Real Estate Practice - Unit 12

Wraparound Loan

- Allows borrower who has an existing loan to get another loan form a second lender without paying off the first loan. - Second lender issues a new larger loan to the borrower at a higher interest rate; combination of first and second loan. - Borrower makes new higher payments to the second lender, and second lender pays the first lender out of those funds. - Wraparound is often used in refinancing situation or purchase of a home when a buyer cannot prepay existing mortgage. - Only allowed if original loan documents allow it.

Installment Land Sales Contract

- Also known as a contract for deed. - Buyer doesn't receive legal title until the final payment is made. - Seller keeps legal title until debt is paid in full - Buyer receives equitable title until debt is fully paid. - Buyer agrees to give seller a down payment and make regular payments of principal and interest for agreed amount of years. - Buyer agrees to pay real estate taxes and insurance premiums and maintain the repairs and upkeep of property. - Many of these contracts allow seller to cancel contract, keep all payments and evict the buyer if buyer defaults. Many states require the seller to refund a least a part of the buyer's payments in that situation.

CalVet Loans - Other facts:

- CDVA offers below market interest rates. - CalVet loans usually have a variable interest rate,which historically has not changed an dis not tied to an index. - VA guaranteed loans require no down payment and non-VA loans require 3% down. - No prepayment penalty for paying loan off early. - LOng terms are typically 30 years. - Loan Maximums are very generous and are adjusted yearly. - Home and loan protection plans are included. - CalVet includes construction and rehabilitation loans.

Most common types of loans:

- Conventional - FHA Insured - VA Guaranteed - Cal Vet Land Contract `

Blanket Mortgage

- Covers more than one property. - Land developers usually use blanket mortgage when buying a plot of land and dividing it into separate lots. - Usually includes a clause called a partial release clause - allows borrower to obtain a release of any individual lot from the lien by repaying a certain part of the loan. Lender will issue the partial release for the one lot, with prevision that the mortgage will continue to cover the remaining lots.

Open end Loan

- Expandable loan which gives a borrower a limit up to which he or she may borrow. Each Incremental advance must be secured by the same mortgage, and any advances may not exceed the original borrowing limit. - Interest rate on original amount borrowed is fixed. But interest rate on any future advances can be at the prevailing rate at the time of the advance. - Usually less expensive than the conventional home improvement loan. - Allows the borrower to "expand" the mortgage to increase the debt to the original amount. Farmer's have used this type of loan to meet their seasonal operating expenses, hopefully paying off the advance after they harvest their crops.

Reverse Annuity Mortgage

- Lender is making payments to the borrower. -System allows older property owners to receive regular monthly payments from the equity in their paid off property without having to sell - Borrower pays a fixed rate of interest and then repays the loan either when the hoe sells or from the borrower's estate upon his or her death

Conventional Loans - Insured

- Lender will terminate PMI payments once the loan has been repaid to a certaain level. federal law required that any loans originated after July 1999 must have the PMI terminated after the borrower: - Has accumulated 22% or equity in the property. - Is current with all loan payments - However, law also states thawt a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI. - Lenders have a duty to inform all of their borrowers of their right to terminate the PMI.

Construction Loan

- Lender's give construction loans to finance the construction of improvements to property such as homes, apartments, office buildings. Lender commits to full amount of the loan, but disburses payments over the life of the construction project. - Payments are made to general contractor or owner for parts of the construction completed since last payment. - Before making a payment, lender will inspect the completed work and ask the contractor proof that the mechanic has waived the lien rights for the work the payment is covering. Interest rates are usually higher cause riskier. Risks include: - Inadequate protection against mechanic's lien - Potential delays in construction completion - Financial failure of contractors or subcontractors Borrower pays interest only on money that has been disbursed up to the payment date. These Loans are short ter. Borrower can get a permanent loan, usually called a takeout loan, which pays off or "takes out" the lender of the construction loan, when construction is complete.

FHA - Insured Loans: Additional Facts

- Loans are assumable, but the rules for assumptions vary depending upon the loan originated, type of property, and specific FHA program under which the original loan was given. - Mortgaged real estate must be appraised by an approved FHA appraiser. - Property must meet FHA standards for type and construction. FHA has standards about quality of the neighborhood. Loans are available for one-to-four family residences and some condominium units. - FHA loans are available to help residents or investors repair or rehabilitate single-family properties. - No prepayment penalties on FHA loans on one-to-four-family residences.

Obtaining a Mortgage

- Mortgage is onsidered a "oparnetship' between he lender and the person getting the loan. - On borrower end, it's obvious that advantage lies in obtaining the funds to complete the purchase. - On the lender end, advantage lies in obtainin income from interest and finance charges on the loan. (Loan is an investment) - To increase their investment, lenders often charge other fees when the borrower gets the loan. Borrowe rcould pay all or some of these charges: - Loan origination fees - Points - Discount Points

Va Loans - Important facts to know about;

- Most cases, down payment is not required. - Loan maximum may be up to 100% of the VA-established reasonable value of the property. - Maximum loan terms are 30 years for one-to-four family homes and 40 years for farms. - VA guarantees both fixed-rate and adjustable rate loans. - Interest rates are negotiable between the lender and the borrower. - No monthly mortgage insurance premium to pay. - Buyer's closing costs are limited to reasonable costs plus no more than a 1% loan origination fee. - Any discount points charged can be paid by either he veteran or the seller. - Loan can be prepaid without a penalty. - VA charges a funding fee, which can be paid at closing or financed with the loan.

Conventional Loans - Uninsured

- Most common and viewed as the most secure. - Most require borrower to make a down payment of 20% or more. - Typically uninsured. Mortgage provides the security. - To protect its interests, lender relies on the appraisal of the property and the borrower's ability to pay off the loan, indicated by the credit repots. - Many lenders follow the underwriting standards from Freddie Mac and Frannie Mae, so they can sell their loans in the secondary mortgage market..

Package Loan

- One that includes all the personal property and appliances that are installed on property. - Used extensively in the sal of furnished condominiums. - Loan will include furniture, draperies, carpeting, kitchen appliances, washer and dryer, freezer and other items as part of the purchase price for the residence.

Other Types of Financing:

- Open-End Loan - Sale and Leaseback - Bridge Loan - Home Equity Loan - Grant Programs

Balloon Payment Loan

- Partially amortized loans. Means that the monthly payments are not large enough to fully amortize the loan by the end of the term, leaving the large balloon payment - They can be interest-only loans, amortized loans, purchase money mortgages, fixed or variable rae loans, or negative amortized loans. Simply LOANS WHICH CONTAIN THE BALOON PROVISION STIPULATING THAT THE REMAINING BALANCE MUST BE RETIRED AT A PREDETERMINED TIME IN THE FUTURE EX: 5 YEAR LOAN FOR 200,000 @ 6% ITNEREST. BORROWER WILL PAY $12,000 PER YEAR, OR $1000 PER MONTH FOR 5 YEARS. AT THE END OF THE TERM, BALANCE OF 200,000 IS DUE.

Other Common Financing Types

- Purchase Money Mortgage - Installment Land Sales Contract - Lease-Purchase - Lease Option - Second Mortgage - Blanket Mortgage - Buy down - Construction Loan - Wraparound Loan - Package Loan

Va Loans

- Requires an appraisal of the property the veteran is seeking to purchase. VA issues a certificate of reasonable value (CRV) on property - CRV places a ceiling on the amount of the loan that is allowed for that property. If purchase price is less than the amount stated in CRV, borrower doesn't have to make a down payment. However, if price of the property exceeds the amount on the CRV, the veteran will have to pay the difference in cash.

Bridge Loan

- Short term loan that covers the period between the end of one loan and the beginning of another. - Typically used in two situations; 1) Cover the time period between the end of a construction loan and the issue of a permanent loan on a property 2) When person needs to borrow money on his or her unsold home to fund acquisition of a new home. Useful when a seller will not accept a property sale contingency.

Grant Programs

- Technically not a loan. - provide buyers with a "gift" of money to use toward their down payment or closing costs which never has to be paid back. - Programs such as: AmeriDream, Nehemiah, Housing Action Resource Trust(HART) and Partners in Charity. Some lenders also accept "gift letters" which acknowledge that the down payment was a gift from a relative and does not need to be repaid. - Grant programs are also known as DOWN PAYMENT ASSISTANCE.

Lease-Purchase

- Tenant enters into two agreements simultaneously - an agreement to purchase and a lease. - Tenant agrees to purchase property, but operates under the lease until terms of purchase agreement are fully satisfied. A part of the lease payment is applied to the purchase until one of the following happens: - Price is reduced enough for the tenant to obtain financing to complete the purchase. - Over time, total of all payments has met the prearranged purchase price.

Sale and Leaseback

- Typically used by commercial enterprises to free up money that's been tied up in real estate to work as capital in the business. - Owner sells real estate property and leases it back from the buyer. Buyer becomes owner and the former owner becomes the tenant. - This is complicated and should be undertaken only with proper and adequate legal and tax advice.

VA Loans - Eligibility

- Veteran must apply to the VA for a certificate of eligibility to determine his or her eligible status and to determine the amount of the loan the VA will guarantee. Certificate doesn't assure veteran to get the loan, only states the maximum amount for which the veteran is eligible. - VA doesn't set a maximum amount of the loan a veteran can get - only amount of the loan that it will guarantee. If veteran qualifies higher than the guarantee, veteran will pay the difference as shown downpayment on the property.

Lease Option

- clause in a lease that gives tenant right to purchase the property under specific conditions - usually predetermined price and within a set period of time. - Owner can choose to give tenant toward purchase price for some of the rent paid, but this is not a requirement.

Growing Equity Mortgage

- fixed-rate loan in which payments increase by a predetermined amount each year, reducing the outstanding balance of the loan. - Allows repayment to the loan much more quickly. - Used when borrower expects that his or her income will keep up with the increase in the payments.

Two other less common repayment plans are

- growing equity mortgage - reverse annuity mortgage

FHA - Insured Loans (Federal Housing Administration)

- provides low down payment loans to qualified buyers. - (HUD) Housing and Urban Development oversees the FHA. - Loans provided are high loan-to-value ration loans; so FHA insures the loan in order to make them available to higher risk individuals. - FHA does not build homes or loan money directly. They insure loans by approved lending institutions. FHA-insured loans protect lenders against any loss they would suffer from a borrower's default.

Check Your Understanding

1) Define a purchase money mortgage - Buyer borrows from seller in addition to the lender. Sometimes done when a buyer cannot qualify for a bank loan for the full amount; so the seller "takes back' a portion of the purchase price as a second mortgage. Purchase money mortgage can also be a first mortgage. 2) Difference between a lease purchase and a lease option? - Lease Purchase is when the tenant enters in two agreements - agreement to purchase and a lease. - A lease option is a clause in a lease that gives the tenant the right to purchase the property under specific conditions - usually at a predetermined price and within a set period of time. 3) Greg and Joyce purchased a home from the builder who offered to pay $5,000 at a closing as an incentive to get them to buy. What kind of mortgage might they get? - A buydown mortgage 4) What are grant programs typically for? - Down Payment assistance.

CHeck Your Understanding

1) Define the term loan-to-value-ratio. - Ratio of debt to the value of the property. If loan to value ration is low, the borrower is paying a higher down payment of property. If loan to value ratio is high the borrower is making a lot down payment. 2) When is a lender required to terminate a borrower's private mortgage insurance? - Borrower has accumulated 22% equity in the property - Current with the loan payments 3) What is the difference between an FHA loan and VA loan - FHA insures and VA loans guarantee 4) What is the major difference between a CalVet loan and other loans? - CalVet loans are actually a land contract. The state purchases the property and resells it to the veteran using a contract of sale. State retain property until paid off and then state will issue a grant deed ot transfer legal title to owner.

Check Your Understanding

1) How much is the loan origination fee and what does it cover? - The loan origination fee is typically 1% of the loan amount. It covers the lender's cost for generating the loan 2) What kind of problem can result from a straight loan? A straight loan is an interest-only loan If the property doesn't appreciate in value over time, the borrower could end up with less in proceeds on the sale than what he needs to pay off the loan 3) What kinds of limits are placed on the interest rate in an adjustable rate mortgage? - Interest rate caps limit the amount of interest the borrower can be charged. Periodic caps limit the amount the rate can change at any one time. Overall caps (aggregate) limit the amount the interest can increase over the life of the loan 4) Describe Reverse Annuity - Lender makes payments to the borrower. Popular among senior citizens who are on fixed incomes and would like to benefit from their home's equity without having to sell.

Points

A one time service charge to the borrower for making the loan. Point represent prepair interest and the lender charges them to get additional income on the loan. Points are paid at closing and are usually equal to 1 percent of the loan amount. 2 points on a $75,000 loan would be $,500 ($75,000 x 2 points)

Conversion Options

Allow the borrower to convert the ARM to a fixed-rate loan at certain times during the life of the loan.

Straight Loan

Also known as interest-only loan. Monthly payments are allocated only to interest. No interest principal is paid off. End of term, borrower must be able to pay off the entire principal amount or get another loan. - Getting more popular because payments are typically lower than other loan types. - An interest-only loan could be a wise choice for someone who plans to own property for a short time and believes the property will appreciate. However it is risky, because if it doesn't appreciate then the borrower ends up with less in proceeds on the sale to make up for the loan he needs to pay off.

VA Loans

Assumable. If loan was made prior to March 1, 1998, loans re assumable for a small processing fee. If loan was made after March 1, 1998, VA must approve the assumption agreement. - All assumed loans, the original veteran borrower is still liable for repayment of the loan unless the VA approves a release of liability. The VA will issue a release if both of the following conditions are met: - Buyer assumes all of the veteran's liabilities on the loan. - The VA and the lender approve the buyer and approve the assumption agreement Note: Release from VA does not release the veteran's liability to the lender. Veteran must negotiate directly with lender for that release.

Fully Amortized Loan

Borrower ha same payment every month. -Payment goes to the interest first and then principal. - Over the life of the loan, The amount going toward interest decreases, while the amount going to principal increases.

Amortized Loan

Borrower makes periodic payments of principal plus interest. Loan is paid off gradually over time. - Usually fixed-interest, long term loans of 15 to 30 years. At end of term, the full amount of principal and all of the interest are totally paid off and has a zero balance.

Straight Amortized Loan,

Borrower pays a different amount each payment. - Fixed amount goes to the principal with each payment - Interest amount changes as the principal balance declines.

CalVet Loans

CDVA will purchase only approved single-family residences (condo, units in planned unit developments, mobile homes) - Property must be structurally sound and provide safe and sanitary living conditions. - Must comply with specific set of standards. If veteran selects a property that fails to meet one or more standards, veteran may still be able ot obtain loan by negotiating with the seller to correct the conditions.

CalVet Loans

California provides alternative special assistance for farm and home purchases. - California Department of Veterans Affairs (CDVA), Division of Farm and Home Loans, administers the program, and the loans are referred to as CalVet loans. - Loans are available to California residents that have met veteran requirements. Eligibility requirements have been expanded that almost any veteran who wants to purchase a home is eligible. - Unlike FHA or VA loan, it is a land contract. - When veteran is approved, the state purchases property and resells it to he veteran using a contract of sale. - State retains the title until the loan is paid off; where California will issue a grant deed to transfer legal title to the veteran.

VA Loans -

Can be used to: - Buy a home, including townhouse, condominium in a VA-approved project. - Build a home - Simultaneously purchase and improve a home. - Improve a home by installing energy-related features such as solar or heating/cooling systems, water heaters, insulation, weather-stripping, storm windows and doors or other energy-efficient improvements approved by the lender and VA. - Refinancing an existing home loan up to 90% of the VA-established reasonable value or refinancing an existing VA loan to reduce the interest rate. - Buy a manufactured home and/or lot.

Discount Points

Charges are designed to offset any losses the lender might suffer when selling the loan to the secondary mortgage market. Discount points are a means of raising the effective interest rate of the loan. - rue of thumb - 1/8 percent for each discount. A charge of 4 points would increase a 7 1/4 percent mortgage to a 7 3/4 percent yield. - 4 points x 1/8 percent = 4/8 = 1/2 percent 7 1/4 +1/2 = 7 3/4

Repayment Plans

Critical decision for both borrower and lender is determining the payment plan that will suit the borrowers financial circumstances while remaining a good investment for the lender. Types of Repayment Plans exist: - Straight (Interest-Only) - Amortized - Adjustable-rate - Balloon Payment

Loan Origination Fee

Fee is typically 1 ercent of the loan amount although it could be higher. Covers the lender's cost for generating the loan.

Buydown

Financing technique to reduce monthly payment for a borrower during the initial years of loan. - Lump sum made to the lender at closing, usually by a builder as an incentive to the buyer or family member helping out. - Payment serves to reduce interest rate on the loan for the first few years; then the rate rises. - Lender assumes the borrower's income will also have risen during these years and he or she will be able to make the increased payments

Second Mortgage

If an owner takes out another loan for additional money, the new loan is a second mortgage - Second mortgage is subordinate to the first cause second mortgages are a greater risk to the lender and usually given at a higher interest rate.

FHA - Insured Loans

Important to know: - can be either fixed-rate 10-30 year loans or one year adjustable loans. - The borrower must have cash for a down payment and closing costs. Items cannot be added to the sales price, nor can become part of the loan repayment. Borrower is charged a percentage of he loan as a premium for the insurance. Borrower pays a one-time upfront insurance premium at closing (or can be financed with the loan). Premium could be paid by some other party, such as seller. Might also be a monthly premium for this insurance. - Lender can charge points, and either the borrower or the seller (or both) can pay them.

Adjustable-Rate Mortgage

Interest RATE CAPS limit the amount of interest the borrower can be charged. Two types of caps: - Periodic caps limit the amount the rate can change at any one time. - Overall (or aggregate) caps limit the amount the interest can increase over the life of the loan. - PAYMENT CAP - limits how much the monthly payment can increase. Looks like a good thing, but could be a problem if the payment cap prevents the payment from covering the interest. When this happens, unpaid interest is added back to the loan, generating even more interest and debt. If continues, borrower will make many payments but owing more than he or she did at the beginning of the loan which is called - NEGATIVE AMORTIZATION.

Conventional Loans - Insured

Less than 20% don payment. - Borrower can get a conventional loan by insuring the loan through a private mortgage insurance program (PMI). - Because of the low deposit, lender's need to minimize their risk from a private mortgage company. - Using this, a borrower may be able to get a loan for up t 97% of (sometimes 100%) of the appraised value of the property.

Balloon Payment Loan

Long term loan that has one large final payment due when the loan matures. - Many borrowers believe that if they have a good credit risk and made payments on time the lender will extend the balloon payment for another term but lenders are not obliged to make an extension and could choose to require full payment when the note comes due.

Purchase Money Mortgage

Most commonly a technique where buyer borrows from the seller in addition to the lender. - Purchase money mortgage is created at time of purchase and delivered at the time the property is transferred as part of the sale transaction. - Sometimes done when buyer cannot qualify for a bank loan for the full amount, so the seller "takes back" a portion of the purchase price as a second mortgage. Purchase money mortgage can also be a first mortgage

Home Equity Loan

Owners have the ability to borrow against the equity they have built up in their home. Homeowners can use a home equity loan for: - Purchasing high dollar items - Taking a vacation - Consolidating other loans or credit card debt - Paying medical expenses. - Paying college tuition - Making Home improvements Home equity Loan is an alternative to refinancing. Can be given as a fixed amount or it can be a line of credit that the homeowner can borrow against as he or she needs.

Adjustable-Rate Mortgage

The interest rate is linked to an economic index. The rate fluctuates up or down over the life of the loan as the index changes. - Loan agreement describes how the interest rate will change and when. - Interest rate the borrower pays is usually the index rate plus a margin. MARGIN - the lender's "mark up" Represents the lender's cost of doing business. Margin usually stays the same over the life of the loan. - ADJUSTMENT PERIOD - establishes how often the lender can change the rate - monthly, quarterly, or annually.

VA Loans

VA - guaranteed loan - another alternative for little or on down payment loan. - Available to eligible veterans and spouses. - Varies according to the length of service and time period during which the veteran served on active duty. Persons who serve in the National Guard or in the Reserves may also be eligible. - VA Loan is guaranteed, not insured. However, like FHA, VA does not loan money directly and guarantee provides added security for the lender. When default, the VA would pay the amount of the guarantee to the lender if the foreclosure on the property didn't bring enough money to cover the balance due on the loan.

First Mortgage

mortgage on a property that had no prior mortgage

Loan-to-value ratio

ratio of debt to the value of the property. -When talking about mortgages, the value is the sale price or the appraised value, whichever is less. - If loan to value ration is low, the borrower is paying a higher down payment on the property. Lender's like this, since the higher the down payment, the lower the risk for the lender.