Georgia Real Estate - Section 15 Unit 2

Under current tax law, what's the maximum tax-free gift an individual can give to another individual annually?

$17,000 -Under current law, individuals may gift up to $17,000 tax-free to any individual annually

Based on current laws, a certain amount of money can be gifted tax-free every year from one individual to another. So it's possible that a married couple could receive up to __________ ($17,000 per child per parent ) to secure a real estate transaction.

$68,000 -Excellent. Current law states an individual can gift up to $17,000 annually to another individual. So a married couple could receive up to $68,000 from their combined parents.

Private loan companies take on substantial risk when they issue a loan to a borrower who's unable to secure financing elsewhere. Which are ways they insulate themselves from that risk?

-They may charge up to the maximum allowable interest for the loan. -They may put a lien on the property for which the loan is being taken. -They may require collateral to secure the loan. -They may charge higher loan fees.

Which of these statements are correct about credit unions?

-Credit unions do a lot of business making personal property loans. -Credit unions lend money for traditional mortgages.

In _____ then-Pres. Bill Clinton enacted the Credit Union Membership _____ Act. This opened the door for credit unions to ____ new members from a much wider _____ than they had before, making credit unions much more _____ with commercial banks.

1998 Access Recruit Criteria Competitive

Credit Union

A bank-like money cooperative where its members can borrow from pooled deposits at low interests rates.

Who or what entity directs the activities of credit unions?

A board of directors

Which of the following describes a CLO when used in the lending system?

A computerized loan origination system that allows borrowers to compare mortgages electronically

What is a closed CLO?

An automated system accessed by an intermediary that allows for electronic comparison of mortgages.

Pat and Danielle are buying their first home. They don't have quite enough money saved for the down payment and closing costs. Who could give them a tax-free gift to help with the purchase?

Any individuals, such as family members

Borrowers cannot apply for mortgages through a CLO.

False

Credit unions are regulated by the federal government, similar to commercial banks.

False

Municipalities make loans directly to qualified homebuyers.

False

Private loan companies are divisions of commercial banks.

False

Sellers aren't allowed to finance any portion of a mortgage for a buyer.

False

Sellers should always be willing to carry a second loan to get their house sold.

False

The U.S. Department of the Treasury supports the sale of municipal bonds because such sales reduce the income tax burden on investors.

False

They're not really companies, but individuals with a lot of money to lend.

False

Your money isn't as secure in a credit union account as it is in a commercial bank.

False

Credit Unions & Real Estate Funding

Federal credit unions were established in 1934 by Pres. Roosevelt. Credit unions finance mostly personal property loans (e.g., auto loans) and traditional mortgages. They also participate in the secondary mortgage market by pooling their mortgages into real estate mortgage investment conduits (REMICs). --The National Credit Union Administration (NCUA) was established in 1970 to charter and supervise federal credit unions. --Credit unions have national deposit insurance under the National Credit Union Share Insurance Fund—similar to that provided for commercial banks under the FDIC. --Credit unions present serious competition for commercial banks. Because of their non- profit nature, they have fewer regulations and more flexibility in lending. --In 1998, Pres. Clinton authorized the Credit Union Membership Access Act. This opened the door for credit unions to recruit members using much wider criteria, leading to huge growth in the credit union sector.

Which of the following is the most widely used municipal bond program in Georgia?

Georgia Residential Finance Authority (GRFA)

Mike has had some financial problems and is considering borrowing from his retirement plan. Which of the following is a true statement?

He should consult with a financial expert before doing so.

Gretchen and Sam are in the market for a new home. They're doing some research on mortgages at home and are comparing many of their options. What are they using?

Open CLO

Which of the following are types of computerized loan origination systems (CLOs)?

Open and closed

Commercial bank

Other

Credit Union

Other

Mutual savings bank

Other

Municipal Bonds in Georgia continued

Peachtree earns income from loan origination fees. As borrowers pay their mortgages, Peachtree may keep a percentage of the interest charged on the loans. Peachtree may also charge the City a fee to service these loans. Peachtree makes periodic principle and interest payments to the city. The city makes periodic interest payments to Joe Investor, and when Joe Investor's municipal bond term ends, the city returns his original investment to him. Cities (or other government entities providing funding) may require that borrowers using municipal bonds purchase properties in specific areas, such as those targeted for revitalization. Because the U.S. Department of the Treasury bears the ultimate burden of lost tax revenue, municipal bond usage in real estate is highly regulated and federal legislation has limited their future use.

A family member

Private

The seller

Private

Janice is planning to borrow money from her retirement savings. Which of the following is a true statement about her situation?

She should consult with a financial expert before withdrawing the funds.

Buyers

Some buyers get help from family members to purchase real estate. Under 2023 tax laws, an individual may give up to $17,000 tax-free to any other individual annually. (If the donor is willing to pay tax on the gift, any amount is okay.) For example, if all four parents of a couple could each contribute the maximum tax-free gift to each of the two borrowers, the couple would receive a total of $68,000 in private financing assistance. In other words, that would be $17,000 gifted from each of two parents to each of the two borrowers (or four times $17,000). Remember, this can't be a loan (because then it must be calculated in the debt-to-income ratio). It must be given and treated as a gift.

Buyers (Private Loan Companies-Quick Reference)

Sometimes a buyer is unable to secure enough financing on their own to close the purchase of a home. In these cases, it's sometimes possible for them to arrange financing through a private loan company.

Sellers

Sometimes the seller will provide financing for a portion of the purchase price. The seller may use junior loans, contract-for-deed, and other creative financing methods to cover a portion of the purchase price and help the buyer complete the transaction. It's crucial that the buyer disclose to the lender the source of any financing beyond the actual mortgage loan.

Who should sellers consult before agreeing to carry part of a loan for a buyer?

Their financial advisor

Which of the following is a true statement about credit unions?

They have nonprofit status

A CLO system is an automated computer system that allows borrowers to compare mortgages electronically.

True

Borrowers should be sure CLOs are providing the best results and are neutral.

True

CLOs may be open or closed.

True

Ken and Sue are purchasing a home but are short on the down payment required by their lender. Sue's mother offered to give them cash to help with the down payment. How much can Sue's mother give under current tax laws?

$34,000

What impact did the Credit Union Membership Access Act of 1998 have on credit unions?

It widened membership criteria

Borrowing against retirement funds, whether pensions or other retirement accounts, has both benefits and drawbacks. Kathy plans to borrow against her retirement fund to buy a house. If Kathy doesn't pay the loan back, it'll probably be classified as an early distribution of retirement funds, resulting in a very sad Kathy when her income taxes are due.

True

Private loan companies may charge higher interest, larger fees, and could require ______ to secure a loan.

Collateral

Pensions and trusts have been investing in mortgage-backed securities for several years, but they're making a move toward more activity on the primary mortgage market, too. The mortgage or hybrid real estate investment trust (REIT) is an increasingly popular option. Which of the following statements describes the hybrid REIT?

-A mortgage REIT is similar to a mutual fund, but it invests in properties instead of stocks and bonds. -Mortgage REITs earn income in part from the interest earned on mortgage loans made

Which of the following represents a potential concern when borrowing funds from a pension or retirement plan?

Borrowing without consulting a financial expert can result in unintended consequences, such as income tax liability and loss of retirement income.

Michelle and Ben are in the market for a new home. Before getting too far into their search, they start by visiting a mortgage broker to learn more about the mortgage terms they may qualify for and compare mortgage options. What type of system is the mortgage broker using to support this?

Closed CLO

Georgette and Elise are buying a home together, and have taken out a loan with a private loan company. They'll pay a bit more interest, and larger fees, but they feel it's worth it to have the home they've always dreamed of. What else might the private loan company require?

Collateral

Credit Union Membership Access Act

Enacted in 1998, this act allows credit unions to solicit members using a much wider set of criteria.

Which banking-related entity shares similarities with the purpose and function of the NCUA?

FDIC

Borrowing against retirement funds, whether pensions or other retirement accounts, has both benefits and drawbacks. Kathy plans to borrow against her retirement fund to buy a house. Kathy must repay the loan within 10 years.

False

Kathy decided to borrow funds from her retirement account to fund the down payment on her new house. Which of the following is true about this loan?

If Kathy's loan is through an employer-sponsored pension plan and she loses her job, the loan will become payable immediately.

Which of the following are potential private loan resources that may be willing to finance a home?

Individual entrepreneurs

Though not a loan, buyers may be able to enlist the help of ______, who can give them a tax-free gift to help them with their purchase.

Individuals, such as family members

Which of the following statements are true about mortgage loan funds available through municipal bond sales?

Issuing agencies may require that homes purchased with muni bond funds be located in specific areas of a city, often a revitalization area.

Who is eligible to receive home loans funded from the sale of municipal bonds?

It depends on the bond authority, but most are targeted toward low- to middle-income borrowers.

Private loan companies may place a ______ on the property for which the loan is being taken.

Lien

Individual Financiers

Many times, a buyer is unable to secure enough financing to close on the purchase of a home. In these cases, individual financiers may help.

Municipal Bonds in Georgia

Municipal bonds (munis) are debt securities issued by government bodies to fund daily operating and capital expenditure needs. Some funds are specifically designed for real estate funding to make home ownership more affordable for low- and middle-income buyers. The most widely used municipal bond program in Georgia is the Georgia Residential Finance Authority (GRFA), though several other residential finance authorities also issue municipal bonds. Here's an example of how municipal bonds can affect real estate: Joe Investor and his investor buddies decide to buy $1 million in bonds from the city at a 3% interest rate. Although the interest rate is lower than some other investment channels, it's exempt from federal income tax (and possibly state and local income tax). The rate of return on munis tends to be more solid than the up-and-down nature of the stock market and other types of investments, giving investors an added sense of security. So the city now has $1 million to play with. They'd like to help low- to middle-income families afford housing, so they agree to lend that money to Peachtree Bank, under the condition that the loans Peachtree makes from that money come with a low interest rate for borrowers. Peachtree doesn't mind issuing this lower interest rate since the city provided the money at a lower cost than Peachtree would pay for those funds on the open market.

Which organization manages and charters credit unions?

NCUA

Private loan companies may be found in many places. There are ______, regional, and local lenders, and even individual entrepreneurs who loan money.

National

What does NCUA stand for?

National Credit Union Administration

What entity insures credit union national deposits?

National Credit Union Share Insurance Fund

How do municipal bonds fund mortgage loans?

Proceeds from the sale of bonds are converted to mortgage loans originated by local lenders.

NCUA

The National Credit Union Administration was established in 1970 as an independent federal agency to supervise and charter federal credit unions

NCUSIF

The National Credit Union Share Insurance Fund was established to insure credit union deposits

Why are investors willing to accept the relatively low interest rates paid on municipal bonds?

The interest earned is usually exempt from federal (and sometimes state and local) income taxes.

Joe decided to borrow funds from his retirement account to fund the down payment on his new house. It's now two years later and he lost his job. What is true about his pension plan?

The loan must be repaid immediately

Janie and Sam are newly married and are looking for their first home. They're fortunate that Janie's mom set aside some money to help with this purchase. Janie's mom says it's a loan, though, and they will have to pay her back. What's wrong with this?

The loan will go against their debt load

Anna is selling her home and met a nice young couple she really wanted to sell to, but they couldn't get financing. If Anna agrees to carry part of the loan for the buyers, what does she need to understand?

The risks involved

What do sellers who agree to carry part of a loan for a buyer need to understand?

The risks involved

Which of the following are ways a private loan company insulates themselves from the risk of lending funds to a borrower who has had problems securing them elsewhere?

They may charge higher interest, higher fees, and require the borrower provide collateral to secure the loan.

Borrowing against retirement funds, whether pensions or other retirement accounts, has both benefits and drawbacks. Kathy plans to borrow against her retirement fund to buy a house. Kathy should keep in mind that until the borrowed money is repaid, the potential growth of her retirement account will be reduced.

True

Borrowing against retirement funds, whether pensions or other retirement accounts, has both benefits and drawbacks. Kathy plans to borrow against her retirement fund to buy a house. Kathy's lender probably won't count this loan in the debt-to-income ratio.

True

Some loan companies are individual entrepreneurs.

True

What's the most common way that a seller can help a buyer come up with the funds to complete a real estate transaction?

With a contract for deed

Mortgage Trusts

Pension and trust funds are already active on the secondary mortgage market, but may become an even larger source of real estate financing in the coming years. A mortgage or hybrid real estate investment trust (REIT) is like a mutual fund, but the investments are made in properties. Income from those investments gives the REIT funds to lend money for mortgages, deriving income from interest earned on the money loaned. Currently, mortgage REITs invest in commercial real estate and multi-family units. Different retirement plans come with different regulations about early withdrawals or lending, so be sure to check with a financial professional if you or your client is considering this as an option.

Shelby wants to buy a piece of real estate and has been turned down from her commercial bank. She decides to go to a _____ for help. She finds out she will be able to get the extra funds she needs, but will have to pay a higher ______ rate, along with higher loan _____. In addition, the loan will require that Shelby use her new car as _____.

Private loan company Interest Fees Collateral

Closed CLOs can only be accessed through real estate offices, builders or mortgage professionals.

True

Private Lenders (Private Loan Companies-Quick Reference)

Private lenders include large national companies, regional providers, local offices, and individual entrepreneurs. Private lenders issue junior financing most of the time, which is a smaller loan amount, due in a shorter amount of time, with collateral as backing. The lenders are likely to require some sort of collateral for the loan, usually in the form of a lien against the property. This lien will be second in priority to any first mortgage lien. Private loan companies take a risk by covering riskier loans that commercial banks won't touch. To compensate for that risk, private loan companies charge higher fees and interest to the borrower. Despite the higher cost to the borrower, private loan companies play an important part of the mortgage lending process, since they help those who need just a little extra funding to meet their goal of property ownership.

Credit unions are headed up by a board of directors, who are elected from the credit union membership.

True

One option for seller financing is a contract-for-deed.

True

What is Computerized Loan Origination?

A computerized loan origination system (CLO) is an automated computer system that allows borrowers to compare mortgages electronically and, if they so desire, to apply for a mortgage. CLOs come in two flavors: closed and open. Closed systems are often found in real estate offices, and the offices of builders and mortgage bankers. The borrower goes through the respective professional to access the system, which is why they're called closed systems. These systems can prequalify the borrower, show competing mortgages with the lowest effective rate or costs at a set point in time (e.g., three, five, seven, or 10 years later). If a buyer wanted to borrow $200,000 and wanted a fixed-rate product with zero points, but didn't qualify based on a provided rate, the CLO will provide options, such as an adjustable rate mortgage, a temporary buy down, or the purchase of points to obtain a lower rate. Open systems work in a similar way, but are accessible to the consumer through their home computer or other device. Real estate agents and lenders pay monthly fees to list properties and loan programs, respectively, and the consumer uses free software to access the system. Note: Borrowers should make certain that any system they use is neutral and will return the best results for them, and not simply the results a particular lender wants them to see. HUD requires CLO systems to provide at least 20 lenders. Real estate agents select the lenders that will be allowed on their system.

Pensions and Other Retirement Funds

As it stands now, the days of 100% financed loans are behind us, and not everyone can afford to save up $20,000 (give or take a few thousand) for a down payment on a home. Instead, some buyers are choosing to borrow money from their pension plans or other retirement accounts. There are definite pros and cons to this approach. While the borrowed funds may not count in the debt-to-income ratio lenders use to assess a borrower's creditworthiness, failure to pay back the loan in time could have serious tax consequences. Some pension plans require payback within five years—not many people can pay off tens of thousands of dollars' worth of debt (plus pay their mortgage, living expenses, and other debts) within five years. And, if your pension plan is through your employer and you lose your job, the loan comes due immediately. Failure to pay back the borrowed funds in time classifies the loan as an early distribution of retirement funds, which is subject to income taxes, plus a penalty if you're under retirement age. Even if you're able to pay back borrowed pension funds, your plan will pack less punch when it comes to the amount of growth and interest earned (less money there means less money to grow).

Federal credit unions are supervised and chartered by the National Credit Union Administration (NCUA).

True

Investors purchase municipal bonds because they're generally stable investments and the interest earned is usually exempt from federal income taxes.

True

Municipal bonds are issued by cities, counties, and states to fund various operations.

True

Open CLOs can be accessed by consumers in the comfort of their own homes.

True

Sellers have the option to go to a bank and get a loan for a buyer, or to provide a loan to them directly.

True

Sellers who agree to carry part of a loan for a buyer should understand the risks involved.

True

There are nationwide private loan companies.

True

There are nationwide, regional, and local loan companies.

True