Modern Real Estate Practice in Pennsylvania 12th Edition Chapter 20: Financing the Real Estate Transaction

2 ©2012 Kaplan, Inc. 20Real Estate Financing: Practice Learning objectives –Identify the types of institutions in the primary and secondary mortgage markets –Describe the various types of financing techniques available to real estate purchasers –Explain role of government financing regulations –Distinguish the requirements and qualifications for conventional, FHA, and VA loan programs –Distinguish among the different types of “creative” financing techniques that address borrowers’ different needs –Define key terms

20Real Estate Financing: Practice Real estate financing market –Secondary mortgage market Fannie Mae Freddie Mac Ginnie Mae 3 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice Cost of Credit –Yield and risk –Determination of interest rate charged to buyer Term of loan Type of mortgage loan Loan amount Lender’s cost of money 4 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice Obtaining credit –Credit scores –Fair and Accurate Credit Transactions Act –Loan application –Underwriting the loan –Loan commitment 5 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice Financing legislation –Truth in Lending Act and Regulation Z Creditor Three-day right of rescission Advertising trigger terms Penalties –Equal Credit Opportunity Act Prohibits discrimination in loan process Race, color, religion, national origin, sex, receipt of public assistance, age, marital status Denial, in writing, within 30 days 6 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice Financing legislation –Community Reinvestment Act Meet credit needs of community in which located Federally supervised financial institution Periodically reviewed –Real Estate Settlement Procedures Act Any residential real estate transaction First mortgage loan Federally related funds 7 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice Loan programs –Conventional loans Loan-to-value ratio (LTV) PITI ratios Private mortgage insurance (PMI) –FHA-insured loans MIP Loan limits Assumability Discount points Prepayment privileges 8 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice Loan programs –VA-guaranteed loans Certificate of eligibility Certificate of reasonable value Funding fee Prepayment privileges Certain assumption rules –Agricultural loan programs Farm Service Agency Farm Credit System Farmer Mac 9 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice Financing techniques –Amortized loans –Adjustable-rate mortgages (ARMs) –Balloon payment loan –Growing-equity mortgages –Reverse mortgages 10 ©2012 Kaplan, Inc.

20Real Estate Financing: Practice 11 ©2012 Kaplan, Inc. Monthly payment (–Month’s interest) = Amount paid toward principal Principal balance × Annual interest rate / 12 = Month’s interest Principal balance (–Amount paid toward principal) = New principal balance

20Real Estate Financing: Practice 12 ©2012 Kaplan, Inc. Monthly payment (– Month’s interest) = Amount paid toward principal 1. $1, – $ = $ $1, – $ = $ Principal balance × Annual interest rate ÷ 12 = Month’s interest 1. $150, × 7.75% ÷ 12 = $ $149, × 7.75% ÷ 12 = $ Principal balance (– Amount paid toward principal) = New principal balance 1. $150, – $ = $149, $149, – $ = $149,788.84

20Real Estate Financing: Practice Other financing techniques –Purchase-money mortgages –Package loans –Blanket loans –Wraparound loans –Open-end loans –Construction loans –Sale-and-leaseback –Buydowns –Home equity loans 13 ©2012 Kaplan, Inc.