Finance Chapter Review

By definition, an appraisal is an opinion or estimation of a property's value at a specific point in time. How accurate the appraisal is depends on who does it. The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 requires that real estate appraisals be in writing and be performed by competent individuals in accordance with a set of uniform standards. In California, the Office of Real Estate Appraisers (OREA) enforces the FIRREA law. Currently, four levels of appraiser licensing exist: Trainee License - Cannot perform an independent appraisal; must work under the supervision of a licensed appraiser. Residential License - Allows appraisal of both residential and non-residential properties with restrictions on complexity and value of the property. Certified Residential License - Allows appraisal of residential properties with no restrictions and non-residential properties with restrictions on value. Certified General License - Allows appraisal of all property types with no restrictions. The process of conducting an appraisal includes seven definite steps: Identify the purpose of the appraisal, such as market value for a purchase or value as loan collateral. Gather the data relevant to the property, such as tax and title records, costs and demographic and economic data. Assess the highest and best use of the property by analyzing market conditions. Estimate the value of the land. Use the three approaches to estimating cost to help reduce errors and establish a "range" of value. Reconcile the estimates from the three approaches into a final value estimate. Compile and present a formal report to the client.

The three approaches to estimating cost referred to in step five above are: the sales comparison approach, the cost approach, and the income approach. Using the sales comparison approach, the value of a property is determined by comparing the property being appraised with recently sold comparable (equivalent) properties. The cost approach is most reliable for properties that were built recently. The cost approach attempts to estimate either the property's replacement cost or reproduction cost. Appraisers use the income approach to estimate the value of properties that produce income, usually from rent paid on leases. This method is best for estimating the value of apartments, stores, shopping centers, and office buildings. The Uniform Residential Appraisal Report (URAR), referred to as the 1004 Form, has become the standard in the industry. This report requires the appraiser to do all of the following tasks: Perform a visual inspection of the interior and exterior areas of the subject property. Inspect the neighborhood. Inspect each of the comparable sale properties (at least from the street). Collect, confirm and analyze data from reliable public or private sources. Submit his or her analysis, opinions and conclusions in the report. In addition to completing the report, the appraiser submits all of the following exhibits: A street map that shows the location of the subject property and the comparables. An exterior building sketch of the improvements, indicating the dimensions and including calculations to show how the appraiser arrived at the estimate for gross living area. If the floor plan is not typical or is functionally obsolete, the appraiser can include a floor plan sketch with the dimensions instead of the exterior building sketch. Photographs showing the front, back, and a street scene of the subject property. Photographs showing the front of each comparable sale property. Any other attachments that will provide support to the appraiser's opinion of market value.

Mary is getting a $120,000 loan at 6.5 percent and will pay 3 discount points. What will the effective interest rate be?

6.88%

What percent of the REIT's assets must be made up of cash, real estate, mortgage notes, or government securities?

75

The steps in the sales comparison approach to estimating value are:

Choose appropriate comparable properties, adjust the comparables for the differences and estimate the value.

Which of these lenders typically deals in construction loans?

Commercial bank

What is the term used to describe a loan that is not government-backed?

Conventional

RESPA applies to:

First mortgage on a single-family home

Which statement about Ginnie Mae is true?

Ginnie Mae guarantees FHA and VA mortgage-backed securities.

Which of the following would not be an example of recasting a loan?

Giving a voluntary conveyance

Under which type of loan does the portion of payment that is applied to principal increase regularly over time?

Growing Equity

With which kind of lease does the tenant not know the actual change in the rent amount in advance?

Indexed

The FHA qualifies potential borrowers based on two ratios, and the borrowers must qualify under both of these ratios. Mortgage Payment Expense to Effective Income The lender will take the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) and divide that amount by the borrower's gross monthly income. The maximum ratio to qualify is 31 percent. Total Fixed payment to Effective Income The lender will add up the total mortgage payment (principal and interest, escrow deposits for taxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then the lender will divide that amount by the borrower's gross monthly income. The maximum ratio to qualify is 43 percent. The maximum loan amount allowed varies by geographic area based on 95 percent of median house prices for the area with a ceiling calculated as a percentage of the current Conforming Loan limits. Legislation in 1998 increased the percentage used for the maximum high-cost area calculation to 87 percent of the current Fannie Mae/Freddie Mac limit. This results in much higher maximum loan limits for high-cost areas. In California, the maximum loan amount varies by county. Although there are many different programs available under FHA insured financing, the most popular is the FHA 203(b) that covers loans on one-to-four-unit owner-occupied dwellings. This fixed-rate loan often works well for first time home buyers because it allows individuals to finance up to 97 percent of their home loan, which helps to keep down payments and closing costs at a minimum. The 203(b) home loan is also the only loan in which 100 percent of the closing costs can be a gift from a relative, non-profit, or government agency. Other popular FHA programs include: Section 234(c) - Mortgage Insurance for Condominium Units Section 245(a) - Growing Equity Mortgage Section 203(k) - Rehabilitation Home Loan The Section 251 - Adjustable Rate Mortgage program provides insurance for adjustable rate mortgages. This program works well with the other widely-used FHA single-family products: 203(b), 203(k) and 234(c).

In an effort to make it possible for veterans returning from World War II to purchase a home, the Veterans Administration (VA), now the Department of Veterans Affairs (DVA), offered the opportunity for veterans to purchase a home with no money down. In order to make this loan acceptable to lenders, the DVA agreed to guarantee the top portion of the loan. Since lenders were now protected in the event of a default by the borrower, lenders agreed to loan four times the current DVA Entitlement. The basic entitlement of a DVA loan is $36,000; although some loans are eligible for up to $60,000 if they are over $144,000. Most lenders require that a combination of the guarantee entitlement and any cash down payment must equal at least 25 percent of the reasonable value or sales price of the property, whichever is less. The veteran must provide a Certificate of Eligibility showing the amount of entitlement available. The entitlement is the maximum number of dollars that DVA will pay if the lender suffers a loss. A veteran may use VA-guaranteed financing for any of the following situations: To buy a home. To buy a townhouse or condominium unit in a project that has been approved by VA. To build a home. To repair, alter or improve a home. To simultaneously purchase and improve a home. To improve a home through installment of a solar heating and/or cooling system or other energy efficient improvements. To refinance an existing home loan. To refinance an existing VA loan to reduce the interest rate and add energy efficiency improvements. To buy a manufactured (mobile) home and/or lot. To buy and improve a lot on which to place a manufactured home which you already own and occupy. To refinance a manufactured home loan in order to acquire a lot.

What is the main advantage of a single-family home investment over other real estate investments?

Liquidity

What does the term "mixed-use development" mean?

More than one use for a single building

Which of the following would probably not be a use of a junior loan?

Purchase of property through the VA

Which of the following is typically not a short-term mortgage loan?

Single-family home loan

The type of estate that has a definite beginning and ending date is known as what?

estate for years

What is the maximum annual amount a single taxpayer can give to a person without incurring a gift tax liability?

$14,000

Bill bought a property for $270,000. The value of the building on the property is $220,000. If the building has an economic life of 50 years, what is the depreciated value of the building after 5 years?

$198,000

The cost recovery period for land improvements is how long?

15 years

Which of the following statements is not true about a note?

A note must be tied to a mortgage to be legal.

Most conventional loans require the borrower to make a down payment of 20 percent or more, making the loan 80 percent or less of the property's sale price. However, a borrower can get a conventional loan with a lower down payment by insuring the loan through a private mortgage insurance program (PMI). A lower down payment means a higher loan-to-value ratio. Lenders need to minimize their risk, so they require additional security in the form of insurance. In California, borrowers can utilize what's called the zero premium settlement plan, which means that the borrower can choose to finance the entire PMI premium and not pay a lump sum initial premium at closing. The PMI payments will terminate once the loan has been repaid to a certain level. Federal law requires that any loans originated after July of 1999 must have the PMI terminated after the borrower: Has accumulated 22 percent of equity in the property (loan-to-value ratio is 78 percent). Is current with all loan payments. However, the law also states that a borrower whose equity equals 20 percent of the purchase price or appraised value may request that the lender cancel the PMI. Lenders have a duty to inform all borrowers of their right to terminate the PMI. A popular way to avoid having to pay private mortgage insurance is through the use of what's known as 80-10-10 financing. What this means is that the institutional lender provides the traditional 80-percent first mortgage. Then the borrower gets a 10-percent second mortgage and makes a 10 percent cash down payment.

Even though conventional loans are the most common loan type available, the government still plays a role in providing loans for property purchases. Government-backed loans include those loans offered by: The Federal Housing Administration (FHA) The Department of Veterans Affairs (DVA) - sometimes simply referred to as VA The California Department of Veterans Affairs (Cal-Vet) Other state, county or city-backed subsidized loan programs The FHA provides low-down-payment loans to qualified buyers. The Department of Housing and Urban Development (HUD) oversees the FHA. The loans FHA provides are high loan-to-value ratio loans, so FHA insures the loans in order to make them available to higher risk individuals. The following items are important to know about FHA loans. FHA loans can be either 15- or 30-year fixed-rate mortgages or 30-year adjustable-rate mortgages (ARMs) in which the interest rate adjusts annually. The maximum loan term is 30 years or 75 percent of the remaining economic life of the property, whichever is less. Down payments are low. However, the borrower must have cash for a down payment and closing costs. These items cannot be added to the sales price and become part of the loan repayment. The maximum loan fee is 1 percent of the loan amount and is typically paid by the buyer. As of 2006, the borrower must pay two insurance premiums. The first is the "upfront" Mortgage Insurance Premium (MIP), which is a percentage of the loan amount. The borrower can pay this one-time premium at closing, or the charge could be financed with the loan. This premium could be paid by some other party, such as the seller. The second premium, called Mutual Mortgage Insurance (MMI), is a monthly premium that is paid with the monthly principal, interest, taxes and insurance payment. This is often referred to as PITI + MMI. MMI premiums may be dropped when the remaining loan balance is 80 percent loan-to-value ratio or less.

Which statement is not true about the Farm Credit System?

FCS banks lend money from their deposits.

Which of the following default types would be considered a technical default?

Failure to keep property in good repair

Greg bought an apartment building two years ago. He found out recently that the building will become rent-controlled. Greg is a victim of what kind of risk?

Legislative

Which of the following statements is not true?

Noninstitutional lenders are not subject to usury law.

What is a document called that is filed by an owner after a project is substantially completed?

Notice of Completion

How does the VA protect itself from the risk of default and foreclosure?

The VA charges a funding fee.

What does a covenant of seisin state?

The borrower has title to the property and can pledge it as collateral.

According to California law, a late payment penalty cannot be assessed to a borrower if the payment is received within how long of the due date?

10 days

Alex bought a property valued at $850,000 which has an annual net operating income of $102,500. What is the capitalization rate?

12%

Jim Smith wants to purchase a vacation home and have it double as an investment. What is the maximum amount of time per year that Jim and his family can stay in the home and still be able to take the depreciation?

14 days

A borrower usually incurs several costs when taking out a construction loan: A flat loan origination fee, which is usually a percentage of the amount of the loan and is assessed at the time the lender makes the loan. Fees to cover the expense associated with preparing and underwriting the loan. Fees to cover the lender's higher overhead costs for items such as on-site inspections, "progress" advances, and checking for mechanics' liens. A construction lender will consider a number of factors before agreeing to finance a construction project. The lender will consider the plans and specifications, breakdown of costs, the contract, the repayment plan and borrower's financial information. The lender and builder will agree on a disbursement system for releasing money as the construction progresses according to a predetermined schedule. This type of payout arrangement is the major distinguishing characteristic of the construction loan over other real estate loans. The lender can disburse the funds by one of these methods. Draw system. Payments are made in stages as construction progresses. Percentage-of-progress system. Funds are disbursed incrementally based on 90 percent of work in place or delivered to the job on a monthly basis, with the remaining 10 percent held until the expiration of the mechanic's lien period. (This is a variation of the draw system.) Voucher system. Money is paid out when the builder gives the lender the receipts from licensed building contractors, subcontractors and material suppliers, accompanied by the appropriate lien waivers and releases. Builder's control service. Funds are paid out by an outside third party acting as an intermediary for the disbursement process.

A "take-out" commitment is a promise by the permanent lender that if certain conditions are met, the lender will issue a permanent loan to the borrower once the construction is completed in a satisfactory manner. A partial release clause is most commonly found with a blanket mortgage, which is placed on multiple parcels of property, such as is the case with a subdivision development. As the developer sells each individual lot, that lot is released from the blanket loan and then the loan balance is reduced a certain amount. A rental achievement clause requires the developer-borrower to pre-lease a certain amount of space in the building. To meet this contingency, the developer will give the lender a certified rent roll that specifies who the tenants will be and which space they will be leasing, the length of each lease and the annual rent each of the tenants will be paying. Construction lenders are always cautious about the possibility of mechanics' liens, which attach to the real property, plus the buildings and improvements that are situated on the land. Mechanics' liens remain in effect until the workmen have been paid in full. Mechanics' liens can arise if the builder does not complete the project or if the job is completed and the builder does not pay those suppliers or contractors who worked on the project. If an owner files a notice of completion within 10 days after a job is essentially completed, the original contractor has up to 60 days in which to file a lien. All other workers have only 30 days. If the notice of completion is not filed and recorded or if the notice is flawed in any way, all parties have up to 90 days from the date of substantial completion in which to file a lien.

A mortgage lender needs to have information about the market value of a property over several years, not just its value at the time of the loan. An analyst can develop a market forecast for every year of the loan amortization. The forecast contains two important elements: It estimates the expected operating results from the property over the forecast period and indicates to the lender whether the property will generate enough cash flow to cover the loan. It estimates the market value on a year-by-year basis, which indicates the risk of losing principal if there is a foreclosure. To develop a meaningful multiple-year operating forecast, an analyst must forecast: Gross revenue - The analyst must predict any changes that could influence the property's ability to pull in rent and then compare any anticipated physical and/or site changes with those same types of changes affecting any the properties that compete for the same tenants. The analyst must estimate how these factors will change over the forecasting time period and predict how the changes will affect the property's rent capabilities. Operating expenses - A good way to estimate the trend of operating expenses as the property gets older is to study the data in already published sources. By comparing the actual results during a single time span for different-aged groups of buildings in the same functional category as the subject property, an analyst can estimate the rate of change in operating expenses that can be attributed to the aging of a building. Changes in market value - The analyst applies an appropriate capitalization rate to each year's forecasted net operating income to get a multiple-year forecast of market values. Combining these market values with a calculated remaining balance of the mortgage loan for each year will give a trend of loan-to-value ratios that will tell the lender what level of risk to expect with the investment.

A common method of seller financing is a purchase-money mortgage in which the seller conveys the title as the buyer simultaneously delivers a mortgage that will secure the note given as partial payment for the land. Sometimes a seller will finance a land sale using an installment land contract instead of a mortgage. With this financing arrangement, the seller keeps title and sometimes keeps possession and use of the land as well, until all the payments are made. Then the seller transfers title to the buyer. A developer who options land does not incur any holding costs, such as taxes, insurance, interest and maintenance, until he or she exercises the option. If the economy weakens or the developer believes that the development of the parcel is not feasible, he or she can simply decline to exercise the option. A good option agreement will include the option price, the option term, and land description, as well as incorporate all of the wording of the purchase contract that will become effective if the option is exercised. A construction loan is a short-term, interim, or temporary loan usually lasting from 9 to 12 months for a single-family home and 18 to 24 months for a more major project, such as an apartment building. Permanent loans on buildings that already exist are usually written for longer terms, usually 15 to 30 years. When used in combination with a construction loan, a permanent loan is called a take-out loan. There are two basic kinds of construction loans: A combination loan, which combines a construction loan with a permanent take-out mortgage and requires only one loan closing. An interim, short-term, straight construction loan, which involves the financing of the construction phase only.

The term syndication is a descriptive term for a group of two or more people who combine their financial resources to achieve certain investment objectives. A syndicate is able to acquire real estate that could not be purchased by an individual alone. A typical real estate syndicate combines the money of individual investors with the management of a sponsor. The syndication has three cycles: Organization - Planning, purchasing property, meeting registration and disclosure rules, and marketing. Operation - Managing both the syndicate and the real property, usually done by the sponsor. Liquidation - Reselling the property. Most investors belonging to syndicates do not invest much of their own money. A syndicate is governed by whatever form of business organization the participants adopt. This could be a: Limited Partnership General Partnership Corporation Real Estate Investment Trust Investors often choose to organize as a limited partnership if they will be syndicating only one project or only a small number of projects. If a syndicate does not identify the properties it plans to purchase, the offering is called a blind pool. Because most syndicates intend to make a profit for many people from the efforts of a few people, they must comply with the rules and regulations of the Securities and Exchange Commission. In California, the Department of Business Oversight regulates control of syndicates. Under the Corporations Code, real estate brokers may engage in the sale of real estate syndicate security interests without obtaining a special broker-dealer license. The California Corporations Code states that a limited partner may become liable for the total debts of the partnership if the limited partner takes an active role in management.

A general partner is an active partner in the partnership who has unlimited personal liability for the debts of the partnership. An advantage that partnerships have over corporations is that partnerships do not pay income tax. The individual partners pay the taxes. A corporation, on the other hand, has double taxation. The corporation pays tax on its corporate profits and then the stockholders pay tax on their dividends. Joint ventures are partnerships for a single undertaking rather than a continuing business. Because the joint venture is set up for a limited purpose, the implied authority of the members is more limited than in general partnerships. Limited partnerships are partnerships in which the limited partners have limited liability as opposed to the unlimited liability of a general partnership. Limited partners are liable only to the extent of their investment. However, a limited partnership must have at least one general partner who has unlimited liability. Limited liability companies provide the limited liability protection of corporations without the regulations associated with corporations. Real estate investment trusts (REITs) allow smaller investors to pool their resources for quality investments with limited liability. Qualifying REITs have tax-free status. To qualify for tax-exempt status under federal law, a real estate investment trust (REIT) must meet several conditions, including: Shares must be owned by at least 100 investors. Five persons or fewer cannot hold more than 50 percent of the shares during the last half of any tax year. At least 75 percent of the trust's assets must be made up of cash, real estate, mortgage notes, or government securities. No more than 30 percent of gross annual income can come from gains from the sale of securities held for less than a year or real estate held for less than four years. At least 90 percent of the trust's gross income must be distributed to shareholders within one year after the end of each fiscal year.

A large variety of noninstitutional lenders exist in the real estate marketplace. This is not surprising, given the fact that noninstitutional lenders are relatively free of regulations. Noninstitutional lenders include: Private Parties (Individuals) Mortgage Brokers Mortgage Bankers Real Estate Trusts Syndications Real Estate Bonds Private Loan Companies Pension and Endowment Funds Credit Unions Private parties have no formal structure. They have very few laws or regulations to deal with in regard to their lending practices. Since there is not much structure, the practices and policies of private parties vary greatly from one lender to another. However, many states, including California, have passed laws that regulate the maximum amount of interest an entity can charge on various loans. This is called usury law. If a loan exceeds the maximum amount, it is considered illegal. In some cases where a lender has been found guilty of usury, the borrower did not have to pay any interest on the loan. Note: Private party lenders are not exempt from usury laws. However, carryback loans made by private sellers are exempt; in other words, a seller can charge any rate of interest he or she wishes.

A mortgage broker is usually retained by a borrower to help obtain financing for a specific commercial property. Finding a suitable lender and arranging the loan entitles the broker to a commission or fee, which is paid by the borrower. Mortgage brokers rarely invest any of their own capital in a loan, so they are taking no risk of loss. In addition, after the loan is placed, mortgage brokers do not service the loan. Loan payments are made directly to the lender, although in some cases they could be made to a collection service. Sometimes lenders make real estate loans on properties that are not located in areas where the lender can personally supervise the loans. For this reason, lenders may choose to use the services of a mortgage banker (or mortgage company). When a mortgage banking company represents an institutional lender, it is known as a mortgage correspondent. The correspondent receives a fee for originating, processing and closing the loan. Loan servicing duties for mortgage bankers usually include collecting payments, including principal, interest, insurance and taxes, on a note in accordance with the loan terms. Servicing also includes operational procedures such as accounting, bookkeeping, insurance and tax record preparation, follow-up on loan payments, follow-up on any delinquencies and analysis of the loan. The mortgage banking industry is regulated under specific state laws. Even so, mortgage companies are less regulated than traditional institutional lenders because they are not lending money that belongs to depositors. Often, mortgage bankers lend their own money from funds they borrow on a line of credit from a commercial bank. They then put together and sell loan "packages" to investors and keep the service contracts for the loans.

Like a mortgage, a deed of trust document: Identifies the parties. Describes the property that will be the collateral. Repeats the terms and conditions of the note. Has a place for the signatures and notarization. Unlike a mortgage, a deed of trust conveys the title to a trustee. The deed of trust also has a number of covenants that pertain to the relationship between the borrower and the lender: Property maintenance Fire insurance Legal action Payment of taxes Expenditures Injury to the property Late payment Trustee actions Reconveyance Assignment of rents Acceleration Trustee acceptance Many trust deed forms also include a complete form of reconveyance at the end, which the trustee will complete when the loan has been fully paid.

Although there are several similarities between a mortgage and a deed of trust, there are also several differences between these instruments. Since California uses both, it would help to take a look at the distinctions. Mortgage Deed of Trust There are two parties to the loan: the borrower and the lender. There are three parties to the loan: the borrower, the lender and the trustee. Under the recording laws of most states, mortgage assignments may be, and in some cases must be, recorded. Deed of trust assignments do not need to be recorded and in some states are not eligible for recording. A mortgage is a lien on the property being given as collateral, with the legal title remaining in the name of the borrower. In a deed of trust, the borrower conveys the property to the trustee, who holds the title to the collateral on behalf of the lender until the loan terms have been satisfied. The mortgage may be discharged by a simple acknowledgement that the loan terms have been satisfied. The deed of trust is discharged using a reconveyance of title form. If the event of a default by the purchaser, the lender must bring legal action through the courts to force the sale of the property (judicial foreclosure). If the loan goes into default, the trustee can sell the property and give the proceeds to the lender without going through the courts (non-judicial foreclosure).

Which type of property is most benefited by the income capitalization approach to estimating value?

Apartment building

There are three approaches to estimating cost: Sales comparison approach Cost approach Income capitalization approach The sales comparison approach is based on the principle of substitution - which says that a buyer will not pay more for the subject property than he or she would pay for a property that is similar in characteristics and amenities. With this approach, the value is determined by comparing the property being appraised with recently sold comparable (equivalent) properties. Since no two properties are exactly alike, the appraiser must compare the similarities and differences among the properties and then make adjustments to the sales prices of the comparable properties to account for the differences. The appraiser makes adjustments to the comparable properties because the sale prices for those properties are known, while the sale price for the subject property is still an unknown. The appraiser makes adjustments to the comparables by either adding value or deducting value. Conversely, if the comparable is inferior to the subject property, some amount is added to the sale price of that home to equalize the difference. The cost approach is most reliable for properties that were built recently, since the appraiser can get access to the actual costs of the development and construction. It's also a good approach for special purpose buildings when data on income is not available or there are no comparable sales. The cost approach has five steps: Estimate the value of the land as if it were vacant and available for its highest and best use. (Note: Land does not depreciate in value.) Estimate the cost of improvements - either replacement or reproduction cost. Estimate the accrued depreciation that results from physical deterioration, functional obsolescence or economic obsolescence. Subtract the depreciation total from the estimated cost of improvements. Add the land value to the depreciated cost to get the total estimated value of the property.

Appraisers use the income approach to estimate the value of properties that produce income, usually from rent paid on leases. This approach assumes that an investor will purchase a property based on the future income stream the property will produce - the principle of anticipation. This approach also assumes that an investor will not pay any more for a property with a certain income than he or she would pay for a similar property with a similar income - the principle of substitution. Investors themselves use this approach to determine how much they will pay for an apartment building, office building, shopping mall or some other like property. The downside to this method is that it is often difficult to determine an appropriate capitalization rate and the needed information about income and expenses can be hard to find. The income approach has five steps: Estimate the potential gross income. Estimate the effective gross income. Estimate the net operating income. Select a capitalization rate. Apply the capitalization rate. The gross rent multiplier (GRM) and the gross income multiplier (GIM) are very similar to the income approach. Appraisers use the GRM or the GIM to estimate the value of properties such as single-family homes and duplexes that could produce income, but are not primarily income-producing properties like apartment buildings and office space. After using all three appraisal methods, the appraiser reconciles the estimates into a final value estimate. The best way to do this is to evaluate how appropriate each method is to the particular type of property being appraised and to make decisions about the quality and quantity of the data that was gathered to support each method.

Which of these statements is true about financing large apartment complexes?

As the size of the building increases, the loan ratio is generally reduced.

By definition, an institutional lender is any financial institution whose loans and lending practices are regulated by law. These institutions pool the funds of their depositors and invest the funds in real estate loans, making them financial intermediaries. On the other hand, noninstitutional lenders are those entities who make real estate loans but who are not so strictly regulated by state or federal government agencies. We'll talk in detail about noninstitutional lenders later in this chapter. In California, institutional lenders include: Commercial banks Savings and loan associations Life insurance companies A commercial bank is a financial institution that is designed to act as a depository for funds and as a lender for commercial activities - usually short-term loans. Most of the funds deposited in banks are in demand accounts (personal and business checking accounts). Since this money can be withdrawn at any time by a depositor, the bank rarely uses these funds for mortgage lending. On the other hand, the depositors' savings accounts (along with loans from other banks and bank owners' equity) give the bank the long-term funds it needs for its investment ventures, including real estate loans. Commercial banks primarily do short-term loans, mostly to businesses to finance their operations. However, lately, California banks have been aggressive players in the home loan market. Commercial banks operate under a state or federal charter. The California Department of Financial Institutions licenses state-chartered banks, while the Comptroller of the Currency gives licenses to nationally-chartered banks.

Bank Loan Activities Many of the bank loans that are real-estate related are also short-term and involve: Construction loans - usually last from three to twelve months. Home improvement loans - can extend up to five years. Manufactured housing loans - usually run ten years, or sometimes longer, depending on how permanently the home is attached to the property. Commercial banks are very active in the home equity loan market. The Tax Reform Act of 1986 abolished deductions for any interest paid on consumer finance, but maintained the deductions for any interest paid on home loans. For this reason, banks have competed strongly for home loan business. Since borrowers can get equity loans for a number of uses, including educational expenses, vacations, medical expenses and the purchase of personal items, these loans have become an important aspect of bank lending operations. Banks are also involved in real estate financing through other opportunities. These avenues include: Trust department operations Mortgage banker activities Ownership of other lending enterprises

The funding fee is a percentage of the loan amount charged for the privilege of obtaining a VA loan. This fund is used for administrative costs and to offset losses incurred in cases of default by the borrower. It is very similar in function to FHA mortgage insurance premiums. The veteran can pay the fee up front or choose to finance it as part of the loan, as long as it does not increase the loan amount beyond the maximum allowed. If so, it must be paid separately by either the veteran or the seller. The following persons are exempt from paying the funding fee: Veterans receiving VA compensation for service-connected disabilities. Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay. Surviving spouses of veterans who died in service or from service-connected disabilities (whether or not such surviving spouses are veterans with their own entitlement and whether or not they are using their own entitlement on the loan). An approved VA appraiser must issue a Certificate of Reasonable Value (CRV) showing the value of the property to be equal to or greater than the sales price. The seller can pay all of the VA purchaser's closing costs, including all discount points. VA loans were freely assumable prior to March 1988. Since then, a purchaser who desires to assume an existing VA loan must qualify with the original lender. The veteran should request a release of liability from the purchaser that will relieve the veteran from any further liability for the loan. The veteran would remain personally liable for any deficiency if he or she does not obtain the release.

California provides another alternative in the form of a special assistance program for farm and home purchases. The California Department of Veterans Affairs (CDVA), Division of Farm and Home Loans, administers the program and the loans are referred to as Cal-Vet loans. These loans are available to California residents who have met the veteran requirements. Eligibility requirements have been expanded to the point that almost any veteran who wants to purchase a home in California would be eligible. Unlike the insured FHA loan or the guaranteed VA loan, the Cal-Vet loan is actually a land contract. When a veteran is approved for a Cal-Vet loan, the state purchases the property and resells it to the veteran using a contract of sale. The state retains the title to the property until the loan is paid off, after which California will issue a grant deed to transfer legal title to the veteran. CDVA will purchase only approved single-family residences (including condominiums, units in planned unit developments, and mobile homes) in California which meet the needs of the veteran as a dwelling place for his or her family. The property must be structurally sound and provide safe and sanitary living conditions. The California Housing Finance Agency (CalHFA) program offers below-market interest rate first mortgage programs and a variety of down payment assistance programs to eligible first-time homebuyers. In order to qualify for a CalHFA loan, a borrower must meet certain requirements. Eligible properties must be priced at or below the county-by-county limits established by CalHFA for new or existing homes.

What is a leasehold mortgage called that is based mostly upon a well-known tenant's financial strength?

Credit loan

What is one of the primary purposes of the secondary mortgage market?

Cycle back money to primary lenders.

A foreclosure is a legal procedure in which the property that is used as security for a debt is sold to satisfy the debt in the event of a default. During the period after a default and before a foreclosure sale, the borrower has a right to reclaim the property that was forfeited due to the mortgage default. The borrower can claim the property by paying the full debt, plus any interest and costs. The right to redeem property between the time of the default and the foreclosure sale is called the equity of redemption right. Once the foreclosure sale has taken place, any right to redeem the property is known as the right of statutory redemption. There are three types of foreclosure proceedings: Judicial foreclosure Nonjudicial foreclosure Strict foreclosure A judicial foreclosure allows a property to be sold by court order after sufficient public notice. Most lenders will seek a judicial foreclosure when they want to get a deficiency judgment, which is any outstanding debt remaining after the foreclosure and sale of a property. The judicial foreclosure procedure can be used with: Conventional mortgages Conventional insured mortgages FHA-insured mortgages VA-guaranteed mortgages Junior mortgages

Conventional mortgage foreclosure The lender files a complaint in court in the county in which the property is located, and the court issues a summons to the debtor, initiating the foreclosure action. All parties who have an interest in the property receive notice of the foreclosure action with a request that they appear to defend their interests. The court orders the sale of the property at public auction to be conducted by the sheriff or a court-appointed representative. This is known as the decree of foreclosure and order of sale. The sale itself must be held between 9 a.m. and 5 p.m. on a business day in the county where the property is located. The lender or creditor who is foreclosing the property, the debtor, junior lien holders and anyone else may bid at the sale. After the sale, the sheriff issues a Certificate of Sale to the highest bidder. The certificate states that the title is subject to any redemption privilege of the debtor. This certificate transfers the title to the purchaser. The purchaser has no rights to possess the property for the period of redemption. The sale proceeds are applied to the costs of lawsuit and attorney fees, the selling expenses, the amount due to the lender, the junior lien holders in order of priority and, finally, any excess is given to the original debtor. Conventional insured mortgage foreclosure Most private mortgage insurance companies consider a default to be nonpayment of the loan for four months. The lender is required to notify the insurer of the default within 10 days, and it is up to the insurer to decide whether or not the lender should foreclose. The first lien holder is the original bidder at the auction. The successful lender-bidder files notice with the insurance company within 60 days after the legal proceedings and if the insurance company believes that they can recover the losses by purchasing the property from the lender and then reselling it, they will reimburse the lender for the total amount of the bid and take title to the property.

Which California agency regulates the offer and sales of securities, franchises and off-exchange commodities?

Department of Business Oversight

Who regulates the control of syndicates in California?

Department of Business Oversight

Freddie Mac Similar to Ginnie Mae and Fannie Mae, Freddie Mac buys conventional loans from savings banks, commercial banks and mortgage companies, assembles the loans into a pool of mortgages and issues a security backed by the mortgages. Freddie Mac has an electronic underwriting system called Loan Prospector®. Freddie Mac has a variety of fixed-rate mortgage products that include the following: 15-, 20-, 30- and 40-year terms Freddie Mac 100 Streamlined Purchase - Offering 400 Streamlined Purchase - Offering 401 Affordable Merit Rate Mortgages Alt 97 Mortgage Guaranteed (Section 502) Rural Housing (GRH) Mortgages HUD - Guaranteed Section 184 Native American Mortgages Freddie Mac has several other mortgage products, including: Balloon/Reset Mortgages Adjustable-Rate Mortgages(ARMs) A-Minus Mortgage (for persons with less-than-good credit) Initial Interest Alternative Stated Income Mortgage (for self-employed persons) A group of products called Home Possible Mortgages offer flexible underwriting, low-to-no down payments, expanded loan-to-value (LTV) ratios and other special underwriting features to underserved qualified borrowers. Freddie Mac presents a wide range of options to fund the acquisition, refinance, moderate rehabilitation, and new construction of multifamily properties that offer affordable rents to families with low- and very low-incomes through programs such as: Forward Commitment, Bond Credit Enhancement, Low-Income Housing Tax Credit Investments, and LIHTC Tax Credit Moderate Rehabilitation. Freddie Mac has been instrumental in developing initiatives and tools for consumers. A particularly important program is called Don't Borrow Trouble. Don't Borrow Trouble is an anti-predatory lending campaign designed to help homeowners avoid scams and resolve any financial difficulties they may be experiencing. Don't Borrow Trouble uses brochures, mailings, posters, public service announcements, transit ads and television commercials to inform the public and answer questions from potential borrowers.

Farmer Mac Farmer Mac, the Federal Agricultural Mortgage Corporation (FAMC), was established as a secondary mortgage market for farmers, ranchers and rural homeowners. Farmer Mac deals with agricultural loans in the same way that Fannie Mae and Freddie Mac deal with conventional and government loans. Farmer Mac has two programs: Farmer Mac I - Farmer Mac purchases or commits to purchase eligible loans. Farmer Mac II - Farmer Mac purchases the "guaranteed" portions of loans guaranteed by the United States Department of Agriculture. REMICs The Tax Reform Act of 1986 created a special tax vehicle called a real estate mortgage investment conduit (REMIC) for entities that issue multiple classes in investor interest that are backed by mortgage pools. A REMIC is an investment-grade mortgage bond that separates mortgage pools into different maturity and risk classes. A REMIC is a conduit for tax purposes, meaning that the income of the REMIC is passed through to the investors who report the income on their individual tax returns. A REMIC can issue mortgage securities in a wide variety of forms. Fannie Mae and Freddie Mac are among the major issuers of REMICs.

The secondary mortgage market consists of holding warehouse agencies that purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors. Mortgage funds can be shifted to where they are most needed in a variety of ways: Lenders can sell loans to one another. One institution can sell a part interest in a block of loans to another institution. A more common way of shifting funds is through the use of mortgage-backed securities (MBS), which are backed by a pool of mortgages. Mortgage-backed securities are pools of mortgages that are used as collateral for issuing securities called pass-through certificates. There are three types of mortgage-backed securities: Straight pass-through - The security holder receives the actual principal and interest payments as they are received from the mortgages in the pool. Modified pass-through - The security holder receives the interest portion of the payment, whether or not it has been collected, and the principal payment when it is collected. Fully modified pass-through - The security holder receives payment of both principal and interest, whether or not it has been collected. Important players in the secondary mortgage market are: Ginnie Mae - Government National Mortgage Association (GNMA) - a government agency Fannie Mae - Federal National Mortgage Association (FNMA) - a former government agency that became a private corporation in 1968 Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMC) - a quasi-government agency These agencies, collectively known as government-sponsored enterprises (GSE), purchase loans or guarantee mortgage-backed securities issued by lenders.

Ginnie Mae Ginnie Mae developed the first mortgage-backed security in 1970. This security was backed by a pool of FHA and VA mortgages. Ginnie Mae doesn't purchase mortgages; it guarantees that the monthly payments will be made every month. Ginnie Mae has two types of mortgage-backed securities (MBS) programs. Ginnie Mae I MBS are based on single-family pools and are Ginnie Mae's most heavily-traded MBS product. Ginnie Mae II MBS are modified pass-through mortgage-backed securities. Fannie Mae Fannie Mae pools loans that generally conform to their standards and converts them into single-class mortgage-backed securities known as Fannie Mae MBS, which they then guarantee as to timely payment of principal and interest. The mortgages that back a Fannie Mae MBS are held in a trust on behalf of Fannie Mae MBS investors and are not Fannie Mae assets. Fannie Mae has two automated underwriting systems available for users. Desktop Underwriter (DU)® helps lenders make informed credit decisions on conventional conforming, non-conforming and government loans. It allows mortgage loan applications to be processed in 15 minutes or less. Desktop Originator (DO)® helps brokers and correspondents generate more loans, gain a competitive edge in the marketplace, boost profitability, and enhance customer service and satisfaction. There are some borrowers in the market who have been labeled as unscoreables, because they have paid for things mostly in cash resulting in a very thin credit file. In order not to lose this potentially creditworthy group of borrowers, many lenders are using "nontraditional" models of credit scoring that use payment history of items such as rent and utilities, as a way of gauging a customer's ability to pay their debts. Fannie Mae has two important special programs available. Neighborhood Champions mortgages make home buying easier for teachers, police officers, firefighters, nurses, hospital workers and other community service professionals. America's Living Communities Plan supports communities' visions for neighborhood revitalization and development.

A shared appreciation mortgage (SAM) is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreciated value of the collateral property. The share of the appreciated value is known as the contingent interest. The contingent interest is established and due at the sale of the property or when the mortgage terminates. A pledged account mortgage (PAM) is a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender. The account is drawn on during the first three to five years of the loan to supplement the periodic mortgage payments, thereby reducing the borrower's monthly payments in the initial years. Once the account is empty, the borrower makes the full mortgage payment. A buydown is a variation of the PAM. In a buydown, the lump sum payment that is made to the lender at closing usually comes from a builder as an incentive to the buyer or from a family member trying to help out. That payment serves to reduce the interest rate on the loan for the first few years. At the end of that time, the rate rises. A renegotiable rate mortgage (RRM) is another type of variable rate mortgage. This mortgage is amortized over 30 years but must be renewed at three-, four-, or five-year intervals. At the time of renewal, the lender can increase the interest rate, but by no more than ½ of 1 percent for each year of the initial term.

In a lease purchase arrangement, a tenant enters into two agreements simultaneously - an agreement to purchase and a lease. The tenant agrees to purchase the property, but operates under the lease until the terms of the purchase agreement are fully satisfied. Often a part of the lease payment is applied to the purchase price. A lease option is a clause in a lease that gives the tenant the right to purchase the property under specific conditions - usually at a predetermined price and within a set period of time. The owner can choose to give the tenant credit toward the purchase price for some of the rent paid, but this is not a requirement. With a bi-weekly payment mortgage, the borrower pays half of the monthly mortgage payment every two weeks, rather than the full payment once a month. This is comparable to 13 monthly payments a year, which can result in faster payoff and lower overall interest costs. The main benefit of a zero percent-down mortgage is that it can enable a person to purchase a home now instead of having to wait to save for a down payment, which could take years. To qualify for a zero percent-down mortgage, most lenders require a stable income and a stellar credit rating -- generally 700 or higher. Depending on the lender, there also may be income requirements as well as caps on the amount of the loan.

Here are the typical steps to the escrow process. Select the Escrow Company - Usually done by the buyer and seller at the time the purchase contract is accepted. Fax the Purchase Contract - Sent by the parties' representative to the escrow agent. Open the Escrow - Done by the escrow agent using the instructions on the purchase contract. Complete All Items - Activities arranged and completed include inspections and title search/insurance. Close the Escrow - The process of signing and transferring all documents and distributing the funds. The Real Estate Settlement and Procedures Act (RESPA) require that the parties to certain transactions receive the correct figures pertaining to their closing costs. RESPA applies to purchases: Of residential property - That is, one-to-four family homes, cooperatives and condominiums. Involving first or second mortgages. Financed by a federally-related loan - That is, loans that are insured by a federal agency, those that are insured or guaranteed by VA or FHA, HUD-administered loans, or those that will be sold to Fannie Mae, Freddie Mac or Ginnie Mae. RESPA does not apply to seller-financed loans. It also does not apply to a loan assumption, unless the lender has changed the terms of the assumed loan or charges more than $50 for the assumption. Lenders must use the Closing Disclosure form to detail the costs that the buyer and seller will pay at closing. In addition to the costs payable to the lender, the form also itemizes any costs due to other parties, such as city or county tax assessments, recording fees and attorney's fees. Buyers have the right to review the completed settlement statement at least three business days prior to closing. Sellers will also get to review the form, but it can be delivered at the consummation of the transaction. RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. For example, an insurance company cannot pay a kickback to a real estate agent or to a lender for referring a client to their agency. To complete your review, please click here for a brief summary of RESPA and TRID information.

In addition to the exchange of the purchase price for the title, the closing requires that both the buyer and the seller pay certain fees and expenses to settle the transaction. The settlement statement has a list of the debits and credits for both the buyer and the seller. In order for the buyer to know how much money to bring to closing and the seller to know how much he or she will receive at closing, the entries on the settlement stated must be calculated. The escrow agent will subtract the total of the buyer's credits from the total debits and the result will be what the buyer needs to bring to closing. Personal checks are usually not accepted at closing, so the buyer will need to bring a certified check or cashier's check. Similarly, the agent will subtract the seller's total debits from the total credits to arrive at what the seller will receive at closing. Some expenses paid at closing must be prorated or divided proportionately between the buyer and the seller. The most common items that fall into this category include: Taxes Insurance Mortgage interest Utilities Any item that is prorated is shown on the settlement statement as a debit to one party and a credit to the other party for the same amount. Some items are those that were paid for in advance, so the buyer will owe the seller part of the payment. For items paid in advance, the buyer will receive a debit and the seller will receive a credit. Other items are those expenses that the seller incurred but have not yet been billed for at the time of closing. These items are paid in arrears. So on the settlement statement, the buyer will get a credit and the seller will get a debit.

Congratulations on the completion of the content for the Finance course! This chapter will be a review of everything you have covered in the previous eighteen chapters. When you have finished this chapter, you'll be ready to move on to the exams. So let's get started! The term estate means "everything a person owns - all assets, whether real property or personal property, and liabilities." The term real estate means the land and everything permanently affixed to it that is owned as part of a person's estate. There are two major classifications of estates based on possession and use: Freehold estates last for an indefinite period of time. A freehold estate denotes property ownership by the estate holder. Leasehold estates expire on a definite date. A leasehold estate involves the right to possess and use, for a period of time, property that is owned by someone else. Freehold Estates Two of the more common types of freehold estates are the fee simple estate and the life estate. Fee Simple Estate Represents the most complete form of ownership. Can be inherited. Has no restriction on the right of the holder to enjoy it, lease it, sell it or give it away. Most investment and lending transactions involve fee simple estates. Life Estate Lasts only as long as the life of the owner (or some other person). Upon the owner's death, reverts to the original transferor, his or her heirs or some other designee. Can be mortgaged, leased or sold during the holder's lifetime. The value and marketability of a life estate can be severely restricted because of the uncertainty of its duration.

Leasehold Estates Leasehold estates are sometimes called "less than freehold estates." Leasehold estates are what we often think of as "renting" or "leasing." The two most common types of leasehold estates are estate for years and estate from period to period. Less common types of leasehold estates are estate at will and estate at sufferance. Let's review each of these. Estate for Years Has a definite beginning and ending date. Not necessary to give notice to the landlord to terminate. NO automatic renewal. When this type of lease is over, it's over. Commonly used with commercial leases and some apartment leases. Investors and lenders will most likely encounter this type of lease. Estate from Period to Period Also known as estate from year to year, periodic tenancy, or a month-to-month lease. Requires proper notice to terminate -- 30 days, 60 days or whatever is agreed to in the lease. No definite ending date. This type of lease renews itself for whatever period of time that was called for in the original lease or whatever is agreed upon in the actual lease. Most apartment leases are estates from period to period if the tenant is required to give notice to terminate. If the current tenants will remain after the property transfers, the grantee (person who receives the property) should agree to take title subject to existing leases. Estate at Will This type of tenancy exists when a landlord allows a tenant to remain in possession of the property without a lease and with no agreement regarding the payment of the rent or the term of the tenancy. This tenancy can be of infinite duration. Estate at Sufferance This type of tenancy exists when a tenant wrongfully remains without the landlord's consent after the expiration of a lease.

Thousands of banks failed in the 1920s and early 1930s. To help alleviate the situation, Congress passed the Banking Act of 1933, the primary objective of which was to help bolster confidence in the banking system so the public would continue to make deposits. The Act created the Federal Deposit Insurance Corporation (FDIC). The FDIC has three major activities: It insures bank and thrift institution deposits for up to $250,000. It identifies, monitors and addresses risks to the deposit insurance funds. It limits the effect a bank or thrift institution failure has on our nation's economy and the financial system. Banks that are chartered by states that do not join the Federal Reserve System are regulated by the FDIC. The FDIC is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. Just as the Banking Act of 1933 created the FDIC to deal with the issue of bank failures, the Federal Home Loan Bank System (FHLB) was structured in 1932 to bring stability to savings and loan associations and to renew the public's confidence in these associations. Its mission was to establish rules and regulations for the member savings associations. Organized like the Fed, the FHLB has twelve federal home loan district banks, charged with improving the supply of funds to local lenders that finance loans for home mortgages. The Federal Housing Finance Board regulates the twelve district banks. The board also has regulatory authority and supervisory oversight responsibility for the Office of Finance.

Once again in the 1980s our country experienced widespread failures of thrift institutions. To deal with this, the government passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989. This legislation provided government funds to insolvent savings and loan associations and mandated massive changes in the examination and supervision of savings and loans. The act: Required savings and loans to adopt new capital standards. Transferred the regulatory powers of the Federal Home Loan Bank Board to a new agency, the Office of Thrift Supervision (OTS), a bureau within the U.S. Treasury Department. OTS is now the chief regulator of all savings banks that have federally-insured deposits. Placed the twelve district Federal Home Loan Banks under control of the Federal Housing Finance Board which we talked about on the previous screen. (The Federal Home Loan Bank Board had this function previous to the passing of this act.) Abolished the defunct Federal Savings and Loan Insurance Corporation (FSLIC). FIRREA also established two new federal deposit insurance funds to be managed by the Federal Deposit Insurance Corporation. The Bank Insurance Fund (BIF) was established to insure deposits in commercial banks. The Savings Association Insurance Fund (SAIF) was established to insure deposits in savings institutions, up to $100,000 per account.

At the same time the underwriter is reviewing financial and employment information, the underwriter will also send a request for a borrower's credit reports to the three credit-reporting agencies. The credit reports indicate the status of current and past accounts. They indicate the dates that payments were made and how regularly they were made, whether or not they were delinquent or if there are any outstanding balances. The borrower's payment history is the most important part of the credit report. Lenders typically assess how likely a borrower is to pay off his debts by using a credit score. The credit reporting agencies use past payment history, the types of credit the borrower has used, outstanding debt and other factors to evaluate and score a particular borrower. Lenders use these scores to decide whether or not to lend money to a borrower, and if so, under what terms. Even though there are many standardized forms used in the lending procedure, the analysis and evaluation of the borrower's credit ability is still the area where there is the greatest amount of interpretation. The evaluation of a borrower's ability to pay can be very subjective, depending on an evaluator's unintentional bias or the lender's changing policies. Experienced loan processors can quickly decide whether or not the borrower can meet minimum requirements for repaying the loan by looking at the employer verification form and the amount of the loan, and then doing a comparison of the monthly payroll information with the required monthly payments. If the borrower's credit report shows a pattern of late or missed payments, the loan processor would probably recommend that the loan be denied and the file closed without further evaluation. However, if the credit report shows just a few late payments and everything else looks good, the lender will probably give the borrower a chance to explain those entries in writing for placement in the file.

Once the lender has determined that the borrower is qualified to receive a loan, the lender will move on to the job of qualifying the property to determine if the property is a good risk. It is important for the lender to determine the market value of a particular piece of property at any given point in time. The market value of a property is an opinion of the value of a property based on analyzing data collected about the property. The analysis could include information about potential income and expenses to the property in addition to the analysis of comparable properties that have sold previously. Many factors can influence the value of property: Anticipation Assemblage Change Conformity Competition Contribution Diminishing Return Highest and Best Use Progression and Regression Substitution Supply and Demand Since the value of a piece of property changes from one point in time to another, each piece of property must be inspected and appraised carefully to get a proper estimate of its fair market value. Depending on what type of loan the lender wants to issue and the current loan to value ratio, the lender will base the loan amount on either the amount of the appraisal or the purchase price, whichever is less.

The Community Development Block Grant Program (CDBG) is a flexible program that provides communities with resources to address a wide range of unique community development needs. Begun in 1974, the CDBG program is one of the longest continuously run programs at HUD. The CDBG program provides annual grants on a formula basis to general units of local government and States. The Public Housing Development program provides Federal grants to local public housing authorities (PHAs) to develop housing for low-income families that cannot afford housing in the private market. The Good Neighbor Next Door program offers a discount of 50 percent from the list price of a home to law enforcement officers, pre-Kindergarten through 12th grade teachers, and firefighters/emergency medical technicians. In return, the buyer must commit to live in the property for 36 months as his or her sole residence. Congress established the Section 184 Indian Housing Loan Guarantee Program to offer home ownership, property rehabilitation, and new construction opportunities for eligible tribes, Indian Housing Authorities and Native American individuals and families wanting to own a home on trust land or land located in an approved Indian or Alaska Native area.

Over the years, the federal government has passed legislation to prevent discrimination in both housing and lending practices. It's important to know about these laws. This legislation includes: Federal Fair Housing Law - Prevents discrimination on the basis of race, religion, color, national origin, sex, ancestry, handicap and familial status. Unruh Civil Rights Act - Provides protection from discrimination by all business establishments in California, including housing and public accommodations. Fair Employment and Housing Act Housing - Prohibits discrimination in the sale, rental, lease, negotiation or financing of housing based on race, color, religion, sex, marital status, familial status, disability, national origin, ancestry, sexual orientation or source of income. Financial Discrimination Act - Prohibits financial institutions from discriminating in loan activities on the basis of race, color, religion, marital status, national origin, ancestry or sex or based on a neighborhood's make-up (redlining). Equal Credit Opportunity Act - Prohibits lenders from discriminating against applicants on the basis of race, color, religion, national origin, sex, marital status, age, or dependency on public assistance. Community Reinvestment Act - Prevents redlining and encourages banks and thrifts to help meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods. Home Mortgage Disclosure Act - Requires that lenders report statistical information each year to insure that lenders are not restricting loans to certain individuals or neighborhoods to exclude them from obtaining a mortgage. Truth in Lending Act - Requires lenders to disclose to buyers the true cost of obtaining credit, so that borrowers can compare the costs of various lenders. Real Estate Settlement Procedures Act - Requires that the lender give a written estimate of costs to the borrower at the time of loan application or within three business days and that the lender make the closing statement available at least three days prior to closing.

The Tax Reform Act of 1986 established an entity that can issue multiclass securities. What is this entity called?

REMIC

Which of the following statements is not true about investing?

Refinancing might not be a good option if an investor has less financial leverage than when he or she first financed a property.

Which of the following is a credit to the seller on the settlement statement?

Sales price

After all the data has been collected, analysts use ratios to determine the reasonableness of operating results that have been reported or forecasted to help make decisions about purchasing or selling investment property. Four common ratios used in the analysis are: Income Multipliers - Income multipliers express the relationship between price and either gross or net income. The current price of the property is divided by the income to give an idea of how effective the property is at generating income compared to its market price. Operating Ratio - This is the percentage of effective gross income that is consumed by the operating expenses. It is calculated by dividing the operating expenses by the effective gross income. Usually, the lower the ratio, the more efficient the property is. Break-Even Ratio - This calculation shows the percent of gross income that is required to meet cash expenditures. It is calculated by adding debt service to operating expenses and dividing by operating income. Lenders use the break-even ratio as one of their analysis methods when considering providing financing for an investment property. Too high of a break-even ratio would cause a lender to use caution. Debt Coverage Ratio - Debt coverage ratio measures the investor's ability to pay the property's monthly mortgage payments from the cash generated from renting the property. Lenders use this ratio as a guide to determine whether the property will generate enough cash to pay rental expenses plus the loan payment. It is calculated by dividing the annual net operating income (NOI) by the annual debt service.

Since the only real way to determine the value of a property is through an actual sale, a lender must rely on an estimate of a property's value through an appraisal. By definition, an appraisal is an opinion or estimate of the value of a property. The use value of a property is the value the property holds for the owner. The exchange value of a property results from comparing the property to other similar properties on the open market. This is where appraisals come into play. The process of conducting an appraisal includes seven definite steps: Identify the purpose of the appraisal, such as market value for a purchase or value as loan collateral. Gather the data relevant to the property, such as tax and title records, costs and demographic and economic data. Assess the highest and best use of the property by analyzing market conditions. Estimate the value of the land. Use the three approaches to estimating cost to help reduce errors and establish a "range" of value. Reconcile the estimates from the three approaches into a final value estimate. Compile and present a formal report to the client. People who will be using a particular site are concerned about convenience and accessibility, aesthetic issues and neighborhood factors. After analyzing the neighborhood, the appraiser will study aspects of the specific property being appraised. The analyst will focus on these three aspects: Functionality of arrangement and design Durability of the construction Visual appeal of the property

Three types of leases have increases built into them: Step-up - Some leases include a step-up provision that spells out how the rent will increase periodically and gives the specific amounts and specific dates of those increases. Indexed - This method calculates rent increases using a specified index such as the consumer price index (CPI). When using this method, the rent adjusts periodically according to the change in the consumer price index. Percentage rent - This is commonly used in leases for shopping centers. With this method, the rent is based partially on the tenant's sales volume. The owner charges the tenant a minimum rent that the tenant will pay, regardless of the amount of sales. If the sales volume exceeds a certain amount, the owner calculates the rent on a percentage of that amount. The calculated amount is called overage rent. If there are no increases built into the lease over its term, it's called a flat lease. It's important for the lease to differentiate which party is responsible for which expenses, especially for those expenses such as property taxes, insurance, utilities and maintenance. A gross lease is defined as one in which the owner pays all of the operating expenses and the tenant has no responsibility for these expenses. This is also called a full-service lease. A net lease is defined as one in which the tenants pay the operating expenses. Alternatively, the responsibility for expenses can be shared between the owner and tenant. For example, the owner could pay operating expenses up to a specified amount. Then, if the expenses increase above that amount during the term of the lease, either all or part of the increase passes through to the tenant and is added to the base rent. These pass-through expenses could be limited to a few expense categories or to all of them, depending on how the agreement is written.

Some lease contracts can contain concessions that can lower the rental rates. Owners tend to write concessions or discounts into leases during periods of time when there is more than a normal supply of rentable space in the area. During times when the market is soft, an owner might offer a tenant an equity interest in the building as a means of attracting tenants to the building. A lease renewal option allows the tenant to renew the lease for a specified rent amount when the lease expires. A right of first refusal option gives the tenant the right at the end of the lease term to renew the lease of the same space at the current market rate, before it's offered to other tenants. A tenant relocation option allows the owner to relocate the tenant to another space in the same building during the term of the lease. Both lenders and investors are interested in trying to determine the prospects that a piece of real estate has for generating cash flow. One way to forecast the future benefit of a property is by looking at its past operating history. Starting with that history and then looking at how anticipated future changes in the economic, social, and political environment will affect the property's ability to generate rents will give some idea as to how these factors will affect the cost of maintaining and operating the property. The operating history of a business can be seen by looking at its past operating statements. A real estate operating statement usually presents cash inflows and outflows from operations and is broadened to include non-operating cash flows, such as those that come from debt service, income taxes, and capital expenditures. When analyzing a property's operating records, the person doing the analysis should verify all of the records by looking at the original documents and comparing the reported operating results with known or predictable outcomes from similar properties in the same neighborhood. Once all of the data on a particular property is collected, the analyst can compare the results to published averages on similar property types.

The Federal Reserve System (the Fed) was created in 1913. Each of the twelve Federal Reserve District Bank supervises all nationally-chartered, and some state-chartered banks within their district. The stated purpose of the Federal Reserve is to maintain a sound banking system and a strong economy for the nation. The Fed is responsible for controlling the flow of money into and out of the economy. There are three primary ways this is accomplished: Manipulating interest rates Changing reserve requirements Selling securities Banks must keep a certain percentage of their assets in reserve. In order to prevent their reserves from dropping below the minimum, banks may choose to borrow from the Federal Reserve System. The interest rate the Fed charges on these loans is called the discount rate. The discount rate is often described as the cost of the borrowed funds to the bank that is doing the borrowing. The bank uses the discount rate to determine what rate of interest it will charge its borrowers. What the bank charges to the borrowers is known as the prime rate, otherwise described as the rate the bank charges to its best or "prime" customers. The higher the discount rate the Fed charges to the bank, the higher the prime rate will be and the higher the rate the bank will charge to its customers. When a bank's reserves are in danger of slipping below the minimum, the bank can approach another bank with excess reserves and borrow money on a short-term basis. For example, Bank A borrows funds from Bank B to keep its reserves from dropping. The interest rate that Bank A will pay to Bank B for use of the funds is the federal funds rate. Most of these loans from one bank to another are overnight loans. The federal funds rate is sometimes confused with the prime rate. Keep in mind that the federal funds rate is what one bank charges another for borrowing - an interbank loan - while the prime rate is what a bank charges a customer.

The United States Treasury plays a critical role in maintaining the economic balance of our country by managing the debt of the entire federal government. The Treasury has numerous functions which include, but are not limited to, the following: Managing federal finances. Managing government accounts and the public debt. Supervising national banks and thrift institutions. Enforcing federal finance and tax laws. What our government spends and what it collects in taxes ultimately has a significant effect on financing for real estate. Whenever the Treasury chooses to issue treasury notes or bonds to help finance government spending, money is diverted from mortgage investments. The result is similar to that of what happens when the Fed increases its reserve requirement. Less capital is available, so buyers shy away from purchasing homes. On the other hand, when the government chooses to reduce its spending, more money becomes available for other endeavors, including financing real estate. The Office of the Comptroller of the Currency (OCC) was established in 1863 as a bureau of the U.S. Treasury. The head of the OCC is a Comptroller, who is appointed by the President and serves a five-year term. The Comptroller also serves as a director of the Federal Deposit Insurance Corporation (FDIC) and a director of the Neighborhood Reinvestment Corporation. The OCC charters, regulates, and supervises all national banks. Although it is headquartered in Washington, D.C., the OCC has four district offices in the US and employs a staff of examiners who conduct on-site reviews of national banks nationwide and supervise bank operations on an on-going basis. The agency issues rules, legal interpretations, and corporate decisions concerning banking, bank investments, bank community development activities, and other aspects of bank operations.

There are basically two categories of loans available to buyers in the marketplace - conventional loans and government-backed loans. Government-backed loans include those loans offered by: The Federal Housing Administration (FHA) The Department of Veterans Affairs (DVA) - sometimes simply referred to as VA The California Department of Veterans Affairs (Cal-Vet) Other state, county or city-backed subsidized loan programs Conventional loans have several advantages over government-backed loans. Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. Conventional loans typically have fewer forms and processing can be more flexible than government-backed loans. There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency. In the event of a loan refusal, borrowers have other lenders that they can make application to. There is only one of each government agency type, so if the loan is refused by a particular agency, there are no alternative lenders available. Conventional lenders are much more flexible. Many offer a variety of loans with attractive provisions. Conventional loans also have their disadvantages. Typically conventional loans require higher down payments than government-backed loans require. Some conventional loans carry prepayment penalties, while government-backed loans do not.

The conventional loan is the most common type of loan and is generally viewed as the most secure. Most conventional loans require the borrower to make a down payment of 20 percent or more, making the loan 80 percent or less of the property's sale price. Conventional loans are typically uninsured. The mortgage itself provides the only security for the loan. To protect its interests, the lender relies on the appraisal of the property and the borrower's ability to repay the loan, as indicated by the borrower's credit reports. Most conventional loans have traditionally been designed as fixed-rate loans. With this common type of mortgage program, the monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally the monthly payments will be very stable. Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, the borrower makes 26 payments, or 13 "months" worth, every year.) Fixed-rate loans can also be structured in other ways. Term loans - This requires interest only payments for some period with a balloon payment at some specified future date. Growing equity mortgage (GEM) - This allows the borrower to pay additional principal each month to pay off the loan faster. Graduated payment mortgage (GPM) - With this type of loan, the payment starts out low and then gradually rises. This is also referred to as a negative amortization loan, because the initial low monthly payments are not enough to pay the mortgage interest that accrues each month. So the amount in unpaid interest is added onto the principal amount of the mortgage.

The term title is used as a way to connect a person who owns property to the property itself. When a person has title to a property, we assume that he or she has everything needed, including documents and records, to prove that he or she actually owns the property. An abstract of title is an historical summary of grants, conveyances, wills, records and judicial proceedings that affect the title to a particular property. The abstract will also include a statement of the status of all recorded liens and encumbrances affecting the property. These documents can affect the quality of the title that will be conveyed from seller to buyer. In most cases, title is conveyed from a grantor to a grantee using a deed. All deeds must be in writing to be valid and to convey interests in real property. Purchasers want the deed to convey a "good and marketable title." A good title is one in which the grantor actually does have the legal ownership of the property that he or she claims to have. But a good title could also be an unmarketable title if it does not have the proper documentation or if there are encumbrances on the property. For a title to be marketable, it must be a clear, salable title that is free from the risk of litigation over possible defects. A marketable title does not have to be perfect - just free from plausible or reasonable objections. There are three common ways to get assurance that a title is good and marketable: Deeds - Provide a warranty as part of the deed. Abstract and Opinion - Search recorded documents for any problems that might affect the title. Title Insurance - Purchase title insurance to cover any unexpected problems.

The most common types of deeds used to transfer property are: General Warranty Deed - This deed offers the most complete warranties about the quality of the property. For this reason it is the most attractive deed from the purchaser's perspective. Essentially, the grantor is saying that the title is free and clear of all encumbrances, except those that are specifically listed in the deed. In addition, the grantor guarantees that if the title ever fails, he or she will compensate the grantee for any losses. Special Warranty Deed - This deed makes essentially the same guarantees as the general warranty deed, except the grantor guarantees the title against only those defects that arose during the period of his or her ownership of the property and not against any defects that existed before that time. Quitclaim Deed - This deed conveys only those rights, interests and title that the grantor has in the property without offering any warranty about the quality of the title. This deed offers a purchaser the least protection. The abstract and opinion method of assuring the title involves two steps. An abstractor does a search of the public records to determine if there are any defects that could affect the title. The search begins with the original source of the title. The searcher will then examine documents in the recorder's office and search other records in other government offices, such as tax and assessment offices. He or she will summarize the various documents that affect the property and arrange them in chronological order of recording, starting with the original grant of title. After the search is completed, the abstractor or a lawyer will study all the documents and information collected and will formulate an opinion of the quality of the title.

Investors have a variety of ownership entity choices. These ownership forms include ownership by: Individuals Corporations Subchapter S Corporations General Partnerships Limited Partnerships Limited Liability Companies The chief consideration when choosing an ownership type is the importance of maintaining decision-making control over operational matters. Ownership by one individual is known as tenancy in severalty. The most common co-tenancy arrangements are tenancy in common and joint tenancy. Even though there appears to be several disadvantages to holding title as a corporation, corporations do offer several advantages. These are the most important: Limited shareholder liability Liquidity Easier transactions Easier estate settlement Unlike corporations, partnerships are not taxable entities. The individual partners handle the taxes for income and losses. A limited liability company, LLC, gives investors the income tax advantage of a partnership and the limited liability benefits of a corporation. When an investor borrows or repays money, his or her tax liability is neither increased nor decreased. However, the interest on money borrowed for rental real estate is usually deductible in the taxable year that it is paid. Costs to renovate low-income housing or special nonresidential properties qualify for tax credits rather than tax deductions. Tax credits are not the same as tax deductions. Tax credits give a dollar-for-dollar reduction in tax liability, which is subtracted from the total tax due after the amount of income tax has been computed. Limited partners' income and expenses are always passive. Real estate rental income and expenses are sometimes passive. The Alternative Minimum Tax is a modified "flat-rate" tax that coexists within the regular income tax system. After a taxpayer figures his or her taxable income and how much he or she owes in income tax using the regular process for computing tax, he or she must compute an alternative minimum taxable income and alternative minimum tax. After both computations are done, the taxpayer must pay the larger of the alternative tax or the regular tax.

The tax consequences of selling property depend in part on the amount and nature of the gain or loss and how the transaction is structured. The realized gain or loss on a transaction is the difference between the consideration received and the adjusted tax basis at the time the transaction takes place. Realized gain may be treated as ordinary income or as capital gain. Capital gain gets special tax treatment. By the same token, a loss may result in a decrease in ordinary income taxable for the year, or it may be a capital loss and be able to offset ordinary taxable income by only a limited amount. If a transaction is a cash sale and the seller realizes a gain, that gain will be recognized in the year of the transaction. However, if the sale results in a loss, a portion of it may have to be carried forward and recognized in future taxable years. When a seller sells a property and gets only a partial payment for it during the year of the sale, he or she can report the transaction under the installment sales method. Using this method allows the seller to defer a part of the income tax liability until he or she collects the balance of the cash. If an investor participates in an exchange of a like-kind asset, any taxable gain or tax-deductible loss is not recognized in the year the transaction takes place. Instead, the investor can defer those gains or losses, until a future taxable transaction occurs involving a substitute property. The legislation that deals with like-kind exchanges is contained in Section 1031 of the IRS code. Because of this, these exchanges are sometimes called Section 1031 exchanges. To qualify as a like-kind exchange, the property being transferred must have been held for productive use in a trade or business or held as an investment and must be exchanged for property that will also be used in a trade or business or be held as an investment. If a person owns a property free and clear and gives the property to someone else, no money or other payment changes hands in the transaction so there is no realized gain or loss. However there may be a gift tax. Taxpayers can give up to $14,000 per person per year to as many people as they want to without having to pay a gift tax. If spouses jointly make gifts, they are permitted to give up to $28,000 per person per year without having to pay the gift tax.

A default is a failure to carry out a contract, agreement, or other obligation, especially a financial obligation such as a note. A mortgage default can result from any breach of the mortgage contract. The most common default is the failure to meet an installment payment of the interest and principal on the note. Other defaults include: Failure to pay taxes when they are due Neglecting to pay hazard insurance premiums Failure to pay taxes or insurance premiums could cause the lender to state that the full amount of the loan is due and payable (acceleration). If the borrower can't meet the requirement for full payment, the lender can bring an action for foreclosure. Some loans also have stipulations regarding property upkeep. In some cases, failure to keep the collateral in repair may constitute what is called a technical default. The Soldiers and Sailors Civil Relief Act of 1940 protects military personnel and their dependents from being harassed by creditors, if their ability to pay their bills has been affected by military service. The Act restricts the power of the creditor to sell, foreclose on, or confiscate the property of a member of the armed services for nonpayment without first obtaining a court order. Under The Housing Act of 1964, the FHA requires that lenders provide relief in circumstances where the default is beyond the borrower's control. The VA also requests relief for a veteran borrower who wants to pay but cannot. The VA itself may choose to keep up the payments for the veteran in order to keep the loan current.

The term workout is used to describe the activities that a lender will undertake to deal with a borrower who is in financial trouble. There are a number of alternatives that a lender can consider in a workout. They include: Forbearance or moratorium - The lender may choose to waive mortgage payments temporarily or even forgive all or some of the payments. A moratorium is usually one of these four types: waiver of principal payments, deferred interest, partial payments or prepayments. Restructuring the mortgage loan - The lender can redesign the loan through recasting (changing the terms, such as interest rate or payment amount) or extension agreement (extending the amortization period for the remaining principal). Transferring the mortgage to a new owner - The defaulted borrower may be able to find someone who can purchase the property and either assume the mortgage or take the property "subject to" the existing mortgage. Deed in lieu of foreclosure - The lender may make or accept an offer to take the title to the property back from the borrower (also called voluntary conveyance). Friendly foreclosure - The borrower accepts the jurisdiction of the court, gives up any right to declare any defenses and claims, relinquishes the right to appeal or argue with any judgment that is given, and otherwise agrees to cooperate with the lender in the litigation. Prearranged bankruptcy - The borrowers and all their creditors agree in advance to the terms on which they will turn the assets over to the creditors in exchange for the release from the liability.

The entity holding title to a property during the term of a deed of trust is called what?

Trustee

Who is the person who grants approval for the loan, rejects the loan, or in some cases, agrees to approve the loan if certain conditions are met?

Underwriter

Duplexes, triplexes and fourplexes are sought-after investment vehicles because an investor can choose to live in one of the units while renting out the remaining units. Some lenders will allow the investor of a two-to-four unit dwelling to put down 15 percent and then obtain a second loan for the remaining 10 percent as long as there will not be a large negative cash flow. It's also less likely that an investor could obtain seller financing for a first loan on a property of the size, since most owners would still owe on the property. One of the advantages to investing in a two-to-four unit dwelling is the fact that tenants often pay all of their own utilities and do repairs. One of the disadvantages is that sometimes the rental income lags behind inflation or operating costs, which results in a smaller net cash flow to the owner. When the supply of larger apartment buildings is greater than the demand, an investor may be able to obtain an apartment house at an extremely fair price. However, when this happens, an owner must be able to withstand the temporary financial losses he or she might incur due to excessive vacancies. Lenders typically offer conventional loans from 60 percent to 75 percent of a property's value. As the size of the building increases, the loan ratio is usually reduced from 75 percent to 60 percent or less. Most lenders require at least 15 percent down, even if the investor has a seller carry-back as a second loan. Conventional lenders look more closely at the cost of operating a property of this size and are more concerned with the location than they are with smaller-sized properties.

When deciding to take a listing of an investment property, an agent needs to do a detailed analysis of the property with regard to the seller's motivation to sell and the current and future financing of the property. In order to give an owner proper financing advice, an agent must know the real reason the owner wants to sell. If the property carries more than one loan, the agent should get the information for each loan, including name, address and phone number of the lender, the loan number and the exact current loan balance. The agent should also request a copy of the note and deed of trust from the owner for each loan he or she has. For each note, the agent should determine the monthly payments, interest rate and due dates. Once the agent has collected the information on all the loans on the property, then he or she should meet with all of the lenders for each of the loans to collect information about possible future financing. After an agent obtains all of the pertinent information from the lender, he or she should meet with the sellers to explain all the information that he or she has collected. How do financing conditions affect property prices? When interest rates go up, the net income of a property after deducting the interest expenses decreases, so the value of the property also decreases. Conversely, when the interest rates decrease, the owner's yield is increased and the value of the property also increases.

How is the payoff of a construction loan normally accomplished?

With a takeout loan

Which of the following is not a HUD responsibility?

FDIC

Which of the following is not a procedure for controlling risk?

Refinancing

RESPA requires the use of the Closing Disclosure for which types of transactions?

Residential transactions financed by a federally-related loan

Commercial banks participate in real estate finance though all but which of the following methods?

Secondary mortgage market

Each of the three financing instruments we talked about could be expanded by the addition of any of a number of special provisions designed to address the specific requirements of an individual loan. A Late Payment Penalty clause requires the borrower to pay a penalty or late charge for any payments that are considered to be late. According to California law, Article 7, 10242.5, a late payment cannot exceed an amount equal to 10 percent of the principal and interest payment. In addition, a late charge cannot be assessed on any payment received within 10 days of the due date. A Prepayment Penalty clause allows lenders to control prepayments by including a provision that allows the lender to assess a penalty to the borrower for paying early. In California, Article 7, 10242.6 of the Real Estate Law allows a prepayment penalty of up to six months' interest on any amount of principal paid in excess of 20 percent of the loan amount in a 12-month period. If there is not a prepayment penalty clause, a Prepayment Privilege clause allows the borrower to repay the balance of the loan at any time without being assessed a penalty. A Lock-In clause is a very drastic form of a prepayment clause as it actually prohibits the borrower from paying the mortgage loan in full before a specific date. A Due-On-Sale clause is a form of acceleration clause that requires the borrower to pay off the entire mortgage debt when the property is sold.

A Subordination clause is an agreement to reduce the priority of an existing loan to a new loan that will be recorded in the future. A Release clause is often used when two or more properties are pledged as collateral for a single loan, as developers often do. As the developer sells off each lot, a portion of the money from the sale is used to pay part of the mortgage. In return, the lender executes and records a release of the lot that was sold. An Exculpatory clause is inserted in a financing document when the lender agrees to waive the right to a deficiency judgment. In some circumstances, a buyer may purchase a property "subject to" the existing mortgage. In this situation, the buyer takes possession of the property, while the seller retains legal title until the buyer pays off the loan. The buyer is not liable to the lender for the payment of the note; however, if the seller defaults on the note, the buyer can lose all his or her equity in the property in a foreclosure sale.

Lenders can use a note and mortgage, a deed of trust or a land contract document in creative ways to meet the needs of individual borrowers. Let's review some of the different options that exist. An open-end loan is an expandable loan in which the lender gives the borrower a limit up to which he or she may borrow. Each advance the borrower takes is secured by the same mortgage. This loan is also known as a mortgage or deed of trust for future advances. Often the money that the lender advances is principal already paid. This type of loan can save the borrower the time and expense of refinancing the property at some future date. The borrower repays the advanced funds either through an extension of the loan term or through an increase in the monthly payments. It's also possible for the lender to adjust the interest rate to assist the repayment. A construction loan is a type of open-end mortgage, also known as interim financing. A construction loan finances the cost of labor and materials as they are needed and used throughout a building project. Construction loans are different from other open-end loans because the collateral typically used to secure the loan has not yet been built. Lenders will typically make a commitment for a loan at 75 percent of the property's total value. Construction loans don't pay out all at once. Borrowers usually get between five and ten advances, called draws, which coincide with certain stages of the construction. Interest rates on construction loans are usually higher than on other loans because the risk is greater.

A blanket loan covers more than one parcel of real estate, owned by the same buyer, as collateral for the same mortgage. Developers often use a blanket loan to secure construction financing for a proposed subdivision or a condominium project. Because of the nature of development and construction, the developer needs to have some way to release single parcels of the project as they are completed. The mechanism for doing this is a release clause. If a release clause is not included in the mortgage document, the developer would be required to pay off the entire loan balance before he or she could sell any of the individual parcels lien free. Under these circumstances, the developer could choose to sell the parcels without paying off the mortgage, but that would create a host of problems for the individual buyers. For this reason, developers usually seek to have a recognition clause included in the blanket mortgage, whereby the lender agrees to recognize the rights of each individual parcel owner, even if the developer defaults and there is a foreclosure. A package loan is one that finances the purchase of a home along with the purchase of personal items, such as a washer, a dryer, a refrigerator, an air conditioner, carpeting, draperies and furniture or other appliances. The financing instrument describes the real property and then states that the specifically-named personal home items are fixtures, and therefore part of the mortgaged property. The monthly payments on the loan include the principal, interest and some pro-rated payment for the appliances. The package loan is very popular in the sale of new subdivision homes and furnished condominiums. Also many commercial rental properties such as apartment buildings, office buildings and clinics are specifically tailored for package loans.

Some of the difficulty in getting loans on mobile and manufactured homes comes from the uncertainty about whether these homes are real property or personal property. Larger mobile homes built in factories and transported only by professional home movers typically attach permanently to lots in mobile home parks or are set up and attached to property that the homeowner has previously purchased. If the owner of the mobile home has a long-term lease with a rental park or has title to the property on which the home will be set, the home will be considered real property and the borrower will be eligible to get a real estate loan. However, since the depreciation on mobile homes in the first few years is pretty steep, many lenders prefer to give mobile home loans with a 15-year term instead of the typical 30-year term. A purchase money loan is most commonly a technique in which the buyer borrows from the seller in addition to the lender. The purchase money mortgage is created at the time of the purchase and delivered at the time the property is transferred as part of the sale transaction. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount, so the seller "takes back" a portion of the purchase price as a second or junior mortgage. A hard money loan is any mortgage loan that is given to a borrower in exchange for cash. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution.

A bridge loan is a short-term loan that covers the period between the end of one loan and the beginning of another. Bridge loans are typically used in two situations: To cover the time period between the end of a construction loan and the issue of a permanent loan on a property. When a person needs to borrow money on his or her unsold home (a second mortgage of sorts) to fund the acquisition of a new home. This is useful when a seller will not accept a property sale contingency. A bridge loan is usually an interest-only term loan that requires a balloon payment at the end of the term. A wraparound loan allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. The second lender issues a new larger loan to the borrower at a higher interest rate. The new loan amount is a combination of the first loan and the second loan. The borrower makes the new higher payments to the second lender and then the second lender pays the first lender out of those funds. A participation loan involves the lender sharing an interest in the property. When money is tight or interest rates are particularly high, the lender runs a greater risk with the loan. To account for this, the lender may want to ensure a greater return by sharing in the property's interest. With long leases in place, lenders are willing to allow tenants to pledge their interests as collateral for improvement loans. This is referred to as a leasehold loan. Life insurance companies, mutual savings banks, and commercial banks are the primary lenders on leasehold loans. Because lenders must retain a first lien position on a loan, most leasehold loans include both the land and the building as collateral. This means that the landlord must subordinate his or her fee simple rights on the property to the new lien. This protects the lender in the event of a default that leads to a foreclosure, as the lender will have the legal right to recover both the land and the building.

Whenever a potential homebuyer borrows money for the purpose of buying a home, he or she will be required to sign a document that describes the amount of money borrowed, the terms under which it will be repaid, and any conditions that relate to either the borrowing of the money, or the consequences in event of default. This document is a promissory note (usually referred to as a "note") and establishes legal evidence of the debt incurred. The two most common types of promissory notes are: Straight note - This is an interest-only note, whereby the borrower agrees to pay the interest periodically and to pay the entire principal when the note comes due. Installment note - This note requires the periodic payment of both interest and principal and is the most common note. A note is itself a complete contract. A note does not need to be tied to either a mortgage or a deed of trust to be valid. However, a note is the fundamental document upon which the mortgage or deed of trust depends. There are many provisions that can be included in a note, but most notes contain at least the following items: Identity of borrower and lender Promise to pay Amount borrowed Interest rate Due dates of payments Amount of payments Maturity date Reference to the real estate as security Signatures

A mortgage is a financing instrument that pledges the real property described in the mortgage document as collateral for the debt described in the note. While a note is a fully enforceable legal document, a mortgage always needs a note to be legally valid. In the event of default by the purchaser, the lender has the right to bring legal action through the courts to force a sale of the property. This is called a judicial foreclosure since it must be ordered by the court. Proceeds from the foreclosure sale are used to repay the remaining debt on the mortgage loan. A mortgage involves a transfer of an interest in real estate from the owner to the lender. The Statute of Frauds requires that the mortgage be in writing; however, although a number of formal, standardized documents exist, there is no specific form that is required for a mortgage to be valid. As a matter of fact, a mortgage could be handwritten as long as it contains the requirements needed for a valid mortgage document: Wording that conveys the intent of the parties to create a security interest in a property for the benefit of the mortgage. Any other items that the particular state's law requires. There is no specific form required for a valid mortgage document. However, there are a number of provisions that should be included in the document no matter what form it takes. The following items are standard to most mortgage forms. Identification of participants Granting clause Property description Covenant of Seisin Attachment of note Property taxes Insurance Preservation and maintenance of property clause Defeasance clause Acceleration clause Signatures and acknowledgement Once the mortgagor has paid off the mortgage in full, the lender will execute and record a mortgage release document indicating that the loan terms have been met.

FHA-insured mortgage foreclosure Before a lender can begin a foreclosure on an FHA-insured mortgage, the lender must file a Form 2068 Notice of Default and deliver that form to the local FHA administrative office within 60 days of the default. If at the auction sale the bids are less than the unpaid balance of the loan, FHA expects the lender to bid on the debt, take the title, and present it to the FHA along with a claim for insurance. The FHA may pay the claim in cash or in government debentures. If the FHA decides to take title to the property, either they will resell it "as is" or they will repair, restore and resell it at a higher price. VA-guaranteed mortgage foreclosure Since a VA loan is not an insured loan, the lender will not recover insurance benefits on a default. If there is a foreclosure, the lender is usually the original bidder at the auction. Afterwards, the lender will submit a claim for the losses to the local VA office. The VA then has two options. It can pay the unpaid balance, interests, and court costs and take title to the property. Or the VA can require that the lender keep title to the property and the VA will pay only the difference between the determined value of the property on the foreclosure date and the mortgage balance. If the property is in disrepair and/or badly damaged, the VA will usually choose the second option. Junior mortgage foreclosure The foreclosure on a junior mortgage is essentially the same as on a senior mortgage. Since many junior lenders are not institutional lenders, a junior lender will usually hire an attorney to administer the foreclosure process. As with the foreclosure on a senior mortgage, the borrower is given a time period to correct the problem. If he or she cannot correct the problem, the attorney will send notice to all those who have an interest in the property and then file for foreclosure.

A nonjudicial foreclosure is also known as a power of sale. With this type of foreclosure, a lender or a trustee has the right to sell the property without spending the time, effort and money involved in a court foreclosure. This form of foreclosure eliminates the statutory redemption period that is allowed in the judicial foreclosure process. The deed of trust gives the trustee the power of sale in the event of a default. If there is a default, the lender will notify the trustee in writing of the borrower's delinquency and will instruct the trustee to begin the foreclosure process. However, the trustee has the option to foreclose judicially if there is the possibility of getting a deficiency judgment since California does not allow a deficiency judgment on a power-of-sale foreclosure. At the sale, the property will go to the highest bidder. The new purchaser will receive a trustee's deed to the property, but there will be no guarantee that the title is clear. There may be some outstanding liens still in effect, such as a federal tax lien, real property taxes or assessments, or a valid mechanic's lien. The power-of-sale process can be incorporated into a standard mortgage contract. Several states that do not use the deed of trust allow this process to be used for mortgages. Using the strict foreclosure method, a lender could get ownership to a property that has a value above the loan balance. The problem with strict foreclosure, however, is that there is no clearly established value for the property because there is no public auction. In this case, the lender's losses cannot be established. There are no deficiency judgments with strict foreclosures.

With an adjustable-rate mortgage (ARM), the interest rate is linked to an economic index. The loan starts at one rate of interest, but then it fluctuates up or down over the life of the loan as the index changes. The loan agreement describes how the interest rate will change and when. There are many possible ARM indexes. Each one has distinct market characteristics and fluctuates differently. The most common indexes are: Constant Maturity Treasury (CMT or TCM) Treasury Bill (T-Bill) 12-Month Treasury Average (MTA or MAT) Certificate of Deposit Index (CODI) 11th District Cost of Funds Index (COFI) Cost of Savings Index (COSI) London Inter Bank Offering Rates (LIBOR) Certificates of Deposit (CD) Indexes Bank Prime Loan (Prime Rate) CMT, COFI, and LIBOR are the most frequently used. Approximately 80 percent of all the ARMs today are based on one of these. The interest rate the borrower pays is usually the index rate plus a margin. An adjustment period establishes how often the lender can change the rate - monthly, quarterly or annually. Interest rate caps limit the amount of interest the borrower can be charged. A payment cap limits how much the monthly payment can increase. Sometimes lenders offer conversion options. This would allow the borrower to convert the ARM to a fixed-rate loan at certain times during the life of the loan.

As financial communities try to make funds available to those who need real estate loans, new and different variations of payment plans become available. Here is a recap of some of the most common plans. The two-step mortgage is an ARM loan program in which the interest rate is adjusted only one time - usually five or seven years after the loan is originated. The new rate remains in effect for the remainder of the loan term. The interest rate for the initial period is usually below market rates. A growing equity mortgage (GEM) is a fixed-rate mortgage whose payments increase by a fixed amount over a given schedule for an established period of time, often the entire term of the loan. There are two main advantages to growing equity mortgages. The low up-front payments may make it easier for first-time home buyers to qualify for and afford a loan. A GEM is usually paid off faster than a traditional fixed-rate mortgage. The major disadvantage of a growing equity mortgage is that the payment continues to go up, regardless of the borrower's income or financial position. With a reverse annuity mortgage, the lender is making payments to the borrower. The RAM allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell. To qualify for most reverse mortgages, the borrower must be at least 62 and live in the home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions. There are three basic types of reverse mort-gage. Single-purpose reverse mortgages - These are offered by some state and local government agencies and nonprofit organizations. Federally-insured reverse mortgages - These are known as Home Equity Conversion Mortgages (HECMs) and are backed by the U. S. Department of Housing and Urban Development (HUD). Proprietary reverse mortgages - These are private loans that are backed by the companies that develop them.

In California, there are several agencies that regulate the savings and loan associations, banks, insurance companies, credit unions and mortgage companies that operate in the state. These agencies include: Division of Financial Institutions (DFI) California Housing Finance Agency (CalHFA) Department of Business Oversight (DBO) Division of Corporations (DOC) Division of Financial Institutions (DOFI) California Department of Insurance (CDI) California Bureau of Real Estate (CalBRE) Office of Real Estate Appraisers (OREA) Supply and demand dictates interest rate changes for real estate loans. Mortgage rate changes are influenced by the following factors: Excessive spending by the government causes higher inflation or higher interest rates. When the government spends its money faster than it can collect it back in taxes, the government is forced to borrow large amounts of money - competing with the private sector for funds. When the government engages in excessive spending and borrowing, inflation becomes the inevitable result. Inflation causes the interest rates to rise even when the supply of money is increased. If the amount of money available for loans increases and the demand for loans is not equal to the supply of that available money, interest rates will go down. If there is a greater demand for loans than there is money available, competition among borrowers for that money pushes prices up and lenders raise the interest rates on that money. Any actions the Federal Reserve takes will directly influence changes in mortgage interest rates.

An encumbrance is defined as "a right or interest in a property held by one who is not the legal owner of the property." There are two general classifications of encumbrances: An encumbrance that affects the physical condition of the property, such as restrictions, encroachments and easements. An encumbrance that affects the title, such as judgments, mortgages, mechanics' liens and other liens. Most pieces of real property carry some sort of physical encumbrance. In some cases, the title to a property may have an encumbrance that is financial, called a lien. A lien can be created by an agreement between the parties (voluntary) or it can be created by operation of law (involuntary). Liens can also be either general or specific. A general lien would apply to all of a person's real and personal property. A specific lien would apply only to the particular property in question. Given these definitions, a real estate loan for a piece of property would become a specific, voluntary lien against that property as soon as it is recorded at the courthouse in the county where that property is located. There are three basic legal documents that are used to finance real estate in California: Note and mortgage Note and deed of trust Land contract

There are three types of trusts: Equity trusts buy and sell real property. Mortgage trusts buy and sell mortgage loans. Hybrid trusts, or balanced trusts, combine both real property investing and mortgage loan investing. Since the REIT itself must be a passive investor, the trustees or directors hire managers called advisors to carry out the general affairs of the REIT. REIT shareholders are in a position that is somewhat like that of the limited partners in a real estate limited partnership. Shareholders may have to pay income tax because of the cash dividends they receive, but they do not face the issue of double taxation that distributed corporate earnings usually deal with. So, REIT shareholders benefit from the corporate attributes of limited liability, centralized management, continuity of life and the ability to transfer interests freely. And they do not incur the related tax disadvantages. An investor on a limited budget can acquire a diversified portfolio by purchasing shares in a REIT mutual fund. Like REITs, mutual funds avoid paying income taxes by distributing most of their earnings to the shareholders each year. While REITs invest in real estate or mortgage-secured debts, mutual funds invest in bonds or the stock of other companies. REITs that are not listed on an exchange or traded over the counter are called private REITs. Because REITs are required to pay out 90 percent of their earnings as dividends, they have limited opportunity to keep earnings for purchasing additional real estate. There are five ways in which REITs can increase income and boost funds from operations: Growing income from existing properties. Growing income through acquisitions. Growing income through development. Growing income through provision of services. Financial engineering.

An investor's tax basis in a property is of major significance to the outcome of the investment. From the time a property is first purchased, owners have a tax basis in the property. Selling or exchanging a property generates a gain or loss equal to the difference between the sales price and the adjusted basis of the property at the time it is sold. The initial basis in property that is purchased is what it cost to make the purchase, including any commissions, legal fees, title insurance and other items that the purchaser had to pay to complete the purchase that are not deductible as a current operating expense. If a buyer purchases two or more assets in a single transaction, the initial tax basis must be distributed among them according to their relative market values. An investor can deduct an allowance from otherwise taxable income to recover some of his or her investment capital. The allowance is called a depreciation allowance. Only assets held for business or income purposes are eligible for the depreciation allowance. However, eligibility for the allowance is determined by the intent to produce income, rather than actually producing it. The recovery period for qualifying residential structures is 27.5 years. The recovery period for nonresidential buildings purchased after May 12, 1993, is 39 years. The recovery period for land improvements such as walks, roads, sewers, gutters, and fences is 15 years. An investor recovers the tax basis of a building in equal annual increments over the allowable recovery period. When a property sells or is damaged or destroyed by a disaster such as a fire, flood or storm, the tax basis is reduced. Any money spent on the property that substantially increases the value or useful life of the property gets added to the tax basis.

The borrower is entitled to receive a copy of the appraisal report if he or she paid for it. Some lenders do not charge the borrower for the report, and therefore they don't have to give a copy to the borrower. In California, if the borrower pays for the appraisal when working with a licensed mortgage loan broker, the broker must provide a copy of the appraisal to the borrower and a copy to the lender at or before the closing of the loan transaction. California law requires the lender to provide notice to loan applicants informing them that they have the right to a copy of the appraisal if they paid for it. After the underwriting process is complete and after the lender and borrower have negotiated, if the loan is approved, the lender will issue a loan commitment. The loan commitment is binding. It details the loan amount and the terms on which the lender is willing to lend. The commitment usually carries an expiration date, setting the time by which the borrower must accept the terms of the loan offer or lose the commitment. Once the lender has qualified the property that will be used as collateral for the loan the lender is preparing to issue to the borrower, the loan officer will request and review a title search on that property. The title search reveals: The legal description of the property The owners of record, and Any outstanding liens or encumbrances on the property

California recognizes two methods for obtaining assurance that the title is good: Abstract and opinion Title insurance An abstract and opinion is a historical summary of all consecutive grants, conveyances, wills, records and judicial proceedings that affect the title to a particular property. The abstract will also include a statement of the status of all recorded liens and encumbrances affecting the property. Title insurance combines the abstracting process with an insurance program. The insurance guarantees the validity and accuracy of the title search. Generally, the insurance policy that the title company issues will protect the policy holder against losses that arise from such "hidden" defects as: Forged documents, such as deeds or mortgages Undisclosed heirs Mistaken legal interpretation of a will Misfiled documents Confusion arising from similarity of names Incorrectly stated marital status Mental incompetence Additionally, the title company agrees to defend the title in court against any lawsuits that may arise from the defects covered in the policy. A title insurance policy is issued at settlement. In California, title insurance insures the lender (and the property owner for an additional fee). Both the buyer and the lender should have title insurance. Insurance for the buyer ensures a clear title and protects his or her investment. Insurance for the lender protects the lender's interest in the property. Title insurance is paid for one time, when the property passes from one owner to another. It stays in effect until the property sells again.

Which of the following statements is not true about a life estate?

Cannot be mortgaged by the holder.

The successful bidder at a judicial foreclosure sale receives which of these documents?

Certificate of Sale

By definition, a junior loan is a mortgage (second mortgage or second trust deed) that is "subordinate in right or lien priority" to an existing mortgage on the same property. Junior loans contain more risk than first loans. For this reason, they will typically carry a higher interest rate. Just like first trust deeds, junior loans require the execution of a promissory note that spells out the terms and conditions of the loan. The property description for a junior loan will be the same as the description contained in the existing first note. The subordinate position of the secondary loan puts the lien holder of the junior loan in a high-risk position. If a foreclosure on the first note results, the first note holder may sell the property to recover as much as he can, leaving the junior lien holder "holding the bag" with effectively no compensation, since the allocation of any proceeds from the sale would be to the "senior" lien holder first, followed by any junior lien holders. Most junior loans are used in low-down-payment situations. Sometimes after a period of three to five years, a borrower will merge the junior note with the existing first note by increasing the first loan by an amount that will allow the junior loan to be paid off. Another and probably more common type of junior loan is the home equity loan. The Tax reform Act of 1986 eliminated the interest deduction for consumer finance, but kept the interest deduction on home loans. So many homeowners choose to take out home equity loans and earmark the funds for a myriad of uses, from home improvements to automobile purchases to vacations to education to medical expenses. Most of these home equity loans have a term of five years. When the loans come due, the borrowers typically choose to refinance their property, obtaining a new first deed of trust to pay off the junior loan.

Historically, real estate lending in this country began with loans made for purchasing or operating farmland. Since much of the land in our early history was available for homesteading through government grants, most borrowers did not need money to acquire land. However, they did need money to purchase seed, feed and equipment to run their farms. The Federal Farm Loan Act of 1916 is a United States federal law which established twelve regional Farm Loan Banks to serve members of Farm Loan Associations. Farmers could borrow up to 50 percent of the value of their land and 20 percent of the value of their improvements. The Farm Credit System (FCS) was inaugurated under the Federal Farm Loan Act. It is designed to serve the unique financial needs of farmers, ranchers, producers and harvesters of agricultural products. It also assists rural homeowners and owners of some types of farm-related businesses. The banks in the FCS provide loans for real estate, operating costs and rural homes. They also offer credit-related life insurance and crop insurance. The Farm Credit Administration (FCA) is an independent federal agency responsible for regulating and examining the banks, associations, and related entities of the Farm Credit System (FCS). The FCA also examines and regulates the following members of the Farm Credit System: The Federal Farm Credit Banks Funding Corporation The Farm Credit System Financial Assistance Corporation The Federal Agricultural Mortgage Corporation, also known as Farmer Mac FCA examines and regulates these service corporations: AgVantis The Farm Credit Finance Corporation of Puerto Rico The Farm Credit Leasing Services Corporation Farm Credit Financial Partners, Inc., The FCS Building Association (FCSBA)

California mortgage brokers must be licensed real estate brokers. These loan brokers are governed by Article 7: Real Property Loans of the California Business and Professions Code. According to California law, the broker must make certain that the borrower receives a completed loan disclosure statement within three business days of receiving a completed loan application or prior to the signing of any loan documents. The form for making this disclosure is called the Mortgage Loan Disclosure Statement. It details the total costs of a loan to the borrower, including data regarding interest rate, balloon payments, security documents, and costs and commissions to the loan broker. Loan brokers also have some restrictions to follow. They are limited in what they can charge for commissions and expenses associated with securing a loan. These limits apply only to first trust deeds of under $30,000 or second trust deeds of under $20,000. The maximum commission amounts allowed for the loan amounts indicated above are: First mortgages - 5 percent of the principal for loans of less than 2 years; 5 percent for loans of more than 2 years but less than 3; 10 percent for loans of 3 years or more Second mortgages - 5 percent of the principal for loans of less than 2 years; 10 percent for loans of more than 2 years but less than 3; 15 percent for loans of 3 years or more Fees for making the loan (such as appraisals, title charges, recording fees, etc.) cannot exceed 5 percent of the principal or $390, whichever is greater. Regardless of the size of the loan, the broker may charge the borrower only the actual costs and expenses paid, not to exceed $700.

In order to increase their investment, lenders often charge other fees when the borrower gets the loan. The borrower could pay all or some of these charges. Loan origination fees - This fee is typically 1 percent of the loan amount, although it could be higher. It covers the lender's cost for generating the loan. Points - This is a one-time service charge to the borrower for making the loan. Points represent prepaid interest and the lender charges them to get additional income on the loan. Points are paid at closing and are usually equal to 1 percent of the loan amount. Two (2) points on a $75,000 loan would be $1,500. ($75,000 x .01 x 2 points). Discount Points - These charges are designed to offset any losses the lender might suffer when selling the loan to the secondary mortgage market. Discount points are a means of raising the effective interest rate of the loan. The rule of thumb is 1/8 percent for each discount point. So a charge of 4 points would increase a 7 ¼ percent mortgage to a 7 ¾ percent yield. 4 points x 1/8 percent = 4/8 = ½ percent 7 ¼ + ½ = 7 ¾

A deed of trust is a legal document which transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender). A deed of trust is also called a trust deed. This popular financing instrument is used in many states today, including California. A deed of trust differs from a mortgage in the way the lender achieves the right to secure repayment of the loan. At settlement, when the property is transferred to the new owner who has obtained a mortgage loan, the borrower signs the note and then signs a deed of trust. The deed of trust conveys title rights in the property over to an assigned trustee. When the borrower repays the note secured by the deed of trust, the trustee will reconvey title back to the borrower using a deed of reconveyance, also called a release deed. If the borrower should go into default on the loan, the lender contacts the trustee who is then empowered to exercise the "power of sale" granted in the deed of trust. The property is sold and the proceeds given over to the lender without any necessity of going through the court system. Lenders prefer this non-judicial type of foreclosure because it can usually be accomplished in a much shorter period of time than the judicial foreclosure. For this reason, California uses the deed of trust almost exclusively when securing loans.

Lenders in many states, including California, prefer to make residential loans using the deed of trust for several reasons. A trustee may be given the power to sell property after default without going through the time-consuming judicial foreclosure process (as we mentioned on the previous screen). The statute of limitations might bar action on a note in a mortgage transaction. However, this is not the case with a deed of trust that contains a power of sale. With power of sale, the trustee has legal title and can sell the property at any time after default to pay off the debt. A deed of trust can be used to secure more than one note. If the lender wants to remain anonymous for some reason, he or she does not have to be named in the deed of trust. Usually there is no statutory right of redemption after the sale under a power of sale. Note: Right of redemption is the right of a mortgagor who has defaulted on a note to redeem or get back the title to the property by paying off the entire mortgage note before the foreclosure sale. After the property has been sold at a foreclosure sale, the mortgagor has no right of redemption, unless state law grants a statutory redemption period. Problems can arise when a non-institutional trustee is named under a deed of trust in that there may be difficulty locating that person to reconvey the title after the debt has been paid. For this reason many lenders prefer to name a corporate trustee in the deed of trust. In California, the trustee and the beneficiary may be the same entity. That means lenders may act as trustees for their own loans and not be in danger of a conflict of interest.

From a buyer's perspective, interest can be defined as the amount paid in return for the use of money. From the lender's perspective, interest is money earned or received from a loan investment. Simple interest is money that is paid only for the amount of principal the borrower still owes. Compound interest is defined as interest which is computed on the principal amount plus the accrued interest. Points are a one-time service charge to the borrower for making the loan. There are two types of points: Origination points Discount points Points represent prepaid interest and the lender charges them to get additional income on the loan. Points are paid at closing and are usually equal to 1 percent of the loan amount. Borrowers are responsible for making monthly mortgage payments, which include both principal and interest. The lender runs an amortization schedule that is based on the amount of the loan, the term of the loan and the interest rate. Most real estate mortgage loans are based on simple interest.

Lenders will try to estimate a potential borrower's ability to fulfill the loan obligation by establishing an income ratio and a debt ratio. Conventional loans typically require the income ratio to be under 28 percent and the debt ratio to be 36 percent or lower. FHA guidelines require the income ratio to be no more than 31 percent and the debt ratio no more than 43 percent. Some expenses paid at closing must be prorated or divided proportionately between the buyer and the seller. Any item that is prorated is shown on the settlement statement as a debit to one party and a credit to the other party for the same amount. Closing agents and lenders typically use one of two methods when calculating items that need to be prorated: the 12- month/360-day method and the 365-day method. When deciding to make a commercial loan, a lender will thoroughly examine the borrower's financial liquidity and assess the profitability of the specific project. The loan analyst will be most interested in the project's break-even point and its return on investment (ROI). The break-even point is the point at which the gross income is equal to a total of the fixed costs, plus all of the variable costs that were incurred to generate the gross income. The return on investment is the ratio of pre-tax net income to the money invested. Real estate lenders often use a required return on an investment, called a capitalization rate, as the means for estimating the value of the collateral being pledged for a loan.

A savings and loan association is a financial institution whose primary function is to promote thrift and home ownership. Also known as "savings banks" or "thrifts," these institutions often offer their depositors a higher rate of interest on their deposits than commercial banks offer. A savings and loan invests at least part of their deposits in residential mortgage loans, which then allows more people to purchase and/or make repairs on their homes. Savings banks must be either state or federally chartered. State-chartered savings institutions are licensed by the State of California and are regulated by the California Department of Savings and Loans. If the institution is insured, it also operates under the supervision of the Federal Housing Finance Board. On the other hand, federally-chartered savings institutions are licensed by the Federal Housing Finance Board and regulated by the Office of Thrift Supervision. Their accounts are insured by the Savings Association Insurance Fund (SAIF) under the Federal Deposit Insurance Corporation (FDIC). Note: All federally-chartered associations are required to participate in the federal savings insurance program. Participation in the insurance program is voluntary for state-chartered savings institutions. Loan Activities According to government regulations, the majority of a savings and loan association's assets must be in real estate loans. These institutions do extend business and consumer loans, but in far smaller numbers than their real estate loans. Savings institutions can make collateral loans that are secured by a borrower's savings accounts, savings certificates, bonds, other existing secured notes or other forms of readily liquid assets.

Life insurance companies are a major source of credit for shopping centers, office buildings, hotels and motels, industrial buildings and large apartment complexes. Life insurance companies typically invest up to a third of their assets in real estate loans. California has the largest dollar volume of insurance company real estate loans of any state in the United States. Life insurance companies are organized in one of two ways: Mutual companies owned by the policyholders who share in the earnings through premium rebates. Stock companies owned by stockholders who get dividends on the earnings. In either form of organization, the insurance companies are licensed by the state where they have their home office or in which they are incorporated. In California, insurance companies are regulated by the Department of Insurance, which dictates what types of loans are permitted and what the maximum loan-to-value ratios can be, as well as other conditions of operation. Life insurance companies probably have the widest range of lending practices of all the institutional lenders. Investment policies are generally very flexible and cover many activities. Life insurance companies who are not incorporated in California, but who choose to do business in this state, are subject to the same rules and restrictions that apply to California-incorporated companies.

The title insurance method of assuring a title is an outgrowth of the insufficiency of the abstract and opinion method we talked about on the previous screen. The title insurance company completes the same tasks outlined previously in the abstract and opinion method, but then adds the insurance component to the equation. The title insurance company warrants to "make good" any loss arising from a defect in the title or from any liens or encumbrances on the property. Generally, the insurance policy will protect the policy holder against losses that arise from such "hidden" defects as: Forged documents, such as deeds or mortgages Undisclosed heirs Mistaken legal interpretation of a will Misfiled documents Confusion arising from similarity of names Incorrectly stated marital status Mental incompetence Additionally, the title company agrees to defend the title in court against any lawsuits that may arise from the defects covered in the policy. There are two types of title insurance policies. Owner's policy Lender's policy An owner's policy is issued for the benefit of the owner or his or her heirs. A lender's policy is issued for the benefit of the mortgage lender and any future holder of the loan. It protects the lender against the same defects as the owner is protected from, plus some other defects, but the insurer's liability is limited to the loan balance as of the date a claim is made. Both polices are paid for with one-time premiums.

National financial trends have an important influence on real estate market conditions. When the national economy is in a recession, supply and demand usually improve for a buyer. During recession times, there is instability in the job market. Business closings and layoffs force homeowners to sell to obtain money to meet other financial obligations. Of course, conditions of economic instability can also discourage buyers from buying. But home prices are generally much lower during recession periods than they would be otherwise, making it a "buyer's market." On the other hand, when the economy is expanding, conditions generally move in favor of the seller. During times of expansion, employment is high and new construction is up, creating a situation of low supply and high demand. Homes tend to appreciate in value during these periods. When the economy is doing well, prospective homebuyers decide it's a good time to buy. With a flourish of buyers on the market, sellers become more rigid about prices. Low prices for buyers are more difficult to find in this "seller's market." How healthy the real estate market is at any given point in time relates directly to the cost of money or interest rates. When interest rates are lower, monthly home payments are lower, which means that many more people can qualify for a loan. And as we said above, when there are more buyers in the market, home prices tend to increase. Money can accrue in a number of ways, such as wages, dividends and profits. What people accrue or earn and don't spend becomes savings, or surplus money. Savings are certainly important to the individual accumulating the surplus, but they are also critically important to the economy. Savings become the eventual source of funds for borrowing. If everyone spent all of their income as they earned it, there would be no money available to borrow. So the more savings that accrue, the greater the pool that is available for borrowers.

Nonresidential properties are broken down into five major subcategories: Commercial real estate can be subcategorized into office buildings, retail space and hotels/motels. In some cases, a commercial building can contain both office and retail space. In other cases, that same building could even have residential units. When the uses for one property are combined, we refer to as a mixed-use development. Industrial and warehouse properties comprise buildings used for light or heavy manufacturing, in addition to any associated warehouse space. Agricultural property includes land used primarily for growing crops or raising livestock, such as farms, pastureland, orchards and timberland. Recreational real estate includes country clubs, marinas, sports complexes, parks, forests and campgrounds. Most institutional real estate has a unique use to the persons who own and use it, such as a government agency, a church, a hospital or a university. There are some important reasons why a business would choose to lease space rather than purchase the building: Most tenants find leasing to be more cost-effective than owning. Owning a building would reduce the flexibility of the business. Engaging in the activities of leasing, repairing and maintaining extra building space could cause the business to lose focus on its major business activities. If the business decided it wanted to downsize from using its existing space, the building owner would have to find someone to use or purchase the excess space. A particular building's potential for generating income depends on two factors: Its ability to attract tenants to rent space The expenses involved with the building's operation

Net operating income or NOI is the term that describes the net income produced by a specific property after all expenses have been deducted from the gross receipts. Net operating income is affected by market rent, vacancies and both fixed and variable operating expenses. Market rent is the price that a specific type of property is likely to draw under the current market conditions. The market rent could be higher or lower than the amount the property is actually renting for under its current lease. In many cases, at any particular point in time, all the space that is available in a building may not be leased. The investor must always allow for periods of vacancy, even if the leasing activity is strong. There are two kinds of expenses that are normally associated with income properties: variable expenses and fixed expenses. Variable expenses fluctuate according to the degree of occupancy. Fixed expenses do not fluctuate. Once an investor has estimated the market rent for property, its vacancy rate, and operating expenses, he or she can calculate the potential net operating income that he or she can receive from the property. Income properties are usually leased to tenants for a designated time period. The lease assigns rights, duties and responsibilities between the owner and the tenant which have an effect on each party for the length of the lease. The terms of the lease include legal considerations that are intended to guard the interests of both the owner and the tenants over the life of their association. There are several methods an owner can use when writing the lease to ensure a fair rental increase over time. The initial rent that a tenant pays under a lease contract is usually a precise dollar amount. This is called base rent.

Several states have established agencies to give financial assistance to communities for real estate developments. Some agencies help communities to attract new industry, while others work to improve citizen housing. Industrial development agencies are empowered to purchase and improve land for industrial and office parks. The funds for the purchase and improvement are usually provided by revenue bonds, but may also come from voluntary citizen contributions. Community Redevelopment Agencies are public entities created by a city or county to implement the community redevelopment activities outlined under the Community Redevelopment Act. A CRA is established by the local government and functions within that local government. CRA projects are funded to a great degree with tax-increment financing (TIF). TIF is a tool to use future gains in taxes to finance the current improvements that will create those gains. The issue of tax-exempt mortgage revenue bonds is another source of funding for some CRA projects. Communities use bond proceeds to make below-market-interest-rate loans to developers in the project area.

Over the past few years, alternatives to this standard fixed-rate loan have become increasingly more popular. Having more creative choices available for borrowers allows lenders to make more loans to more buyers and at higher loan amounts. With a graduated payment mortgage (GPM) the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. With a GPM loan, the buyer may have initial payments that are less than the interest-only portion of the loan at that point. The interest owed and not paid in the initial months is added back to the principal causing what is referred to as a negative amortization. The FHA-245 program is a popular graduated payment mortgage program. FHA-245 has five plans available. Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first five years of the loan. The other two plans permit payments to increase 2 and 3 percent annually over 10 years. Starting at the sixth year of the five-year plans and the 11th year of the 10-year plans, payments will stay the same for the remaining term of the mortgage.

Some states issue income-tax-free mortgage loan bonds to obtain financing for comparatively low-cost mortgage loans. These loans are usually made available to eligible persons to help them purchase single-family homes. Interest income on the bonds is both federal and state tax-exempt, so they can be purchased at rates that are lower than other taxable investments. In California, Cal-Vet loans are funded through the sales of tax-exempt bonds. Other California Bonds Under California's Community Redevelopment Law, Community Redevelopment Agencies (CRAs) can finance local redevelopment projects by issuing GO bonds. CRAs can also finance some residential and commercial developments through the issue of tax-exempt mortgage revenue bonds. Savings associations are also allowed the opportunity to issue mortgage-backed bonds. The association uses the money from the sale of the bonds to create more mortgages, which keeps a continuous flow of real estate finance funds. Private loan companies deal mostly in junior financing - that is, second deeds of trust that allow borrowers to pull out some of the equity in their property to use for other purchases. Borrowers often use this money for purchasing automobiles, furniture or other high cost items. California law requires loan companies to get licenses and performance bonds. There are also laws that limit the fees that loan companies can charge for their services. Private loan companies are also bound by Regulation Z of the Truth-in-Lending Act. According to this act, a lender must disclose the true cost of the credit being offered, so that borrowers can compare all the credit terms available to them. It also provides a three-day right to rescind, which means the borrower has up to three business days to cancel the loan.

Pension funds collect contributions from workers, and sometimes employers, and then invest those funds to create a large money pool from which the workers may withdraw when they reach retirement. The California State Teachers Retirement Fund is one example in this state. Traditionally, pension funds have been invested in stocks and bonds and this continues to be the case for the most part. More recently though, since mortgage-backed securities have become available, pension funds have begun to play a role in the real estate market by purchasing existing real estate loans in the secondary market. An endowment in the financial world is a transfer of money or property which is donated to an institution, with the stipulation that it be invested, keeping the principal intact. This allows the donation itself to have a much greater impact over a long period of time than if it were spent all at once, due to compound interest. Since these endowment funds are permanent, fund managers want to choose investments that are safe and will generate relatively high levels of income for long periods of time. For this reason, endowment funds offer a good source of mortgage financing for commercial and industrial properties. Many commercial banks and mortgage companies handle investments for endowment funds. Credit unions are nonprofit financial institutions into which members place their money, usually through direct deposit. Credit unions pay no income tax, so they can pay higher interest rates on deposits than other savings institutions. They also offer a wide variety of loans at far lower interest rates than their competitors, making credit union membership very attractive. Credit unions make mostly short-term loans. When they do make real estate loans they tend to be second mortgages or home improvement loans. Under the Federal Credit Union Act, credit unions have the authority to make 30-year loans to their members to finance a principal residence. They can also make FHA or VA loans at interest rates comparable to market value.

The Real Estate Investment Trust (REIT) was formed in 1960 by federal tax law. The goal was to influence small investors to combine their resources with others to raise venture capital for real estate transactions. REITs enjoy special income tax benefits similar to those granted to mutual funds. They are exempt from corporate tax if they invest at least 75 percent of their assets in real estate and distribute 90 percent or more of their annual taxable real estate income to their investors. There are three types of real estate investment trusts: Equity trusts - In this type of trust, the investors participate as owners of large and hopefully more profitable income-producing properties Mortgage trusts - In this type of trust, investors loan their money to be used making mortgages on commercial income properties and get their income from interest, loan origination fees and profits from buying and selling mortgages. Hybrid trusts - These are a combination of the above types A syndicate is a group of two or more people who unite their resources for the purpose of making and operating an investment. Members of the syndication can pool their capital to finance a real estate transaction or to purchase a piece of property. Syndicates may operate in the form of a: Real estate investment trust Corporation General partnership Limited partnership Tenancy in common In California, the limited partnership is the preferred form. End of Page

Real estate bonds can be used for real estate financing in two ways. Corporate bonds are a method of raising capital for such things as major improvements or acquiring new equipment. If the bond is backed by a mortgage, it is a secured bond. If the bond is issued against the company's general assets, it is an unsecured bond, also called a debenture. Municipal bonds are issued by government entities as a way to finance real estate projects and community improvements such as sewers, road paving, schools and parks. There are two types of municipal bonds: general obligation (GO) bonds and revenue bonds. GO bonds are backed by the full faith and credit of the municipality that issues them. The ability to back up GO bonds with tax funds is what makes GO bonds different from revenue bonds, which are repaid using the revenue generated by the specific project the bonds are issued to fund, for example, tolls collected on the toll bridge built from the revenue bonds. GO bonds are typically used to fund projects that will benefit the entire community, while revenue bonds are used to fund projects that will benefit specific populations, who provide the revenue to repay the debt through user fees and user taxes.

Sam Frank is a retired Army officer who wants to purchase a home from Jim who is also a veteran. Sam wants to assume the current loan on the property. What will Jim need to get from Sam?

Release of liability

If the builder started any of the construction work before the construction loan was actually recorded, then it's possible for a mechanic's lien to take priority over any other liens that were placed after the job started. This is called relation back doctrine. If a tenant negotiates a contract for repairs or improvement to a property without the owners' approval, the owners can protect themselves against a lien by filing and recording what's called a Notice of Nonresponsibility in which they deny responsibility and liability for the repairs or improvements. To help finance community improvements, property owners in the community are often assessed a portion of the costs of those improvements. There are four significant state laws, or improvement acts, that allow property owners to be partially or fully assessed for the construction and financing of capital improvements: Vrooman Street Act This law gives authority to city councils to grade and finish streets, build sewers and perform other improvements within municipalities or counties. Street Improvement Act of 1911 This act is utilized more than any other for street improvements in California. The law allows municipalities to issue bonds ordering the improvements and allows the assessments to be paid in equal installments during the term of the bonds. Improvement Bond Act of 1915 This law allows a public agency to issue bonds for subdivision street improvements, including the construction of sewers. The bonds usually carry an interest rate of 6 percent, which is assessed and distributed proportionately among the owners of the affected properties. The Mello-Roos Community Facilities Act of 1982 This act allows a wider range of facilities and services than other improvement bond acts and does not require that the improvements benefit individual properties specifically.

Risk is the chance of experiencing a loss. Risk is always the outcome of a decision or a series of decisions. Risk management in business usually requires giving prior thought to potential problem areas. Risk management is an ongoing process that changes constantly. However, it is a process with distinct milestones that are sequential in application. The main task of risk management is to identify the risks faced by the business. Once risks have been identified, they need a plan of control. Risk control deals with dealing with loss in three ways: Avoid loss. Limit loss. Reduce loss. The first control deals with the issue of avoiding the risk or not entering into the risky situation in the first place. The second control deals with limiting the frequency of losses, that is reducing the number of times a particular event can occur. The third control deals with reducing loss when an event does occur. Investors must consider many variables when purchasing income properties. These factors include: Market factors Occupancy rates Tax influences Level of risk Amount of debt financing and Proper procedures to use for measuring return on investment Investors invest their equity funds for four main reasons: Return rate Property appreciation Diversification Tax benefits

The title report on a property shows there is a lien on the property. Who is responsible for removing the lien to clear the title?

Seller

Fannie Mae and Freddie Mac are able to replenish their own funds by doing what?

Selling mortgage-backed securities.

Many people believe that if they lose their home in a foreclosure, they will owe no taxes. This is not necessarily true. As far as the IRS is concerned, a foreclosure is considered a sale. If the amount of the defaulted loan exceeds the tax basis of the property, the IRS considers that there has been a gain. The potential for bankruptcy under Chapters 7, 11 and 13 of the Bankruptcy Code affects the value of real estate as collateral. The objective of a Chapter 7 bankruptcy is to liquidate the debtor's assets and distribute the proceeds among the various creditors. A lender will normally be paid in full if the value of the property is more than the balance due under the mortgage. A Chapter 11 bankruptcy is available to owners of a business and looks to safeguard the debtor's assets while putting together a plan of reorganization. Chapter 11 bankruptcy proceedings should be a great concern to lenders who may find that their security is tied up for years during the reorganization process. A Chapter 13 bankruptcy is known as a "wage earner proceeding." This plan is designed for the rehabilitation of the debtor. The funding of the plan is designed to come from future wages and earnings of the debtor. During the period covered by the plan, creditors must accept payments as they are provided in the plan and may not seek to collect their debts by other means.

Several kinds of property exist in real estate markets, but in effect, they fall into two major classifications: residential and nonresidential. Residential properties include single-family homes and multiple-family properties such as apartments, condominiums and co-ops. There are two main reasons that investors purchase residential property. Some investors purchase property to keep, meaning that they will buy the property and hold it for the long term. An investor purchases property to get income, to see the property appreciate in value, and sometimes to gain tax benefits. The other reason investors purchase property is to flip it. A property purchased to flip is one that is intended to be resold as soon as possible. Investors that intend to flip properties feel that they can make a profit either with or without renovation, repairs, or improvements. If you look at the income from a single-family home against the price that the investor paid for it, it might appear to be a poor investment. However, income is not the only measure. A more important measure is how the home appreciates. Financing is a major advantage offered by single-family homes. Most lenders will offer a conventional loan of 75 percent of the lower of the appraised value or the purchase price of a non-owner-occupied home. Total seller financing is also a possibility for an investor. Single-family homes usually have the lowest interest rates and the best overall terms of all the residential rental properties. The most important advantage of investing in a single-family home is that this kind of investment is more liquid than other kinds of property. The greatest disadvantage to single-family home investment is the fact that most single-family homes generate a negative cash flow for at least the first few years. Vacation homes, condominiums and fixer-uppers can also be good investments under the proper circumstances.

The US Department of Agriculture Rural Development Program (USDA Rural Development) helps rural individuals, communities and businesses obtain financial and technical assistance to address their diverse and unique needs. USDA Rural Development programs support such essential public facilities and services as water and sewer systems, housing, health clinics, emergency service facilities and electric and telephone service. The California Housing Finance Agency (CalHFA) program offers below-market interest rate first mortgage programs and a variety of down payment assistance programs to eligible first-time homebuyers. Conventional Loans interest only PLUSSM - Offers up to 100 percent financing and allows borrowers to pay only the interest for the first five years of a 35-year term. After that, borrowers pay principal and interest at the same low, fixed interest rate for the remaining 30 years. 40-Year Fixed Mortgage - Offers up to 100 percent financing with a 40-year term and a below-market, fixed interest rate. 30-Year Fixed Mortgage - Offers up to 100 percent financing with a 30-year term and a below-market, fixed interest rate. CalHFA also offers a number of down payment assistance programs. Affordable Housing Partnership Program (AHPP) CalHFA Housing Assistance Program (CHAP) California Homebuyer's Downpayment Assistance Program (CHDAP) Extra Credit Teacher Home Purchase Program (ECTP) High Cost Area Home Purchase Assistance Program (HiCAP) Homeownership In Revitalization Areas Program (HIRAP) School Facility Fee Down Payment Assistance Program (SFF) CalHFA participates in these other partnerships and programs. Builder-Lock (BLOCK) Program HomeChoice Program Information HUD - Section 8 Housing Choice Voucher Program Self-Help Builder Assistance Program (SHBAP)

The Department of Housing and Urban Development (HUD) is the principal federal agency responsible for programs concerned with America's housing needs, fair housing opportunities, and improvement and development of our communities. The Department of Housing and Urban Development was created to: Administer the principal programs that provide assistance for housing and for the development of communities. Encourage the solution of housing and community development problems through states and localities. Encourage the maximum contributions that may be made by both primary and secondary homebuilding and mortgage lending industries to housing, community development and the national economy. HUD programs include urban renewal, public housing, model cities, rehabilitation loans, FHA-subsidy programs and water and sewer grants. HUD's activities include, but are not limited to, the following: Regulating interstate land sales. Supervising the Federal Housing Administration. Regulating Ginnie Mae. Overseeing (but not regulating) the operations of Freddie Mac and Fannie Mae. Administering the Community Development Block grant. Administering the Lower-Income Rental Assistance program. Overseeing the Indian Housing Block Grant program. The Interstate Land Sales Full Disclosure Act (Title XIV of the Housing and Urban Development Act of 1968) authorizes a nationwide program of registration of subdivisions marketed in interstate commerce. The Act requires submission of a statement of record describing a proposed subdivision in detail, accompanied by maps, contract documents and certifications designed to fully disclose relevant information about the subdivision.

The standard policy in California is the California Land Title Association (CLTA) policy. It may be issued to a lender only, a buyer only or jointly to lender and buyer (called a joint-protection standard coverage policy). Typically, in southern California the seller pays for the standard policy, while in northern California the buyer pays. The American Land Title Association (ALTA) policy is an extended coverage policy that insures against many of the items excluded in the CLTA standard policy. This policy gives coverage to the lender, not the buyer. However, a buyer can purchase an owner's policy that provides the extended coverage. The ALTA policy includes a survey or physical inspection of the property. Many of the items excluded on the CLTA standard policy are covered on the ALTA extended policy. However, please note that no title insurance policy protects against: Defects known to the insured but not disclosed to the title insurer Government zoning regulations The American Land Title Association has a policy called the ALTA-R that many title insurance companies recommend to owners of one-to-four unit, owner-occupied residences. This policy does not include a survey, since property lines are already established by recorded subdivision maps.

The person preparing the closing documents usually orders a land survey of the property, which shows the "footprint" of the house and any deck, patio, garage or carport. It also shows other buildings on the property, driveways, fences or swimming pool. Any problem found with either the physical layout of the property or in the title search results creates a cloud on the title that must be resolved prior to closing on the loan. Examples of a cloud on a title include: Mechanic's lien Income tax lien Property tax lien Encroachment Zoning violation Deed problems, such as a name that is not legally correct or the lack of the appropriate signatures After the borrower and the property have been qualified to the lender's satisfaction and while the preliminary title report is being researched and prepared, the escrow process gets into full swing. In California, the majority of escrows are handled by either title insurance companies or independent escrow companies. The remaining escrows are typically handled by either the attorneys who routinely perform escrows as a part of their practice or brokers who handle the escrow of their own transactions.

Another common financing instrument used over the years is known as a land contract. A land contract has several other names, including real estate contract, installment sales contract, agreement for deed, agreement to convey and contract for deed. A land contract is not tied to a note. It is a complete financing contract in and of itself that is executed between a seller and a buyer. Under a land contract, a seller pledges to convey the title to the property at the time when the buyer completes whatever obligations the contract stipulates. Under the terms of the land contract, the buyer gets possession of the property and equitable title, while the seller holds legal title to the property and continues to be primarily liable for payment of any existing mortgage. A land contract incorporates many of the same conditions as you would find in a mortgage, such as the names of the parties involved, the pledge of the property as collateral, a full legal description of the property, the terms and conditions for repaying the loan, the specific responsibilities of the borrower during the loan term and a statement that discusses the remedies in case of default. However, a land contract is NOT a mortgage. Under a land contract, as we mentioned above, the sellers keep the title in their own name and the deed shows that the sellers still own the property. This gives some measure of added protection to the sellers in the event of a buyer default.

There are some disadvantages in using a land contract on both the buyer and seller side. From the buyer's perspective: Since the seller does not deliver a good marketable title until the buyer makes the final payment, the buyer must continue to make the payments even if there is some doubt that the seller will be able to perform at the end of the contract term. For example, the title could be in jeopardy if the seller places another mortgage or other encumbrances on the property during the period of the land contract. The buyer may have some trouble getting the seller to deed the property at the end of the term. For example, if at the time of final payment the seller is missing or dead, the property could be tied up in probate. During the life of the contract, liens could have arisen against the seller that would cloud the title. The buyer could be restricted from assigning his or her interest in the land contract if a covenant against assignment exists. There could be problems if the seller did not actually apply the buyer's payments to the existing mortgage. From the seller's perspective: In the event of a default, it could be time consuming and expensive to clear record title, especially if the buyer is in bankruptcy or is a nonresident. The seller's interest in the land contract is less salable than a mortgagee's interest would be if the seller had chosen to sell under a purchase-money mortgage. Since the land contract is indeed a contract, it is subject to differing interpretations, which allows for the prospect of disputes and lawsuits.

When deciding about investing in certain properties, it is always important that investors carefully make forecasts of future cash flow. Real estate investors follow a number of strategies and investment styles: Investing in Core Properties Investing in Core Properties with a Value-Added Strategy Property Sector Investing Contrarian Investing Market Timing Growth Investing Value Investing Strategy as to Size of Property Strategy as to Tenants Arbitrage Investing Turnaround/Special Situation Opportunistic Investing Investing in Trophy or Blue Chip Properties Developments Financial leverage is defined as the benefits that may result for an investor who borrows money at a rate of interest lower than the expected rate of return on the total funds invested in the property. Different types of risk carry investment risk characteristics that investors must consider when deciding among alternative investments. Risk types are: Business risk Financial risk Liquidity risk Inflation risk Management risk Interest rate risk Legislative risk Environmental risk

There is no way to avoid risk when dealing with real estate investments. However, risks can often be significantly reduced with relatively simple risk management procedures. Here is a list of those procedures: Reducing risk through careful selection Diversification Market research Property management Shifting risk to tenants Shifting risk to insurance companies Hedging to control risk After all possible risk control techniques have been put in place, some amount of unavoidable risk still remains. Before making any commitment of funds to a real estate projects, most rational and well-informed real estate investors will do the following: Specify investment objectives with reference to the return on investment, the timing of the return and acceptable risk levels. Identify the major risks that are involved and calculate them as completely as possible. Eliminate some risks, transfer others through insurance or other techniques and limit the remaining risks to acceptable levels. Make decisions to accept or discard specific investments, based on whether the expected returns justify carrying the remaining risks in light of how the project will contribute to the investor's overall objectives. During the time period an investor holds a property there can be many changes that affect the actual performance of the property. The investor also looks at the potential benefits associated with leverage. Factors such as these could cause the investor to consider selling the property. If an investor has less financial leverage then when he or she first financed a property, the investor may choose refinancing as an option. Instead of selling one property and buying another, an investor could consider renovation as an option.

When a lender is processing a loan, there are four critical procedures involved. The lender or its designee must: Determine the ability of the borrower to repay the loan. Estimate the value of the property that is collateral for the loan. Research and analyze the marketability of the title. Prepare the documents necessary to approve the loan and close the transaction. The evaluation process used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral is called underwriting. Underwriting will determine whether a borrower and property meet the minimum requirements established by the lender, the investor or the secondary market (into which the lender will probably sell the loan). Underwriting is usually performed by a loan officer at a financial institution and is based on information contained in the borrower's loan application and an appraisal of the property. It is the most important and last approval step in the loan process before the loan is forwarded to the loan department to draw up the actual loan documents. The loan process starts when a borrower completes a loan application and gives it to a lender for evaluation. Most lenders use some version of the Uniform Residential Loan Application published by Fannie Mae. This form requests that the borrower provide information about both the property and the borrower.

To qualify for a mortgage loan, a borrower must meet the lender's qualifications in terms of income, debt, cash, and net worth. In addition, the borrower must demonstrate sufficient creditworthiness to be an acceptable risk. The loan officer who will be doing the underwriting will verify all of the information included on the application by actually contacting the references given. The underwriter will check the banks where the borrower has deposits and will check with the borrower's employer or employers. The typical form used to verify deposits is called the Request for Verification of Deposit. Just like for the verification for deposits, there is a form called Request for Verification of Employment that the lender will use to collect the employment information. Once the lender has verified the borrower's employment with regard to income, the lender will try to estimate the applicant's ability to fulfill the loan obligation. The lender will do this by establishing an income ratio and a debt ratio. In addition to the income ratios, the lender will use the information on the verification of deposit forms to assess if the borrower has the funds to make the required down payment. The underwriter will examine the assets and liabilities section of the borrower's application very carefully. The information about the borrower's net worth is important to the lender, as it gives indication of the borrower's ability to sustain payment of the debt in the event that the borrower would lose his or her job. An important job of the underwriter is to become alert to any possible red flags in the loan application or other documents. These red flags are not necessarily indicative of fraud. However, seeing any of these items should alert the underwriter that the application or documents need further review.