Real Estate Part 3

Riders

- additional documents to be added to the original financing instruments - provide full disclosure of any special requirements from, restrictions on, or liabilities incurred by the borrower

Deed

-serves as evidence of ownership. -used to transfer ownership of the property -Should always be recorded. -People can later be added or deleted from deed but original parties remain responsible for any financing at time of purchase.

The Federal Reserve may ____ to tighten the economy

1.Increases discount rates 2.Sell securities 3.Raise reserve requirements.

Q:4.What percent of a VA-guaranteed loan may a veteran borrow with no down payment

100%

FHA loans

2-3% down

FHA down payment requirement

3% of the first $25,000 of the acquisition cost, plus 5% of the balance of the acquisition cost up to $125,000, plus 10% of the remainder of the acquisition cost up to the regional loan ceiling 100% of any acquisition cost over the regional loan ceiling

Secondary Market

After a primary market lender has funded a large number of mortgage loans, there is no longer money available for the funding of additional mortgage loans. The secondary market investors solve this problem by purchasing packages of loans from the primary lenders, usually at a discount, making it possible for the primary market lenders to fund additional mortgage loans. the secondary market investors use these loan packages as collateral for mortgage-backed securities that are sold on the open market. The major "players" in the secondary market are Fannie Mae and Freddie Mac, but recently the Federal Home Loan Bank has begun to take a more active role

Direct Loan Program

Applicants must have low incomes no down payments

Second Mortgage Special Circumstances

Available to police officers, fire fighters, teachers, and medical service workers to encourage them to purchase homes in work areas. Often have lower interest rates and longer payment periods. Can have special requirements that may wave payments until first property is sold.

Mortgagor

Borrower

Conventional loans

Carry prepayment penalties, and require high down payments

Mortgage Broker

Do not lend money nor service loans. Rather, a mortgage broker brings together a lender and a borrower for a fee paid by the lending institution

Government-backed loans

FHA, VA, RHS

Fannie Mae, when they purchase a mortgage

Fannie Mae executes a servicing agreement which allows the loan originator to be the collection agent and receive a fee.

Loan Priority

First loan on house is paid first. Second lender will get any remaining proceeds after foreclosure sale.

Freddie Mac purchases loans from...

Freddie Mac purchases conventional loans from savings banks, commercial banks, and mortgage companies, assembles the loans into a pool of mortgages, and issues a Participating Certificate or Guaranteed Mortgage Certificate security backed by the mortgages.

Ginnie Mae, two types of mortgage-backed securities

Ginnie Mae I - based on single-family pools and generally have the same or similar maturities and interest rate on the mortgages. Ginnie Mae II - modified pass-through mortgage-backed securities wherein an issuer may participate by issuing custom single-issuer pools or multiple-issuer pools.

Ginnie Mae, what they do now

Ginnie Mae handles the housing assistance and loan management functions that were originally managed by Fannie Mae.

Reverse Annuity Mortgage

Homeowner has to be over 62. They receive monthly payments fro the equity they have in their house, but the loan does have to be repaid upon death of owner or sale of property

Mortgagee

Lender

Satisfaction of loan

Loan is paid off.

Freddie Mac guidelines

Loan limits (Adjusted every year), private mortgage insurance, gifts, seller down payments

Fannie May Guidelines

Loan limits(annually), debt-to-income ratio, private mortgage insurance, gifts, seller down payment

Leverage

Making use of other peoples money. (Ex. Make low down payment and borrow the rest)

Mortgage Instruments

Mortgage and Deed of trust

security instruments for a real estate loan

Mortgage and a note

private mortgage insurance program (PMI).

Often put on a mortgage to lower the down payment usually insures the top 30% of the loan

Mortgage Bankers

Originate and service mortgage loans for the construction and purchase of housing. May use their own or borrow funds. Or act as a loan correspondent for an out-of-town investor. Often specialize in FHA and VA loans

installment land contract functions

Sales contract: when signed by the parties at the closing, the property is considered sold b.Financing instrument: there is no promissory note c.Security device: there is no mortgage or trust deed d.Right to possess with a future right to title (as distinct from a lease that does not give future title right).

Guaranteed Loan Program

The purpose of this loan program is to enable eligible low-and moderate-income rural residents to acquire modestly priced housing for their own use as a primary residence.

FHA basic loan program

Title II, Section 203(b) program for loans on one- to four-family residential properties.

VA- guaranteed financing

To buy a home, townhouse, condominium that has been approved by VA. To build, repair, alter or improve a home. •To simultaneously purchase and improve a home. •To improve a home through installment of a solar heating and/or cooling system or other energy efficient improvements. •To refinance an existing home loan. •To refinance an existing VA loan to reduce the interest rate and add energy efficiency improvements. •To buy a manufactured (mobile) home and/or lot. •To buy and improve a lot on which to place a manufactured home which you already own and occupy. •To refinance a manufactured home loan in order to acquire a lot.

Ginnie Mae Basic mission

To create and operate a mortgage-backed security program for the Federal Housing Administration and Veterans Administration mortgages

Pension Funds

Traditionally invested only in ultra-conservative investments, now put more money into real estate. The Employee Retirement Security Act (ERISA) of 1974 governs pension funds.

The VA does not lend money unless there is no other financing available. Also, the VA does not insure loans; it guarantees them.

True

History of Purchasing a Home

Usually had to be done in cash, short term (5-10yr) loans were available with interest. 50% of purchase price was usually required

REITS Real Estate Investment Trusts

Usually invest in large commercial projects. Owned by their investors and enjoy generous federal income tax advantages have greatest cash resources

Warehousing

a line of credit extended by a commercial bank to a mortgage banker.

federal law and the termination of private mortgage insurance

any loans originated after July 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments. However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI.

FHA maximum loan amounts

are limited by loan-to-value ratio

Primary Market

banks, saving associations, credit unions or mortgage brokers

Wraparound

borrower who has an existing loan obtains another loan from a second lender without paying off the first loan

Mortgage Document

borrowers pledge of the property as collateral security for repayment

Purchase money mortgage

buyer to borrow from the seller in addition to the lender, borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to "take back" a note, or to "carry paper

Deed of Trust

coveys title rights to assigned trustee. In event of default, lender doesn't have to go through the court system.

VA issued Certificate of Reasonable Value

creates a maximum value on which the VA-guaranteed portion of the loan will be based.

Insurance Companies

deal mostly with large scale projects, malls etc.

Tenants in Common

each party has a defined interest in the property that may be sold, left in a will, or otherwise conveyed to another party. They do not necessarily have to have an equal interest in the property, although that is most common in a residential purchase

Freddie Mac created to...

establish a reliable secondary market for the sale of conventional mortgages by and for S&Ls. Dedicated to homeownership in minority populations

Fannie May (FNMA)

established by federal charter in 1938 Purchased the new FHA loans from the primary market lenders Became totally shareholder owner corp in 1968 balanced from of money throughout the country

Federal Housing Administration

established in 1934 to decrease families loosing their homes

Mortgage

establishes lien again property . May include restrictions on the use or disposal of home

Savings and Loan Associations

federal or state charted Federal deposits are insured by the savings association insurance fund. focused on home financing

Tenancy by the Entirety

for married couples so if one spouse dies, the other gains ownership of the property without going through probate court

Severalty Ownership

form of ownership for a single owner.

Limited Partnerships

formed to make significant investment beyond the reach of an individual investor. Profits are taxed.

intermediation

funds on deposit with financial institutions are loaned out to borrowers.

Credit Unions

growing source of money direct to borrowers. Regulated by state Banking Commissioners. Known for making low cost loans without a lot of junk charges.

Ginnie Mae operates

guaranteeing to lenders that monthly payments on mortgage loans will be made

Community Property

husbands and wives own an equal, undivided interest in the property

Freddie Mac

if the borrower has 5% down, seller can contribute up to 3% of closing costs - introduced the first security backed by conventional loans

FHU

insures that the lender will not suffer significant loss in the case of borrower default. Borrower and property must meet certain requirements.

Fixed rate loan

interest rate stays the same throughout the term of the loan

Advantages of conventional

less processing time; fewer forms; no legal limit on amount; choice of lenders; lenders are more flexible

Advantages of government-backed loans

lower down payments; no prepayment penalties

The Rural Economic and Community Development (RECD),

makes loans for home purchases or construction in rural areas and small (fewer than 20,000) communities outside metropolitan areas, borrowers demonstrate a limited income record and a need for housing

Graduated payment mortgage

monthly payments gradually increase from below what's required to amortize the loan to above those of a normal fixed rate loan

Industrial Banks

mostly in construction loans, second loans, or loans on vacant land. higher interest rates and higher deposits.

Joint Tenants With Right of Survivorship

must take title to the property at the same time, with equal interests and with a provision for "right of survival," meaning that if one joint tenant dies, his or her interest in the property conveys to the other joint tenants. In some states, it is also possible to take title as joint tenants without right of survivorship.

FHA loan interest rates

negotiated with borrower and lender

Mutual Savings Bank

northeastern states, the oldest concerned primarily with savings. focused on home financing.

Conventional Loans

not government-backed, banks, and savings & loan associations Permanent, long-term loan. Risk to a lender is greater. Most require 20% down

Straight loan

only interest payments are made with principal due as final payment

disintermediation

owners of the savings invest their money directly by making loans or other investments

Fannie Mae

peak when their are limited opportunities for other investments debt-to-income ration cannot exceed 28% - largest loan purchaser in the secondary market - does no loan directly to home buyers - private corp with a public purpose

Adjustable rate mortgage

periodic adjustment of interest rate

Commercial Banks

primary source of money for all types of loans in small towns and rural areas, greatest cash resources in real estate financing

Amortized loan

principal is directly reduced with interest computed on the declining balance of the loan; partially in which payments are insufficient to fully amortize the loan at maturity, so balloon payment is required

Individual (Unintentional) Investors

provides 1/3 of all loans less than 20k. they are not regulated. These are people who never intended to be in the loan business but were forced in order to sell their homes

State Chartered banks

regulated by various state agencies and the FRS and FDIC membership is optional Deal mostly with short term financing

Mortgage Loan

requires a signed promissory note accompanied by a mortgage or deed of trust.

Budget loan

requires payment of principal, interest, taxes, and homeowner's insurance; lender makes tax and insurance payments on behalf of borrower

Wraparound

second mortgage that is paid to seller to cover both first loan and second loan Cannot be done without lender approval if the senior lien contains a strict due on sale clause

Blanket mortgage

secured by more than one property

Construction loan

short-term financing for construction of real estate project

Bridge loan

short-term loan to cover newly purchased property until buyer's previous property sells

Note

signed document that describes the amount of money borrowed, terms under which it will be repaid, and any conditions that relate to the borrowing of the money or the consequences in the event of default. Established legal evidence of debt.

Freddie Mac (FHLMC)

strong commitment to extending home ownership to underserved Very successful. Also originated as stockholder owned In 1970 congressed chartered Fannie may to make this.

Insurance Companies

through loan correspondence rather than dealing directly with borrowers

The US Department of Agriculture Rural Housing Service

was created in 1994 to meet housing and community development needs of rural America. The RHS has various programs to aid low-to-moderate-income rural residents to purchase, construct, repair, or relocate a dwelling and related facilities. Qualified homebuyers can get loans with minimal closing costs and no down payment. RECD involved in making loans for home purchases or construction in rural areas.

Ginnie Mae (GNMA)

when Fannie Mae became private this was established in 1968, division within HUD job is to provide a guarantee insurance program for the government loan packages that are used as collateral for mortgage-backed securities based on FHA and VA loans.

Private mortgage insurance

•Allows for lower down payment •Some borrowers are more of a risk because of low down payment •Lender purchases the insurance and passes the cost to the borrower via fee at closing and monthly •Loans after July 1999 must terminate PMI after borrower accumulates 22% of equity and is current with all loan payments •Can be avoided through 80-10-10 financing

Federal Reserve System

•Composed of 12 district banks, manages nation's monetary policy •Reserves - amounts of money banks are required to keep on hand •Discount rates - rate at which the Fed charges banks for money •Buying/selling securities - when the Fed buys, there is more money in the market, lower interest rates, and stimulated economy; when the Fed sells, there is less money in the market, higher interest rates, and slower economy •Tightens economy by increasing discount rates, selling securities, raising reserve requirements

Mortgage loan classification

•Method of Payment •Time Period •Property Pledged

Conventional Loan Advantages

•Processing usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days. •Conventional loans typically have fewer forms, and processing is more flexible. •There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency. •In the event of a loan refusal, borrowers have other lenders that they can make application to. There is only one of each government agency type, so if the loan is refused by a particular agency, there are no alternative lenders available. •Conventional lenders are much more flexible. Many offer a variety of loans with attractive provisions.

VA loan requirements

•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. •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. •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.

Conventional Loan Disadvantages

•Typically, conventional loans require higher down payments than government-backed loans. •Some conventional loans carry prepayment penalties, while government-backed loans do not.

Mortgage Loan Financial Components

•principal •interest and interest rate •points •term •payments

Mortgage Broker duties

•sells mortgage loans on behalf of individuals or businesses •receives a commission from lenders for originating loans •assesses borrowers' qualifications •applies for lender pre-approval of loans •gathers documents •explains procedures •completes a lender application form •submits materials to the lender •advises clients on selection of loans and lenders •is usually registered with the state and personally liable for loan fraud •does not work for a particular lender •is not a lender

Mortgage Banker and loan officers

•works for a lender that originates loans and resells them to secondary lenders •specializes in originating and/or servicing mortgage loans