Prin 2 Math Flashcards
Whole Number:
Any number between zero and infinity. Whole numbers are not fractions or negative numbers.
Synonyms:
Positive integers, basic numbers
Fraction:
A fraction is part of a whole — a fraction is not a whole number.
Numerator:
The number on top of a fraction’s division line or the number of the parts with which you are working; also called the divisor.
Denominator:
The number below the fraction’s bottom line or the number of equal parts in total; also called the divisor.
Improper Fractions:
When the value of the numerator (the number on top) is greater than the denominator (the number on the bottom), the fraction is an improper fraction.
Mixed Numbers:
A number consisting of a whole number and a fraction.
Decimal:
A fraction whose denominator is a power of ten and whose numerator is expressed by figures placed to the right of a decimal point.
Decimal Definition in Normal, Real Life Words:
A number that involves a decimal point.
Ratio:
The quantitive relation between two numbers.
Percentage:
A fraction or ratio with a denominator of 100.
Usually written as just the numerator and a % symbol.
Profit:
A financial gain. Making more money selling a product than was spent buying or producing the product.
Loss: A financial loss —
Making less money selling a product than was spent buying or producing the product.
Interest:
Money repaid regularly at a specified rate as compensation for money lent.
Principal:
amount lent to a borrower to purchase a house — the borrower pays the lender interest in exchange for the principal.
Mortgage:
A mortgage is a secured loan that is tied to real estate, where the borrower has to pay the money back to the lender on a set schedule and amount of payments. Mortgages are also considered “liens against property” or “claims on property.”
Down Payment:
initial payment made when buying something on credit; a down payment is paid directly by the buyer to the seller. The standard down payment is 20% of the overall house price, and while a 20% down payment is recommended, it is not required. The minimum down payment required by mortgage lenders is 3% of the house’s price.
Amortization:
The repayment of a loan over time in equal installments that include principal and interest.
TREC has its own requirements for calculator use on the licensing exam. TREC-acceptable calculators must:
Be silent
Be battery-operated
Not have paper tape printing capabilities
Not have an alphabet keyboard
Percent comes from a Latin phrase “per centum ”, percent essentially means
Per hundred
You can never solve a problem while a percentage is still in percentage form — it must be changed into its
Decimal form
Percentage:
A rate or amount in each hundred (3⁄4 is 75% written as a fraction)
Part:
A portion of the total amount, the numerator (3 of 3⁄4)
Total:
The “final” or “end result” number, the denominator (4 of 3⁄4)
A commission is a
Percentage of the sales price
Here are my key tips for reading word problems:
Identify key words
Write down key info
Identify what you need to solve
Identify info you need to find
Cross out all unnecessary info
total, part, and percentage come together to create a nifty formula.
The part divided by percentage will equal the total.
Here are some of the variables that will impact a seller’s potential profit on a sale:
Any remaining mortgage balance left on the house
Any repairs that must be made
Any liens on the house
The commission of the sale given to the listing agent and buyer’s agent
Any closing costs related to a survey, title, etc.
non-amortized loans
means that the borrower will be paying interest only throughout the life of the loan.
principal will remain the same and will be due as a balloon payment at the end of the loan’s term.
These loans are more common in commercial and investment real estate.
Mortgage:
A legal agreement between a creditor and borrower in which the creditor lends money with interest to the borrower for the purchase of property with the condition that the creditor takes ownership of the title if the borrower defaults in repayment of the loan
Origination points are
fees charged to the borrower by the lender to pay for the loan origination.
Discount points are
paid by the borrower to lower the interest rate.
Proration:
The allocation or distribution of an annual expense across smaller chunks of time
assessed value is
value placed on a property by a governmental unit for use in calculating property taxes.
Assessing units employ
assessors to perform these assessments
An assessing unit or approved assessing unit is a
department that has the power to assess real property (such as a city, town, or county).
These units evaluate every piece of real property in their jurisdiction.
Tax rates are commonly written as
a certain number of dollars per $100, but they can also appear in percentage form.
expressing a tax rate in dollars per $100 is the same as
expressing the tax rate as a percent.
The amount that a homeowner pays in property taxes are based upon two things:
The tax rate
The assessed value of the property
there are two ways that a homeowner’s taxes can increase:
Property tax rate increases.
Property’s assessed value increases.
Accrued items are
costs that have been incurred, but have not been paid for yet.
360-day year is known as a
“banker’s year”; it is commonly used in banking to make calculations easier. That way, the year is cleanly divided into 12 months of 30 days each.
365-day year is sometimes also called the
“conventional calendar year,” because its divisions reflect the actual months of the calendar that most of us use.
To calculate the daily charge for an item using the conventional calendar year, divide the yearly charge by 365 (366 in a leap year).
Before you begin calculating prorations, then, you will need to answer the following questions:
What kind of item is being prorated? Is the charge for the item assessed daily, monthly, annually, or according to some other schedule?
Is this item accrued or prepaid?
Which calculation method should be used?
Where is my calculator? 😮
When calculating prorated expenses for a prepaid item, it is first necessary to
determine the period of time for which the expense has been prepaid.
Square footage:
Acreage:
A unit of area measurement used to compare the size of buildings (length x width)
A unit of area measurement used to determine the size of land — 1 acre = 43,560 square feet. (acreage)
The most common measurement that buyers consider when searching for a home is the home’s
Square footage
Square footage is a unit of area measurement, equal to 1 ft. by 1 ft. Buyers and sellers will often use square footage as a way to compare the size of buildings.
If a real estate license holder incorrectly calculates the square footage of a house, they may be
liable for misrepresentation. For this reason, license holders should always search for and cite a source for square footage instead of calculating square footage on their own.
1) 1 yard is equal to
2) 1 square yard is equal to
1) 3 feet
2) 9 square feet
The finished area of a home is considered
The Livable area
Finished areas include rooms within the house or connected to the house that are typically heated and/or air-conditioned, making them suitable for habitation year-round.
The unfinished area of a home includes
external areas such patios, porches, decks, and garages. A basement or attic could also be considered unfinished, depending on the functionality of the room.
Volume is measured in
Cubic feet
1 acre =
43,560 sq ft
1 section = 1 square mile =
1 township = 36 sections =
640 acres
36 square miles
1 linear mile is equal to
5,280 linear feet.
The frontage is the portion of
the boundary of a lot that borders the street. Frontage is measured in front feet.
A front foot is the unit used to measure
a property that borders a street. One front foot is one foot of property bordering the street.
When giving the dimensions of a property, the front feet are always
Stated first.
For example, if a property is 150’ x 313’, the property has a frontage of 150 feet, or, 150 front feet.
Related to frontage, the depth of a lot is how far the lot goes back. So, if a rectangular lot is 150’ x 313’, the frontage is
150 front feet and the depth is 313 feet.
The perimeter is
the boundary of the property.
To find out what the perimeter is of a property, all you have to do is add the boundary lines together.
Appraisal:
The value of a property, based on factors determined by the opinion of a certified appraiser
When Selling: If your client is selling a house, you usually want the house to appraise for
as much as possible, that way the client has the potential to get the most money possible (and you the commission).
When Buying:
If your client is buying a house, they want the appraisal to go at least as high as their offer. If not, the buyer could be liable to pay the difference* between their offer and the appraisal.
An appraiser’s job is to supply
impartial and unbiased information in order to estimate the value of a property.
To be an appraiser, you need:
Strong analytical skills 💪
The ability to observe and assess market trends 📈
The ability to separate opinion from fact 🔎
to be licensed
licensed real estate agent cannot perform an
appraisal unless they are also a licensed appraiser.
Lenders, not buyers or sellers, usually choose the
Appraiser
Even though the lenders choose who will be appraising the property, the lenders are legally not allowed to be
affiliated with the appraisers.
To come up with the official value assessment of a home, the appraiser:
Researches the right market areas
Assesses and analyzes information about the property
Uses their own professional judgment
Appraisals can be used for any number of things, including:
Mortgage lending
Government acquisitions
Tax assessments/assessment appeals
Buyer/seller negotiations
The Uniform Standards of Professional Appraisal Practice (USPAP) is
the ethical code that appraisers in the United States must follow. All state-certified, practicing appraisers must follow these guidelines.
All appraisers are regulated b
Appraiser Qualifications Board (AQB) of the Appraisal Foundation.
Appraisal Foundation is authorized by
Congress to set the minimum requirements for Certified General Real Property Appraisers and Certified Residential Real Property Appraisers.
The AQB also sets recommended minimum requirements for the
Licensed Real Property Appraiser and Trainee classifications.
Appraisers in Texas are regulated by the
Texas Appraiser Licensing & Certification Board (TALCB).
TALCB is very closely related to
TREC
TREC and TALCB even share the same
resources and staff members!
as an appraiser supervisor, they can only supervise
three trainees at a time
There are three different levels of appraiser that a trainee can aspire to attain.
A trainee can become a:
Licensed Residential Appraiser
Certified Residential Appraiser
Certified General Appraiser
Licensed Residential Appraisers cannot:
But are qualified to appraise:
1)appraise subdivisions
One-to-four family non-complex residential units where the transactions are valued at less than $1,000,000
One-to-four family residential complex units having a transaction value of less than $250,000
To become a Licensed Residential Appraiser, an Appraiser Trainee needs:
And will also:
And:
A student wanting to become a Licensed Residential Appraiser will need either an
75 additional education hours on top of the 79 they’ve already taken.
need to verify that their National USPAP course (15 hours) was taken after Feb. 1, 2002.
the student will need 2,000 hours of logged appraisal experience logged over a minimum of one year (12 months). This experience must be logged and signed by their supervisor.
Associate’s Degree or 30 course credit hours from an accredited college or university.
After Licensed Residential Appraiser, the next level is
Certified residential appraiser
At the level of Certified Residential Appraiser, an appraiser can participate in
one to four residential unit transactions, no matter the value.
Certified Residential Appraiser: Requirements
For this level, the Appraiser Trainee will need:
Also:
To become a Certified Residential Appraiser, a trainee needs:
Certified Residential Appraisers are required to have a
125 hours of education on top of the 79 hours they’ve already taken.
make sure their National USPAP course (15 hours) was taken after Feb. 1, 2002.
2,500 hours of logged appraisal experience over a minimum of two years (24 month). And these must also comply with USPAP.
Bachelor’s Degree (or higher) from an accredited college or university.
Leveling Up: Certified General Appraiser
To progress from Appraiser Trainee to Certified General Appraiser needs
A Certified General Appraiser can
Trainees must have:
Will need:
To qualify to be a Certified General Appraiser,
On top of the 79 hours of education they’ve already taken, the trainee will need to take 225 hours of additional education.
appraise any kind of property, anywhere, anytime, anyhow.
completed their 15 hours of National Universal Standards of Professional Appraisal Practice Course after Feb. 1, 2002.
a Bachelor’s Degree (or higher) from an accredited college or university.
trainee will need 3,000 hours of appraisal experience
Once a trainee completes the requirements for the level of appraiser they want to become, they’ll have to take the
state appraiser test before they can become an appraiser.
General data is information about the
area surrounding the property. This could include the city, region, and neighborhood in which the property is situated. 🏙
Specific data, on the other hand, is information regarding
The property
A limited appraisal is a
abbreviated version of a regular appraisal. The appraiser generally makes this kind of assessment by checking out the exterior of the property only.
There are three types of value in the real estate world. They are:
Market value
Appraised value
Assessed value
Market value is
the price for which a property will sell if offered openly under normal conditions.
Only licensed appraisers can give an
Appraised value
The assessed value is the value
governmental unit for use in levying annual real estate taxes.
Reminder: Property taxes are ad valorem taxes, which means “according to value.”
Taxes are based on the
assessed value of the property,
…not the price that the homeowner paid for it, so there may be a difference between these two prices.
Why are these lenders so interested in the appraisal of a property for which they are offering a loan?
If things go bad and the borrower stops making mortgage payments, the lender may have to foreclose on the property. Lenders do not want to be stuck with a house that is worth less than the amount the borrower owes on the property.
lenders limit the amount of the loan to a certain
percentage of the home’s appraised value or sales price, whichever is lower. This limit is expressed as a loan-to-value ratio, or LTV.
The subject property is the
property that is being evaluated in any given appraisal.
The principle of anticipation is the idea that the present value of a property is
affected by the anticipated income or utility that property will give its property owner.
A property’s overall value is made up of the combined value of each of its parts. The value of each component contributes to the total value. This is the
Principle of contribution
contributory value of an item is not always
equal to the price of that item.
Ex:Some improvements are really smart because the value they add is higher than the expense.
Ex: seller could renovate an area of the home or add an improvement, only to be disappointed that the amount they spent doesn’t directly correlate with the additional amount they can fetch for the house.
The principle of substitution states
that the value of something is affected by the cost of getting a similar (substitute) item elsewhere.
The principle of change reminds us that the condition of a property, the desirability of its location, and the market in which it exists can always
Change
Any change could affect the value of the property, which is why appraisals are only good (acceptable to lenders) for a few months. An outdated appraisal may not reflect important zoning changes, damage to the building, or changes in the housing market.
there is a principle of conformity that says values are highest when
the houses in a neighborhood look roughly the same.
Value suffers when a house is much nicer, much worse, or just plain weirder than the other houses on the block.
principle of conformity is that maximum value is realized when land use is in
harmony with surrounding standards.
Principle of Regression:
When lower-value properties surround a subject property, they can drag down the value of the property via the principle of regression.
Principle of Progression:
If the subject property is located among properties that have a higher value, that can bump up the subject property’s value because of the principle of progression.
Sales comparison approach:
Determining value by comparing the subject property to similar properties (“comps”) that have sold recently. It’s most commonly used for single-family residences.
Cost approach:
Determining value by considering how much the same property would cost to build brand new at current prices (replacement cost), then adjusting for depreciation.
Income approach:
Determining value by considering how much income the property could generate when used as rental property.
Depreciation, a concept well known by appraisers, is the
loss of value because of obsolescence (becoming obsolete) or deterioration.
Undeveloped land is never subject to
Depreciation
Functional obsolescence:
Loss of value because a property’s function or appearance has gone out of style or has been replaced by a more appealing version
Economic obsolescence:
Loss in value caused by negative forces outside the property which are beyond the control of the owner (unfavorable changes in the environment or market)
Deterioration:
Loss of value caused by physical wear and tear over time
Chronological age:
literal age of the property. If the home was built 30 years ago, it’s chronological age is 30.
Effective age:
estimated age that is influenced by the updates and quality of maintenance of the property. A 30-year-old house that has been well cared for might have an effective age of 15.
Since different methods will yield different results for the same property, the appraiser will
reconcile these differences and come to a single number.
Appraisal Report:
report from a licensed appraiser that sums up a property’s market value based on collected data
Appraisal Review:
review of the appraisal report to make sure the appraisal meets the lender’s standards
Desk Review:
When the lender carries out an appraisal review at their desk (as opposed to sending someone out into the field) to make sure the original appraisal is accurate
Field Review:
When a third-party appraiser is sent back out to the property to check the validity of the first appraisal
The appraisal report is usually paid for by the
Buyer
There are eight steps to completing an appraisal:
Stating the objective Listing the data needed Gathering and recording data Determining the highest and best use Estimating the land value Estimating value using applicable approaches to appraisal Reconciling the final value estimate Completing and presenting the value report
The first thing an appraiser does is state their task. The appraiser identifies the
purpose of the appraisal, the date, the property location, and any other aspects that make the specific appraisal project unique.
When stating the objective, an appraiser:
Identifies the property with a complete legal description
Establishes which property’s rights are to be appraised (Typically this will be fee simple ownership, which is full ownership, but it may be less than full ownership, like a tenant’s leased occupation rights, right-of-way, or an easement.)
States the type of value the appraisal seeks to define, which is typically the market value (an investment value, value in use, or appraised value; however, it also determines property value in certain situations)
Determines the effective date of the valuation because value changes over time
Clarifies any limitations (this part protects the appraiser!)
The Appraisal Standards Board, or ASB, is responsible for establishing the
The ASB also enforces the
rules for completing an appraisal and compiling its report.
Uniform Standards of Professional Appraisal Practice, or USPAP, which outlines the ethical and professional standards of real estate appraisal.
The lender’s underwriter might even call for an appraisal review to double check the accuracy of the appraisal. This review is conducted by
another professional (either an independent or in-house specialist).
Things to Know About Market Value
It’s not the same thing as the sales price.
It’s an opinion, not a fact.
Not all appraisers will agree on the same value.
Here are a few examples of conditions that are NOT fair and normal:
wealthy clairvoyant sees the house of her childhood visions, but it’s not for sale. She makes an offer to the homeowners that’s well above market value to convince them to move. 🔮
An elderly man wants to sell the house he has lived in for decades in a city that’s seen massive growth. A buyer offers to buy it in cash for an amount that seems like a lot to the elderly man, but it’s actually below market value.
A doctor gets a job offer in a new city, and they need her to start ASAP. She accepts a below-market offer on her condo after having it listed for one day. She needs to sell quick!
DUST is a pretty handy acronym used in the real estate biz to help us remember the four characteristics that make real estate valuable:
Demand
Utility
Scarcity
Transferability
Demand is an obvious component of value. If no one wants the property,
It’s not valuable
Utility: Properties need to be useful or serve some kind of
Purpose to have value
sales comparison (or direct sales comparison) approach, also referred to as
Market days approach
The sales comparison approach to appraisal uses two value principles:
The principle of substitution
The principle of contribution
When an appraiser uses the sales comparison approach, they collect data from
previous sales of similar properties in the area with similar features: amenities, square footage, number of rooms, and location.
Appraisers rely heavily upon the sales comparison approach for
appraising owner-occupied residential properties and vacant land.
The Sales Comparison Approach is
100%linear
To estimate a property’s current market value using the cost approach, an appraiser needs to determine
how much it would cost to replace the building or other improvements. Then they would subtract the cost of depreciation from that value. Lastly, they would add the value of the land itself.
Here’s an overview of the steps involved in using the cost approach:
Estimate the value of the land itself.
Estimate the new construction cost of improvements (using replacement cost, reproduction cost, or another method).
Add up any and all types of depreciation.
Subtract the accrued depreciation from new construction cost to get the estimated value of current improvements.
Add the land value and improvement value together.
There are several methods used for determining the new construction cost of improvements within the cost approach:
The quantity survey method is quite intense. This involves the appraiser individually tallying up the value of everything that goes into the cost: labor and equipment, raw materials, business overhead, and other fees.
The unit-in-place method is less granular. It takes direct and indirect costs into account, but combines them into a simplified cost for a building component.
The square foot method is possibly the least accurate method, but it’s the simplest and most widely used. The appraiser estimates a cost per square foot for that specific type of building and then multiplies it by the square footage of the structure
quantity survey method
involves the appraiser individually tallying up the value of everything that goes into the cost: labor and equipment, raw materials, business overhead, and other fees.
unit-in-place method
takes direct and indirect costs into account, but combines them into a simplified cost for a building component.
square foot method is possibly the least accurate method, but it’s the simplest and most widely used. The appraiser estimates
a cost per square foot for that specific type of building and then multiplies it by the square footage of the structure.
Most appraisers do not use this method, but the cost approach is a great method to use when
putting a value on new construction.
Here’s what the appraiser is tasked with while calculating the replacement cost:
Establishing the improvement’s reproduction or replacement cost
Estimating the existing building’s depreciation (loss in value)
Establishing the value of a comparable land parcel
Making the appropriate adjustments to the comparable parcel
Combining the figures from the previous steps into the cost approach formula
Stating the value of the subject property
The replacement cost is
the cost of giving the new building similar features using comparable modern materials at current prices.
The reproduction cost is
the cost of procuring exact copies of the building’s components, preserving the styles and materials used at the subject property’s original construction.
(You probably wouldn’t do this unless the goal was to recreate the look of a historical building.)
Common types of depreciation include physical deterioration and obsolescence.
Physical deterioration is the loss of value caused by physical wear and tear over time.
Obsolescence is a property’s loss of value due to economic or functional factors.
Straight-line cost recovery is
an accounting method in which depreciation expenses are deducted from a property’s value.
Depreciation can be classified as either
curable or incurable.
Curable physical deterioration:
broken window that can be replaced
Incurable physical deterioration:
a major foundation problem that would cost more to fix than the structure is worth
Curable functional obsolescence:
electrical wiring that can easily meet current safety standards if updated
Incurable functional obsolescence:
a very outdated floor plan and no HVAC system
Curable external (economic) obsolescence:
No examples, because there is no such thing! By definition, the owner cannot fix the external factors causing depreciation of the property.
Economic life is
the length of time for which an improvement on property is expected to remain functional and useful.
The income capitalization approach determines an investment property’s value based on
its return.
It does this by dividing its net operating income (NOI) by the capitalization rate (cap rate) of the property. Cap rate is the ratio of NOI to property value.
Sometimes, cap rates and NOI figures are contained
in a property’s published listing documentation. Other times, only the the sales price is.
The IRV Formula
The basic formula for this approach is commonly referred to as IRV.
You can break this formula down even further into three steps:
Estimate the net operating income.
Determine the capitalization rate.
Apply the IRV formula to arrive at a value estimate.
three common income calculations done in real estate investment:
Potential gross income (PGI)
Effective gross income (EGI)
Net operation income (NOI)
potential gross income (PGI)
amount of income the property would bring in if it was at 100% occupancy (all units rented out).
add up all the rents and BAM
If you subtract the income loss from the PGI, you get the
effective gross income (EGI).
Operating expenses are the occasional or continuous
expenses required for the operation of an income-producing property. Examples include the salary of the building staff or maintenance costs.
in order to have an even more accurate account of how much money a property brings in, you can subtract a property’s operating expenses
from its EGI. When you do that, the number you get is the net operating income (NOI).
Because NOI takes into account both income loss and operating expenses, it is the
most accurate representation of how much money a property actually brings in.
Fair Market Value:
The price for which a property will sell if offered openly under normal conditions
Comparative Market Analysis: Also known as
CMA, this is a report generated by a license holder that compares the prices of recently sold homes (“comparables”) in order to estimate the fair market value of a similar property (the “subject property”)
Subject Property:
The property that is the “subject” of the CMA
Comparables:
The recently sold homes that are compared to the subject property in a CMA
Pricing a property is a magical mix of research, math, and art.
the benefits that make that effort worthwhile include:
Promotes a fast response -
Creates competition-
Sets realistic expectations-
A CMA is NOT
An appraisal
Let’s get this out of the way right now. A CMA is NOT an appraisal.
Here are a few of the more significant differences:
You must have an appraiser’s license to create an appraisal
An appraisal is usually done for a fee
A CMA can be done by a license holder
A CMA is usually done for free
A CMA is less detailed AND less reliable than an appraisal
CMA and an appraisal have a few things in common:
Both are used to arrive at a fair market value of a property.
Both use a sales comparison approach that is based on the principle of substitution and the principle of contribution.
next in how they approach the creation of a CMA, most address these steps in one fashion or another:
Evaluate the neighborhood.
Evaluate the subject property.
Get your comparables.
Compare and adjust selected comparables.
Establish a listing price range.
The location of the subject property is
one of the primary factors that determines its value.
three principles from Chapter 2 are at play when evaluating the subject property and its neighborhood:
Principle of Conformity says that values are highest when the houses in a neighborhood look roughly the same.
Principle of Regression says that a subject property situated in the midst of lower-value homes will experience a downward pull on its own value.
Principle of Progression says that a subject property situated in the midst of higher-priced homes will experience an upward pull on its own value.
Other things to look for when collecting neighborhood info that can influence subject property market value:
Percentage of rentals vs. owner-occupied homes (high rental percentage lowers location value)
Presence of vacancies or foreclosures (lowers location value)
HOA codes in place to regulate appearance, maintenance, and use of homes
How zoned? In transition? Mixed use?
Street width and condition
Utilities: electric, gas, sewer, cable, internet, etc.
Public services: transportation, police, and fire
Access to major roads, stores, entertainment, employers, schools, etc.
Environment: noise, traffic, smells, wind
Geography: varied or uniform, flat, barren, steep, hilly, etc.
Property taxes
Some of the lot features you will want to make note of and consider as you build your CMA include:
Size and dimensions (standard shapes are more desirable)
Frontage (can increase value if it gives access to certain features)
Landscape (flat, hilly, wooded, etc.)
Orientation to sun and amount of shade
Exposure to the elements and environment (wind, noise, etc.)
Title concerns (easements, encroachments, etc.)
As you continue to focus on the exterior of the home, pay attention to details like:
Do the gutters go completely around the home?
Is there a garage? If so, how many cars does it hold and is it attached to the home?
Is there a front porch? A back patio?
Is the yard fenced in? If so, in what condition is the fence?
Are there additional structures on the lot? A workshop? Storage shed?
Are there any gardens or flower beds? How about sprinklers?
What is the condition of the sidewalks and driveway?
Is the home due for a new roof or paint job? These can be expensive maintenance issues that will need to be considered.
The size of the home is one of the
primary factors that influence the market value of a property. This is why appraisers prefer to stay within 10% of the net square footage when comparing one home to another.
Count the total number of rooms, making note of number of bedrooms and bathrooms. And remember that bathrooms are further broken out by
whether they are a full bath (tub, sink, toilet), three-quarter bath (shower, sink, toilet), or half-bath (sink, toilet).
Infrastructure and systems that can differentiate a property should be documented. These include things like:
A/C, heating, gas, and electric
Energy-efficiencies (solar panels, double-paned windows, insulation, appliances)
Electronics, internet, cable-readiness, etc.
The MLS listing for recently sold homes will also provide
the original listing price and days on market, which may be useful to you in the property pricing discussion.
You want to have at least
three recently sold comparables in your CMA report.
A good comparable is a property that is within a
quarter-mile to a half-mile of the subject property.
On one hand, pending sales are great because they reflect the most
On the other hand, they are NOT final, so the ultimate
immediate buyer/seller behavior in the market.
sales price is unknown.
Sellers see current listings as their
competition and can be tempted to price their own home according to what others are asking.
More than anything else, expired listings and re-listed properties can serve as
teaching opportunities in the listing agreement conversation.
The primary cause for expired listings is
improperly priced properties, and the re-listed property can show the importance of getting that right the first time.
If you’re going to make note of a re-listed property that eventually sold, be sure to
add the days-on-market together from both listing episodes.
One of the best things to look at when trying to determine the price of a property is
the price that willing buyers have recently paid for similar structures.
It’s most accurate way to get sale price without an appraisal.
there are ways to account for the differences between one apple and the next by making a few small adjustments.
remember about this:
The adjustments needed should be relatively small or the apples aren’t really “comparable.”
Typical adjustments for comparables found on a CMA include:
Number of bathrooms Number of bedrooms Size of lot GLA (gross living area) square footage Garage (how many cars fit) Basement (finished or unfinished)
But brand-new license holders can figure this out by looking at recently sold homes that are identical in all ways except for one feature and, then,
attribute the price difference between the two homes to that one feature.
Where the comparable home has features or amenities the subject property lacks, you will need to
subtract the feature’s price value from the comparable’s sales price.
if the comparable lacks a feature or amenity that the subject property has, you need to
add the feature’s price value to the comparable’s sales price.
Once you have those adjusted comp sales prices, you can create a
suggested price range for your prospective client.
The comparables that required the least amount of adjustments will be
the ones you lean on the most in your creation of that suggested price range for the subject property.
When settling on a listing price, you will want to help the seller understand
the market environment, and how that might impact the list price.
If the last comparable sale closed a few months back, but the median price for homes in the area have inched upward 1% per month,
add that amount to the list price for every month that has gone by since that last comparable closed.
In a seller’s market where prices are moving up and inventories are shrinking, the seller can add
10-12% to the last comparable sale and attract buyers.
There are seller considerations that might influence how aggressive they want to be in pricing the home for a quick sale. Things like:
Contingency purchase of another home
Job transfer
Financial issues
Primary Mortgage Market:
The arena in which borrowers and lenders meet up for the purposes of negotiating loans terms of a mortgage transaction
Secondary Mortgage Market:
The marketplace where home loans and their servicing rights are bought and sold between lending institutions (that originated the loans) and investors
Government-Sponsored Enterprises:
Publicly-traded institutions that were created by Congress to provide liquidity, stability, and affordability to the mortgage market
Federal Agricultural Mortgage Corporation:
A government-sponsored enterprise (GSE) providing a secondary market for agricultural and rural mortgage loans; also known as Farmer Mac
Depository Lenders:
Institutions that make mortgage loans from funds derived from their customers’ savings accounts
Savings Associations:
Specialize in long-term residential loans; primary function is to promote thrift and homeownership
Federal Home Loan Bank System:
Eleven private, wholesale regional U.S. banks chartered to regulate member organizations, set reserve requirements, establish discount rates, and provide insurance for depositors
Federal Deposit Insurance Corporation:
Created by Congress in 1933 to insure deposits, supervise financial institutions, make large financial institutions resolvable, and manage receiverships
Commercial Banks:
Designed to be safe depositories and lenders for a multitude of commercial banking activities, relying mainly on demand deposits (checking accounts) for their basic supply of funds
Credit Unions:
Provide members with a source of funding for personal property and, more recently, real estate mortgage loans
Savings Banks:
Play an active and important role in local real estate financing activities, providing long-term mortgage loans with funds derived from customer savings accounts
Life Insurance Companies:
Prefer investments in large projects such as shopping centers as opposed to smaller loans for home mortgages and construction loans
Mortgage Bankers:
Not bankers in the traditional sense, but as private entrepreneurs, their income is derived from fees received for originating and servicing real estate loans
Mortgage Brokers:
Bring together borrowers and lenders and earns a fee for that service
Savings and loans, commercial banks, credit unions, mortgage bankers and mortgage brokers, and investment groups represent a few of the players that make up the
Primary market
When sold to investors, these repackaged loan bundles are presented as
mortgage-backed securities (MBS).
The three major players in the secondary mortgage market are:
Fannie Mae - Federal National Mortgage Association (FNMA)
Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMC)
Ginnie Mae - Government National Mortgage Association (GNMA)
Fannie Mae and Freddie Mac are both what is known as a
government-sponsored enterprise (GSE), created by Congress to provide liquidity, stability, and affordability to the mortgage market.
The GSEs provide liquidity (the ready access of affordable funds) to
thousands of banks, savings and loans, credit unions, and mortgage companies that make loans in the primary mortgage market.
The GSEs make those funds available to these members of the primary mortgage market by
being willing purchasers of the loan bundles the lenders put together — as long as the loans meet the underwriting criteria of the GSEs.
Fannie Mae and Freddie Mac purchase loans from lenders that meet their guidelines. This influx of cash allows
lenders to then give out more loans to potential homebuyers.
only significant difference between Fannie Mae and Freddie Mac is
the size of the financial institutions from which they purchase their mortgage loan bundles. Fannie Mae deals with larger commercial banks whereas Freddie Mac works with the smaller “thrift” banks.
For a fee, Ginnie Mae guarantees timely payment of
principal and interest on privately issued mortgage-backed securities (MBS) collateralized by FHA, VA, or other government insured or guaranteed mortgages.
Whereas Ginnie Mae deals exclusively with FHA, VA, and other government-supported mortgage loans, Fannie Mae (since the 1970s) and Freddie Mac (always) engage primarily in
conventional conforming mortgage loans.
And, as a final thought about the secondary mortgage market, comes this information from the Farm Credit Administration:
The Federal Agricultural Mortgage Corporation (Farmer Mac) is a Government-sponsored enterprise (GSE) with the mission of providing a secondary market for agricultural real estate mortgage loans, rural housing mortgage loans, and rural utility cooperative loans.
Savings accounts are fundamental to establishing the foundation for
mortgage lending by organizations known as depository institutions.
Thrifts are organized in two different ways
either stock companies or mutual companies.
thrifts were comparatively free from public regulation up until
Federal Home Loan Bank System (FHLB) was created in 1932.
the FHLB was chartered to do four things:
Regulate member organizations
Set reserve requirements
Establish discount rates
Provide insurance for depositors
The FHLB operates 11 district banks that are regulated by the
Federal Housing Finance Agency.
The accounts in these banks are insured up to $250,000 per title per account by the Federal Deposit Insurance Corporation (FDIC).
The member savings associations were chartered and regulated by
Office of Thrift Supervision (OTS),
which now falls under the Office of the Comptroller of the Currency (OCC).
In response to the thousands of bank failures that occurred in the 1920s and early 1930s, the (created?)
FDIC was created by Congress in 1933 to:
In response to the thousands of bank failures that occurred in the 1920s and early 1930s, the FDIC was created by Congress in 1933 to:
Insure deposits
Supervise financial institutions for safety and soundness
Make large financial institutions resolvable
Manage receiverships
the FDIC insures deposits up to
250,000 per depositor, per account.
Savings associations specialize in
Long term residential loans
The primary function of these savings associations is to
promote thrift and home ownership.
real estate-related assets are the main source of investment for savings associations which includes:
residential mortgage loans, residential construction loans, home equity loans, and mortgage-backed securities.
Savings associations offer
conventional, FHA-insured, and VA-guaranteed loans.
Commercial banks are designed to
be safe depositories and lenders for a multitude of commercial banking activities.
They have a variety of sources of capital, including savings, loans from other banks, and the equity invested by their owners.
demand deposits
Known as checking accounts
Commercial banks were originally designed primarily to make loans to
Today, they often diversify into loans in the
businesses to finance their operations and inventories.
Real estate sector
Commercial banks participate in real estate financing in several ways, including:
Operation of their trust departments
Acting as mortgage bankers (including the ownership of mortgage banking companies)
Through direct or indirect ownership of other lending businesses
In the role of mortgage bankers, commercial banks represent:
Life insurance companies
Real estate investment or mortgage trusts
Other commercial banks seeking loans in a specific community
Commercial banks participate, either directly or indirectly, as owners of
real estate mortgage trusts (REMTs) or as members in a regional bank-holding company.
What’s an REMT? A real estate mortgage trust (REMT) is a
registered company that owns and operates real estate mortgages; investors can buy and sell interests in mortgages.
Savings banks provide
long-term mortgage loans with funds derived from customer savings accounts.
The insurance industry is one of the largest industries in terms of
tax revenue at both the state level as well as the federal level according to the Department of Commerce.
Life insurance companies prefer investments in
large retail projects such as shopping centers as opposed to office, industrial, or multifamily properties.
the mortgage banker assumes the role of
an intermediary. They search out and develop new mortgage businesses by originating loans, selling the loans to investors, and collecting the payments on the loans for the benefit of the investors.
Some of the larger mortgage banking companies maintain
hazard insurance and escrow departments as well as loan origination and servicing divisions.
The income of mortgage bankers is derived from
fees received for originating and servicing real estate loans
There are laws in each state that regulate mortgage banking companies. However, these companies are
less regulated than commercial banks because they are not lending the funds of depositors.
mortgage broker brings together a
And Mortgage brokers, unlike mortgage bankers, seldom invest capital in
borrower and a lender and earns a fee for that service.
real estate loans and do not service the loans they help bring about.
Servicing a loan refers to
overseeing the collection and processing of payments and following up on delinquencies in payment of loans.
Credit unions are typically owned by their
members, and as member-owned and cooperative institutions, credit unions can provide a “safe place” for borrowers.
And pool loans into REMIC’s
Fannie Mae:
government-sponsored enterprise created to act as a secondary mortgage market facility that could purchase, hold, and sell FHA-insured loans
Freddie Mac:
government-sponsored enterprise created in 1970 to further support the secondary mortgage market, and specifically, to support smaller thrift banks
Ginnie Mae:
Government National Mortgage Association (Ginnie Mae) is a government-owned entity that supports the secondary mortgage market by guaranteeing timely payment of principal and interest on privately issued mortgage-backed securities (MBS) collateralized by FHA, VA, or other government-insured or guaranteed mortgages
Balloon Payment:
payment made at the mortgage term’s end that is comparatively much larger than the payments that preceded it
The word “mortgage” means
“death pledge” in Old French.
means that the pledge of the mortgage will die through fulfillment of the loan for the property or die via default and repossession by the lender.
housing GSEs are the:
Federal National Mortgage Association (Fannie Mae)
Federal Home Loan Mortgage Corporation (Freddie Mac)
Federal Home Loan Bank System (FHLBank System), which currently consists of 11 Federal Home Loan Banks (FHLBanks)
The federal government began its response to the housing crisis in 1932, with the enactment of the
Which created:
Then government also created:
Federal Home Loan Bank Act (the Bank Act).
the FHLBank System and the Federal Home Loan Bank Board (FHLBank Board) as its regulator.
Home Owners’ Loan Corporation (HOLC), the Federal Housing Administration (FHA), and Fannie Mae.
Federal Home Loan Bank System (FHLBank System) was designed to
serve as a reserve credit system to support housing finance and provide relief to troubled homeowners and lending institutions.
It consists of 11 member banks.
The Bank Act provided the FHLBanks with budgetary
authority to borrow up to $215 million from Treasury and issue tax-free bonds as a source of funds for the benefit of member institutions.
The National Housing Act was enacted in:
And established:
1934 as part of the New Deal.
Federal Housing Administration (FHA)
Federal Housing Administration (FHA)
which offered loans funded by approved lenders
FHA insurance protected these approved lenders against
losses, giving lenders added security and also expanding the pool of potential homebuyers for whom lenders were willing to underwrite loans.
A 1938 amendment to the National Housing Act established the Federal National Mortgage Association (FNMA), known as
Fannie Mae
Fannie Mae was a federal government agency. Its mandate was to act as a
secondary mortgage market facility that could purchase, hold, and sell FHA-insured loans.
By purchasing FHA-insured loans from private lenders, Fannie Mae created
liquidity in the mortgage market, providing lenders with cash to fund new home loans.
The 1968 HUD Act also created a new housing finance organization, the
Government National Mortgage Association
Ginnie Mae was established as a
government-owned corporation within HUD, a structure it retains to this day.
For a fee, Ginnie Mae guarantees
timely payment of principal and interest on privately issued mortgage-backed securities (MBS) collateralized by FHA, VA, or other government-insured or guaranteed mortgages.
Fannie Mae and Freddie Mac (the government-sponsored enterprises) typically purchase
conventional conforming mortgage loans.
issue and guarantee MBS collateralized by these mortgage loans or hold mortgage loans and MBS in their portfolios.
In 1970, the secondary mortgage market was expanded when Congress passed the
Emergency Home Finance Act, which established the Federal Home Loan Mortgage Corporation known as Freddie Mac, to help thrifts manage the challenges associated with interest rate risk.
Federal Home Loan Mortgage Corporation known as Freddie Mac, was created to help
thrifts manage the challenges associated with interest rate risk.
The FHLBanks originally capitalized Freddie Mac with a
$100 million contribution.
Freddie Mac began to purchase long-term mortgages from thrifts, increasing their
capacity to fund additional mortgages and reducing their interest rate risk.
The Act also authorized Fannie Mae and Freddie Mac to
buy and sell mortgages not insured or guaranteed by the federal government.
In 1971, Freddie Mac issued the first
conventional loan MBS (mortgage-backed security).
During the mid-2000s, several FHLBanks also purchased large volumes of
private-label MBS for their mortgage investment portfolios.
During the mid-2000s, several FHLBanks also purchased large volumes of private-label MBS for their mortgage investment portfolios. Subsequently, many FHLBanks suffered financial deterioration due to
their investments in private-label MBS collateralized by subprime mortgages.
Congress enacted the Housing and
Economic Recovery Act of 2008 (HERA) in July.
Congress enacted the Housing and Economic Recovery Act of 2008 (HERA) in July. Less than six weeks later, FHFA placed
Fannie Mae and Freddie Mac into conservatorships, where they remain today.
The FHFA Office of Inspector General is
an independent oversight and law enforcement arm of FHFA
The FHFA Office of Inspector General, an independent oversight and law enforcement arm of FHFA,
conducts an array of audits and evaluations examining FHFA’s regulation of the housing GSEs and its conservatorships of Fannie Mae and Freddie Mac.
Pre-qualification:
first step in the loan application process where lenders take prospective borrowers at their word and give borrowers a general estimate of the amount for which they will be approved
Pre-approval:
second step in the loan application process where lenders thoroughly review the borrower’s qualifications and, if approved, offer a pre-approval letter indicating the borrower’s ability to obtain financing.
Loan Approval:
final step in the loan application process, here lenders review the borrower’s creditworthiness and the value of the property.
One important distinction between pre-qualification and pre-approval is that pre-qualification does NOT
involve an evaluation of your credit report.
the pre-qualification decision is only as good as
the information supplied by the borrower.
Note: Financial status is the only thing a lender can discriminate on. They CANNOT discriminate based on
things like age, relationship status, etc.
The primary difference between pre-approval and final loan approval is that the property information is NOT
considered (or known).
Before a lender ultimately approves a mortgage loan they will have evaluated two things:
The creditworthiness of the borrower
The value and title marketability of the property to be used as collateral
But the two primary benefits a borrower experiences after going to the trouble of getting pre-approved (vs. only pre-qualified) prior to finding a property to buy are:
First, it makes the borrower’s offer a preferred offer.
Second, pre-approval makes the closing process go more smoothly.
The seller of a home that receives multiple offers will likely give preference to the
pre-approved buyer if all other aspects of the offer are equal.
During this final review, the lender will evaluate two things:
Property Approval (value of the property) Buyer Approval (creditworthiness of the buyer)
Evaluating the property’s value is what differentiates the -
why do lenders need to evaluate the property?
final step of the loan approval process from the other loan approval steps.
The Reason: If the borrower were to default on the loan, the lender wants assurance that the price of the property is similar to the amount of the loan. If the amount of the borrower’s loan was much greater than the appraised value of the property, the lender would be risking that loss if the borrower defaulted.
To appraise the property, the lender will review the particulars of the property. This includes the legal description, improvements, title, survey, and taxes. For income-producing property or loans made to corporations,
additional information is required. This includes financial and operating statements, schedules of leases and tenants, and balance sheets.
FICO scores range from
300 to 850.
Normally FHA requires a minimum FICO score of 580; prospective borrowers with scores under 500
are not eligible for FHA loans.
let the borrower (your client) know that purposely making a materially false or misleading written statement in order to acquire property or credit, including a mortgage loan, is a violation of
Texas Penal Code, Section 32.32, and — depending on the amount of the loan or value of the property — is punishable by imprisonment for a term of two to 99 years and a fine not to exceed $10,000.
The Uniform Residential Loan Application (or URLA) is a
standardized document jointly owned and maintained by the government-sponsored enterprises Fannie Mae and Freddie Mac for loans intended to conform to their underwriting requirements.
The Uniform Residential Loan Application (or URLA)
The purpose of the form is to allow borrowers to
apply for a mortgage loan and to allow consistency in data-gathering by lenders that is needed to evaluate borrower eligibility.
An electronic network for handling loan applications through remote computer terminals linked to several lenders’ computers is a
computerized loan origination (CLO) system.
A computerized loan origination system allows a real estate broker or sales agent to
pull up a menu of mortgage lenders, interest rates, and loan terms, then help a buyer select a lender and apply for a loan right from the brokerage office.
Although multiple lenders may be represented on an office’s CLO computer, consumers must be informed that
other lenders are available outside of the CLO system.
The broker, in whose office the computerized loan origination system terminal is located, may earn
origination fees of up to one half percent of the loan amount.
the primary method for making an underwriting decision is via
Automated underwriting
Automated underwriting
which is a process of electronically evaluating a loan application and subsequently providing a recommendation for or against loan approval.
Referring to loan process
Real estate brokers and sales agents should advise borrowers not to
take on additional debt between the time of loan application and the date of closing.
Amortization:
Refers to the process of allocating the cost of an asset or the repayment of loan principal over time
Fixed-Rate:
When the interest rate does NOT change over the life of a loan
Adjustable-Rate:
When the interest rate can change over the life of a loan; adjustable-rate mortgages are known as “ARMs”
Flexible-Payment Loan:
specific type of adjustable-rate mortgage that starts with a lower payments for the first several years then shifts to larger payments for the remainder of the term
Balloon Payment Loan: Employs periodic payments that will
not fully amortize the the loan, thereby requiring a final payment that is larger than previous payments
Interest-Only Loan:
type of balloon payment loan that calls for periodic payments of interest with the principal is to be paid in full at the end of the term as a balloon payment
A fixed-rate amortized loan payment plan features
constant payments of principal and interest throughout the life of the loan.
a straight amortized loan features a payment plan wherein
each total monthly payment amount is different.
With an ARM, the interest rate
changes periodically, usually in relation to an index, and payments may go up or down accordingly.
Depending on the type of ARM loan, the interest rate and monthly payment will
change every month, quarter, year, three years, or five years.
The period between rate changes is called the
Adjustment period
If you take out an adjustable-rate mortgage, the company that collects your mortgage payments (your servicer) must notify you about
first interest rate adjustment at least seven months before you owe a payment at the adjusted interest rate
How ARMs Work: The Index
If the index rate moves up, your interest rate will also go up in most circumstances, and you will probably have to make
higher monthly payments.
To set the interest rate on an ARM, lenders add a few percentage points to the index rate, called the
Margin
The fully indexed rate is equal to the
margin plus the index. For example, if the lender uses an index that currently is 4 percent and adds a 3 percent margin, the fully indexed rate would be 7%.
Interest-rate caps come in two versions:
A periodic adjustment cap, which limits the amount the interest rate can adjust up or down from one adjustment period to the next after the first adjustment.
A lifetime cap, which limits the interest-rate increase over the life of the loan. By law, virtually all ARMs must have a lifetime cap.
By law, virtually all ARMs must have a
lifetime cap.
Negative amortization is
unpaid interest + the balance of the loan.
What are the benefits to an ARM?
Lower initial interest rates
Larger loan amounts
Likelihood of falling interest rates
(However, circumstances could change)
(Risky and not solid)
What are the disadvantages of an ARM?
Early redemption penalties that come into play when selling or refinancing early in the loan term
Lack of predictability of monthly payment amounts
Greater full-term loan expense
Overall complexity
A flexible-payment loan, is a specific type of
adjustable-rate mortgage.
These will sometimes appeal to younger buyers and buyers who have uneven or fluctuating income levels in times of high interest rates to purchase real estate.
An interest-only loan, also known as a straight loan or term loan, is a type of
balloon payment loan that calls for periodic payments of interest.
One reason borrowers might select an interest-only residential loan would be if they
expected strong appreciation of the property over the short term they planned to own it.
Just beware: If the property doesn’t appreciate in value over time, the borrower could end up with
less in proceeds on the sale than what they need to pay off the loan.
When a mortgage or deed of trust loan employs periodic payments that will not fully amortize the amount of the loan by the time the final payment is due, the final payment is larger than the others. This is called a
Balloon payment
The major problem with a balloon payment loan is that
borrower has to come up with a large sum of money at the end of the term.
the four components of a monthly mortgage payment.
Principal, Interest, Taxes, and Insurance
Conventional Loan:
loan that is not underwritten by any agency of the federal government
Government-backed Loan:
loan that is insured, guaranteed, or provided by any government agency.
Loan-to-value Ratio:
loan-to-value ratio (LTV) is a ratio of debt to value of the property.
Nonconforming Loan:
Loans that do not meet Fannie Mae/Freddie Mac guidelines
There are two general categories of real estate loans:
Conventional and
government-backed
If Conventional loans are nonconforming when they do not meet Fannie Mae/Freddie Mac guidelines. They may be nonconforming because they exceed the
conforming loan limit or buyers may lack sufficient credit or collateral.
Loan terms (such as minimum credit scores required, interest rate charged, and the necessity for mortgage insurance) are based on a
loan-to-value ratio. The loan-to-value ratio (LTV) is a ratio of debt to value of the property.
Typically, the LTV on a conventional loan has been 80 percent of the value of the property or less, requiring
a down payment of 20 percent or more.
Fannie Mae records indicate that loans on which a borrower has made a 3% down payment (a 97% LTV) are foreclosed four times more often than loans with
10% down payment (a 90% LTV).
private mortgage insurance (PMI) is required on
conventional loans for which the borrower has invested less than 20%
Federal law requires that, for any loans originated after July 1999, the PMI must be
terminated after the borrower has accumulated 22% of equity in the property (the loan-to-value ratio is 78%) and is current with all loan payments.
Two notable advantages of nonconforming conventional loans:
- The Advantage of Time
2. The Advantage of No Limits
There is usually no legal limit on loan amounts with
conventional loans whereas government-backed loans have dollar limits that vary by agency.
The common term FHA loan refers to
a loan that is insured by the agency.
There are several types of FHA loans, but the most common are
Section 203(b), Section 203(k), Section 251, and streamline refinance loans.
When the FHA issues an insurance commitment to a lender, it promises to repay the balance of the loan in full if the borrower defaults. This guaranty is funded by
imposing an upfront mortgage insurance premium (MIP) that must be paid by the borrower when obtaining an FHA-insured loan.
FHA borrowers must also pay an
annual premium, which is payable monthly as part of the regular PITI payment.
This MIP applies to all types of FHA loans and is known as the
Mutual Mortgage Insurance, which may be dropped when the remaining loan balance has an 80% loan-to-value ratio or less.
The Department of Veterans Affairs (VA) is
authorized to guarantee loans to purchase or construct homes for eligible veterans and their spouse.
This includes the spouse of a veteran whose death was service-related or the spouse of a serviceperson missing in action/a prisoner of war (providing the spouse has not remarried).
Va loans can be used for
owner-occupied houses or condominiums, improvements, manufactured homes, land, farms, and refinancing or assuming VA loans.
VA-guaranteed loans help veterans finance a home purchase with:
Which means:
Little or no down payment.
VA loans can be used for 100% of the purchase price.
the term VA loan refers to a loan that is not made by the agency but
guaranteed by it.
To determine the portion of a mortgage loan that the VA will guarantee, the veteran must apply for
A certificate of eligibility
certificate of eligibility for vet is
the veteran’s entitlement to VA home loan benefits under the law, based on military service (see chart).
As of January 2018, the conforming loan limit was
$453,100 for most of the country.* (The actual limit is established on a county-by-county basis.)
VA Loan Qualification
Two methods are used to determine a veteran’s ability to qualify for a loan:
Debt-to-income ratio
Residual income
Residual income is defined as the
amount of monthly income remaining after all the debts are deducted, including:
Income tax
Social security tax
Maintenance and utilities
After an appraisal is done by a VA-approved appraiser, the VA issues a
Certificate of Reasonable Value
Certificate of Reasonable Value (CRV) is:
an estimate of the market value on the date of inspection for the property being purchased.
In the event that the purchase price is greater than the amount cited in the CRV, the veteran may
withdraw from the contract without penalty and have the earnest money refunded or pay the difference in cash at closing — as long as their agent makes sure the sales agreement contains a VA Option Clause.
The Farm Service Agency (FSA) offers
both direct and guaranteed ownership or operating loans to purchase and maintain farmland and to construct or repair buildings and other fixtures
Using government funds, direct farm loans are made and serviced by
FSA
Guaranteed farm loans are made and serviced by local lenders and guaranteed by the
FSA in the event of the borrower’s default.
Rural Development (RD) provides both
direct and guaranteed loans for the purchase or construction of single-family homes, repair of existing homes, and the development of affordable rental housing.
The program’s full name is USDA Rural Development Guaranteed Housing Loan, but is usually referred to as simply a
USDA loan
The program’s full name is USDA Rural Development Guaranteed Housing Loan, but is usually referred to as simply a USDA loan. It is also called a Section 502 Loan, referring back
to its origins found in Section 502(h) of the Housing Act of 1949.
These no-down-payment loans are 100% backed by the U.S. Department of Agriculture (USDA) and are available for
suburban and rural home buyers throughout the country.
Texas Veterans Land Board (VLB):
division of the General Land Office of Texas that administers three programs to assist Texas veterans in purchasing a principal residence and/or land and in financing home improvements
Texas Bootstrap Loan Program:
A self-help housing construction program that provides very low-income families (owner-builders) an opportunity to purchase or refinance real property on which to build new housing or repair their existing homes
Veterans Land Loan Program:
program that gives Texas veterans the opportunity to borrow up to $150,000 to purchase land at competitive interest rates while typically requiring a minimum 5% down payment for tracts of one acre or more — only one of its kind in the nation
Targeted Area:
A census tract in which 70% or more of the families have incomes that are 80% or less of the statewide median income or an area of chronic economic distress
The Texas Department of Housing and Community Affairs (TDHCA) has over 30 years’ experience and expertise in working with
low to moderate-income first-time homebuyers with two programs,
My First Texas Home and
Texas Mortgage Credit Certificate Program.
A quick overview of the main benefits of the TDHCA programs are:
Homebuyers may combine TDHCA programs for maximum benefit
TDHCA’s programs are available statewide
The first time homebuyer requirement is waived for veterans
Households who have not owned a home in the previous three years may qualify
A homebuyer education course is required
My First Texas Home program allows
qualified Texans access to competitive interest rate home loans and down payment and closing cost assistance.
Homebuyers who meet the following minimum requirements are eligible to apply for a loan under the My First Tx Home program:
First-time homebuyer or a homebuyer who has not owned a home as primary residence within the past three years
Homebuyer(s) income does not exceed program’s income limit guidelines
Purchase price of home does not exceed program’s purchase price limit guidelines
The Texas Two Steps to finding a targeted area property:
Get the census tract code and enter the address.
Check to see if the census tract is included on the Targeted Area Census Tracts by County.
Properties eligible for loans through My First Texas Home include:
Single family units
Single units in condominium developments and planned unit developments
Duplexes as long as one unit of the duplex is occupied by the eligible borrower as the principal resident and the duplex was first occupied for residential purposes at least five years prior to the closing date
Texas REALTORS® who have successfully completed the TDHCA Down Payment Assistance/Texas Homeownership Programs continuing education 12-hour training are
certified as “Texas Affordable Housing Specialists.”
My First Texas Home also provides down-payment/closing cost assistance to eligible homebuyers. Presently, assistance amounts up to
5% are possible.
The Texas Department of Housing and Community Affairs created its Texas Mortgage Credit Certificate Program (MCC) for the residents of Texas, to help
make ownership of new and existing homes more affordable for individuals and families of low and moderate income, especially first-time buyers.
What Is a Mortgage Credit Certificate?
A Mortgage Credit Certificate allows the homebuyer to claim a tax credit for some portion of the mortgage interest paid per year. It is a dollar-for-dollar reduction against their federal tax liability. In other words, a Mortgage Credit Certificate reduces the amount of taxes owed to the federal government.
Mortgage Credit Certificate reduces
amount of taxes owed to the federal government.
Who Is Eligible to Receive an MCC?
The program is open to those individuals and families who:
Meet income and home purchase requirements
Have not owned a home as primary residence in the past three (3) years
Meet the qualifying requirements of the mortgage loan
Will use the home as their principal/primary residence
The MCC may not be used in connection with the refinancing of an existing loan. For targeted areas, the first time homebuyer requirement is
waived, and there are increased income and purchase price limits.
A mortgage interest deduction differs from a mortgage tax credit in a number of ways. For example, all homebuyers, regardless of income, may take a mortgage interest deduction, whereas mortgage tax credits are available only to
holders of MCCs.
The Texas Statewide Homebuyer Education Program - Homebuyers can complete an in-person/face-to-face course available through a
certified homebuyer education provider — A HUD-approved, non-profit organization or government entity
The Texas Bootstrap Loan Program is a self-help housing construction program that provides very low-income families (owner-builders) an opportunity to purchase or refinance
real property on which to build new housing or repair their existing homes through “sweat equity.”
All owner-builders are required to provide at least 65% of the
labor necessary to build or rehabilitate their housing by working with a state-certified Nonprofit Owner-Builder Housing Provider (NOHP).
There are various ways for how owner-builders may fulfill their sweat equity requirement. They may
contribute the labor personally;
they may build or rehabilitate housing for others;
and/or they may receive non-contract labor assistance from friends, family, or volunteers.
The maximum Bootstrap loan may not exceed $45,000 per household. Owner-builders may obtain additional loan funds from other department and non-department sources as long as the total amount of amortized repayable loan funds from all sources does not exceed
$90,000
The three VLB loan programs available to a Texas veteran are:
Home Loans
Land Loans
Home Improvement Loans
(Tx veterans land board)
To qualify for one or all of their three programs they need to meet one of the following service criteria:
An active-duty military member
A member of the Texas National Guard
A reserve component military member having completed 20 qualifying years for retirement
A Veteran having served at least 90 active duty days unless discharged sooner due to service connected disability and not discharged dishonorably
A surviving spouse of a Veteran listed as missing in action or whose death was service-connected
VLB programs are financed with bonds, which are serviced by
loan payments from Veteran participants.
In 1983, the Legislature created the VLB Veterans Housing Assistance Program (VHAP), to aid
Texas veterans in purchasing a home.
Veterans, military members and their spouses may receive up to
$424,100* on a fixed-rate loan for 15, 20, 25, or 30 year terms.
Veterans with a VA service-connected disability rating of 30% or greater
qualify for a discounted interest rate.
The VLB Veterans Land Loan Program is the only one of its kind in the nation, giving Texas veterans the opportunity to borrow up to
$150,000 to purchase land at competitive interest rates while typically requiring a minimum 5% down payment for tracts of one acre or more.
Land Loan Requirements
To be eligible for VLB financing, the land must:
Be wholly within the state of Texas
Contain at least one acre, excluding any portion beneath a dedicated public roadway or navigable waterway or subject to frequent inundation or otherwise unusable
Have legal, usable access to a public road. Access must be a minimum of 60 feet wide or meet the county public road width requirements, whichever is greater. “Usable” means that it can be driven on by a standard passenger car in inclement weather
Be properly described by either a Field Note description of the tract with the surveyor’s official seal and signature (original or copy), or a complete copy of the recorded subdivision plat if the description is by lot & block
Not be zoned strictly for commercial use
Not have been owned by you or your spouse within the previous three years
The VLB helps veterans, military members and their spouses buy homes and then helps them pay to improve it through the
Texas Veterans Home Improvement Program (VHIP).
1986
Texas Veterans Home Improvement Program (VHIP). This program was introduced in 1986 to provide
below-market interest rate loans to qualified Texas veterans for home repairs and improvement to their existing homes.
VLB Home Improvement Loans in the amount of $25,000 or less are
insured by the Federal Housing Administration (FHA).
VLB Home Improvement Loans in the amount of $25,000 or less are insured by the Federal Housing Administration (FHA). To qualify, the following requirements must be met:
The home being repaired must be wholly located in the state of Texas.
The home must be the applicant’s primary residence.
Single family dwellings, condominiums, duplexes, triplexes and four-plexes are eligible. Duplexes, triplexes and four-plexes must be at least 5 years old.
Modular or manufactured homes that are on a permanent foundation and are part of the real estate (real property) may also be eligible, but the final decision on these types of loans will be determined by the VLB.
The VLB must be in first or second lien position.
The borrower cannot advance funds to the contractor or purchase material prior to receipt of the loan proceeds from VLB. Loan proceeds will be available on the fourth business day after closing.
The borrower must secure a general contractor.
A VLB home improvement loan can be used for alterations, repairs and improvements that are eligible for financing under the
Department of Housing & Urban Develop (HUD) federal Housing Administration (FHA) Title I Loan Program.
Federal Reserve:
nation’s central bank operates to maintain sound credit conditions, help counteract inflationary and deflationary trends, and create a favorable economic climate
Federal Funds Rate:
Rate banks charge other banks to lend money — the Fed indirectly controls this rate.
Discount Rate:
Rate the Fed charges banks to lend money — the Fed directly controls this rate.
Prime Rate:
Rate banks charge their most creditworthy customers — this rate is strongly influenced by the rates above.
Open market operations (OMOs):
The purchase and sale of securities in the open market by a central bank
The Federal Reserve System divides the country into
12 federal reserve districts, each served by a federal reserve bank.
It is said that the Federal Reserve is “independent within the government.” This is due to the following reasons:
Since it charges member banks interest, the Fed generates revenue independently without a need for Congressional funding.
It has the authority to act on its own without permission from Congress.
Members on its Board of Governors are appointed to long-terms, which limits the ability of Congress and the President to influence its day-to-day operations.
The Fed’s job is to ensure
stability in the economy.
The Fed Tools: Reserve Funds Requirement
Tool Number 1: Reserve Federal Fund Requirement:
All nationally chartered banks must join the Federal Reserve and purchase stock in its district reserve banks. The Federal Reserve requires each member bank to keep a set amount of its assets on hand as reserve funds; these funds are unavailable for any other use, including for loans.
The Fed Tools: Reserve Funds Requirement
When the Federal Reserve increases the fund reserve requirement for its member banks, it primarily affects the economy in two ways:
Protects consumer saving deposits as banks have more money in reserves
Discourages banks from lending money as they have less disposable funds
The Fed Tools: Reserve Funds Requirement
When banks hold funds in excess of their required reserves (maybe they had a lot of customer deposits that day), these excess funds are known as federal funds. Why?
The excess funds are held at one of the twelve Federal regional banks.
The Fed Tools: Reserve Funds Requirement
The federal funds rate is the rate
a bank charges when lending funds to other banks.
The Fed Tools: Reserve Funds Requirement
Federal Reserve member banks are also permitted to borrow money from the 12 district reserve banks to meet their fund reserve requirements but not to expand their lending operations. The interest rate charged by the district banks for the use of this money is called
the discount rate.
The Fed Tools: Reserve Funds Requirement
the prime rate is often the basis for determining a bank’s interest rates on
other loans, including mortgages.
How do the federal funds rate and discount affect the prime rate?
If banks can get such-and-such percentage for their excess reserves (fed funds rate), they are going to want a higher rate from consumers in exchange for loans.
And if banks need to pay the Fed an interest rate for money lent (discount rate), they are going want a higher percentage (prime rate) from borrowers.
The government influences activity in the secondary mortgage market in a couple of ways, most notably through
government-sponsored enterprises (GSEs) and government agencies that have major roles in the secondary mortgage market.
Most lenders use Fannie Mae/Freddie Mac standardized forms and follow the underwriting guidelines issued by those entities so they can sell their mortgages into the agencies’ secondary mortgage markets. Their standardized documents include
loan applications, credit reports, appraisal forms, notes, and deeds of trust.
Both GSEs, Fannie Mae and Freddie Mac, support the activities in the secondary market in two ways:
Buying individual or bundles of mortgages in the primary market that allow lenders to finance their business to loan origination for consumers
Repackaging those purchased loans into mortgage-backed securities (MBS) for sale to investors who might not otherwise be willing to invest in the loans
What Ginnie Mae does is guarantee securities issued by
private institutions and backed by pools of federally insured or guaranteed loans — mainly FHA, VA, and USDA Rural Development mortgage loans.
Regardless of whether the mortgage payment is made, investors in Ginnie Mae securities will receive
full and timely payment of principal as well as interest.
Farmer Mac provides a secondary market for first-mortgage agricultural real estate loans by purchasing
USDA guaranteed loans from agricultural mortgage lenders, pooling or bundling those loans, and issuing mortgage-backed securities, increasing the availability of credit for farmers, ranchers, and rural homeowners.
Graduated Payment Mortgage:
fixed-rate mortgage that has a lower initial interest rate in its first years, but includes gradual increases each year
Bridge Loan:
Short-term loans used to transition from one loan to another — can connect borrower from their current construction loan to their eventual mortgage loan (or present home to their new home)
Wraparound Loan:
Like a bridge loan, enables a borrower to obtain additional financing from a second lender without paying off the first loan – gives borrower new, increased rate at higher interest rate and assumes payment of existing loan
Subprime Mortgage:
A mortgage with an interest rate higher than prime mortgages due to the higher risk associated with a less qualified borrower
Predatory Lending:
The act of a lender putting their welfare above that of their borrowers
A graduated payment mortgage has the following attributes:
It’s a fixed-rate mortgage. (All interest rates are pre-determined.)
It starts off with a lower interest rate.
The interest rate increases over the first few years of the loan until it levels off.
Most often used by younger borrowers who anticipate an earnings increase as they mature in their careers.
Why would a borrower want a buydown mortgage?
Typical buydown arrangements provide for a reduced interest rate over the first one- to two-years of the loan term and generally do not involve deferred interest or negative amortization.
Pledged Account Mortgage
This type of mortgage loan is a graduated payment mortgage, much like a buydown mortgage, wherein funds are drawn from a
savings account to subsidize interest payments during the initial years of a loan term. Once those funds are depleted, the borrower assumes responsibility for making a full monthly mortgage payment.
A package mortgage includes not only the real estate but also
all personal property and appliances installed on the premises.
A blanket mortgage or deed of trust pledges more than:
usually used by:
But can finance:
One parcel out lot
land developers to finance subdivision projects;
purchase of improved properties or consolidate loans as well.
A blanket loan usually includes a partial
release clause that permits the borrower to obtain the release of any one lot or parcel from the lien by paying a specified amount of the loan.
Title to property purchased on a contract for deed normally does not
transfer to the purchaser until the full price has been paid.
In a purchase-money mortgage, the buyer borrows from the
seller in addition to the lender.
In the event of a foreclosure, a purchase-money deed of trust is valid against
Against homestead
A due-on-sale clause (alienation clause) in the original deed of trust generally prevents a sale with a
wraparound loan; therefore, it is not used often.
An alienation clause or due-on-sale clause is a provision in the mortgage contract that
triggers the payment in full of the loan upon the sale or conveyance of the property.
Reverse mortgages enable homeowners who are 62 years old or older to
borrow against the equity in their homes.
If a seller-financed loan is decided upon, the seller should execute a promissory note addressing the same concerns that the document from a third-party financier would provide:
Interest Rate
Repayment Schedule
Late payment penalties
Explanation for what constitutes default and the ramifications of default
Under a construction loan, the lender commits the full amount of the loan but disburses the funds, known as
Draws
Construction loans are generally short-term or interim financing. The ultimate buyer/borrower is expected to arrange for a permanent loan, also known as a
takeout loan,
..that will repay or “take out” the construction financing lender when the work is completed.
Sale-and-leaseback arrangements are used to finance
large commercial or industrial properties.
A subprime mortgage carries an interest rate higher than the rates of
Prime mortgages
Interest-only loans, option arm loans, negative amortization loans, extended fixed-rate loans that had 40- to 50- year terms, low- or no-money down loans, and balloon loans are examples of some of the forms
these subprime loans took.
