Broker Chapter 12 Financing Real Estate Copyright Gold Coast Schools 1
Learning Objectives Describe the difference between a note and a mortgage Explain the benefits of having the first recorded lien on a property Describe Florida's statutory foreclosure process Calculate the mortgage payment on a new loan using financial tables or a financial calculator Copyright Gold Coast Schools 2
Learning Objectives Calculate the down payment for an FHA loan Describe the differences between a term loan, a partially amortized loan and a fully amortizing loan Explain how to calculate the interest rate on an adjustable-rate mortgage Describe the major characteristics of the FHA's reverse annuity mortgage Copyright Gold Coast Schools 3
Learning Objectives List 4 required consumer disclosures under Florida's Time-Sharing Act List 3 possible scenarios that could cause loss for a consumer buying property with a contract for deed Describe at least 3 possible benefits to the seller on a sale-leaseback transaction Copyright Gold Coast Schools 4
Learning Objectives List the protected classes of consumers under the Equal Credit Opportunity Act Explain why the APR disclosure for a 30- year loan may understate the real yield List at least 5 requirements of the Real Estate Settlement Procedures Act List at least 10 items a borrower should bring to the loan application appointment Copyright Gold Coast Schools 5
Learning Objectives Calculate the minimum qualifying ratios for conventional and FHA mortgages Estimate the approximate yield to the lender when the lender charges discount points Describe the characteristics and advantages of automated underwriting systems Copyright Gold Coast Schools 6
Promissory Note A note without a mortgage is an unsecured note A note referencing a mortgage is a secured note Anyone who witnesses a note cosigns the note Copyright Gold Coast Schools 7
Mortgages Parties to a mortgage Mortgagor borrower Mortgagee lender Mortgage clauses Acceleration Prepayment clause Prepayment penalty clause Due-on-sale clause Copyright Gold Coast Schools 8
Mortgages Acceleration 1 st step in the foreclosure process Lender calls the entire amount due Reinstatement Allows mortgagor to reinstate by paying the delinquent payments and costs before foreclosure Included in loans sold to Fannie Mae & Freddie Mac Copyright Gold Coast Schools 9
Mortgages Prepayment clause Permitted without penalty by VA, FHA, Fannie Mae & Freddie Mac Prepayment penalty Penalty if loan is paid early Any note silent as to the right of the borrower to prepay, may be prepaid without penalty Copyright Gold Coast Schools 10
Mortgages Due-on-Sale Type of acceleration clause Property is sold mortgagor must pay remaining balance Prevent buyer from assuming loan without lender approval Novation Lender qualifies buyer to assume loan New borrower is substituted on the loan Original borrower is released from liability Copyright Gold Coast Schools 11
Title vs. Lien Theory States Title theory borrower takes possession Deed of trust conveys title to 3 rd party (trustee) Reconveyance Deed Lien theory borrower takes possession and title Lender holds lien Satisfaction of Mortgage Florida Lien Theory Copyright Gold Coast Schools 12
Mortgage Priorities Superior liens go ahead without exception Real estate property taxes Special assessments After superior liens based on date of recording Subordination Step back in priority Land developer to a construction loan Copyright Gold Coast Schools 13
Rights of Mortgage Lenders Right to foreclose Foreclosure sale Sold to highest bidder Certificate of sale recorded 10 day waiting period Certificate of title to high bidder Deficiency judgment Granted by the court Liens other property owned by borrower in county Lost, destroyed or stolen note Lender must attach affidavit to the complaint Detail chain of all note transfers Show lender is entitled to enforce Copyright Gold Coast Schools 14
Rights of Mortgage Lenders Right to foreclose Foreclosure sale Sold to highest bidder Certificate of sale recorded 10 day waiting period Certificate of title to high bidder Deficiency judgment Granted by the court Liens other property owned by borrower in county Copyright Gold Coast Schools 15
Rights of Borrowers Right of possession Equity of redemption By law regardless if prohibited in mortgage Borrower may pay remaining balance due Ends at time of sale Copyright Gold Coast Schools 16
Mortgages by Method of Payment Term mortgages Interest only Principal due at the end of the term Fully amortized mortgages Payments of principal and interest Payment remains constant Partially amortized mortgages Amortizes over a term Example; a 30 year term with a balloon payment due at the end of the 5 th year Copyright Gold Coast Schools 17
Mortgages by payment Adjustable rate mortgage (ARM) Alternative for persons who intend to live in their properties for a short time Usually 3 years or less Calculated interest rate determined by index + margin Graduated payment mortgage (GPM) Monthly payments in early years do not cover the accrued interest Negative amortization Copyright Gold Coast Schools 18
$250,000 Fixed vs. Adjustable Rate Mortgage Fixed 30 year @ 6% Vs. Adjustable 2% Ann. Cap / 6% Lifetime Cap @ 3.5% Fixed Rate Adjustable Rate ARM Savings(Loss) Year Payment Rate Payment Rate Monthly Accrued 1 $1,499 6% $1,123 3.5% $376 $4,512 2 1,499 6 1,411 5.5 88 5,568 3 1,499 6 1,723 7.5 (224) 2,880 4 1,499 6 2,052 9.5 (553) (3,756) 12
Mortgages by payment Reduction option mortgage Interest rates decline Borrower may refinance one time Early payment mortgage Payment + following months principal Reduces loan period in half 15 year mortgage Higher monthly payments Lower interest rates Substantial interest savings Copyright Gold Coast Schools 20
Mortgages by payment 3% down payment mortgage 1 st time homebuyers May have owned a home previously Have not owned a home for 3 years Buydown 3-2-1 buydown Builder pays lump sum Buyers interest rate increases each year Buyer qualified at final note rate Copyright Gold Coast Schools 21
Mortgages by Purpose Purchase money mortgage owner financing Participation mortgage equity kicker participate in equity return % of sales proceeds % of income Mortgage participation number of lenders participate in the loan Blanket mortgage Release clause Covers more then one parcel of property Copyright Gold Coast Schools 22
Mortgages by Purpose Reverse annuity mortgage Elderly homeowner s trade equity in their home for monthly income Package mortgage Includes real and personal property in a home Most real estate loans are package mortgages Home equity loan Low interest rates Closing costs paid by lender Interest is tax deductible Lump sum or line of credit Copyright Gold Coast Schools 23
Mortgages by Purpose Home equity loan calculation Borrowing against equity in owner s home Loan calculation Appraised value Times loan to value ratio Equals total loans Minus existing mortgage balance(s) Equals equity line Copyright Gold Coast Schools 24
Conventional Mortgage Loans Conforming Meets requirements of Fannie Mae and Freddie Mac Nonconforming Do not meet requirements Not sold in secondary market Kept in lenders portfolio Copyright Gold Coast Schools 25
Conventional Mortgage Loans Loans that are neither government insured or guaranteed Not usually assumable Private Mortgage Insurance (PMI) Less that 20% downpayment Borrower pays monthly PMI insurance Borrower defaults Lender receives 25% of mortgage amount Homeowners Protection Act PMI automatic termination Borrower obtains 22% equity Copyright Gold Coast Schools 26
Government Mortgage Loans FHA insured loan Lower downpayment Maximum loan amount VA guaranteed loans Maximum VA guarantee - $106,025 Maximum loan with VA guarantee - $424,100 No maximum VA loan amount Veteran pays 25% of amount over $424,000 as downpayment Copyright Gold Coast Schools 27
Discount Points Origination fee/discount points prepaid interest to lenders Borrowers pay 1% of the loan amount for each discount point Increases yield by approximately 1/8 of 1% per discount point Copyright Gold Coast Schools 28
Qualifying the Buyer TWO QUALIFYING RATIOS Housing Expense PITI GMI Total Obligations PITI + All Debts GMI 28% 31% - Conventional FHA VA 36% 43% 41% PITI principal, interest, taxes, insurance GMI gross monthly income Copyright Gold Coast Schools 29
Qualifying the Buyer Rule of thumb: A home buyer with average debt can afford a home 2 ½ times his or her annual income Copyright Gold Coast Schools 30
Other Techniques Contract for deed Buyer has possession Title Seller - legal title Buyer - equitable title Buyer should insist that contract be recorded Gives constructive notice Allows for homestead Sale and leaseback Copyright Gold Coast Schools 31
Other Techniques Sale and leaseback Business owning property ties up equity capital Construct building/s Sell property to investors Execute long-term lease (25-99 years) Achieve 100% property financing No equity tied up Deduct 100% of lease for income taxes Financial ratios improved Copyright Gold Coast Schools 32
Equal Credit Opportunity Act Prohibits discrimination in granting loans based on Race Color Religion Sex National origin Marital Status Age Receipt of income from public assistance Exercise of rights under the Consumer Credit Protection Act Copyright Gold Coast Schools 33
Truth-in-Lending Act Purpose is to inform consumers of exact credit costs before they make a purchase Easier for consumers to compare loans between lenders True cost of credit Annual Percentage Rate (APR) Bait and Switch advertising - a federal offense Regulation Z Applies to credit secured by a residence but not business or commercial loans Copyright Gold Coast Schools 34
Truth-in-Lending Act Triggering terms any finance specifics advertised which would require all of the specifics to be given Loan triggers Amount or %age of down payment Amount or %age of any payment # of payments or period of repayment Amount of any finance charges Loan trigger in advertising must disclose Amount or %age of down payment Terms of repayment (# of payments and amount) Annual percentage rate (APR) Copyright Gold Coast Schools 35
Real Estate Settlement Procedures Act (RESPA) Procedure for a real estate settlement (closing) Requires the use of Closing Disclosure Statement ( previously HUD -1) Information booklet Loan Estimate Must receive an estimate of closing costs At the time of loan application or within 3 business days Copyright Gold Coast Schools 36
RESPA Prohibitions Kickbacks or referral fees Related to a closing are prohibited Real estate loan transaction Closing services Referrals between Real Estate Brokers specifically exempt Seller may not require that the title insurance be purchased from a particular title company unless seller is paying Copyright Gold Coast Schools 37
Residential Loan Underwriting Borrower analysis Credit history 35% of FICO score based on payment history Stability of income Income/expense ratios Housing expense ratio Total obligations ratio (see slide 31) Copyright Gold Coast Schools 38
Residential Loan Underwriting Property analysis Appraisal Title examination Survey Flood insurance Copyright Gold Coast Schools 39