09 - Lender Loan Process
Harry and Sally get a $200,000 mortgage for 30 years at a fixed rate of 6.75%. Their monthly payment amount is $1,297.19. What will their principal payment be when they make their third payment?
$174.13 is the principal payment when they make their third payment.
A building is producing an annual net operating income of $17,050 and has a capitalization rate of 6.2%. What is the value of the building?
$275,000
Now let's look at how the rate changes.
2 points x 1/8% = 2/8 = .25% 8.5 + .25 = 8.75% effective rate
Break-even point is calculated using this formula:
= Fixed costs ÷ (1- Variable cost ratio)
What type of license allows appraisal of all property types with no restrictions?
A Certified General License allows appraisal of all property types with no restrictions.
Anticipation
A buyer's decision to purchase a property may be influenced by the benefits they expect to receive over the period of time they have the property. The value of the property can increase or decrease depending on whether the anticipated change is a benefit or a disadvantage. For example, a buyer hears that the property down the street may become a shopping mall. Is that a benefit or a disadvantage? It may depend on the buyer's viewpoint.
What does RESPA require lenders to give to borrowers?
A closing disclosure that details all financial particulars of a transaction
What is an indication of debt secured by the property?
A lien is an indication of debt secured by the property.
What kind of title is one that is so free of defects that the buyer is certain they will not have to defend the title?
A marketable title is one that is so free of defects that the buyer is certain they will not have to defend the title.
What type of suit will correct a fault in the title?
A suit to quiet title will correct a fault in the title.
Substitution
According to this principle, a buyer will not pay more for a home than what they would pay for another home that is equally attractive and available. For example, if there are several homes for sale in a neighborhood and they are alike in size, quality, and amenities, a buyer won't usually purchase the home with the highest price.
Highest and best use
According to this principle, every property has a single-use which produces the greatest income and return. This means that the property will have its highest value when it is used for that purpose. The property's use must be: legally permissible physically possible financially feasible maximally productive For example, an old office building may not be in its highest and best use if it's located in a downtown area that is undergoing a residential redevelopment. Its best use might be a conversion to high-end condominium units.
What is detailed in the Assets and Liabilities section of the loan application?
All things of value that are owned by the borrower, including cash, stocks, bonds, life insurance policies, value of real estate owned, value of businesses, and value of automobiles and other personal property are detailed in the assets section. What the borrower owes, including auto loans, charge accounts, real estate loans, medical bills, insurance premiums and any long-term liabilities such as alimony and child support payments are detailed in the liabilities section.
many factors that can influence property value
Anticipation Assemblage Change Conformity Competition Contribution Diminishing return Highest and best use Progression and regression Substitution Supply and demand
Change
Both market conditions and a property's physical condition change constantly over time. These changes affect the benefits of the property. Using our shopping mall example again, is the construction of a mall a benefit or a detriment to the property's value? An appraiser needs to keep abreast of these types of changes.
Income ÷ Value =
Capitalization rate
Sales Comparison Approach: How It Work
Date of Sale Location Physical Characteristics Transaction Characteristics Sale Conditions
Paul and Diane purchased a home from David and Deri. The closing is set for September 5. The real estate taxes of $1,850 will be due at the end of the year. Using the 12-month/360-day method, what will be David and Deri's share of the taxes (seller pays for the day of closing)?
David and Deri's share of taxes is $1,259.03.
Monthly Rent x GRM =
Estimated Value
What's in a Credit Report?
FICO score Credit summary Accounts Account age Inquiries - requests for credit history Potentially negative information Mortgage accounts Installment accounts Revolving accounts Other accounts Collections Public records
Sales Price ÷ Gross Annual Income =
Gross Income Multiplier
Sales Price ÷ Gross Rent =
Gross Rent Multiplier
Calculating Proration Math - 12-Month/360-Day Method
Here are the seven steps of this method. Step 1: Identify an item and the amount needing to be prorated. Step 2: Divide by 12 to get the monthly rate. Step 3: Divide by 30 to get a daily rate. Step 4: Multiply the monthly rate by the number of months the seller owned the property before closing to get the months-amount due. Step 5: Multiply the daily rate by the number of days the seller owned the property in the closing month to get the amount due for the closing month. Step 6: Add the two amounts to get the prorated amount for the seller. Step 7: Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount.
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, demographic data, 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.
In real estate, what best describes the loss of value from a property from most any cause?
In real estate, depreciation best describes the loss of value from a property from most any cause.
Here are some important things to know about a credit report
It lists what types of credit an individual uses, the length of time accounts have been open, and whether bills have been paid on time. It tells lenders how much credit an individual has used and whether the individual is seeking new sources of credit. It gives lenders a broader view of an individual's credit history than they can get from other data sources. It includes information on where the individual lives and whether the individual has been sued, arrested, and/or filed for bankruptcy.
Origination points
Lenders charge origination points to recover some costs of the loan origination process. In many cases, a loan officer's compensation is based on the origination points. Depending on the lending institution, the origination points may be negotiable.
The types of value include:
Market value Reproduction value Replacement value Salvage value Assessed value Condemned value Depreciated value Rental value Insured value Use value/Exchange value Mortgage value
Mark and Amy are getting a $120,000 loan at 8.5% and will pay 2 origination points at closing. What will the point cost be and what will the effective interest rate be?
Point cost: $2,400 $120,000 x .01 x 2 points Effective interest rate: 8.5% Note: Origination points do not change the effective rate of the interest.
List three items not covered by a title insurance policy
Problems with the title that occur after the date the owner purchased the policy. The penalties of the owner's failure to pay for the property. An unrecorded title defect that the owner knew about or allowed to occur.
RESPA says that borrowers must receive a loan estimate of the closing costs within how many days of the loan application?
RESPA says that borrowers must receive a loan estimate of the closing costs within three business days of the loan application.
Some red flags may appear when a lender reviews the Verification of Employment form.
Review a list of these red flags There is a lengthy employment gap between the current and previous employment. There are no prior year's earnings. All of the dollar amounts are rounded off The borrower was hired on a weekend or holiday. Most of the income comes from commissions. A prior employer is now out of business. The borrower changed professions from the previous employer to the current employer. The current business entity is not in good standing with regulatory agencies. The verification form says the borrower has a company car, while the application shows the borrower has an automobile loan. The income is out of line with the kind of employment. There are several whiteouts, cross-outs, or "squeezed in" numbers.
The underwriter must be able to validate all EXCEPT which of the following?
Seller
The income approach has five steps.
Step 1: Estimate the potential gross income. Step 2: Estimate the effective gross income. Step 3: Estimate the net operating income. Step 4: Select a capitalization rate. Step 5: Apply the capitalization rate.
The cost approach has five steps.
Step 1: Estimate the value of the land as if it were vacant and available for its highest and best use. Note that land does not depreciate in value. Step 2: Estimate the cost of improvements - either replacement or reproduction cost. Step 3: Estimate the accrued depreciation that results from physical deterioration, functional obsolescence, or economic obsolescence. Step 4: Subtract the depreciation total from the estimated cost of improvements. Step 5: Add the land value to the depreciated cost to get the total estimated value of the property.
Let's review the seven definite steps of the appraisal process
Step 1: Identify the purpose of the appraisal - such as market value for a purchase or value as loan collateral. Step 2: Gather the data relevant to the property - including tax and title records, costs, and demographic and economic data. Step 3: Assess the highest and best use of the property by analyzing market conditions. Step 4: Estimate the value of the land. Step 5: Use the three approaches to estimating cost to help reduce errors and establish a range of value. Step 6: Reconcile the estimates from the three approaches into a final value estimate. Step 7: Compile and present a formal report to the client.
What does a land survey show?
The "footprint" of the house and any deck, patio, garage, or carport. It also shows other buildings on the property, driveways, fences, or a swimming pool.
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 is known as the what?
The Break-Even Point.
Which appraisal approach is based on the principle of substitution?
The Sales Comparison Approach is based on the principle of substitution.
Which appraisal approach has the appraiser estimating the cost of individual components - including materials, labor, overhead, and profit? The appraiser then adds together the individual estimates to arrive at the overall cost.
The Unit In Place Method approach has the appraiser estimating the cost of individual components - including materials, labor, overhead, and profit. The appraiser then adds together the individual estimates to arrive at the overall cost.
Unit-In-Place Method
The appraiser estimates the cost of individual components - including materials, labor, overhead, and profit. Then they add together the individual estimates to arrive at the overall cost.
What does an appraiser do after they have completed the estimates of value using all three estimating approaches?
The appraiser reconciles the estimates into a final value estimate. This is called reconciliation.
The typical form used to verify deposits is called the Request for Verification of Deposit (VOD)
The borrower must sign a verification form that allows the bank to give the lender information about current balances in the borrower's accounts.
What is the most important part of the credit report?
The borrower's payment history.
Which parties to a transaction should have title insurance?
The buyer and the lender should have title insurance.
But what if the lender were charging 2 discount points instead of origination points? How would that change the figures?
The calculation for the point amount remains the same. Point cost: $2,400 $120,000 x .01 x 2 points
What is the capitalization rate of a property that sold for $325,000 and is producing an annual net operating income of $29,250?
The capitalization rate is 9% ($29,250 ÷ $325,000 = .09)
Which appraisal approach attempts to estimate either the property's replacement cost or reproduction cost?
The cost approach attempts to estimate either the property's replacement cost or reproduction cost
John is getting an $85,000 loan at 6.5% and will pay 2 discount points. What will the effective interest rate be?
The effective interest rate will be 6.75%.
Name four red flags that might appear on a borrower's credit report
The employment or residence data on the credit report is different from the application. There are several recent inquiries from credit card companies or other mortgage lenders. The Social Security number is invalid. The length of the credit history is inconsistent with the borrower's age. The co-borrower's maiden name is different from the data indicated on the application. The borrower is over 25 and has no credit history. Personal data on the credit report is not consistent with what is on the borrower's application. Late payments on the credit report due to unemployment, illness, or layoff do not match the Verification of Employment form data.
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?
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 Underwriting.
What's the formula for determining the gross rent multiplier?
The formula for determining the gross rent multiplier is: Sales Price ÷ Gross Rent = Gross Rent Multiplier
The highest price a buyer is willing to pay and the lowest price a seller is willing to accept is known as?
The highest price a buyer is willing to pay and the lowest price a seller is willing to accept is known as market value.
What are the FHA guidelines for income and debt ratios?
The income ratio is 31% and the debt ratio is 43%.
What does a mortgage lender need in addition to an appraisal to help evaluate the risk involved in a loan on investment property?
The lender needs information about the market value of a property over the life of the loan, or at least for several years.
Would the loan amount be a credit or a debit to the buyer on the settlement statement?
The loan amount would be a credit to the buyer on the settlement statement.
Which of the following is true:
The market price of a property is the actual sales price
Request for Verification of Employment (VOE) that the lender uses to collect the employment information
The next thing the underwriter will check is the borrower's employment status. Just like for the verification of deposits, there is a form called
The rate of return an investor will require on their investment of capital in this kind of property is defined as?
The rate of return an investor will require on their investment of capital in this kind of property is defined as the capitalization rate
The Three Approaches to Estimating Cost
The sales comparison approach The cost approach The income approach
The typical form used to verify deposits is called the ____________?
The typical form used to verify deposits is called the Verification of Deposit.
The typical form used to verify employment is called the ____________?
The typical form used to verify employment is called the Request for Verification of Employment.
The value of the "largest home on the block" may decrease if the other homes on the street are much lower in value is known as?
The value of the "largest home on the block" may decrease if the other homes on the street are much lower in value is known as regression.
The value of the "smallest house on the block" will tend to increase if the other homes on the street have more value is known as?
The value of the "smallest house on the block" will tend to increase if the other homes on the street have more value is known as progression.
Proration Math - The 365-Day Method
There are four steps in the 365-day method. Step 1: Identify an item and the amount needing to be prorated. Step 2: Divide by 365 to get the daily rate. (Divide by 366 in a leap year.) Step 3: Multiply the daily rate by the number of days the seller owned the property before closing to get the seller's share. Step 4: Subtract the seller's prorated amount from the starting amount to get the buyer's prorated amount.
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. KEY CONCEPT The rule of thumb is 1/8% for each discount point. So a charge of 4 points would increase a 7.25% mortgage to a 7.75% yield. 4 points x 1/8% = 4/8 = .50% 7.25 + .50 = 7.75%
Diminishing return
This condition is a result of continuing to add improvements to a property when those improvements will have no effect on increasing the value of the property.
Contribution
This is what the market recognizes as the change in value an improvement makes to a property, rather than what the improvement actually cost. A remodeled kitchen might add $50,000 to the value of a home, while the actual cost could have been anywhere from $25,000 to $75,000.
Progression and regression
This principle holds that a property is affected by the surrounding properties. The value of the "smallest house on the block" will tend to increase if the other homes on the street have more value - this is progression. On the other hand, the value of the "largest home on the block" may decrease if the other homes on the street are much lower in value - this is regression.
Competition
This principle holds that when several businesses of a similar type are close to one another, together they may make more money than they would individually. For example, several fast-food chain restaurants located on the same major street attract more buyers than one fast food restaurant would if it sat by itself.
Conformity
This principle says that a property is at its highest value when it conforms with and fits into its surroundings. If a three-bedroom, one-bath home is in a neighborhood where all the homes have two bathrooms, it might be wise for the owner to consider installing a second bathroom.
Supply and demand
This principle says that the value of a property depends on: how many properties are available in an area. property prices. the number of prospective buyers. the price buyers are willing to pay. For example, if there is only one home for sale in a highly desirable neighborhood, that home probably has more value than it would if there were four homes for sale in that same neighborhood.
Two approaches to estimate the value of properties such as single-family homes and duplexes that could produce income are?
Two approaches to estimate the value of properties such as single-family homes and duplexes that could produce income are Gross Rent Multiplier (GRM) and the Gross Income Multiplier (GIM).
What happens after Underwriting approves the loan?
Underwriting 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.
When an appraiser calculates the reproduction or replacement cost of a building they use one of these four methods.
Unit Comparison Method (Square-Foot Method) Unit-In-Place Method Quantity Survey Method Index Method
When processing a loan, determining the borrower's ability to repay the loan is typically one of the first procedures the lender will follow?
When processing a loan, determining the borrower's ability to repay the loan is typically one of the first procedures the lender will follow.
Assemblage
When two adjacent pieces of property are joined together, the value of the one larger parcel may be greater than the value of the two separately. For example, two lots are valued at $25,000 each. But when they are combined for one use, they have a value of $60,000. The extra value created by merging the two parcels is called plottage value.
Lenders must provide
a Loan Estimate of settlement costs at the time of loan application or within three business days of application
A Closing Disclosure
a form designed to detail all financial particulars of a transaction, must be delivered to the borrower at least three days before closing.
ability to measure the profitability of an investment
borrower's financial liquidity to determine their ability to make the payments? The lender also assesses the profitability of the specific project as to its ability to generate the cash flow necessary to be financially successful. The loan analyst is most interested in the project's break-even point and return on investment
A borrower's debt ratio is
calculated based on all of the monthly obligations the borrower has. These obligations are items and payments the borrower must make for other debts - including car payments and revolving charge accounts. Conventional loans usually require the debt ratio be 36% or lower, but FHA guidelines state the debt ratio may not be greater than 43%.
An appraiser arrives at net operating income by
deducting annual operating expenses from effective gross income. Operating expenses can be both fixed and variable.
When a lender processes 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 - whether it has defects or clouds/claims on the title. prepare the documents necessary to approve the loan and close the transaction.
The cost approach attempts to
estimate either the property's replacement cost or reproduction cost.
Replacement cost
is the construction cost at today's prices of producing a similar or equivalent structure. This method is most popular when appraising older buildings with outdated features. Newer materials and techniques can replace the outmoded ones.
Reproduction cost
is the construction cost at today's prices of producing an exact duplicate of the current building, including its improvements and its flaws.
The potential gross income
is the rent scheduled to be collected on the property plus income from any other sources - including vending machines, parking fees, and laundry facilities.
In Texas, the two common types of title policies are:
loan policies that protect lenders owner policies that protect property buyers
A marketable title is
one that is so free of defects that the buyer is certain they will not have to defend the title.
An appraiser calculates effective gross income by
subtracting vacancy and credit losses from potential gross income.
A land survey shows
the "footprint" of the house and any deck, patio, garage, or carport. It also shows other buildings on the property, driveways, fences, or a swimming pool.
To review, the income ratio establishes
the borrower's capacity to pay the loan by limiting the percentage of gross income they may spend on housing costs. Housing costs include the principal, the interest, the taxes, and homeowner's insurance. They may also include some monthly assessments for mortgage insurance and utilities. Conventional loans typically require this ratio to be under 28%. FHA guidelines require the income ratio to be no more than 31%.
Underwriting is
the evaluation process used to determine the borrower's ability to repay a loan and estimate the value of the property being used as collateral.
The capitalization rate is
the rate of return an investor will require on their investment of capital in this kind of property
Depreciation can be
urable - meaning it's economically feasible to repair, or incurable - meaning it's not economically feasible to repair
