California Real Estate Principles, 10.1 Edition Chapter 9 Part I: Real Estate Lenders

Chapter 9 Part I 1. Compute loan qualifying ratios 2. List institutional and non-institutional lenders 3. Describe how private mortgage insurance has changed lending practices in California

Qualifying The Buyer Character (desire) Capacity (ability) Lender’s concern: Character (desire) Credit history Capacity (ability) Income to make the payments Capital (assets) Reserves to convert to cash

Credit A buyer’s credit is the most important factor that influences a lender Consumer’s should be encourage to protect their credit

Credit Report Information varies from credit bureau to credit bureau A credit report is a detailed history of the borrower’s indebtedness over time

Credit Bureaus Equifax www.equifax.com Experian www.experian.com TransUnion www.transunion.com

Credit Scores FICO (Fair Isaac Company) developed a system of scoring by comparing a person’s credit report with many other credit reports to determine the risk of lending to the borrower. Credit scores have advantages over credit reports: Results can be delivered instantaneously Credit decisions are fairer Older credit problems count for less More Credit is Available Credit rates are lower

Composition of FICO Score Payment History – 35% Amounts Owed – 30% Length of credit History – 15% New Credit – 10% Diversity of Credit – 10%

Front End Ratio Monthly housing payment includes payment of principal + interest + taxes + insurance + dues+ PMI Divide monthly housing payments by gross income to determine the front end ratio Monthly housing payment = percentage % Gross monthly income

Back End Ratio Total monthly expenses includes total monthly housing payments + long term debt Divide total monthly expenses by gross monthly income to determine the back end ratio Total monthly expenses = percentage % Gross monthly income

Ratios (%) General Guidelines Conventional FHA /VA Front End 28% 31% Back End 36% 43% 41%

Ratio Terms GROSS MONTHLY INCOME = All stable, legal income before taxes. MONTHLY HOUSING PAYMENT = Projected monthly loan payments + ½ of estimated property taxes and insurance premium monthly + PMI and association dues. LONG TERM DEBT = Monthly payments that continue for six months or longer. TOTAL MONTHLY EXPENSE = Monthly housing payments + monthly long term debts.

Loans Loan Origination fee Appraisal fees LTV = Loan-to-value Appraised Price or Sales Price (whichever is less) x 80% = Maximum loan Loan Origination fee 1 point = 1% of the loan amount Appraisal fees Credit Report fee with extensive information Escrow and Title fees are negotiable Beneficiary Demand Statement showing existing loan balance

It’s A PITI to have to make the payment! Monthly Payment It’s A PITI to have to make the payment! A ssociation dues P rincipal I nterest on the loan T axes on the property I nsurance

Conventional Qualifying Ratios Example: Gross monthly income $4,000 Long term debts $500 $4,000 [x] 28% [=] $1,120 for PITI $4,000 [x] 36% [=] $1,440 for PITI and debts - 500 debts = $ 940 The lower of the two. For the above: $1120 vs. $940 = Maximum payment of $940 per month for PITI

California Loan Market High demand Increasing population Numerous large financial institutions Use of mortgage companies for out-of-state lenders Escrow and title companies provide fast service Loan security is Trust Deed not a mortgage contract Active secondary market to trade loans for cash to generate more loans

Lenders Institutional Non-Institutional Savings & Loan Banks Insurance Companies Non-Institutional Mortgage Companies Mortgage Brokers Real Estate Investment Trusts (REIT) Pension Funds Credit Unions Individuals

Savings & Loan or Thrift Institutions Commercial Banks Insurance Companies Charter Federal & State State Loan-to-value ratio Usual maximum 90% (Can go to 95%) Usually 80% (Can go to 95%) 75% Loan term 30 + years 25 to 30 Interest rates Usually at the higher end of the market Usually middle of the market Usually at the lower end of the market Favorite real estate loans Prefer conventional made on single family dwellings, apartments buildings, mobile homes, condominiums Prefer construction loans with backup takeout loan assured from another lender; Equity home loans Business loans FHA/VA backed Prefer high quality loans Larger commercial and industrial properties with AAA tenants Hotels and office buildings -FHA/VA Customer Greatest share of market Present or former Lend through loan correspondents-mortgage companies

Second Deed of Trust Junior Lien Purpose Close the gap between the sales price and the first loan plus down payment Private lenders Short term loan on single family dwellings Mortgage brokers: agents for private loans Mortgage bankers: lend their own or other’s funds Real Estate Investment Trust (REIT) Created by Federal law; involves at least 100 investors Credit Unions are a group of voluntary savers

Private Mortgage Insurance (PMI) Required on LTV greater than 80% Lender reimbursed if borrower defaults Premiums paid by borrower PMI sold by private insurance companies Strict credit requirements due to higher risk