1 Real Estate Finance Today, 3 rd Edition Doris S. Barrell.
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Transcript of 1 Real Estate Finance Today, 3 rd Edition Doris S. Barrell.
1
Real Estate Finance Today, 3rd Edition
Doris S. Barrell
2
Course Objectives Define basics of real estate finance Review government Influences Discuss current issues in lending Describe conventional and government
loan programs Calculate monthly mortgage payments Examine special financing alternatives
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Basics of Real Estate Finance
Financing Instruments
Primary Market
Secondary Market
4
Financing Instruments
Note
Mortgage
Deed of Trust
5
The Note
Signed Legal documentStates terms and conditions for
repayment of the loanAccompanied by either a mortgage
or a deed of trust
“I. O. U.”
6
The Mortgage
Pledges real property as security for debt
Creates a mortgage lien on property
Requires judicial foreclosure in case of default
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The Deed of Trust
Establishes real property as security for debt
Conveys title rights to trusteeTrustee has power of saleLender named as beneficiaryDoes not required court action to
foreclose
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The Transaction
Note + Mortgage or
Deed of Trust
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The Primary Market
Sources of funding
Broker or Banker?
Origination and Processing
10
Sources of Funding
Commercial Banks
Savings Associations
Credit Unions
11
Commercial Banks
Originally for short-term loans
Active today in mortgage lending
12
Savings Associations
Originally called Savings & Loan
Historically primary source of mortgage lending
Also referred to as “thrifts”
13
Credit Unions
Newcomer to mortgage financing
Provide service to members
Greatly expanding
14
Mortgage Broker or Banker?
Mortgage Broker Originates loan Matches borrower
with investor Paid by “finder fee”
PLUS: has wide range of loan products
Mortgage Banker Originates loan Uses own money Continues to service
loan
PLUS: qualifying standards are set, underwriting flexible
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Origination & Processing
Prequalified? Preapproved?
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Members of the Team
Loan OfficerAppraiserProcessorUnderwriterClosing DepartmentSettlement Attorney or Agent
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Loan Officer
Meets with borrower Collects information
on assets & debts Fills out Uniform
Residential Loan Application
Determines appropriate loan product
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Appraiser
Appraisal is ordered by the lender
Appraisal paid for by borrower at time of application
Appraisal establishes value to substantiate the loan
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Processor
Receives application from loan officer, appraisal, and credit report
Collects and verifies all informationPrepares case file for submission to
underwriterStays in contact with borrower
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Underwriter
Approves or denies the loan
May set conditions
21
Lender Closing Department
Prepares financing documents
Submits file to settlement attorney or title company closing agent
22
Settlement (or Closing)
Attorney or title company agent Prepares deed to convey title Prepares HUD-1 Statement Conducts title search Acquires title insurance for lender and
purchaser Ensures all terms of contract are met
23
Geographic Differences
Western states settle “in escrow”
Eastern & mid-west settle with attorney or title company agent
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Secondary Market
Fannie Mae
Freddie Mac
Ginnie Mae
25
Fannie Mae
Originally chartered as Federal National Mortgage Association (FNMA)
Created in 1938 to purchase FHA loans Extended to VA loans after WWII Totally stockholder owned since 1968 Purchases both government and
conventional loans Sells mortgage-backed securities
26
Freddie Mac
Originally chartered as Federal Home Loan Mortgage Corporation (FHLMC)
Chartered in 1970 to purchase conventional loans
Today purchases government and conventional loans
Sells marketable securities Under general oversight by HUD
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Ginnie Mae
Government National Mortgage Association
Created as spin-off from Fannie Mae in 1968
Guarantees mortgage-backed securities based on FHA and VA mortgage loans
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Private Investors
Insurance CompaniesPension FundsIndividual Investors
REMIC – Real Estate Mortgage Investment Conduit
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Private Investors
Life Insurance
Pension Funds
REMICs
Individuals
30
Government Influences The Federal Reserve
Federal Home Loan Banks
Department of the Treasury
National Credit Union Administration
Dept. of Housing and Urban Development
31
The Federal Reserve
Controls flow of money into the economy Discount Rate Reserves Open Market
Supervises commercial banks
32
Federal Home Loan Bank
Established in 1932 to supervise savings associations
12 District banks (like the “Fed”) Federal Home Loan Bank Board
abolished in 1989 Supervision of savings associations
given to OTS Provides reserves and secondary market
for its members
33
Department of the Treasury
Office of the Comptroller of Currency (OCC)
Office of Thrift Supervision (OTS)
Federal Deposit Insurance Corporation (FDIC)
34
National Credit Union Administration (NCUA)
Independent federal agencyCharters and supervises federal
credit unionsOperates National Credit Union
Share Insurance Fund (NCUSIF)Insures savings in all federal and
many state chartered credit unions
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Dept. of Housing and Urban Development (HUD)
F H A
G in n ie M ae
F an n ie M ae &F red d ie M ac
In d ian H ou s in g
C D B G &S ec tion 8
R E S P A &F a ir H ou s in g
H U D
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Congressional Acts
Fair Housing Act of 1968
Equal Credit Opportunity Act (ECOA)
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Congressional Acts
Real Estate Settlement Procedures Act (RESPA)
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Congressional Acts
Truth-in-Lending Act (TILA)Requires disclosure of all cost of creditAnnual Percentage Rate (APR) must be
shownRegulation Z affects advertising
Community Reinvestment Act (CRA)Requires bank’s commitment to
community
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Congressional Acts
Taxpayer Relief Act of 1997
Sale of personal residence
$500,000 capital gains tax exemption for couple ($250,000 for single)
Must have occupied 2 out of past 5 yrs.
Can be taken every 2 years
No buy-up required
40
Congressional Acts
Taxpayer Relief Act of 1997
Sale of Investment Property
Capital Gain tax on profit reduced to 15%
Depreciation recapture at 25%
Hold for 12 months
41
Current Issues in Mortgage Lending The Subprime Crisis
Foreclosure Rates Increase
Importance of Credit Score
Required Homeowner Insurance
42
The Subprime Crisis
Extreme growth
Declining housing market
New affordable lending options
Predatory Lending Concerns
43
Foreclosures Increase
Who’s hurting?
Who’s to blame?
Who can help?
44
Lender Workout Options
Foreclosure PresaleShort SaleDeed in LieuReinstatementForbearanceRefinancing
45
Sources of Help
Consumer Credit Counseling Service
Non-profit organizations
888-995-HOPE
www.HOPENOW.com
46
Credit Scoring
Equifax
Experian
(TransUnion
FICO
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Percentage of Contribution
Payment history 35%Current total debt 30%Length of credit history 15%Requests for new credit 10%Types of credit in use 10%
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Factors That Lower Score
Late paymentsToo many credit cardsExcessive potential creditMaxed-out cardsLiens, judgments, foreclosureMultiple inquiries
49
Ways to Improve Score
Pay bills on time Reduce number of
credit cards Refuse preapproved
credit cards Refuse increased
loan limits Correct errors on
credit reports
50
Required Homeowner Insurance
Disaster impact
Accelerating rates
Flood Insurance
51
Conventional Mortgage LoansStandard Conforming Loans
Affordable Loan Products
Non-conforming Loans
Adjustable Rate Mortgage (ARM)
Growing Equity Mortgage (GEM)
52
Standard Conforming Loans
Guidelines established by Fannie Mae and Freddie Mac
Made homeownership possible for more people
53
Original Guidelines
Maximum loan amount – set annuallyMinimum down payment – 5%Qualifying ratios – 28/36Reserves – 2 monthsPrivate mortgage insurance requiredNon-assumableNo pre-payment penalty
54
Private Mortgage Insurance
Protects the lenderRequired with less than 20% downPayment can be made upfront, financed
or paid in monthly incrementsLegislation mandates removal of PMI
when 78% LTV reachedWays to avoid PMI
55
Ways to Avoid PMI
Lender-paid PMI Lender charges slightly higher rate
with no PMI payment
Combined lst & 2nd mortgage (trust) 80-10-10 80-15-5 80-20
56
Affordable Loan Products
Fannie Mae Mortgage Solutions
Biweekly Mortgage
Expanded Approval™
Flexible 97 and Flex 100™
MyCommunity Mortgage™
57
Affordable Loan Products
Freddie Mac Home Possible Home Possible 97
and 100 Neighborhood
Solution™ Initial Interest
Fixed-rate
58
Non-conforming Loans
Loans which do not conform to Fannie Mae/Freddie Mac guidelines
Guidelines set by lender
Loans exceeding conventional limits are called “jumbos”
59
Special Community Programs
Attract essential workers into community
Encourage low & moderate income first-time homebuyers
Help to move from subsidized housing
Promote revitalization
60
Adjustable Rate Mortgages
Index Margin Note Rate Initial Rate Adjustment period Caps Assumable Convertable
61
Example of a 1-year ARM
Index (T-bill) 4.0 Margin 2.5 Note rate 6.5 Initial rate 4.5 Caps 2/6
“Worst-case scenario” Yr. 1 = 4.5 Yr. 3 = 8.5 Yr. 2 = 6.5 Life of loan = 10.5
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Benefits & Disadvantages
Benefits
Qualify for more loan
Lower monthly payment
Good for short-term planning
Disadvantages
Payments increase
More interest paid Sharing risk with
lender
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Growing Equity Mortgage
Increasing payments to principal Decrease term of loan Save in interest paid
Bi-monthly mortgage Pay one-half payment every 2 weeks Creates one extra month’s payment
64
Formulas Using Rate Factor
Formula One Determine principal
and interest payment
Multiply loan amount by rate factor
$200,000 x 6.65 =
$1330.00
Formula Two Determine loan
amount
Divide PI dollars by rate factor
$1330 divide by 6.65 = $200,000
65
Calculating Monthly Payment
Principal and Interest
(loan amount times rate factor) Taxes and insurance
estimate 2% of sales price, divide by 12 Private Mortgage Insurance
(average .8% x loan amount divide by 12)
Condominium or Homeowner Fees
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Case Study #1 – The Browns
Annual income ($30,000 + $25,000)
Debts ($300) Savings ($5,000 plus
$5,000 gift) Interest rate - 7.5%,
30 yr loan Qualifying ratios –
28/36
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Case Study #2 - Greenberg
Income - $36,000Debts - $335Savings - $3,0007% interest, 30 yr.33/38 ratios
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Case Study #3 - Gonzalezs
Income - $70,000 Debts - $ 500 Savings - $15,000 8%, 30 yr loan 33/38 ratios
8%, 15 yr loan
69
Government Insured or Guaranteed Loans
Federal Housing Administration
(FHA)
Dept. of Veterans Affairs (VA)
State or Local Programs
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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 ratios31/43
Seller contribution: up to 6% of sales price
Mortgage Insurance Premium: 1.50% upfront and .5% annual, charged monthly
Assumable with purchaser qualifying
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Mortgage Insurance Premiums for FHA Loan (MIP)
Upfront MIP
1.50% of loan amount amortized over life of loan
Not charged on condos
Annual MIP
.5% of loan amount divided by 12 per month
All FHA loans
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Compensating Factors
Low long-term debts Large down payment Minimal credit use Excellent job history History of making equal or greater
payments than new PITI Additional potential income
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Special FHA Programs
FHA/VA 203(h) – disaster relief
FHA/ARM 251 (1/5 caps)
Officer, Teacher Next Door
Housing Choice Voucher (formerly Section 8)
74
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
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Calculate FHA monthly payment Principal & Interest
Loan amount x rate factor Taxes & Insurance
Estimate 2% of sales price divided by 12 Mortgage Insurance
Upfront: 1.50% of loan amount financed Annual: .5% of loan amount divided by 12
Condo or Homeowner fee
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VA Loans Certificate of Eligibility
90 days in wartime 180 days service before l980 2 yrs. Service since 1980 6 yrs for reservists & National
Guard
Entitlement set by VA 25% of current Fannie/Freddie
loan limit
Top 25% of loan guaranteed Bank lends 5 times entitlement
77
VA loan Guidelines
Maximum loan amount: 4 times VA entitlement
Minimum down payment: 0 Qualifying ratio: just 41 Funding fee: similar to PMI or MIP Seller contribution: unlimited Assumable with buyer qualification Certificate of Reasonable Value:
appraisal
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VA Funding Fee
First Use Subsequent
0-5% down 2.15% 3.30%
5-10% down 1.50% 1.50%
10%+ down 1.25% 1.25%
RESERVISTS/NATIONAL GUARD
0-5% down 2.40% 3.30%
5-10% down 1.75% 1.75%
10%+ down 1.50% 1.50%
79
Case Study #1 - Browns
Sales price: $142,000Mortgage: $137,740Calculate payment for FHA loan
FHA or MyCommunity Mortgage™?
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Case Study #2 - Wong
Income: $40,000Debt: $725Current rent: $850
Compensating factors?
81
Case Study #3 - Martinez
Income: $28,000Debt: $80Savings: $2000
VA eligible?
82
Special Financing Alternatives
Seller Financing
Low/Doc or No/Doc Loans
Loans for Self-employed
Alternative Sources of Cash
Reverse Annuity Mortgage
83
Seller Financing
First or Second Mortgage (Trust)
Lease-Purchase Option
84
Lease-Purchase Option
Non-refundable depositSales price establishedAccelerated rent with credit backLiability for repairsDelayed settlementFinancing arranged 60 days prior to
settlement
85
Loans for Self-Employed
The Problem!
Solutions
Low/doc loan
Tax returns
Profit & Loss
Balance sheet
86
Alternate Sources of Cash
Gift
CD, Stocks, Bonds
IRA
401(k)
87
Reverse Annuity Mortgage
Payments to owner based on equity in home
Benefit to elderly needing cash Lump sum Payments Line of Credit
88
Available RAM Programs
Private lender
FHA Home Equity Conversion Mortgage (HECM)
Fannie Mae HomeKeeper®