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Real Estate Finance !!
Terms in this set (154)
The Characteristics of Real Estate
2. Tax benefits
3. Pride of Ownership
the Owner occupies the residence
Mortgage interest and property taxes may be tax deductible
Pride of Ownership
Many homeowners see the home as a sign of accomplishment
home ownership protects the individual or family from future increases in rental rates
properties are purchased and held in anticipation of income, appreciation or both
Total number of housing units in 2010
Total value of housing units in the US
Total value of commercial real estate in the US
RE agent needs to have knowledge of...
1. Arranging for the pre-qualification/pre-approval process
2. Discuss general mortgage loan programs that buyers may consider
3. Answering finance and closing related questions
4. Providing buyers with a list of potential lenders.
5. Preparing the contract with all terms of sale, including financing conditions
6. Tracking important dates from contract to closing, including monitoring the time the buyer has to obtain financing approval.
FHA, VA and USDA
The 4 C's of good lending
character, capacity, capital, collateral
measure of the willingness of a borrower to make on-time payments, Credit character is revealed in the borrower's credit report.
measure of the borrower's ability to repay the debt, and is demonstrated through current earnings and job stability
sum of all assets that the borrower has accumulated.
something of value that can be pledged as security for repayment of the loan
Percent of interest charged on a loan
an upfront payment of interest paid by borrowers to reduce the interest rate on the loan
The process of creating a new mortgage loan, including all steps taken by a lender to attract and qualify a borrower
Typically functions as a middleman between the borrower and the lender, negotiating, selling or arranging loans to be delivered to larger investors.
Entities which provide their own funds for the purpose of providing mortgage financing, as opposed to commercial banks/savings associations
Usually smaller in scale than mortgage bankers or brokers, these lenders typically extend loans with their own funds, at their own risk.
building of a file that will be used to make an underwriting decision.
The detailed process of evaluating a borrower's loan application to determine the risk involved for the lender.
The consummation of a real estate transaction in which all appropriate documents are signed and the proceeds of the mortgage loan are the disbursed by the lender.
The process of transferring funds to a title or escrow company for disbursement
Includes collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance, remitting funds to the note holder, and following up on delinquencies.
Supply and Demand
demand for real estate is high and the supply is low, prices increase; prices decline when supply is high and demand is low.
Supply can be restricted by a number of factors including:
Land costs, construction costs, taxation, economics and local government
Demand for real estate is affected by
Growth in employment, transportation systems, personal preference, availability of credit, and federal government policy
at the national level, the value of residential real estate is affected by many factors including...
Federal government tax policy, the supply of money, monetary policies of the federal reserve, interest rates
at the local level, economical cycles and real estate values are affected by...
availability of employment, population trends, availability of a trained workforce and local government policy
FHA was created in
Who Funds the FHA
The FHA funds itself
In order to qualify for exemption from capital gains the property must have been the primary residence for 2 of the previous...
A loan with no discount points is known as a
What is money
Assets which have immediate purchasing power.
M1 money supply
sum of currency held by the public and transaction deposits at depository institutions
M2 money supply
M1 plus savings deposits, small-denomination time deposits and retail money market mutual fund shares.
currency that is not backed by any precious metals at all.
the maintencance of a stable money supply that provides for growth in the economy while keeping inflation in check. The federal reserve is responsible for Monetary Policy
Federal Government spending, approved by congress. The US treasury is responsible for raising money to support the spending decisions of congress. Raises money by increasing borrowing and raising taxes.
the central banking system of the United States
excess of money supply in the market
more money in the market and less goods for sale
Cost of production and offering services increase, causing a raise in prices.
High demand, low quantity, Housing prices rise, creating bidding wars
The 3 primary Monetary Policy Tools
Open Market Operation
The Discount Rate
Open Market Operations
most flexible and often used tool of monetary policy; buying or selling government securities
Federal Open Market Committee (FOMC)
Sets the Fed's monetary policy, which is carried out through the Trading Desk of the Federal Reserve Bank of New York. FOMC decides that the more money and credit should be available, it directs the trading desk to buy securities from the open market.
the interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a short term basis
Federal Funds Rate
Rate that the Fed charges banks for unsecured loans.
the percentage of deposits that banking institutions must hold in reserve, either cash on hand or as reserve account balances at a reserve bank
responsible for raising funds to finance the operations of the US government.
Federal Deposit Insurance Corporation (FDIC)
an agency created in 1933 to insure individuals' bank accounts, protecting people against losses due to bank failures
Federal Home Loan Bank
system of regional banks which local lending institutions everywhere borrow funds to finance housing, economic development, infrastructure and jobs.
Dept of Housing and Urban Development (HUD
Established in 1965 as a cabinet department by LBJ, created to strengthen the housing market, bolster economy and protect consumers; meet needs for quality, affordable rental homes; improving quality of life and build inclusive and sustainable communities free from discrimination
The Dodd Frank Wall Street Reform & Consumer Protection Act, signed into law in 2010, established the
Consumer Financial Protection Bureau
Real Estate transactions regulated by the office of consumer Credit Commissioner include
Home Equity Loans
Home Improvement Loans
The Community Reinvestment Act was enacted in __________, ensures that banks serve the needs of the community in which they were chartered.
Secondary Mortgage Market
A market for the purchase and sale of existing mortgages, designed to provide greater liquidity for mortgages; also called the secondary money market. Mortgages are first originated in the primary mortgage market.
the return on an investment
Federal National Mortgage Association - The nation's largest, and privately owned, investor in residential mortgages.
Federal Home Loan Mortgage Corporation; purchase mortgages in the secondary market.
Housing and Economic Recovery Act of 2008 (HERA)
Major federal law designed to assist with the revitalization of the U.S. housing market; includes provisions related to foreclosure prevention and consumer protections, as well as establishing minimum standards for licensing and registration of mortgage loan originators. See the Secure and Fair Enforcement for Mortgage Licensing Act.
Government National Mortgage Association; pools mortgages for investors
The Federal Agricultural Mortgage Corp - a privately owned and publically traded company established by Congress to create a secondary market for agricultural mortgage and rural utilities loans.
Used to qualify for a loan based upon the proposed house payment and gross monthly income. 28% x GMI= Max monthly house payment
the ratio of the borrower's total recurring monthly debts, including such obligations as house payments, installment loans, liens, alimony, car, and other recurring payments. 36% x GMI =Max PITI and debts.
a loan made with real estate as security and which does not involve government participation in the insuring or guaranteeing the loan.
Primary Mortgage Market
Borrowers and mortgage lenders come together to create and negotiate terms of a mortgage transaction.
Working capital primarily generated through deposits from clients.
Savings and Loans
locally owned and privately managed; receives individuals savings and uses funds to make long term amortized home loans; makes loans for construction, purchase, repair or refinancing; state or federally chartered.
life insurance companies
funded by insurance premiums which are reinvested to produce capital. Invest heavily in the secondary mortgage market.
pension and retirement programs
funded by client deposits; held in anticipation of distribution when the client reaches retirement age and used for investment purposes.
not-for-profit banks set up by organizations for their customers to use
do not hold depositor's funds; not regulated or licensed; money used is to make loans by sale of bonds.
person, corporation or firm that provides its own funds for mortgage financing.
provides consumers with assistance securing lard to place or niche sources of mortgage money. Serves as middleman between borrower and lender.
processes, underwrites, closes and funds own files in their name. Loan is then sold to another lender.
Real Estate Investment Trust (REIT)
an investment vehicle, created in 1960 by congress, to make it possible for small investors to invest in larger commercial properties by purchasing shares in the organization that owns the real estate.
Real Estate Mortgage trusts (REMT)
special form of REIT that invests in mortgages or mortgage backed securites.
least common form of mortgage financing. Seller agrees to finance all or part of a sale.
Dodd-Frank Wall Street Reform Act
increased insurance coverage on all federally insured credit union accounts up to $250,000
A claim, charge, or liability that attaches to and is binding on real estate.
A right given by law to certain creditors to have their debts paid out of the property of a defaulting debtor, usually by means of a court sale.
Types of Liens
Mortgage and Trusts Deeds, Tax Liens, Judgements, Mechanic and Materialman's
attaches to one or more specific or named properties (ex: mortgage)
A lien that attaches to all property owned by an individual. Real and personal.
freely given, collateral for loan
involuntary lien/statutory lien
A lien placed on property without the consent of the property owner.
arises out of common law, include seller, buyer. judgement of unpaid debts.
covenants, conditions, and restrictions (CC&Rs)
deed restrictions that control the use of property and architectural style
Private Deed Restrictions
limitations placed in a deed when property is conveyed to a new owner.
for ingress and egress and utilities
An RE Agent needs to have knowledge of some aspect of mortgage lending
1. Arranging for pre-qual/pre-appr of buyers
2. Discussing general mortgage loan programs
3. answering finance and closing questions
4. providing a list of potential lenders
5. preparing contract with all terms of sale
6. tracking important dates from contract to close
Time must be brought up to an annual amount
the determination of the equal periodic loan payments necessary to provide a lender with a specified interest return and to repay the loan principal over a specified period
loan amortization schedule
A schedule of equal payments to repay a loan. It shows the allocation of each loan payment to interest and principal.
Damage to credit score
Default can lead to a number of negative consequences for the defaulting party including
Deed in Lieu
cannot be accepted from borrowers who can financially afford their mortgage payments
Streamlined Modification Program (SMP)
A loan modification program initiated in 2008 for at-risk borrowers with Fannie Mae and Freddie Mac loans.
Power of Sale
Types of foreclosure
all states allow, lender files with judicial and borrower has 30 days to respond with payment. If payment is not made the property is sold through an auction to highest bidder carried out by court or sheriff's office.
Power of sale
AKA Statutory foreclosure, allowed by many states if the mortgage includes a power of sale clause. Homeowner has defaulted on mortgage payments, lender sends out notices demanding payment, mortgage company carries out a public auction.
A small number of states allow this type of foreclosure. In strict foreclosure proceedings, the lender files a lawsuit on the homeowner that has defaulted.
Types of Foreclosure in Texas
used when a power of sale clause exists in a mortgage or deed of trusts. Borrower pre-authorizes the sales of property to payoff balance on loan in event of default.
Home Affordable Modification Program (HAMP)
program which assists borrowers in making their mortgages more easily managed. Created in 2008, overseen by the Department of Treasury, HUD and HAMP. Allows the treasury to work with loan providers to refinance existing loans.
Re-amoritizing a mortgage.
working out a way to repay the delinquency each month along with regular monthly payments.
when a bank takes back a property and auctions it off to recover the unpaid loan amount
breach or nonperformance of the terms of a note or covenants of a mortgage
Social Media Platforms
is not reviewed by loan underwriters to determine creditworthiness.
Neutral inquires, they are not rated as either positive or negative on a credit report
Full Name, Marital Status, Social Security Number, and present address
what borrows ask in Part III of the uniform residential loan application
Benefits of Pre-qualification
1. Buyers are able to be realistic when setting pricing.
2. The Buyer's Agent has a better understanding of the buyer's ability to pay.
3. The Buyer's Agent can avoid showing properties the buyer can't afford
4. Seller are somewhat reassured the buyer has sufficient income and credit to close.
Conditional Approval Letter
The form buyer's will obtain when pre-qualified, letter is not a guarantee a lender will fund.
a systematic process that uses statistical models to assess an individual's credit worthiness based on credit history and current credit accounts.
Credit score, score is based on past delinquencies, and current debt level, length of credit history, types of credit, frequency of applied credit and the number of trade lines open.
Gift from relatives to help fund. Will need a verification in the form of a gift letter, donor source of documentation, copy of check or verification of deposit.
Fannie Mae 1003 Application
the Uniform Residential Loan Application
Verification of Deposit
A form sent by a lender directly to a bank verifying the borrower's accounts.
Verification of Employment (VOE)
To review borrower's employment history to determine job stability
demand, utility, scarcity, transferability
There are four determinants of value. Each of these must be present in order to have value. They are
must be sufficient demand for a property to have value
Must be able to fulfill a need.
If a type of property in a market area is too abundant, it has reduced value. If a market is flooded values will remain flat.
if cannot be transferred it has little value. May be due to a title flaw, government regulation, or restrictions.
the most probable price a property should bring in a competitive and open market under all conditions.
Sales Comparison approach, Cost approach, income approach
are 3 approaches to value
Sales Comparison Approach
AKA the market data approach. When an estimate of value is obtained by comparing the subject property with recently sold comparable properties.
considers how much a new structure of this size and type would currently cost to build.
Will not be used in a typical residential transaction, it applies only to income generating rental property.
a reduction in value of property from causes as deterioration or obsolescence.
Physical deterioration, functional obsolescence, external obsolescence
are types of depreciation
A loss of property value due to wear and tear.
The actual age of property in years
The appraiser's estimate of the age of the house based upon its ongoing maintenance and upgrades.
The loss in desirability of the style, layout, or function of an element of a property over time.
loss in value caused by factors outside the property itself. Oversupply, drop in demand, zoning, government actions.
Gross Rent Multiplier (GRM)
GRM= Sales price/Monthly rent
a loan developed by HUD for the rehabilitation and repair of single family properties
The Serviceman's Readjustment Act
AKA GI Bill of Rights, signed into law in 1944
fully amortized loan, 3.5% down payments, Low interest rates, mandatory collection of taxes and HO Insurance in escrow and guidelines for borrower qualification
What are Loan reforms spearheaded by FHA
FHA Insured Loan Programs
203 (b)-Fixed Rate Program 10-30 Yrs
203 (k)-Purchase and Rehabilitation
251-Adjustable program in 1,2,3,5,7 0r 10 yr adjustable rate
234 (c) Condo program
up-front mortgage insurance premium (UFMIP)
FHA charges this premium which can be paid at closing or added to the loan at funding. Can be added to the loan even if it causes the loan to exceed the appraised value.
Sales Price/value x 96.5% LTV= Base Loan Amount
UFMIP Formula Base Loan Amount
BASE LOAN AMOUNT x 1.75%= UFMIP
Base Loan Amount + UFMIP= Total Loan Amount w/UFMIP
Total Loan amount with UFMIP formula
based on the LTV and is added to the borrower's monthly payment
Sales Price/value x 96.5% LTV=Base Loan Amount
Base Loan Amount x .85%= Annual Mortgage Insurance
Annual Mortgage Insurance/ 12 months=Monthly MIP
Formulas for Annual Mortgage Insurance Premium
FHA Loan Limits
maximum amount of loan funds available to a borrower relative to housing costs in a given area
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