Principles of Real Estate 2
Three approaches to value
(1) The Sales Comparison Approach, (2) The Cost Approach, (3) The Income Approach.
According to HUD, a home has a life expectancy of
60 years
Mortgagor
A borrower in a mortgage loan transaction.
Mortgagee
A lender in a mortgage loan transaction.
Pre-approval
A letter from a lender that informs a seller about the amount of money that a potential buyer can obtain. The Pre-Approval Letter is issued only after the lender has evaluated the borrower in the under-writing process. The pre-approval letters require the identifications of a property.
conditional approval
A loan approval that you receive which is based on certain requirements you need to complete. Your Ways to Work approval letter is an example of a conditional approval.
Functional Obsolescence
A loss of value to an improvement to real estate arising from functional problems, often caused by age or poor design.
Secondary Mortgage Market
A market for the purchase and sale of existing mortgages, designed to provide greater liquidity for mortgages; also called the secondary money market. Mortgages are first originated in the primary mortgage market.
income capitalization
A method of appraising the value of a property by applying a rate of return to the property's net income.
Physical Deterioration
A reduction in a property's value resulting from a decline in physical condition; can be caused by action of the elements or by ordinary wear and tear.
Loan Pre-Qualification/Pre-Approval.
All pre-qualification and pre-approval letter are subject to underwriting approval.
Triggering Terms Requiring Disclosure
Amount of Down payment 20% down, Amount of any payment Pay only $700 per month, Number of payments Only 360 Monthly payments, Period of repayment 30-year financing available, Amount of any finance charge example 1% finance charge Note: if an ad discloses only the APR, then no other disclosures are required
Cost approach to value
An estimate of value based on current construction costs, less depreciation, plus land value. Contrast with the income approach to value and the sales comparison approach to value.
Fannie Mae formerly known as FNMA Federal National Mortgage Association
Began in 1938, In 1968 Fannie Mae became a privately-owned and managed corporation. At that time, the US congress re-chartered Fannie Mae as a private company mandating that it operate with private capital on a self sustaining basis to enhance the flow of funds through the secondary market to home buyers.
Community Reinvestment Act C.R.A federal law established in 1977 that prescribes, it was revised in May of 1995.
C.R.A Community Reinvestment certain activities for financial institutions to help meet the needs in their communities. It prohibits redlining, which is the practice of refusing to provide financing in a particular area because of location.
Off special interest in residential appraisal is a age of the improvements. the appraiser is concerned with age in two areas
Chronological Age and Effective Age
Characteristics of value acronym DUST D Demand
Demand there must be sufficient demand for the property for it to have value. Without demand, it is of little or no value.
Characteristics of value acronym DUST
Demand, utility, scarcity, transferability
Types of Appraisal Reviews
Desk Review-Desk Review Most lenders, especially for conforming loan programs, conduct simple desk reviews, normally at their desk. Field Review- many lenders especially when dealing with High LTV Loan to value ratio loans, will order a field review of the appraisal.
Appraisal Factors that affect loan approval
Economic obsolescence, Major functional obsolescence, rural property 25% build up, buildings are not typical of the area, items that affect the marketability or livability of the property, any condition that affects the health or safety of an occupant.
Federal Open Market Committee F.O.M.C
F.O.M.C tighten money and credit in the economy, the F.O.M.C directs the New York Trading Desk to sell government securities, collecting payments from banks by reducing their reserve accounts.
Fannie Mae formerly known as
Federal National Mortgage Association F.N.MA began in 1938 as an agency of the federal government and was created to bring stability to the U.S. Housing market
Additional Documents from the appraiser
Floor plan, Photographs of Property and Comparable, Local maps, flood maps, rental survey, operating income and expense statements, copy of recent property survey, background information about the appraiser, appraisal certification.
For tax purposes the ___ is determined by the taxing authority. a. assessed value b. appraised value c. market price d. investment value
For tax purposes the __ is determined by the taxing authority. a. assess value
Given a 60-year life, a 20 year old home would have a depreciation factor on 20/60, or 1/3
Given a 60-year life, a 20 year old home would have a depreciation factor on 20/60, or 1/3
Government National Mortgage Association G.N.M.A. was established in 1968 to promote homeownership
Government National Mortgage Association or Ginnie Mae, this agency of HUD operates in the secondary mortgage market. It is involved with special government financing programs. Owned by the government.
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates. The Fed's monetary policy action affect prices, employment, and economic growth by influencing the availability and cost of money and credit in the economy, this in turn affects the willingness of consumers and business to spend money on goods and service.
Principle of Progression
Higher valued properties in the neighborhood lead to an increase in value of a subject property
Conditional approval the borrower's credit is submitted to underwriting for approval
However, the credit application is only one component of the Complete Application, and only after receiving the complete application will the lender provide the borrower with a Loan Estimate L.E
Government National Mortgage Association Ginnie Mae
If a 62 year old can borrow of the equality of the loan through Ginnie Mae
Sales Comparison Approach
In the sales comparison approach or market data approach, an estimate of value is obtained by comparing the subject property with recently sold comparable properties similar to
Principal of increasing and decreasing returns
It is prudent to improve property when the value added by the improvement exceeds cost of the improvement. The would suggest that an owner should not "over improve" a property.
Functional Obsolescence
Loss of value due to worn or outmoded features: Ex. One bath
External Obsolescence
Losses of property value caused by forces or conditions beyond the borders of the property. The losses are deducted from a building's reproduction cost in the cost approach to estimating market value.
Principle of Regression
Lower valued properties in the neighborhood lead to a decline in value of a subject property
Market Value
Market value is the most probable price a property should bring in a competitive and open market under all conditions requisite to a fair sale, under guidelines published by federal lending institutions. Fannie Mae and Freddie mac.
Non-depository Mortgage Originators
Mortgage loan originators can be broken down into three categories Mortgage bankers, Mortgage Brokers and Correspondent Lenders.
Income approach value
One of the three main methods of appraisal in which an estimate of the property value is based on the net income it produces, also called the capitalization method or the investor's method of appraisal.
Mortgage Lending Activates
Origination, Loan Processing, Underwriting, Close, Fund
Planned Unit Development PUD
PUD A planned combination of diverse land uses, such as housing, recreation, and shopping, in one contained development or subdivision.
Principles of residential appraisals are
Principle of contribution, Principle of Change, principle of anticipation, principle of substitution, principle of conformity, principle of increasing and decreasing returns, Principle of supply and demand principle of regression, principle of competition.
The mortgage package actually consists of two major documents
Promissory note and mortgage
Comparable
Properties used in an appraisal report that are substantially equivalent to the subject property.
Application to be considered the lender must have all the following
Remember the requirements with the acronym P.E.N.S.I.L Property address, Estimated Value, Name of the borrower, Social Security Number, Income, Loan Amount.
Characteristics of value acronym DUST S Scarcity
S Scarcity if a type of property in a market area is too abundant, it has reduced value. if a market is flooded with property for sale, values will remain flat.
The secure and fair enforcement for mortgage Licensing Act
SAFE Act is designed to enhance consumer protection and reduce fraud.
Loan officer
Someone who advises, evaluates, and signs off on loans to individuals and business. Real estate license holders often refer byers to a number of trusted loan originators, now universally referred to as residential mortgage loan originators RMLOS
Characteristics of value acronym T Transferability
T Transferability if for some reason the property cannot be transferred, it is of little value. This may be due to a title flaw that cannot be cured, government regulations or restrictions that make transfer impossible.
Under Dodd-Frank, The Consumer Financial Protection Bureau C.F.P.B was established. The Bureau has the authority to examine and enforce consumer protection regulations for all mortgage-related businesses.
The C.F.P.B Consumer Financial Protection Bureau is responsible for Truth in Lending TILA, Fair Credit Reporting F.C.R.A, Real Estate Settlement Procedures Act RESPA
Principle of Competition
The absence of competition will cause prices to increase in the marketplace. Conversely, increased competition tends to bring prices down.
In the appraisal report, the property being appraised is referred to as the __ property a. target property b. comparable property c. sold property d. subject property
The appraisal report, the property being appraised is referred to as the __ property d. subject property
The appraised value of a property is a. the sale price b. an opinion of value c. a market analysis d. the market value o a property
The appraised value of a property is b. An opinion of Value
The appraiser who deems the property maintained and upgraded sufficiently to justify an effective age of 10 years will use a depreciation factor on 10/60 or 1/6, which is one-half of the depreciation based upon chronological age.
The appraiser who deems the property maintained and upgraded sufficiently to justify an effective age of 10 years will use a depreciation factor on 10/60 or 1/6, which is one-half of the depreciation based upon chronological age.
Effective Age
The appraiser's estimate of the age of the house based upon its ongoing maintenance and upgrades. A house might have been well maintained and updated over the years; therefore, the appraiser might determine that a 20 year old house might have an effective age of 10.
Servicing
The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.
Federal Reserve System
The country's central banking system, which is responsible for the nation's monetary policy by regulating the supply of money and interest rates. Federal Reserve critical role is to keep the economy healthy through the proper application of Monetary policy.
Gross Rent Multiplier GRM
The figure used as a multiplier of the gross monthly income of a property to produce an estimate of the property's value. GRM Equal Sales Price Divided by Monthly Rent
mortgage market
The market in which borrowers and mortgage lender come together to create and negotiate terms for a mortgage transactions is called the primary mortgage market
primary mortgage market
The market in which borrowers and mortgage lender come together to create and negotiate terms for a mortgage transactions is called the primary mortgage market
A major difference between mortgage companies and regulated lender is the mortgage companies rely on commercial banks that grant a warehouse line of credit to them.
The moans are short term, collateralized by the mortgage notes they fund, and are normally repaid through the sale for these notes to the secondary market
Principle for substitution
The prices in which similar items are sold in a market tend to be similar, and the value of one item can be inferred from the price in which a similar item is sold
Loan Pre-Qualification/Pre-Approval Under ideal circumstances, the buyer has been pre-qualified or pre-approved for a loan prior to beginning the search for a home.
The process benefits not only the buyer, but the seller and agents in several ways. Buyers are able to be more realistic when setting their pricing goals, the buyer's agent has a better understanding of the buyer's ability to pay, the buyer's agent can avoid showing properties that the buyer cannot afford, Sellers are somewhat reassured that the buyers has sufficient income and credit to close and does not obligate to the borrower to the lender.
Loan Processing
The process of collecting information about a borrower in order to build a loan file that will be used to make an underwriting decision.
Origination
The process of creating a new loan, including all steps taken by a lender to attract and qualify a borrower, are considered originating actives.
Foreclosure
The seizure of property from borrowers who are unable to repay their loans or satisfy the unpaid promissory note.
Fannie MAE 1003 Application
The standard loan application is use is the Uniform Residential Loan application, better known as Fannie Mae 1003.
Pre-qualification
This usually refers to the loan officer's written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower.
Characteristics of value acronym DUST U utility
U Utility the property must be able to fulfill a need. If for some reason the property has no use, it is a little or no value. Utility does not necessarily mean development.
Correspondent Lender
Usually smaller in scale than mortgage bankers or brokers, these lenders typically extend loans with their own funds, at their own risk.
Principal of Supply and Demand
When for real estate is great and the supply is short, prices in the marketplace go up. like wise when the supply is high and demand is low, prices decline. The real estate market does not respond as quickly to changes in supply and demand as other products. This is because of the "lag time" involved n real estate development and the relatively long time that it takes to complete a transaction.
mortgage
Which is a document of pledges the property as security for repayment of the note, is recorded in the county in which the property is located.
chronological age
actual age of the property in years. if the house is 20 years old, it has a chronological age of 20
Underwriting
an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed-upon price
ad valorem tax known as according to value
are assessed based upon the assessed value of the property and the existing tax rate. A tax levied according to value, generally used to refer to real estate tax. Also called the general tax.
Principle of Change
change is constant and is reflected in values. Appraiser makes adjustments for changes in market conditions, and for time.
Mortgage Broker
for many years, the role of the mortgage broker was to represent major lenders and insurance companies. Mortgage brokers provided consumers with assistance securing hard to place and niche sources of mortgage money.
Principal of Anticipation
future benefits and detriments will affect property values
most buyers need to obtain a mortgage loan when buying a home. The types, terms and most of available financing effect purchases decisions. for example
high interest rates mean many buyers can only afford to purchase less expensive houses. as a result, mortgage terms affect the volume of real estate transactions and hence the supply demand, and the price of homes.
The truth in Lending Act TILA regulation Z, The Consumer Financial Protection Bureau C.F.P.B assumed authority to publish regulations under most provisions of the Truth in Lending Act TILA as of July 21, 2011.
is a U.S. federal law designed to protect consumers in credit transactions by requiring clear disclosure of key terms of lending arrangement and all costs. Most of the specific requirements imposed by TILA are found in regulation Z, so a reference to the requirements of TILA usually referred to requirement s contained in Regulation Z as well as the statute itself.
Freddie Mac
is federally chartered corporations, established as the Federal Home Loan mortgage Corporation F.H.L.M.C in 1970 for the purpose of purchasing mortgages in the secondary market.
Depreciation
is the reduction in value of property from causes such as deterioration or obsolescence.
The SAFE Mortgage licensing act was designed to enhance consumer protection and deduce fraud by encouraging states to establish minimum standards for licensing and registration of state licensed mortgage loan originators, and by establishing a
nationwide mortgage licensing system and registry for the residential mortgage industry. All mortgage loan originators must now be registered with the Nationwide Mortgage licensing system and registry NMLSR
Mortgage Bankers
originate loans, lend money, sell loans and continue to service loans they have sold
discount rate
rate the Federal Reserve charges eligible financial institutions to borrow fund on a short term basis. Unlike open market operations, which interact with financial market forces to influence short term interest rates, the discount rate is set by the boards of directors o the Federal Reserve Banks. and its subject to approval by the Board of Governs.
A borrower may be quoted a rate of 6 percent per annum on a particular mortgage product and at this rate, the lender is charging no discount points. A loan with no discount points is known as a par loan a loan that is made at the current market rate of interest.
repeat: A borrower may be quoted a rate of 6 percent per annum on a particular mortgage product and at this rate, the lender is charging no discount points. A loan with no discount points is known as a par loan a loan that is made at the current market rate of interest.
The yield on the loan is determined by the rate of interest charged on the loan and the discount points charged by the lender at closing. A one point discount is one point discount is one percent of the loan amount, and is an up front payment of interest paid by borrowers to reduce the interest rate on the loan.
repeat: The yield on the loan is determined by the rate of interest charged on the loan and the discount points charged by the lender at closing. A one point discount is one point discount is one percent of the loan amount, and is an up front payment of interest paid by borrowers to reduce the interest rate on the loan.
Limited appraisals
some lenders accept a shorter version of the appraisal report for under writing, rather than requiring a full appraisal report which include interior inspection.
Principle of Conformity
suggest that value if maximized when there is a reasonable degree of homogeneity, or sameness, in a neighborhood.
Principle of Contribution
suggests that the value of a property is equal to the sum of the contributory valve of each of its component parts. The value of any component of property is determined by how much value the improvement contributes to the value of the whole property.
close
the consummation of a real estate transaction in which all appropriate documents are signed and the proceeds of the mortgage loan are disbursed by the lender is called closing.
Loan Amortization
the determination of the equal periodic loan payments necessary to provide a lender with a specified interest return and to repay the loan principal over a specified period
Liquidity
the ease with which an asset can be converted into the economy's medium of exchange
Equal Credit Opportunity Act E.C.O.A. originally passed in 1974 ensures that all consumers are given an equal change to obtain credit.
the equal credit opportunity act prohibits discrimination in any aspect of a credit transaction on the basis of Race, Color, Religion, National Origin, Sex, Marital Status, Age provided that the applicants has the capacity to enter in a binding contract.
Fund
the process done during the close process, the process of transferring funds to a title or escrow company for disbursement is called funding.
Secondary market do not lend money
the purchase mortgage notes as investments to earn a return. The return is called a YIELD and it represents the money earned on a investment. By selling loans in the secondary market, lenders are able to obtain additional funds with which to make more loans to homebuyers.
appraisal process
the value of a property may be affected by social, economic, governmental, and environmental influences. An appraiser must always be aware of these influences and possible changes in them that could affect market value. The appraiser's observations are noted on the appraisal. Appraisers are licensed or certified by the state in which they practice.
Price doesn't necessarily equal
value price is the amount of money for which a particular property sold. Many factors can cause a price to rise above or fall below market value.
promissory note
which is also known as a real estate lien note, is the borrowers unconditional promise to pay repay, and includes the amount borrowed, payments amounts, due date and rate of interest. The note is not generally recorded.