COST OF HOUSING The average person spends about 20% to 25% of their income on housing. If a person could pay cash for the property there would be no need for financing. Therefore if long-term financing is necessary, mortgages or trust deeds are used.
PRIMARY & SECONDARY FINANCING Primary financing is the use of 1st trust deeds. Usually the interest rates are lower on a first trust deed. Secondary financing is any type of financing other than a first trust deed. Second trust deed, third trust deed, or etc.
PRIMARY & SECONDARY MORTGAGE MARKETS Primary mortgage market refers to a loan being made directly to the borrowers. Secondary mortgage market refers to the resale of existing mortgages and trust deeds.
SECONDARY MARKET The purpose of the secondary mortgage market is to buy the loans from the primary mortgage market. This gives the primary mortgage market more money to loan out.
Federal National Mortgage Association (“FNMA or Fannie Mae”) Government National Mortgage Association (GNMA or “Ginnie Mae”) Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”)
CONFORMING LOANS A lender either keeps the loan in its portfolio or sells them. Loans that are kept by the lender are called portfolio loans . Conforming loans are conventional loans (non-government loans) that meet the underwriting standards for purchases by FNMA and FHLMC.
www. fanniemae.com MAXIMUM LOAN AMOUNTS Fannie Mae's maximum loan amounts for 2007 are as follows: $801,950 Four–family loans $645,300 Three–family loans $533,850 Two–family loans $417,000 One–family loans Maximum Loan Amount Number of Units
JUMBO LOANS $417,000+ Loans for amounts over the conforming loan amount are called a jumbo loan . Jumbo loans will have an interest rate of ¼% to ¾% more than a conforming loan.
TYPES OF LENDERS Institutional Lenders Non-institutional Lenders
SELLER CARRYBACK FINANCING Generally, seller carryback financing is relatively straightforward.
1. Generally they are fixed rate loans.
Usually they are amortized over 30 years but due and payable in 5 to 10 years.
Most often they are interest only loans due in 5 years.
Seller to carry for 5 years at 9% interest only
Seller carries a loan for $75,000
$75,000 X .09 = $6750 interest per year
$6750/12 = $562.50 payment per month
After 5 years the buyer owes the seller $75,000
3. If the first TD is an ARM then the 2 nd cannot be an ARM.
TYPES OF LOANS Since there are a variety of loans and interest rates in the marketplace, the borrowers should compare lenders on the basis of:
Down payment needed or loan-to-value ratio.
Loan costs and fees required.
Length of the loan.
5. Prepayment penalties.
CONVENTIONAL LOANS A conventional loan is any loan that is not a government backed loan. ADVANTAGES: 1. Less red tape 2. Shorter processing time. 3. Larger loan amount. 4. More variety of loans.
1. Higher down payment. 2. Prepayment penalties. 3. Low down payments require PMI. DISADVANTAGES:
GOVERNMENT LOANS 1. FHA 2. DVA 3. Cal Vet
FHA $261,609 VENTURA $261,609 SANTA BARBARA $261,609 SAN DIEGO $183,350 SAN BERNARDINO $183,350 RIVERSIDE $261,609 ORANGE $237,500 LOS ANGELES MAXIMUM LOAN COUNTY
DVA Maximum loan amount with no money down is: $240,000 On any amount over $240,000 the veteran will need 25% down.
Example: Mr. Hoffman purchased a home for $340,000. His down payment is $25,000 ($340,000 – $240,000 = $100,000 x 25%) The loan amount is $315,000 ($340,000 - $25,000)
CAL-VET For L. A. and Orange Counties the maximum Cal Vet loan is: $250,000 Interest Rates For Most Loans 6.65% First time buyer 5.95%
Example: Mr. Hoffman, is not a first time home owner, purchased a home for $200,000 on a Cal Vet loan. Down $200,000 x 2% = 4,000 Loan: $196,000. and interest will be 6.65%
FIXED RATE Fixed rate loans are loans where the interest rate is constant during the term of the loan. The two most used time periods for loans are 15 and 30 years. One of the advantages of a 15 year loan, compared to a 30 year loan, is approximately ½% less interest rate.
Example: Mrs. Flint can obtain 15 year loan at 8%, and a 30 year loan at 8½%. She obtains a $100,000 loan. 30 yr. 12 × 30 × $751 = $270,360 15 yr. 12 × 15 × $956 = $167,840 Savings $102,520
ARM LOANS TERMINOLOY 1. Index 2. Margin 3. Adjustment period 4. Interest rate cap 5. Overall cap 6. Payment cap (7.5%) 7. Negative amortization 8. Conversion clause
INTEREST RATE Interest rate (%) : The interest rate of an ARM loan is made up of the Index plus the margin Index (I) : The index is an interest that cannot be controlled by the lender. The index must be readily available and verifiable. Margin (M) : Lender adds to the index a few percentage points (2 or 3), called the margin.
The ARM rate % is equal to the index plus the margin. % = I + M If the margin is 2% and the index is 4%, then the interest rate would be: % = 4% + 2% = 6%
ADJUSTMENT PERIOD The adjustment period of an ARM is the period of time in which the lender can change the interest rate. There are a variety of adjustment periods: 6 months or 1 year are most common. Another method is 5/1. This is where the interest rate will not change for the first 5 years. After 5 years it could change during the next 25 years.
ARM DISCOUNTS This term has a lot of names: introductory rate, tickler rate, teaser rates are some of common names. Mr. Travis procures $100,000 loan with an ARM rate of 6% and at the time of the loan the rate 7%. His monthly payments at 6% are $600. A year later the rate increase to 7%. His payments are now $665. He may not be able to make this higher payment.
CAPS There are two basic types of caps on an ARM loan: 1. Period Cap 2. Lifetime Cap
PERIOD CAP A period cap limits the interest rate increase or decrease from one adjustment period to the next. These caps are usually 1% to 2% per adjustment period. Mr. Evans has an ARM with a 1% adjustment per period. If the ARM rate is now 7% then the next period it can only be increased to 8%.
OVERALL CAP The overall cap limits the interest rate increase over the life of the loan. Mrs. Lemont has an ARM with a 7% interest rate. It has lifetime cap of 5%. The highest the interest rate can be is 12%.
CONVERTIBLE ARMs A convertible ARM clause is one that allows the borrower to convert the ARM to a fixed rate loan at designated times.
THE FINANCING PROCESS 1. Qualifying the buyer. 2. Qualifying the property. 3. Approving and processing the loan. 4. Closing the loan. 5. Servicing the loan.
QUALIFYING THE BUYER Character Capacity Capital
QUALIFYING THE BORROWER These ratios can change from lender to lender and area to area. Front-end Ratio FR = PITI ÷ GMI
Back-end Ratio BR = (PITI + D) ÷ GMI
CONVENTIONAL Fixed ARMs Front-end Ratio 28% 28% Back-end Ratio 36% 36% GOVERNMENT FHA DVA Front-end Ratio 29% None Back-end Ratio 41% 41%
REGULATION OF REAL ESTATE FINANCING Truth-in-Lending RESPA Fair Credit Reporting ACT
TRUTH-IN-LENDING ACT This disclosure act requires that lenders reveal to customers how much they’re being charged for credit in terms of an Annual Percentage Rate (APR). Under certain circumstances a customer has the right to cancel a credit transaction up until midnight of the third day after signing (72 hours).
RESPA Real Estate Settlement Procedures Act (RESPA) applies to first loans on one to four units residential properties. A good-faith estimate is provided to every person requiring credit. Each charge will be listed on a HUD-1 statement.
FAIR CREDIT REPORTING ACT If a loan is rejected because of information disclosed in a credit report, the borrower must be notified, and is entitled to know all the information the agency has in its file on the applicant (buyer) as well as the sources.