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The Real Estate School
U N I T 1 9
FINANCING THE REAL ESTATE
TRANSACTION
1
Page 369
OBTAINING CREDIT
• Cost of Credit – Loan is an investment by the lender
• Lenders evaluate two aspects of the investment:
1. Yield – Return or income that
can be generated
2. Risk – Likelihood that the
investor will lose money
6
Page 370
OBTAINING CREDIT
• Cost of Credit (cont’d)
• The interest rate that the lender charges the borrower depends
on four factors:
1. Term of Loan – Length of time
2. Type of Loan – Fixed vs. adjustable
3. Amount – Jumbo loans carry greater risk
4. Cost of Money – Rates fluctuate with market
7
Page 370
OBTAINING CREDIT
• Most real estate licensees encourage buyers to meet with lenders
before looking at property
• Preapproval – Based on a preliminary credit application
• Prequalification – Process by
which lender determines the
upper loan limit of the
borrower
8
Page 370
OBTAINING CREDIT
• Credit Scores – Result of an analysis of factors characteristic of
repayment and credit risk
• Scores range from less than 400
up to 900
• The higher the score, the lower
the credit risk
9
Page 371
OBTAINING CREDIT
• Credit Scores (cont’d)
• Five major factors are analyzed:
1. Past payment performance
2. Credit use
3. Credit history
4. Types of credit in use
5. Credit report inquiries
10
Page 371
OBTAINING CREDIT
• Cost of Credit (cont’d)
• Credit scores not only affect a
borrower’s ability to obtain a loan
but also the interest rate a lender
will charge
11
Page 371
OBTAINING CREDIT
• Fair and Accurate Credit Transactions Act (FACTA) –
Requires that each of the three major credit bureaus
provides a FREE credit report every 12 months upon
request
12
Page 371
OBTAINING CREDIT
• Fair and Accurate Credit Transactions Act (FACTA) – Agencies
are required to provide a toll-free number to assist consumers,
correct mistakes, and remove disputed information
13
Page 371
OBTAINING CREDIT
• Loan Application – Requires loan applicants submit personal
information about their employment, income, assets, and other
financial obligations
14
Page 371
OBTAINING CREDIT
• Underwriting the Loan – Process of
analyzing the extent of risk a lender
will assume in connection with a
mortgage loan
15
Page 372
OBTAINING CREDIT
• Underwriting the Loan (cont’d)
• Borrower is evaluated based on the following criteria:
• Occupancy – Owner occupied or investment
• Income – Enough to support borrower
• Assets and Cash Reserves – Verification needed
• Debt – House payment plus other debts
• Loan-to-Value (LTV) – Mortgage ÷ Property Value
16
Page 372
OBTAINING CREDIT
• Underwriting the Loan (cont’d)
• Lenders often rely on automated scoring systems as part of the
underwriting process
• Freddie Mac’s
Loan Prospector
• Fannie Mae’s
Desktop Underwriter
17
Page 372
OBTAINING CREDIT
• Loan Commitment – Lender’s pledge to lend a certain
amount of money to a borrower under specific terms using a
particular property as collateral
18
Page 372
OBTAINING CREDIT
• Loan Commitment (cont’d)
• Commitment letter is in writing and creates a contract between
the lender and the borrower
• May contain conditions that affect the lender’s ultimately
fulfilling its promise of a loan
• Examples: house for sale contingency, title insurance
19
Page 372
FINANCING LEGISLATION
• Federal government regulates the lending practices of mortgage
lenders through:
• Truth in Lending Act
• Equal Credit Opportunity Act
• Real Estate Settlement Procedures Act
• Community Reinvestment Act
20
Page 373
FINANCING LEGISLATION
• Truth in Lending Act
• Regulation Z – Requires that credit institutions inform borrowers
of the true cost of obtaining credit
• Generally applies when a
credit transaction is
secured by a residence
21
Page 373
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Regulation Z (cont’d)
• Consumer must be informed of all finance charges such as
loan fees, finder’s fees, service charges, points, and interest
• The lender must compute and disclose the Annual Percentage
Rate (APR)
22
Page 373
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Creditor – A person who extends consumer credit more than 25
times a year or more than 5 times a year if the transactions
involve dwellings as security
• Must be subject to a
finance charge or payable
in more than 4 installments
23
Page 373
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Three-day Right of Recission – Most consumer credit
transactions have three (3) days in which to rescind the
transaction by notifying the lender
• Does NOT apply to owner-occupied residential mortgages
• Does apply to refinancing a home mortgage or home equity
loan
24
Page 373
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Advertising – Provides strict
regulation of real estate
advertisements that refer to
mortgage financing terms
25
Page 373
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Advertising (cont’d)
• Annual Percentage Rate (APR) must be stated
26
Page 373
APR
+ ÷ =
Interest
Rate
Fees &
Costs
Mortgage
Amount
Annual
Percentage
Rate
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Advertising (cont’d)
• Buydowns or reduced-rate mortgages must show both the
limited term to which the interest rate applies and the annual
percentage rate
• Variable-rate mortgages must show the number and timing of
payments, amount of largest and smallest payments, and statement
that payments will vary
27
Page 373-374
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Advertising (cont’d)
• Trigger Terms – If any of the following terms
are used in the advertisement, they all must
be included:
28
Page 374
• Cash price
• Down payment
• Number, amount, and due date of
all payments
• Annual Percentage Rate
• Total of all payments to be made
over the term of the loan
FINANCING LEGISLATION
• Truth in Lending Act (cont’d)
• Penalties for non-compliance include:
• $10,000 for each day violation continues
• $10,000 for engaging in unfair or deceptive practice
• Creditor may be liable to consumer for twice the amount of
the finance charge, court costs, attorney fees, and actual
damages
• Willful violations: $5,000 and/or 1 year imprisonment
29
Page 374
FINANCING LEGISLATION
• Equal Credit Opportunity Act (ECOA) – Prohibits lenders who grant
or arrange credit from discriminating against credit applicants
because of:
30
Page 374
• Race
• Color
• Religion
• National origin
• Sex
• Marital status
• Age
• Public assistance
FINANCING LEGISLATION
• Equal Credit Opportunity Act (ECOA) (cont’d)
• Must inform rejected credit applicants of the reason(s) for
denial in writing within 30 days
• Borrower is entitled to a
copy of the appraisal
report if they paid for it
31
Page 374
FINANCING LEGISLATION
• Community Reinvestment Act (CRA) – Financial institutions are
expected to:
• Meet the deposit and credit needs of their community
• Participate and invest in community development and
rehabilitation projects
• Participate in loan programs for housing, small business, and
small farms
32
Page 375
FINANCING LEGISLATION
• Community Reinvestment Act (CRA) (cont’d)
• Law requires federally supervised financial institutions to
prepare a statement containing:
• Definition of geographic boundaries of community
• ID the types of community reinvestment offered
• Comments from the public about their performance
• Periodically reviewed by federal supervisory agencies
33
Page 375
LOAN PROGRAMS
• Loan-to-Value (LTV) Ratio = Mortgage ÷ Value
• Higher LTV = Higher Risk
• Lower LTV = Lower Risk
• Example: If a property has an appraised value of $200,000,
secured by an $180,000 loan, what is the LTV?
Answer: $180,000 ÷ $200,000 = 90% LTV
34
Page 375
LOAN PROGRAMS
• Conventional Loans – Any loans that are not government insured
or guaranteed
• Most secure loan
because the
loan-to-value ratio is
usually 80% or less with
a down payment of
20% or more
35
Page 376
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Security for the loan is provided solely by
the mortgage and payment of the debt
rests on the ability of the borrower to pay
36
Page 376
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Qualifications for a conventional loan:
• Total monthly housing expense ≤ 28% of total monthly gross
income
• Total monthly obligations ≤ 36% of total monthly gross
income
• Loans that meet these guidelines are called conforming loans
37
Page 376
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Maximum loan limits for 2023
38
Page 376
General Loan Limits $726,200
High-Cost Areas $1,089,300
NOTE: Updated
limits different than
book
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Qualification Example: (NOTE: Be able to qualify the borrowers
based on the facts presented in the example on pages 376-377)
39
Page 376-377
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Private Mortgage Insurance (PMI) – Insurance policy purchased
by borrowers on loans with LTV greater than 80%
• Provides the lender with funds in
the event that the borrower
defaults on the loan
• Borrower pays monthly premiums
40
Page 377
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Private Mortgage Insurance (PMI) (cont’d)
41
Page 377
$200,000 $180,000
(90% LTV)
Sales Price Mortgage
Lender wants to insure this portion
(10%) of the loan by having Buyer pay
for PMI
Dotted line box represents 20% of the
sales price
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Private Mortgage Insurance (PMI) (cont’d)
• Federal law requires that PMI
automatically terminate if a
borrower has accumulated at
least 22% equity in the home
(based on original purchase price)
42
Page 377
LOAN PROGRAMS
• Conventional Loans (cont’d)
• Private Mortgage Insurance (PMI) (cont’d)
• Borrowers can petition lender
to drop PMI if the home is
located in an area where
homes have appreciated
and equity has reached 22%
43
Page 377
LOAN PROGRAMS
• FHA Insured Loans
• FHA insurance provides security
to the lender against loss from
borrower default
• Interest rates are competitive with other types of loans
• Borrowers eligible for 96.5% loan-to-value financing for one to
four unit structures
44
Page 377-378
LOAN PROGRAMS
• FHA Insured Loans (cont’d)
• Technical requirements for FHA loans:
• Minimum 3.5 % down payment
• Borrower pays Mortgage Insurance Premium (MIP)
• Appraised by an approved FHA appraiser
• Maximum mortgage amount varies by area
• Borrower must meet FHA credit qualifications
45
Page 378
LOAN PROGRAMS
• FHA Insured Loans (cont’d)
• A qualified buyer may assume an existing FHA loan originated
after December 15, 1989
• Investors may not
assume FHA loans
made after
December 14, 1989
46
Page 379
LOAN PROGRAMS
• FHA Insured Loans (cont’d)
• Discount Points – Allowed
to be charged by lender
• Seller may pay up to 6%
of the buyer’s closing
costs
47
Page 379
LOAN PROGRAMS
• VA Guaranteed Loans
48
Page 379
• VA is authorized to guarantee loans to
purchase or construct homes for eligible
veterans and their spouses
• Little or no down payment
• VA sets qualifications
• Must be owner-occupied
LOAN PROGRAMS
• VA Guaranteed Loans (cont’d)
• Certificate of Eligibility – Sets forth the maximum guarantee for
which the veteran is eligible
• Certificate of Reasonable Value (CRV) – States the property’s
current market value based on a VA-approved appraisal
• VA Funding Fee – Financed or payable at settlement and varies
depending on the down payment amount
49
Page 380
LOAN PROGRAMS
• VA Guaranteed Loans (cont’d)
• Prepayment Privileges – No penalty
• Assumption Rules – In most cases, the VA must approve the new
buyer and assumption agreement
• Original veteran-borrower remains personally liable for
repayment unless the VA approves a Release of Liability
50
Page 380
LOAN PROGRAMS
• Agricultural Loan Programs
• Farm Service Agency (FSA) offers programs to help families
purchase or operate family farms
51
Page 380
LOAN PROGRAMS
• Agricultural Loan Programs (cont’d)
• Rural Housing and Community Development Service – Provides
loans to help families purchase or improve single-family homes
in rural areas
52
Page 380
LOAN PROGRAMS
• Agricultural Loan Programs (cont’d)
• Farm Credit System – Provides loans to farmers, ranchers, rural
homeowners, agricultural cooperatives, rural utility systems, and
agribusiness
53
Page 381
LOAN PROGRAMS
• Agricultural Loan Programs (cont’d)
• Farmer Mac – Pools or bundles agricultural loans form lenders
for sale as mortgage-backed securities
54
Page 381
FINANCING TECHNIQUES
• Adjustable Rate Mortgage (ARM) – Loan originates at one rate of
interest, then fluctuates up or down during the loan term based
on an economic indicator
55
Page 381
FINANCING TECHNIQUES
• Adjustable Rate Mortgage (ARM) (cont’d)
• Common components of an ARM include:
• Index – Undeterminable economic indicator that is used to
adjust the interest rate
• Margin – Index plus a premium
• Rate Caps – Limits the amount the interest rate may change
during a specific period and the life-of-the-loan
56
Page 381
FINANCING TECHNIQUES
• Adjustable Rate Mortgage (ARM) (cont’d)
• Common components of an ARM include: (cont’d)
• Payment Cap – Maximum amount for payments
• Adjustment Period – How often the rate may change (i.e. 1
year, 3 years, 5 years)
• Conversion Option – Permits borrower to convert to a fixed
rate mortgage at certain intervals
57
Page 381
FINANCING TECHNIQUES
• Balloon Payment Loan – When the periodic payments are not
large enough to fully amortize the loan by the time the final
payment is due
• The final payment is called
a balloon payment
58
Page 382
FINANCING TECHNIQUES
• Growing Equity Mortgage (GEM) – Uses a fixed interest rate but
payments of principal increase according to an index or a schedule
• Also known as a rapid-payoff mortgage
59
Page 382
FINANCING TECHNIQUES
• Reverse Annuity Mortgage (RAM) – Allows people 62 or older to
borrow money against the equity they have built up in their home
• Borrower is charged a fixed rate
of interest and no payments are
due to the lender until the
property is sold or the borrower
defaults, moves, or dies
60
Page 382
FINANCING TECHNIQUES
• Purchase Money Mortgage – Created when the seller agrees to
finance all or part of the purchase price for the buyer
• Often called seller financing or owner financing
61
Page 382
OWNER FINANCING AVAILABLE
FINANCING TECHNIQUES
• Purchase Money Mortgage (cont’d)
• The buyer/borrower executes a note and a mortgage at the
time of purchase and the seller records the mortgage against
the property
62
Page 382
FINANCING TECHNIQUES
• Package Loans – Include real
and personal property
63
Page 383
• Blanket Loans – Cover more
than one parcel or lot
FINANCING TECHNIQUES
• Wraparound Loans – Enables a borrower with an existing loan to
obtain additional financing from a 2nd lender without paying off
the 1st loan
• 2nd lender gives the borrower a new, larger loan at a higher
interest rate and assumes payment of the existing loan
64
Page 383
FINANCING TECHNIQUES
• Open-End Loans – Secures a note
executed by the borrower to the
lender to secure future advances of
funds made by the lender to the
borrower
65
Page 383
FINANCING TECHNIQUES
• Construction Loans – Made to finance the construction of
improvements on real estate
• Lender commits to the full
amount of the loan but
disburses the funds periodically
during construction
• Borrower arranges permanent loan to pay off construction
financing when the work is completed
66
Page 384
FINANCING TECHNIQUES
• Sale and Leaseback – Real estate used by seller for business
purposes is sold to an investor who then leases the property back
to the seller
• Enables a business to free
money tied up in real estate
and use it as working capital
67
Page 384
FINANCING TECHNIQUES
• Buydowns – A way to temporarily (or permanently) lower the
interest rate on a mortgage loan
• Lump sum is paid to the lender
in cash at closing to offset the
interest rate and monthly
payments during the loan’s
first few years
68
Page 384
FINANCING TECHNIQUES
• Home Equity Loans – A source of funds using a home’s equity
• The original mortgage loan
remains in place and the
home equity loan is junior
to the original loan
69
Page 385

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LCAR Unit 19 - Financing the Real Estate Transaction - 14th Edition Revised

  • 1. The Real Estate School U N I T 1 9 FINANCING THE REAL ESTATE TRANSACTION 1 Page 369
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  • 6. OBTAINING CREDIT • Cost of Credit – Loan is an investment by the lender • Lenders evaluate two aspects of the investment: 1. Yield – Return or income that can be generated 2. Risk – Likelihood that the investor will lose money 6 Page 370
  • 7. OBTAINING CREDIT • Cost of Credit (cont’d) • The interest rate that the lender charges the borrower depends on four factors: 1. Term of Loan – Length of time 2. Type of Loan – Fixed vs. adjustable 3. Amount – Jumbo loans carry greater risk 4. Cost of Money – Rates fluctuate with market 7 Page 370
  • 8. OBTAINING CREDIT • Most real estate licensees encourage buyers to meet with lenders before looking at property • Preapproval – Based on a preliminary credit application • Prequalification – Process by which lender determines the upper loan limit of the borrower 8 Page 370
  • 9. OBTAINING CREDIT • Credit Scores – Result of an analysis of factors characteristic of repayment and credit risk • Scores range from less than 400 up to 900 • The higher the score, the lower the credit risk 9 Page 371
  • 10. OBTAINING CREDIT • Credit Scores (cont’d) • Five major factors are analyzed: 1. Past payment performance 2. Credit use 3. Credit history 4. Types of credit in use 5. Credit report inquiries 10 Page 371
  • 11. OBTAINING CREDIT • Cost of Credit (cont’d) • Credit scores not only affect a borrower’s ability to obtain a loan but also the interest rate a lender will charge 11 Page 371
  • 12. OBTAINING CREDIT • Fair and Accurate Credit Transactions Act (FACTA) – Requires that each of the three major credit bureaus provides a FREE credit report every 12 months upon request 12 Page 371
  • 13. OBTAINING CREDIT • Fair and Accurate Credit Transactions Act (FACTA) – Agencies are required to provide a toll-free number to assist consumers, correct mistakes, and remove disputed information 13 Page 371
  • 14. OBTAINING CREDIT • Loan Application – Requires loan applicants submit personal information about their employment, income, assets, and other financial obligations 14 Page 371
  • 15. OBTAINING CREDIT • Underwriting the Loan – Process of analyzing the extent of risk a lender will assume in connection with a mortgage loan 15 Page 372
  • 16. OBTAINING CREDIT • Underwriting the Loan (cont’d) • Borrower is evaluated based on the following criteria: • Occupancy – Owner occupied or investment • Income – Enough to support borrower • Assets and Cash Reserves – Verification needed • Debt – House payment plus other debts • Loan-to-Value (LTV) – Mortgage ÷ Property Value 16 Page 372
  • 17. OBTAINING CREDIT • Underwriting the Loan (cont’d) • Lenders often rely on automated scoring systems as part of the underwriting process • Freddie Mac’s Loan Prospector • Fannie Mae’s Desktop Underwriter 17 Page 372
  • 18. OBTAINING CREDIT • Loan Commitment – Lender’s pledge to lend a certain amount of money to a borrower under specific terms using a particular property as collateral 18 Page 372
  • 19. OBTAINING CREDIT • Loan Commitment (cont’d) • Commitment letter is in writing and creates a contract between the lender and the borrower • May contain conditions that affect the lender’s ultimately fulfilling its promise of a loan • Examples: house for sale contingency, title insurance 19 Page 372
  • 20. FINANCING LEGISLATION • Federal government regulates the lending practices of mortgage lenders through: • Truth in Lending Act • Equal Credit Opportunity Act • Real Estate Settlement Procedures Act • Community Reinvestment Act 20 Page 373
  • 21. FINANCING LEGISLATION • Truth in Lending Act • Regulation Z – Requires that credit institutions inform borrowers of the true cost of obtaining credit • Generally applies when a credit transaction is secured by a residence 21 Page 373
  • 22. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Regulation Z (cont’d) • Consumer must be informed of all finance charges such as loan fees, finder’s fees, service charges, points, and interest • The lender must compute and disclose the Annual Percentage Rate (APR) 22 Page 373
  • 23. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Creditor – A person who extends consumer credit more than 25 times a year or more than 5 times a year if the transactions involve dwellings as security • Must be subject to a finance charge or payable in more than 4 installments 23 Page 373
  • 24. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Three-day Right of Recission – Most consumer credit transactions have three (3) days in which to rescind the transaction by notifying the lender • Does NOT apply to owner-occupied residential mortgages • Does apply to refinancing a home mortgage or home equity loan 24 Page 373
  • 25. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Advertising – Provides strict regulation of real estate advertisements that refer to mortgage financing terms 25 Page 373
  • 26. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Advertising (cont’d) • Annual Percentage Rate (APR) must be stated 26 Page 373 APR + ÷ = Interest Rate Fees & Costs Mortgage Amount Annual Percentage Rate
  • 27. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Advertising (cont’d) • Buydowns or reduced-rate mortgages must show both the limited term to which the interest rate applies and the annual percentage rate • Variable-rate mortgages must show the number and timing of payments, amount of largest and smallest payments, and statement that payments will vary 27 Page 373-374
  • 28. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Advertising (cont’d) • Trigger Terms – If any of the following terms are used in the advertisement, they all must be included: 28 Page 374 • Cash price • Down payment • Number, amount, and due date of all payments • Annual Percentage Rate • Total of all payments to be made over the term of the loan
  • 29. FINANCING LEGISLATION • Truth in Lending Act (cont’d) • Penalties for non-compliance include: • $10,000 for each day violation continues • $10,000 for engaging in unfair or deceptive practice • Creditor may be liable to consumer for twice the amount of the finance charge, court costs, attorney fees, and actual damages • Willful violations: $5,000 and/or 1 year imprisonment 29 Page 374
  • 30. FINANCING LEGISLATION • Equal Credit Opportunity Act (ECOA) – Prohibits lenders who grant or arrange credit from discriminating against credit applicants because of: 30 Page 374 • Race • Color • Religion • National origin • Sex • Marital status • Age • Public assistance
  • 31. FINANCING LEGISLATION • Equal Credit Opportunity Act (ECOA) (cont’d) • Must inform rejected credit applicants of the reason(s) for denial in writing within 30 days • Borrower is entitled to a copy of the appraisal report if they paid for it 31 Page 374
  • 32. FINANCING LEGISLATION • Community Reinvestment Act (CRA) – Financial institutions are expected to: • Meet the deposit and credit needs of their community • Participate and invest in community development and rehabilitation projects • Participate in loan programs for housing, small business, and small farms 32 Page 375
  • 33. FINANCING LEGISLATION • Community Reinvestment Act (CRA) (cont’d) • Law requires federally supervised financial institutions to prepare a statement containing: • Definition of geographic boundaries of community • ID the types of community reinvestment offered • Comments from the public about their performance • Periodically reviewed by federal supervisory agencies 33 Page 375
  • 34. LOAN PROGRAMS • Loan-to-Value (LTV) Ratio = Mortgage ÷ Value • Higher LTV = Higher Risk • Lower LTV = Lower Risk • Example: If a property has an appraised value of $200,000, secured by an $180,000 loan, what is the LTV? Answer: $180,000 ÷ $200,000 = 90% LTV 34 Page 375
  • 35. LOAN PROGRAMS • Conventional Loans – Any loans that are not government insured or guaranteed • Most secure loan because the loan-to-value ratio is usually 80% or less with a down payment of 20% or more 35 Page 376
  • 36. LOAN PROGRAMS • Conventional Loans (cont’d) • Security for the loan is provided solely by the mortgage and payment of the debt rests on the ability of the borrower to pay 36 Page 376
  • 37. LOAN PROGRAMS • Conventional Loans (cont’d) • Qualifications for a conventional loan: • Total monthly housing expense ≤ 28% of total monthly gross income • Total monthly obligations ≤ 36% of total monthly gross income • Loans that meet these guidelines are called conforming loans 37 Page 376
  • 38. LOAN PROGRAMS • Conventional Loans (cont’d) • Maximum loan limits for 2023 38 Page 376 General Loan Limits $726,200 High-Cost Areas $1,089,300 NOTE: Updated limits different than book
  • 39. LOAN PROGRAMS • Conventional Loans (cont’d) • Qualification Example: (NOTE: Be able to qualify the borrowers based on the facts presented in the example on pages 376-377) 39 Page 376-377
  • 40. LOAN PROGRAMS • Conventional Loans (cont’d) • Private Mortgage Insurance (PMI) – Insurance policy purchased by borrowers on loans with LTV greater than 80% • Provides the lender with funds in the event that the borrower defaults on the loan • Borrower pays monthly premiums 40 Page 377
  • 41. LOAN PROGRAMS • Conventional Loans (cont’d) • Private Mortgage Insurance (PMI) (cont’d) 41 Page 377 $200,000 $180,000 (90% LTV) Sales Price Mortgage Lender wants to insure this portion (10%) of the loan by having Buyer pay for PMI Dotted line box represents 20% of the sales price
  • 42. LOAN PROGRAMS • Conventional Loans (cont’d) • Private Mortgage Insurance (PMI) (cont’d) • Federal law requires that PMI automatically terminate if a borrower has accumulated at least 22% equity in the home (based on original purchase price) 42 Page 377
  • 43. LOAN PROGRAMS • Conventional Loans (cont’d) • Private Mortgage Insurance (PMI) (cont’d) • Borrowers can petition lender to drop PMI if the home is located in an area where homes have appreciated and equity has reached 22% 43 Page 377
  • 44. LOAN PROGRAMS • FHA Insured Loans • FHA insurance provides security to the lender against loss from borrower default • Interest rates are competitive with other types of loans • Borrowers eligible for 96.5% loan-to-value financing for one to four unit structures 44 Page 377-378
  • 45. LOAN PROGRAMS • FHA Insured Loans (cont’d) • Technical requirements for FHA loans: • Minimum 3.5 % down payment • Borrower pays Mortgage Insurance Premium (MIP) • Appraised by an approved FHA appraiser • Maximum mortgage amount varies by area • Borrower must meet FHA credit qualifications 45 Page 378
  • 46. LOAN PROGRAMS • FHA Insured Loans (cont’d) • A qualified buyer may assume an existing FHA loan originated after December 15, 1989 • Investors may not assume FHA loans made after December 14, 1989 46 Page 379
  • 47. LOAN PROGRAMS • FHA Insured Loans (cont’d) • Discount Points – Allowed to be charged by lender • Seller may pay up to 6% of the buyer’s closing costs 47 Page 379
  • 48. LOAN PROGRAMS • VA Guaranteed Loans 48 Page 379 • VA is authorized to guarantee loans to purchase or construct homes for eligible veterans and their spouses • Little or no down payment • VA sets qualifications • Must be owner-occupied
  • 49. LOAN PROGRAMS • VA Guaranteed Loans (cont’d) • Certificate of Eligibility – Sets forth the maximum guarantee for which the veteran is eligible • Certificate of Reasonable Value (CRV) – States the property’s current market value based on a VA-approved appraisal • VA Funding Fee – Financed or payable at settlement and varies depending on the down payment amount 49 Page 380
  • 50. LOAN PROGRAMS • VA Guaranteed Loans (cont’d) • Prepayment Privileges – No penalty • Assumption Rules – In most cases, the VA must approve the new buyer and assumption agreement • Original veteran-borrower remains personally liable for repayment unless the VA approves a Release of Liability 50 Page 380
  • 51. LOAN PROGRAMS • Agricultural Loan Programs • Farm Service Agency (FSA) offers programs to help families purchase or operate family farms 51 Page 380
  • 52. LOAN PROGRAMS • Agricultural Loan Programs (cont’d) • Rural Housing and Community Development Service – Provides loans to help families purchase or improve single-family homes in rural areas 52 Page 380
  • 53. LOAN PROGRAMS • Agricultural Loan Programs (cont’d) • Farm Credit System – Provides loans to farmers, ranchers, rural homeowners, agricultural cooperatives, rural utility systems, and agribusiness 53 Page 381
  • 54. LOAN PROGRAMS • Agricultural Loan Programs (cont’d) • Farmer Mac – Pools or bundles agricultural loans form lenders for sale as mortgage-backed securities 54 Page 381
  • 55. FINANCING TECHNIQUES • Adjustable Rate Mortgage (ARM) – Loan originates at one rate of interest, then fluctuates up or down during the loan term based on an economic indicator 55 Page 381
  • 56. FINANCING TECHNIQUES • Adjustable Rate Mortgage (ARM) (cont’d) • Common components of an ARM include: • Index – Undeterminable economic indicator that is used to adjust the interest rate • Margin – Index plus a premium • Rate Caps – Limits the amount the interest rate may change during a specific period and the life-of-the-loan 56 Page 381
  • 57. FINANCING TECHNIQUES • Adjustable Rate Mortgage (ARM) (cont’d) • Common components of an ARM include: (cont’d) • Payment Cap – Maximum amount for payments • Adjustment Period – How often the rate may change (i.e. 1 year, 3 years, 5 years) • Conversion Option – Permits borrower to convert to a fixed rate mortgage at certain intervals 57 Page 381
  • 58. FINANCING TECHNIQUES • Balloon Payment Loan – When the periodic payments are not large enough to fully amortize the loan by the time the final payment is due • The final payment is called a balloon payment 58 Page 382
  • 59. FINANCING TECHNIQUES • Growing Equity Mortgage (GEM) – Uses a fixed interest rate but payments of principal increase according to an index or a schedule • Also known as a rapid-payoff mortgage 59 Page 382
  • 60. FINANCING TECHNIQUES • Reverse Annuity Mortgage (RAM) – Allows people 62 or older to borrow money against the equity they have built up in their home • Borrower is charged a fixed rate of interest and no payments are due to the lender until the property is sold or the borrower defaults, moves, or dies 60 Page 382
  • 61. FINANCING TECHNIQUES • Purchase Money Mortgage – Created when the seller agrees to finance all or part of the purchase price for the buyer • Often called seller financing or owner financing 61 Page 382 OWNER FINANCING AVAILABLE
  • 62. FINANCING TECHNIQUES • Purchase Money Mortgage (cont’d) • The buyer/borrower executes a note and a mortgage at the time of purchase and the seller records the mortgage against the property 62 Page 382
  • 63. FINANCING TECHNIQUES • Package Loans – Include real and personal property 63 Page 383 • Blanket Loans – Cover more than one parcel or lot
  • 64. FINANCING TECHNIQUES • Wraparound Loans – Enables a borrower with an existing loan to obtain additional financing from a 2nd lender without paying off the 1st loan • 2nd lender gives the borrower a new, larger loan at a higher interest rate and assumes payment of the existing loan 64 Page 383
  • 65. FINANCING TECHNIQUES • Open-End Loans – Secures a note executed by the borrower to the lender to secure future advances of funds made by the lender to the borrower 65 Page 383
  • 66. FINANCING TECHNIQUES • Construction Loans – Made to finance the construction of improvements on real estate • Lender commits to the full amount of the loan but disburses the funds periodically during construction • Borrower arranges permanent loan to pay off construction financing when the work is completed 66 Page 384
  • 67. FINANCING TECHNIQUES • Sale and Leaseback – Real estate used by seller for business purposes is sold to an investor who then leases the property back to the seller • Enables a business to free money tied up in real estate and use it as working capital 67 Page 384
  • 68. FINANCING TECHNIQUES • Buydowns – A way to temporarily (or permanently) lower the interest rate on a mortgage loan • Lump sum is paid to the lender in cash at closing to offset the interest rate and monthly payments during the loan’s first few years 68 Page 384
  • 69. FINANCING TECHNIQUES • Home Equity Loans – A source of funds using a home’s equity • The original mortgage loan remains in place and the home equity loan is junior to the original loan 69 Page 385