Chapter 13

Georgia Real Estate An Introduction to the Profession Eighth Edition Chapter 13 Types of Financing

Key Terms adjustable rate mortgage (ARM) affordable housing loan blanket mortgage construction loan equity sharing graduated payment mortgage negative amortization option package mortgage RAM seller financing wraparound mortgage © 2015 OnCourse Learning

Adjustable Rate Mortgages The interest rate on adjustable rate mortgages (ARM) is tied to some publicly available index. It carries an interest rate that is lower than the rate on a fixed-rate mortgage of similar maturity. © 2015 OnCourse Learning

Adjustable Rate Mortgages If interest rates fall, the monthly payments fall. If interest rates rise, the monthly payments rise. © 2015 OnCourse Learning

Adjustable Rate Mortgages Most ARMs allow assumption and most allow prepayment without penalty. © 2015 OnCourse Learning

Interest Rate The interest rate on an ARM is tied to an index rate. The index rate must be readily verifiable by the borrower and the rate must not be controlled by the lender. © 2015 OnCourse Learning

Margin The index rate is added to the margin. The combination of these two becomes the interest rate to the borrower. © 2015 OnCourse Learning

Adjustment Period The amount of time that elapses between adjustments is the adjustment period. The most common adjustment period is one year. © 2015 OnCourse Learning

Interest Rate Cap Lenders are required to disclose an interest rate cap. The two most popular caps are 1% and 2% per year. © 2015 OnCourse Learning

Payment Cap A payment cap sets a limit on how much the borrower’s monthly payment can increase in any one year. No matter how high a payment is called for by the index rate, the monthly payment cannot increase more than the payment cap. © 2015 OnCourse Learning

Negative Amortization When the required payment exceeds the monthly cap, the difference is added to the balance owed on the loan and earns interest just like the original amount borrowed. This is called negative amortization. The balanced owed rises. © 2015 OnCourse Learning

Choosing Wisely When a lender makes an ARM loan, the lender must explain to the borrower the worst-case scenario, in writing. VA loans are fixed-rate loans. FHA provides an adjustable rate loan program. © 2015 OnCourse Learning

Graduated Payment Mortgage In a graduated payment mortgage, the interest rate and maturity are fixed, but the monthly payments start artificially low and gradually rises. The amount owed on the loan actually increases during its early years. (negative amortization). © 2015 OnCourse Learning

Equity Sharing With equity sharing, in return for providing financing, the lender wants to share in some of the benefits normally reserved for the equity holder. The equity holder would agree to this to either get a lower interest rate or get financing when financing was scarce. © 2015 OnCourse Learning

Package Mortgage It is possible to include personal property in a real estate mortgage with a package mortgage. © 2015 OnCourse Learning

Package Mortgage An example would be a furnished condo in a resort community. The loan would be inclusive of the value of the real estate and the furnishings. © 2015 OnCourse Learning

Blanket Mortgage A mortgage secured by two or more properties is called a blanket mortgage. An example is when a developer purchases raw land and develops it into multiple lots. The original mortgage agreement includes a clause that specifies how much of the loan must be repaid before a lot can be released. © 2015 OnCourse Learning

Reverse Mortgage With a reverse mortgage, the lender can pay the homeowner a lump sum or monthly payments as an annuity for the reverse term of the loan. The homeowner receives a monthly check, has full use of the property and is not required to repay until they sell or die. © 2015 OnCourse Learning

Construction Loan Under a construction loan, money is advanced as construction takes place. The lender will parcel out the loan as the building is being constructed. The buyer will obtain a permanent mortgage from another source to repay the construction loan. © 2015 OnCourse Learning

Blended-Rate Loan When interest rates rise, it may be difficult for buyers to qualify. Many home owners will have loans with rates below the current market. A blended-rate loan can be very attractive in a situation when you want to sell your home and you do not want to help finance the buyer. © 2015 OnCourse Learning

Blended-Rate Loan For example, the seller has a loan at 7%. The current interest rate is 12%. With a blended loan, the lender could offer the buyer a 9% loan. Blended loans are available on FHA, VA and conventional loans. © 2015 OnCourse Learning

Equity Mortgage An equity mortgage is a loan where the lender agrees to make a loan based on the amount of equity in a borrower’s home. © 2015 OnCourse Learning

Equity Mortgage The maximum amount is general 70% - 80% of the home value minus any first mortgage or other liens against the property. © 2015 OnCourse Learning

Equity Mortgage It is typically a second mortgage that is used to tap the increase in equity resulting from rising home prices without refinancing the first loan. An equity mortgage uses the home as an asset against which the homeowner can borrow and repay as needed. © 2015 OnCourse Learning

Affordable Housing Loans An affordable housing loan targets first-time homebuyers and low to moderate-income borrowers. HUD offers the “Officer Next Door” program allowing police officers to buy FHA-foreclosed properties at half price if the officers live in the cities where they work. © 2015 OnCourse Learning

Affordable Housing Loans There is a similar programs for teachers called “Teacher Next Door.” Fannie Mae offers flexible mortgages for school employees, police officers, firefighters and healthcare workers. It offers 97% and 100% loan programs. © 2015 OnCourse Learning

Credit Criteria Many low and moderate-income families do not have checking accounts. Most affordable housing programs accept timely payment of rent and utility bills as credit criteria. © 2015 OnCourse Learning

Conventional Mortgage vs. AIM © 2015 OnCourse Learning

Seller Financing When a seller is willing to accept part of the property’s purchase price in the form of the buyer’s promissory note accompanied by a mortgage or deed of trust, it is called seller financing. © 2015 OnCourse Learning

Seller Financing Seller financing is popular for land sales, on property where an existing mortgage is being assumed by the buyer and on property where the seller prefers to receive the money spread out over a period of time with interest intead of lump-sum cash. © 2015 OnCourse Learning

Seller Financing The seller is responsible for servicing the loan and subject to losses due to default and foreclosure. In Georgia, the term purchase money mortgage refers to seller financing. © 2015 OnCourse Learning

Wraparound Mortgage A wraparound mortgage encompasses existing mortgages and is junior to them. The existing mortgages stay on the property and the new mortgage wraps around them. © 2015 OnCourse Learning

Wraparound Mortgage The seller continues to remain liable for payment of the first mortgage. If the seller defaults, the buyer may have an unwelcome surprise. © 2015 OnCourse Learning

Contract for Deed A contract for deed, also called an installment contract or land contract, enables the seller to finance a buyer by permitting him to make a down payment followed by monthly payments. Title remains in the name of the seller. © 2015 OnCourse Learning

Contract for Deed When the final payment is made to the seller, or the property is refinanced through a traditional lender, title is conveyed to the buyer. Meanwhile, the seller continues to hold title and is responsible for paying the mortgage. © 2015 OnCourse Learning

Option An option is a right, for a given period of time, to buy, sell, or lease property at a specified price and terms. © 2015 OnCourse Learning

Option A common variation is a lease with an option to buy. The tenant, in addition to paying rent and using the property, also has the right to purchase it at a preset price for a fixed period of time. © 2015 OnCourse Learning

Mortgage Fraud Mortgage fraud involves obtaining loans with deceit or misrepresentation. Georgia became the first state to enact a law specific to mortgage fraud: the Georgia Residential Mortgage Fraud Act. © 2015 OnCourse Learning

Illegal Flipping Illegal flipping is purchasing a property and then selling it immediately at a fraudulent and increased price. © 2015 OnCourse Learning

Silent Second A silent second involves increasing the sales price fraudulently and asking the seller to take a second loan with the increase in purchase price. © 2015 OnCourse Learning

Chunking Chunking is a scheme where the borrower makes multiple, simultaneous applications for a loan on one property. © 2015 OnCourse Learning

Identity Theft An unsuspecting victim has personal information stolen; it is then used to qualify for a loan on property. © 2015 OnCourse Learning

Debt Cancellation/Deed Transfer The security deed of a property is cancelled and the property then fraudulently transferred into the name of the fraudster. The property is then sold to an unsuspecting purchaser. © 2015 OnCourse Learning

Red Flags of Mortgage Fraud False information from parties involved in the transaction Altered information on documents Inflated appraisals Unexpected costs Payments higher than expected Required credit insurance © 2015 OnCourse Learning

Red Flags of Mortgage Fraud A request for deed or prepaid fees Inability to communicate with the buyer or seller except via a third party Multiple contracts Being asked to sign blank documents Closing statement reflects different price or seller than contract © 2015 OnCourse Learning

Red Flags of Mortgage Fraud Unknown lender issues approval Simultaneous closings Inadequate identity documentation Seller never at principal residence Property in poor condition but higher price is offered © 2015 OnCourse Learning

Red Flags of Mortgage Fraud Loan involves money to make repairs Missing good faith estimate, truth-in-lending statement, or HUD-1 statement Payment or receipt of a kickback from sales proceeds © 2015 OnCourse Learning

Reporting Mortgage Fraud If you suspect mortgage fraud in a transaction, you are required to report it. © 2015 OnCourse Learning

Reporting Mortgage Fraud © 2015 OnCourse Learning

Investing in Mortgages Individuals can invest in mortgage loan pools through Ginnie Mae and Freddie Mac. Individuals can also buy junior mortgages at yields above Ginnie Mae and Freddie Mac certificates. © 2015 OnCourse Learning

Investing in Mortgages The best way to determine the value of a property is by having it appraised by a professional appraiser who is independent of the party making or selling the mortgage investment. © 2015 OnCourse Learning

Investing in Mortgages The investor should also run a credit check on the borrower, making certain that the market value of the property is in excess of the loans against it and that the property is well constructed, well located and functional. © 2015 OnCourse Learning

Sale and Leaseback Under a sale and leaseback, an owner- occupant sells the property and then remains as a tenant. The buyer acquires an investment and the seller obtains capital for other purposes while retaining the use of the property. © 2015 OnCourse Learning

Land Leases Land leases are at least 55 years long. Unless otherwise stated in the agreement, improvements to the land become the property of the fee owner at the end of the lease. © 2015 OnCourse Learning

Land Leases Jekyll Island is a state park. All development on the island is with land leases. Potentially, all buildings and development will become state property at the end of the leases. © 2015 OnCourse Learning

Land Leases In a long-term lease, it is common to use step- up rentals. Rents will automatically increase at set intervals to hedge against inflation. An alternative is to renegotiate the rents at various points during the life of a lease so that the effects of land value changes are more equal between the lessor and the lessee. © 2015 OnCourse Learning

Land Leases The property would be reappraised and the lease rent adjusted to reflect any changes in the value of the property. Property taxes are paid by the lessee. © 2015 OnCourse Learning

Financing Overview When interest rates are fluctuating, borrowers often gravitate toward adjustable rates, hoping to avoid the worst if rates go up, and to benefit from lower monthly payments if the rates come down. When interest rates are low, fixed rate loans are more popular. © 2015 OnCourse Learning