Georgia Real Estate - Section 16 Unit 1
$10,000 down payment $90,000 loan
$100,000 total value
A buyer is purchasing a home appraised at $480,000. The buyer is obtaining a 90% loan, and the lender will charge an origination fee of 1% at closing. How much will the loan origination fee be?
$4,320 -$480,000 x .9 = $432,000 (loan amount), and 1% of $432,000 = $4,320
A buyer is purchasing a property for $500,000. His lender's loan-to-value ratio is 90%. How much is the buyer financing?
$450,000 (500,000 x 90%)
A discount point is calculated at 1% of the loan amount. The lender is charging the borrower two points to buy down the interest rate on his loan. He's borrowing $250,000. What's the dollar value of the points the borrower will pay?
$5,000 Right! A discount point is 1% of the loan value, and the borrower's lender is charging two points on a $250,000 loan, so $250,000 x .02 = $5,000.
A buyer is purchasing a property for $400,000. He has a down payment of $40,000 and is financing the rest. What's the amount of the loan origination fee if the lender charges 1.5%?
$5,400 (400,000 - 40,000 = 360,000 x 1.5%)
Which of the following percentages is an allowable loan origination fee?
2% -Commonly, lenders charge between 1 and 3% for origination fees. Qualified mortgages don't allow the lender to charge fees more than 3% of the loan amount.
Down payment: 50% Loan: 50%
50/50 loan 1:2 Loan-to-Value ratio
Glenn is purchasing a home for $400,000. The property appraised at $415,000 and Glenn is financing $300,000. What's the loan-to-value ratio?
75% ($300,000 / $400,000 x 100)
For conventional loans in which the loan-to-value ratio is in excess of a certain percentage, lenders generally require private mortgage insurance. What's this percentage?
80%
What's the most common ratio for borrowers who use split, or piggyback, mortgages?
80/10/10
Down payment: 10% Loan: 90%
90/10 loan 9:10 Loan-to-value ratio
Jane found a house she loved that was listed at $345,000. Her offer of $330,000 was accepted, but the appraisal came in at $300,000. Jane plans to finance $275,000. What's the loan-to-value ratio?
92% Lenders use the lower of the sales price or appraised value. This results in an LTVR of 92% = (275,000 ÷ 300,000) x 100.
Loan amount / Property value x 100
= Loan-to-Value
When buyers voluntarily pay to bring interest rates down, this is called ______.
A buy down
What is a loan origination fee?
A fee a lender charges for processing a loan
The Adams family is financing their loan through Acme Bank and their agent negotiated a great sales price on their new home. Smith Title Company processed the loan documents. The Adamses must purchase mortgage insurance. Who does the insurance protect?
Acme Bank
Piggyback (Split) Financing
Borrower takes out a second, subordinate loan for an additional 10% Borrower takes out a first mortgage for 80% + The remaining 10% comes from the borrower's down payment = 100% of amount needed for purchase
Which of the following is an action borrowers take to temporarily lower the interest rate on their mortgage loan?
Buydown
Leonard is offered a loan at 5.75%. Because he plans to be in his home for several years, he chooses to pay points up front to have the rate reduced to 5.25%. What's this an example of?
Discount points
What is Equity?
Equity, in reference to property, is the difference between a home's appraised value and the debt owed on it. In other words, the equity is the amount of the home you actually own. While this sounds like it'd be easy to calculate, remember that a home's appraised value isn't necessarily the price that was paid for it. A home's appraised value can increase or decrease depending on a variety of factors and conditions, including things like the property's overall condition, whether or not it has a garage, any updates or upgrades to it, and more.
Vince Parker is purchasing a home for $150,000. He puts 10% down on a conventional loan. Will he be required to obtain PMI or MIP?
PMI
Terminates
PMI-Automatically, when the loan-to-value ratio reaches 78% (meaning the borrower has 22% equity); less frequently, it's removed at the midpoint of a loan's amortization schedule for borrowers whose mortgage includes an interest-only period, a balloon payment, or principal forbearance in a hardship; may also be terminated by borrower petition or when the loan-to-value is 80% or less (or borrower may refinance). The borrower must be current on payments. MIP-Never; it's in place for the life of the loan (though refinancing is an option)
Match the percentage of funds to the source of financing to complete the 70/20/10 piggyback loan ratio and avoid paying PMI. 20%
Second mortgage
Mortgage Insurance Basics
So, if a buyer doesn't have a 20% down payment, does that mean that the buyer can't purchase a home? Not at all. Lenders will loan to buyers with a lower down payment, but they'll want insurance to cover their losses if the buyer defaults. That 20% would have protected them in a foreclosure sale (chances are the lender can still get at least 80% of the value of the property). So, what can be used to fill the down payment gap? Mortgage insurance. Mortgage insurance comes in two "flavors" depending on whether the loan is conventional or FHA. Borrowers with a conventional loan may have to purchase mortgage insurance depending on the down payment they make. Borrowers with an FHA loan must pay MIP. Let's take a look.
You're preparing to list a client's home, and you've got some comps that give you an estimated value of $265,000. Your clients have been in the home for seven years. They've put about $12,000 of improvements into the property, and have $130,000 left on their mortgage. Using these figures, how much equity do they have in the property?
$135,000 ($265,000 - $130,000)
A buyer is purchasing a property for $400,000. His loan-to-value ratio is 80%. The lender also charges a one-point loan origination fee. How much is the loan origination fee?
$3,200
A couple is purchasing a house for $350,000 and financing $335,000. If the couple's lender charges an origination fee of 1%, what will the fee amount be?
$3,350 ($335,000 x 1%)
Jeffrey has accepted an offer of $310,000 for his house. The buyer is making a $50,000 down payment, and the buyer's appraisal came in at $300,000. On what number will the buyer's lender base the loan-to-value ratio?
$300,000
A buyer is purchasing a property for $400,000. His lender's loan-to-value ratio is 80%. How much is the buyer financing?
$320,000 400,000 x 80%
A buyer is purchasing a property for $500,000. He has a down payment of $50,000 and is financing the rest. What's the amount of the loan origination fee if the lender charges one-and-a-half points?
$6,750 (500,000 - 50,000 = 450,000. 450,000 x 1.5%=6.750)
You're working with a buyer who's purchasing a home that appraised at $80,000. The buyer is obtaining a 90% loan, and the lender will charge a one-point origination fee at closing. How much will the loan origination fee be?
$720 (80,000 x 90% = 72,000. 72,000 x 1%=720)
A homeowner has $80,000 of principal left to pay on the mortgage. The home was recently appraised at $156,000, which is $13,000 more than the purchase price. How much equity does the homeowner have?
$76,000 (80,000 - 13,000) To find how much equity she has, subtract the amount she still owes on her mortgage from the appraised value.
Piggyback financing is a legal way to avoid having to purchase private mortgage insurance. Which of the following statements are true about this type of financing and the concepts that make it work? Select all that apply.
-Conventional loans require PMI if the loan-to-value ratio is over 80% -The first mortgage in a piggyback loan must be 80% or less of the property's value -The second mortgage amount in a piggyback loan is the difference between the remaining balance owed and the amount of the down payment
Piggyback (Split) Financing continued
-Piggyback (or split) financing is a legal way for borrowers to avoid having to purchase private mortgage insurance (PMI) when they put less than 20% down. -Conventional loans require PMI on loans where the amount exceeds 80% of the purchase price. With piggyback financing, the borrower takes out a first mortgage for 80% of the amount needed for purchase and a second, subordinate loan for an additional 10%. The remaining 10% comes from the borrower's down payment. -Because neither of the loans exceed 80% of LTV, PMI is not required.
A buydown usually results in a temporary reduction in interest rates. The buydown may be structured in many ways, but one method is a 3-2-1 buydown. Select the statements that are true of interest rates in a 3-2-1 buydown.
-Reduced by 3% the first year, 2% the second year, and 1% the third year -Returns to original interest rate in the fourth year Right! A 3-2-1 buydown results in a 3% interest rate reduction in year one, 2% in year two, and 1% in year three, with the rate returning to the full rate in year four.
Example For a loan balance of $350,000 with a going interest rate of 6.75%, the monthly mortgage payment (principal + interest) would be $2,270. But with a 3-2-1 buydown, the buyer could put a lump sum of $15,840 down at closing (beyond the down payment amount), and the interest rate and payments would look like this:
-Year One: Interest rate: 3.75% Monthly payment: $1,621 Annual savings: $2,270 (original payments if a buydown wasn't utilized) - $1,621 (new payment after buydown) = $649 savings per month, which equals an annual savings of $7,788 -Year Two: Interest rate: 4.75% Monthly payment: $1,826 Annual savings: $2,270 (original payments if a buydown wasn't utilized) - $1,826 (new payment after buydown) = $444 savings per month, which equals an annual savings of $5,328 -Year Three Interest rate: 5.75% Monthly payment: $2,043 Annual savings: $2,270 (original payments if a buydown wasn't utilized) - $2,043 (new payment after buydown) = $227 savings per month, which equals an annual savings of $2,724 On the fourth through subsequent years, the rate is the original market rate of 6.75%, and monthly payments are $2,270. The savings over the first three years have paid for the initial buydown: $7,788 + $5,328 + $2,724 = $15,840. Remember that the benefit here is not to save the borrowers money, but to allow them to qualify for a bigger loan by paying interest up-front. More borrowers will qualify for the $1,621 initial monthly payment than would qualify for a $2,270 payment.
Which of the following two are possible loan origination fee percentages borrowers might expect to incur?
1% 3%
Generally, what's the common range for loan origination fees?
1% to 3%
Which of the following ratios are among those acceptable in a piggyback financing arrangement?
80/10/10
Jane's offer of $310,000 was accepted, but the appraisal just came in at $300,000. Jane plans to finance $250,000. What's the loan-to-value ratio?
83% ($250,000 / $300,000)
Charlie and Wendy are purchasing a property with a sales price of $350,000. They'll be financing $335,000. What is their LTVR?
95.7% 335,000 / 350,000 x 100 = 95.7%
What about a VA Loan?
A VA loan is another type of government loan and may involve 100% financing (0% down). However, VA loans never require mortgage insurance.
Buydowns
A buydown is essentially a lump sum prepayment of interest to the lender at closing that buys down the interest rate to below the market rate, either temporarily (e.g., for the first one to three years) or permanently (for the life of the loan). Most buydowns are temporary. Sometimes the lump sum pre-payment is instead added into the cost of the loan, but lenders can't do this without the borrower's express permission.
Which of the following describes loan-to-value ratio?
A calculation that describes the amount being borrowed compared to the value of a property
Rhonda and her husband filed for bankruptcy five years ago. They want to purchase a new house but don't have the best credit score. They've decided to buy the home using an FHA loan. Which of these is a true statement?
A minimum down payment of 3.5% is required
After owning their home for five years, Charlie and Wendy have $125,000 in equity built up. How's equity calculated?
Appraised home value minus the amount of any indebtedness against the home
Steve just started a new career after graduating from college. He's had his eye on a two-bedroom bungalow listed at $325,000, and because Steve's real estate agent shared with him that there are several interested parties, he's decided to offer the full asking price, even though he only has $26,000 saved for a down payment. Steve's banker informed him he's been approved for a _____ loan, but since he'll have a 92% loan, he'll also have to carry _____. The banker explained to Steve that, although he has terrific credit, the lender will want some additional _____ in case something should happen and Steve _____ on his loan.
Conventional PMI protection defaults
Private mortgage insurance protects the lender in case the borrower takes which of the following actions?
Defaults on the loan
Secure Lending is charging Bonnie 1% of the loan amount for her mortgage so that she can obtain a loan at 5.5%. What is this an example of?
Discount points
These are charged by lenders to loan money at a given interest rate.
Discount points
______ are charged by the lender to loan money at a given interest rate.
Discount points
Match the percentage of funds to the source of financing to complete the 70/20/10 piggyback loan ratio and avoid paying PMI. 10%
Down payment
Scott wants to buy a house that's $100,000. He knows he'll need to finance 90% of the total because he only has $10,000 for his _____. Scott's concerned about having to pay for _______, but his banker assures him he won't need to if he takes out a ______. Scott agrees. His first _____ will be for 80% of the $100,000 and his second will be for 10%. That, along with his ____ down payment, will cover the new home purchase without exceeding the 80% threshold for PMI.
Down payment Private mortgage insurance Piggyback loan Mortgage 10%
Borrowers may cancel MIP when they reach an LTVR of more than 80%.
False
PMI automatically terminates when LTVR reaches 78%. Under what other circumstances may PMI be cancelled? Borrower receives a home equity line of credit (HELOC) secured by the same property on which PMI is carried
False
Match the percentage of funds to the source of financing to complete the 70/20/10 piggyback loan ratio and avoid paying PMI. 70%
First mortgage
Scott has plenty of money saved and is ready to make a down payment on his $14 million dream home. One problem: Scott doesn't want to end up with a jumbo loan because he goes over the conforming loan limit. What option does Scott have?
He can take out a piggyback loan
Celia was obtaining a conventional loan, and she put $50,000 down as a down payment. Why might her lender also require her to obtain private mortgage insurance?
Her down payment of $50,000 isn't at least 20% of the purchase price -When loan-to-value ratios exceed 80% on a conventional loan, lenders may require private mortgage insurance.
The equity equation formula is:
Home's appraised value - loan debt = equity
Loan Origination Fee
Lenders often receive compensation by charging loan origination fees. If you heard that "ABC Bank charges a 1% loan origination fee," this would mean that ABC charged 1% of the loan up front, which is paid by the borrower at closing. Loan origination fees are especially common with mortgage brokers. They may vary between 1% and 3%. Loan fees higher than 3% no longer qualify as qualified mortgages, so very few lenders charge anything above 3%. Example: Let's say that XYZ Lender charges a 2% loan origination fee. Kelly and Bob are buying a home that cost $250,000, and they are obtaining a 90% loan and paying the loan origination fee. Their loan origination fee could be calculated like this: $250,000 home cost. x 0.9. 90% loan = $225,000 loan amount $225,000 x 0.02 2% fee = $4,500 loan origination fee
Points
Let's talk about points. You'll need to be familiar with these, but not those types of points. In real estate, a point is 1% of the loan amount. To calculate the amount a buyer will pay in points, we multiply the loan amount by the points (or the percentage): Loan Amount x points = points amount So, if a house sold for $100,000, and the buyer was getting an 80/20 loan (which means financing 80% and putting down 20%), and the lender charged two points, these points would be against the $80,000 loan. So take $80,000 times .02 (which is your two points, or your 2%), and your buyers will pay $1,600 in points at closing. $80,000 x 2% = $1,600
A discount point equals 1% of the _______.
Loan amount
A calculation that describes the amount being borrowed compared to the value of a property is called ______ ratio.
Loan-to-value
The Bransons have a conventional loan for which they were required to obtain private mortgage insurance. Their local real estate market has been going like gangbusters, and their house is now appraised at twice their loan balance! Will their PMI be cancelled?
Maybe, but they'll have to petition their lender
Loan Type
PMI (Private Mortgage Insurance)-Conventional MIP (Mortgage Insurance Premium)-FHA
Protects
PMI-Lender MIP-Lender/FHA (FHA insures the lender against default; MIP allows FHA to recover losses)
Premium amount
PMI-Varies based on the borrower's credit score and LTV. MIP-Up-front premium as a percentage of the loan value at closing (which can be rolled into the loan) plus ongoing annual premiums that decrease each year as the principal balance decreases
Down payment required
PMI-Varies, often 10% or more; will be required if the loan-to-value ratio exceeds 80% MIP-A minimum of 3.5%
Buydown Advantage
The advantage of a buydown is that it can help the borrower qualify for a larger loan, because it keeps housing payments lower for the first few years. The mortgage payment always includes principal and interest, reducing the loan balance over time. Borrowers who opt to temporarily buy down the interest rate often do so because they can't qualify for a mortgage payment at the going rate, and they expect to increase their income by the time the rate returns to the going market rate. They may also have available extra cash at closing, either through savings or through a gift from family.
Value
The lesser of either the appraised value or the sales price
When calculating loan-to-value ratios, which of the following will be used by the lender?
The lesser of the sales price or appraisal value
Shalonda is looking to purchase a home for $325,000 using a conventional loan. She has $49,000 to place as a down payment on the house. Which of the following statements is true?
The loan-to-value ratio exceeds 80%
Jacqueline found a ready, willing, and able buyer for her client's condo, with a sales price of $20,000 more than the asking price. However, the appraisal came in just under the asking price. Which number will the lender use to calculate the loan-to-value ratio?
The smaller number
Sophia and Antonio are expecting twins. They want to sell their old house and buy a larger home using a conventional loan. In order to be sure they'll get the PMI waived, what will they need to have?
They should have a loan-to-value ratio of 80% or less.
What's one reason a borrower would choose a split—or piggyback—loan option?
To avoid going over the conforming loan limit
What's one reason a borrower may choose a piggyback (or split) loan?
To avoid paying private mortgage insurance
What's the purpose of PMI?
To protect the lender in case of borrower default when the borrower has put down less than 20%
Borrowers will pay an upfront premium when they close on the loan and annual premiums for the life of the loan.
True
MIP is required of all FHA borrowers.
True
PMI automatically terminates when LTVR reaches 78%. Under what other circumstances may PMI be cancelled? Identify which statements are true and which are false. By borrower petition, when appraisal shows LTVR of 80% or less
True
PMI automatically terminates when LTVR reaches 78%. Under what other circumstances may PMI be cancelled? Identify which statements are true and which are false. When borrower reaches the mid-point of amortization
True
How long does the borrower have to pay private mortgage insurance?
Until the borrower reaches a 22% equity position
Lenders use the loan-to-value ratio (LTVR)
to determine the loanable amount of a given property
