Real Estate Investment Chapter 6 Property Taxes and Income Taxes © 2011 Cengage Learning.
©2011 Cengage Learning. Chapter 8 Part I: Real Estate Lenders California Real Estate Principles...
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Transcript of ©2011 Cengage Learning. Chapter 8 Part I: Real Estate Lenders California Real Estate Principles...
Chapter 8 Part I
1. Compute loan qualifying ratios
2. List institutional and non-institutional lenders
3. Describe how private mortgage insurance has changed lending practices in California
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Qualifying The Buyer
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Lender’s concern:
•Character (desire)•Credit history
•Capacity (ability)•Income to make the payments
•Capital (assets)•Reserves to convert to cash
Credit
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A buyer’s credit is the most important factor that influences a lender
Consumer’s should be encourage to protect their credit
Credit Report
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Information varies from credit bureau to credit bureau.
A credit report is a detailed history of the borrower’s indebtedness over time.
Credit Bureaus
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Equifax www.equifax.comExperian www.experian.comTransUnion
www.transunion.com
Credit Scores
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FICO (Fair Isaac Company) developed a system of scoring by comparing a person’s credit report with many other credit reports to determine the risk of lending to the borrower.
Credit scores have advantages over credit reports: Results can be delivered instantaneouslyCredit decisions are fairer Older credit problems count for lessMore Credit is Available Credit rates are lower
Composition of FICO Score
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Payment History – 35% Amounts Owed – 30%Length of credit History – 15%New Credit – 10%Types of Credit in Use – 10%
Front End Ratio
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Monthly housing payment includes payment of principal + interest + taxes + insurance + dues+ PMI.
Divide monthly housing payments by gross income to determine the front end ratio.
Monthly housing payment
Gross monthly income= percentage %
Back End Ratio
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Total monthly expenses includes total monthly housing payments + long term debt.
Divide total monthly expenses by gross monthly income to determine the back end ratio.
Total monthly expenses
Gross monthly income= percentage %
Ratio Terms
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GROSS MONTHLY INCOME = All stable, legal income before taxes.
MONTHLY HOUSING PAYMENT = Projected monthly loan payments + ½ of estimated property taxes and insurance premium monthly + PMI and association dues.
LONG TERM DEBT = Monthly payments that continue for six months or longer.
TOTAL MONTHLY EXPENSE = Monthly housing payments + monthly long term debts.
Loans
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LTV = Loan-to-value
Appraised Price or Sales Price (lesser value) x 80% = Maximum loan
Loan Origination fee1 point = 1% of the loan amount
Appraisal fees
Credit Report fee with extensive information
Escrow and Title fees are negotiable
Beneficiary Demand Statement showing existing loan balance
Monthly Payment
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It’s A PITI to have to make the payment!
ssociation dues
rincipal
nterest on the loan
axes on the property
nsurance
Conventional Qualifying RatiosExample:
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Gross monthly income $4,000Long term debts $500$4,000 [x] 28% [=] $1,120 for PITI
$4,000 [x] 36% [=] $1,440 for PITI and debts - 500 debts
= $ 940 The lower of the two.
For the above: $1120 vs. $940 =
Maximum payment of $940 per month for PITI
California Loan Market
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High demand Increasing population Numerous large financial institutions Use of mortgage companies for out-of-state lenders Escrow and title companies provide fast service Loan security is Trust Deed not a mortgage contract Active secondary market to trade loans for cash to
generate more loans
Lenders
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InstitutionalSavings & LoanBanksInsurance Companies
Non-InstitutionalMortgage CompaniesMortgage BrokersReal Estate Investment Trusts (REIT)Pension FundsCredit UnionsIndividuals
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Savings & Loan or
Thrift Institutions
Commercial Banks Insurance Companies
Charter Federal & State Federal & State State
Loan-to-value ratio
Usual maximum 90% (Can go to 95%)
Usually 80%
(Can go to 95%)
75%
Loan term 30 + years 30 + years 25 to 30
Interest rates Usually at the higher end of the market
Usually middle of the market
Usually at the lower end of the market
Favorite real estate loans
Prefer conventional made on single family dwellings, apartments buildings, mobile homes, condominiums
Prefer construction loans with backup takeout loan assured from another lender; Equity home loans Business loans
FHA/VA backed
Prefer high quality loans Larger commercial and industrial properties with AAA tenants Hotels and office buildings -FHA/VA
Customer Greatest share of market Present or former Lend through loan correspondents-mortgage companies
Second Deed of TrustJunior Lien
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PurposeClose the gap between the sales price and the first
loan plus down paymentPrivate lenders
Short term loan on single family dwellings
Mortgage brokers: agents for private loansMortgage bankers: lend their own or other’s fundsReal Estate Investment Trust (REIT)
Created by Federal law; involves at least 100 investors
Credit Unions are a group of voluntary savers