Financing Study Guide for the Real Estate License Exam

Repayment of a Mortgage

How, when, and in what amounts a mortgage is repaid depends on what type of mortgage is used to purchase the property. The interest rate and the term of the mortgage will have a big effect on the repayment of a mortgage.

Fixed-Rate

Under a fixed-rate mortgage, the interest rate and the monthly loan payment do not change. That’s because fixed-rate mortgages are amortized. At the end of the loan term, the mortgage is paid in full.

Graduated-Payment Mortgage (GPM)

Graduated-payment mortgages (GPMs) have monthly payments that start out small and increase over time. A GPM could be good for first-time buyers with a brand new job who expect their income to increase quickly as they get promoted or for a real estate agent just starting out in the business.

Balloon Mortgage

A balloon mortgage is an unamortized mortgage. At the end of the term of a balloon mortgage, there is a large balance due that needs to be popped or paid off. Similar to a GPM, a balloon mortgage could be good for a buyer who expects to receive a large amount of money—maybe from an inheritance or a big job bonus—before the balloon payment becomes due.

Adjustable-Rate

Adjustable-rate mortgages have interest rates that adjust periodically based on Libor or Treasury bill rates. One benefit to an adjustable-rate mortgage is that a buyer can afford more property because the monthly payment starts out lower than with a conventional mortgage. One drawback is that if interest rates increase, the borrower’s monthly payment will go up too.

Other Mortgages

By now, you’ve probably realized that there is no reason for a real estate transaction to fall through because the buyer couldn’t find the right loan. Real estate agents who understand the ins and outs of mortgages and creative financing options will sell more property, make more commissions, and have happier clients.

Reverse Mortgage (RM)

A reverse mortgage (RM) lets the homeowner cash in on their home equity and still live in the home while making no monthly mortgage payments. Also known as an HECM or home equity conversion mortgage, a reverse mortgage is only for seniors 62 years or older. Interest still accrues on the loan and is added to the loan balance due.

Biweekly Mortgages

A biweekly mortgage payment is 50% of a monthly payment and is made every 2 weeks. Biweekly mortgages can make it easier for borrowers to budget. It is also faster to pay off a mortgage with biweekly payments. That’s because by paying every 2 weeks, the borrower makes 26 half payments (13 full payments) over the course of 1 year, compared to making 12 payments on a monthly payment schedule.

Mortgage Sources

In addition to understanding the different types of loans available for a buyer, a real estate agent also needs to tell a buyer where to go for a loan. The mortgage industry is made up of primary and secondary markets.

Primary Market

The primary mortgage market consists of institutions where a buyer goes directly to apply and qualify for a loan used to buy real property. These lending institutions are also known as mortgage originators because they are offering, or originating, a mortgage loan to a borrower.

Savings and Loans

Savings and loan companies (S&Ls) are different from regular commercial banks because S&Ls are usually owned by their customers or depositors. S&Ls provide the same services to their members that other commercial banks do to the general public, such as checks, debit cards, and home loan mortgages.

Commercial Banks

Large regional and national commercial banks are sometimes referred to as institutional lenders. Commercial banks make loans for homes and also residential and commercial investment property. In addition to savings and loan companies, commercial banks are one of the main sources for mortgage home loans.

Mutual Savings Banks

Mutual savings banks are government-chartered institutions that are funded and owned by their members. In turn, the members receive profit distributions from the bank’s activities. Sometimes also called thrift institutions, mutual savings banks are similar in concept to savings and loan companies.

Life Insurance Companies

Commercial real estate investors looking for loans to finance the purchase of a shopping center, an office building, or to develop a tract of land sometimes turn to life insurance companies. Life insurance companies focus on large, more complicated investment transactions rather than making loans on homes.

Mortgage Companies

Mortgage companies are formed specifically by investors to offer only mortgage loans and not general banking services. Because mortgage companies are investor-owned, they can be a good source of creative financing for buyers who can’t qualify for a conventional loan.

Secondary Market

Most institutions that make mortgage loans on the primary market do not hold the loan to maturity. Instead, they sell the loan to an institution on the secondary market to free up funds so that they can make more primary market mortgage loans. This is what keeps the lending market liquid.

Federal National Mortgage Association

Also known as FNMA, or Fannie Mae, the Federal National Mortgage Association is a government-sponsored enterprise founded in 1938 to create a secondary market for the trading of mortgages. FNMA is not a federal government agency, but it is one of the largest corporations in the U.S. when measured by assets.

Federal Home Loan Mortgage Corporation

Also known as FHLMC, or Freddie Mac, the Federal Home Loan Mortgage Corporation is also a government-sponsored enterprise. It was founded in 1970 to enlarge the secondary market for mortgages. Similar to Fannie Mae, Freddie Mac is not a federal government agency.

Government National Mortgage Association

Also known as GNMA, or Ginnie Mae, the Government National Mortgage Association was founded in 1968 to promote homeownership, provide liquidity in the market, and serve as the principal financing arm for government mortgage loans.

Farmers Home Administration

The Farmers Home Administration (FmHA) was founded in 1946 to provide loans and grants in rural areas. During a reorganization in 1994, the functions of FmHA were transferred to the Farm Service Agency, and in 2006 FmHA was closed down and its housing programs transferred to USDA Rural Development.

Lending Criteria

A lender making a mortgage loan on the primary market wants to make sure of two things: (1) that the property is worth at least the value of the loan amount, and (2) that the borrower has the ability to make the loan payments, taxes, and insurance. Lending criteria will vary between lenders and can also change frequently. The underwriters for a specific mortgage lender will consider the risk management of the lender’s entire loan portfolio in addition to each specific loan. For the borrower, this means that if one lender says no to a mortgage loan, another lender could say yes.

Mortgage Loan Discounting

Mortgage loan discounting is a technique used by borrowers to lower the interest rate on their mortgage loan in exchange for paying an upfront, one-time fee.

Points

Also known as mortgage points or discount points, points are fees paid directly to the lender at closing in exchange for a lower interest rate. This process is also known as buying down the rate. One point is equal to 1% of the mortgage amount, so paying points upfront can lower the interest paid over the life of the mortgage loan.

Prepayment

Prepaying a mortgage loan means paying all or part of the mortgage before the payment is due. Doing this can save a lot of money in interest payments. Some lenders give the borrower the privilege of making prepayments. Other mortgage loans have a prepayment penalty, meaning that the borrower will pay a fee to the lender if the mortgage is paid off before the term of the loan or the property is sold.

Acceleration Clauses

An acceleration clause is a provision of the mortgage loan agreement that lets the lender require the borrower to repay all of the outstanding loan balance—plus any accrued interest and penalties—if the borrower breaks any terms of the loan agreement. Acceleration clauses are typically used when a home is being foreclosed on.

Loan Assumption

A loan assumption is when a buyer takes over the seller’s existing loan. Usually, the lender needs to approve a loan assumption, since the borrower is now a different person. Property that is transferred with a mortgage loan without the lender’s approval is known as a sale subject to an existing loan.

Usury

Usury means that the interest rate being charged to a borrower is higher than what the law allows. Usury also means the lender is unfairly enriched by making an unethical or immoral loan. Although usury laws vary from state to state, federal law regarding first position mortgages usually takes precedence over state law.

Estoppel Certificate

An estoppel certificate is a legally binding document signed by one party certifying that the representations of a second party are true and correct. Landlords ask tenants to sign an estoppel certificate when they sell a property so that the buyer knows the leases are accurate. HOAs and condo associations issue estoppel certificates to buyers outlining a current owner’s financial standing and any special assessments due.

Release from a Mortgage

A lender releases a mortgage when the loan has been paid off. A mortgage release is also the removal of the lender’s lien on the real property.

Satisfaction piece—A satisfaction piece is an official document that a lender will issue when a debt has been satisfied, or paid off.

Parcel or land release—When a blanket loan is used to purchase a tract of land or multiple pieces of real estate, the lender will issue a parcel or land release as the individual subdivided lots or individual pieces of real estate are sold.

Postponement of lien—When a first position lien holder agrees to move into second position, this is called postponement of lien. An example of this is when a seller financer agrees to the loan being wrapped and the seller’s note becomes subordinate to the new loan lien.

Foreclosure—Foreclosure occurs when the lender takes possession of a property because the borrower did not keep up on the payments.

Foreclosure

When a property is foreclosed on, the lender has the legal right to take the property from the borrower, sell the property, and use the proceeds to pay off the borrower’s loan plus any accrued interest and penalties.

Deficiency Judgment

If a lender forecloses on a property and sells it, but there is still not enough money to pay off the borrower’s loan, then the lender will obtain a deficiency judgment against the borrower. This judgment is an unsecured money judgment against the debtor or borrower.

Equity of Redemption

If the mortgage on a borrower’s property has been accelerated and the mortgage loan is being foreclosed on, the borrower has the right to pay off in full the principal balance plus accumulated interest and penalties and keep the property. In doing this, the borrower is exercising its equity of redemption right.