Page 1 - Practice and Disclosures Study Guide for the Real Estate License Exam

General Information

Even though real estate agents aren’t directly involved in originating loans, it’s important to understand some of the basic disclosures required, especially if you are representing buyers. In this section, we’ll discuss required disclosures—and what they mean. These will include those handled when a loan is first made, special disclosures for real estate, disclosures when a mortgage loan is refinanced or assumed, and procedures for closed-end loans where all of the funds are disbursed when the loan closes.

Basic Disclosures Required

Just as there are laws prohibiting discrimination in housing and in lending, there are also consumer protection laws to make sure basic disclosures are made to borrowers that inform them of the terms and conditions of a loan. These are terms that should be made very clear in any real estate transaction.

1. Creditor

A creditor is someone who gives credit, and to whom money is owed. An easy way to think of this is that creditors give money or credit to the borrower and debtors owe money to the creditor.

2. Financed Amount

Financed amount is another term for the loan amount. The financed amount—or amount financed—is the entire loan amount, minus any prepaid fees and down payment made plus any extras such as fees that are being financed. The financed amount is used to calculate the monthly or installment payments that a debtor owes to a creditor.

3. Itemized Financed Amount

Prior to closing, real estate buyers receive a settlement statement—formerly known as a HUD-1 statement—that itemizes or lists the various charges, fees, and monies that make up the financed amount. This will include items such as the amount given to the borrower directly, the amount paid to others on behalf of the borrower, total loan proceeds, the amount financed, and any prepaid finance charge.

4. Finance Charge

A finance charge can also be thought of as the cost of borrowing money. Finance charges consist of interest plus any accrued interest and any other fees or transaction costs.

5. Annual Percentage Rate

It’s important to remember that the annual percentage rate is not the same thing as the interest rate. Also known as APR, the annual percentage rate includes the interest expense plus any fees or extras that are included in the loan amount. For example, if the loan on a $500,000 house is 5% and the borrower adds closing costs of $5,000 onto the loan amount, the borrower would be paying interest on $505,000. Because of this, the APR is always a little higher than the stated interest rate.

6. Variable Rate

A variable interest rate is one that changes over time. Variable rates are tied into an underlying benchmark rate such as LIBOR or the interest rate that a Treasury bond pays. Variable rates are adjusted on a regular basis, usually every 2 years. With a variable rate loan, the monthly payment a borrower makes can also periodically change.

7. Payment Schedule

A payment schedule specifies on what date—not day—payment is due. Common due dates from payment schedules are the 1st, 10th, or 15th of the month. Note that the payment schedule is not the same thing as the amortization schedule. The payment schedule specifies due dates while the amortization schedule shows the percentage of principal and interest paid with each payment in a fixed installment loan.

8. Payment Total

The payment total is the total of all payments made over the full term, or life, of a loan. The payment total consists of principal and interest paid and assumes that the loan is not paid off early. Note that monthly payment totals usually consist of PITI, or principal, interest, prorated taxes by month, and prorated insurance by month.

9. Demand Feature

If a loan has a demand feature, that means that the creditor can demand that the debtor immediately pay the entire loan balance. Exercising, or using, the demand feature is normally done by the lender when the borrower falls behind on their payment and is the first step in the lender foreclosing on the borrower.

10. Total Sales Price

The total sales price of a property is the total amount a buyer pays for the property. Sometimes, the total sale price is different from the purchase price. For example, if a buyer agrees to pay $200,000 for a house and take over an outstanding debt of $10,000 from the seller, then the total sales price would be $210,000.

11. Prepayment

Prepayment occurs when a borrower pays off a loan early, either in part or in full. For example, if a borrower pays $1,100 per month when the payment due is $1,000, then the extra $100 would be considered a partial prepayment. When a borrower refinances a loan before the end of the term, then the first loan would be entirely prepaid. Sometimes, loans have prepayment penalties, where the borrower is required to pay a fee to the lender for paying a loan off early.

12. Late Payment

A late payment occurs when a borrower does not make a payment by the date shown on the payment schedule. Some lenders will report late payments to the credit bureaus 30 days after a payment is due, while others may wait until a payment is 60 days past due. Lenders will usually charge a late payment fee for payments not made by the scheduled due date.

13. Security Interest

Also known as collateral, a security interest is something that has been pledged by the debtor to the creditor in exchange for receiving a loan. In residential real estate, the security interest is usually the house that is mortgaged. Sometimes, hard money loans or commercial real estate lenders will ask for an additional security interest, such as other property or assets a borrower owns.

14. Insurance

Insurance provides protection against a possible future event. In real estate, an insurance contract or policy protects the borrower and the lender against property loss or damage by reimbursing the borrower for the amount of loss or damage. A premium is a monthly or annual payment that the insured—the person receiving the insurance—makes to an insurance company.

15. Some Security Interest Charges

Two types of security interest charges are equitable charges and floating charges. An equitable charge lets the secured party such as the lender appropriate or take a specific asset of the borrower. With residential real estate, this is usually the house. A floating charge attaches to the borrower’s assets as a whole, not to a specific asset.

16. Contract Reference

A contract reference is used when one part or clause of a contract refers to or cross-references another part or clause in the same contract or a different contract. For example, Section C of a contract might use the words subject to Section A or in accordance with Section B to show how A and B interact with C.

17. Assumption Policy

An assumption policy in a loan document allows the original borrower to convey or assign the terms and balance of an existing loan to a new borrower. Not all lenders allow loans to be assumed and, if they do, they normally require the party that is having the loan assigned to them qualify for the outstanding balance of the original loan.

18. Required Down Payment

Think of a down payment as what a buyer is required to contribute toward the purchase price of the property in order to secure a loan. To reduce its risk, a lender may require the borrower to make a down payment of a certain amount of money or a certain percentage of the purchase price. For example, if a lender offers 90% financing, then the borrower is required to make a down payment of 10% to get the loan from the lender.

Special Residential Mortgage Disclosures

Consumer protection laws require lenders to make special residential mortgage disclosures. When a disclosure must be made (or the time of disclosure) and when disclosures must be remade (or redisclosed) are two common examples of special disclosures.

Time of Disclosure

Three days is the magic number when thinking about the time of disclosure. A loan estimate must be received by a borrower three days before the lender can start incurring fees, such as an appraisal fee. Three days before signing loan documentation, a borrower must receive a closing disclosure that includes the loan terms, projected monthly payments, fees, and closing costs.

Redisclosure Required

Lenders are required to redisclose a loan estimate if the APR is at least one-eighth of a percentage point—.125—higher or lower than the APR that was initially disclosed to the borrower. The APR, or annual percentage rate, can change if interest rates go up or if the borrower adds more fees or charges that originally planned to the amount being financed.

Subsequent Disclosures

Sometimes, later disclosures are required by the lender. Also known as subsequent disclosures, these disclosures are triggered when borrowers refinance or when an existing loan is assumed by a new borrower.

Refinancings

The main reasons borrowers refinance an existing loan are to get a lower interest rate, to get cash or equity out of their property, or sometimes both. Disclosures required in refinancings are the same as those required in new loans—with one big difference. Borrowers who are refinancing have a three-day right of rescission. This means that within three days of receiving their loan closing documents, they can change their minds, even if the loan terms are exactly what the lender promised.

Assumptions

When a loan is assumed, the creditor—also known as the lender—must disclose to the new borrower before the assumption occurs: the unpaid loan balance due, total charges due for assuming the loan, the original APR, the payment schedule and the total payment that are remaining.

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