Chapter 12
Broker
Financing Real Estate
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
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
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
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
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
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
Mortgages
Parties to a mortgage
Mortgagor—borrower
Mortgagee—lender
Mortgage clauses
Acceleration
–
1
ststep in the foreclosure process
–
Lender calls the entire amount due
Mortgages
Reinstatement
Allows mortgagor to reinstate by paying the delinquent payments and costs
Included in loans sold to Fannie Mae &
Freddie Mac
Due on sale
Mortgages
Prepayment
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
Mortgage Theory
Title theory
Title is transferred to lender or third party trustee
Deed is conveyed back to mortgagor when loan is paid off
Lien theory
Borrower has title
Satisfaction of mortgage when loan is paid off
Florida is a lien theory state
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
Rights of the Mortgage Lenders
Right to foreclose
Foreclosure procedure in Florida
–
Foreclosure sale
Certificate of title
Deficiency judgment
Right to transfer mortgage
Rights of the Borrowers
Right of possession
Equity redemption
By law regardless if prohibited in mortgage
Ends at time of sale
Conventional Mortgage Loans
Loans that are neither government insured or guaranteed
Not usually assumable
Private Mortgage Insurance (PMI)
Homeowners Protection Act
PMI – automatic termination
Conventional Mortgage Loans
Conforming
Meets requirements of Fannie Mae and Freddie Mac
Nonconforming
Do not meet requirements
FHA Insured Mortgage Loans
Loan programs
203(b) — most common FHA program (1 - 4 units)
234(c) — similar to the 203(b) program, insures condominiums
245 — insures graduated payment mortgages (negative amortization)
Mortgage Insurance Premium (MIP)
Assumption
VA Mortgage Loans
Department of Veterans Affairs (VA) loan
Guarantees
The amount of the guarantee is based on the loan amount and the veteran’s entitlement
DVA has the authority to make loans in areas where there is not VA approved lender
No maximum loan amount
Maximum guarantee
Interest rates are negotiable
Closing costs may not be included in the loan
Mortgages by Method of Payment
Term mortgages
Interest only
Principal due at the end of the term
Partially amortized mortgages
Amortizes over a term
Example; a 30 year term with a balloon payment due at the end of the 5
thyear
Fully amortized mortgages
Mortgages
Adjustable rate mortgage (ARM)
Alternative for persons who intend to live in their properties for a short time
Calculated interest rate determined by
–
index + margin
Payment-option mortgage
“pick a pay” loan
Graduated payment mortgage (GPM)
Monthly payments in early years do not cover the accrued interest
Negative amortization
Mortgages
Reduction Option Mortgage
Early Payment Mortgage
15 year Mortgage
Buydowns
Mortgages by Purpose
Purchase money mortgage — owner financing
Participation mortgage
Equity kicker
Contingent interest
–
% of sales proceeds
–
% of income
Mortgage participation — number of
lenders participate in the loan
Mortgages by Purpose
Blanket mortgage
Release clause
Covers more then one parcel of property
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
Mortgages by Purpose
Home equity loan
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
Time-sharing
Pertinent facts about property
disclosed in the offering statement
Types of ownership
Interval — best bundle of rights
Right to use — lease or license to use
10 day right to cancel after receiving
the offering statement
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
Equal Credit Opportunity Act
Prohibits discrimination in granting loans based on
Race
Color
Religion
Sex
National origin
Age
Marital Status
Truth-in-Lending Act
Purpose is to inform consumers of
exact credit costs before they make a purchase
Published by the board of Governors of Federal Reserve
Administered by Federal Trade
Commission
Truth-in-Lending Act
Bait and Switch advertising - a federal offense
Regulation Z
Applies to credit secured by a residence but not business or commercial loans
Requires the disclosure of the Annual Percentage Rate (APR)
Triggering Terms - any finance
specifics advertised which would
Real Estate Settlement Procedures Act
Procedure for a real estate settlement (closing)
Requires the use of
Uniform Settlement Statement (HUD -1)
Information booklet
Good Faith Estimate
Must receive an estimate of closing costs
At the time of loan application or within 3
days
Real Estate Settlement Procedures Act
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
Exempt from RESPA
Loans to finance 25 acres or more
Loans for home improvement or refinance
Loans to purchase a vacant lot if none of loan will be used to place dwelling on it
Sales where the only financing involved is an assumption of existing loan
Construction loans not being converted into permanent loans
Loans for construction of 1-4 family structure
when lot is owned by borrower
Residential Loan Underwriting
Initial Interview
Credit History
Verifying and analyzing the income
Qualifying the Buyer
2 Qualifying Ratios
Housing Ratio
–
"Front-end" ratio
–
31% for FHA (was 29%)
–
28% for conventional
Total obligations ratio
–
"Back-end" ratio
–
43% for FHA (was 41%)
–
36% for conventional
–
41% for VA
Monthly Housing Expense (PITI) Monthly Income
Total Monthly Obligations
Monthly Income
Qualifying the Buyer
VA
Uses a total obligation ratio, but does not use a housing expense ratio
Guidelines are more lenient than FHA or Conventional
Rule of thumb: A home buyer with
average debt can afford a home 2 ½
times his or her annual income
Residential Loan Underwriting
Property analysis
Appraisal
Title examination
Survey
Loan analysis
Loan-to-value ratio
Interest rate and discount points
–
Discount points are prepaid interest
–
Payback period for points = discount points
paid ÷ payment difference
Residential Loan Underwriting
Initial interview and loan application
Credit history — a credit report shows a borrower’s willingness to pay debt
Verifying and analyzing income
–
