13.Types of Mortgages and Sources of Financing

Qualifying the Title

- Abstract and opinion -Title insurance

Laws regarding fair credit and lending procedures

- Equal Credit Opportunity Act (ECOA) - REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA

Major warehousing agencies in the Secondary Mortgage Market are:

- Federal National Mortgage Association or Fannie Mae - (FNMA) - Government National Mortgage Association or Ginnie Mae - (GNMA) - Federal Home Loan Mortgage Association (Freddie Mac) Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) — , private companies sponsored by the government — in the U.S. home mortgage industry. Though separate companies that compete with one another, they have the same business model, wherein they buy mortgages on the secondary mortgage market, pool those loans together, and then sell them to investors as mortgage-backed securities in the open market

Other types of Mortgages

- Land contract -Purchase Money Mortgage: or Part Purchase Money - Blanket Mortgage -Reverse Annuity Mortgage

The key differences between Ginnie Mae and the Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac,

- Only Ginnie Mae securities are explicitly backed by the full faith and credit of the U.S. Government. -Ginnie Mae is a self-sustaining, profitable and wholly-owned government corporation located within the U.S. Department of Housing and Urban Development (HUD - Ginnie Mae's conservative and stable business model significantly mitigates taxpayers' exposure to risk associated with mortgage securitization -In the Ginnie Mae program, Issuers are financially responsible for their securities, even if the underlying mortgage collateral becomes delinquent.

Requirements to receive an FHA loan

- Up Front Mortgage Insurance Premium (UFMIP) - MIP or Mortgage Insurance Premium Lenders may charge points to increase their yield. Either the borrower the seller, or both can pay them. Each point is 1% of the loan amount. A discount point is pre-paid interest. No prepayment penalties are allowed on FHA loans! Loans are assumable with certain qualifying conditions depending upon when the original loan was obtained. The mortgaged real estate must be appraised by an approved FHA appraiser.

VA Loan requiremetnst

- the veteran must have served 181 days active service in the military since 1940. - The VA requires that a veteran assumes liability for the loan. If a veteran does not pay the mortgage as agreed there will be a foreclosure. - The property must be owner-occupied for at least one year. - A qualified veteran may borrow up to 100% of the loan with no down payment. - Veteran must first apply for a Certificate of Eligibility in order to obtain a VA loan. - The house must qualify with an appraisal and is issued a Certificate of Reasonable Value. - The amount of the loan is limited to the amount shown on the Certificate of Reasonable Value. - Loans may be assumed by non-veterans, but veterans may still liable. - VA will lend money in rural areas where there is no financial institution available. - Points can be paid by either the seller or the buyer. - VA does not allow prepayment penalties to be charged if a veteran pays off a loan early. - If a veteran has died his/her widow or widower may be eligible for a VA loan. In order to be eligible for a VA loan, the widow or widower may not be married again at the time of application. - If a loan is assumed by another veteran and the seller has used all of his/her eligibility, the seller cannot use his/her eligibility again, unless he is given a novation because he/she will still be liable for the loan. - FHA and VA will allow buyer to pay more than appraised value, if they pay the difference in CASH.

Primary Sources of Home Financing

-Savings and Loans - Banks - Insurance companies - Mortgage Loans Originators -Mortgage Brokers -Mortgage Bankers - Private Individuals -Local Governmets

Two major sections of Truth In Lending

1. Annual Percentage Rate (A.P.R.) 2. Advertising

-Title insurance-

A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Title insurance protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title

- Abstract and opinion -

A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The ABSTRAT of title DOES NOT GUARANTEE or ensure the validity of the title of the property. It is a condensed history that merely discloses those items about the property that are of public record. It does not reveal such things as encroachments and forgeries. Chain of Title - The recorded history of matters that affect the title to a specific parcel of real estate, such as ownership, encumbrances and liens, usually beginning with the original recorded source of the title. The chain of title shows the successive changes of ownership, each one linked to the next so that a "chain" is formed.

Qualifying for a Loan Buyer

A qualified buyer is one who has demonstrated the financial capacity and credit worthiness required to afford the asking (or agreed upon) price. Before submitting an offer to buy, some buyers become pre-qualified or pre-approved with a lender for a loan up to a certain amount. Assessing the buyers' price range depends on three basic factors: stable income, net worth and credit history. Besides the buyer needing to be qualified to purchase real estate, the property also has to qualify.

AMORTIZED LOAN, fully amortized

An amortized loan is one where regular monthly principal and interest are paid throughout the whole loan period. This is also known as a fully amortized, FIXED RATE mortgage. An amortized loan will pay off the loan with interest over the lifetime of the loan. When payments are made on an amortized mortgage the INTEREST is the HIGHEST part of the payment. Over time as payments are made, the amount of INTEREST DECREASES in the payment as the amount of the PRINCIPAL PAYMENT INCREASES . At the MID-POINT of the mortgage payoff, the principal and interest payment WILL BE THE SAME, at which point the principal will be the highest part of the payment. EX: a loan of $350,000 is obtained at 8% interest for 30 years. The monthly P& I would be $2,568.18 per month. This would mean that during the 360 months of the loan (30 years x 12 months per year) the payment would remain at $2,568.18 per month. Amortized mortgages may be paid monthly, or bi-monthly. Making a bi-monthly payment can shorten the time a mortgage is paid off - i.e. a 30 year mortgage would be paid off in 15 years.

Partially Amortized Loan/ BALOON Mortgage

At the end of the time period of a balloon payment, the final payment is huge so the buyer must be prepared to pay the balance or refinance with a new loan before the final payment is due. This is sometimes used by borrowers who are using the loan for a short term until they inherit a large sum of money or have other financial gains. Small payments at the beginning, one large payment at end of time period!

- Federal National Mortgage Association or FANNIE Mae - (FNMA)-

Born out of the great depression, the PURPOSE of FNMA was to buy existing loans from banks thus FEEDING UP cash so that more loans could be made. The American dream of homeownership resulted from this agencies ability to move money in the market. Sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor. Fannie Mae was established in 1938 for the purpose of purchasing FHA loans from loan originators to provide some LIQUIDITY for government insured loans. - Quasi Government Corp - was government when originally formed, but is now a private corporation - Buys FHA loans, VA loans, and conventional loans - Referred to as "Fannie Mae" - LARGEST purchaser in secondary market

Financing Laws

Consumer Credit Protection Act: Truth In Lending Law: (Regulation Z) The purpose of this law is DISCLOSURE. The law requires lenders to disclose to buyers the true cost of obtaining credit so that the borrower can compare the costs of various lenders. The regulation requires that the consumer be fully informed of all finance charges, as well as the true annual interest rate, before a transaction is consummated. The truth in lending law does not control interest rates; does not control costs to close a transaction. Truth In Lending applies to residential loans, federally related 1-4 family properties, non -commercial, and family farms. Commercial transactions are not covered under the Truth in Lending law

Conventional Loans

Conventional loans are NEITHER GUARANTEED NOR INSURED BY FEDERAL GOVERNMENT. Loans are made by local lenders through savings and loans, mortgage brokers, mortgage bankers, banks and credit unions.A minimum down payment of 20% must be made. Most loans are packaged by the lenders and SOLD in the secondary market to the Federal Home Loan Mortgage Corporation. Assumptions of these loans are rarely allowed; almost all of the loans contain an alienation clause. Prepayment clauses in the loans will depend on what type of loan is used- adjustable, fixed etc.

FHA Loan Assumption

FHA loans are assumable, however the rules have been modified through the years. Loans before December 1986 required no pre-approval. Loans acquired after this date require a creditworthiness process for the buyer assuming the loan. Local FHA offices determine specific closing costs which will be borne by the buyer.

UFMIP UP FRONT MORTGAGE INSURANCE Premium

FHA loans require a down payment as low as 3.5%. This down payment may be a gift if needed by the buyer but not a loan. Since these loans may be obtained for such a low down payment, the borrower is charged a one-time insurance premium at closing. This insurance provides security to the lender in addition to the real estate in case of borrower default. The one-time charge is paid at closing regardless of any down payment by the borrower or some other party (seller) and may be rolled into the loan amount. This charge is called an: UP FRONT MORTGAGE INSURANCE Premium (UFMIP)

MIP Mortgage Insurance Premium

For loans made with a low down payment, the FHA also charges the borrower an insurance amount with each payment until the loan to value ratio falls to 78%.

Government National Mortgage Association or GINNIE Mae - (GNMA)

Ginnie Mae is CONTROLLED by an agency of the HUD Department of Housing and Urban Development. As a wholly owned government corporation within the Department of Housing and Urban Development (HUD), Ginnie Mae's mission is to expand affordable housing finance in America by linking domestic and global capital to the nation's housing finance markets, providing liquidity to federally sponsored mortgage lending programs. This is a MORTGAGE SUBSIDY PROGRAM offered by Congress from time to time through the Government National Mortgage Association. When assistance is needed, GNMA is authorized to purchase certain mortgages at BELLOW market interest rates so that borrowers can be granted low interest loans. GNMA then sells these loans in the secondary market at deep discounts, the discount loss being the amount of the subsidy. - Buys FHA loans or VA loans - Referred to as "Ginnie Mae"

Interest rate, Principal and Payment

Interest rate in mortgage apply to ANNUAL interest payment and EXCLUDE principal payment. REMEMBER convent ANNUAL payment to MONTHLY and vice versa and EXCLUDE "PRINCIPAL" payments from calculation. Payment = Principal x Rate Principal = Payment / Rate Rate = Payment / Principal

M.G.I.C. MORTGAGE GUARANTEE INSURANCE CORPORATION

Largest private insurer The amount a lender will loan is generally based on the appraised value for loan purposes or the sale price, whichever is lower. The Loan to Value Ratio (LTV) is a percentage of the amount borrowed in relation to the property sales price or appraised value, whichever is lower. This is an important percentage because it expresses the party most at risk. For example on a $300,000 purchase price, a buyer with a 10% down payment has $30,000 invested and the lender has $270,000 invested. The LTV is 90%: $270,000/$300,000 = .90 or 90%.

LTV / Leverage and Loan to Value Ration

Leverage is the principal of using other people's money (lenders) to make investments, such as buying homes. The lower the down payment, the higher the risk will be to the lender. The lower the down payment, the higher the "leverage" obtained by the borrower. For example, with 10% down, the remainder would be a 90% loan or a 90% LTV (loan to value ratio).

Home Equity Loan

Many times the home owner will wish to borrow AGAINST the equity of the home in order to make major capital repairs, like an addition or a new roof or pay off bills. A home equity loan allows the borrower to use the home equity and place a SECOND loan in a junior position in order to get cash. The amount that can be borrowed depends on the lender. The borrower should be certain that he can afford the double payments (both the first and second) and can afford the cost of getting the new loan. Great care should be used by the borrower not to borrow more money on equity that the borrower can handle since a foreclosure on the second deed (the home equity loan) can result in foreclosure of the first as well. If the borrower cannot make the payments, he could lose his home.

Factors

One way that loan officers and real estate licensees are able to determine monthly payments is by the use of factors. A factor is the COST PER THOUSAND that is required to create the principal and interest payment necessary to pay off the loan. Factors (per thousand) necessary to make equal monthly payments to amortize a loan. Municipalities collect real estate taxes, also known as property taxes, to fund municipal operations, public schools, roads, police and firemen. The millage rate is the amount per $1,000 of property value used to calculate taxes. Millage rates vary by region, and are usually higher in cities than they are in less-developed areas. Using the millage rate to calculate real estate taxes is a simple mathematical operation that can be completed with a basic calculator or pencil and paper.

The way to amortize a loan If the loan is $115,000 at 10% interest for 30 years and the payment is $1009.21 per month (P &I), what is the principal balance after one payment?

Remember the steps -Multiply - divide - subtract - subtract, you will have no difficulty in amortizing a loan. Determine the annual amount of interest paid, based on the LOAN BALANCE. $115,000 x 10%= $11,500 interest per year. Divide by 12 to get monthly interest: $11,500 ÷ 12= $958.33 per month interest. Subtract $958.33 from the total monthly payment of $1009.21= $50.88 is the amount of the first monthly principal payment.

Reverse Annuity Mortgage

Senior citizens over the age of 62 can benefit from this mortgage. The lender makes payments to the homeowner each month based upon the accumulated equity rather than giving the money as a lump sum. The loan must be repaid upon the death of the owner or the sale of the property. Sometimes this is advantageous to the senior citizens who own their own home, who are house rich and cash poor. Care must be taken to find out all about this type of loan. The discount points and other fees on this loan can be unusually high.

Adjustable Mortgages / ARM

Sometimes called an ARM (for adjustable rate mortgages), this type of loan means that the interest rate can FLUCTUATE up or down. It is always tied to some type of FINANCIAL index; increases are capped for each period and for the term of the loan. The interest rate of the loan is usually the INDEX plus a premium called the MARGIN. """ The rate of interest on the loan goes up or down, depending on the index, margin, period of adjustment and caps""" - Periodic caps limit the amount of interest rate that may be charged during any one adjustment period. For example, if the loan has a 2% cap, it can only go up 2% during any one adjustment period, or down a maximum of 2%. - A life time cap is over the period of the loan, usually 5, 10, 15, or 30 years. If the life time cap is 5% the maximum the loan can go up or down during the life of the loan is 5%. Most adjustable loans have both periodic and lifetime caps, which limit interest rate increases. It is possible to have NEGATIVE AMORTIZATION. If the payment is not high enough to cover the fully indexed amount, the mortgage balance can increase so that the balance is more than the original loan. Some companies provide TEASER RATES for the first year. These loans may have higher caps, in the second year, the additional unpaid interest increases either the mortgage balance or the payment. All borrowers should be made aware of any negative amortization loan.

What is the monthly balance after the second payment? To get the second month's interest payment

Subtract the first month's principal payment. $115,000- $50.88 which leaves a loan balance at the beginning of the second month of $114,949.12. Take $114,949.12 x 10%=11,494.91. Divide by 12 to get monthly interest = $957.91 Subtract $957.91 from the principal and interest payment of $1,009.21. The principal paid is $51.30 Subtract $51.30 from the balance of $114,949.12=$114,897.82

Federal Home Loan Mortgage Association Freddie Mac

The Federal Housing Financing Agency is the REGULATOR The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with Fannie Mae, Buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases. The real estate professional must be able to recognize these three major players in the secondary market by their full names, nick names and initials.BUYS - CONVENTIONAL LOANS - "Freddie Mac" - created by Congress in 1970

Secondary Mortgage Market

The PURPOSE of the secondary mortgage market is to PROVIDE LIQUIDITY (funds) for the primary market (institutional lenders). The promissory note is considered to be PERSONAL PROPERTY (readily negotiable) that can be bought and sold. Lenders sell their "Paper" or notes in the secondary mortgage market to free up money so they can make more loans. The Secondary Mortgage Market is the market in which these notes are exchanged and funds are provided directly to institutional lenders. Secondary market participants ARE KNOW as WAREHOUSING agencies because they purchase mortgage loans, and ASSEMBLE them into one or more packages of loans which may be held or resold to investors.

Difference between Fannie and Fredee

The main difference comes down to WHO they buy mortgages FROM: Fannie Mae mostly buys mortgage loans from COMMERCIALS banks. Freddie Mac mostly buys them from SMALLER banks that are often called "thrift" banks. The two companies are part of a complex process that keeps money moving through the U.S. housing economy, allowing more people to afford to buy homes than would otherwise be able if Fannie and Freddie did not exist. Since the 2008 financial crisis, when the U.S. government bailed out Fannie and Freddie, the government has had a more direct say in these two businesses.

Purchase Money Mortgage: or Part Purchase Money

This is a mortgage given as part of the buyer's consideration for the purchase of real property. A Purchase Money Mortgage is delivered at the same time that the real property is transferred as a simultaneous part of the transaction. For example, the buyer assumes a first mortgage of $50,000, makes a $20,000 down payment in cash, and receives a second mortgage called a purchase money mortgage from the seller for $15,000 for a shorter term. The seller's second mortgage is a part purchase money mortgage. Mortgage given by a seller, in connection of the sell of his property.That is the seller will take the mortgage from the purchaser, sot the transaction will colose

Package loan

This type of loan is used in resort areas a great deal, since the mortgage includes the fixtures, appliances and other personal property in the same loan. These loans are USED PRIMARILY IN BUSINESS opportunities wherein a commercial store or restaurant has personal property that are a part of that business.

Biweekly mortgage

This type of mortgage is usually a fixed rate mortgage loan with payments every two weeks instead of monthly. The purpose of this type of loan is to SAVE INTEREST, and pay down the loan faster. If the borrower has the cash to do this, it is a very workable plan if the objective is to pay off the loan.

A buyer got a 30 year loan of $50,000 with an interest rate of 10%, a factor of 8.78. What will the buyer's monthly P & I be?

To solve the problem: 8.78 x 50 = $439.00 per month. You can also take .00878 x 50.000,-

Qualifying the Property

Type of property (residential, commercial, agricultural) Location Area zoning Value range Neighborhood Actual age/Effective age/Remaining economic life Condition (repairs and predications) Special clearances (code compliance, well and septic certifications etc.) Overall marketability

A.P.R. Annual Percentage Rate

an expression of the relationship of the total finance charge to the total amount to be financed. Use of APR PERMITS the consumer to COMPARE rates. This is standardized yardstick expressing the true annual cost of borrowing. This law does not include a computation of unearned finance charges. Legal fees to prepare deeds, survey fees, recording fees, title insurance premiums, are not included in the finance charges but discount points, loan origination fees and other lender fees are included.

The ratios that FHA uses

are different than that of conventional lenders. FHA uses a Housing Expense ratio (HER) to determine if a buyer is qualified for the loan. The gross monthly income times 29% is for the housing payment and 41% is for all obligations. Because this a federal program, the ratios, rules and interest rates change often. The real estate professional is advised to check with local lenders on the ratios and the maximum sale price FHA regulations set minimum standards for the type and construction of buildings and credit-worthiness of borrowers. FHA does NOT build homes nor does it lend money itself. The term "FHA Loan" refers to a loan that is insured by the Federal Housing Administration. FHA loan limits are based upon the area where the property is located.

Advertising

dvertising - all terms listed in column B must be disclosed if ANY ONE of the triggering terms in Column A is advertised. Column A Column B Trigger Terms: Required Disclosure: Amount or percentage of down payment dvertising - all terms listed in column B must be disclosed if ANY ONE of the triggering terms in Column A is advertised. Column A Trigger Terms: - The amount or percentage of down payment - Amount of any installment - Finance charge in dollars or that there is no charge for credit - Number of installments - Period of repayment Column B Required Disclosure: - The amount or percentage of down payment - Terms of repayment - Annual percentage rate and if increase is possible - Total finance charge - Total # of payments and due dates Truth in lending is violated when the phrase, "no down payment required" is advertised without any other information.

FHA loans Federal Housing Administration loans

insures loans for lenders of real property made by qualified or approved lending institutions. The Department of Housing and Urban Development (HUD) oversees the FHA. If a buyer wants to obtain an FHA loan, a licensee should send them to a qualified lender, such as a savings & loan or a bank.

Blanket Mortgage:

is a loan on SEVERAL PIECES OF PROPERTY. Blanket mortgages contain: PARTIAL RELEASE CLAUSE. This clause is one where the mortgagee agrees to release certain parcels from the loan of the blanket mortgage upon payment by the mortgagor of a certain sum of money. A DEVELOPER could use this type of mortgage so that as lots are sold, he could repay part of the mortgage without having to repay all of it.

Land Contract

is an INSTALLMENT CONTRACT or a CONTRACT FOR DEED. The parties are called vendor (seller) and vendee (buyer). The buyer does not get legal title until the final payment is made. (Discussed in Session 12).

PMI Private Mortgage Insurance

is charged at the beginning of the loan and may also be part of the monthly payment so the payment becomes PITI, Principle, Interest, Taxes, Insurance and PMI Insurance. The mortgage insurance is purchased from a private company, not the federal government. Both the real estate professional and the buyer should understand that PMI is to protect the LENDER from default of the buyer, not insure the buyer's life. Typical payment of Conventional Insured: $700 Taxes Principal and interest payment $150 Taxes $ 70 Insurance $60 PMI TOTAL: $980 per month (PMI) is insurance provided by a private insurer that protects the lender against loss in the event of a foreclosure and deficiency.

Conventional Insured Loans

these loans require less than 20% down payment but they also require mortgage insurance which protects the lender (not the home buyer!).

VA loans allow

veterans to qualify for loan amounts larger than traditional Fannie Mae / conforming loans. VA will INSURE a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills. The maximum VA loan guarantee varies by county. As of 1 January 2012, the maximum VA loan amount with no down payment is usually $417,000, although this amount may rise to as much as $1,094,625 in certain specified "high-cost areas". Once a VA loan is paid in full or the member sells the property and frees the loan, they may re-apply for another VA loan.

The Veterans Administration VA Loans

will GUARANTEE that a loan made by an approved lending institution will be paid.