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Real Estate Finance rd Edition Today, 3 Doris S. Barrell 1 Real Estate Finance rd Edition Today, 3 Doris S. Barrell 1

Course Objectives o Define basics of real estate finance o Review government Influences o Course Objectives o Define basics of real estate finance o Review government Influences o Discuss current issues in lending o Describe conventional and government loan programs o Calculate monthly mortgage payments o Examine special financing alternatives 2

Basics of Real Estate Finance o Financing Instruments o Primary Market o Secondary Market Basics of Real Estate Finance o Financing Instruments o Primary Market o Secondary Market 3

Financing Instruments o. Note o. Mortgage o. Deed of Trust 4 Financing Instruments o. Note o. Mortgage o. Deed of Trust 4

The Note o Signed Legal document o States terms and conditions for repayment of The Note o Signed Legal document o States terms and conditions for repayment of the loan o Accompanied by either a mortgage or a deed of trust “I. O. U. ” 5

The Mortgage o Pledges real property as security for debt o Creates a mortgage The Mortgage o Pledges real property as security for debt o Creates a mortgage lien on property o Requires judicial foreclosure in case of default 6

The Deed of Trust o Establishes real property as security for debt o Conveys The Deed of Trust o Establishes real property as security for debt o Conveys title rights to trustee o Trustee has power of sale o Lender named as beneficiary o Does not required court action to foreclose 7

The Transaction o. Note + Mortgage or ü Deed of Trust 8 The Transaction o. Note + Mortgage or ü Deed of Trust 8

The Primary Market o Sources of funding o Broker or Banker? o Origination and The Primary Market o Sources of funding o Broker or Banker? o Origination and Processing 9

Sources of Funding o. Commercial Banks o. Savings Associations o. Credit Unions 10 Sources of Funding o. Commercial Banks o. Savings Associations o. Credit Unions 10

Commercial Banks o Originally for short-term loans o Active today in mortgage lending 11 Commercial Banks o Originally for short-term loans o Active today in mortgage lending 11

Savings Associations o. Originally called Savings & Loan o. Historically primary source of mortgage Savings Associations o. Originally called Savings & Loan o. Historically primary source of mortgage lending o. Also referred to as “thrifts” 12

Credit Unions o Newcomer to mortgage financing o Provide service to members o Greatly Credit Unions o Newcomer to mortgage financing o Provide service to members o Greatly expanding 13

Mortgage Broker or Banker? Mortgage Broker Mortgage Banker o Originates loan o Matches borrower Mortgage Broker or Banker? Mortgage Broker Mortgage Banker o Originates loan o Matches borrower o Uses own money with investor o Paid by “finder fee” o Continues to service o PLUS: has wide o PLUS: qualifying range of loan products loan standards are set, underwriting flexible 14

Origination & Processing o. Prequalified? o. Preapproved? 15 Origination & Processing o. Prequalified? o. Preapproved? 15

Members of the Team o. Loan Officer o. Appraiser o. Processor o. Underwriter o. Members of the Team o. Loan Officer o. Appraiser o. Processor o. Underwriter o. Closing Department o. Settlement Attorney or Agent 16

Loan Officer o Meets with borrower o Collects information on assets & debts o Loan Officer o Meets with borrower o Collects information on assets & debts o Fills out Uniform Residential Loan Application o Determines appropriate loan product 17

Appraiser o Appraisal is ordered by the lender o Appraisal paid for by borrower Appraiser o Appraisal is ordered by the lender o Appraisal paid for by borrower at time of application o Appraisal establishes value to substantiate the loan 18

Processor o Receives application from loan officer, appraisal, and credit report o Collects and Processor o Receives application from loan officer, appraisal, and credit report o Collects and verifies all information o Prepares case file for submission to underwriter o Stays in contact with borrower 19

Underwriter o Approves or denies the loan o May set conditions 20 Underwriter o Approves or denies the loan o May set conditions 20

Lender Closing Department o Prepares financing documents o Submits file to settlement attorney or Lender Closing Department o Prepares financing documents o Submits file to settlement attorney or title company closing agent 21

Settlement (or Closing) Attorney or title company agent o Prepares deed to convey title Settlement (or Closing) Attorney or title company agent o Prepares deed to convey title o Prepares HUD-1 Statement o Conducts title search o Acquires title insurance for lender and purchaser o Ensures all terms of contract are met 22

Geographic Differences Western states settle “in escrow” Eastern & mid-west settle with attorney or Geographic Differences Western states settle “in escrow” Eastern & mid-west settle with attorney or title company agent 23

Secondary Market o. Fannie Mae o. Freddie Mac o. Ginnie Mae 24 Secondary Market o. Fannie Mae o. Freddie Mac o. Ginnie Mae 24

Fannie Mae o Originally chartered as Federal National Mortgage Association (FNMA) o Created in Fannie Mae o Originally chartered as Federal National Mortgage Association (FNMA) o Created in 1938 to purchase FHA loans o Extended to VA loans after WWII o Totally stockholder owned since 1968 o Purchases both government and conventional loans o Sells mortgage-backed securities 25

Freddie Mac o Originally chartered as Federal Home Loan Mortgage Corporation (FHLMC) o Chartered Freddie Mac o Originally chartered as Federal Home Loan Mortgage Corporation (FHLMC) o Chartered in 1970 to purchase conventional loans o Today purchases government and conventional loans o Sells marketable securities o Under general oversight by HUD 26

Ginnie Mae o Government National Mortgage Association o Created as spin-off from Fannie Mae Ginnie Mae o Government National Mortgage Association o Created as spin-off from Fannie Mae in 1968 o Guarantees mortgage-backed securities based on FHA and VA mortgage loans 27

Private Investors o Insurance Companies o Pension Funds o Individual Investors o REMIC – Private Investors o Insurance Companies o Pension Funds o Individual Investors o REMIC – Real Estate Mortgage Investment Conduit 28

Private Investors o Life Insurance o Pension Funds o REMICs o Individuals 29 Private Investors o Life Insurance o Pension Funds o REMICs o Individuals 29

Government Influences o The Federal Reserve o Federal Home Loan Banks o Department of Government Influences o The Federal Reserve o Federal Home Loan Banks o Department of the Treasury o National Credit Union Administration o Dept. of Housing and Urban Development 30

The Federal Reserve o Controls flow of money into the economy n n n The Federal Reserve o Controls flow of money into the economy n n n Discount Rate Reserves Open Market o Supervises commercial banks 31

Federal Home Loan Bank o Established in 1932 to supervise savings associations o 12 Federal Home Loan Bank o Established in 1932 to supervise savings associations o 12 District banks (like the “Fed”) o Federal Home Loan Bank Board abolished in 1989 o Supervision of savings associations given to OTS o Provides reserves and secondary market for its members 32

Department of the Treasury Office of the Comptroller of Currency (OCC) Office of Thrift Department of the Treasury Office of the Comptroller of Currency (OCC) Office of Thrift Supervision (OTS) Federal Deposit Insurance Corporation (FDIC) 33

National Credit Union Administration (NCUA) o Independent federal agency o Charters and supervises federal National Credit Union Administration (NCUA) o Independent federal agency o Charters and supervises federal credit unions o Operates National Credit Union Share Insurance Fund (NCUSIF) o Insures savings in all federal and many state chartered credit unions 34

Dept. of Housing and Urban Development (HUD) 35 Dept. of Housing and Urban Development (HUD) 35

Congressional Acts Fair Housing Act of 1968 Equal Credit Opportunity Act (ECOA) 36 Congressional Acts Fair Housing Act of 1968 Equal Credit Opportunity Act (ECOA) 36

Congressional Acts o. Real Estate Settlement Procedures Act (RESPA) 37 Congressional Acts o. Real Estate Settlement Procedures Act (RESPA) 37

Congressional Acts o. Truth-in-Lending Act (TILA) Requires disclosure of all cost of credit Annual Congressional Acts o. Truth-in-Lending Act (TILA) Requires disclosure of all cost of credit Annual Percentage Rate (APR) must be shown Regulation Z affects advertising o. Community Reinvestment Act (CRA) Requires bank’s commitment to community 38

Congressional Acts o. Taxpayer Relief Act of 1997 Sale of personal residence o $500, Congressional Acts o. Taxpayer Relief Act of 1997 Sale of personal residence o $500, 000 capital gains tax exemption for couple ($250, 000 for single) o Must have occupied 2 out of past 5 yrs. o Can be taken every 2 years o No buy-up required 39

Congressional Acts o. Taxpayer Relief Act of 1997 Sale of Investment Property o Capital Congressional Acts o. Taxpayer Relief Act of 1997 Sale of Investment Property o Capital Gain tax on profit reduced to 15% o Depreciation recapture at 25% o Hold for 12 months 40

Current Issues in Mortgage Lending o The Subprime Crisis o Foreclosure Rates Increase o Current Issues in Mortgage Lending o The Subprime Crisis o Foreclosure Rates Increase o Importance of Credit Score o Required Homeowner Insurance 41

The Subprime Crisis o Extreme growth o Declining housing market o New affordable lending The Subprime Crisis o Extreme growth o Declining housing market o New affordable lending options o Predatory Lending Concerns 42

Foreclosures Increase o Who’s hurting? o Who’s to blame? o Who can help? 43 Foreclosures Increase o Who’s hurting? o Who’s to blame? o Who can help? 43

Lender Workout Options o Foreclosure Presale o Short Sale o Deed in Lieu o Lender Workout Options o Foreclosure Presale o Short Sale o Deed in Lieu o Reinstatement o Forbearance o Refinancing 44

Sources of Help o Consumer Credit Counseling Service o Non-profit organizations o 888 -995 Sources of Help o Consumer Credit Counseling Service o Non-profit organizations o 888 -995 -HOPE o www. HOPENOW. com 45

Credit Scoring o. Equifax o. Experian o(Trans. Union o. FICO 46 Credit Scoring o. Equifax o. Experian o(Trans. Union o. FICO 46

Percentage of Contribution o Payment history o Current total debt o Length of credit Percentage of Contribution o Payment history o Current total debt o Length of credit history o Requests for new credit o Types of credit in use 35% 30% 15% 10% 47

Factors That Lower Score o. Late payments o. Too many credit cards o. Excessive Factors That Lower Score o. Late payments o. Too many credit cards o. Excessive potential credit o. Maxed-out cards o. Liens, judgments, foreclosure o. Multiple inquiries 48

Ways to Improve Score o Pay bills on time o Reduce number of credit Ways to Improve Score o Pay bills on time o Reduce number of credit cards o Refuse preapproved credit cards o Refuse increased loan limits o Correct errors on credit reports 49

Required Homeowner Insurance Disaster impact Accelerating rates Flood Insurance 50 Required Homeowner Insurance Disaster impact Accelerating rates Flood Insurance 50

Conventional Mortgage Loans o Standard Conforming Loans o Affordable Loan Products o Non-conforming Loans Conventional Mortgage Loans o Standard Conforming Loans o Affordable Loan Products o Non-conforming Loans o Adjustable Rate Mortgage (ARM) o Growing Equity Mortgage (GEM) 51

Standard Conforming Loans Guidelines established by Fannie Mae and Freddie Mac Made homeownership possible Standard Conforming Loans Guidelines established by Fannie Mae and Freddie Mac Made homeownership possible for more people 52

Original Guidelines o Maximum loan amount – set annually o Minimum down payment – Original Guidelines o Maximum loan amount – set annually o Minimum down payment – 5% o Qualifying ratios – 28/36 o Reserves – 2 months o Private mortgage insurance required o Non-assumable o No pre-payment penalty 53

Private Mortgage Insurance o Protects the lender o Required with less than 20% down Private Mortgage Insurance o Protects the lender o Required with less than 20% down o Payment can be made upfront, financed or paid in monthly increments o Legislation mandates removal of PMI when 78% LTV reached o Ways to avoid PMI 54

Ways to Avoid PMI o Lender-paid PMI n Lender charges slightly higher rate with Ways to Avoid PMI o Lender-paid PMI n Lender charges slightly higher rate with no PMI payment o Combined lst & 2 nd mortgage (trust) n 80 -10 -10 n 80 -15 -5 n 80 -20 55

Affordable Loan Products o Fannie Mae Mortgage Solutions n Biweekly Mortgage n Expanded Approval™ Affordable Loan Products o Fannie Mae Mortgage Solutions n Biweekly Mortgage n Expanded Approval™ n Flexible 97 and Flex 100™ n My. Community Mortgage™ 56

Affordable Loan Products o Freddie Mac Home Possible n n n Home Possible 97 Affordable Loan Products o Freddie Mac Home Possible n n n Home Possible 97 and 100 Neighborhood Solution™ Initial Interest Fixed-rate 57

Non-conforming Loans o Loans which do not conform to Fannie Mae/Freddie Mac guidelines o Non-conforming Loans o Loans which do not conform to Fannie Mae/Freddie Mac guidelines o Guidelines set by lender o Loans exceeding conventional limits are called “jumbos” 58

Special Community Programs o Attract essential workers into community o Encourage low & moderate Special Community Programs o Attract essential workers into community o Encourage low & moderate income first- time homebuyers o Help to move from subsidized housing o Promote revitalization 59

Adjustable Rate Mortgages o Index o Margin o Note Rate o Initial Rate o Adjustable Rate Mortgages o Index o Margin o Note Rate o Initial Rate o Adjustment period o Caps o Assumable o Convertable 60

Example of a 1 -year ARM o Index (T-bill) o Margin o Note rate Example of a 1 -year ARM o Index (T-bill) o Margin o Note rate o Initial rate o Caps 4. 0 2. 5 6. 5 4. 5 2/6 “Worst-case scenario” o Yr. 1 = 4. 5 o Yr. 2 = 6. 5 Yr. 3 = 8. 5 Life of loan = 10. 5 61

Benefits & Disadvantages Benefits Disadvantages o Qualify for more o Payments loan o Lower Benefits & Disadvantages Benefits Disadvantages o Qualify for more o Payments loan o Lower monthly payment o Good for shortterm planning increase o More interest paid o Sharing risk with lender 62

Growing Equity Mortgage o Increasing payments to principal n n Decrease term of loan Growing Equity Mortgage o Increasing payments to principal n n Decrease term of loan Save in interest paid o Bi-monthly mortgage n n Pay one-half payment every 2 weeks Creates one extra month’s payment 63

Formulas Using Rate Factor Formula One Formula Two o Determine principal o Determine loan Formulas Using Rate Factor Formula One Formula Two o Determine principal o Determine loan and interest payment o Multiply loan amount by rate factor o $200, 000 x 6. 65 = $1330. 00 amount o Divide PI dollars by rate factor o $1330 divide by 6. 65 = $200, 000 64

Calculating Monthly Payment o Principal and Interest (loan amount times rate factor) o Taxes Calculating Monthly Payment o Principal and Interest (loan amount times rate factor) o Taxes and insurance estimate 2% of sales price, divide by 12 o Private Mortgage Insurance (average. 8% x loan amount divide by 12) o Condominium or Homeowner Fees 65

Case Study #1 – The Browns o Annual income o o ($30, 000 + Case Study #1 – The Browns o Annual income o o ($30, 000 + $25, 000) Debts ($300) Savings ($5, 000 plus $5, 000 gift) Interest rate - 7. 5%, 30 yr loan Qualifying ratios – 28/36 66

Case Study #2 - Greenberg o Income - $36, 000 o Debts - $335 Case Study #2 - Greenberg o Income - $36, 000 o Debts - $335 o Savings - $3, 000 o 7% interest, 30 yr. o 33/38 ratios 67

Case Study #3 - Gonzalezs o Income - $70, 000 o Debts - $ Case Study #3 - Gonzalezs o Income - $70, 000 o Debts - $ 500 o Savings - $15, 000 o 8%, 30 yr loan o 33/38 ratios o 8%, 15 yr loan 68

Government Insured or Guaranteed Loans o Federal Housing Administration (FHA) o Dept. of Veterans Government Insured or Guaranteed Loans o Federal Housing Administration (FHA) o Dept. of Veterans Affairs (VA) o State or Local Programs 69

FHA Loan Guidelines Maximum loan amount : varies by area Minimum down payment: 1. FHA Loan Guidelines Maximum loan amount : varies by area Minimum down payment: 1. 25% for sales price $50, 000 or less: 2. 25% for over $50 K Qualifying ratios 31/43 Seller contribution: up to 6% of sales price Mortgage Insurance Premium: 1. 50% upfront and. 5% annual, charged monthly Assumable with purchaser qualifying 70

Mortgage Insurance Premiums for FHA Loan (MIP) Upfront MIP o 1. 50% of loan Mortgage Insurance Premiums for FHA Loan (MIP) Upfront MIP o 1. 50% of loan amount amortized over life of loan o Not charged on condos Annual MIP o. 5% of loan amount divided by 12 per month o All FHA loans 71

Compensating Factors o Low long-term debts o Large down payment o Minimal credit use Compensating Factors o Low long-term debts o Large down payment o Minimal credit use o Excellent job history o History of making equal or greater payments than new PITI o Additional potential income 72

Special FHA Programs o FHA/VA 203(h) – disaster relief o FHA/ARM 251 (1/5 caps) Special FHA Programs o FHA/VA 203(h) – disaster relief o FHA/ARM 251 (1/5 caps) o Officer, Teacher Next Door o Housing Choice Voucher (formerly Section 8) 73

FHA 203(k) Rehab Loan Finance both purchase and rehab costs 97% LTV of projected FHA 203(k) Rehab Loan Finance both purchase and rehab costs 97% LTV of projected value Paid in “draws” Minimum $5, 000 in rehab cost Owner-occupant only 74

Calculate FHA monthly payment o Principal & Interest Loan amount x rate factor o Calculate FHA monthly payment o Principal & Interest Loan amount x rate factor o Taxes & Insurance n Estimate 2% of sales price divided by 12 o Mortgage Insurance n Upfront: 1. 50% of loan amount financed n Annual: . 5% of loan amount divided by 12 o Condo or Homeowner fee n 75

VA Loans o Certificate of Eligibility n 90 days in wartime n 180 days VA Loans o Certificate of Eligibility n 90 days in wartime n 180 days service before l 980 n 2 yrs. Service since 1980 n 6 yrs for reservists & National Guard o Entitlement set by VA n 25% of current Fannie/Freddie loan limit o Top 25% of loan guaranteed n Bank lends 5 times entitlement 76

VA loan Guidelines o Maximum loan amount: 4 times VA entitlement o Minimum down VA loan Guidelines o Maximum loan amount: 4 times VA entitlement o Minimum down payment: 0 o Qualifying ratio: just 41 o Funding fee: similar to PMI or MIP o Seller contribution: unlimited o Assumable with buyer qualification o Certificate of Reasonable Value: appraisal 77

VA Funding Fee First Use Subsequent 2. 15% 3. 30% 5 -10% down 1. VA Funding Fee First Use Subsequent 2. 15% 3. 30% 5 -10% down 1. 50% 10%+ down 1. 25% 0 -5% down RESERVISTS/NATIONAL GUARD 0 -5% down 2. 40% 3. 30% 5 -10% down 1. 75% 10%+ down 1. 50% 78

Case Study #1 - Browns o Sales price: $142, 000 o Mortgage: $137, 740 Case Study #1 - Browns o Sales price: $142, 000 o Mortgage: $137, 740 o Calculate payment for FHA loan o FHA or My. Community Mortgage™? 79

Case Study #2 - Wong o Income: $40, 000 o Debt: $725 o Current: Case Study #2 - Wong o Income: $40, 000 o Debt: $725 o Current: $850 o Compensating factors? 80

Case Study #3 - Martinez o Income: $28, 000 o Debt: $80 o Savings: Case Study #3 - Martinez o Income: $28, 000 o Debt: $80 o Savings: $2000 o VA eligible? 81

Special Financing Alternatives o Seller Financing o Low/Doc or No/Doc Loans o Loans for Special Financing Alternatives o Seller Financing o Low/Doc or No/Doc Loans o Loans for Self-employed o Alternative Sources of Cash o Reverse Annuity Mortgage 82

Seller Financing o First or Second Mortgage (Trust) o Lease- Purchase Option 83 Seller Financing o First or Second Mortgage (Trust) o Lease- Purchase Option 83

Lease-Purchase Option o Non-refundable deposit o Sales price established o Accelerated rent with credit Lease-Purchase Option o Non-refundable deposit o Sales price established o Accelerated rent with credit back o Liability for repairs o Delayed settlement o Financing arranged 60 days prior to settlement 84

Loans for Self-Employed o The Problem! o Solutions n Low/doc loan n Tax returns Loans for Self-Employed o The Problem! o Solutions n Low/doc loan n Tax returns n Profit & Loss n Balance sheet 85

Alternate Sources of Cash o Gift o CD, Stocks, Bonds o IRA o 401(k) Alternate Sources of Cash o Gift o CD, Stocks, Bonds o IRA o 401(k) 86

Reverse Annuity Mortgage o Payments to owner based on equity in home o Benefit Reverse Annuity Mortgage o Payments to owner based on equity in home o Benefit to elderly needing cash n Lump sum n Payments n Line of Credit 87

Available RAM Programs o Private lender o FHA Home Equity Conversion Mortgage (HECM) o Available RAM Programs o Private lender o FHA Home Equity Conversion Mortgage (HECM) o Fannie Mae Home. Keeper® 88