Untitled Flashcards Set

·       Classification of Mortgage Loans

1.      Conventional Mortgages

a.      Conventional mortgage loans are distinguished since they have no government insurance (FHA) or guarantee (VA). Mortgage bankers and depository institutions offer these loans.

b.      Terms of the loan, e.g., interest rate and maturity, are guided by the market, but technically and legally, terms are completely negotiable between the borrower and lender. Obviously, the lender is usually in the stronger negotiating position.

2.      Insured Conventional Mortgages

a.      Conventional lenders will not normally lend in excess of 80% LTV without some form of default insurance (mortgage insurance).

b.      Conventional lenders will make loans as high as 90-95% if the borrower qualifies and pays for mortgage default insurance that covers the loan amount above 80% LTV.

3.      FHA insured mortgages (Federal Housing Administration)

a.      FHA is a government agency

b.      FHA does not make the loans; it ONLY insures them

c.      FHA covers the ENTIRE loan amount (unlike PMI, which only covers around 15%)

d.      FHA collects insurance premiums from borrowers up front and with the payments

e.      Loan amounts are limited, causing those wanting more expensive homes to use conventional mortgage loans

4.      VA guaranteed Mortgage Loans (Department of Veteran Affairs)

a.      Covers the top part of the loan… about 25%

b.      Can result in very low down payment (as low as zero)

c.      No insurance premiums are required from the borrower

d.      Laon guarantee amount usually limited to the CRV (certificate of reasonable value- like and appraisal)

·       What is Title Insurance?

o   Title Insurance protects you from problems with an ownership title when you buy real estate. These may be problems that existed before the purchase, such as: (1) unpaid property taxes, (2) fraud or forgery of previous paperwork, or (3) a spouse or unknown heir who claims they own the property

o   The title insurance company charges premiums to search, abstract, and examine a property's title and issue an insurance policy that indemnifies the buyer against loss arising from claims against the property.  (Usually paid at closing)

o   Combines the same steps as an abstract of title and attorney’s opinion; plus, it adds title insurance in case the insurance company title examination staff missed a defect 

o   Purchase with a one-time payment (premium) at the time of property acquisition (part of the closing transaction)

·       What is a closing statement?

o   A closing statement is a document that records the details of a financial transaction. A homebuyer who finances the purchase will receive a closing statement from the bank, while the home seller will receive one from the real estate agent who handled the sale. The closing statement includes the fees associated with buying or selling a home and details of the property.

o   A prorated closing cost refers to an expense or income that is split between the buyer and the seller based on the portion of the billing period that each party owns the property. Since certain costs, such as property taxes or HOA fees, are typically billed monthly or annually, the closing statement will “prorate” (or adjust) these amounts so that each party pays only for the time they actually owned the property.

o   Because the dates on which property taxes are due to a particular governmental unit rarely coincide with the title closing date, a portion of the annual property taxes is usually prorated between the buyer and the seller (ex. property taxes)

o   A proration of taxes is usually made at closing by refunding to the buyer the portions of the taxes that the buyer will be responsible for on the next January 1^st, but related to the period that the seller owned the property.  Property taxes, Homeowners association (HOA) dues, Utilities, Rental income (if tenants are involved), Mortgage interest (if paid in arrears)

·       Truth-in-lending (FTL) Requirements

o   Truth-in-lending legislation generally requires that lenders disclose financial information contained in mortgage loan agreements to individuals purchasing one-to-four-family residences. The intent of FTL legislation is to require that lenders disclose to borrowers the financial information contained in loan agreements uniformly so that borrowers can compare the costs of different loan agreements.

o   Annual Percentage Rate

o   Finance Charges

o   Amount financed

o   Total of payments

o   Amount of payments

o   Number of payments

o   Security interest

o   Assumption policy

o   Variable rate

o   Filing fees

o   Late charge

o   Payment due date

o   Prepayment policy

o   Hazard insurance

o   Mortgage insurance

·       What is Default insurance?

o   In some cases, lenders will require that borrowers obtain default insurance. The borrower purchases this insurance policy to protect the lender from potential losses should the borrower default on the loan. The lender is not willing to bear the total risk of borrower default, or the loan may be sold to a third-party investor

o   The underwriter may require a borrower to pay for default insurance if the loan is within the guidelines but the risk is judged to be moderate to high.

·       What is a conforming loan?

o   Government-sponsored Enterprises (GSEs) are willing to purchase conforming and nonconforming loans.

o   The conforming category specifies the loan amount that Congress has authorized as the maximum mortgage loan that these GSEs may purchase from lenders and for which the US Treasury will provide credit backing. These loans must meet the underwriting requirements of Fannie Mae and Freddie Mac. The underwriter may require a borrower to pay for default insurance if the loan is within the guidelines but the risk is judged to be moderate to high.

·       What is a Jumbo Loan?

o   A jumbo loan is non-conforming because the loan amount would be too big (a jumbo loan would be at a higher interest rate in comparison to a conventional loan)

o   You would expect a jumbo loan to be at a higher interest rate

·       Closing statement in Prorations.

o   Because the dates on which property taxes are due to a particular governmental unit rarely coincide with the title closing date, a portion of the annual property taxes is usually prorated between the buyer and the seller

o   A proration of taxes is usually made at closing by refunding to the buyer that portion of the taxes that the buyer will be responsible for on the next January 1^st, but related to the period that the seller owned the property. In this way, the seller pays taxes up until the closing date.    

·       What is Escrow?

o   An escrow account is a non-interest-bearing account into which prorated taxes from the seller are deposited and into which the borrower prepays a monthly share of property tax along with the monthly mortgage payments. These funds are accumulated until taxes are due, and then the lender makes a disbursement to pay the tax bill when due.

o   Think of an escrow account like a savings jar for property taxes. Each month, you put in some money along with your mortgage payment. When taxes are due, the lender uses this jar to pay them. This ensures no tax liens on your property, especially if your loan covers more than 80% of the property’s value.

o   RESPA limited the amount that a creditor may require the borrower to pay as an initial deposit into the escrow account.

o   What types of things get escrowed? Mortgage Insurance, Hazard insurance, mortgage cancellation insurance, property taxes, homeowners insurance, HOA fees, improvements/ repairs, and rental/ security deposits.

·       What is the closing statement?

o   To summarize the disbursements, charges, and credits associated with the closing, a settlement of closing statement is prepared by the settlement agent. The statement summarizes the expenses and fees to be paid by the buyer and seller, and it shows the amount of funds that the buyer must pay and the amount of funds the seller will receive at closing.

o   Fees and Expenses: What follows is an identification of various expenses (either paid by the buyer or seller) associated with real estate closings, followed by an illustration of a settlement statement

o   Think of the uniform settlement statement under RESPA as a standardized recipe card used at every home closing. The lender, like a chef, prepares it, ensuring both the buyer and seller understand the ingredients (costs) involved. This transparency, along with an information booklet, helps borrowers assess if the “meal” (closing costs) is fairly priced.

·       Financing of a house

o   Two fundamental relationships that must be assessed by any lender when considering the risk of making a mortgage loan are the expected payment-to-income ratio and the loan-to-value ratio.

o   The payment-to-income ratio is simply the monthly payment on the loan amount being applied for plus other housing expenses divided by the borrower's income

o   The front-end ratio measures how much of a person's income is allocated toward mortgage expenses, including PITI. In contrast, the back-end ratio measures how much of a person's income is allocated to all other monthly debts.  It is the sum of all other debt obligations divided by the sum of the person's income. Other debts commonly include student loans, credit card payments, and non-mortgage loans. (PITI- Principal, interest, taxes, and insurance)

o   Payment to income ratio: a measure of the borrower’s ability to make monthly house payments.

o   For conventional loans:

o   Max PITI-to-Income = 28% of gross income

o   Max total payments= 36% of gross income

o   The loan-to-value ratio is the loan amount requested divided by the estimated property value

·       Closing Costs:

o   Loan origination fee

o   Discount points

o   Credit report fee

o    Appraisal fee

o   Mortgage insurance premium

o   Title search fee

o   Title insurance

o   Title insurance (owners policy)

o   Escrow fee

o   Property taxes

o   Homeowners insurance prepaid interest

o   Recording fee

o   Transfer tax

o   Home inspection

o   Pest inspection

o   Survey fee

o    Attorney fees

o   Etc.

• Closing costs

• Title insurance

• Home warranty