Real estate finance

FHA Loans

FHA Loans 1. Federal Housing Administration (FHA) -c. Basic FHA Standards (cont.) i. Qualifying Borrowers: FHA only and borrower meet specified criteria. FHA criteria insures loans when the home, lender covers items such as: method of construction, worthiness of the borrower and minimum qualified appraisers building structure, the determining the credit standards for lenders. It also sets the guarantee for various regions of the coun try maximum loan amounts that it will 1) Income: There is no FHA mortgage loan; however, min imum income requirement to obtain an one must prove steady income for at least two years. Seasonal pay, child support, retirement pensiorn payments, unemployment Social Security income, alimony, and rent compensation, VA benefits, military pay income sources. Part-time pay, overtime, paid by family all qualify as in come as long as they are steady pay also count as

FHA Loans

Federal Housing Administration (FHA) -a. Nature of FHA Loans. Primary market lenders qualify borrowers and property according to FHA standards (less stringent than conventional loan the event standards) and enter Into various imortgage agreemen ts (fixed rate mortgage adjustable rate mortgage, etc.). The borrower pays FHA mortgage insurance. lender makes claim against FHA insurance policy for a portion of its loss (thereby reducing the risk of lending borrowers) b. Principal Advantage of FHA Loans. lower down payments (higher LTV) than typically permitted by conventional FHA loans permit borrowers to make loans ( as little payments possible because FHA insurance allows borrowers to finance approximately 97 % of the value of their home purchase through their mortgage , in some cases

FHA Loans

Federal Housing Administration (FHA) -ⓒBasic FHA Standards ( cont V.Closing Costs: The FHA defines allowable closing costs that may be charged to the borrower. These costs are detemined as reasonable and customary by each local FHA office. All other in the considered non-allowable and generally paid by the seller when purchasing a new home or by the lender when refinancing your current FHA mortgage Closing Costs: EXAMPLE: The mortgage origination fee, charged by the lender for the administrative cost of processing the mortgage, may not exceed one percent of the of mortgage

FHA Loans

Federal Housing Administration Basic FHA Standards (cont.) use FHA qualified appraisers to .ii. Qualifying Collateral: Lenders must estimate the value and condition of real estate financed with FHA in surance. FHA appraisers must satisfy minimum professional criteria and follow PHA appraisal standards. iv.Maximum Loan Amounts: While HUD does not regulate interest rates it does limits the amount that it will insure. Maximum loan amoun ts vary over time and by place, depending on the cost of living and other factors . Loan amounts are established from the average cost of homes m each marketplace, usually coun ty by coun ty throughout the nation.

FHA Loans

1. Federal Housing Administration (FHA) C.Basic FHA i.Qualifying Borrowers (cont.) Debt-to-income Ratio (cont: 4) Acceptable credit history: (5) Compensation not reflected in the qualified income calculation, like food stamps or similar govemment assistance: (6) A minimal increase in monthly housing (7) Substantial Substantial net worth sufficient to pay the mortgage regardless of income: (9) Potential for increased eamings, as indicated by job training or education levels; and/or (10) Relocation of the primary wage eamer 3) Credit Score: FHA criteria are more forgiving than conventional lending criteria on the borrower's credit score (or lack of any credit history)

FHA Loans

1. Federal Housing Administration (FHA) c. Basic FHA Standards insurance. i FHA Mortgage Insurance : FHA borrowers purchase mortgage -1) Premiums: Borrowers pay an up-front premium at the time of purchase mortgage insurance (which may be financed), as well as regular mortgage payment. added to the For most monthly premlums that are homes , an up - front of the loan amount financed. Thereafter, mon thly mortgage payment. must be paid at closing. mon thly in surance premium is due along with mortgage insurance premiurn of 1.75 % This amount may be

Foreclosure Mortgages

1. Nature of Mortgages Deeds of Trust c. Foreclosure (cont.) - i. Mortgage ludicial Foreclosure (cont.) Sheriff 's Deed : Deed , siniilar to a deed in foreclosure , which is presented by a court to a buver after property is sold to satisfy than the delinquent borrower a judgment. When anyone, other buys (also known as a referee's public auction, they receive a sheriffs deed deed). A sherifts deed functions to eliminate against the property so that thee purchaser may recelve marketable title. Howevet ifthe original borrower bys the property at auction. junior liens remain in place

Status of Title

1. Nature of Mortgages and Deeds of Trust - b.Status of Title (cont.) ii. Deed of Trust: Under the ty pical DOT, a neutral holds title to the financed property until, or repays the loan in full (also known as title holds title to financed property until the loan is paid in full. If the loan is third person (trustee) unless, the borrower (trustor) theory). The neutral third party loan isnot paid full, the neutral third party transfers title to the full, the neutral third party has the power to sell the borrower. If the property on behalf of the lender. The fact that the owner does not retain legal title to the property, that foreclosure, the primary differences there are three parties, and that there is no between a deed of trust (DOT) and a mortgage.

Foreclosure Mortgages

1. Nature of Mortgages and Deeds of Trust -c. Foreclosure (cont.) i. Mortgage (cont.) Judicial Foreclosure (cont.): reason to foreclose, the judge will order After a hearing, and if the court finds public that the property be sold at a on ly after a prescribed period of advertising The public auction may occur public places and in the sale is conducted at the property or at the county courthouse, depending upon the law jurisdiction. Judicial foreclosures local newspaper: The lengthy and expensive.

Foreclosure Mortgages

1. Nature of Mortgages and Deeds of Trust c. Foreclosure (cont.) 01. Mortgage ( cont . ) 1) ludicial Foreclosure (cont.) a) Lis Pendens: describes the Latin phrase meaning "action possible future recorded public pending," which notice of a constructive notice has been filed and that an action concept of providing lien. A lis pendens provides affecting particular real estate that the real estate is, or is about to become, (notice to creditors and purchasers). priority of the lien dates back to date the lis pendens was filed. involved in a lawsuit If the suit is successful, the

Basic Interest Options

1. Principal Lending Agreements. Principal options for calculating in terest and making payments include the following lending agreements. a.Basic Interest Options · i Fixed - Rate Mortgage : Interest rate stays the same for the term ofthe mortgage (commonly 10, 15, or 30 years). floats up or down according to a specified index. The interest rate is ii. Adjustable-Rate Mortgage (ARM): Mortgage where the interest rate identify the adjustment interval (interest rate adjusted after one year). Also interval (such as 1%, or 4%). Terms such as "one year ARM" generally usually having a "cap rate of change per adjustment "adjusted" at certain rate" or maximum time intervals (such as six months or one year). known as variable rate mortgage

Financing Concepts

1. Real Estate Finance Markets-General Concepts: d. Primary Mortgage Market: Network of direct lenders, also known as prime lenders or originators, who make mortgage loans directly to borrowers. Some primary lenders retain the mortgages they originate, other investors. selling loans, they liquidate their investment and receive loans additional funds to make more loans. e. Secondary Mortgage Market: Network of institutions that purchase and sell existing mortgages. Two different, but complemen ting, forces led to the creation ofthe secon dary market: business entities with cash reserves in real market in need of cash to estate, and financial institutions in the primary originate loans. Secondary market participants investment in primary loans, and primary participants receive cash for receive a return on their additional loans.

Financing Concepts

1. Real Estate Markets-General Concepts: b. Financial Institutions: Intermediary (middle man) that obtains funds from depositors and lends those funds to borrowers in order to earn a retun (percentage rate). Common financial instituions include: commercial banks, savings and loans, in surance companies, and credit unions. c. Federal Reserve System: Central banking system run by the federal govemment, which regulates banks in the US, controls the availability and credit in the US (discount rate; reserve requiremen ts buying and selling government securities, which provides cash to lenders for additional loans). and serves as a lender of last resort to qualified banks.

Lending Agreements Control Interest

2. Special Lending Agreements -b.Special Lending Agreements to Control Interest .Renegotiable Rate Mortgage Special adjustable rate mortgage (ARM) that is a long tenn loan with short-term renewal periods, (auch as 3-5 years) where interest rates are renegotiated. Payments are generally amortized at each adjustment period for the life of the loan (the long-tem mortgage amount remains the same). ii. Buydown Mortgage: Pinancing technique used in times ofhigh interest rates. In a buydown, the lender is "prepaid" portion order to reduce the buyer'smonthly payments during the initial years of the loan. In times of very high rates, sometimes use a buydown to offset high interest rates and qualify buyers for loans. At the of the bought down time period, the interest rate reverts to the original amount.

Lending Agreements to Control Payments

2. Special Lending Agreements a Special Lending Agreements to Control Payments (cont.) ii. Reverse Mortgage (RAM): Mortgage where the lender makes tax- free payments (periodic and/or line of credit) to the homeowner based on accumulated equity. The balance of a RAM, which never exceeds value of the home, becomes upon specified occurrence, like death of the borrower sale of the home. A RAM is commonly used by the elderly (or retired homeowners) to supplement or provide income. ili. Interest Only Mortgage: An interest only mortgage (also known as a straight mortgage or term loan) is a loan where the borrower only pays towards the interest during the life of the loan (the entire at the end of the loan term). Interest on ly mortgages achieve low monthly principal is due payments early in the life of the loan.

Lending Agreements for New Construction

2. Special Lending Agreements c. Special Lending Agreements for New Construction . Construction Loans (Story Loans): Short-term to finance new loan used by builders construction . Lenders disburse developers , and contractors periodic payments at various payments until construction is complete . (Interest only) due based stages of construction, with interest on the amount of money disbursed Construction loans converted to traditional mortgages upon project completion. release clause, which i. Blanket Mortgage: Loan parcel of real estate as security usually contain a partial be released when a certain and developers commonly use blanket land that will later be divided into individual parcels for resale. amount of the loan wherein the borrower (collateral) for the debt. pledges more than one Blanket mortgages allows an individual parcel has been repaid. Builders mortgages to develop large tracts of

Lending Agreements to Control Payments

2. Special Lending Agreements. Lending agreements evolve with market creativity oflenders. The following special lending agreements may involve various combinations ofthe principal lending agreemen ts presented above. a.Special Lending Agreements to Control Payments í Graduated Payment Mortgage : A graduated often a fixed rate loan where payments are initially (first 5 years) paymen t mortgage ( GPM ) negatively amortized (causing low initial payments) and subsequently amortized (causing increased payments) for the remainder of the loan A GPM achieves low monthly payments early the life of the loan

Primary Mortgage Market

2. The Mortgage Market. Network of direct lenders, also known as prime lenders or originators, who make mortgage loans (supply cash) directly to borrowers. Some primary lenders retain the mortgages they originate, loans to other investors participating in the secondary loans, they liquidate their investment and receive additional finds to make more but most sell mortgage market. By selling loans a. Primary Market Activities i. Loan Origination: Primary market participants provide cash (originate loans) directly to borrowers. it. Loan Servicing: Many conventional even after they sell them. Servicing a loan includes: collecting mon thly lenders continue to service loans supervising the loan; payments disbursing funds to pay property taxes and in surance and handling delinquencies, early payoffs, and mortgage release. For this service, they charge a collection fee.

Conventional Loans

2. The Primary Mortgage Market - b.Types of Primary Market Loans i.Conventional Loans (cont.) (PMI): Insurance used by lenders to 2) Private Mortgage Insurance hedge against the risk that a borrower Conventional lenders reduce the risk of default by requiring will default on a mortgage borrowers to purchase private mortgage insurance (PMI) under specified circumstances, such as loans with greater than the standared 80 % loan - to - value ratio . For requiring PMI , lenders charge the borrower an in surance charge every year that premium that is due at closing, plus a small the in surance is in force. Often, the borrower may terminate PMI once the loan-to-value ratio drops to an acceptable percentage

Commercial Banks

2. The Primary Mortgage Market Types of Primary Mar ket Lenders commerce, especially in the and short-term construction (interim financing). are the primary source of funds LCommercial Banks : Banks which make loan s primarily to assist areas of business loans, home improvement, Demand deposits (checking accounts) Due to this focus, commercial ban and Loan (S&L), for example, dominated by short-tem, liquid than Savings for commercial banks. the secondary market -selling home packages of loans at holding companies and tust ownership of commercial discount, Large in the residential real estate market in a variety and their loan portfolilos tend to be high-yleld loans. Commercial banks participate ofways. Many are active on loans they originate, and buying commercial banks also have bank departments real estate developments that are active in the financing such as shopping and centers, large apartment complexes, resort propertles, and the like.

Mortgage Bankers

2. The Primary Mortgage Market c. Types of Primary Market Lenders (cont) ii. Mortgage Bankers (cont. 1) Compared to Mortgage intermediary name of a lender. (middle man) who Brokers: Amortgage broker is merely an arranges and closes banks, a mortgage loans in the loan funds or broker does not brokers directly. before contacting a lender: arranging a loan, she usually contact mortgage borrowers and real estate percen tage of the Unlikemortgage service loans. Borrowers Mortgage brokers qualify If the mortgage charges the borrower a fee, loan. Meanwhile, loans and are also major mortgage broker successful usually in the form commercial real estate ban kers make and VA loans. originators of FHA

VA Loans

2. VA Guaranteed Home Loan (VA Loan) C.Basic VA Standards .i.Nature of the Guarantee 1) Basic Entitlement: The amount of the loan that the VA guarantees (pays the lender if the veteran defaults) is called the basic entitlement and is subject to change. The basic entitlement is a maximum amount adjusted locally based on the loan amount (currently, up to $36,000 for loans under $144,000, with a bonus entitlement ofup $68,250 loans over $144,000).

VA Loans

2. VA Guaranteed Home Loan (VA Loan) c. Basic VA Standards (cont.) ii. Qualifying Borrowers: The VA imposes stan dards to determine which persons qualify for VA Guaranteed loans. - 1) Active Duty: Borrowers must serve a minimun amount oftime (90 days in war time: 181 days in peacetime) in the U.S. armed forces without dishonorable discharge. - 2) Certificate of Eligibility: The VA sets a limit on the amount of the loan guaran by issuing Certificate of Eligibility to an eligible (requires proof ofmilitary service). of eligibility informs the lender that the borrower is qualified to participate VA Program, but it does not guaran tee that a lender will actually loan the veteran any money.

VA Loans

2. VA Guaranteed Home Loan (VA Loan) c. Basic VA Standards (cont.) iv. Lending Restrictions 1) Closing Costs: The VA regulates a veteran's closing costs. Although some additional costs are unique to certain localities, authorize closing costs generally include VA appraisal, credit report, survey, title evidence , recording fees , a 1 % loan origination fee , and discount points. The closing costs and origination charge cannot be included in the loan, except in VA refinancing loans. Under VA Guaranteed Loan, there are no mortgage insurance premiums. The VA does not requirea down payment if the purchase price or cost isno more than the reasonable value of the property, as determined by VA, but the lender require one. If the purchase price than the reasonable value, the difference must be paid in cash by the veteran.

VA Loans

2. VA Guaranteed Home Loan (VA Loan) c.Basic VA Standards (cont.) . iv. Lending Restrictions (cont.) 2) Funding Fee: The VA charges a first-time funding fee of % for most veterans ( 2.40 % for previously obtained home loan, the 3.30 % for the loan and for at closing or may be financed subsequent reservists ) . Ifthe veteran funding fee increases to thereafter This is payable reduced based on the down payment of at least 5 purchase price of the property , the funding with the purchase price (fee may be amount of down payment). If the veteran makes percent, but less than 10 percent of the fee is reduced to 1.50 % of Ifthe veteran makes down funding fee is reduced to 1.25 % of the loan amount 1.75 % for reservists payment ofat least 10 percent , the loan amount ( 1.50 % for reservists )

Lending Agreements for New Construction

2.Special Lending Agreements e.Special Lending Agreements for New Construction (cont.) real property as ii. Package Mortgage: Loan in which the collateral for the mortgage. Package used for construction, including appliances. borrower pledges personal and mortgages are often Package Mortgage: EXAMPLE: A home loan that includes the washer dryer and refrigerator as collateral is a package mortgage.

Savings and Loan Associations

2.The Primary Mortgage Market - c.Types of Primary Market Lenders (cont.) ii. Savings and Loan Associations (S&Ls): Financial promotes home ownership and private interest rates on deposits than commercial savings. S&Ls often offer higher institution that banks. All savings and loan associations must be chartered by the federal government or by the state in which they are located. Federally chartered the Office of the Comptroller of the Currency insured through the Federal Deposit Insurance Corporation (FDIC). The (OCC), and their accoun ts are associations are regulated by FDIC insures depositors up to $250,000 per individual account and institution

Approving Loans

3. Approving Real Estate Loans-General Concepts: d.Loan-to-Value Ratio (LTV): Ratio between a mortgage loan amount and the sales price of financed property or appraised value of whichever is lower (divide loan amount by property value). Lenders analyze LTV and establish maximum ratios in order to reduce the risk default on his loan. The higher the LTV the less money down a purchaser pays because the lender is lending a greater amount of the purchase price. Conversely, the lower the LTV, the higher the down payment for the purchaser because the lender lends a lesser amount of the purchase price. Higher LTV means greater risk for the lender because, as lenders theorize, the more equity has in a home (created by the down payment), the less likely one will default. LTV: EXAMPLE: A buyer pays $110,000 for a house that is appraised at $100.000 and an SSL loans him $ 80,000 His loan value ratio is 80 % [ 80,000 / 100,000 0.80 8096 ]

Approving Loans

3. Approving Real Estate Loans-General Loan Application Procedures: To apply for most mortgage loans, the borrower must complete a standard federal form (UNIFORM RESIDENTIAL LOAN APPLICATION [FNMA 1003 FormD. The borrowermust provide the following: in formation on employment, salary history, monthly income, and liabilities, authorization for lender to verify and affidavit stating whether he intends to live in the property. Backup documentation also includes: W-2s paycheck stubs, copies of the purchase contract, tax returns, benefits/retirement in come statements, statements. It is federal crime to provide false in formation on (or in support of) the loan application. b. Collateral: Money or property pledged to a lender by a borrower as security for the payment of debt. Mortgage lenders minimize the risk of loaning money by requiring borrowers to pledge collateral. Should the buyer fail to pay the loan, the lender may recoup the loss by exercising right the sale of pledged collateral (the property).

Rural Development Loans

3. Rural Development and Farm Service Agency Direct Loans (cont.) i . Qualified Applicants : Applicants for direct loans from RHS must have very low or lo incomes . Very low - income area median income ( AMI ) ; low income is between 50 % and 80 % ofAMI is defined as below 50 % of the moderate applicant's income must be not exceed moderate than $5,500 above the low-income limit. The low-or very low-income at approval and income at closing. Pamilies must be without adequate housing, but must be able to afford mortgage payments, including taxes and insurance ( which are typically within 22 % to 26 % ofan applicant 's However, payment subsidy is en hance repayment ability. Applicants elsewhere, yet have reasonable credit histories. must be unable obtain credit available to applicants order

Rural Development Loans

3. Rural Development and Farm Service Agency b. Guaranteed Loans (cont.) iv. Housing Requirements: Houses purchased through Rural Housing Guaranteed Loans must be modest in size, design, and cost. Houses constructed, purchased, or rehabilitated model building code adopted by the state, as well as the RHS themal and housing must be permanently installed must meet the volun tary national site standards. New Manufactured and meet the HUD Manufactured Housing Construction and Safety manufactured housing will not be RHS direct Standards, as well as the RHS themal and site standards. Existing guaranteed unless already financed with teed loan or if it is Real Estate Owned (REO) formerly secured by an RHS direct or guaranteed loan.

Assumable vs. Non-Assumable

3. Secondary Loans (cont.) the seller's old loan Assumable Non Assumable from one borrower to another. For example, to the buyer which could interest rate below the Mortgage . Act of tr.uisterring a loan some lenders may benefit the buyer where the curren t market interest rates agree to transfer existing mortgage has an When a buyer payment of the debt. However assumes a mortgage, she assumes personal liability for fill some mortgage agreements assumption. An assumption with the agreement (assumption clause) generally requires the lender's approval specifically prohibit consistent

Secondary Loans

3. Secondary Loans. or are subordinate to, other loans. a. Junior Mortgage. Any mortgage that is subordinate in priority to another mortgage. In the event of a borrower's default, a first mortgage lender has a superior claim on the collateral (real estate) satisfy the outstanding junior (second, third, etc.) mortgage lender may only claim remain ing funds (if carry higher interest rates because any exist) after the first mortgage is satisfied (paid). Junior mortgages usually they entail greater risk due to their position compared to other liens. Home equity loans are usually juniormortgages. borrowed funds along with the Wraparound Mortgage. Junior mortgage whose balance includes newly balance owed on an older, previously existing off, but the new mortgage "wraps mortgage. The older mortgage is not paid new mortgage is junior to the older the new lender makes around" the older one, producing a single payment to satisfy both loans. The one. The borrower pays the new lender and payments on the original loan, protecting the new junior position.

Ginnie Mae

3. Secondary Mortgage (cont.). What Ginnie Mae does is guarantee investors and interest on MBS loans insured by the backed by federally Administration (VA). Other -b.Ginnie Mae (GNMA) the timely payment of principal insured or guaranteed loans-mainly, (FHA) or guaran teed by the guarantors or issuers of loans MBS include the Department eligible as collateral of Veterans Affairs Federal Housing for Ginnie Mae of Housing Department of Agriculture's Urban Ginnie Mae Mortgage Backed Rural Housing Service (RHS) and Developmeni s Office of Public and Securities are fully by the full faith and credit of the payment is will receive full and United States the Department Indian Housing (PIH). modified pass-through securities, guaranteed investors in Ginnie govemment. Regardless Mae Mortgage timely payment of principal as well as interest. of whether Backed Securities the mortgage

Ginnie Mae

3. Secondary Mortgage Market b. Ginnie Mae (GNMA). Federal govemment Govemment which was organized to operate National Mortgage Association the federal subsidy (GNMA), without capital stock bousing loan programs. sponsored corporation, known as During times of financial difficulty, high discount rates (imposed by the Fed) and high interest rates, Ginnie special assistance programs for low-yield, VA). This helps to stabilize national real estate Mae and Fannie Mae work together to provide high-risk loans (primarily FHA and financial markets. The Ginnie mortgage loans in the to make new mortgage issue mortgage-backed Mae guaranty allows mortgage lenders to obtain a better price for their secondary market. The lenders loans available. Ginnie Mae does securities (MBS). Therefore, Ginnie Mae's then proceeds not buy or sell loans, or does derivatives hedge or carry long-term debt. balance sheet

Secondary Mortgage Market

3. Secondary Mortgage Market. Network of institutions that purchase and sell existing mortgages . Two different , but omplen entary , forces led to the creation of the secondary market: business entities with cash reserves in real estate and primary market financial institutions in need of cash to originate loans. Whereas primary markets originate loans to eligible buyers, the secondary mortgage market purchases loans from primary lenders. Secondary market participants receive a retum on their investment in primary for additional loans. Investors on the secondary loans, and primary participants recelve cash market purchase mortgages for long-term investment. Investors on the secondary market may purchase individual loans, but usually purchase mortgage-backed securities. When mortgage holders package mortgages, they issue securities, and each security represents a share in the package.

Approving Loans

3.Approving Real Estate Loans-General Concepts: c.Qualifying Borrowers and Collateral: Even with collateral, lenders take risks when they loan money-there are legal and regulatory costs associated with a forced sale (foreclosure), and in herentuncertain market prices. However; lenders further risk by qualify borrowers. Banks qualify a borrower's ability to repay debt by analyzing the borrower's credit history employment history, and other relevant factors. Banks also qualify the borrower's collateral by estimating the value of the property. If the lender qualifies both the borrower and the property, the lender may the risk of loaning reasonable, and the lender loan the borrower a ofwhat the lender determines the property to be worth.

Down Payment Assistance

4. Down Payment Assistance Programs - a. Federal Programs (cont.) 2 ) 3 % Down Payment Mortgages ( cont . ) , Freddie Mac also allows a mortgage with a 3 % down payment option . These conventional mortgages are meant as a more affordable loan option for low-and moderate-income (including homebuyers). order qualify, borrowers have min credit and fit within the stated income requiremen ts. First-time buyers (anyone who has not owned a home in the last three years) must also participate in a borrower education program

Down Payment Assistance

4. Down Payment Assistance Programs -a. Federal Programs (cont.) , 2 ) 3 % Down PayⅢ ent conventional mortgages with a 3 % first-time homebuyers down payment Mortgages . Fannie Mae now llows several meant to help option . This program , is afford the large down otherwise payments required for most qualify for a loan). In min imum eligibility requirements, including: documen tation, and other risk management standards. who cannot conventional mortgages order to qualify, borrowers must meet underwriting, income (although they would

Down Payment Assistance

4. Down Payment Assistance Programs a. Federal Programs (cont.) ) 3 % Down Payment Mortgages ( cont ) . These programs are meant to expand access to credit for borrowers who would otherwise be unable to afford a loan. However, borrowers are still required to purchase private mortgage in surance for these conventional loans (as they are paying less standard 20 % down payment ) . Also note that Rannie Mae and Preddie Mac do not with lenders willing to Issue such mortgages. In returm, those loans are eligible for purchase on the secondary mortgage market b. State Programs. Many other assistance to low-income state and local govemments provide down payment residents or first-time homebuyers. Most programs have purchase price limits, income limits and require mandatory education classes

Down Payment Assistance

4. Down Payment Assistance Programs a. Federal Programs program, a federal program HOME program gives 1) HOME Federal Program. The HOME passed in 1990, was established to assist low-income homebuyers. The fiunds to states, cities, and counties (as participating jurisdictions, or P]s) to support homebuyer assistance efforts. While Pls the specific terms of their programs, in general , assisted homeowners must have incomes at or below 80 % of the area median income. HOME funds may be used for down payment assistance, closing costs, property rehabilitation primary fin ancing, interest rate subsidies, and loan guarantees. work, as well as for have discretion to determine

Interest Rates

4. Mortgage Interest Rates-General Concepts: Discount Points: Additional fees charged by lenders to borrowers in exchange for below market interest rates. Discount points are paid lump sum at the time of closing, and one point is generally amount. Generally, lenders must charge eight discount points in order to raise percent of the loan an interest rate yield by one percent . In other words , ifa lender must get 10 % rate over the life ofthe loan , yield on a loan , but the buyer wan ts % in terest the lender will charge eight points, which are due at closing. As a result, the lender 's effective yield on the loan is 10 % and the buyer pays 990 interest the life of the loan.

Real Estate Investment

6. Real Estate Investment-General Concepts: Leverage: ofusing borrowed funds to finance an investment (as in a mortgage). The more borrowed fiunds used, the more "highly leveraged" an investor is (low down payment and high LTV). The investor hopes to realize a profit over the initial purchase price and the cost of borrowing funds. b. Hypothecation: Common lending arrangement where a borrower retains the right to possess property while it serves as security (collateral) for a loan. mortgage is an example of hy pothecation. As long as the borrower complies with the terns of the mortgage, she retains exclusive use and en joyment ofthe property. The lender hy pothecates the property to the borrower c. Liquid Asset (Liquidity): An estimated measure of the ease with which one may convert an asset in to cash. Liquid assets are those assets that can be converted in to casha quickly and easily. Gold is an example of a liquid asset. Real estate, on the other hand, is traditionally a long ten investment (non-liquid asset)

Rural Development Loans

Rural Development and Farm Service Agency. Federal agencies, which administer rural development and conservation programs under the U.S. epartment of Agriculture. The Office of Rural Development loans fumds directly and also guaran tecs loans by conventional lenders under certain circumstances. Direct Loans. Rural Housing Direct Loans are administered by the Rural Housing Service (RHS), a sub-agency order directly fund loans to low- and very homeownership. Applicants may obtain financing to: purchase an existing low-in come households for in the Office of Rural Development, in dwelling, purchase a site and constuct a dwelling or purchase newly constructed dwellings located in nural areas. Mortgage payments are based on the household's adjusted income.

Fannie Mae

Secondary Mortgage Fannie Mae ( FNMA .Govemmen t sponsored private corporation , formally known as the Federal National Mortgage Association, which was originally organized as a federal agency that purchased FHA-insured loans. Fannie Mae stock previously traded on the public stockmarket, but has since been money operations by buying and selling securities, mortgage-backed delisted from the Exchange. directly, but instead generates funds for its secondary mortgage market FHA, and conventional mortgages, and by bonds, and discount notes in the money are in short supply. Fannie Mae buys mortgages sells nortgages. Pannie Mae is the market When mortgage fmds when there is a surplus of funds, Fannie largest single private mortgage purchaser

Freddie Mac

Secondary Mortgage Market (FHLMC). corporation, known which operates mortgages Macwas under the - c. Freddie Mac as the Federal Home Loan Mortgage supervision of t organized to borrow and pool them togethet security. However To accomplish its mission, mortgages, GNMA money from mortgages Mac mortgages FHLMC does not ral Housing mment sponsored private Corporat ion (FHLMC), Finance Agency pension and trust and to sell bonds (FHFA). Freddie funds, to purcha mortgages, mortgage-backed FHA an d VA FHLMC purchases guarantee on the open market wit payment of Freddie conventional conventional secondary market mortgages and securities from S&Ls and ban ks in the

lending Agreements for Risky Loans

Spectal lending Agreements d Special tending Agreenents for Risky Loans de s Shared Appre , i · , " Mortgage ( vAM ) : I din 4. range ene w here . at rates below currentmaket terest rates in re for a prott shue rom a Riture sale of the fAnancesd real estate The specine terms of the shared appreciation agreoment must he clearly stated ini the mortgage deed or mist shared ap rectati tgages are usen lutvers w ho · annot quale for traditional mortgages . HPurchase Money Mortgage (PMN) A purchase money mortgage eller orowner nancng) is a loan by the seller to a bayerwhe, usialb twe pronen ' v.mbinesa omnot quali or an nstinutional mortgage at the Bll pue hase anount p " rc h . * se money , mor ty , ige w ith an institutional mertgage)

Insurance Companies

The Primary Mortgage Market Types of Primary Market Lenders (cont.) iv.Insurance Companies: Primary market lender concemed with risk and long-tenn stability. Accordingly, insurance compan ies tend to invest mostly large real estate projects and commercial properties such as multi-use office parks, apartment complexes, and shopping malls. Life insurance companies are some of the largest groups of investors in commercial and industrial real estate markets. Life insurance companies residential real estate markets. Traditionally, the involvement oflife also play a role in in surance companies in residential mortgage loans has only been as a buyer of large blocks of packaged loans the secondary insurance companies are increasingly origin ating residential mortgage loans on the primary market through mortgage brokers.

Conventional Loans

The Primary Mortgage b.Types ol Primary Market Loans (cont.) i.Conventional Loans (cont.) 2) Private Mortgage Insurance (PMI) (cont.) a) Optional PMI Cancellation: with good payment historles mortgage balance to 80 % initial appraised value (whichever is less). Under federal law, borrowers may cancel PMI upon of the original purchase price or the reducing their b) Automatic PMI Cancellation: must automatically the borrower reduces his mortgage to 78 % high risk loans), regardless of whether cancel PMI coverage (on most Under federal law, lenders loans) once of the value ( 77 % for the borrower so requests

VA Loans

VA Guaranteed Home Loan (VA Loan). Loan guaran teed by the Department of Veterans Affairs for eligible veterans that purchase, build, or refinance homes. VA loans arepart of a government ni · rtgage i - derance program established under the icemen's Readjustment Act of 1944. Under normal ciramstances, the VA does not lend money. Instead, the VA giarantees loans made by VA approved lenders. However umlike FHA programs, the VA can lend money through its direct loan pro gram. This happens only in extreme cases where local mortgage money is not available to a qualified veteran

VA Loans

VA Guaranteed Home Loan c. Basic VA Standards (cont.) Av . Lending Restrictions 3) Assumption: VA Guaran teed Loans are veterans, and may be prepaid without penalty. set by the lender, NOT the VA. Like FHA loans assumable, even by non- in terest rates are d. Direct Loans. The VA is authorized to originate (directly fund) loans only in extreme circunstances where there is no source of local funding.

VA Loans

VA Loans 2. VA Guaranteed Home Loan (VA Loan) c. Basic VA Standards (cont.) i. Nature of the Guarantee (cont.) Maximum Loan Amount: maximum amount ofmoney it will The lender (not the VA) determines the loan to the veteran and the interest rate. However, the VA limits the amount of a loan it will guarantee, and will guaran tee any portion of loan that exceeds the reasonable value of the property (as specified by a VA certified appraiser in a certificate of reasonable amount established by the times the amount of a veteran's value"). While there is no maximum loan VA, lenders will generally entitlement without lendup to 4 payment. requiring a down

VA Loans

VA Loans nteed Home Loan ( VA Loan ) Standards (cont.) ii. Qualifying not loan is an appraisal. VA's estimate ofthe value of the property, the first Certificate of Reasonable Value (CRV) step in securing a VA market value of the subject property establishes the maximum amount that the VA will based on a VA approved appraisal and finance for the appraised property

Government Programs

guaran tee conventional loan. mortgage loans, D.GOVERNMENT PROGRAM S. Govemment provide an altemative to those programs, which either insure or who may not located within the 1. Federal Hou asing Administration (FHA). The Federal Department of Housing loansmade by and Urban family and its homes, FHA Insures Development lenders throughout office provides mortgage insurance on territories. multi-family Housing Administration. PHA-approved (but does not nes, manufactured prepayment penalties. homes, and originate) mortgages on single- hospitals. FHA loans insurance the United reduces a lender'srisk there are no ofmortgage default. FHAmortgage

Financing Concepts

Real Estate Finance Markets-General Concepts: the entire purchase price in cash. Institution that loans the borrower the amount needed to buy the property Financing usually involves a Financial Financing Process through which one purchases property without paying to minimize the lender's risk that a borrower will default on his loan, including variety of lending procedures and criteria help minus any down payment. Lenders take risks when lending money to finance real estate. However, there are a the borrower's pledge of Collateral, the lender's Qualification ofthe borrower incurring such risk through Interest, assessed on a loan's outstanding balance. and a lender's control of Loan-to-Value ratios. Lenders are rewarded for payments may be made in equal amounts over the life of the loan or in varying an adjustable rate of interest over specified period of time. In addition, loan Most real estate loans carry either a fixed rate of interest for the life of the loan, the lender calculates Interest and how /when the borrower makes paymen ts. There are various lending agreements classified according to how amounts over the life loan.

Financing Concepts

Real Estate Markets-General Concepts: a. Financing (cont.) property owner enters into a con i.Mortgage: Loan secured by a voluntary lien on real property, where a tract to borrow money and volun tarily agrees to extinguish the rights in his real (in favor of the lender) if he fails to pay the debt according to the terms of the loan agreement. Either and after repayment (lien borrower (mortgagor) holds title to the mortgaged property during theory-majority ofstates) or a third person (trustee) retains title until the mortgage is paid (title theory-minority of states).

Rural Development Loans

Rural Development and Farm Service Agency b. Guaranteed Loans. Rural housing guaran teed loans are administered by the Rural Housing Service (RHS) to help low-income individuals households purchase homes in rural areas . Applican ts obtain 100 financing from repair, renovate or relocate a home, or to purchase and prepare sites, including extending such loan. Funds can be used to build, approved lenders , and in retum , RHS provides a 90 % guarantee to lenders in providing water and sewage 115 % of the median income for the area Families must be without Qualified Applicants : Applicants for loan s may have an income ofup to including taxes and surance. In addition, applican must have adequate housing, but must mortgage paymen reasonable credit histories.

FHA Loans

1. Federal Housing Administration (FHA) -C . Basic FHA Standards ( cont . ) ii. Qualifying Borrowers (cont.) 2) Debt-to-Income Ratio: The FHA limits borrowers' debt-to-income ratio to 31 % for housing costs and 43 % for housing expenses and other long-term debt. Convention al loans common ly impose a debt - income ratio of28 % toward housing and 36 % towards housing expenses and other debt. In some cases, borrowers may qualify to ratio ifthey meet certain compensation factors. This may include: (1) A demonstrated ability to pay more towards housing expenses, (2) A large down payment; (3) demonstrated conservative attitude toward using credit and the ability to accumulate savings,

FHA Loans

1. Federal Housing Administration (FHA) -c.Basic FHA Standards (cont.) i. FHA Mortgage Insurance (cont.) - 2) Terminating Premiums: FHA mortgage insurance premiums terminate based on the LTV. Than 90 % : For mortgages a ) Mortgages with an LTV Greater with Loan - to - value ratios greater than will be collected until the end of the loan term. annual premiums » b ) Mortgages with an LTV Less Than or Equal to 90 % : For mortgages with Loan - to - value ratios less than or equal to 90 % annual premiums will be collected or 11 years, whichever happens first until the end of the loan term

Foreclosure - Mortgages

1. Nature of Mortgages and Deeds Foreclosure (cont.) . i. Mortgage (cont.) 1) ludicial Foreclosure: must follow in order to force the sale mortgage when the buyer defaults. Under judicial Procedure in lien theory states that lenders of real estate finan ced by a foreclosure, the defendants securing the debt, and presents borrower has an opportunity his own evidence that he is identifies the debt evidence that the loan lender must usually file a lawsuit which names the and the mortgage is in default. The to rebut the lender's evidence and present not in default as order the sale by public be used to pay the debt. auction and for the alleged by the lender: The lender asks the court to proceeds from the sale to

Lien Theory

2. Legal Theories of Mortgages: States follow one of two differing legal theories regarding the status of title to financed property. Similar to the difference between mortgage and a deed of trust, the difference between these theories determines the degree of a borrower's rights in foreclosure. financed property. In lien - a. Lien Theory: Most states follow the lien or mortgage contract theory. these states, the mortgage is treated as a lien on the borrower's title to the theory states, buyer holds legal equitable to the financed property during the loan repayment period. Ifthe borrower defaults in a lien theory state, the lender must follow foreclosure procedures in property in order to order extinguish the borrower's rights in the property, and to sell the satisfy the borrower's debt. Florida is a lien theory state.

Government Backed Loans

2. The Primary Mortgage Market b. Types of Primary Market Loans (cont) originated by primary market . i. Government Backed Loans: Loan lenders, but backed by govemment addition to conventional loans made by private lenders, there are available to qualified borrowers. nsurance (FHA) or guarantees (VA). In govemment lending programs

Conventional Loans

2. The Primary Mortgage Market b. Types of Primary Market Loans i.Conventional Loans : Loan originated by prima , market lenders without govemment insurance (FHA) or guarantees authorized by the Department of Veterans Affairs (VA), but highly influenced by the policies (underwriting) of secondary market investors (FNMA, h, conventional loans represent a greater risk to lenders than govemment backed loans. 1) Down Payments: Amount of the purchase price that a borrower must pay in cash (higher with a conventional loan than with loans supported by a govemment program). Most conventional lenders require at least a 20 % down payment ( 80 % LTV ) in order to avoid private mortgage in surance

VA Loans

2. VA Guaranteed Home Loan (VA Loan) a. Nature of VA Loans. real estate according to VA Primary market lenders qualify standards. Primary lenders then enter into eligible veterans and mortgage agreements with qualified The VA guaran tees it will pay a portion of the mortgage veterans (fixed rate, adjustable rate, etc.). the veteran defaults (lender pursues borrower for the balance). b. Principal Advantage of VA Loans. VA loans permit eligible veterans to mortgage property with little or no down payment, and without purchasing mortgage insurance.

Nonconforming Loans

2.Special Lending Agreements e. Nonconforming Loans: Loans that do bank criteria for fiunding. Generally, this is due to the borrower's insufficient income or poor credit. hSubprime Loan : · ype ofnon conforming loan that does notcomply with Fannie Mae's guidelines (income, documentation, credit history, etc.) These loans have higher default rates (than conforming "prime" loans) because they are made to borrowers unable to qualify for a traditional loan due to in sufficient income and/or poor credit. Subprime loans have special features which make them riskier, including: interest-on ly payments for a set period: "teaser rates (artificially low rates which increase substantially after a few mon ths); and "pay option" (negative amortization) loans with adjustable rates, for which borrowers choose their mon thly payment (full payment, interest only, or a min imum payment which may be lower than the interest payment). Lenders charge borrowers for subprime to make up for the increased risk.

Savings and Loan Associations

2.The Primary Mortgage Market c. Types of Primary Market Lenders (cont.) ii. Savings and Loan Associations (S&Ls) (cont.): State chartered associations may , but are not required to , subscribe to the federal insurance program. S&Ls make both conventional loans and loans involving government backing, like the FHA and VA Programs. conventional loans made on Conventional loans those loans residen tial dwellings majority ofS&L However, the with one to four units. involve govemment programs. In addition to originating mortgages, S& Ls also buy and sell mortgages on the secondary market.

Mortgage Bankers

2.The Primary Mortgage Market c.Types of Primary Market Lenders (cont.) borrow funds from ili. Mortgage Bankers: Primary lenders commercial sources to then fund (person, fi, or corporation) that conventional and on the secondary govemment-backed loans by selling mortgages at a discount to investors assume risks, andmay market. Mortgage bankers close continue to service loans even after loans in their own name the secondary market. they are sold on deposits.

Approving Loans

3. Approving Real Estate Loans-General Concepts: -c Qualifying Borrowers and Collateral ( cont . ) Pre-Qualification: Informal estimate (often over the phone without documen tation) of the amount a borrower may afford to Pre-Approval: Lender's conditional commitment to lend specific borrower (follows receipt and review financial records and a preliminary approval process).

Rural Development Loans

3. Rural Development and Farm Service Agency - a. Direct Loans (cont.) Direct must be modest in size, design, and cost. Modest housing is il. Housing Requirements: Houses purchased through Rural Housing property that is considered modest for the area, does not have market value in excess of the applicable area loan limit, and does not have certain prohibited features. Houses constructed, purchased, or rehabilitated must voluntary national model building code adopted by the state, as well the RHS themal and site standards. Manufactured housing be permanently installed and Manufactured Housing Construction and Safety Standards, as well as the RHS thermal and site standards.

Rural Development Loans

3. Rural Development and Farm Service Agency - b. Guaranteed Loans (cont.) ii. Lenders: Approved lenders Guaranteed Loan program Lenders approved by: HUD in surance, Ginnie Mae for the Departiment for participation ofVeterans submission under the Single Family Housing include: (1) any State housing agency; (2) applications FHA mortgage-backed securities mortgagee, Fannie Mae Mac for participation issuance ofGNMA in family mortgage with direct lending authority: USDA Rural Development Affairs as a qualified in family mortgage loans, or Freddie loan s (3) Any FCS (Farm Credit and (4) Any lender participating in other and/or Farm Service Agency guaranteed loan System) institution programs.

Rural Development Loans

3. Rural Development and Farm Service Agency Direct Loans (cont.) and who cannot afford 33- to a 33 year tem (38 promissory note interest year terms). The term for those with incomes ii. Loan Terms: Rural Housing below 60 percent of AMI Direct Loans have up by a payment assistance subsidy on the current manufactured homes. market rates However that interest rate is modified rate is set by the RHS based years for

Rural Development Loans

3. Rural Development and Farm Service Agency Guaranteed Loans (cont.) Guaranteed Loans have a 30 year term. The ili. Loan Terms: Rural Housing promissory interest rate is down payment. The lender using repayment (gross) income required must also determine repayment feasibility PITI and to total family debt.

Secondary Loans

3. Secondary c. Home Equity Loans. mortgage with either a fixed or adjustable Loan that may be either a first, second, or third interest rate, which secured (collateral) by equity in real the borrower or the borrower may draw estate. The lender may equity used by borrowers because mortgage in terest is tax deductible, payments from make a single payment to ine of credit . Home consolidate consumer debt un like the interest on con sumer debt. d. Open-End Mortgage. maximum amount a borrower Loan secured by real property in which the lender sets to the maximum borrower only pays interest on the actual needed various times. Under may borrow, and the borrower may borrow up open-end mortgage, the amount borrowed. Open-end used to finance construction where the builder mortgages are commonly borrows money as he completes portions of the project. This mortgage type is much like open line ofcredit.

Interest Rates

4.Mortgage Interest Rates-General Concepts: - c. Rate Lock: A rate lock is a lender's promise to a interest rate (with or without a certain number points) specified period borrower to hold a specified oftime, usually while the lender processes the borrower's loan application. Also known as lock-in" "rate commitment d. Usury: Act of charging an in terest rate in excess State usury laws establish a maximum interest rate that lenders may charge. ofwhat the law permits.

Mortgage Repayment

5. Mortgage Repayment General Concepts: c.Equity: Cash value property deducting debts, including mortgage indebtedness. Equity: EXAMPLE: A buyer purchases a house for $100,000 $20,000 down payment and an $80,000 principal. This owner's later, the owner sells the house for $150,000. Over the ten year period, she paid $40,000 mortgage. The owner's equity this house $20,000. Ten years cash value in her $110,000 ($150,000 cash value-$40,000 debt still owed)

Mortgage Repayment

5.Mortgage Repayment-General Concepts: Home Equity Loans: Loan that may be either a first, second, or third mortgage with either a fixed or adjustable interest rate, which is secured (collateral by equity in real estate. The lender may make a single payment to the borrower or the borrower may draw payments from a equity loans are often used to consolidate con sumer debt because mortgage interest is tax deductible, unlike the interest consuner debt. e. Reduction Certificate: Document, also known as an estoppel certificate, which certifies the status ofa loan as of a certain date, including the amount of the loan that remains outstanding, the interest rate of the loan, and the date that the loan matures. Mortgagees must generally certificate to prospective purchasers when they assume fumish a reduction payments of a loan take title subject to an existing loan. As a result, the purchaser can confirm key in formation as ofa certain date.

Basic Payment Options

Basic Payment Options years such projects. much higher than Mr. Smith could Partially Amortized Loan: small convenience store in a rural community. However, fully amortized EXAMPLE: Mr. Smith wants to borrow $60,000 to open a Local banks only loan money for seven seven year loan requires payments poses little risk of defaulting years using a 20-year will be much lower, amortization the loan, it agrees afford. Because the bank determines that Mr: Smith to loan Mr. Smith the money for seven but he will have a large final seven years. table. This means that Mr. Smith's monthly payments payment when the loan becomes due in

Real Learning Objectives

Compare mortgages and deeds of trust ,Understand how title theory affects foreclosure and satisfaction Identify common clauses and covenants in mortgages and deeds of trust . Understand assumption and "subject to" agreements Identify TILA disclosures and advertising regulations Identify RESPA disclosures and exceptions Understand the rights of a borrower under the ECOA Identify prohibited conduct under the ECOA Identify predatory lending practices the laws that combat such behavior

Mortgages/Deeds of Trust

E.MORTGAGES/DEEDS OFTRUST. State states) or deeds of trust (minority of states) laws favor either mortgages for financing real estate. States that favor (majority of mortgages are known as lien theory states, while states that favor deeds of trust known as title theory states. Florida is a lien theory state. both real estate financing instruments Nature of Mortgages and Deeds of Trust. Mortgages and deeds of trust (DOTS) that create a voluntary lien on real property until or unless the borrower repays a loan (borrower agrees to tum over loan).

Financing Concepts

Estate Finance Markets-General Concepts: Financing (cont.) ii. Land Contract (Contract for Deed): Method of seller financing in which the buyer receives equitable seller retains legal title until the buyer completes all installment payments. Unlike a mortgage, the buyer who purchases property under a land contract receives fewer protections in the event ofa default than with a traditional mortgage. A land contract, also known as an "Agreement for Deed" ora "Contract for Deed," is similar in a few ways to the typical sales contract (purchase agreement). Land contracts bilateral, executory, and assign able contracts to transfer property that bind the parties to perform agreed.

FHA Loans

Federal Housing Administration (FHA) c. Basic FHA Standards (cont.) i. FHA Mortgage Insurance (cont.) 1) Premiums (cont.): For all loans monthly premium depends on the made after January base loan amount, length of the 26, 2015, the loan ( in years ) , and the loan to higher LTV, 1.05 % . higher base Monthly range from 0.45 % of repay amount of money, the LV . Monthly premiums premiums are larger for loans with a and longer length of time to

Title Theory

Legal Theories of Mortgages b.Title Theory: typical financed property transfers through deed of trust, in which the borrower conveys legal title to lender who holds it un til the loan is paid in full by the borrower and the borrower retains equitable title. Upon satisfaction of the debt, the lender transfers legal title to the borrower Traditionally, if the borrower defaults in a title theory state, there foreclosure because the lender already has legal title. However, most states that follow title theory have enacted laws which extend rights similar those afforded by lien theory states.

Interest Rates

Mortgage Interest Rates-General Concepts: Simple interest is based Interest The cost ofborrowingmoney . A lender charges a fee to the borrower based on a certain percentage of the unpaid loan balance for the ofborrowed money. The total amount borrowed money is called the principal. Simple interest is the most common method of calculating interest. remaining principal. In other words, the borrower only pays interest on the amount of money the borrower pays down the principal, he owes less in terest which remains unpaid. -b · Annual Percentage Rate ( APR ) : The cost ofcredit expressed yearly percen tage rate. The APR of a mortgage mortgage broker fees, and certain other credit charges. includes the interest rate, points,

Mortgage Repayment

Mortgage Repayment-General Concepts: account used by lenders to hold, or reserve, a borrower'smoney for future payment of items such as real estate taxes, hazard insurance, and deferred main tenance. Reserve accoun ts are also known as customer trust funds. Common ly, borrowers must pay a lump sum to the lender closing in order to establish a reserve account. After this lump sum payment, the borrower pays a mon thly portion of estimated taxes and in surance costs into the reserve account. PITI: Abbreviation for Principal, Interest. Taxes, and Insurance, the components of a typical mortgage payment. Borrowers pay a monthly portion ofmortgage principal and interest, and pay a mon thly portion oftaxes and insurance into a reserve account. Collectively, these components comprise the total monthly loan payment.

Number of Parties

Nature of Mortgages and Deeds of Trust -a. Number of Parties i. Mortgage: The typicalmortgage is a contract between two (2) parties- the borrower (mortgagor) and the lender (mortgagee) -consisting ofa promissory note and a mortgage contract - 1) Promissory Note: A promissory by the borrower (maker) to repay note is a written promise sign the lender (bearer). which specifies the amount of the debt, the interest rate, and the time and method of repayment. A promissory note is signed by a maker (borrower), who promises to repay the bearer (the lender). The words "or bearer" makes the note negotiable. Ifthe note is negotiable, the original lender may note another person. That person then replaces the initial lender with the legal demand repayment. The noten eed not be recorded because it only establishes a personal obligation

Foreclosure Mortgages

Nature of Mortgages and Deeds of Trust -c. Foreclosure (cont.) Mortgage (cont.) time following a judicial sale for an and reclaim the title to his property. This period 2) Right of Redemption: following the lien theory of mortgage, Rights commonly recognized in states which set a limited period of owner to pay his outstanding debt may run from one During this period, of sale that entitles him to deed the high bidder receives a month to more than a year. certificate original (also known owner fails redeem property as equity of redemption within the statutory and statutory right of time period

Foreclosure Mortgages

Nature of Mortgages and Deeds of Trust c. Foreclosure (cont.) i.Mortgage (cont.) 3) Strict Foreclosure: Strict foreclosures are only recognized in a small number of states. A strict foreclosure requires that notice be properly served to the borrower and that specified paperwork be filed with a court. The court then establishes a deadline for the borrower to repay the delinquent debt. If the borrower fails to meet this deadline the court awards full title for In a strict foreclosure, the borrower loses his equity of redemption and statutory redemption rights.

Nonconforming Loans

Nonconforming Loans Special Lending Agreements e. Nonconforming Loans (cont : il Jumbo (does not "confonn' to) the loan amount limits set by Loan: A loan that exceeds Preddie Mac and Pannie Mae. Some jumbos may also be subprime loans however, some are not because they have favorable terms and require borrowers to have excellent credit and sufficient income afford the payments

Basic Payment Options

Principal Lending Agreements b. Basic Payment Options (Amortization) (cont.) Partially Amortized Loan: Partial amortization describes a loan with a payments that include a during the life of the loan), followed by series ofamortized payments (regular equal portion of the interest and principal balloon payment" at maturity. The balloon payment is the entire amortized mortgage provides reduced payment at the end of the loan's remain ing balance. A partially mon thly payments at the cost of a balloon term. Under a partially than any previous payment. The payment amortized mortgage, the final payment is larger amount "balloons" on the last installment

Basic Payment Options

Principal Lending Agreements b. Basic Payment Options (Amortization) (cont.) ii. Negative Amortization: Lending agreement where the individual loan payments are of unequal amounts and are insufficient to repay all interest charges. Therefore, the loan balance increases rather than decreasing the life of the loan. Under a negatively amortized loan, payments only cover a portion of the in terest and none of the principal. Shortages in interest and/or principal payments are added to the loan balance (principal). causing the balance to increase over time (opposite of fully amortized).

Basic Payment Options

Principal Lending Agreements b. Basic Payment Options to which mortgage paymen ts are equally spread with the final payment resulting in a zero balance. (Amortization). Amortization describes the degree over the tenn of the mortgage i. Amortized Loan: Full amortization is a systematicmethod repaying a loan by making regular equal that the loan itself and all in terest on the loan's maturity (completion). remains the same over the life of the loan, Although the amount of each payment payments (usually mon thly) so loan, is reduced to zero by the principal paid each month fluctuates the amount of interest and increases) (interest decreases while principal

Conventional Loans

Private Mortgage Insurance: EXAMPLE: The Mortgage Guaranty Insurance Corporation (MGIC) the largest private mortgage 10 % to 30 % of the principal on loans made to qualified regulations . ABCS & L is only allowed to make insurance company, Insures the top buyers . Because offederal loans based on 80 % of the appraised value . residence appraised $100,000, but the buyer can only payment . By insuring the top 10 % of the principal loan amount with a MGIC insurance guarantee, ABC-S&L is able to make a $90,000 regulations ( 80 % is secured by the property . the top 10 ecured by the MGIC (90)loan without violating federal make a $10,000 down guarantee)

Real Estate Investment

Real Estate Investment-General Concepts: d. Intermediation: Process by which financial institutions (intermediaries) invest deposited funds. That is, bank customers deposit money into checking savings accounts, and banks invest such funds in money markets mortgages, govemment securities, and other investments. e. Disintermediation: where private individuals invest their own usually occurs when money markets, govenment securities, and other investments offer significantly higheryields (greater return) than bank accounts. Such direct investment disrupts the normal flow ofmoney in the financial marketplace

Seller Financing

money directly to the buyer 1. Seller Financing. Seller may fin ance the sale of her own property by lending Common seller financing agreements include the followhng a . Purchase Mobi , Mo i dgage . Mortgage bel 、 een a s ller and buyer which the bsęyer may (or may not) combine with an institutionalmortgage -b. Land Contract Intyer recelves equitable (Contract for Deed). Method of seller financing in which the title upon closing and the seller retains legal title until the ber completes all installment payments. who purchases property under a land contract recelves fewer protections in the Unlike a mortgage, the buyer event of a default than with a traditional mortgage

Foreclosure -Mortgages

Nature of Mortgages and Deeds of Trust Foreclosure. Situation where a borrower defaults (fails to pay) the lender seeks to auction secures the loan in (involuntarily transfer) the collateral (property) on a loan and is govemed by state law sure Mortgage Adefaultingborrower strict foreclosure more common. in states that follow judicial ora can be subject to either a the lien theory Judicial foreclosures allow strict foreclosures. Only a handful of states

Number of Parties

Nature of Mortgages and Deeds of Trust a. Number of Parties (cont.) . i. Mortgage (cont.) 2) Mortgage Contract: The mortgage contract is a security instrument, property is collateral (hypothecation) for repayment of debt. promissory without mortgage contract is merely a personal obligation (unsecured by any collateral). Mortgage contracts should be recorded because they liens property il. Deed of Trust: The typical DOT is a contract between three (3) parties-the borrower (trustor), (beneficiary), and aneutral third person (trustee). Jlust like mortgages, DOTs are accompanied promissory notes

Status of Title

Nature of Mortgages and Deeds of Trust of Title (mortgagor) . i. Mortgage: Under the typical mortgage, the borrower retains title to the mortgaged property lien on the mortgaged property, forcibly sold through foreclosure) in the while the lender (mortgagee) takes which may be enforced (property (also known as lien theory).

Financing Concepts

Real Estate Finance Markets-General Concepts: a. Financing (cont.) ii. Deed of Trust: Voluntary lien on real property where, similar to a mortgage. Under a deed of trust, a property owner a contract to borrow money and voluntarily agrees to extinguish the rights property (in favor of the lender) pay the debt according to the terms of the loan agreement. In a deed of trust, a neutral third party holds title to financed property until the loan is paid in fiull.