loan.

Front 20

4.2 - Installment Loan

Back 20

Payments include principal AND interest.

Front 21

4.2 - Level Payment Loan

Back 21

All payments are equal.

Most frequently used installment loan.

Front 22

4.2 - Fully Amortized Loan

Back 22

A loan where the payments are sufficient to pay off the entire loan.

Front 23

4.2 - Partially amortized Loan

Back 23

Payments pay all of the interest and some of the balance with a balloon payment at the end.

Front 24

4.2 - Negative Amortized Loan

Back 24

"NegAm"

Monthly payments do not cover all of the interest with the unpaid portion being tacked onto the balance.

Front 25

4.2 - Adjustable Rate Mortgages

Back 25

"ARM"

Rate increases/decreases based on an "Index" (T-Bills, 11th District Cost of Funds, Fed. Home Loan Bank Board)

Front 26

4.2 - Fully Indexed Rate

Back 26

Index plus Margin(spread)

Front 27

4.2 - Discounted Rate

Back 27

Feature of some ARM's.

First few months of the loan are at a lower rate.

Also called Teaser Rate.

Front 28

4.2 - Interest Rate Caps

Back 28

Feature of some ARM's.

1. Periodic adjustment cap

2. Lifetime cap

Front 29

4.2 - Carryover

Back 29

Feature of some ARM's.

Any increase in the rate that is not imposed due to a cap might be added to a later adjustment.

Front 30

4.2 - Payment Cap

Back 30

Feature of some ARM's.

Limits the amount that the payment can increase.

Any interest not paid because of the payment cap will be added to the balance of the loan.

Front 31

4.2 - Conventional -vs- Insured

Back 31

Conv. = Not FHA insured or VA guaranteed

Front 32

4.2 - Conforming Loan

Back 32

A loan that adheres to the Federal Housing Finance Agency guidelines.

Front 33

4.2 - Reverse Mortgage

Back 33

62 or over.

Large amount of equity in the home.

Front 34

4.2 - Home Equity Conversion Mortgage

Back 34

HECM

FHA insured reverse mortgage.

Homeowners can receive the equity in a lump sum, monthly payments, or as a LOC

Front 35

4.2 - Subprime Loan

Back 35

A loan made to a borrower who has a relatively high risk profile.

Front 36

4.2 - Seller Carry Back Loans

Back 36

When the seller finances the puchase for the buyer with a mortgage or deed of trust.

Front 37

4.2 - Land Installment Contract

Back 37

Sells the property on installment loans.

Front 38

4.2 - Primary Mortgage Market

Back 38

The market wherein mortgage loans are originated.

Front 39

4.2 - Secondary Mortgage Market

Back 39

The market wherein mortgages are sold by primary mortgage lenders to investors.

Front 40

4.2 - Housing and Economic Recovery Act of 2008

Back 40

HERA

Down payment assistance programs offered by many state housing auth.

Front 41

4.3 - FHA

Back 41

Federal Housing Admin., 1934

Insures loans for people that cannot make a conventional down payment.

Up front MIP.

Front 42

4.3 - VA

Back 42

Veterans Admin.

Designed to help veterans get loans.

Appraisal Value is presented in a Certificate of Reasonable Value (CRV).

Front 43

4.3 - Advantages of a VA-Guaranteed Loan

Back 43

1. No down payment required.

2. Underwriting standards are less stringent.

3. No mortgage insurance required.

4. Loans are assumable is approved.

Also, a motivated seller can pay a "discount fee" to the lender .

Front 44

4.3 - Fannie Mae (pre-1968)

Back 44

1938

Federal National Mortgage Association

Established to purchase mortgages from primary lenders.

Split in 1968 into Fannie Mae (private) and Ginnie Mae (Gov't.)

Front 45

4.3 - Fannie Mae (post-1968))

Back 45

Private (non-gov't).

Continued to purchase mortgages.

Front 46

4.3 - Ginne Mae

Back 46

Government corporation.

Role was to guarantee pools of eligible loans.

Front 47

4.3 - Freddie Mac

Back 47

Private, 1968

Role was essentially to compete with Fannie Mae

Front 48

4.3 - Federa Housing Finance Agency (FHFA)

Back 48

2008

Fannie Mae and Freddie Mac were put into Gov't. conservatorship to keep them from going bankrupt during 2007 housing crisis.

Front 49

4.4 - Acceleration Clause

Back 49

States that upon default of a violation of other conditions, the lender has the option of declaring the entire balance payable immediately.

Front 50

4.4 - Due-On_Sale Clause

Back 50

Lender has the right to declare loan due immediately if the property is sold or transferred.

Front 51

4.4 - Blanket Mortgage

Back 51

Used to finance two or more parcels of real estate.

Most have a "Partial Release Clause" which allows developer to sell of individual parcels and pay back only a proportionate amount.

Front 52

4.4 Assumption

Back 52

Buyer agrees to be primarily liable on the loan but the original owner agrees to be secondly liable.

Front 53

4.4 - Subordination Clause

Back 53

States that the loan will have lower priority than one recorded later.

Makes it easier for a construction loan to be secured.

Front 54

4.4 - Defeasance Clause

Back 54

States that when the dept is paid off, the lender must release the property from lien.

Front 55

4.4 - Lien Theory -vs- Title Theory

Back 55

Title Theory - Mortgagee retains legal title.

Lien Theory - Mortgagor retains title while mortgagee holds a lien.

Front 56

4.5 - Truth In Lending Act (TILA)

Back 56

1968

Helps borrowers understand the costs of borrowing money.

Front 57

4.5 - Real Estate Settlement Procedures Act (RESPA)

Back 57

Fed. law designed to prevent kickbacks for lenders, real estate agents, developers, title insurance companies, etc.

Front 58

4.5 - Equal Credit Opportunity

Back 58

1974

Enforced by Consumer Financial Protection Bureau

Front 59

4.5 - Usury

Back 59

Charging of interest in excess of that allowed by law