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1 Real Estate Finance Today, 3 rd Edition Doris S. Barrell.

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Presentation on theme: "1 Real Estate Finance Today, 3 rd Edition Doris S. Barrell."— Presentation transcript:

1 1 Real Estate Finance Today, 3 rd Edition Doris S. Barrell

2 2 Course Objectives  Define basics of real estate finance  Review government Influences  Discuss current issues in lending  Describe conventional and government loan programs  Calculate monthly mortgage payments  Examine special financing alternatives

3 3 Basics of Real Estate Finance  Financing Instruments  Primary Market  Secondary Market

4 4 Financing Instruments  Note  Mortgage  Deed of Trust

5 5 The Note  Signed Legal document  States terms and conditions for repayment of the loan  Accompanied by either a mortgage or a deed of trust “I. O. U.”

6 6 The Mortgage  Pledges real property as security for debt  Creates a mortgage lien on property  Requires judicial foreclosure in case of default

7 7 The Deed of Trust  Establishes real property as security for debt  Conveys title rights to trustee  Trustee has power of sale  Lender named as beneficiary  Does not required court action to foreclose

8 8 The Transaction  Note + Mortgage or Deed of Trust

9 9 The Primary Market  Sources of funding  Broker or Banker?  Origination and Processing

10 10 Sources of Funding  Commercial Banks  Savings Associations  Credit Unions

11 11 Commercial Banks  Originally for short-term loans  Active today in mortgage lending

12 12 Savings Associations  Originally called Savings & Loan  Historically primary source of mortgage lending  Also referred to as “thrifts”

13 13 Credit Unions  Newcomer to mortgage financing  Provide service to members  Greatly expanding

14 14 Mortgage Broker or Banker? Mortgage Broker  Originates loan  Matches borrower with investor  Paid by “finder fee”  PLUS: has wide range of loan products Mortgage Banker  Originates loan  Uses own money  Continues to service loan  PLUS: qualifying standards are set, underwriting flexible

15 15 Origination & Processing  Prequalified?  Preapproved?

16 16 Members of the Team  Loan Officer  Appraiser  Processor  Underwriter  Closing Department  Settlement Attorney or Agent

17 17 Loan Officer  Meets with borrower  Collects information on assets & debts  Fills out Uniform Residential Loan Application  Determines appropriate loan product

18 18 Appraiser  Appraisal is ordered by the lender  Appraisal paid for by borrower at time of application  Appraisal establishes value to substantiate the loan

19 19 Processor  Receives application from loan officer, appraisal, and credit report  Collects and verifies all information  Prepares case file for submission to underwriter  Stays in contact with borrower

20 20 Underwriter  Approves or denies the loan  May set conditions

21 21 Lender Closing Department  Prepares financing documents  Submits file to settlement attorney or title company closing agent

22 22 Settlement (or Closing) Attorney or title company agent  Prepares deed to convey title  Prepares HUD-1 Statement  Conducts title search  Acquires title insurance for lender and purchaser  Ensures all terms of contract are met

23 23 Geographic Differences Western states settle “in escrow” Eastern & mid-west settle with attorney or title company agent

24 24 Secondary Market  Fannie Mae  Freddie Mac  Ginnie Mae

25 25 Fannie Mae  Originally chartered as Federal National Mortgage Association (FNMA)  Created in 1938 to purchase FHA loans  Extended to VA loans after WWII  Totally stockholder owned since 1968  Purchases both government and conventional loans  Sells mortgage-backed securities

26 26 Freddie Mac  Originally chartered as Federal Home Loan Mortgage Corporation (FHLMC)  Chartered in 1970 to purchase conventional loans  Today purchases government and conventional loans  Sells marketable securities  Under general oversight by HUD

27 27 Ginnie Mae  Government National Mortgage Association  Created as spin-off from Fannie Mae in 1968  Guarantees mortgage-backed securities based on FHA and VA mortgage loans

28 28 Private Investors  Insurance Companies  Pension Funds  Individual Investors  REMIC – Real Estate Mortgage Investment Conduit

29 29 Private Investors  Life Insurance  Pension Funds  REMICs  Individuals

30 30 Government Influences  The Federal Reserve  Federal Home Loan Banks  Department of the Treasury  National Credit Union Administration  Dept. of Housing and Urban Development

31 31 The Federal Reserve  Controls flow of money into the economy Discount Rate Reserves Open Market  Supervises commercial banks

32 32 Federal Home Loan Bank  Established in 1932 to supervise savings associations  12 District banks (like the “Fed”)  Federal Home Loan Bank Board abolished in 1989  Supervision of savings associations given to OTS  Provides reserves and secondary market for its members

33 33 Department of the Treasury Office of the Comptroller of Currency (OCC) Office of Thrift Supervision (OTS) Federal Deposit Insurance Corporation (FDIC)

34 34 National Credit Union Administration (NCUA)  Independent federal agency  Charters and supervises federal credit unions  Operates National Credit Union Share Insurance Fund (NCUSIF)  Insures savings in all federal and many state chartered credit unions

35 35 Dept. of Housing and Urban Development (HUD)

36 36 Congressional Acts Fair Housing Act of 1968 Equal Credit Opportunity Act (ECOA)

37 37 Congressional Acts  Real Estate Settlement Procedures Act (RESPA)

38 38 Congressional Acts  Truth-in-Lending Act (TILA) Requires disclosure of all cost of credit Annual Percentage Rate (APR) must be shown Regulation Z affects advertising  Community Reinvestment Act (CRA) Requires bank’s commitment to community

39 39 Congressional Acts  Taxpayer Relief Act of 1997 Sale of personal residence  $500,000 capital gains tax exemption for couple ($250,000 for single)  Must have occupied 2 out of past 5 yrs.  Can be taken every 2 years  No buy-up required

40 40 Congressional Acts  Taxpayer Relief Act of 1997 Sale of Investment Property  Capital Gain tax on profit reduced to 15%  Depreciation recapture at 25%  Hold for 12 months

41 41 Current Issues in Mortgage Lending  The Subprime Crisis  Foreclosure Rates Increase  Importance of Credit Score  Required Homeowner Insurance

42 42 The Subprime Crisis  Extreme growth  Declining housing market  New affordable lending options  Predatory Lending Concerns

43 43 Foreclosures Increase  Who’s hurting?  Who’s to blame?  Who can help?

44 44 Lender Workout Options  Foreclosure Presale  Short Sale  Deed in Lieu  Reinstatement  Forbearance  Refinancing

45 45 Sources of Help  Consumer Credit Counseling Service  Non-profit organizations  HOPE 

46 46 Credit Scoring  Equifax  Experian  (TransUnion  FICO

47 47 Percentage of Contribution  Payment history35%  Current total debt30%  Length of credit history15%  Requests for new credit10%  Types of credit in use10%

48 48 Factors That Lower Score  Late payments  Too many credit cards  Excessive potential credit  Maxed-out cards  Liens, judgments, foreclosure  Multiple inquiries

49 49 Ways to Improve Score  Pay bills on time  Reduce number of credit cards  Refuse preapproved credit cards  Refuse increased loan limits  Correct errors on credit reports

50 50 Required Homeowner Insurance Disaster impact Accelerating rates Flood Insurance

51 51 Conventional Mortgage Loans  Standard Conforming Loans  Affordable Loan Products  Non-conforming Loans  Adjustable Rate Mortgage (ARM)  Growing Equity Mortgage (GEM)

52 52 Standard Conforming Loans Guidelines established by Fannie Mae and Freddie Mac Made homeownership possible for more people

53 53 Original Guidelines  Maximum loan amount – set annually  Minimum down payment – 5%  Qualifying ratios – 28/36  Reserves – 2 months  Private mortgage insurance required  Non-assumable  No pre-payment penalty

54 54 Private Mortgage Insurance  Protects the lender  Required with less than 20% down  Payment can be made upfront, financed or paid in monthly increments  Legislation mandates removal of PMI when 78% LTV reached  Ways to avoid PMI

55 55 Ways to Avoid PMI  Lender-paid PMI Lender charges slightly higher rate with no PMI payment  Combined lst & 2 nd mortgage (trust)

56 56 Affordable Loan Products  Fannie Mae Mortgage Solutions Biweekly Mortgage Expanded Approval™ Flexible 97 and Flex 100™ MyCommunity Mortgage™

57 57 Affordable Loan Products  Freddie Mac Home Possible Home Possible 97 and 100 Neighborhood Solution™ Initial Interest Fixed-rate

58 58 Non-conforming Loans  Loans which do not conform to Fannie Mae/Freddie Mac guidelines  Guidelines set by lender  Loans exceeding conventional limits are called “jumbos ”

59 59 Special Community Programs  Attract essential workers into community  Encourage low & moderate income first- time homebuyers  Help to move from subsidized housing  Promote revitalization

60 60 Adjustable Rate Mortgages  Index  Margin  Note Rate  Initial Rate  Adjustment period  Caps  Assumable  Convertable

61 61 Example of a 1-year ARM  Index (T-bill)4.0  Margin2.5  Note rate6.5  Initial rate4.5  Caps2/6 “ Worst-case scenario”  Yr. 1 = 4.5Yr. 3 = 8.5  Yr. 2 = 6.5Life of loan = 10.5

62 62 Benefits & Disadvantages Benefits  Qualify for more loan  Lower monthly payment  Good for short- term planning Disadvantages  Payments increase  More interest paid  Sharing risk with lender

63 63 Growing Equity Mortgage  Increasing payments to principal Decrease term of loan Save in interest paid  Bi-monthly mortgage Pay one-half payment every 2 weeks Creates one extra month’s payment

64 64 Formulas Using Rate Factor Formula One  Determine principal and interest payment  Multiply loan amount by rate factor  $200,000 x 6.65 = $ Formula Two  Determine loan amount  Divide PI dollars by rate factor  $1330 divide by 6.65 = $200,000

65 65 Calculating Monthly Payment  Principal and Interest (loan amount times rate factor)  Taxes and insurance estimate 2% of sales price, divide by 12  Private Mortgage Insurance (average.8% x loan amount divide by 12)  Condominium or Homeowner Fees

66 66 Case Study #1 – The Browns  Annual income ($30,000 + $25,000)  Debts ($300)  Savings ($5,000 plus $5,000 gift)  Interest rate - 7.5%, 30 yr loan  Qualifying ratios – 28/36

67 67 Case Study #2 - Greenberg  Income - $36,000  Debts - $335  Savings - $3,000  7% interest, 30 yr.  33/38 ratios

68 68 Case Study #3 - Gonzalezs  Income - $70,000  Debts - $ 500  Savings - $15,000  8%, 30 yr loan  33/38 ratios  8%, 15 yr loan

69 69 Government Insured or Guaranteed Loans  Federal Housing Administration (FHA)  Dept. of Veterans Affairs (VA)  State or Local Programs

70 70 FHA Loan Guidelines Maximum loan amount : varies by area Minimum down payment: 1.25% for sales price $50,000 or less: 2.25% for over $50 K Qualifying ratios31/43 Seller contribution: up to 6% of sales price Mortgage Insurance Premium: 1.50% upfront and.5% annual, charged monthly Assumable with purchaser qualifying

71 71 Mortgage Insurance Premiums for FHA Loan (MIP) Upfront MIP  1.50% of loan amount amortized over life of loan  Not charged on condos Annual MIP .5% of loan amount divided by 12 per month  All FHA loans

72 72 Compensating Factors  Low long-term debts  Large down payment  Minimal credit use  Excellent job history  History of making equal or greater payments than new PITI  Additional potential income

73 73 Special FHA Programs  FHA/VA 203(h) – disaster relief  FHA/ARM 251 (1/5 caps)  Officer, Teacher Next Door  Housing Choice Voucher (formerly Section 8)

74 74 FHA 203(k) Rehab Loan Finance both purchase and rehab costs 97% LTV of projected value Paid in “draws” Minimum $5,000 in rehab cost Owner-occupant only

75 75 Calculate FHA monthly payment  Principal & Interest Loan amount x rate factor  Taxes & Insurance Estimate 2% of sales price divided by 12  Mortgage Insurance Upfront: 1.50% of loan amount financed Annual:.5% of loan amount divided by 12  Condo or Homeowner fee

76 76 VA Loans  Certificate of Eligibility 90 days in wartime 180 days service before l980 2 yrs. Service since yrs for reservists & National Guard  Entitlement set by VA 25% of current Fannie/Freddie loan limit  Top 25% of loan guaranteed Bank lends 5 times entitlement

77 77 VA loan Guidelines  Maximum loan amount: 4 times VA entitlement  Minimum down payment: 0  Qualifying ratio: just 41  Funding fee: similar to PMI or MIP  Seller contribution: unlimited  Assumable with buyer qualification  Certificate of Reasonable Value: appraisal

78 78 VA Funding Fee First UseSubsequent 0-5% down2.15%3.30% 5-10% down1.50%1.50% 10%+ down1.25%1.25% RESERVISTS/NATIONAL GUARD 0-5% down2.40%3.30% 5-10% down1.75%1.75% 10%+ down1.50%1.50%

79 79 Case Study #1 - Browns  Sales price: $142,000  Mortgage: $137,740  Calculate payment for FHA loan  FHA or MyCommunity Mortgage™?

80 80 Case Study #2 - Wong  Income: $40,000  Debt: $725  Current rent: $850  Compensating factors?

81 81 Case Study #3 - Martinez  Income: $28,000  Debt: $80  Savings: $2000  VA eligible?

82 82 Special Financing Alternatives  Seller Financing  Low/Doc or No/Doc Loans  Loans for Self-employed  Alternative Sources of Cash  Reverse Annuity Mortgage

83 83 Seller Financing  First or Second Mortgage (Trust)  Lease- Purchase Option

84 84 Lease-Purchase Option  Non-refundable deposit  Sales price established  Accelerated rent with credit back  Liability for repairs  Delayed settlement  Financing arranged 60 days prior to settlement

85 85 Loans for Self-Employed  The Problem!  Solutions Low/doc loan Tax returns Profit & Loss Balance sheet

86 86 Alternate Sources of Cash  Gift  CD, Stocks, Bonds  IRA  401(k)

87 87 Reverse Annuity Mortgage  Payments to owner based on equity in home  Benefit to elderly needing cash Lump sum Payments Line of Credit

88 88 Available RAM Programs  Private lender  FHA Home Equity Conversion Mortgage (HECM)  Fannie Mae HomeKeeper®


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