Chapter 14: Real Estate Financing:...

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© Dearborn Real Estate Education, 2012

Chapter 14: Real Estate Financing: Practices


Introduction to the Real Estate Financing Market

• Governmental influence

– Federal Reserve System

– Home Land Bank System

– Office of Thrift Supervision

• Primary Market

• Secondary Market

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Seeds of Today’s Mortgage Industry

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• Early mortgage loans – Large down payment– Short-term– Balloon payment or refinance

• Federal Reserve Act of 1913– Created the Federal Reserve System– Allowed banks to make real estate loans– Implemented a system allowing government to

influence interest rates

• Other legislation – Federal Home Loan Bank Act of 1932 – Banking Act of 1933 (Glass-Steagall) created FDIC – National Housing Act of 1934 created FSLIC


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• Federal Home Loan Banks– 12 regional cooperative banks

– Expand credit opportunities

– Privately owned by members

• Federal Housing Administration (FHA) – Created in 1934 to offer mortgage insurance

– Innovator of mortgage products/terms

– Part of Housing and Urban Development

– Largest insurer of mortgage loans

• Government-Sponsored Enterprises (GSEs) – Established by Congress as financial intermediaries

– Federal Home Loan Banks, Fannie Mae, Freddie Mac


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• Mortgage: Written instruments using real property to secure repayment of a debt

• Primary market: Borrowers and lenders come together to negotiate terms for mortgages

• Commercial banks: Variety of financial services

– Historically demand deposits

– Regulation now allows more low risk mortgage loans

• Savings and Loan Associations (thrifts): Specialize in savings deposits and mortgage loans

– Traditionally major real estate lender; long-term, low-interest loans

– S & L crisis of 1980s led to massive restructure

Primary Mortgage Market

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• Mortgage banker: Company, individual, or entity that originates, processes, underwrites, closes/funds, and services mortgage loans

• Mortgage broker: Company or individual who, for a fee, places loans with lenders, but does not service such loans

– Collect financial and other required information

– Analyze income and debt for maximum mortgage amount

– Explain available loan programs and loan process

– Fill out loan application and provide required disclosures

– Process loan file and submit to lenders

– Assist borrower response and participate in closing

Mortgage Banking Companies

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• Private investors or government agencies that buy or sell real estate mortgages

• Established by federal government to moderate local real estate cycles

• Standardized loan criteria

• Purchased mortgage loans assembled into pools

• Mortgage-backed securities (MBS)

– Debt obligations that represent claims to the cash flows (principal and interest) from pools of mortgage loans

– Pass-through securities most common

Secondary Mortgage Markets

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• Federal National Mortgage Association (1938)

– Also known as FNMA or Fannie Mae

– Largest investor in residential mortgages

– Buys pools of conforming conventional, FHA, VA

– Converts to guaranteed MBS

• Government National Mortgage Association (1968)

– Also known as GNMA or Ginnie Mae

– Pools federally insured/guaranteed loans; does not buy or sell

– MSB carry full faith and credit of U.S. government


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• Federal Home Loan Mortgage Corporation (1970)

– Also known as FHLMC or Freddie Mac

– Buys and pools, then actively sells MSB on open market

• Fannie Mae and Freddie Mac

– GSEs under conservatorship of Federal Housing Finance Agency

– Special authority to borrow from U.S. Treasury


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• Standardized underwriting criteria used to qualify borrowers and property

• Lenders conform in order to easily sell into secondary market

• Eliminates variations in loan quality, types of loans, and regional differences

• Create some confidence in quality of MBS• Automated underwriting systems (AUS)

– Streamline and standardize underwriting– Fannie Mae: Desktop Underwriter® – Freddie Mac: Loan Prospector®



Federal Reserve System

• Role – Maintain sound credit conditions

– Counteract inflationary and deflationary trends

– Create favorable economic climate

• Open market operation

• Reserve requirements

• Discount rates

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Monetary Policy and the FedMonetary Policy and the Fed

� Monetary policy: Government control over economy primarily through supply and cost of money

� Federal Reserve System

� Established by Federal Reserve Act of 1913

� Nation’s central bank; 12 Federal Reserve districts

� Controlled by 7-member Board of Governors (Federal Reserve Board)

� Federal Open Market Committee (FOMC) controls sale and purchase of government securities

� Monetary policy: Government control over economy primarily through supply and cost of money

� Federal Reserve System

� Established by Federal Reserve Act of 1913

� Nation’s central bank; 12 Federal Reserve districts

� Controlled by 7-member Board of Governors (Federal Reserve Board)

� Federal Open Market Committee (FOMC) controls sale and purchase of government securities

Federal Reserve SystemFederal Reserve System

Monetary Policy and the FedMonetary Policy and the Fed

� Federal Reserve Banks (FRBs)

� 1 main office in each Fed district

� “Banker’s bank”

� Store currency and coin

� Process checks and electronic payments

� National banks chartered by the federal government must join

� State-chartered banks and other depositories may join

� Fed’s primary mission: Ensure that money and credit are available to sustain economic growth without inflation

� Federal Reserve Banks (FRBs)

� 1 main office in each Fed district

� “Banker’s bank”

� Store currency and coin

� Process checks and electronic payments

� National banks chartered by the federal government must join

� State-chartered banks and other depositories may join

� Fed’s primary mission: Ensure that money and credit are available to sustain economic growth without inflation

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Open Market OperationsOpen Market Operations

� Buying and selling U.S. government securities (bonds) on the open market

� Responsibility of Federal Open Market Committee (FOMC)

� Establishes target federal funds rate

� Affects short-term interest rate charged to banks borrowing in Fed funds market

� Selling securities

� Increases reserves

� Removes money from circulation

� Buying securities

� Decreases reserves

� Puts money into circulation

� Buying and selling U.S. government securities (bonds) on the open market

� Responsibility of Federal Open Market Committee (FOMC)

� Establishes target federal funds rate

� Affects short-term interest rate charged to banks borrowing in Fed funds market

� Selling securities

� Increases reserves

� Removes money from circulation

� Buying securities

� Decreases reserves

� Puts money into circulation

Discount RatesDiscount Rates

� Discount rate: Interest rate the Federal Reserve Banks charge financial institutions for short-term loans of reserves

� Federal Funds Rate: Recommended rate set by the Fed for its member banks to charge when borrowing form each other.

� Borrowing direct from Fed discouraged unless:� Bank is in trouble� Unable to borrow from banks in open Fed funds

market

� Discount rate: Interest rate the Federal Reserve Banks charge financial institutions for short-term loans of reserves

� Federal Funds Rate: Recommended rate set by the Fed for its member banks to charge when borrowing form each other.

� Borrowing direct from Fed discouraged unless:� Bank is in trouble� Unable to borrow from banks in open Fed funds

market

Discount RatesDiscount Rates

� Three discount window programs:� Primary credit: Usually overnight to sound

depository institutions � Secondary credit: Meet short-term liquidity

needs but at higher rate� Seasonal credit: Extended to small

depositories in agricultural or resort communities

� Set by Boards of Directors of FRBs; subject to approval by Board of Governors

� Less of a policy tool than open market operations

� Three discount window programs:� Primary credit: Usually overnight to sound

depository institutions � Secondary credit: Meet short-term liquidity

needs but at higher rate� Seasonal credit: Extended to small

depositories in agricultural or resort communities

� Set by Boards of Directors of FRBs; subject to approval by Board of Governors

� Less of a policy tool than open market operations

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Reserve RequirementsReserve Requirements

� Percentage of funds held in reserve against specified deposit liabilities

� Cash or in an account at a FRB

� Intended to provide confidence that deposits are safe and accessible

� Set by the Fed for all:� Commercial banks� Savings banks� Savings and loans� Credit unions� U.S. branches and agencies of foreign banks

� Percentage of funds held in reserve against specified deposit liabilities

� Cash or in an account at a FRB

� Intended to provide confidence that deposits are safe and accessible

� Set by the Fed for all:� Commercial banks� Savings banks� Savings and loans� Credit unions� U.S. branches and agencies of foreign banks

Money Supply and Interest RatesMoney Supply and Interest Rates

Adjusting Interest RatesAdjusting Interest Rates

� Manage growth of economy at reasonable interest rates without fueling inflation

� Discount rate charged to member banks adjusted to control money supply and inflation� Higher discount rate discourages growth and

borrowing, which lowers inflation� Lower discount rate spurs economy

� Fed does not adjust long-term interest rates� Cost of money affects banks who pass that on

to customers

� Moral suasion: Using persuasive influences of authorities on the public so that they will behave in a certain way

� Manage growth of economy at reasonable interest rates without fueling inflation

� Discount rate charged to member banks adjusted to control money supply and inflation� Higher discount rate discourages growth and

borrowing, which lowers inflation� Lower discount rate spurs economy

� Fed does not adjust long-term interest rates� Cost of money affects banks who pass that on

to customers

� Moral suasion: Using persuasive influences of authorities on the public so that they will behave in a certain way

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The Primary Mortgage Market

• Lenders that originate loans directly to borrower

• Income generated from– Finance charges

– Interest payments

– Loan servicing fees


Major Primary Market Lenders

• Savings associations

• Commercial banks

• Life insurance companies

• Credit unions

• Pension funds

• Endowment funds

• Investment group financing

• Mortgage banking companies

• Mortgage brokers

• Individual lenders

©2011 Kaplan, Inc.

• Loan Officer

• Appraisal

• Processor

• Underwriter

• Closing Dept.

• Settlement Agent

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The Secondary Mortgage Market

• Where mortgage loans are bought, serviced, and re-sold after being originated

• Fannie Mae

• Ginnie Mae

• Freddie Mac


Recent Financial Crisis

• Federal actions to stabilize and strengthen housing and lending markets

• Causes of crisis

• Prevalence of distressed property sales


Types of Mortgage Loans

• Conventional loans

• FHA-insured loans

• VA-guaranteed (GI) loans

• Rural Economic and Community Development Services

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Conventional Loans

• Not backed by government agency

• Lowest loan-to-value ratio

• Conforming vs. non-conforming loans

• Private mortgage insurance (PMI)

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• Classified by percentage of down payment

• Loan-to-value: Amount borrowed compared to property value

– Lesser of sales price or appraised value

• Higher LTV = lower down payment = more risk

• Standard 80% conventional loan requires 20% down

Conventional Programs

• How much can Bill borrow?

$160,000 x .80 = $128,000

• What would be the required down payment?

$32,000 down

• If the house appraises for $150,000, how much can Bill borrow?

80% = $120,000 maximum loan

• What other options does he have?

– Offer seller appraised value

– Come up with additional $8,000 for the down payment

Bill wants to buy a house that is selling for $160,000, and the lender has approved him for an 80% conventional loan.

80% Conventional Loan

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What is the loan-to-value if the loan amount is $139,500, the appraised value is $164,117 and the sales price is $155,000?

A. 80%

B. 85%

C. 90%

D. 95%

LTV Problem

$139,500 ÷÷÷÷ $155,000 = 0.90 = 90 %

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• 90%, 95%, 100% loan-to-value

• Possible because of private mortgage insurance (PMI) and secondary financing

• More stringent qualifying standards/may not be available

• May have higher interest rates, fees, etc.

• 90% LTV– At least 5% of down payment from personal cash

reserves

• 95% LTV– Requires owner-occupancy

– Entire down payment from personal cash reserves

Higher LTV Loans

Higher LTV Loans• 90%, 95%, 100% loan-to-value

• Possible because of private mortgage insurance (PMI) and secondary financing

• More stringent qualifying standards/may not be available

• May have higher interest rates, fees, etc.

• 90% LTV– At least 5% of down payment from personal cash

reserves

• 95% LTV– Requires owner-occupancy

– Entire down payment from personal cash reserves

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Loans for Special Needs

• Special needs such as:

– Small down payments but excellent credit

– Marginal credit but large down payment

– Good credit but limited documentation

• Programs such as:

– Stated income

– Low-doc or no-doc

– NINA (no income no assets)

– Easy qualifier

• Rare in today’s marketplace; current conditions drive availability

Private Mortgage Insurance (PMI)

• Offered by private companies to insure lender against borrower default

• Allowed lenders to make loans above 80% LTV

• Required on loans with less than 20% down

• PMI premiums:

– Fee at closing w/ renewal premium

– One-time PMI premium

– Lender paid mortgage insurance (LPMI)

How PMI Works

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PMI: Fee at Closing and Renewal

• Companies offering PMI use rate cards to determine monthly premium

PMI: Cancellation

• Mortgage insurance fulfills purpose when risk of borrower default reduced

• Homeowners Protection Act (HPA)

– Applies to single family, owner-occupied homes

– PMI automatically cancelled at 78% LTV if borrower not delinquent

– Borrower may request cancellation at 80% LTV if borrower shows timely repayment for 12 months

• When cancelled, monthly payment reduced by premium amount

• Does not apply to upfront / one-time PMI premium

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• Meet Fannie Mae/Freddie Mac standards

• May be sold on secondary market

• Qualifying standards

– 28% housing expense ratio

– 36% debt-to-income ratio

• Borrower must qualify under both ratios

• Borrower should have at least:

– 5% own funds for down payment

– 2 months of reserves on deposit

Conforming Loans

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“Qualify the Buyer.”

Debt ratio is the percentage of monthly income that can be

applied toward monthly long-term obligations.


Housing Expense-to-income Ratioincludes not only the minimum required loan payment for principal and interest,

but also inclusion of property taxes, hazard insurance, flood insurance,

private, mortgage insurance, special assessments and HOA dues if

applicable. Historically, 28 – 32% or less.


Debt-to-Income (DTI) Ratioincludes the borrower’s proposed monthly housing expense and any

recurring debt or expenses that will remain after the loan has

closed. Historical guidelines have been 36 – 41%

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Housing Expense-to-income Ratio

PITI=

Housing Expense

RatioMonthly Gross Income

PITI ÷÷÷÷ Monthly Gross Income = HE Ratio

PITI ÷÷÷÷ HE Ratio = Monthly Gross Income

PITI = Monthly Gross Income x HE Ratio

Percentage Problems

• Remember Percentage Problems usually involve three components: the total, the rate or percent and the part ÷÷÷÷ ÷÷÷÷

X Rate (percent)Total

Part

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Housing Expense-to-income Ratio

PITI

Housing Expense RatioMonthly Gross Income

÷÷÷÷ ÷÷÷÷X

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Debt-to-Income (DTI) Ratio

PITI +O

Debt to Income RatioMonthly Gross Income

÷÷÷÷ ÷÷÷÷X


PITIO=

DTI

RatioMonthly Gross Income

Also known as the Total Obligations Ratio = PITI plus other monthly non-housing long-term obligations.

PITIO ÷÷÷÷ Monthly Gross Income = DTI Ratio

PITI = (Monthly Gross Income x DTI Ratio) - O

O = reoccurring expenses

Debt-to-income Ratio problem

$997.95 + $130+

$60 + $245 = 39.8%

$3,600

A couple has a combined gross monthly income of $3,600. Loan P&I=$997.95. Prop. Tax=$130/mo. $60/mo for insurance. Can they qualify for the loan if they have a car payment of $245?

The 39.8% does exceed 36% so the couple does not qualify.

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$997.95 + $130+ $60 + $245

39.8%$3,600

÷÷÷÷ ÷÷÷÷X

A couple has a combined gross monthly income of $3,600. Loan P&I=$997.95. Prop. Tax=$130/mo. $60/mo for insurance. Can they qualify for the loan if they have a car payment of $245?

The 39.8% does exceed 36% so the couple does not qualify.

Simple loan qualification problem

Roy and Rita wish to obtain a new loan. Their combined monthly income is $4,200. What amount of monthly payment can they qualify for if the lender uses the 28/36 ratios and they have no other debts?

$4,200 x .28 = $1,176


John and Debbie Buyer have been told that the monthly payment for PITI on the house they have selected is $1,234.56. If the lender is looking for a 28/36 ratio, what is the required monthly income for John and Debbie?

$1234.56 = $4,409.140.28

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Kit and Charlie’s combined monthly income is $5,000. What monthly PITI can they qualify for if area conventional lenders are qualifying at 28/36?

$5,000 x .28 = $1,400.00

PITI ÷÷÷÷ Monthly Gross Income = HE Ratio

Loan Qualification Problem

An applicant for a mortgage has recurring monthly debt of $425 and a gross monthly income of $3,850. For a conforming loan, what is the maximum house payment—including principal, interest, taxes, and insurance—for which she qualifies?

A.$961.00B.$1,078.00C.$1,193.50D.$1,233.00

Step 1: ($3,850 x 0.36) = $1,386.00

Step 2: $1,386.00 - $425 = $961 = A

PITI = (Monthly Gross Income x DTI Ratio) - O

Mortgage Exercise

A potential borrower is applying for a conventional loan to purchase a primary residence. Currently he pays $500 in rent, $420 for an auto loan, $170 toward his VISA bill, and $300 on a student loan each month. His gross monthly income totals $4,900, and his take-home pay after taxes is $3,700.

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Mortgage Exercise

What is the maximum house payment—including principal, interest, taxes, and insurance—for which the borrower will qualify?

– Monthly debt is $890 (auto loan + VISA + student loan); rent does not count as debt

– Conventional guidelines allow housing expense ratio of 28% and total debt-to-income ratio of 36%, based on gross monthly income

– Under the 1st ratio, he qualifies for $1,372 ($4,900 x .28)

– Under the 2nd ratio, he qualifies for $874 ($4,900 x .36 = $1,764; $1,764 - $890 = $874)

– You must accept whichever ratio is lower

Loan qualification problem

An applicant for a mortgage has recurring monthly debt of $425 and a gross monthly income of $3,850. For a conforming loan, what is the maximum house payment—including principal, interest, taxes, and insurance—for which she qualifies?

Step 1: PITI ÷÷÷÷mo. income = 0.28

$3,850 x .28 = $1,078

Step 2: PITIO ÷÷÷÷mo. income = 0.36

$3,850 x .36 = $1,386

PITI + $425 = $1,386 PITI = $1,386 – 425 = $961


FHA-Insured Loans

• Federal insurance on private money loans

• FHA does not make loans

• Mortgage insurance premium (MIP) can be financed

• Must use FHA-approved appraiser

• Construction minimum standards

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FHA-Insured Loans (cont.)

• No prepayment penalties

• All FHA loans can be assumed

• Points and interest rates are set by lenders, not FHA

• Lead-based paint disclosure on houses built prior to 1978


FHA Loan Programs

• 203(b): fixed interest rate loans

• 234 : condominium purchases

• 245 : graduated payment loans

• 251 : adjustable rate loans

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• FHA insures mortgage loans made by approved lenders

• No have income limits

• Eligibility:– U.S. citizen

– Permanent resident

– Non-permanent resident with qualifying work visa

• Sets maximum mortgage amount

• FHA part of Department of Housing and Urban Development (HUD)

• Oversight through HUD’s Office of Housing

Federal Housing Administration

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• Underwriters consider 4 C’s:– Credit history of the borrower

– Capacity to repay the loan

– Cash assets available

– Collateral

• Must pay off any outstanding court-ordered judgments

• Cannot be in default on any federal loan– Confirmed through Credit Alert Verification Reporting

System (CAIVRS) database

• Must have sufficient income to service all debt

• Qualifying ratios somewhat more liberal

FHA: Underwriting Standards

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• Underwriters consider 4 C’s:– Credit history of the borrower

– Capacity to repay the loan

– Cash assets available

– Collateral

• Must pay off any outstanding court-ordered judgments

• Cannot be in default on any federal loan– Confirmed through Credit Alert Verification Reporting

System (CAIVRS) database

• Must have sufficient income to service all debt

• Qualifying ratios somewhat more liberal

FHA: Underwriting Standards

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• Relationship of borrower’s total monthly housing expense to income, expressed as percentage

– More commonly referred to as the housing expense ratio

• Total mortgage payment (PITI) may not exceed 31% of gross stable monthly income

$3,200 Stable monthly income

x .31 Housing expense ratio

$ 992 Maximum monthly housing expense

FHA: Payment to Effective Income

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Mary wants an FHA loan to buy a house. She would have these monthly expenses:

$536.82 Principal and interest

$ 53.00 Property taxes

$ 25.00 Homeowners insurance

$ 90.83 MIP

+ $ 90.00 Homeowners association dues

$800.65 Total housing expense (PITI)

What would be Mary’s required stable monthly gross income in order to qualify for this loan?

$800.65 ÷ 0.31 = $2,582.74

FHA Qualifying (Part 1)

FHA: Debt-to-Income

• Relationship of borrower’s total monthly debt obligations to income, expressed as a percentage

– Includes housing and other long-term debts that will not be cancelled

• Back end ratio given primary consideration by TOTAL Scorecard

• Borrower’s total expenses cannot exceed 43% of monthly income

$800.65 Housing expense (PITI)192.65 Auto payment

+ 40.00 Revolving credit account$1,033.30 Total debt

Based on her debt, what would be Mary’s required stable monthly gross income in order to qualify for this loan using the total debt-to-income ratio?

$1,033.30 ÷ 0.43 = $2,403.02

Borrower must qualify under both ratios, so $2,403.02 is the required stable monthly gross income Mary would need in order to buy this home.

FHA Qualifying (Part s)

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FHA: Compensating Factors• If applicant exceeds either 31/43 ratio, lender must

document factors that mitigate risk:

– Housing expense ratio

– Down payment

– Accumulated savings

– Previous credit history

– Compensation/income not reflected in effective income

– Minimal housing expense increase

– Substantial cash reserves

– Substantial non-taxable income

– Potential for increased earnings

– Primary wage-earner relocation

FHA: Property Eligibility• Eligible one- to four-family dwellings include:

– Detached or semi-detached dwellings– Row houses– Multiplex dwellings– Individual condominium units (if approved)– Some manufactured housing

• Independent utilities and other facilities must include:– A continuing supply of safe, potable water– Sanitary facilities and a safe method of sewage

disposal– Heating adequate for health and comfort– Domestic hot water– Electricity for lighting and equipment

FHA: Property Conditions • Must meet minimum property standards (MPS)

for new construction or minimum property requirements (MPR) for existing

• Appraiser recommends needed inspections:

– Infestation/evidence of termites

– Inoperative or inadequate plumbing, heating, or electrical systems

– Structural failure in framing members

– Leaking or worn-out roofs

– Cracked masonry or foundation damage

– Drainage problems

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FHA: Property Conditions

• Lender requires repairs necessary to:

– Protect health and safety of occupants

– Protect security of the property

– Correct physical deficiencies or conditions affecting structural integrity

FHA: Property Occupancy

• Must establish bona fide occupancy as principal residence within 60 days of signing mortgage

• Must live in the house for at least one year

• Generally may have only one FHA loan at a time

• Non-occupying co-borrower limits LTV to 75% unless:

– Family member

– Someone with documented evidence of long-term relationship separate from loan

FHA: Maximum Mortgage Amount

• HUD limits the maximum loan amount by community (county, zip code, or metropolitan statistical area)

• Loan amounts reviewed every 3 years• 2012 loan limit for most single family = $271,050• Different limits for 2-, 3-, and 4-family• Higher limits in some areas• Current schedule of maximum limits available

here:

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FHA: Minimum Required Investment

• 3.5% minimum required investment of sales price or appraised value, whichever is less– 10% minimum required investment for credit score

less than 580

• Closing costs may not apply to 3.5%

• Entire minimum investment may be non-repayable gift from relative, employer or labor union, charitable organization, close friend with clearly documented interest– Gifts may NOT come from interested third party

• Requires signed gift letter stating no repayment required


VA-Guaranteed (GI) Loans

• VA guarantees home loans for eligible veterans

• Certificate of eligibility

• No maximum VA loan limit

• 100% financing available


VA-Guaranteed Loans

• Assumable by anyone

• Restoration of entitlement

• No prepayment penalties

• Funding fee can be financed

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VA-Guaranteed Loans

• Guaranteed by federal government through the Veterans Benefits Administration– Part of the Department of Veterans Affairs

• Help meet housing needs of eligible veterans• Owner-occupied single family • 1- to 4-unit multifamily if vet occupies one unit as

principal residence• Rarely loans money directly• Approved lenders and Automatic Endorsers• Lender’s Handbook: www.homeloans.va.gov

VA: Entitlement/Maximum Loan

• Guaranty limited to 25% lesser of purchase price or established reasonable value

• Entitlement documented in COE

• Vets may generally purchase home up to 4 times entitlement with no down payment

• Annual loan limit set by county

– Most counties $417,000 in 2010

– www.homeloans.va.gov/loan_limits.htm

• If entitlement insufficient or limit exceeded:

– Eligibility + down payment + equity must = 25%

VA: Restoring Entitlement

• Eligibility may be restored and used for another VA loan if:

– Property is sold and loan paid in full

– Eligible veteran assumes outstanding balance and substitutes his/her entitlement

• Must meet occupancy, income, and credit requirements

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Case in Point

Each veteran is buying a home where county loan limit for a single family home is $417,000, making the maximum guaranty $104,250

Example 1: Veteran Bob has full entitlement available and is purchasing a home for $350,000.

$350,000 Purchase Pricex .25

$87,500 Guaranty Required

Since Bob has his entire entitlement of $104,250 available, he can purchase this house without a down payment. Even though he still has $16,750 in available entitlement, however, the loan-to-value on this purchase cannot exceed 100%.

Case in Point


Example 2: Veteran Ann wants to buy a house for $320,000. She has already used $27,500 of her entitlement on a prior loan, which has not been restored.

$ 104,250 Maximum Entitlement- 27,500 Used Entitlement

76,750 Available Entitlement $ 320,000 Purchase Price

x .2580,000 Guaranty Required

- 76,750 Available Entitlement$ 3,250 Down Payment

If Ann wants to buy this house, she must convince the seller to lower the price, restore some of her entitlement, or make a down payment of $3,250.


Veteran Dave wants to buy a house for $480,000. He has his full entitlement of $104,250 available. To buy this house, how much of a cash down payment must Dave make?

$ 480,000 Purchase Price

x .25

$ 120,000 Guaranty Required

- 104,250 Available Entitlement

$ 15,750 Down Payment

Entitlement

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VA: Qualifying Standards • Must be satisfactory credit risk with means to

repay loan

• If legally married, spouse income may also be considered

– Non-married co-borrower not allowed unless also an eligible vet occupying as principal residence

• Housing expense ratio (front end) not considered

• Debt-to-income ratio should not exceed 41%

– Tax-free income may be grossed up to calculate

A veteran with a family of three who lives in the Midwest is applying for $114,000 loan and has the following income and debts:

Gross Monthly Income:$1,950 Primary Employment+ 640 Part-time Employment$2,590 Total Income

Expenses:$ 706.42 Expected Housing Expense (PITI)

209.00 Car Payment122.65 Student Loan

+ 52.09 Revolving Credit Account$1,090.16 Total Expenses

$1,090.16 ÷ $2,590 = 0.42 or 42% total debt-to-income ratio

VA Loan Qualifying


Rural Economic & Community Development Services (USDA)

• Under Dept. of Agriculture

• For low- to moderate-income families in rural areas

• Guaranteed or direct loans

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USDA: Rural Development • U.S. Department of Agriculture Rural Development Housing

and Community Facilities Programs (HCFP)

• Grants and loans to rural communities for essential services

• Assist with single family and multifamily

– Housing

– Site preparation

– Rental assistance

– Water and waste

– Repair and rehabilitation

• Low-income homebuyers in rural communities

– Small towns up to 20,000

– Temporarily eligible in response to conditions, natural disaster

USDA: Section 502 Loans

• Guarantees loans made by approved private lenders

• Makes direct loans if no local lender is available• May be used to:

– Purchase existing home– Construct new home– Renovate or repair existing home – Relocate existing home– Purchase and prepare site

• Eligible house must be modest and not exceed the applicable area loan limit

• Applicants must meet area median income (AMI) income requirements

• 100% LTV with no mortgage insurance


Effective October 1, 2011, USDA mortgage insurance rates are:

• For purchases, 2.00% upfront fee paid at closing, based on the loan size.

• For refinances, 1.00% upfront fee paid at closing, based on the loan size.

• For all loans, 0.30% annual fee, based on the remaining principal balance.

Note that the annual fee is for the life of the loan. It does not end with the loan-to-value reaches a certain point as with an FHA loan.

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• Guaranteed Rural Housing (GRH) Loans– Loans made by approved lenders

• Lender sets interest rate

– Requires upfront guarantee fee of 2% + annual fee

• Could be financed, raising LTV to 102%

– Income up to 115% of AMI

• Homeownership Direct Loans– Funded by USDA

• Housing and Community Facilities Program sets interest rate

– Low (below 50% of AMI) or very low income (50-80% of AMI)


Other Types of Loans

• Purchase-money mortgages

• Package loans

• Blanket mortgages

• Wraparound loans

• Open-end mortgages

• Construction loans

• Sale and leaseback

• Buydowns

• Home equity loans

• Reverse-annuity mortgages


Mortgage Priorities

• Priority usually in order of recordation

• Senior vs. junior mortgages

• Subordination agreement

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Residential Lending Practices and Procedures

• Application for Credit

– Credit score

– Credit history

• Prequalifying Buyers

– Automated underwriting

– Conventional loans

– FHA loans

– VA loans


Financing Legislation

• Truth-in-Lending Act and Regulation Z

• Federal Equal Credit Opportunity Act

• Fair Credit Reporting Act

• NC Predatory Lending Act

• Real Estate Settlement Procedures Act (RESPA)


Truth-in-Lending Act

• Full disclosure of all finance charges

• Must disclose APR

• 4 Chief Disclosures in “Federal Box”

• Regulation Z regulates advertising

• Penalties

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Truth in Lending Act (TILA)

• Enacted in 1968 to prevent abuses in consumer credit cost disclosures

• Administered by Consumer Financial Protection Bureau

• Implemented by Regulation Z

• Does not limit interest rates or finance charges

• Applies to credit extended to consumers

– Subject to finance charge

– More than four installments

– For other than business or commercial purposes

TILA: APR and Finance Charges

• APR: Annual Percentage Rate

– Total cost of financing loan as %

– Includes interest rate on the note

– Reflects associated finance charges

• Finance charges

– Consumer credit as a dollar amount

– Spread out over life of loan

– Direct, indirect charges for extending credit

– Does not include charges payable in comparable cash transaction

TILA: Truth in Lending Statement• Required data in the “Federal Box”

• Mandatory statementYou are not required to complete this agreement merely because you have received these disclosures or signed a loan application.

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TILA: Advertising• Requires clear and conspicuous disclosure of terms• Any specific loan terms shown in an ad must be actually

available• Triggering terms include:

– Amount of down payment– Amount of any payment– Number of payments– Period of repayment– Amount of any finance charge

• Required disclosures with triggering term include:– Amount or percentage of down payment– Terms of repayment– Annual percentage rate, using that term spelled out in full– Whether the note rate may increase

• If ad contains only APR, additional disclosures notrequired

TILA: Advertising Triggering Terms

Triggering Terms

(require disclosure)

Non-Triggering Terms

(do not require disclosure)

20% down

Pay only $700 per month

Only 360 monthly payments

30-year financing available

1% finance charge

5% APR loan available here

Easy monthly payments

FHA financing available

100% VA financing available

Terms to fit your budget


Equal Credit Opportunity Act

• Prohibits discrimination against credit applicants

• Protected classes

– Race

– Color

– Religion

– National origin

– Sex

– Marital status

– Age

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Fair Credit Reporting Act

• Gives individuals right to check and correct personal credit reports

• Information limited to last 7 years, except bankruptcies for last 10 years

• One free report a year available


NC Predatory Lending Act

• Imposes restrictions on high-cost loans

• Addresses permissible fees charged on primary home loans secured by 1st

mortgage or deed of trust

• Prohibits unfair and deceptive practices by lenders

• Public education about predatory lending

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High Cost Home Loans – Three Thresholds:

1. Annual percentage rate – As the Federal H.O.E.P.A. –APR 8 percentage points above the rate for Treasury Securities with comparable maturity for first lien mortgages.

2. Prepayment Penalty – Allows collections of Prepayment Penalties for more than 30 months or more than 2%

3. Points and Fees – “points and fees” paid to lenders and brokers as defined in the statute exceed 4% of the total loan amount. Lowered from 5% as of 9/01/2010

NC Predatory Lending Act

http://www.federalreserve.gov/releases/h15/update/Selected Daily Interest Rates from Federal Reserve

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Loan Fraud Legislation

• Any misrepresentation to lender for the purpose of securing larger loan than guidelines allow

• Apply to all residential and commercial transactions

• Federal felony punishable by fines up to $1 million and/or 30 years in prison

• NC Residential Mortgage Fraud Act –agents must report


Real Estate Settlement Procedures Act (RESPA)

• Disclosure of all settlement charges in residential transactions involving new loan

• Discussed in Chapter 15

Chapter 14: Real Estate Financing:...

Documents

Transcript of Chapter 14: Real Estate Financing:...