Cycles
Cycles are periodic, irregular up and down movements of economic activity that take place over a period of 2 to 6 years. Real estate markets are cyclical due to the relationship between demand and supply for particular types of property.
Two Phases and Turning Points of Real Estate Cycle
The real estate cycle, just like the business cycle, has two phases and two turning points. The two phases are expansion (recovery or boom) and contraction (recession or bust). The two turning points are peaks and troughs. An expansion is an increase in t
Market economy
A market economy is an economy that relies primarily on interactions between buyers and sellers to allocate resources.
Financial market
A financial market allows people to buy and sell financial securities and commodities relatively easily. Markets work by bringing interested buyers and sellers together and making it easier to complete transactions.
Money Market
The money market is the interaction of buyers and sellers of short-term money market instruments such as short-term financing and securities. These short-term market instruments may have low or high interest rates, which is part of their risk.
The interes
Capital Market
Capital markets, which consist of markets for stocks and bonds, deal in long-term financing and securities. The capital market is the market in which long-term or intermediate-term securities are traded by buyers and sellers. These securities take more th
Capital
Capital consists of equity (one's own money) and debt (borrowed money). In other words, if you are going to purchase a home, typically you use some of your own money and a lot of the bank's money.
Equity
Equity is an owner's financial interest in real or personal property at a specific moment in time. In real estate, it is the difference between what a property is worth and what the owner owes against that property. At purchase, the equity is equal to the
Debt
Debt is a dollar amount that is borrowed from another party, usually under specific terms. It can be secured or unsecured. Secured debt is a debt owed to a creditor that is secured by collateral. A good example of this is mortgage debt or a car loan. The
Bonds
A bond is a debt instrument. When you buy a bond, you lend someone money at a fixed interest rate for a fixed period of time. While your money is out you receive interest on it. At a specific time in the future, you receive your principal back. Thus, the
Money Supply
The money supply, or money stock, is the total amount of money available for transactions and investment in the economy. It consists of currency in circulation, money in checking accounts, deposits in savings, and other liquid assets. Liquid assets are se
Categories of the Money Supply
The money supply is categorized by how quickly the asset can be converted into cash. The Federal Reserve Board tracks and publishes the money supply. Currently, it is measured two different ways�M1 and M2�with M1 being the most liquid. The categories freq
Board of Governors
The Board of Governors (BOG) oversees the Federal Reserve System. It is made up of seven members who are appointed by the President and confirmed by the Senate.
Federal Reserve Banks
The twelve Federal Reserve Banks are the operating arms of the central bank. The Federal Reserve Banks handle the Treasury's payments, assist with the Treasury's cash management and investment activities, and sell government securities. They supervise mem
Red funds rate
The fed funds rate is the rate at which depository institutions trade balances at the Federal Reserve. The Fed influences the supply of money and credit available by raising and lowering the amount of reserves that banks are required to hold and the disco
Reserve requirements
Reserve requirements refer to a certain percentage of each deposit in a bank that must be set aside as a reserve. When the Fed requires a larger reserve, the banks have less to lend, so interest rates increase while borrowing and spending decrease. If the
Discount Rates
Federal Reserve member banks are permitted to borrow money from the Reserve Banks to increase their lending capabilities. The interest rate the banks pay for the federal funds is called the discount rate. The discount rate is the interest rate that is cha
Open Market Operations
The Federal Open Market Committee (FOMC) consists of twelve members�seven members from the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the other eleven Reserve Bank presidents. The purpose of the FOMC is to set t
U.S. Department of the Treasury
The U.S. Department of the Treasury was created in 1789 to manage the government finances. Alexander Hamilton was the first Secretary of the Treasury. The Secretary of the Treasury serves as a major policy advisor to the President and has primary responsi
Residential Loan Originators
Residential mortgage lenders (loan originators) are part of the primary mortgage market. They originate and fund loans to borrowers. Primary mortgage market lenders include commercial banks, thrifts, mortgage bankers, credit unions, and others. A mortgage
Brokerage Firms & Investment Banks
The mortgage-backed securities created by the issuers are marketed by stock brokerage firms and investment banks such as Goldman Sachs, Merrill Lynch, Morgan Stanley, Credit Suisse, Citigroup, Deutsche Bank, and JP Morgan Chase. The Securities and Exchang
Mortgage pool
A mortgage pool is a group of mortgages that usually have the same interest rate and term. The debt instruments, which are known as mortgage-backed securities, are collateralized by the mortgage pool.
Points
Up-front finance charges, such as points and fees, increase the lender's yield on the loan. Points, or discount points, are calculated as a percentage of the loan amount. One point equals one percentage point. Therefore, 2 points on a $100,000 loan is $2,
Loan origination fees or funding fees
Loan origination fees or funding fees are typically one or two points of the amount of the loan. The income the lender derives from this source is called the mortgage yield.
Mortgage yield
Mortgage yield is the amount received or returned from real estate loan portfolios expressed as a percentage.
Loan servicing
Loan servicing lenders receive fees for collecting payments from the borrower on behalf of the loan originator or subsequent noteholder. A loan servicer collects payments from borrowers, subtracts fees, and sends the balance of the money to investors who
Securitization
Securitization provides liquidity to originators of real estate loans. Securitization is the pooling and repackaging of cash flow that turns financial assets into securities that are then sold to investors. Any asset that has a cash flow can be securitize
Mortgage-backed security
A mortgage-backed security is a type of asset-backed security that is protected by a collection of mortgages. The mortgages are pooled and secured against the issue of bonds. Most bonds backed by mortgages are classified as mortgage-backed securities (MBS
Pass-Through Securities
The simplest mortgage-backed securities are pass-through securities. The pass-through or participation certificate represents direct ownership in a pool of mortgages. They are called pass-throughs because the principal and interest of the underlying loans
Collateralized Mortgage Obligation
Collateralized mortgage obligations (CMOs), a type of MBS, are bonds that represent claims to specific cash flows from large pools of home mortgages. The streams of principal and interest payments on the mortgages are distributed to the different classes
Sequential Pay CMO
In a sequential pay CMO, issuers distribute cash flow to bondholders from a series of classes, called tranches. A tranche is a part or segment of a structured security. A security may have more than one tranche, each with different risks and maturities. E
Stripped Mortgage-Backed Security
A stripped mortgage-backed security (SMBS) is a type of CMO in which the interest and principal of the mortgage are separated into principal-only and interest-only bonds.
Principal-only stripped mortgage-backed security
A principal-only stripped mortgage-backed security (PO) is a bond with cash flows that are backed by the principal repayment component of a property owner's mortgage payments. Because principal-only bonds sell at a discount, they are zero coupon bonds. A
Interest-only stripped mortgage-backed security
An interest-only stripped mortgage-backed security (IO) is a bond with cash flows that are backed by the interest component of the property owner's mortgage payments. IO bonds change in value based on interest rate movements.
Default risk
Default risk is the borrower's inability to meet interest payment obligations on time. Lenders pool mortgages by their interest rate and date of maturity. Additionally, mortgages are pooled by the initial credit quality of the borrower. Pools are comprise
Housing GSEs
A government-sponsored enterprise (GSE) is a financial services corporation created by the United States Congress. The housing GSEs are Fannie Mae (Federal National Mortgage Association), Freddie Mac (Federal Home Loan Mortgage Corporation), and the Feder
HFA Single-Family Owner-Occupied Purchase Goals
1. Low-Income Housing Goal (23%). This targets families with incomes no greater than 80% of the area median income. (Area median income is defined as the median income of the metropolitan area, or for properties outside of metropolitan areas, the median i
Federal National Mortgage Association
(Fannie Mae) was created by Congress in 1938 to bolster the housing industry in the aftermath of the Great Depression. It does not lend money directly to home buyers. Initially, it was authorized to buy and sell FHA-insured loans from lenders, but VA-guar
The Federal Home Loan Mortgage Corporation
(Freddie Mac) is a stockholder-owned corporation chartered by Congress in 1970 to stabilize the mortgage markets and support homeownership and affordable rental housing. Freddie Mac stock is traded on the OTC Bulletin Board under FMCC.
Its mission is to p
Federal Home Loan Banks
(FHLBanks) are 12 regional cooperative banks that lending institutions use to finance housing and economic development in their communities. Created by Congress, the FHLBanks have been one of the largest, private sources of funding for community lending i
Government National Mortgage Association
The Government National Mortgage Association (Ginnie Mae) is a government-owned corporation within the Department of Housing and Urban Development (HUD). Ginnie Mae's focus is to support the market for FHA, VA, and other loans.
Unlike Fannie Mae and Fredd
Approved issuers
Approved issuers are lenders that meet specific requirements and are approved to issue Ginnie Mae MBS. Approved issuers acquire or originate eligible FHA and VA loans. The loans are pooled and securitized into MBS, which are then guaranteed by Ginnie Mae.
Lender
A lender is the person who or company that makes mortgage loans, such as a mortgage banker, credit union, bank, or a savings and loan. A lender underwrites and funds the loan.
Third party originators (TPOs)
Those who originate but do not underwrite or fund loans are called third party originators (TPOs). This classification includes mortgage brokers and loan correspondents. TPOs package loans for lenders and are paid a commission when the loan is funded. Thi
Fiduciary Lenders
A financial fiduciary is an institution that collects money from depositors, premium payers, or pension plan contributors and makes loans to borrowers. Financial fiduciaries include commercial banks, thrifts, credit unions, life insurance companies, and p
Portfolio lenders
Larger banks and thrifts that lend their own money and originate loans to keep in their own loan portfolio are called portfolio lenders. This is because they originate loans for their own portfolio and not for immediate resale in the secondary mortgage ma
Commercial Banks
Commercial banks are the all-purpose lenders. Commercial banks receive deposits and hold them in a variety of accounts, extend credit, and facilitate the movement of funds. Deposits held in checking accounts are called demand deposits. A demand deposit is
Compensating balances
Some banks require commercial borrowers to keep a certain amount of money on deposit as a requirement of the loan agreement. These deposits are called compensating balances. Deposits held as compensating balances by a bank do not earn interest. As a resul
Federal Deposit Insurance Corporation
All federally chartered commercial banks must be members of the Federal Reserve System, which supervises member commercial banks. The Federal Deposit Insurance Corporation (FDIC) insures deposits. The Federal Deposit Insurance Corporation (FDIC) is an ind
Thrifts
Thrifts are the largest single resource for residential mortgage credit. A thrift is an organization formed to hold deposits for individuals.
Types of Thrift Institutions:
Savings and loan associations
Savings banks
Mutual savings banks
These institutions
Savings and Loan Associations
Traditionally, savings and loan associations (S&Ls) have played a major role in the economy by pooling the savings of individuals to fund residential mortgages. The first customers of S&Ls were depositors and borrowers. As their customer base grew, the S&
Savings Banks
A savings bank has been described as a distinctive type of thrift institution because it can behave like a commercial bank or like an S&L. While savings banks are authorized to make mortgage loans, most specialize in consumer and commercial loans. However
Mutual Savings Banks
A mutual savings bank is a financial institution owned by depositors, each of whom has rights to net earnings of the bank in proportion to his or her deposits. The depositors' return on their investment is determined by how successful the bank is in manag
Credit Unions
A credit union is a cooperative, non-profit organization established for banking purposes. Credit unions are owned and operated by their members. Usually, members are people in associations who share a common affiliation such as teachers, workers in the s
National Credit Union Share Insurance Fund
The National Credit Union Share Insurance Fund (NCUSIF) insures the shares and deposits in a credit union. Share insurance is similar to the deposit insurance protection offered by the Federal Deposit Insurance Corporation (FDIC).
Most share accounts that
Life Insurance Companies
Life insurance companies obtain their funds from insurance premiums. Unlike the demand deposits of depository institutions, the premiums invested in life insurance companies are not subject to early withdrawal and do not earn a high rate of interest. Ther
Pension Funds
Pension funds have huge amounts of money to invest. In fact, it is in the trillions. Both employer and employees contribute to employee pension plans. A pension plan is a retirement fund reserved to pay money or benefits to workers upon retirement.
The co
Semi-Fiduciary Lenders
Financial semi-fiduciaries are non-depository lenders. A semi-fiduciary institution is never directly accountable to depositors, premium payers, or pension plan contributors. Therefore, they are less strictly regulated and can take more risks than financi
Mortgage Companies
A mortgage company, which is also known as a mortgage banker, is a company whose principal business is the origination, closing, funding, selling, and servicing of loans secured by real property. Mortgage companies originate a majority of all residential
Warehouse Line of Credit
Since mortgage companies do not have depositors, they use short-term borrowing called a warehouse line or warehouse line of credit. A warehouse line is a revolving line of credit extended to a mortgage company from a warehouse lender to make loans to borr
Real Estate Investment Trusts
A share in a real estate investment trust (REIT) is a security that sells like a stock on the major exchanges. REITs invest in real estate or mortgages. REITs were designed to provide a similar structure for investment in real estate as mutual funds provi
Non-Fiduciary Lenders
Non-fiduciary lenders are non-depository institutions. In other words, they do not take deposits. Because they are relatively free from government regulations, these lenders follow their own underwriting guidelines and risk criteria.
They are private lend
Finance Companies
A finance company is a business that makes consumer loans for which household goods and other personal property serve as collateral. In addition, some private loan companies make home equity loans. The credit criteria may be more relaxed than the underwri
Foreign National Lenders
Due to the demand for real estate loans to people who are not American citizens, some niche lenders offer foreign national loans. Foreign national loans are similar to standard U.S. loans, except that the required down payment is generally larger�about 30
Private Individuals
Private individuals are non-fiduciary lenders who offer an alternative source of financing. They participate in financing real estate by carrying back loans on their own property and by investing in security instruments (mortgages and deeds of trust).
Sel
Third Party Originators
Third party originators (TPOs) originate but do not underwrite or fund loans. TPOs complete loan packages and act as the mediator between borrowers and lenders. TPOs include mortgage brokers and loan correspondents.
Mortgage Brokers
There is a niche for everyone in the mortgage loan business. A mortgage broker originates loans with the intention of brokering them to lending institutions that have a wholesale loan department. Mortgage brokers are third party originators (TPOs) and not
Loan Correspondents
A loan correspondent is usually a third party originator who originates loans for a sponsor. However, the purchaser of the closed loan may make the underwriting decision in advance of closing. Alternatively, the purchaser may grant the authority to underw
Loan origination
Loan origination is the lending process from application to closing. Historically, mortgage loans were offered directly to borrowers by a direct lender who completed the loan process during retail loan origination. Today, many loans are prepared by a thir
Retail Loan Origination
Retail loan origination refers to lenders (banks, thrifts, and mortgage bankers) that deal directly with the borrower and perform all of the steps necessary during the loan origination and funding process. This retail approach to loan origination is an ou
Wholesale Loan Origination
When a lender buys a processed loan from a mortgage broker it is called wholesale mortgage lending. Wholesale loan origination, which is sometimes called third party origination, is the process in which mortgage brokers and loan correspondents originate l
Wholesale lenders benefit from the flexibility of the market. If a market declines rapidly, they can:
a) start up in a location where the market is attractive.
b) pay fewer points to a loan originator.
c) hire a larger staff.
d) All of the choices apply
a) If a market declines rapidly, a wholesale lender can stop purchasing loans in one geographic area and buy loans in another location where the market is more profitable
Nontraditional mortgage product
Any mortgage product other than a 30-year, fixed-rate mortgage is called a nontraditional mortgage product. Types of loans include conventional and government-backed (FHA and VA). Loans are further described by occupancy (residence or investment) and by p
Purchase money loan
A loan that is used to purchase property is called a purchase money loan. It is used strictly for financing the purchase of real property. Any loan made at the time of a sale, as part of the sale, is a purchase money loan. Even a second loan that finances
Closed-end loans
Most loans used to purchase property are closed-end loans. A closed-end loan is one in which the borrower receives all loan proceeds in one lump sum at the time of closing. The borrower may not draw additional funds against the loan at a later date.
Refinancing
Refinancing replaces the old loan with a new one. A person may refinance to reduce the interest rate, lower monthly payments, or change from an adjustable-rate to a fixed-rate loan. The loan amount remains the same, but the terms change. Refinancing usual
Cash-out refinancing
Cash-out refinancing involves refinancing the loan for a larger amount than the current loan. Any loan used to take cash out of a property is a hard money loan. Hard money loans draw on the equity in property. This type of loan includes home equity loans,
Amortization
Amortization is the liquidation of a financial obligation on an installment basis. An amortization schedule details each payment, displays the specific amount applied to interest and principal, and shows the remaining principal balance after each payment.
Fully amortizing loan
A fully amortizing loan is fully repaid at maturity by periodic reduction of the principal. When a loan is fully amortized, the payments the borrower makes are equal over the duration of the loan. Any mortgage other than a 30-year, fully amortizing, fixed
Partially amortizing loan
A partially amortizing loan has a repayment schedule that is not sufficient to pay off the loan over its term. This type of loan calls for regular, periodic payments of principal and interest for a specified period of time. At maturity, the remaining unpa
Straight loan
A straight loan is not amortized. The borrower only makes periodic interest payments during the term of the loan. The entire principal balance is due in one lump sum upon maturity. These loans are also called interest-only loans. This type of loan is not
Fixed-Rate Loans
A fixed-rate loan has two distinct features�fixed interest for the life of the loan and level payments. The level payments of principal and interest are structured to repay the debt completely by the end of the loan term. The major advantage of fixed-rate
Fully Amortizing Fixed-Rate Loans
Maturity dates for fixed-rate loans range from 40, 30, 20, 15, to 10 years. A maturity date is the date on which a debt becomes due for payment. The longer the loan term, the smaller the payment and the more interest is paid over the term of the loan. Dur
Interest-Only Fixed-Rate Loans
Interest-only fixed-rate loans are short-term fixed-rate loans that have fixed monthly payments usually based on a 30-year fully amortizing schedule and a lump sum payment at the end of its term. They typically have terms of 3, 5, and 7 years.
The advanta
Biweekly Payment Plan
Loans with a biweekly payment plan call for payments every 2 weeks. Since there are 52 weeks in a year, the borrower makes 26 payments, which is equivalent to 13 months of payments, every year. The shortened loan term decreases the total interest costs. T
Adjustable-Rate Loans
When a fixed-rate loan is out of reach or impractical for the borrower, a nontraditional mortgage product, such as an ARM product may meet the borrower's specific financial situation. An adjustable-rate loan or adjustable-rate mortgage (ARM) is a loan wit
Basic Features of ARMs
A lender may offer a variety of ARMs, all of which share similar features�initial interest rate and payment, adjustment period, index, margin, and caps. These basic features are incorporated into every ARM loan.
For a limited period of time, every ARM has
Interest Rate
The interest rate on an ARM changes periodically, usually in relation to an index, and payments may go up or down accordingly. The interest rate is made up of two parts: the index and the margin. The index is a measure of interest rates and the margin is
Index
The index is a publicly published number that is used as the basis for adjusting the interest rates of adjustable-rate mortgages. The most common indices, or indexes, are the Constant Maturity Treasury (CMT), the 11th District Cost of Funds Index (COFI),
CMT�Constant Maturity Treasury
The 1-year Constant Maturity Treasury Index (CMT) is the most widely used index. Nearly half of all ARMs are based on this index. It is used on ARMs with annual rate adjustments. The CMT index is a volatile index that responds quickly to market changes. T
COFI�11th District Cost of Funds Index
The 11th District Cost of Funds Index (COFI) is more prevalent in the West. The COFI reflects the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts and other sources of funds
LIBOR�London Interbank Offering Rate
The London Interbank Offering Rate (LIBOR) is the interest rate charged that major international banks are willing to offer term Eurodollar deposits to each other. A Eurodollar is a dollar deposited in a bank in a country in which the currency is not the
CODI�Certificate of Deposit Index
These indexes are averages of the secondary market interest rates on nationally traded Certificates of Deposit. The 6-month Certificate of Deposit Index (CODI) generally reacts quickly to changes in the market.
MTA�Monthly Treasury Average
The Monthly Treasury Average, which is also known as the 12-Month Moving Average Treasury index (MAT), is relatively new. This index is the 12-month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one y
Prime Rate
The prime rate refers to the interest rate that individual banks charge their most creditworthy customers for short-term loans. Because many large banks choose to set their prime rates based on the federal funds rate, the prime rates offered by different
Margin
The lender adds a few percentage points, or margin, to the index to determine the interest rate that a borrower pays. The amount of the margin may differ from one lender to another, but it is constant over the life of the loan. Some lenders base the amoun
Interest Rate Caps
ARM loans help avoid payment shock with built-in protections called caps. Payment shock is a significant increase in the monthly payment on an ARM that may surprise the borrower. Caps regulate how much the interest rate or payment can increase in a given
Periodic Adjustment Cap
All adjustable-rate loans carry periodic adjustment caps (interim rate caps). The periodic adjustment cap limits the amount the interest rate can adjust up or down from one adjustment period to the next after the first adjustment. Some ARMs allow a greate
Lifetime Cap
Almost all ARMs have a lifetime interest rate cap called a lifetime cap. The lifetime cap is the maximum interest rate that may be charged over the life of the loan. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime
Payment Caps
In addition to interest-rate caps, some ARMs have payment caps. A payment cap restricts a payment from increasing more than a specified percentage above the prior year's payment amount. These loans reduce payment shock in a rising interest rate market, bu
Discount Points
Discount points are a one-time charge paid by the borrower to lower the interest rate on the loan. A point is equal to one percent of the loan amount. If the fee paid only lowers the interest rate for a specified amount of time rather than for the entire
Prepayment Penalties
Since January 10, 2014, prepayment penalties are not permitted on ARMS. However, some older ARM loans include a prepayment penalty clause in the promissory note. A prepayment penalty is a fee charged when the loan is paid off early. Prepayment penalties a
Assumable Feature
Sometimes ARMs are assumable, which is important for borrowers who plan to resell the property within a short time. The assumable feature of a loan allows a borrower to transfer the loan to another borrower, usually with the same terms, if the new homebuy
Interest-Only ARM
An interest-only ARM (IO) loan allows payment of interest only for a specified number of years (typically between 3 and 10 years). This allows the borrower to have smaller monthly payments for a period of time. After that, monthly payments increase even i
Convertible ARM
A convertible ARM is an ARM that can be converted to a fixed rate by the borrower at some point during the loan term. As an example, a lender may have a 1-year ARM with a feature that allows conversion from the ARM to a fixed-rate loan during the first 60
Option ARM
An option ARM is a type of loan that allows the borrower to choose among several payment options each month. This provides flexibility for borrowers by allowing them to choose the payment that suits their current financial situation. Option ARMs offer a v
Low Initial Teaser Rate
Option ARMs are often 1-month adjustable loans and typically have low initial teaser rates with low initial payments that enable a borrower to qualify for a larger loan amount. A teaser rate is a low, short-term introductory interest rate designed to temp
Recasting
Option ARM payments are typically adjusted every 5 years. Lenders do this by amortizing the higher principal balance created by the addition of interest (negative amortization). This automatic payment adjustment is called recasting. It amortizes the loan
Hybrid Loans
While many consumers prefer the more familiar types of loans, a unique loan called a hybrid ARM may be suitable for some borrowers. A hybrid ARM may be desirable for borrowers who plan to sell their homes or pay off their loans within a few years.
A hybri
Graduated Payment Mortgage Loans
The graduated payment mortgage is another alternative to an adjustable-rate mortgage. A graduated payment mortgage (GPM) is a fixed-rate loan with initial payments that are lower than the later payments. The difference between the lower initial payment an
When a borrower considers a discounted ARM, the borrower should compare:
a) current adjusted negative amortization payments.
b) discounted initial rates for later low payments.
c) future payments with those of a fully indexed ARM.
d) carefully to make sur
c) When considering a discounted ARM, the borrower should compare future payments with those of a fully indexed ARM.
Conventional loan
A conventional loan is any loan without government insurance or guarantees. The main sources of conventional loans are commercial banks, thrifts, and mortgage companies.
Because it has no government insurance or guarantee, the lender is not required to fo
Risk-based pricing
Each lender measures risk through a process called risk-based pricing. Risk-based pricing is a process that lenders use to determine home loan rates and terms. Since each lender measures risk differently, interest rates vary from lender to lender. Convent
Loan-to-Value Ratio
Conventional lenders set their own loan-to-value ratios. A loan-to-value ratio (LTV) is the ratio of the loan amount to the property's appraised value or selling price, whichever is less.
Example: The lender has an 80% LTV ratio for its conventional loan.
Down Payment
The basic protection for a lender who makes conventional loans is the borrower's equity in the property. In a purchase transaction, this is the down payment. A down payment is the portion of the purchase price that is not financed.
If the borrower has 10%
Mortgage Insurance
Insurance in general is intended to spread any loss from a particular peril over a large insured group. Mortgage insurance is insurance that provides coverage for the top part of a residential loan in the event of default. The lender is insured against lo
Private Mortgage Insurance
Private mortgage insurance (PMI) is extra insurance that lenders require from most homebuyers who obtain conventional loans that are more than 80% of their new home's value. In other words, buyers with less than a 20% down payment are normally required to
Canceling PMI
Effective July 29, 1999, the federal Homeowner's Protection Act (HPA) allows the cancellation of private mortgage insurance under certain circumstances.
Automatic Termination
Lenders or servicers must automatically cancel PMI coverage on most loans once a
Portfolio Loan
A portfolio loan is a loan retained by the lender. Since these loans do not conform to Fannie Mae/Freddie Mac credit standards, they cannot be sold into the secondary market. They are either retained in the lender's portfolio or privately securitized for
Conventional Loans
Any conventional loans sold in the secondary mortgage market must conform to the Fannie Mae/Freddie Mac underwriting guidelines and are called conforming loans. Therefore, conventional loans that are kept by lenders are called non-conforming loans or port
Conforming Loans
The majority of loans originated by lenders for one-to-four unit residential properties are conventional loans and the majority of those are conforming loans. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae an
Underwriting guidelines
In addition to that very important role, Fannie Mae and Freddie Mac provide the underwriting guidelines for conforming loans. Underwriting guidelines are principles lenders use to evaluate the risk of making real estate loans. The guidelines are just that
Fannie Mae/Freddie Mac Suitable Property
Fannie Mae and Freddie Mac purchase loans used to finance a wide variety of one-to-four residential property types. Loans made on these properties that are within conforming loan guidelines can be sold to Fannie Mae.
1-4 family unit principal residences
S
Loan Limits
In order to qualify for a conforming loan, the amount financed must not exceed the maximum loan limits established by Fannie Mae/Freddie Mac. Different loan limits apply according to the number of units. The limit is less for a single-family property and
Debt-to-Income Ratios
To determine a consumer's maximum loan amount, lenders use a guideline called a debt-to-income ratio. A debt-to-income ratio (DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. Lenders use two calculations�a front r
Back Ratio
The back ratio is the percentage of income needed to pay for all recurring debt. To calculate this percentage, divide the housing expense and consumer debt by the borrower's gross monthly income. Consumer debt can be car payments, credit card debt, judgme
Automated Underwriting Systems
Automated underwriting (AU) is a technology-based tool that combines historical loan performance, statistical models, and mortgage lending factors to determine whether a loan can be sold into the secondary market. An automated underwriting system (AUS) ca
Desktop Underwriter�
Desktop Underwriter� (DU) is the automated underwriting system that Fannie Mae has developed to assist lenders in making informed credit decisions on conventional, conforming, and FHA/VA loans. Contrary to popular belief, DU does not approve loans. DU pro
Loan Prospector�
Loan Prospector� (LP) is a risk assessment tool that gives lenders access to Freddie Mac's credit and pricing terms. Loan Prospector� uses statistical models based on traditional underwriting factors such as a person's capacity to repay a loan, a person's
MyCommunityMortgage� Loan
The MyCommunityMortgage� (MCM) loan is a conventional, community lending mortgage that offers underwriting flexibilities to qualified borrowers who meet specific income criteria or properties that meet geographic location eligibility criteria under Fannie
FannieNeighbors�
FannieNeighbors� is a nationwide, neighborhood-based mortgage option designed to increase homeownership and revitalization in census tracts designated as underserved by the U.S. Department of Housing and Urban Development (HUD). The FannieNeighbors option
Community Seconds� Loan
Under the Community Seconds� loan program, a borrower can obtain a secured second loan that typically is funded by a federal, state, or local government agency, an employer, or a nonprofit organization. To qualify for this loan, borrowers must earn no mor
Energy Improvement Feature
Fannie Mae has long supported financing options for energy-efficient home improvements. The energy improvement feature (EI feature) can provide sustainable funding for improvements to lower homeowner costs through energy efficiency. The EI feature can be
Affordable Merit Rate� Mortgage
Freddie Mac's Affordable Merit Rate� Mortgage offers borrowers who are credit challenged an initial interest rate that is closer to conventional rates. The program gives borrowers the opportunity to reduce their interest rate at no cost. If the borrowers
Home Possible� Mortgage
The Home Possible� Mortgage targets first-time homebuyers, move-up borrowers, retirees, families in underserved areas, new immigrants, and very low and low-to-moderate-income borrowers. This product features higher loan-to-value ratios, higher debt-paymen
Adjustable-Rate Mortgages
Freddie Mac's adjustable-rate mortgages (ARMs) help borrowers maximize their home buying power with lower interest rates. ARMs offer flexibility for borrowers who relocate frequently or expect their income to increase within the next couple of years. Borr
Investment Property Mortgages
Freddie Mac's investment property mortgages offer a variety of mortgage options�fixed-rate mortgages, most ARMs, 5- and 7-year balloon/reset mortgages, and A-minus Mortgages. The loan-to-value ratio depends on the mortgage option chosen and the borrower m
Non-Conforming Loans
A non-conforming loan is a loan that does not meet the Fannie Mae or Freddie Mac lending guidelines. This can be due to the type of property being financed or because the borrower's income is difficult to verify. Loans that exceed the maximum loan amount
Jumbo Loans
A jumbo loan exceeds the maximum conforming loan limit set by Fannie Mae and Freddie Mac. Because jumbo loans are bought and sold on a much smaller scale, these loans usually carry a higher interest rate and have additional underwriting requirements.
Subprime Loans
Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called subprime loans or "B" paper and "C" paper loans as opposed to "A" paper conforming loans. The purpose of "B" and "C" paper loans is to offer financing to appl
Fees that May be Subject to Abuse
Processing fee: The lender charges this fee for processing the loan. It is commonly charged in prime loans but may be excessive in subprime financing.
Loan origination fee: The origination fee is the basic charge for executing the loan and, for a prime lo
Prepayment Penalties
Many conventional non-conforming loans carry prepayment penalties. A typical prepayment penalty is equal to 6 months' interest on any prepayment that is greater than 20% of the loan balance. The prepayment penalty equals approximately 3% to 4% of the loan
Packing
Packing is the practice of adding credit insurance or other extras to increase the lender's profit on a loan. Lenders can require the purchase of credit insurance provided the premiums are calculated and paid on a monthly basis. A lender may not finance a
Typical Subprime Loans
Examples of "B" paper loans are the 2/28 ARM and 3/27 ARM. These ARMs have a fixed interest rate for the first 2 or 3 years of the loan. After that, the interest rate can change yearly according to the index plus the margin (subject to any caps). "B" pape
Exploding ARM
The exploding ARM is a notorious home loan product offered in the subprime industry. This adjustable-rate mortgage loan product features a low introductory teaser rate for which the borrower qualifies even with high debt-to-income ratios. When these rates
Predatory Lending
Predatory lending is the abusive practice of extending credit with the intent to deceive and take advantage of the borrower. Subprime borrowers pay higher rates and fees that make them more susceptible to predatory lending practices that can strip them of
Equity stripping
Equity stripping is a predatory scheme in which unscrupulous investors take advantage of homeowners who are in financial trouble. Equity stripping occurs when these investors prey on people who are often uninformed and in need of help. In this scheme, the
Junk Fee
Lenders charge higher fees on subprime loans due to their higher risk. Origination fees as high as 7% and various junk fees are common to subprime loans. A junk fee is a questionable fee charged in closing costs that may not bear any significant relations
Lenders charge higher fees on subprime loans due to their higher risk. A mortgage broker is paid a(n) __________ by lenders to deliver high interest rate loans.
A) junk fee
B) warehouse fee
C) endorsement fee
D) yield-spread premium
D) Yield-spread premiums are points paid by lenders to mortgage brokers for delivering high interest rate loans.
Federal Housing Administration
The Federal Housing Administration (FHA) is a federal government agency that insures private home loans for financing homes and/or home repairs. Created by Congress in 1934, the FHA became part of the Department of Housing and Urban Development (HUD) in 1
Mutual Mortgage Insurance
The FHA does not make loans. It insures loans to protect the lenders who make the loans. On loans with less than a 20% down payment, the lender is protected in case of foreclosure by mutual mortgage insurance (MMI). The borrower pays the mutual mortgage i
Upfront mortgage insurance premium (UFMIP) - FHA
Effective April 9, 2012, the FHA charges an upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount. The MIP must be either paid in cash at closing or financed in the mortgage amount. If financed, the UFMIP is added to the base loan am
Annual Insurance Premium (FHA)
In addition to the UFMIP, the FHA collects an annual insurance premium, on certain mortgages, which the borrower usually pays monthly. The percentage amount of the annual premium is based on the LTV and the term of the mortgage.
Currently, on a less than
MIP Cancellation Policy After April 1, 2013
Effective April 1, 2013, the FHA will remove annual MIP after 11 years provided that a homeowners' beginning LTV was 90% or less. For everyone else, including those making a 3.5 percent FHA down payment, the agency will assess MIP fees for so long as the
Minimum Property and Construction Standards
The FHA developed minimum property standards (MPS) and standards for new construction to reduce their mortgage risk and to improve housing standards and conditions. The MPS assured that the housing used as collateral for FHA-insured mortgages met minimum
FHA Home Inspection Notice
Requirement for FHA-approved lenders:
Each mortgagee approved for participation in the mortgage insurance programs under title II of the National Housing Act [12 U.S.C. 1707 et seq.] shall provide prospective homebuyers, at first contact, whether upon pre
Benefits of FHA-Insured Loans
FHA-insured loans allow low to moderate-income people to buy a home with lower initial costs. FHA-insured loans feature low down payments, competitive interest rates, easy qualifying requirements, and low closing costs. In addition, FHA loans are assumabl
FHA Loan Limits
The FHA sets the maximum loan amounts. The loan limits are determined by the type of property�one-unit, two-unit, three-unit, and four-unit properties. The FHA national loan limit "floor" is $271,050, which is 65% of the national conforming loan limit (cu
Property Appraisal- FHA
The appraisal is a critical component of an FHA mortgage. The FHA requires an appraisal of the property, which is used to determine the market value and acceptability of the property for FHA mortgage insurance purposes. The loan amount that is approved fo
FHA Repair Requirements
The FHA tries to make sure that the home is in a safe, sound, and sanitary condition. For that reason, the FHA appraiser is expected to require repair or replacement of anything that may affect the safe, sound, and sanitary habitation of the house. If rep
Standardized Appraisal Reporting Forms
FHA-approved appraisers use the standardized Fannie Mae appraisal reporting forms. The appraisal reporting form used depends on the type of property that is being appraised.
Uniform Residential Appraisal Report (Form 1004). This report form is designed to
FHA Requirements
A borrower does not apply to the FHA for a home loan. Instead, the borrower applies for an FHA-insured loan through an approved lender, who processes the application and submits it for FHA approval.
Only an approved FHA lender can originate an FHA loan. L
Property Eligibility
The property must be the borrower's principal residence and located in the United States. The following property types are eligible for the FHA program.
Types of Eligible Property:
1-4 family owner-occupied residences
Row houses
Multiplex and individual c
FHA Underwriting Guidelines
FHA guidelines are designed to promote homeownership. Additionally, helping people finance a home that is within their means promotes stability. When followed properly, lending guidelines help people purchase and keep their homes.
Basic Guidelines for an
FHA Income Requirement
The FHA uses gross income when qualifying a borrower for a loan. Income includes salary, overtime, commissions, dividends, and any other source of income if the borrower can show a stable income for a minimum of 2 years.
The FHA does not require borrowers
FHA Employment Requirement
FHA underwriting guidelines do not impose a minimum length of time a borrower must have held a position of employment to be eligible. Typically, the lender must verify the borrower's employment for the most recent 2 full years. A borrower with a 25% or gr
FHA Credit History Requirement
Unlike Fannie Mae/Freddie Mac loans, FHA underwriting looks at the stability of income and the borrower's ability to make timely payments. An important aspect of FHA underwriting is that FHA loans are more flexible with credit scores. For example, to qual
Debt-to-Income Ratios
As with conventional loans, FHA lenders look at the borrower's debt-to-income (DTI) ratios to determine the maximum loan amount. The FHA uses a 31% front ratio and a 43% back ratio, written 31/43. A more conservative back ratio is 41%, but FHA home loan g
FHA 203(b) Residential Loan
The basic FHA loan program is the FHA 203(b) Loan that offers financing on the purchase or construction of owner-occupied residences of one-to-four units. This program offers 30-year, fixed-rate, fully amortized loans with minimum upfront cash requirement
FHA 251 Adjustable-Rate Mortgage
The FHA adjustable-rate mortgage provides a viable alternative to the Fannie Mae/Freddie Mac ARMs. The FHA administers a number of programs, based on FHA Section 203(b) loans, with special loan features. One of these programs, Section 251, insures ARMs. T
FHA 245(a) Graduated Payment Mortgage
A graduated payment mortgage (GPM) loan has a monthly payment that starts low and increases gradually at a specific rate. Payments for the initial years only cover part of the interest due. The unpaid interest amount is added to the principal balance. Aft
FHA 255 Home Equity Conversion Mortgage
Reverse mortgages are becoming popular in America. They can supplement retirement income and give older Americans greater financial security. A reverse mortgage is a loan that enables elderly homeowners to borrow against the equity in their homes and rece
Payment Options of a Reverse Mortgage
Lump sum payment
Monthly payment for a fixed term or for as long as borrower lives in the home
Line of credit
The borrower is not required to make payments as long as he or she lives in the home. The borrower is not required to repay the loan until a spec
FHA 203(k) Rehabilitation Loan
A rehabilitation loan is a great option for buyers who are planning to improve their property immediately upon purchase. This home loan provides the funds to purchase a residential property and to complete an improvement project all in one loan, one appli
Title 1 Home Improvement Loan
Title 1 loans on single-family homes may be used for alterations, repairs, and for site improvements. The loan is available for single-family homes, manufactured homes, and multifamily structures. Title 1 loans may be used in connection with a 203(k) Reha
Energy Efficient Mortgage
The Energy Efficient Mortgages Program (EEM) helps homebuyers or homeowners save money on utility bills by enabling them to finance the cost for adding energy-efficient features to new or existing housing. The program provides mortgage insurance for the p
Department of Veterans Affairs
The United States Department of Veterans Affairs (VA) was created in 1989 to replace its predecessor, the Veterans Administration, which was established in 1930. It is a government-run military veteran benefit system with the responsibility of administeri
Advantages of VA-Guaranteed Loans
No down payment (in most cases)
Lenient qualifications
Reasonable loan charges
No PMI or MMI
VA minimum property requirements. All new houses, regardless of when appraised, are covered by either a 1-year builder's warranty or a 10-year insured protection
Reasonable and Customary Closing Charges (VA standards)
Appraisal and inspections
Prepaid items
Credit report
Recording fees
Flood zone determination
Survey
Hazard insurance
Title examination and insurance
Funding Fee (VA Loan)
Although the VA requires that veterans only pay reasonable charges for the loan, law requires the VA funding fee. Veterans who obtain VA home loans pay the funding fee. This reduces the cost of the program to taxpayers. For loans made between November 22,
Items That Cannot be Charged to the Veteran (VA Loan)
Amortization schedules
Photographs
Attorney services other than title
Postage/mailing charges
Document preparation fees
Preparing loan papers
Escrow charges
Conveyance fees
Fees charged by brokers
Stationery
Finders or other third parties
Tax service fees
Entitlement
The entitlement is the maximum guaranty that the VA will provide for the veteran's home loan. With the current maximum guaranty, a veteran who has not previously used the benefit may be able to obtain a maximum VA loan with no down payment depending on th
Certificate of Reasonable Value (CRV)
The lender orders an appraisal using the Request for Determination of Reasonable Value form. The appraisal for VA loans is known as a Certificate of Reasonable Value (CRV) and must be issued by a certified VA appraiser. A loan cannot exceed the value esta
Guaranty Amounts (VA Loan)
The VA has limits for conforming loans and jumbo loans as described below.
Loans for $417,000 or Less:
The guaranty amount for conforming loans when the original principal loan amount is $417,000 or less is shown in the following chart.
Loan Amount: $56,2
VA Loans for More Than $417,000
Some lenders offer VA loans for more than $417,000. These are VA jumbo loans. Veterans pay a 25% down payment on the amount above the $417,000.
Example: Veteran Victor wants to use a VA loan for a home that costs $527,000. There is no down payment on the
Automatic authority
Automatic authority is the authority of a lender to close VA-guaranteed loans without the prior approval of the VA. VA-approved Lender Appraisal Processing Program (LAPP) lenders can process loans faster than other lenders. LAPP lenders do not need to sen
Eligibility
Eligibility is the veteran's right to VA home loan benefits under the law and based on military service. However, an eligible veteran still must meet credit and income standards in order to qualify for a VA-guaranteed loan.
Certificate of Eligibility (COE)
Certificate of Eligibility (COE), which is a document issued by the VA that provides evidence of an applicant's eligibility to obtain a VA loan. The applicant submits VA Form 26-1880 (Request for a Certificate of Eligibility) along with proof of service (
Qualifying Property Types for VA Guaranty
1-4 family owner-occupied residences
Condominium unit in a VA-approved housing development
Manufactured home and lot
Lots on which the veteran plans to place a manufactured home that he or she already owns and occupies
Purchase of land on which the vetera
Minimum Property Requirements
The VA wants to make sure the home being purchased by the veteran is suitable and sanitary for living. In existing and new construction, the VA has minimum property requirements to determine the eligibility of the property. Minimum property requirements (
Residual income
Residual income is the amount of net income remaining after deducting debts, obligations, and monthly shelter expenses that is used to cover family living expenses, such as food, health care, clothing, and gasoline. The residual income method uses the vet
Debt-to-Income Ratio
The VA uses one debt-to-income ratio to qualify borrowers. The qualifying ratio is 41% and is calculated by dividing the monthly housing expense plus long-term debt by the gross monthly income. A ratio in excess of 41% requires scrutiny and compensating f
Traditional 30-year Fixed-Rate Loan
With a fixed-rate VA-guaranteed loan, a qualified veteran can purchase a home with no down payment depending on the appraised value of the property. The seller may give seller concessions of up to 4% of the reasonable value of the home. That 4% does not i
VA Adjustable-Rate Mortgage
The VA will guarantee an adjustable-rate mortgage. The VA offers various types of ARM products that are competitive with Fannie Mae and Freddie Mac products. The veteran must qualify at the initial note rate.
VA Graduated Payment Mortgage
A VA graduated payment mortgage (GPM) may only be used to acquire a single-family dwelling unit (not a manufactured home) and the loan can include funds for energy efficiency improvements. Since the principal balance increases during the initial years of
Construction/Permanent Home Loan
The VA will guarantee a construction/permanent home loan, which is a loan to finance the construction and/or purchase of a residence. The loan is closed prior to the start of construction, at which time proceeds are disbursed to cover the cost of the land
Interest Rate Reduction Refinancing Loan
A veteran with an existing VA loan may use an Interest Rate Reduction Refinancing Loan (IRRRL), which may also be referred to as a streamlined loan, to lower his or her interest rate. Except when refinancing an existing VA-guaranteed ARM to a fixed-rate,
Manufactured Home Loan
Private lenders such as finance companies make VA-guaranteed manufactured home loans. The VA will guarantee 40% of the loan amount or the veteran's available entitlement, up to a maximum amount of $20,000.
Seller Financing
A common source for alternative financing is the seller. If the seller is going to be the lender, he or she agrees to provide the funds to the buyer for the amount required to close a real estate transaction. The funds are usually in the form of a loan th
Advantages of Seller Financing
Offers creative financing for buyers with a less than stellar credit rating, no down payment, or not enough cash to cover closing costs
Buyers can avoid private mortgage insurance (PMI) associated with loan-to-value ratios above 80%
Advertising the availa
Carryback Financing
Carryback financing is the extension of credit by a seller who takes back a note for a portion or the entire purchase price of a property. A seller can choose to finance a significant portion of the real estate purchase by carrying back a first or second
Discounting Trust Deeds
If a trust deed held by the seller is sold to an outside party, usually a mortgage broker, the note and trust deed are discounted. Discounting a note is selling a note for less than the face amount or the current balance. Discounting a note increases the
Contract for Deed
This is a contract in which the seller (vendor) becomes the lender to the buyer (vendee). The vendor pays off the original financing while receiving payments from the vendee on the contract of sale. The vendor and vendee's relationship is like that of a b
Wraparound Loan
A wraparound loan is another type of seller financing. It is essentially a purchase money loan that includes both the unpaid principal balance of the first loan and a new second loan against the property. This type of financing is commonly used when a sel
Grant Deed
A WRAP is recorded with a grant deed conveying full title to the buyer. A grant deed is a type of deed in which the grantor warrants that he or she has not previously conveyed the property being granted, has not encumbered the property except as disclosed
Secondary Financing
Borrowers obtain secondary financing to provide additional funds for the purchase of property or to take cash out of property. Second lien loans are available for these purposes. Second lien loans are subordinate (inferior) to the mortgage or deed of trus
Private Lender Hard-Money Loan
As previously defined, a hard money loan is any loan used to take cash out of a property. Hard money loans are typically offered by private investors who are seeking to earn a higher return on their investment through the interest rates on the loan. These
Swing Loan
A swing loan or bridge loan is a temporary, short-term, hard money loan made on a borrower's equity in his or her present home. It is used when the borrower has purchased another property and the buyer needs cash to close the sale on the new home. The new
Home Equity Loan
A home equity loan (HEL) is a hard money loan made against the equity in the borrower's home. The traditional home equity loan (HEL) is a one-time loan for a lump sum and is typically at a fixed-interest rate. The traditional home equity loan is repaid in
Home Equity Line of Credit Loan
A home equity line of credit (HELOC) is a typical open-end loan. An open-end loan is expandable by increments up to a maximum dollar amount. It is a line of credit that is secured by the borrower's home. The HELOC allows the homeowner to draw out cash up
Credit Limit
With a home equity line, a borrower is approved for a specific credit limit, which is the maximum amount he or she can borrow at any one time. Many lenders set the credit limit on a home equity line by taking a percentage (75%-90%) of the appraised value
Interest Rate Charges and Plan Features
Home equity plans typically have variable interest rates rather than fixed rates. A variable-rate HELOC is based on a published index, such as the prime rate or a U.S. Treasury bill rate. Interest rate changes coincide with the fluctuations in the chosen
Traditional Second Lien Loan vs. HELOC
A traditional second lien loan provides more predictable loan payments than a HELOC. A traditional second offers a fixed amount of money that is repayable over a fixed period. Usually, the payment schedule calls for equal payments that pay off the entire
Manufactured Housing
A mobilehome is a factory-built home manufactured prior to June 15, 1976, constructed on a chassis and wheels, and designed for permanent or semi-permanent attachment to land. In the past, mobilehomes were known as trailers and were used mainly as second,
Changing a Mobilehome from Personal to Real Property
Permanent foundation
Certificate of occupancy
Building permit (where required)
Recorded document stating that the mobilehome has been placed on a foundation
Features and Requirements of FHA Manufactured Home Loans
Maximum loan amounts: $69,678 for the home or $92,904 for the home and the lot
Maximum loan terms:20 years for the home or 25 years for the home and the lot
5% minimum down payment
Adequate income for repaying the loan and other expenses
Primary residence
Co-ops
A cooperative or co-op is ownership of an apartment unit in which the owner has purchased shares in the corporation that holds title to the entire building. Members of a cooperative do not own their unit directly since the corporation officially owns or l
Share Loan (Cooperative)
For prospective purchasers of a cooperative, there is financing available in the form of a share loan. A share loan is a type of loan that is made to finance the purchase of shares in a corporation. Share loans are available from commercial banks that off
Timeshares
A timeshare is a real estate development in which a buyer can purchase the exclusive right to occupy a unit for a specified period of time each year. The time is usually in 1-week intervals and can be a fixed week or a floating week. In addition to the on
Unimproved Land
Real estate buyers may express interest in purchasing unimproved land or raw land for building custom homes, investment purposes, or for other reasons. Financing options for raw land have their own unique characteristics. In general, the loans for raw lan
Rural Properties
Rural property is property located in the outlying region of an urban center. Rural property includes forests, national parks, farmland, lakeshores, mountains, riverbanks, and rural residential locations. Obtaining financing for rural property can be a ch
Direct Loan Program
Direct loans are made and serviced by FSA using government money. FSA has the responsibility of providing credit counseling and supervision to its direct borrowers by helping applicants evaluate the adequacy of their real estate and facilities, machinery
Guaranteed Loan Program
Guaranteed loans are made and serviced by commercial lenders, such as banks, the Farm Credit System, or credit unions. FSA guarantees the lender's loan against loss, up to 95%. FSA has the responsibility of approving all eligible loan guarantees and provi
Land Contract Guarantee Program
Land contract guarantees are available to the owner of a farm or ranch who wishes to sell real estate through a land contract to a beginning or socially disadvantaged farmer or rancher.
Mixed-Use Properties
A mixed-use property is a property that combines residential living units and commercial space within the same building structure. Mixed-use properties are suitable for business owners who wish to have their residence located in the same building. In many
Construction Financing
Construction financing is comprised of two phases�the construction phase and completion. During the construction phase, an interim loan is necessary to fund the costs of the construction. Upon completion of the construction, the borrower must obtain perma
Subordination clause
A construction loan may contain a subordination clause. A subordination clause is a statement in a financial instrument that is used to change its priority. The priority of a deed of trust is fixed by the date it is recorded�the earlier the date, the high
Short-term loan
An interim loan is a short-term loan that finances construction costs such as the building of a new home. The lender advances funds to the borrower as needed while construction progresses. Lenders often include a contingency that states that after the pro
Long-term loan
After the construction is complete, a more permanent, long-term takeout loan is necessary. Takeout loans can be used to pay off any interim construction loans taken out prior to the construction project. Like an interim loan, the lender and borrower agree
Blanket Loan
A blanket loan is a loan secured by several properties. The security instrument used can be a blanket deed of trust or a blanket mortgage. It is often used to secure construction financing. A blanket loan offers a convenient way to finance multiple proper
Pledged Account Mortgage Loan
A pledged account mortgage (PAM) loan is a type of loan in which an amount of cash is set aside in an account to be drawn upon during the initial years of the loan, as a supplement to periodic mortgage payments. With this option, the borrower must keep an
Rollover Mortgage Loan
A rollover mortgage (ROM) or renegotiable rate mortgage is a loan in which the interest rate and monthly payment are renegotiated after a fixed period. With a rollover mortgage, the balance owed on the loan is refinanced at prevailing market interest rate
Lender Participation Loans
Under a shared appreciation mortgage (SAM) loan, the lender and the borrower agree to share a certain percentage of the appreciation in the market value of the property that is security for the loan. In return for the shared equity, the borrower is offere
Unsecured Loan
Consumers who need a small loan to repair a car, buy a new appliance, or take a trip choose a closed-end, unsecured loan instead of using their credit cards or getting a home equity loan. An unsecured loan is one in which the lender receives a promissory
When a seller carries the paper on the sale of his or her home, it is known as a:
a) wraparound mortgage.
b) contract for deed.
c) discount.
d) purchase-money loan
D: When a seller carries the paper on the sale of his or her home, it is also called a purchase-money loan, which is similar to the loan made by an outside lender
Four Steps in Obtaining a Real Estate Loan
Completing the Application
Processing
Underwriting (risk analysis)
Closing
Fannie Mae/Freddie Mac Uniform Residential Loan Application (Form 1003)
Today, a standardized form called the Fannie Mae/Freddie Mac Uniform Residential Loan Application (Form 1003) is used for most residential home loans. This form is called either the Freddie Mac Form 65 or Fannie Mae Form 1003, which is its more common nam
Loan package
The first thing a borrower does when applying for a loan is to complete the application and other documents in the loan package. A loan package is the file of documents the lender needs to determine whether to fund a loan. The documents in the loan packag
Collateral
Collateral is something of value given as security for a debt. Real property is the primary collateral for a real estate loan and acts as the security for repayment of the loan in case the borrower defaults. The second section of the application describes
Preparing the Loan Package
The first step in the loan process is to gather information and prepare the loan package.
The loan processor orders an appraisal of the property and a credit report on the borrower. The processor also sends out the necessary verification letters to confir
Processor's Final Checklist
Residential Loan Application�Fannie Mae/Freddie Mac form or other approved equivalent
Typed copy preferred
Completed in full, including borrower's signature
Occupancy status indicated
Application matches verification documents
Residential Mortgage Credit
Performing loan
A performing loan is a loan on which the agreed-upon payments of principal and interest are current. Accurate risk assessment is basic and vital to buying affordable housing. Mistakes in risk assessment that lead to foreclosure can be devastating to borro
What Lenders Look For
Lenders look for the borrower's ability and willingness to repay debt. They speak of the three Cs of credit: capacity, character, and collateral.
Underwriting
Upon receiving the loan package, the underwriter analyzes the risk factors associated with the borrower and the property before making the loan. Underwriting is the practice of analyzing the degree of risk involved in a real estate loan. The underwriter d
Underwriting Guidelines
Guidelines are a set of general principles or instructions used to direct an action. Underwriting guidelines are principles lenders use to evaluate the risk of making real estate loans. The guidelines are just that�guidelines. They are flexible and vary a
Loan-to-Value Ratios
To calculate the payment, the lender begins by asking for the loan amount. The maximum loan amount is determined by the value of the property and the borrower's personal financial condition. To estimate the value of the property, the lender asks a real es
Down payment
The down payment is the initial equity the borrower has in the property.
Deficiency
The risk to the lender is the risk that the borrower will default on loan payments, thereby causing the property to go into foreclosure. In that event, the lender either receives the property at the foreclosure sale or receives a deficient amount at the s
The Ability-to-Repay Rule
The Ability-to-Repay Rule, Regulation Z
1026.43, requires that a lender make a "reasonable and good faith determination at or before consummation that the borrower will have a reasonable ability to repay the loan according to its terms." [�1026.43(c)(1)].
Eight Underwriting Factors Used to Determine a Borrower's ATR
When making the ability-to-repay determination, lenders must use third-party records to verify all information on which they rely, and consider at least eight ATR underwriting factors to use as the basis for determining a borrower's ability to repay the l
Fully indexed rate
A lender must determine a borrower's ability to make the monthly payment based on the "full" payment�not based on a teaser rate. The payment must be considered on a monthly basis, and be at the fully adjusted indexed rate or the introductory rate, whichev
Mortgage-related obligations
Mortgage-related obligations are property taxes and premiums (mortgage insurance, credit life, accident, health, or hazard insurance) that are required by the lender and certain other costs related to the property such as homeowners association fees or gr
Verification Using Third-Party Records
Lenders must verify the borrower's information by using reasonably reliable third-party records. A third-party record is a document or other record prepared or reviewed by an appropriate person other than the borrower, the lender, or the mortgage broker (
Qualified Mortgages
A qualified mortgage is a mortgage that meets certain requirements specified under the Dodd-Frank Act and clarified by the Bureau.
If a mortgage satisfies the requirements of a qualified mortgage, and is NOT a higher-priced mortgage, then the lender is de
Standard Qualified Mortgages
The CFPB defines a Qualified Mortgage as a credit transaction secured by a dwelling:
1. that has regular substantially equal periodic payments. The mortgage cannot have negative amortization, interest only payments, or balloon payments. If the loan does n
Temporary Alternative Definition of Qualified Mortgages
Because some borrowers can afford loans with a higher debt-to-income ratio of 43% based on their particular circumstances, the Bureau established a second, temporary class of qualified mortgages called alternative qualified mortgages. In addition, the tem
Sales comparison approach of appraisal
The sales comparison approach, or market approach, is the one most easily and commonly used by real estate associates. The sales approach depends on recent sales and listings of similar properties in the area that the appraiser evaluates to form an opinio
Cost approach of appraisal
The cost approach is used to look at the value of the appraised parcel as the combination of two elements. These elements are: (1) the value of the land as if vacant and (2) the cost to rebuild the appraised building as new on the date of valuation, less
Income approach of appraisal
The income approach is used to estimate the present worth of future benefits from ownership of a property. The value of the property is based on its capacity to continue producing an income. This method is used to estimate the value of income-producing pr
Appraisal Report
Appraisal Report must be used when the intended users include parties other than the client, the Appraisal Report is the most commonly used report option. The Uniform Residential Appraisal Report (URAR) is an example of an Appraisal Report. It contains ma
Restricted-Appraisal Report
The Restricted Appraisal Report is the briefest presentation of an appraisal and contains the least detail. This type of report is restricted- because there can only be one intended user of the report.
A credit report includes data such as personal information, credit information, public record information, and:
a) moral character.
b) inquiries.
c) ancestry.
d) income.
B: A credit report includes four categories of data that have been collected and reported to the credit bureaus. They are (1) personal information, (2) credit information, (3) public record information, and (4) inquiries.
Promissory Note
A promissory note (note) is a written legal contract that obligates the borrower to repay a loan. Even a note that is handwritten on a restaurant napkin and signed by both parties may be a binding promissory note. However, most lenders use a Fannie Mae/Fr
Borrower's Promise to Pay
Next, the note should include the words "promise to pay" and the amount of the loan plus interest. In a note, the borrower receives the loan and the lender receives the borrower's promise to repay the loan as specified in the note. The note should state c
Interest
Most lenders charge interest. Usually it is shown as an annual percentage. However, some notes show exactly how much interest is to be charged on a weekly, monthly, or yearly basis. If no interest will be charged on the loan, the note should state that cl
Payments
The note must show the date payments begin, when they are due, and when they stop. If a loan is to be repaid all in one lump sum, only the due date is necessary. There are several types of repayment plans, each with a different kind of obligation made cle
Borrower's Right to Prepay
The note usually includes a prepayment clause. A prepayment clause, which is also called an or more clause, allows a borrower to pay off a loan early or make higher payments without paying a prepayment penalty. The prepayment is applied first to any accru
Loan Charges
The loan charges segment of the note explains the actions the noteholder must take if a law that sets a limit on the loan charges applies to the loan. If this is the case, the note states that the noteholder will reduce the charge as much as is necessary
Borrower's Failure to Pay as Required
The note includes a section that details the steps the noteholder will take if the borrower does not make a complete payment within an allotted number of days after it is due. This includes late charges and steps the noteholder will take if the borrower d
Giving of Notices
The note states that unless a law requires the noteholder to give notices to the borrower using a different method, the noteholder must deliver notices to the borrower by personal delivery or first class mail. All notices must be delivered or mailed to th
Joint and Several Liability
Each borrower who signs the promissory note agrees to be jointly and severally liable. Joint and several liability means that each debtor (borrower) is responsible for the entire amount of the loan.
Waivers
The waiver segment of the note mentions any rights the noteholder and borrower are waiving. This may include presentment and notice of dishonor. The right of presentment is the borrower's right to present the noteholder with a demand for payment of funds.
Reference to Security
A reference is made in the note that it is secured by a security instrument (mortgage, deed of trust, or security deed) upon real property. The security instrument protects the lender from possible loss. The lender formalizes the reference to the security
Fixed-Rate Balloon Notes
Fixed-rate balloon notes are nearly identical to the previous fixed-rate note except that lenders disclose the risk inherent in a balloon note.
A balloon note has words similar to the following at the beginning of the note.
THIS LOAN IS PAYABLE IN FULL AT
Interest Rate and Monthly Payment Changes
This section of the note details the date on which the initial change to the interest rate may occur and how often it will change after this initial change. The change date is the date on which the interest rate changes.
The note reminds the borrower that
Negotiability of a Promissory Note
A note is considered personal property and is a negotiable instrument. A negotiable instrument is a written unconditional promise or order to pay a certain sum of money on demand or at a definite future date, payable either to order or to bearer and signe
Required Elements to Create a Negotiable Promissory Note
Unconditional promise or order to pay a certain amount of money
Payable on demand or at a definite time
Payable to order or bearer
Signed by the maker (borrower)
Uniform Commercial Code
The Uniform Commercial Code (UCC) governs negotiable instruments and is designed to give uniformity to commercial transactions across all 50 states. As we have seen, notes are negotiable instruments that are easily transferable from one person to another.
Protections for a Holder in Due Course
The favored position that the holder in due course enjoys is a greater claim to note payments than the original holder. If a court action is necessary to enforce payment on the note, the maker cannot use any of the following defenses to refuse payment to
Defenses Not Allowed by the Maker of a Note
The maker cannot claim non-receipt of what was promised by the payee in exchange for the note.
The maker cannot claim the debt has already been paid. Even if it was paid, the original maker may still be required to pay a holder in due course unless there
Defenses Allowed Against Anyone
Forgery, if the maker really did not sign the note
Secret, material changes in the note
Incapacity, if the maker is a minor or an incompetent
Illegal object, if the note is connected to an illegal act or if the interest rate is usurious (higher than allow
Straight Note
This note calls for interest-only payments during the term of the note. The principal payment is due in one lump sum upon maturity. This type of note is not commonly used by institutional lenders but may be used between a buyer and seller or other private
Installment Note
This note requires periodic payments on the principal with payments of interest made separately.
Installment Note with Periodic Payments of Fixed Amounts
This fully amortized note consists of level, periodic payments of both interest and principal that pay off the debt completely at maturity.
Adjustable-Rate Note
This note has an interest rate that adjusts with a movable economic index.
Demand Note
This note does not become due until the noteholder makes a demand for its payment.
Fully Amortized Note
This note is fully repaid at maturity by periodic reduction of the principal.
Partially Amortized Installment Note
This note includes a repayment schedule that is not sufficient to pay off the loan over its term. This type of note calls for regular, periodic payments of principal and interest for a specified period of time. At maturity, the remaining unpaid principal
The maker of the note is not allowed to use which of the following defenses against a holder in due course?
a) Claim non-receipt of what was promised by the payee in exchange for the note
b) Claim a setoff
c) All of the choices apply
d) Claim the debt has
C: The maker cannot claim non-receipt of what was promised by the payee in exchange for the note. He or she cannot claim the debt has already been paid. The maker cannot use fraud in the original making of the note as a defense. He or she cannot claim a s
In a promissory note, the maker is the __________ and the noteholder is the __________. Points: 0
a) lender / trustor
b) trustor / subsequent owner of the note
c) borrower / subsequent owner of the note
d) borrower / lender
C: The parties involved are the maker (borrower) and the holder. The maker is the borrower who executes a note and becomes primarily liable for payment to the lender. The lender is the party to whom a note is made payable. A subsequent owner of the note i
Mortgage
A mortgage is a security instrument that secures the payment of a promissory note. A mortgage is a two-party security instrument and is, in fact, a contract for a loan. The two parties are the mortgagor (borrower) and mortgagee (lender). This loan contrac
Lien theory state
In a lien theory state, title to real property is vested in the borrower. The borrower gives only a lien right to the lender during the term of the loan.
Title theory state
In a title theory state, title to real property is vested in the lender. In a title theory state, the mortgage states that title reverts to the borrower once the loan is paid. Whether the state is a lien theory or title theory state, possession of the pro
Modified lien theory state
A modified lien theory state is one in which the mortgage is a lien unless the borrower defaults. In this case, the title is automatically transferred to the lender. In any case, the borrower enjoys possession of the property during the full term of the m
Satisfaction of mortgage
A defeasance clause is included in the mortgage. A defeasance clause cancels the mortgage upon repayment of the debt in full. The title to the property transfers back to the mortgagor and the lender's interest in the property terminates. Satisfaction of a
Remedy for Default
The common remedy for default of a mortgage is judicial foreclosure (court action). If the mortgage contains a power of sale clause, a non-judicial foreclosure is possible. The power of sale clause is a clause in a mortgage or deed of trust that gives the
Statutory Redemption
Some mortgages allow statutory redemption, which is the statutory right of a mortgagor to recover the property AFTER a foreclosure sale.
Statute of Limitations
In the case of nonpayment on a mortgage debt, creditors must be aware of how the statute of limitations affects their ability to bring legal action. The statute of limitations limits the period of time during which legal action may be taken on a certain i
Deed of Trust
A deed of trust (trust deed) is a security instrument that secures a loan on real property. When a promissory note is secured by a deed of trust, three parties are involved: the borrower (trustor), the lender (beneficiary), and a neutral third party (trus
Parties in a deed of trust
The parties in a deed of trust are the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee). The beneficiary (lender) holds the note and deed of trust until reconveyance or until the debt is paid in full. In most states, a tit
Title
In the deed of trust, the trustor (borrower) holds equitable title while paying off the loan. Equitable title is the right to obtain absolute ownership to property when legal title is held in another's name. As equitable owner, the borrower has all the us
Reconveyance
Under a deed of trust, when the loan is paid off, the lender (beneficiary) sends the note and deed of trust to the trustee along with a request for reconveyance. The trustee cancels the note, signs a deed of reconveyance, and sends it to the borrower. The
Remedy for Default (deed of trust)
Under a deed of trust, the lender has a choice of two types of foreclosure�trustee's sale or judicial foreclosure. The common remedy for default of a trust deed is a trustee's sale (non-judicial foreclosure). This is because a deed of trust has a power of
Deficiency Judgment
In most cases, when a loan is secured by a deed of trust and the lender forecloses under a power of sale (trustee's sale), no deficiency judgment is available. In states in which deeds of trust are generally used to secure loans, the only security for a b
Statute of Limitations (deed of trust)
The rights of the lender (beneficiary) under a deed of trust do not end when the statute of limitations has run out on the note. The trustee is given both bare legal title and power of sale in the deed of trust. The power of sale in a deed of trust never
Which statement about the lender's right to protect its interest in the property is not true? The lender may:
a) not have the utilities turned on or off.
b) replace or board up doors and windows.
c) protect itself if a condemnation threatens the lender's
C: The lender may protect itself if a condemnation threatens the lender's interest, may make repairs, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations/dangerous conditions, and have the utilities t
The legal arrangement that allows a borrower to remain in possession of a property secured by a loan is called:
a) hypothesis.
b) hypothecation.
c) covenant of seisin.
d) collateral
D: Hypothecation is the legal arrangement that allows a borrower to remain in possession of a property secured by a loan.
In deeds of trust, the only security for a beneficiary is:
a) any personal assets of the borrower.
b) any real assets of the borrower.
c) the collateralized property.
d) all real and personal property of the borrower.
C: In states in which deeds of trust are generally used to secure loans, the only security for a beneficiary is the property itself.
Settlement
Settlement, or closing, is the final meeting of the parties involved in the real estate transaction at which the transaction documents are signed and the deed and money are transferred. The closing process is sometimes called passing papers because, to th
Preparation for closing
In preparation for closing, the closing agent conducts a title search and obtains certificates of estoppel to verify outstanding balances on loans, liens, and encumbrances. The closing agent uses the sales contract, invoices submitted by various third par
Inspection
At the closing, each party reviews the documents that are of interest to his or her side. For instance, the buyer's side examines the long list of documents that the seller's side brings and the lender's representative reviews the documents that assure th
Approval & Exchange
Approval and the exchange of the documents and checks are interwoven. This is because, for legal reasons, certain events need to take place before others. For instance, the buyer must be in possession of the property in order to pledge it for the new mort
Roles of Closing Participants
The people who are present at a closing meeting vary from state to state. Sometimes it even varies from one region of a state to another. The closing agent, seller, buyer, and real estate agents generally attend the real estate closing. Sometimes the titl
Documents Needed for the Closing Meeting
Deed: A warranty deed is the most common deed used for this purpose, but others (such as a grant deed) are also used to transfer ownership.
Survey: A survey shows the property's boundaries, improvements, and any encroachments. The buyer will likely requir
Closing Documents Needed for an Income Property
Current leases
Rent schedules
Lists of current expenditures
Letter to be sent to current tenants to inform them of the upcoming change in ownership
Tasks That Must Be Complete Prior to the Settlement Meeting
Complete any major contingencies that are present in the contract of sale and are the responsibility of the buyer. These might include arranging for new financing or getting approval to assume a loan.
Inform the lending institution of the name of the clos
Marketability of Title
When a home is being purchased, a thorough search of the title must be completed to see if there are any liens, claims of ownership, or other outstanding judgments against the property, such as back taxes.
Buyers, sellers, lenders, and real estate brokers
Abstract of Title
Before reliable histories of properties came into existence, abstractors investigated the status of title to property. They searched available records and pertinent documents and prepared an abstract of title. An abstract of title is a written summary of
Lender's Title Insurance Policy
The lender's policy is designed to benefit the lender. Some lenders require a title company to provide them with a 24-month chain of title in order to see if the property has been subject to flipping. Lenders look at the flipping of properties very closel
Owner's Title Insurance Policy
The owner's title insurance policy is designed to benefit the owner and his or her heirs. The coverage is usually a standard policy but owners can purchase an extended coverage policy at extra cost. The coverage cited in an owner's policy is in force for
Types of Title Insurance Coverage
The American Land Title Association (ALTA) is the national trade association for title insurance companies and title insurance agents. The American Land Title Association (ALTA) forms are used almost universally throughout the nation. The two types of tit
Losses Protected by Standard Title Policies
Matters of record
Off-record hazards such as forgery, impersonation, or failure of a party to be legally competent to make a contract
The possibility that a deed of record was not delivered with intent to convey title
Losses that might arise from the lien
Losses Not Protected by Standard Title Policies
Defects in the title known to the holder to exist at the date of the policy but not previously disclosed to the title insurance company
Easements and liens that are not shown by public records
Rights or claims of persons in physical possession of the land
Extended Coverage Policy
All risks covered by a standard policy are covered by an extended coverage policy. An extended coverage policy also covers other unrecorded hazards such as outstanding mechanics' liens, tax liens, encumbrances, encroachments, unrecorded physical easements
Property Taxes
Property taxes are paid in arrears (at the end of each tax period). Paying in arrears is payment at the end of a period for which payment is due. It is the opposite of paying in advance.
When a property tax is assessed against a property, a property tax l
Immune & Exempt Property
All property within the locality of the taxing authority, whether state or local government, is taxed unless specifically immune or exempt. Immune properties typically include those owned by governments, such as schools, parks, military bases, and governm
Special Assessments
When specific improvements are needed to benefit a certain area�such as underground utilities, sewers, or streets�special assessments are levied to pay for the improvements. Special assessments are taxes used for specific, local purposes. In contrast, pro
Closing Costs
Closing costs are the expenses buyers and sellers normally incur in the transfer of ownership of real property that are over and above the cost of the property. These costs appear on the seller's and buyer's closing statements. The closing statement is an
Prorated Costs
Proration is the division and distribution of expenses and/or income between the buyer and seller of property as of the date of closing. Prorations are typically calculated using the seller's last full day of ownership and the buyer is charged for the clo
Property Tax
Property tax is the money owed to the local or state government for services used by the homeowner. Property taxes are often prorated. If the seller prepaid property taxes, he or she expects to get the unused portion back. This shows up as a credit.
Interest on Loan Assumption
When a buyer assumes an existing loan, the interest is shown on the closing statement as a debit to the seller and a credit to the buyer.
Assumable loans are not very common in today's market. However, it is important to understand how to calculate prorat
Escrow (Impound) Account
An escrow account, which is sometimes referred to as an impound account, is a trust account for funds set aside for future, recurring costs relating to a property, such as payment of property taxes and hazard insurance. Usually the lender determines wheth
Allocated Costs
The list of costs to be allocated can become quite long. Generally, the costs fall into the categories of inspections, required retrofits, and fees. Some items that may be on the list include transfer taxes, recording fees, and hazard and title insurance.
Transfer Taxes
Transfer taxes are paid to state or local governments to transfer the ownership of property from one owner to another. Transfer taxes allow the government to assess property values. Transfer tax may also be known as documentary stamp tax or conveyance tax
Stamp Tax on Deeds
The stamp tax on deeds is required whenever real property is transferred from one owner to another. In order to establish accurate tax assessments, this tax allows governments to secure data about the fair market value of real properties in their jurisdic
Recording Fees
Recording fees are monies paid to government agencies, typically the county, to legally record documents that concern the property. The buyer often pays the recording fees.
Title & Hazard Insurance
Title insurance protects the policyholder from losses due to a problem in the chain of title. Typically, both the owner and the lender take out separate policies. Often, the previous owner pays for a new owner's policy and the buyer pays for the lender's
Credits & Debits
A credit is the reduction or elimination of an asset or expense. A credit is usually recorded on the right side of a column on a closing statement. A debit shows the amount owed.
Typically, the buyer and seller negotiate the allocation of these costs in t
Seller's Statement
The seller's statement is a record of the financial proceeds the sellers receive upon the transaction's closing.
Seller's Credits
Amount of the total consideration or sales price
Any prepaid property taxes
Prepaid monthly property owner's association dues
Buyer's Statement
The buyer's statement is a record of costs and credits incurred for the purchase of the property.
Buyer's Credits
Down payment
Binder deposit (good faith deposit)
Amount of new loan
Assumed loan
Prorated taxes
Prorated rents
Security deposits held by sell
Closing Statements
The closing statement is an accounting of funds made to the sellers and buyers individually. The closing agent must complete closing statements for every real estate transaction. The sellers and buyers are both credited and debited for their agreed-upon s
Estimated Closing Statement
Prior to closing, the closing agent prepares an estimated closing statement for both buyer and seller. An estimated closing statement serves as a preliminary copy of the Closing Disclosure or the HUD-1 Settlement Statement and outlines all credits and deb
Settlement Statements
The HUD-1 Settlement Statement (Uniform Settlement Statement) is a standardized two-page form that serves as the official itemized summary of all settlement charges. This document breaks down the amounts due from the borrower and to the seller into line i
Typical Seller and Buyer Costs
Typically, the seller pays the sales commission, title insurance (owner's policy), title abstract and exam, documentary transfer tax (deed), repairs, and home warranty plan.
The buyer typically pays for title insurance (lender's policy), recording fees, d
Loan Funding Procedures
In order to start the funding process with the mortgage company, proper documentation must be sent to the lender or underwriter before each individual loan is funded.
1. Request for purchase detailing summary of transaction from mortgage company
2. Requir
Endorsement & Flow of Loan Documents
Original signed note is to be sent directly from closing agent back to bank; note is to be endorsed in blank
Original Assignment of Deed of Trust in blank, plus assignment to investor is sent with the note to closing agent
Collection of the Note
Upon receipt of note, a bailee letter is prepared and sent with note to the investor for payment
Loan is booked at the negotiated rate
Payoff Procedures
Funds wired to the closing agent from the investor
Borrower sent payoff information
Payoff calculated from date of closing to date of receipt of wire
Loan for payoff amount credited at the negotiated rate
Appropriate fees deducted from the wire and deposi
Closing the Loan
After all information that is required in the underwriting process is received, processed, and analyzed, and the security for the loan is determined to be sufficient, the decision is made to accept or reject the loan. This decision is made by the person o
Disclosures at Settlement/Closing
The Closing Disclosure or the HUD-1 Settlement clearly show all charges imposed on borrowers and sellers in connection with the settlement of a loan transaction. The Real Estate Settlement Procedures Act (RESPA) gives the borrower the opportunity to reque
Disclosures After Settlement
Loan servicers must deliver an Annual Escrow Statement to borrowers once a year. The Annual Escrow Statement summarizes all escrow account deposits and payments during the servicer's 12-month computation year. It also notifies borrowers of any shortages o
Transfer of Real Estate Loan Servicing
A promissory note is a negotiable instrument that may be bought and sold. The loan servicing may be retained or transferred. The transfer of loan servicing is a process in which the servicing is sold to a third party who will service the loan in the futur
Changes to Terms and Conditions due to Transfer of Servicing
The transfer of servicing should not affect the borrower or the real estate loan adversely. The original terms and conditions of the real estate loan stay the same. The interest rate and duration of the loan do not change on fixed-rate loans. The payment
Notification of Loan Servicing Transfer
The originating lender and subsequent noteholder holding a loan do not have to ask the borrower's permission to transfer the servicing, but they do have to inform the borrower of the transfer. If the loan servicing is going to be sold, the borrower should
Items Included in a Servicing Transfer Statement
Name and address of new servicer
Toll-free telephone number
Contact information for new servicing company
Date and location to which borrower should send next payment
Welcome Letter
The borrower should also receive a welcome letter from the new servicer that outlines the same information. This letter should give the same information that was given in the Servicing Transfer Statement, such as the name of the new institution, a contact
Grace Period- Loan Servicing Transfer
After the transfer, there is a grace period of 60 days. The grace period is a time period provided by the noteholder during which the borrower makes payments without penalty. A borrower cannot be charged a late fee for mistakenly sending a loan payment to
Responsibilities of a Loan Administrator
A loan administrator is an employee of a loan servicing company. He or she performs the day-to-day management of individual loans and services entire loan portfolios while protecting the interests of both the borrower and the investor. In addition, the lo
Escrow Account
An escrow account (impound account) is a fund the lender may require the borrower to establish in order to pay mortgage default insurance, property taxes, and/or hazard insurance as they become due on the property during the year. This account protects th
Late Payments
If a payment is not received when due, a computer-generated reminder notice should be sent. In states where a late charge is allowed, the reminder states that a late charge will be assessed unless the payment is received before the end of the grace period
Default and Foreclosure
If the borrower's delinquency is caused by circumstances beyond his or her control, the loan administrator may need to work out a loan modification plan or foreclosure. Loan servicers must let borrowers know about any loss mitigation options to retain the
Annual Escrow Statement
The loan administrator is required to give the borrower an Annual Escrow Statement that details the activity in the escrow account. This statement shows deposits into the account and the account balance. It also reflects remittances of property taxes and
Loan Insurance Requirements
Noteholders always require evidence of property insurance coverage for building(s) on which a loan is made before they disburse money on the loan. As set out in the loan documents, borrowers must have fire and hazard insurance on the property. If the borr
Homeowners Insurance
Homeowners insurance is property insurance that covers the building or structure, any completed additions, and the possessions inside from serious loss such as that caused by theft or fire. Homeowners insurance is required by all lenders to protect their
Fire, Extended Coverage, & Vandalism Insurance
Basic property insurance can be customized with additional coverage. This coverage insures against direct loss to property caused by fire or lightning, windstorm or hail, explosions, riot or civil commotion, theft, aircraft, vehicles, smoke, vandalism, an
Earthquake Insurance
In states like California, where earthquakes are common, owners of property can obtain earthquake insurance. Earthquake insurance policies cover damage to the structure during an earthquake, but can vary greatly in terms of exclusions and deductibles. Ded
Flood Insurance
Property located in areas that tend to flood should be covered with flood insurance. In fact, federal law requires mortgage lenders to assure that all properties within designated flood prone areas have flood insurance before the lenders provide a mortgag
Insurer Eligibility
The loan administrator determines whether an insurance policy is acceptable and meets the investor's requirements. The insurance carrier must have financial strength and be licensed to transact business in the state where the property is located. Another
Real Estate Taxes
Property taxes must be kept current during the term of the loan. The loan administrator is responsible for making sure that the real estate taxes and other assessments are paid promptly�whether paid out of an established escrow (impound) account or paid d
Loan Assumption and Payoff Procedures
The loan administrator must be notified whenever ownership of the property is transferred. The administrator needs to know if the loan is to be assumed or paid off.
Assumption Request:
When a property is sold, the buyer may want to assume the existing loa
Payoff Request
When the loan administrator receives a request for a payoff demand statement (typically from a settlement or escrow officer), he or she must determine if the loan has a lock-in provision or prepayment penalty. This must be determined before he or she prep
The payoff demand statement details:
a) the amounts to satisfy the debt.
b) statement fees.
c) reconveyance fees.
d) recording fees.
A: The payoff demand statement is a written statement that details the current principal balance, interest, and any other amounts to satisfy the debt.
Default
When a borrower fails to pay a contractual debt, the situation is known as a default. A default can occur in a number of debt obligations such as car payments, home loans, credit card payments, and other recurring monthly payments. A borrower may default
Refinance
Refinancing the existing loan is a possible solution especially if the borrower has enough equity in the property and qualifying credit according to the lender's guidelines. The borrower can seek a new loan with a lower interest rate or longer term that w
Loan Modification
A loan modification is a permanent change in one or more of the terms of a borrower's loan, allows the loan to be reinstated, and results in a payment the borrower can afford.
Loan Terms that May be Changed:
Reduce interest rate
Change from an adjustable
Default - Sell the Property
If the borrower is in default and knows that sustaining payments in the future will be difficult, he or she can opt to sell the property. Although selling the property is difficult, especially if the borrower is emotionally attached, the proceeds of the s
Forbearance
The lender can work with the defaulting borrower by offering a forbearance or moratorium. Forbearance is the forgiving of a debt or obligation. During the forbearance, a lender can waive payments or allow reduced payments until the borrower is economicall
Recasting Loan
When a borrower is delinquent with payments, recasting is another option a lender can seek. Recasting is the act of redesigning an existing loan balance in order to avoid default or foreclosure. The loan period may be extended, payments reduced, or the in
Deed in Lieu of Foreclosure
If the previously mentioned remedies do not help the borrower, a last resort is to exercise a deed in lieu of foreclosure. A deed in lieu of foreclosure is a voluntary transfer of the property back to the lender. When this occurs, the lender avoids a leng
Foreclosure
Foreclosure is the legal procedure lenders use to terminate the trustor or mortgagor's rights, title, and interest in real property by selling the property and using the sale proceeds to satisfy the liens of creditors. Deeds of trust or mortgages that con
Types of Foreclosure
Foreclosure laws vary in each state, but there are three general types of foreclosure proceedings. When the promissory note conveys a power of sale to the lender, a non-judicial foreclosure is allowed. In states that recognize judicial foreclosure, a lend
Non-Judicial Foreclosure
(**in CA) A non-judicial foreclosure is the procedure a lender uses to sell a property without the involvement of a court. This is also known as foreclosure by power of sale. A trustee's sale is the part of a non-judicial foreclosure process in which the
Notice of Default
In many states, the foreclosure procedure begins when the lender asks the trustee to file (record) a notice of default.
Items Stated in a Notice of Default:
Legal description of the property
Borrower's name
Lender's name
Amount of default
Reason for defau
Foreclosure Advertising
Some states do not require preliminary advertising or the publishing of a foreclosure sale in a newspaper or other advertising media. However, the majority of states do. When the state requires that notice of the sale be posted in a newspaper, the deed of
Foreclosure Notice of Sale
From the default date, the borrower has a certain number of days (specified by state or jurisdiction) to cure the default by paying all payments due, including the trustee's foreclosure charges and any unpaid real estate taxes. In some instances, the note
Foreclosure Public Auction
The terms of the sale, or auction, are generally all cash. The sale is held a specified number of days after the notice of sale is filed and is held at a stated date, time, and place. Auction sales often occur at the county courthouse. At the sale, the tr
Judicial Foreclosure
A beneficiary (lender) may choose a judicial foreclosure instead of a trustee sale under a deed of trust. A judicial foreclosure is the procedure a lender uses to sell a mortgaged property with the involvement of a court. Judicial foreclosures are not typ
Steps in a Judicial Foreclosure
Public notice is given of impending foreclosure
Lender files lawsuit against borrower and anyone else who has acquired an interest in the property after the mortgage being foreclosed on was recorded
Lender's attorney shows evidence of default of loan to c
Strict Foreclosure
In Connecticut, and under certain circumstances in other states, strict foreclosure can also occur. Strict foreclosure is a type of foreclosure in which the mortgagee initiates a lawsuit on the defaulting mortgagor, who must pay the mortgage within a spec
Disbursing the Proceeds of the Sale
A property may be used as the security for more than one loan. There may be second or even third loans against a property. These are known as junior loans. Junior loans pose no difficulty for the original lender as long as the borrower is willing and able
Foreclosure by Junior Lienholders
Most junior lienholders record a Request for Notice of Default (or Delinquency) to protect themselves in the event the borrowers default on senior loans. Upon learning of the impending foreclosure by a senior lienholder, the junior lienholder has three ch
Foreclosing FHA Loans
If a borrower defaults on a loan backed by the Federal Housing Administration (FHA), a lender can file Form 2068 - Notice of Default with a local FHA office. The filing must take place within 60 days of the default and must contain a detailed account of t
Foreclosing VA Loans
If the Department of Veterans Affairs (VA) insures the defaulted loan, the lender can file a claim with the local VA office. Delinquency claims must occur after the borrower has defaulted for more than 3 months. After the VA office is notified of the defa
Sue on Promissory Note
For a lender, sometimes the proceeds of the sale are not sufficient to satisfy the foreclosed debt. In addition, the expenses incurred while pursuing a foreclosure can be costly and the lender may want to recover those expenses as well. If that happens, t
Lending Regulation and Reform
During the Great Depression, the Glass-Steagall Act was passed that prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities. In addition, before deregulation in the early 1980s, le
1980 - Depository Institution's Deregulation & Monetary Control Act
The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 had sweeping changes, one of which was to raise deposit insurance from $40,000 to $100,000. It also permitted Savings and Loans to offer a much wider range of services than
1982 - Garn-St Germain Depository Institutions Act
The Garn-St Germain Depository Institutions Act was designed to complete the process of giving expanded powers to federally chartered S&Ls and to enable them to diversify their activities with the view of increasing profits. Major provisions included elim
1982 - Alternative Mortgage Transaction Parity Act
The Alternative Mortgage Transaction Parity Act (AMTPA) allowed lenders to originate adjustable-rate mortgages, and mortgages with balloon payments and negative amortization.
The S&Ls moved away from their traditional low-risk residential lending practice
1989 - Financial Institutions Reform, Recovery, and Enforcement Act
The inevitable legislative backlash to the behavior of the savings and loan industry was the enactment by Congress of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). This was an attempt to rebuild an industry that had disgraced
1999 - Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (GLBA) repealed part of the Glass-Steagall Act prohibiting banks from affiliating with securities firms. This allowed commercial banks, investment banks, insurance companies, and securities firms to consolidate. Additionally, it
2008 - Housing and Economic Recovery Act
On July 30, 2008, President Bush signed the Housing and Economic Recovery Act (HERA), known as the Housing Stimulus Bill. It authorized temporary measures to stimulate the housing market�homebuyer tax credits, additional property tax deductions, seller-fu
2008 - Emergency Economic Stabilization Act
In 2008, the Emergency Economic Stabilization Act was passed, creating a $700 billion Troubled Assets Relief Program (TARP). TARP was established to stabilize the United States financial system and prevent a systemic collapse. The U.S. Treasury establishe
2010 - Dodd-Frank Wall Street Reform & Consumer Protection Act
On July 21, 2010, the federal Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted into law as a response to the financial turbulence and recession in the late 2000s. It made sweeping changes to financial regulatory agenc
1866 Civil Rights Act
The 1866 Civil Rights Act is a federal law that prohibits discrimination based on race in all property transactions. However, it was basically ignored until 1968.
U.S. Supreme Court Case of Jones v. Mayer of 1968
The Supreme Court Case of Jones v. Mayer prohibits discrimination based on race by upholding the 1866 Civil Rights Act and the 13th Amendment to the U.S. Constitution, which prohibits slavery.
Fair Housing Act
In the financing, leasing, or selling of residential property, Title VIII of the Civil Rights Act of 1968 provided anti-discriminatory protection in education, housing, and employment for five protected classes of people based on their race, color, religi
The Fair Housing Act Prohibited Practices
The Fair Housing Act prohibits coercing, threatening, intimidating, or interfering with a person's enjoyment or exercise of housing rights based on discriminatory practices, or retaliating against a person who or organization that aids or encourages the e
Penalties for Violating the Fair Housing Act
Discipline. If the professional is licensed with a respective state department of real estate, or is a member of a professional association, discipline is a likely result of discrimination. A license or association membership may be suspended or revoked,
Home Mortgage Disclosure Act
The federal Home Mortgage Disclosure Act of 1975 (HMDA), implemented by Regulation C, requires most mortgage lenders to gather data from their borrowers when they apply for a loan. The purpose of HMDA is to determine whether financial institutions are ser
Fair Housing Assistance Program
The purpose of the Fair Housing Assistance Program (FHAP) is to strengthen nationwide fair housing efforts by helping individual state and local governments administer laws of their own that are consistent with the Federal Fair Housing Act.
HUD provides F
Fair Housing Initiatives Program
The Fair Housing Initiatives Program (FHIP) was established by the Housing and Community Development Act of 1987 (HCD Act of 1987) and was amended by the HCD Act of 1992. The FHIP provides funding to public and private entities that formulate or carry out
Housing for Older Persons Act
As the name implies, the Housing for Older Persons Act (HOPA) provides incentives for self-testing by lenders for discrimination under the Fair Housing Act and the Equal Credit Opportunity Act.
Credit Protection
Real estate finance is based on credit so it makes sense that consumers must have certain protections and guarantees. Good credit is a valuable intangible asset. Since 1968, many laws have been written to reduce the problems and confusion and to protect c
Consumer Financial Protection Bureau
Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB or Bureau) within, but not controlled by, the Federal Reserve Board. The CFPB is headed by a Director appointed by the President and confirmed by the Senate for a fiv
Supervisory Authority
The Bureau has primary supervisory and examination authority over certain nondepository and FDIC-insured depository institutions or insured credit unions with assets over $10 billion. Nondepository covered persons include mortgage originators, brokers, an
Responsibilities and Rulemaking Authority
On July 21, 2011, the CFPB took over the authority from many existing agencies. It has the responsibility to regulate consumer financial products and services and enforce certain designated consumer protection laws.
As part of the Dodd-Frank Act, the CFPB
Truth in Lending Act
The federal Truth in Lending Act (TILA) is Title 1 of the Consumer Credit Protection Act of 1968. The Truth in Lending Act is aimed at promoting the informed use of consumer credit by requiring disclosures about its terms and costs. This legislation requi
Regulation Z
Regulation Z implements the Federal Truth in Lending Act. [12 CFR �1026]. It requires creditors to give certain disclosures to the consumer before making a loan contract.
A creditor is a lender (person or company) who regularly makes real estate loans tha
Disclosure Timing - 3/7/3 Rule
According to the MDIA, the disclosures are classified as early disclosures, re-disclosures, and final disclosures and the timing of the disclosures can be remembered by the 3/7/3 rule.
Early Disclosure
With an early disclosure, creditors are required to g
Disclosure Statement
TILA requires lenders to disclose the important terms and costs of their loans, including the annual percentage rate, finance charge, the payment terms, and information about any variable rate feature.
The finance charge is the dollar amount the credit wi
Adjustable-Rate Loan Disclosure
A lender offering adjustable-rate residential mortgage loans must provide prospective borrowers with a copy of the most recent Federal Reserve Board publication, which provides information about adjustable-rate loans. The Consumer Handbook on Adjustable-R
Closed-End and Open-End Loan Disclosure
Open-end credit includes types of credit arrangements such as revolving credit cards and home equity lines of credit. Home equity plans require that disclosures and a brochure also be given to the consumer along with the application.
Closed-end credit inc
Right of Rescission
The right to rescind (cancel) a real estate loan applies to most consumer credit loans (hard money loans) or refinance loans. Loans used for the purchase or construction of the borrower's personal residence (purchase money loans) have no right of rescissi
The Truth in Lending Act - Advertising
The Truth in Lending Act establishes disclosure standards for advertisements that refer to certain credit terms, called triggering terms. Triggering terms include the amount or percentage of any down payment, the number of payments or period of repayment,
Mortgage Acts and Practices - Advertising Rule
The Mortgage Acts and Practices-Advertising Rule (MAP Rule), implemented by Regulation N, applies only to non-depository mortgage lenders, state-chartered credit unions, and entities that market and advertise mortgage products, such as mortgage brokers, r
Equal Credit Opportunity Act
Lenders extend millions of dollars in credit to consumers to finance an education or a house, remodel a home, or get a small business loan. It is very important that lenders understand these laws in order to be in compliance and avoid lawsuits.
The Equal
Regulation B
Regulation B implements the provisions of the Equal Credit Opportunity Act (ECOA). [12 CFR �1002]. In 1974, the Act made it unlawful for creditors to discriminate in any aspect of a credit transaction based on sex or marital status. In 1976, amendments to
Handling Borrowers' Applications
Creditors must treat all potential borrowers equally and fairly when handling loan applications. Therefore, it is inappropriate and illegal to question potential borrowers about their age, gender, marital status, national origin, religion, race, sexual or
Extending Credit
Creditors must act fairly and cannot refuse loans to qualified, creditworthy borrowers. Creditors cannot lend borrowers money on terms that differ from those granted to others with similar income, expenses, credit history, and collateral.
The race of peop
Evaluating Borrowers' Income
Creditors must evaluate the source of income objectively. Creditors may not refuse to consider or discount income from alimony, child support, part-time employment, pensions, social security, or public assistance. Income from child support and alimony pay
Credit Application Denial
A creditor must tell the applicant if the application was accepted or rejected within 30 days of having received a complete application. After analyzing the risk factors of the borrower and the property, a creditor may deny the loan. This is legal as long
Right to Financial Privacy Act
The Right to Financial Privacy Act states that customers of financial institutions have a right to expect that their financial activities have a reasonable amount of privacy from federal government scrutiny. The Act specifies that, before any information
Home Equity Loan Consumer Protection Act
The Home Equity Loan Consumer Protection Act of 1988 requires lenders to disclose terms, rates, and conditions (APRs, miscellaneous charges, payment terms, and information about variable rate features) for home equity lines of credit with the applications
Home Ownership and Equity Protection Act
The Home Ownership and Equity Protection Act of 1994 (HOEPA) deals with high-rate, high-fee home loans that are refinance or home equity installment loans. The law addresses certain deceptive and unfair practices in home equity lending. It amends the Trut
Section 32 Mortgage Threshold Triggers
The annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable transaction by more than:
6.5% for first liens;
8.5% for first liens less than $50,000 secured by a dwelling that is personal property (e.g., manufactured home);
Required Disclosures for High-Rate, High-Fee Loans
If a loan meets the specified requirements, a borrower must receive several disclosures at least 3 business days before the loan is finalized. These disclosures must be given in addition to the other TILA disclosures that the borrower must receive no late
New High-Cost Mortgage Restrictions
Once a transaction is determined to be a high cost mortgage, several restrictions apply. [��1026.32, 1026.34].
Additional Requirements for High-Cost Mortgages
Balloon payments are generally prohibited.
Prepayment penalties are prohibited.
Financing points
High-Cost Mortgage Counseling Requirements
Lenders are required to provide to consumer borrowers a list of federally certified or approved homeownership counselors or organizations (List) within 3 business days after receiving an application for a mortgage loan. The list is to be obtained by the l
Negative Amortization Counseling Requirements
Before making a closed-end loan secured by a 1-4 unit dwelling that may result in negative amortization, lenders must obtain confirmation that a first-time borrower received counseling on the risks of negative amortization from a HUD-certified or -approve
Fair Credit Reporting Act
The Fair Credit Reporting Act (FCRA) is one of the most important laws that protects consumer identity and credit information. It is designed to promote the accuracy, fairness, and privacy of the information collected and maintained by credit reporting ag
Fair and Accurate Credit Transactions Act
The Fair and Accurate Credit Transactions Act (FACTA) of 2003 amends the FCRA to give borrowers the right to see what is in their credit file and to have any errors corrected.
If a lender refuses credit to a borrower because of unfavorable information in
Section 114 of FACTA - Red Flag Rules
In 2007, several agencies (Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, and Federal Trade Commission) passed the Interagency Gu
Five categories of red flag warning signs.
1. Alerts, Notifications, & Warnings from a Credit Reporting Agency
Fraud or active duty alert on a credit report
Notice of credit freeze in response to a request for a credit report
Notice of address discrepancy provided by a credit reporting agency
Cred
Amendment to Reg. X - Disclosing YSP
The YSP, or yield spread premium, is the difference between the wholesale rate on the loan and the rate paid by the borrower and is credited to the borrower for accepting a higher than current market interest rate. In the past, the yield spread premium (Y
Amendment to Reg. Z
Final rule (R-1366) of the Board of Governors of the Federal Reserve System (Board) amending Regulation Z became effective on April 6, 2011. The purpose of this final rule is to protect consumers in the mortgage market from unfair or abusive lending pract
Applicability
The final rule applies to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 6, 2011. It excludes transactions secured by real property if such property does not include a dwelling, HELOCs extend
Prohibited Practices of loan originators
Effective April 6, 2011 mortgage brokerage firms are reclassified as loan originators. This means that mortgage brokerage firms will be prohibited from collecting both origination fee and indirect compensation (YSP) in the same transaction. The mortgage b
Mortgage Reform and Anti-Predatory Lending Act
Title XIV of the Dodd-Frank Act established the Mortgage Reform and Anti-Predatory Lending Act (Reform Act). The provisions of the Reform Act are designated as designated consumer laws, which are the laws that will come under the authority of the new Boar
Required Practices of Loan originators
Subtitle B of the Reform Act establishes national underwriting standards for residential loans. Loan originators must make a reasonable effort based on verified and documented information that "at the time the loan is consummated, the consumer has a reaso
Settlement
Settlement, which is known as closing in some states, is the process by which ownership of real property or title to the property is passed from seller to buyer. Certain disclosures protecting consumers from unfair lending practices are required at variou
Real Estate Settlement Procedures Act
The federal Real Estate Settlement Procedures Act (RESPA) protects consumers by mandating a series of disclosures that prevent unethical practices by mortgage lenders and that provide consumers with the information to choose the real estate settlement ser
RESPA's Purposes
� To help consumers get fair settlement services by requiring that key service costs be disclosed in advance
� To protect consumers by eliminating kickbacks and referral fees that will unnecessarily increase the costs of settlement services
� To further p
TILA-RESPA Rule - Integrated Mortgage Disclosures
The TILA-RESPA rule created integrated disclosure forms for closed-end mortgage loan transactions by consolidating four existing disclosures required under TILA and RESPA into two disclosure forms. The new integrated mortgage disclosure forms are the Loan
Mortgages Covered by the TILA-RESPA Rule
Effective October 3, 2015, the new Integrated Disclosure forms must be used for most closed-end federally related residential mortgages that are covered by RESPA. Additionally, the integrated disclosure requirements apply to construction-only loans, vacan
Loans That Continue to Use the GFE and the HUD-1 Statement
Home-equity lines of credit (HELOCs)
Reverse mortgages
Mortgages secured by a mobile home or a dwelling that is not attached to real property
As a side note, if the transaction is an all-cash sale, a commercial sale, or an investment sale not subject to R
Timing of the Disclosures
RESPA requires that borrowers receive disclosures at various times�when a borrower submits a loan application, before the closing, during settlement, and after the closing. These disclosures spell out the costs associated with the settlement, outline lend
Disclosures at the Time of Loan Application
When a potential homebuyer applies for a home loan, the lender must give the buyer a special information booklet, the Loan Estimate, and a Mortgage Servicing Disclosure Statement.
The disclosures must be provided at the time a written application is submi
Special Information Booklet
Until July 31, 2015, the booklet that must be provided is the HUD "Shopping for Your Home Loan: Settlement Costs Booklet". Beginning October 3, 2015 the CFPB booklet "Your Home Loan Toolkit" (Toolkit) must be provided. The Toolkit replaces the "Shopping f
Loan Estimate
The Loan Estimate replaces the early Truth in Lending statement and the Good Faith Estimate. It summarizes key loan terms and gives an estimate of loan and closing costs. The effective date is October 3, 2015. The lender is generally required to provide t
Mortgage Servicing Disclosure Statement
The Mortgage Servicing Disclosure Statement states whether the lender intends to sell the real estate loan servicing immediately, if the loan servicing can be sold at any time during the life of the loan, and the percentage of loans the lender has sold pr
Disclosures Before Closing Occurs
If information in the Loan Estimate substantially changes, the lender must provide the borrower with a revised Loan Estimate.
Reasons Lenders Revise Loan Estimates:
Changed circumstances affecting the settlement charges.
Changed circumstances affecting el
Disclosures During Settlement
The Closing Disclosure must show the actual charges at settlement. In addition, an Initial Escrow Statement is required at closing or within 45 days of closing. This statement itemizes estimated taxes, insurance premiums, and other charges to be paid from
Disclosures After the Closing
The servicer must deliver an Annual Escrow Loan Statement to the borrower. This statement summarizes all escrow account deposits and payments during the past year. It also notifies the borrower of any shortages or surpluses in the account and tells the bo
Prohibited Practices Under RESPA
RESPA prohibits the following Acts.
Kickbacks, Fee Splitting, and Unearned Fees: The Act prohibits anyone from giving or accepting a fee, kickback, or anything of value in exchange for referrals of settlement service business involving federally related m
National Flood Insurance Act
National Flood Insurance is available to any property owner whose local community participates in the national program by adopting and enforcing flood plain management. The National Flood Insurance Act states that federally regulated lenders are required