Broker. Financing Real Estate. Chapter 12. Copyright Gold Coast Schools 1

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1 Broker Chapter 12 Financing Real Estate Copyright Gold Coast Schools 1

2 Learning Objectives Describe the difference between a note and a mortgage Explain the benefits of having the first recorded lien on a property Describe Florida's statutory foreclosure process Calculate the mortgage payment on a new loan using financial tables or a financial calculator Copyright Gold Coast Schools 2

3 Learning Objectives Calculate the down payment for an FHA loan Describe the differences between a term loan, a partially amortized loan and a fully amortizing loan Explain how to calculate the interest rate on an adjustable-rate mortgage Describe the major characteristics of the FHA's reverse annuity mortgage Copyright Gold Coast Schools 3

4 Learning Objectives List 4 required consumer disclosures under Florida's Time-Sharing Act List 3 possible scenarios that could cause loss for a consumer buying property with a contract for deed Describe at least 3 possible benefits to the seller on a sale-leaseback transaction Copyright Gold Coast Schools 4

5 Learning Objectives List the protected classes of consumers under the Equal Credit Opportunity Act Explain why the APR disclosure for a 30- year loan may understate the real yield List at least 5 requirements of the Real Estate Settlement Procedures Act List at least 10 items a borrower should bring to the loan application appointment Copyright Gold Coast Schools 5

6 Learning Objectives Calculate the minimum qualifying ratios for conventional and FHA mortgages Estimate the approximate yield to the lender when the lender charges discount points Describe the characteristics and advantages of automated underwriting systems Copyright Gold Coast Schools 6

7 Promissory note A note without a mortgage is an unsecured note A note referencing a mortgage is a secured note Anyone who witnesses a note cosigns the note Copyright Gold Coast Schools 7

8 Mortgages Parties to a mortgage Mortgagor borrower Mortgagee lender Mortgage clauses Acceleration 1 st step in the foreclosure process Lender calls the entire amount due Copyright Gold Coast Schools 8

9 Mortgages Reinstatement Allows mortgagor to reinstate by paying the delinquent payments and costs Included in loans sold to Fannie Mae & Freddie Mac Due on sale Copyright Gold Coast Schools 9

10 Mortgages Prepayment Prepayment penalty Penalty if loan is paid early Any note silent as to the right of the borrower to prepay, may be prepaid without penalty Copyright Gold Coast Schools 10

11 Mortgage Theory Title theory Title is transferred to lender or third party trustee Deed is conveyed back to mortgagor when loan is paid off Lien theory Borrower has title Satisfaction of mortgage when loan is paid off Florida is a lien theory state Copyright Gold Coast Schools 11

12 Mortgage Priorities Superior liens go ahead without exception Real estate property taxes Special assessments After superior liens based on date of recording Subordination Step back in priority Land developer to a construction loan Copyright Gold Coast Schools 12

13 Rights of the Mortgage Lenders Right to foreclose Foreclosure procedure in Florida Foreclosure sale Certificate of title Deficiency judgment Right to transfer mortgage Copyright Gold Coast Schools 13

14 Rights of the Borrowers Right of possession Equity redemption By law regardless if prohibited in mortgage Ends at time of sale Copyright Gold Coast Schools 14

15 Conventional Mortgage Loans Loans that are neither government insured or guaranteed Not usually assumable Private Mortgage Insurance (PMI) Homeowners Protection Act PMI automatic termination Copyright Gold Coast Schools 15

16 Conventional Mortgage Loans Conforming Meets requirements of Fannie Mae and Freddie Mac Nonconforming Do not meet requirements Copyright Gold Coast Schools 16

17 FHA Insured Mortgage Loans Loan programs 203(b) most common FHA program (1-4 units) 234(c) similar to the 203(b) program, insures condominiums 245 insures graduated payment mortgages (negative amortization) Mortgage Insurance Premium (MIP) Assumption Direct Endorsement Copyright Gold Coast Schools 17

18 VA Mortgage Loans Department of Veterans Affairs (VA) loan Guarantees The amount of the guarantee is based on the loan amount and the veteran s entitlement DVA has the authority to make loans in areas where there is not VA approved lender No maximum loan amount Maximum guarantee Interest rates are negotiable Closing costs may not be included in the loan Copyright Gold Coast Schools 18

19 Mortgages by Method of Payment Term mortgages Interest only Principal due at the end of the term Partially amortized mortgages Amortizes over a term Example; a 30 year term with a balloon payment due at the end of the 5 th year Fully amortized mortgages Copyright Gold Coast Schools 19

20 Mortgages Adjustable rate mortgage (ARM) Alternative for persons who intend to live in their properties for a short time Calculated interest rate determined by index + margin Payment-option mortgage pick a pay loan Graduated payment mortgage (GPM) Monthly payments in early years do not cover the accrued interest Negative amortization Copyright Gold Coast Schools 20

21 Mortgages Reduction Option Mortgage Early Payment Mortgage 15 year Mortgage Buydowns Copyright Gold Coast Schools 21

22 Mortgages by Purpose Purchase money mortgage owner financing Participation mortgage Equity kicker Contingent interest % of sales proceeds % of income Mortgage participation number of lenders participate in the loan Copyright Gold Coast Schools 22

23 Mortgages by Purpose Blanket mortgage Release clause Covers more then one parcel of property Reverse annuity mortgage Elderly homeowner s trade equity in their home for monthly income Package mortgage Includes real and personal property in a home Most real estate loans are package mortgages Copyright Gold Coast Schools 23

24 Mortgages by Purpose Home equity loan Borrowing against equity in owner s home Loan calculation Appraised value Times loan to value ratio Equals total loans Minus existing mortgage balance(s) Equals equity line Copyright Gold Coast Schools 24

25 Time-sharing Pertinent facts about property disclosed in the offering statement Types of ownership Interval best bundle of rights Right to use lease or license to use 10 day right to cancel after receiving the offering statement Copyright Gold Coast Schools 25

26 Other Techniques Contract for deed Buyer has possession Title Seller - legal title Buyer - equitable title Buyer should insist that contract be recorded Gives constructive notice Allows for homestead Sale and leaseback Copyright Gold Coast Schools 26

27 Equal Credit Opportunity Act Prohibits discrimination in granting loans based on Race Color Religion Sex National origin Age Marital Status Receipt of income from public assistance Copyright Gold Coast Schools 27

28 Truth-in-Lending Act Purpose is to inform consumers of exact credit costs before they make a purchase Published by the board of Governors of Federal Reserve Administered by Federal Trade Commission Copyright Gold Coast Schools 28

29 Truth-in-Lending Act Bait and Switch advertising - a federal offense Regulation Z Applies to credit secured by a residence but not business or commercial loans Requires the disclosure of the Annual Percentage Rate (APR) Triggering Terms - any finance specifics advertised which would require all of the specifics to be given Copyright Gold Coast Schools 29

30 Real Estate Settlement Procedures Act Procedure for a real estate settlement (closing) Requires the use of Uniform Settlement Statement (HUD -1) Information booklet Good Faith Estimate Must receive an estimate of closing costs At the time of loan application or within 3 days Copyright Gold Coast Schools 30

31 Real Estate Settlement Procedures Act Kickbacks or referral fees Related to a closing are prohibited Real estate loan transaction Closing services Referrals between Real Estate Brokers specifically exempt Seller may not require that the title insurance be purchased from a particular title company unless seller is paying Copyright Gold Coast Schools 31

32 Exempt from RESPA Loans to finance 25 acres or more Loans for home improvement or refinance Loans to purchase a vacant lot if none of loan will be used to place dwelling on it Sales where the only financing involved is an assumption of existing loan Construction loans not being converted into permanent loans Loans for construction of 1-4 family structure when lot is owned by borrower Loans to purchase property for resale Copyright Gold Coast Schools 32

33 Residential Loan Underwriting Initial Interview Credit History Verifying and analyzing the income Copyright Gold Coast Schools 33

34 Qualifying the Buyer 2 Qualifying Ratios Housing Ratio "Front-end" ratio 31% for FHA (was 29%) 28% for conventional Monthly Housing Expense (PITI) Monthly Income Total obligations ratio "Back-end" ratio 43% for FHA (was 41%) 36% for conventional 41% for VA Both of these ratios on gross income Total Monthly Obligations Monthly Income Copyright Gold Coast Schools 34

35 Qualifying the Buyer VA Uses a total obligation ratio, but does not use a housing expense ratio Guidelines are more lenient than FHA or Conventional Rule of thumb: A home buyer with average debt can afford a home 2 ½ times his or her annual income Copyright Gold Coast Schools 35

36 Residential Loan Underwriting Property analysis Appraisal Title examination Survey Loan analysis Loan-to-value ratio Interest rate and discount points Discount points are prepaid interest Payback period for points = discount points paid payment difference Copyright Gold Coast Schools 36

37 Residential Loan Underwriting Initial interview and loan application Credit history a credit report shows a borrower s willingness to pay debt Verifying and analyzing income Income stability is based on the expectation of continuance Copyright Gold Coast Schools 37

38 $250,000 Fixed vs. Adjustable Rate Mortgage Fixed 30 6% Vs. Adjustable 2% Ann. Cap / 6% Lifetime 3.5% Fixed Rate Adjustable Rate ARM Savings(Loss) Year Payment Rate Payment Rate Monthly Accrued 1 $1,499 6% $1, % $376 $4, , , , , , (224) 2, , , (553) (3,756) 12

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