©2011 Cengage Learning

Chapter 8 Part I: Real Estate Lenders California Real Estate Principles ©2011 Cengage Learning

Chapter 8 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 ©2011 Cengage Learning

Qualifying The Buyer ©2011 Cengage Learning Lender’s concern: C haracter (desire) Credit history C apacity (ability) Income to make the payments C apital (assets) Reserves to convert to cash

Credit ©2011 Cengage Learning A buyer’s credit is the most important factor that influences a lender Consumer’s should be encourage to protect their credit

Credit Report ©2011 Cengage Learning Information varies from credit bureau to credit bureau. A credit report is a detailed history of the borrower’s indebtedness over time.

Credit Bureaus ©2011 Cengage Learning Equifax Experian TransUnion

Credit Scores ©2011 Cengage Learning 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 ©2011 Cengage Learning Payment History – 35% Amounts Owed – 30% Length of credit History – 15% New Credit – 10% Types of Credit in Use – 10%

Front End Ratio ©2011 Cengage Learning 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 Gross monthly income = percentage %

Back End Ratio ©2011 Cengage Learning 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 Gross monthly income = percentage %

Ratios (%) ©2011 Cengage Learning Conventional FHADVA Front End28% 31% Back End36% 43%41%

Ratio Terms ©2011 Cengage Learning 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 ©2011 Cengage Learning LTV = Loan-to-value Appraised Price or Sales Price (lesser value) 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

Monthly Payment ©2011 Cengage Learning It’s A PITI to have to make the payment! ssociation dues rincipal nterest on the loan axes on the property nsurance

Conventional Qualifying Ratios Example: ©2011 Cengage Learning 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 debts = $ 940 The lower of the two. For the above: $1120 vs. $940 = Maximum payment of $940 per month for PITI

California Loan Market ©2011 Cengage Learning  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 ©2011 Cengage Learning Institutional Savings & Loan Banks Insurance Companies Non-Institutional Mortgage Companies Mortgage Brokers Real Estate Investment Trusts (REIT) Pension Funds Credit Unions Individuals

©2011 Cengage Learning Savings & Loan or Thrift Institutions Commercial BanksInsurance Companies CharterFederal & State State Loan-to-value ratio Usual maximum 90% (Can go to 95%) Usually 80% (Can go to 95%) 75% Loan term30 + years 25 to 30 Interest ratesUsually 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 CustomerGreatest share of marketPresent or formerLend through loan correspondents-mortgage companies

Second Deed of Trust Junior Lien ©2011 Cengage Learning 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) ©2011 Cengage Learning 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