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

2. 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

3. 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

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

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

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

7. 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

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

9. 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

10. 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

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

12. 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.

13. 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

14. 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

15. 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
debts
= $ 940
The lower of the two.
For the above: $1120 vs. $940 =
Maximum payment of $940 per month for PITI

16. 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

17. 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

18. 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

19. 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

20. 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