Mortgage Financing Basics

Terminology Mortgage Mortgagor (example – CTX Mortgage) Voluntary lien on Real Estate, given by the mortgagor to secure the payment of a debt or the performance of an obligation to the mortgagee. Mortgagor (example – CTX Mortgage) Borrower retains legal title. Mortgagee (example – Mr. and Mrs. Bob Andrews) Has a lien on the property securing the debt. Mortgage Loan Instruments Promissory Note Amount of debt, time and method of repayment (Prepayment Penalty) & rate of interest. Mortgage Document or Deed of Trust Terms of note, duties of mortgagor, provisions for default, assignment of mortgage & release of mortgage lien.

Where does the money come from? Major Sources of Lending Banks, Thrifts, Credit Unions (Fiduciary lenders) Mortgage Brokers (Middle man not a lender) Internet Lending Mortgage Bankers (Lender using their own $) Secondary Mortgage Market Loans bought and sold after they have been funded. Agencies purchase loans and assemble them into securities for sale to investors. Agencies Fannie Mae – Privately owned stock issuing agency supervised by Federal Government. Deals in FHA, VA and Conventional Loans. Freddie Mac and Ginnie Mae similar agencies.

Types of Loans Used to be only… 30 & 15 Year Fixed 1 Year ARM 7 Year Balloon 

Types of Loans Now can be… 1 Month ARM 80-20 3/1 or 3/6 ARM Full Verification 5/1 or 5/6 ARM No Income 7/1 or 7/6 ARM Stated Income 10/1 or 10/6 ARM No Ratio 2/28 or 3/27 ARM No Income/No Asset/ No Employment (No DOC) Libor ARMS A-Loans T-Bill ARMS B-C Loans Cofi ARMS 30 or 40 Year Amortization 80-10-10 80-15-5

Financing Techniques Straight Loan Amortizing Loan Term Loan or Interest Only Loan. Used to be for seconds only but now a popular first mortgage option. Amortizing Loan Monthly payments of interest and principal. Adjustable Rate Mortgage (ARM) Interest Rate and payments fluctuate. Tied to a fixed margin for the life of the loan and an adjustable index. Rate caps yearly and for the life of the loan. Balloon Payment Loans Lump sum payment after a period of time.

4 Critical Elements of a Mortgage Application   Credit Character Appraisal Collateral Income Capability Down Payment Cash

Credit Most important factor in lending today! Investigates your debt repayment character Determines how much you really owe Tri-merge credit report – TransUnion, Equifax, and Experian are all closely looked at when approving a loan for a mortgage.

Credit Scores FICO Scores > 760 = EXCELLENT CREDIT 680-750 = GOOD CREDIT 620-680 = FAIR CREDIT < 620 = POOR CREDIT < 500 MAJOR CREDIT PROBLEMS

Appraisal Determines if there is sufficient value in the property to protect the interest of the buyer & the bank Performed by a state licensed appraiser LTV = loan to value = (loan amount / purchase price or appraised value [whichever is less]) FHA & VA appraisals are slightly more restrictive Drive by or cyber appraisals are common

Employment - Income Hourly Pay vs. Commission vs. Salary Overtime Second Job Disability* Self Employed – Depreciation Child Support* Social Security Rental Income Bonus** Car Allowance Interest** * = Has to continue for 3 years ** = Average of last two years

Down Payment Acceptable Sources Down Payment Requirements Gift from family (w/ restrictions) Assets (1 or 2 months bank statements) Tax Return Money Equity in present home  Down Payment Requirements Conventional = 3% - 5% FHA = 2.25% (3% into deal) VA =0% Special Programs = 0% (80%/20%)

Closing Costs Credit Report Appraisal Fee Flood Certification Fee Attorneys Fees Title Insurance Recording Fees Vermont Property Transfer Tax Points

Conclusion The mortgage process is more of an art than a science. Putting a loan together is like breaking the components of the borrowers down to pieces of a puzzle and finding the right loan that creates a picture something like this: