Real Estate Finance

Exam rule

The loan is the credit. The promissory note or bond is the borrower's personal promise to repay it. The mortgage is the security instrument. It gives the mortgagee, or lender, a lien on the mortgagor's real property. New York follows lien theory, so the owner keeps title and the usual rights of ownership. Recording the mortgage gives public notice and helps protect its priority. An unrecorded mortgage may still bind the parties, but it can lose priority to a later protected buyer or lender. An assignment transfers the lender's interest and the related debt to a new holder. It does not change the loan terms. A satisfaction or certificate of discharge clears the recorded lien after full payment. Special structures change the collateral. A blanket mortgage covers two or more parcels, and a release clause can free one parcel. A package mortgage covers real estate and named personal property. A pledged-account mortgage adds a cash or savings account as collateral. A purchase-money mortgage helps finance the purchase. A wraparound mortgage includes an older loan within a new, larger obligation. A construction mortgage commonly releases funds in draws as work passes inspection. Under a land contract, the buyer gets possession and equitable interest while the seller keeps legal title until the contract conditions are met.

Exam rule

PITI stands for principal, interest, taxes and insurance. Principal is the unpaid amount borrowed. Only the part of a payment applied to principal lowers that balance. Interest is the price charged for using the money. Property taxes and hazard insurance may be collected each month in an escrow account. The lender or servicer then pays those bills when due. Mortgage insurance, flood insurance and association charges may add to the housing cost even though they are not all part of the four-letter term. A fixed interest rate can keep principal and interest steady while taxes, insurance and escrow amounts still change. A lender may require the owner to insure the property and pay taxes because unpaid taxes or serious damage can weaken the lender's security. Interest and real estate taxes may affect income taxes, but deductibility depends on current tax law and the taxpayer's facts. A salesperson should never promise a deduction.

Exam rule

A fully amortizing loan pays principal and interest in installments that reduce the balance to zero by maturity. On a level-payment fixed-rate loan, early payments contain more interest and later payments contain more principal. A straight or term mortgage may require interest payments during the term and leave principal due at maturity. A balloon loan also leaves a large final payment. A graduated-payment mortgage starts low and rises on a schedule. If a payment is too small to cover interest, unpaid interest can be added to principal. That is negative amortization. An adjustable-rate mortgage, or ARM, commonly uses an index plus a set margin. A periodic rate cap limits one rate change. A lifetime cap sets the total rate ceiling. A payment cap limits the payment change, so it may allow negative amortization. Inflation reduces the buying power of future fixed payments, while an ARM shifts more rate risk to the borrower. One discount point equals 1 percent of the loan amount. Points paid to lower the rate are a buydown. The annual percentage rate is a broader cost measure than the note rate because it includes interest and certain finance charges. An open-end mortgage or home equity line can allow new advances up to a limit. A home equity loan is commonly a closed-end lump sum secured by existing equity. A bridge loan supplies short-term money between transactions. A reverse mortgage lets an eligible older homeowner draw equity, but the owner still must meet duties such as taxes, insurance and upkeep.

Exam rule

A mortgagor must pay the debt, taxes and assessments. The owner must keep the property insured and in reasonable repair. Failure to perform a required duty is default. A grace period gives a short time after a due date before a stated late consequence applies. It does not cancel the payment. An acceleration clause can make the full unpaid balance due after a covered default and required notices. An alienation clause, often called a due-on-sale clause, can permit acceleration after an unapproved transfer. A prepayment penalty clause can charge for an early payoff when law and the loan terms allow it. These clauses do different jobs. New York mortgage foreclosure is a court action under RPAPL Article 13. The borrower keeps an equity of redemption, which is the right to stop the foreclosure by paying the required debt and costs before the right ends. If the foreclosure sale brings less than the amount owed, the lender must follow RPAPL Section 1371 to seek a deficiency judgment for the allowed shortfall. Acceleration starts a collection step. It does not give the lender an instant deed.

Exam rule

Property with a mortgage can be sold in three tested ways. In a sale free and clear, the existing lien is paid and discharged at or before closing. A buyer who assumes the mortgage agrees to pay the existing debt and becomes personally liable on that promise. A buyer who takes title subject to the mortgage does not promise the lender to pay it. The property still secures the debt and can be foreclosed, but that buyer does not become personally liable merely from taking subject to it. In either transfer, the seller may remain liable on the original note unless the lender gives a release or agrees to a novation. The parties must also check the due-on-sale clause because an unapproved transfer may permit acceleration. A sale-and-leaseback is different. The owner sells the property and leases it from the buyer. The seller gets cash and keeps possession as a tenant. A shared-equity or shared-appreciation plan is also different. A lender or investor receives an agreed share of later value or gain in return for financing help.

Exam rule

A conventional mortgage has no FHA insurance, VA guaranty or USDA guaranty. It can be conforming or nonconforming. A conforming loan meets the purchase standards used by Fannie Mae or Freddie Mac. Those standards include a loan limit set by FHFA each year. A loan above the applicable limit is commonly called a jumbo loan. Conventional does not mean cheap, easy or low risk. The lender still sets credit, income, asset, appraisal and down-payment rules. Loan names can also describe purpose or collateral. A purchase-money mortgage is given as part of a purchase. A construction loan funds work in stages, often through inspected draws. A bridge or swing loan supplies short-term funds while one transaction waits for another. A blanket loan covers more than one parcel. A package loan includes real estate and named personal property. An open-end loan permits later advances under its terms. These labels can overlap. For example, a conventional construction loan can later be replaced by a conforming permanent loan.

Exam rule

Government-backed does not mean the government usually hands the buyer the money. An approved private lender makes the loan. FHA insures the lender against covered loss. FHA borrowers pay mortgage insurance under program rules. The Department of Veterans Affairs guarantees part of an eligible VA loan. A standard VA-backed purchase loan may permit no down payment and does not require monthly private mortgage insurance, but a funding fee can apply. Eligibility and occupancy rules still matter. The USDA Rural Housing Service Section 502 guaranteed program backs approved-lender loans for eligible households buying a primary residence in an eligible rural area. Income, property, credit and program rules apply. FHA insurance, a VA guaranty and a USDA guaranty all protect the lender in different ways. None is a promise that every applicant will qualify, and none is conventional financing.

Exam rule

SONYMA is the State of New York Mortgage Agency. It works through participating lenders to support homeownership in New York. Its programs may offer below-market financing or help with down payment, closing costs or mortgage insurance. Some programs focus on first-time buyers, but the exact rules depend on the current program. Income limits, purchase-price limits, rates, property rules, borrower contributions and assistance terms can vary by location and program. A buyer starts with a participating lender, not with a salesperson deciding eligibility. The lender checks current documents and program fit. A salesperson can explain the program's purpose and direct the buyer to official HCR material. The salesperson should not quote an old rate or limit from memory, promise approval or describe assistance as a free grant unless the current terms say so.

Exam rule

The primary market, also called the primary mortgage market, is where a borrower obtains a loan from a lender. Banks, credit unions, mortgage banks and other approved lenders can operate there. The secondary market comes after origination. A lender may assign or sell a mortgage and its debt to recover funds and make more loans. Fannie Mae and Freddie Mac buy eligible mortgages, hold some and package others into mortgage-backed securities. They are government-sponsored enterprises, not direct federal mortgage insurers. Ginnie Mae has a different job. It does not buy the loans and does not issue the securities. It guarantees timely payment to investors on qualifying securities backed by government-insured or guaranteed loans. A sale or assignment changes who owns the loan interest. Servicing may stay with the old company or move to another one. The borrower's rate, balance and other contract terms do not change merely because the loan was sold.

Exam rule

The Truth in Lending Act is part of the Consumer Credit Protection Act. Regulation Z gives consumers a standard way to compare credit costs. Key disclosures include the finance charge and annual percentage rate. The right to rescind generally applies to covered nonpurchase credit secured by a consumer's principal dwelling, such as many home equity loans and refinances. The consumer usually has until midnight of the third business day after the last required event. A loan used to acquire or initially construct the principal dwelling is generally exempt. Do not confuse this cancellation period with the three-business-day wait for a Closing Disclosure. Closed-end credit advertising has triggering terms. They include the down payment as an amount or percentage, the number of payments or repayment period, the payment amount and the amount of any finance charge. If an ad states one, it must give the required additional disclosures clearly. If an ad states a rate, it must state it as an annual percentage rate. Advertised terms must actually be available. A real estate licensee should use approved truthful copy and should not invent financing terms.

Exam rule

For a covered mortgage, the creditor must deliver or mail the Loan Estimate no later than the third business day after receiving the six-item application. Those items are the consumer's name, income, Social Security number for a credit report, property address, estimated property value and loan amount sought. The form helps the applicant compare projected terms and costs. The consumer must receive the first Closing Disclosure at least three business days before consummation. It shows the final terms and closing figures. A corrected Closing Disclosure starts a new three-business-day wait in only three cases. The APR becomes inaccurate, the loan product changes or a prepayment penalty is added. Most other changes need a corrected form but do not restart the wait. RESPA and Regulation X cover settlement practices. Section 8 bars giving or accepting a thing of value for settlement-service referrals and bars splitting charges for work not performed. Payment for real services at reasonable value is different from a referral kickback.

Exam rule

A lender studies both the property and the borrower. For the property, it reviews the sales price and appraised value. It also checks location, condition, comparable sales, property type, occupancy and income potential. One-to-four-family, owner-occupied and income-producing properties may use different rules. Loan-to-value, or LTV, compares the loan with the value used by the lender. A larger down payment lowers LTV. For the borrower, the housing expense ratio compares the new housing payment with gross monthly income. Total debt-to-income adds other monthly debts. The lender reviews income or salary, employment history, stability and likely continuance. It may consider education or training when useful. It also checks liquid assets, monthly obligations and repayment history. Self-employed people, partners and owners of corporations may need business and personal records. A credit report helps verify debt and payment history. One passing ratio never guarantees approval. Ability-to-repay rules call for verified financial facts. Redlining is different and unlawful. It means denying or limiting credit because of an area's location or protected-group makeup instead of lawful credit facts.

Exam rule

Private mortgage insurance, or PMI, protects a conventional lender from part of a loss. The borrower usually pays the premium, but the lender gets the protection. PMI is common when a conventional first mortgage has an LTV above 80 percent. The federal Homeowners Protection Act gives general rules for a covered loan. The borrower may ask to cancel PMI when the scheduled balance reaches 80 percent of the home's original value. The request must be in writing. Payment history, current value and junior-lien conditions may apply. Automatic termination usually occurs when the scheduled balance first reaches 78 percent of original value and the borrower is current. If the borrower is not current then, PMI ends after the borrower becomes current. Final termination is the midpoint backstop when PMI has not ended sooner and the borrower is current. These rules use scheduled balance and original value unless another legal rule applies. FHA mortgage insurance and a VA guaranty are not PMI, so their rules differ.

Exam rule

Subprime describes higher-risk credit. It does not prove abuse by itself. Predatory lending is a harmful pattern built around unfair terms, false claims or pressure. Warning signs include hidden fees, very high costs and balloon payments that are too large for the borrower. Blank documents and false statements are also warnings. Other signs are debt consolidation that leaves the owner worse off, home-equity lending based only on collateral and repeated refinancing with no reasonable benefit. That repeated refinancing is loan flipping. Fraud can come from a borrower, broker, appraiser, lender or other participant. Bad loans can strip equity and lead to foreclosure. New York Banking Law Section 6-l adds rules for covered high-cost home loans. It requires due regard to repayment ability based on verified income, obligations, employment and other resources. It bars negative-amortization payment schedules and prepayment penalties on covered loans. A lender or broker may not advise a borrower to default on an existing loan in connection with the new high-cost loan. A licensee who sees pressure, unexplained charges or possible fraud should stop. The licensee should avoid promises and refer the consumer to qualified legal, housing or lending help.