© OnCourse Learning.

Chapter 11 Real Estate Financing Learning Objectives
Define the basic mortgage theories Define and describe the essential elements and common provisions of the mortgage note and the mortgage instrument (deed of trust) Describe common note payment plans Describe the concepts of principal and interest, including calculations Define the rights of the parties in mortgage instruments Define three methods of sale of mortgaged property Describe the characteristics, major programs and payment plans, and qualification requirements of the following: Conventional mortgage loans FHA-insured loans VA-guaranteed loans © OnCourse Learning

Chapter 11 Real Estate Financing Learning Objectives
Describe the basic definitions, characteristics, and uses of other mortgage loans and payment methods Describe common sources of financing Describe the major players in the secondary mortgage market Describe loan underwriting practices and procedures Define and describe mortgage legislation: Truth-in-Lending Simplification and Reform Act Equal Credit Opportunity Act © OnCourse Learning

Chapter 11 Real Estate Financing
Principal, Interest, Taxes, and Insurance (PITI) Principal- amount of money on which interest is paid or received Interest- money paid for using someone’s else's money Mortgage loan interest is almost always calculated in arrears. All conforming loans (those sold in the secondary mortgage market) are calculated in arrears Taxes and insurance are often paid to the lender in escrow to protect the lender from loss; either from priority liens arising from unpaid taxes or from catastrophic loss. © OnCourse Learning

Principal, Interest, Taxes, and Insurance (PITI)
Chapter 11 Principal, Interest, Taxes, and Insurance (PITI) Amortization and Debt Service Amortization- gradual reduction of a loan amount from the original amount of the loan to a zero balance through periodic payments Debt Service – principal and interest only (no escrow for T&I) In past, agents used amortization tables (text- figure 11.1) In beginning of loan period, most of payment goes toward interest (figure 11.3) Toward end of loan term, most of payment goes toward principal and little toward interest (figure 11.5) © OnCourse Learning

Chapter 11 Principal, Interest, Taxes, and Insurance (PITI) Equity difference between the market value of the property and what is owed on it As property increases in value, equity increases. Adding improvements that increase market value (without borrowing money) adds equity When loan is completely paid, owner has 100% equity Usury interest charged in excess of the legal limit both lender and borrower must understand that money is to be paid back and there must be corrupt intent. © OnCourse Learning

Chapter 11 Principal, Interest, Taxes, and Insurance (PITI) Discount Points & Yield Lenders may charge discount points to increase the yield (profit) to the lender. Each point charged to a loan will cost one of the parties 1% of the loan and will be paid at the time of closing. Each point charged increases the loan yield by 1/8 % (0.125%). Lenders may charge points on Conventional, FHA, and VA loans. © OnCourse Learning

Chapter 11 Principal, Interest, Taxes, and Insurance (PITI)
Loan Fees, Loan Values, and Loan-to-Value Ratio The best loan for any buyer depends on a number of factors: amount available for down payment and closing costs buyer’s income and debt load length of time buyer intends to occupy the property buyer’s credit score qualification for special down payment programs. © OnCourse Learning

Chapter 11 Real Estate Financing Mortgage Note (Promissory Note)
Mortgage Basics Mortgage Note (Promissory Note) promise that the borrower will be personally liable for paying the amount of the money in the note specifies the manner in which the debt is to be paid must be in writing not recorded See figure 11.7 in text © OnCourse Learning

Mortgage and Deed of Trust
Chapter 11 Mortgage and Deed of Trust Basic Mortgage Concepts Hypothecation: Borrower pledges property as security for a loan without surrendering possession. Mortgage-(Lien theory): Loan constitutes a lien against the real property. A two party instrument in which the borrower gives a piece of paper (mortgage) to the lender in return for the borrowed funds. Borrower is mortgagor. Lender is mortgagee. Most states are lien theory states. Dead of Trust-(Title theory)- conveyance to a third person North Carolina is a title theory state. © OnCourse Learning

Mortgage or Deed of Trust (Essential Elements): Must be in writing as required by the Statute of Frauds. All parties must be identified and have contractual capacity. Mortgagor or trustor must have a valid interest in the property pledged or conveyed. must be a valid debt legally acceptable description of the property mortgaging clause defeasance clause proper execution of the mortgage or deed of trust only borrower or trustor signs delivered to and accepted by the mortgagee or trustee © OnCourse Learning

Mortgage and Deed of Trust
Chapter 11 Mortgage and Deed of Trust Clauses and Covenants The note executed by the borrower includes info about: acceleration, alienation, due-on-sale prepayment penalty. Burrower is required to: pay all real property taxes keep the buildings in a proper state of repair and preservation insure the structures for 100% of the loan amount less the land value or other amount specified by the lender have a good and marketable title to the property © OnCourse Learning

Chapter 11 Mortgage Basics Rights of Mortgage Borrowers:
right to possess the property during the mortgage term as long as the borrower is not in default right to redeem the title or have the mortgage lien released at any time prior to default by paying the debt in full (Defeasance) equity (right) of redemption: right to pay off the outstanding loan balance and regain legal title to the property until foreclosure is finalized. North Carolina Law provides for “statutory redemption” period. © OnCourse Learning

Chapter 11 Mortgage Basics Rights of Lender
transfer or assign the mortgage or deed of trust provides liquidity foreclosure in the event of default Foreclosure- The liquidation of title to the real property pledged to recover funds to pay off debt. judicial foreclosure- lawsuit non-judicial- not court ordered (see figure 11-8) “power of sale” clause strict foreclosure- narrow time period deed in lieu of foreclosure- “friendly” deficiency judgement nonrecourse © OnCourse Learning

Chapter 11 Real Estate Financing Mortgage Basics Short Sale
borrower is unable or unwilling to pay off the mortgage loan borrower owes more money than the property is worth lender allows the property to be conveyed free from the old loan © OnCourse Learning

Chapter 11 Real Estate Financing Sales of Mortgaged Properties
Cash sale: simplest real estate transaction seller receives all cash for sale and pays off any outstanding loan balance Loan assumption: seller remains liable for the loan/payment of the note can be released from liability by the lender Most conventional loans are not assumable. FHA and VA loans generally are assumable with qualification. Taking title “subject to” a loan- The new purchaser does not become liable for payment of the note. Most lenders require new financing. © OnCourse Learning

Categories of Residential First Mortgage Loans Conventional No participation by an agency of the federal government. Uninsured – borrower has sufficient equity (20% +) to protect the lender in the event of default Private Mortgage Insurance (PMI) – protects the lender against losses if borrower defaults Required on mortgage loans for more than 80% LTV conforming– comply with FMMA/HFLMC guidelines and use standardized forms Non-conforming– does not meet standards Home equity © OnCourse Learning

Categories of Residential First Mortgage Loans FHA Insured Loans FHA does not make direct loans insures lenders against financial loss buyer pays for this protection by paying: Up-front mortgage insurance premium (UFMIP) Annual mortgage insurance premium (MIP) FHA 203(b) Regular Loan Program: For the purchase or construction of 1 to 4 family dwellings The most popular FHA program Rules for loan assumption qualification, release of liability, notification and time of payoffs differ according to when loan was unwritten © OnCourse Learning

Chapter 11 Real Estate Financing FHA 203(b) Regular Loan Program:
Categories of Residential First Mortgage Loans FHA 203(b) Regular Loan Program: FHA maximum loan amount: Maximum loan amounts are based on geographic regions Higher limits are allowed in high cost regions Must be owner occupied dwelling Contract requirements: contain specific wording regarding the FHA appraised value buyer be provided with a lead-based paint disclosure buyer sign the form, “For Your Protection: Get a Home Inspection” before signing the “Offer to Purchase” © OnCourse Learning

Chapter 11 Real Estate Financing VA- Guaranteed Loan Program
VA guarantees repayment of the top portion of the loan to the lender in the event of borrower default. Loan cannot exceed the VA’s certificate of reasonable value (CRV). Eligibility: Borrower must qualify as a veteran in order to be eligible for loan. VA loans can be made to the unmarried surviving spouse of a veteran who died as a result of service related injuries. Contract Requirements: must have specific wording regarding the value of the property in the sales contract © OnCourse Learning

Chapter 11 Real Estate Financing VA- Guaranteed Loan Program
VA Funding Fee: VA charges a funding fee of between 0.5% and 3.35% except for members with service-connected disabilities. Qualification for VA Loans: requires owner occupancy qualify under the gross monthly income rule qualify under a net family support standard © OnCourse Learning

Chapter 11 Real Estate Financing Other Aspects of FHA and VA Loans
Escrow account – borrower must pay an impound into this account each month to accumulate money to pay the annual real property tax bill and annual homeowner’s insurance policy premium. Down payment – borrower must pay anything over the maximum loan amount in FHA or VA loans: Down payment cannot be financed unless the down payment is secured by collateral other than the property and that loan is disclosed to the lender. Miscellaneous Both VA and FHA loans are assumable (with qualification). VA and FHA mortgages never require a pre-payment penalty. © OnCourse Learning

Chapter 11 Real Estate Financing RD and FSA Mortgage Loans
Rural Development (RD) and Farm Service Agency (FSA) loans: Direct loans: Funds come from the government. RD guaranteed loans: Funds come from mortgage lenders. Fully or partially subsidized loans are below prevailing market rates. RD loans are for the purchase, repair, and rehabilitation of single and multifamily residences and to maintain and create rural employment The FSA provides loans to purchase and operate family-sized farms. © OnCourse Learning

Chapter 11 Real Estate Financing Typical Loan Repayment Plans
Fixed rate- most widely used Adjustable (variable) interest rates (ARMs)- varies with standard index Graduated payment plans- allows for negative amortization Buy-down loan- lender draws against escrow, decreases interest rate Term loan- interest only payment for specified term Growing equity mortgage:- allows the loan to be paid off much faster Types of Loans by Purpose or Special Feature Purchase Money Mortgage- seller financed Construction loan- interim, or temporary, short-term financing Open-end mortgage- refinanced without rewriting the mortgage and incurring closing costs © OnCourse Learning

Types of Loans by Purpose or Special Feature Blanket mortgage-two or more parcels of real estate pledged for debt Package mortgage- personal AND real property pledged to secure payment Mortgage Priorities First mortgage:- highest in priority. May be only mortgage Junior mortgage- usually higher interest rates and shorter terms Effect of recordation- priority of liens established by date Tax liens take priority Mechanics liens take effect before recordation Subordination of mortgages: Can be changed by agreement of the parties even after recording Releases- releases parties from original terms. Recording is important © OnCourse Learning

Chapter 11 Real Estate Financing The Role of the Federal Reserve Bank
Controls the discount rate (the amount of money in the economy). Ensures economic stability and growth. Dictates reserve requirements for banks. Powerful influence on Real Estate Market Enforces: The Truth-in-Lending Simplification and Reform Act The Equal Credit Opportunity Act Primary Sources of Mortgage Funds Savings and Loans Savings Banks- depositor owned Commercial Banks- federally or state chartered Prefer short term, higher yield mortgage © OnCourse Learning

Chapter 11 Real Estate Financing Primary Sources of Mortgage Funds
Mortgage Bankers and Mortgage Brokers: Mortgage bankers make and service loans. Mortgage brokers bring together lender and borrower for a fee paid by the lender. Life Insurance Companies, Credit Unions, Real Estate Investment Trusts Individual Investors, Government Agencies, Employers Secondary Mortgage Market Sales to Organizations: Fannie Mae (FNMA)- largest player in market. former government agency. Ginnie Mae (GNMA)- government agency Freddie Mac (FHLMC)- private agency. Purchases conventional loans. Private Mortgage Insurers © OnCourse Learning

Residential Lending Practices and Procedures in Transactions Subject to Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure Loan Application Procedures: standardized mortgage application form Lender will usually require payment for appraisal fee and credit report. lender to prepare and provide a Good Faith Estimate (GFE) within 3 days Application details will be verified. Loan Underwriting: review of loan documentation, value of property and buyer’s creditworthiness Borrower Analysis: two years of financial history to determine if income and credit is sufficient © OnCourse Learning

Residential Lending Practices and Procedures in Transactions Subject to Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure Property Analysis: Lender hires a state-licensed appraiser to estimate the value of the property Lender hires an attorney to perform a title search to assure title is clear Loan Analysis: Determine if the mortgage meets the financial goals of the lender and to determine its’ ability to be sold within the secondary market place Loan Commitment and Closing © OnCourse Learning

Chapter 11 Real Estate Financing Financing Legislation
Dodd-Frank Wall Street Reform and Consumer Protection Act: Establishes the Bureau of Consumer Financial Protection (CFPB) Established to prevent lender abuses, predatory lending, and inappropriate fees on consumer loans. CFPB incorporates federal regulations for consumer loans into one agency Truth-in-Lending Act: Part of the Federal Consumer Credit Protection Act Does not apply to commercial loans © OnCourse Learning

Chapter 11 Real Estate Financing Financing Legislation Regulation Z:
establishes disclosure and advertising requirements, and penalties for non-compliance applies to all personal, family, household, or agricultural loans Disclosure requirements: Annual percentage rates (APRs) Finance charges Amount financed Total of payments Penalties for violation of Regulation Z: fine of up to $5,000 AND/OR imprisonment for up to one year © OnCourse Learning

Fair Credit Reporting Act (FCRA): Ensures consumer credit reporting agencies use reasonable procedures to collect and evaluate relevant consumer credit information and that information is fairly and impartially used. Items addressed by the FCRA include: Permissible use of reports Requirements pertaining to information in reports Disclosure of information to consumers Procedure for disputing report’s accuracy Consumer report user requirements Civil liability for willful or negligent non-compliance with the Act Penalties for unauthorized disclosure by consumer credit reporting agencies © OnCourse Learning

Equal Credit Opportunity Act (ECOA): Prevents discrimination in the loan process by lenders Unlawful to discriminate on the basis of: race, color, religion, sex, national origin, marital status, age Note: Marital status and age coverage in this Act differs from that of the state and federal fair housing acts Illegal to discriminate if: Part of the applicant’s income is derived from public assistance Applicant has availed themselves of any protection available through ECOA or TILSRA © OnCourse Learning

© OnCourse Learning.

Similar presentations

Presentation on theme: "© OnCourse Learning."— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

© OnCourse Learning.

Similar presentations

Presentation on theme: "© OnCourse Learning."— Presentation transcript:

Similar presentations

About project

Feedback