unit 13 Flashcards
Reduction of Principal on a loan balance of an amortized loan
If the loan is $115,000 at 10% interest for 30 years and the payment is $1009.21 per month (P &I), what is the principal balance after one payment?
If you remember the steps –Multiply – divide – subtract – subtract, you will have no difficulty in amortizing a loan.
Determine the annual amount of interest paid, based on the loan balance.
$115,000 x 10%= $11,500 interest per year. Divide by 12 to get monthly interest $11,500 ÷ 12= $958.33 per month interest.
Subtract $958.33 from the total monthly payment of $1009.21= $50.88 is the amount of the first monthly principal payment.
What is the monthly balance after the second payment? To get the second month’s interest payment,
Subtract the first month’s principal payment. $115,000- $50.88 which leaves a loan balance at the beginning of the second month of $114,949.12.
Take $114,949.12 x 10%=11,494.91. Divide by 12 to get monthly interest = $957.91
Subtract $957.91 from the principal and interest payment of $1,009.21. The principal paid is $51.30
Subtract $51.30 from the balance of $114,949.12=$114,897.82
Types of Mortgages
Amortized means to “put to death”, from the French word mort, meaning death. An amortized loan is one where regular monthly principal and interest are paid throughout the whole loan period.
For example, a loan of $350,000 is obtained at 8% interest for 30 years. The monthly P& I would be $2,568.18 per month. This would mean that during the 360 months of the loan (30 years x 12 months per year) the payment would remain at $2,568.18 per month. This is also known as a fully amortized, fixed rate mortgage.
An amortized loan will pay off the loan with interest over the lifetime of the loan.
When payments are made on an amortized mortgage the interest is the highest part of the payment. Over time as payments are made, the amount of interest decreases in the payment as the amount of the principal payment increases. At the mid-point of the mortgage payoff, the principal and interest payment will be the same, at which point the principal will be the highest part of the payment.
Amortized mortgages may be paid monthly, or bi-monthly. Making a bi-monthly payment can shorten the time a mortgage is paid off – i.e. a 30 year mortgage would be paid off in 15 years.
Partially Amortized Mortgage
Borrowers also use a partially amortized mortgage. This is called a balloon payment loan.
At the end of the time period of a balloon payment, the final payment is huge so the buyer must be prepared to pay the balance or refinance with a new loan before the final payment is due. This is sometimes used by borrowers who are using the loan for a short term until they inherit a large sum of money or have other financial gains.
Small payments at the beginning, one large payment at end of time period!
Adjustable Mortgages
Sometimes called an ARM (for adjustable rate mortgages), this type of loan means that the interest rate can fluctuate up or down. It is always tied to some type of financial index; increases are capped for each period and for the term of the loan.
The interest rate of the loan is usually the index plus a premium called the margin. The rate of interest on the loan goes up or down, depending on the index, margin, period of adjustment and caps.
Periodic caps limit the amount of interest rate that may be charged during any one adjustment period. For example, if the loan has a 2% cap, it can only go up 2% during any one adjustment period, or down a maximum of 2%.
A life time cap is over the period of the loan, usually 5, 10, 15, or 30 years. If the life time cap is 5% the maximum the loan can go up or down during the life of the loan is 5%.
Most adjustable loans have both periodic and lifetime caps, which limit interest rate increases. It is possible to have negative amortization. If the payment is not high enough to cover the fully indexed amount, the mortgage balance can increase so that the balance is more than the original loan. Some companies provide teaser rates for the first year.
These loans may have higher caps, in the second year, the additional unpaid interest increases either the mortgage balance or the payment. All borrowers should be made aware of any negative amortization loan, ask about it and understand it, or completely avoid it.
Biweekly mortgage
As discussed previously, this type of mortgage is usually a fixed rate mortgage loan with payments every two weeks instead of monthly. The purpose of this type of loan is to save interest, and pay down the loan faster. If the borrower has the cash to do this, it is a very workable plan if the objective is to pay off the loan.
Home Equity Loan
Many times the home owner will wish to borrow against the equity of the home in order to make major capital repairs, like an addition or a new roof or pay off bills. A home equity loan allows the borrower to use the home equity and place a second loan in a junior position in order to get cash. The amount that can be borrowed depends on the lender. The borrower should be certain that he can afford the double payments (both the first and second) and can afford the cost of getting the new loan.
Great care should be used by the borrower not to borrow more money on equity that the borrower can handle since a foreclosure on the second deed (the home equity loan) can result in foreclosure of the first as well. If the borrower cannot make the payments, he could lose his home.
Package loan
This type of loan is used in resort areas a great deal, since the mortgage includes the fixtures, appliances and other personal property in the same loan. These loans are used primarily in business opportunities wherein a commercial store or restaurant has personal property that are a part of that business
Mortgages
Land Contract is an installment contract or a contract for deed. The parties are called vendor (seller) and vendee (buyer). The buyer does not get legal title until the final payment is made. (Discussed in Session 12).
Purchase Money Mortgage: or Part Purchase Money: This is a mortgage given as part of the buyer’s consideration for the purchase of real property. A Purchase Money Mortgage is delivered at the same time that the real property is transferred as a simultaneous part of the transaction. For example, the buyer assumes a first mortgage of $50,000, makes a $20,000 down payment in cash, and receives a second mortgage called a purchase money mortgage from the seller for $15,000 for a shorter term. The seller’s second mortgage is a part purchase money mortgage.
Blanket Mortgage: is a loan on several pieces of property. Blanket mortgages contain a partial release clause. This clause is one where the mortgagee agrees to release certain parcels from the loan of the blanket mortgage upon payment by the mortgagor of a certain sum of money. A developer could use this type of mortgage so that as lots are sold, he could repay part of the mortgage without having to repay all of it.
Reverse Annuity Mortgage: Senior citizens over the age of 62 can benefit from this mortgage. The lender makes payments to the homeowner each month based upon the accumulated equity rather than giving the money as a lump sum. The loan must be repaid upon the death of the owner or the sale of the property. Sometimes this is advantageous to the senior citizens who own their own home, who are house rich and cash poor. Care must be taken to find out all about this type of loan. The discount points and other fees on this loan can be unusually high.
FHA Loans
The Federal Housing Administration (FHA) insures loans for lenders of real property made by qualified or approved lending institutions. The Department of Housing and Urban Development (HUD) oversees the FHA. If a buyer wants to obtain an FHA loan, a licensee should send them to a qualified lender, such as a savings & loan or a bank. Following are the requirements to receive an FHA loan:
FHA loans require a down payment as low as 3.5%. This down payment may be a gift if needed by the buyer but not a loan. Since these loans may be obtained for such a low down payment, the borrower is charged a one-time insurance premium at closing. This insurance provides security to the lender in addition to the real estate in case of borrower default. The one-time charge is paid at closing regardless of any down payment by the borrower or some other party (seller) and may be rolled into the loan amount. This charge is called an Up Front Mortgage Insurance Premium (UFMIP). For loans made with a low down payment, the FHA also charges the borrower an insurance amount with each payment until the loan to value ratio falls to 78%. The insurance is called MIP or Mortgage Insurance Premium.
Lenders may charge points to increase their yield. Either the borrower the seller, or both can pay them. Each point is 1% of the loan amount. A discount point is pre-paid interest.
No prepayment penalties are allowed on FHA loans.
Loans are assumable with certain qualifying conditions depending upon when the original loan was obtained. The mortgaged real estate must be appraised by an approved FHA appraiser.
FHA regulations set minimum standards for the type and construction of buildings and credit-worthiness of borrowers. FHA does NOT build homes nor does it lend money itself. The term “FHA Loan” refers to a loan that is insured by the Federal Housing Administration. FHA loan limits are based upon the area where the property is located.
The ratios that FHA uses are different than that of conventional lenders. FHA uses a Housing Expense ratio (HER) to determine if a buyer is qualified for the loan. The gross monthly income times 29% is for the housing payment and 41% is for all obligations. Because this a federal program, the ratios, rules and interest rates change often. The real estate professional is advised to check with local lenders on the ratios and the maximum sale price.
FHA
Common FHA loan Programs
Some commonly used programs:
Section 203 (b) is a fixed rate program. It is the mostly widely used of all FHA programs. It requires minimum down payment and closing costs.
234 (c) - for loans on condominiums (Condominiums MUST be FHA certified for these loans)
245- Graduated Payment Plan Mortgage
203K- allows the purchaser to borrow enough money to rehabilitate a property. (this program will be retired in 2015)
FHA Reverse Mortgage – Owners 62 years of age or older
FHA also has 251-an adjustable Rate Mortgage Program (ARM).
Loan Assumption – FHA loans are assumable, however the rules have been modified through the years. Loans before December 1986 required no pre-approval. Loans acquired after this date require a creditworthiness process for the buyer assuming the loan. Local FHA offices determine specific closing costs which will be borne by the buyer.
VA Loans
VA Loans
The Veterans Administration (VA) will guarantee that a loan made by an approved lending institution will be paid.
The veteran must have served 181 days active service in the military since 1940.
The VA requires that a veteran assumes liability for the loan. If a veteran does not pay the mortgage as agreed there will be a foreclosure.
The property must be owner-occupied for at least one year.
A qualified veteran may borrow up to 100% of the loan with no down payment.
Veteran must first apply for a Certificate of Eligibility in order to obtain a VA loan.
The house must qualify with an appraisal and is issued a Certificate of Reasonable Value.
The amount of the loan is limited to the amount shown on the Certificate of Reasonable Value.
Loans may be assumed by non-veterans, but veterans may still liable.
VA will lend money in rural areas where there is no financial institution available.
Points can be paid by either the seller or the buyer.
VA does not allow prepayment penalties to be charged if a veteran pays off a loan early.
If a veteran has died his/her widow or widower may be eligible for a VA loan. In order to be eligible for a VA loan, the widow or widower may not be married again at the time of application.
If a loan is assumed by another veteran and the seller has used all of his/her eligibility, the seller cannot use his/her eligibility again, unless he is given a novation because he/she will still be liable for the loan.
FHA and VA will allow buyer to pay more than appraised value, if they pay the difference in CASH.
The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities.
VA loans allow veterans to qualify for loan amounts larger than traditional Fannie Mae / conforming loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills.
The maximum VA loan guarantee varies by county. As of 1 January 2012, the maximum VA loan amount with no down payment is usually $417,000, although this amount may rise to as much as $1,094,625 in certain specified “high-cost areas”.
Once a VA loan is paid in full or the member sells the property and frees the loan, they may re-apply for another VA loan.
conventional loans
Conventional Loans
Conventional loans are neither guaranteed nor insured by the federal government. Loans are made by local lenders through savings and loans, mortgage brokers, mortgage bankers, banks and credit unions.
A minimum down payment of 20% must be made. Most loans are packaged by the lenders and sold in the secondary market to the Federal Home Loan Mortgage Corporation. Assumptions of these loans are rarely allowed; almost all of the loans contain an alienation clause. Prepayment clauses in the loans will depend on what type of loan is used- adjustable, fixed etc.
Conventional Insured Loans
Unlike the conventional loans listed above, these loans require less than 20% down payment but they also require mortgage insurance which protects the lender (not the home buyer!).
PMI (Private Mortgage Insurance) is charged at the beginning of the loan and may also be part of the monthly payment so the payment becomes PITI, Principle, Interest, Taxes, Insurance and PMI Insurance. The mortgage insurance is purchased from a private company, not the federal government. Both the real estate professional and the buyer should understand that PMI is to protect the lender from default of the buyer, not insure the buyer’s life.
Typical payment of Conventional Insured:
Principal and interest payment
$700
Taxes
$150
Insurance
$ 70
PMI
$60
Total
$980 per month
conventional
Conventional Insured Loans
HUD’s mission is to create strong, sustainable, communities and quality affordable homes for all. HUD is working to strengthen the housing market to boost homeownership. HUD. The Department of Housing and Urban Development (HUD) oversees the FHA. Private Mortgage Insurance (PMI) is insurance provided by a private insurer that protects the lender against loss in the event of a foreclosure and deficiency.
Largest private insurer is M.G.I.C. (MORTGAGE GUARANTEE INSURANCE CORPORATION).
The amount a lender will loan is generally based on the appraised value for loan purposes or the sale price, whichever is lower. The Loan to Value Ratio (LTV) is a percentage of the amount borrowed in relation to the property sales price or appraised value, whichever is lower. This is an important percentage because it expresses the party most at risk. For example on a $300,000 purchase price, a buyer with a 10% down payment has $30,000 invested and the lender has $270,000 invested. The LTV is 90%: $270,000/$300,000 = .90 or 90%.
Remember, whether an FHA, VA or conventional loan is made to a consumer, the lender and/or investor:
Is concerned with the current and future value of the property.
Is concerned with the income and income potential of the loan applicant.
Is concerned with the attractiveness of other investments that could be made for a better return.
A lender or investor is really not interested or concerned with the loan applicant’s need of financial assistance.
qualifying for a loan
A qualified buyer is one who has demonstrated the financial capacity and credit worthiness required to afford the asking (or agreed upon) price. Before submitting an offer to buy, some buyers become pre-qualified or pre-approved with a lender for a loan up to a certain amount. Assessing the buyers’ price range depends on three basic factors: stable income, net worth and credit history
Qualifying the Buyer
Ability to repay the loan- Uniform Residential Loan Application
Income
Employment history
Mortgage to income ratio – The ratio between the monthly housing expense and stable monthly income or a Total Obligation Ratio of income to total expenses.
Assets
Liquid savings, checking, certificates of deposit etc.
Other (personal property, real estate)
Liabilities
Revolving and installment accounts
Child support and alimony payments
Pledged assets, unsecured loans
Debt Coverage ratio – The ratio of annual net income to annual debt service. For example, a lender may require that a qualified corporate borrower have net income of 1.5 times the debt service of the loan being approved.
Attitude
Credit report
Explanation of derogatory items (judgments, late payments, tax liens etc.)
Mortgage history rating
Besides the buyer needing to be qualified to purchase real estate, the property also has to qualify.
qualifying for a loan
Qualifying the Property
Type of property (residential, commercial, agricultural)
Location
Area zoning
Value range
Neighborhood
Actual age/Effective age/Remaining economic life
Condition (repairs and predications)
Special clearances (code compliance, well and septic certifications etc.)
Overall marketability
Qualifying the Title
Abstract and opinion - A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The abstract of title does not guarantee or ensure the validity of the title of the property. It is a condensed history that merely discloses those items about the property that are of public record. It does not reveal such things as encroachments and forgeries. Chain of Title - The recorded history of matters that affect the title to a specific parcel of real estate, such as ownership, encumbrances and liens, usually beginning with the original recorded source of the title. The chain of title shows the successive changes of ownership, each one linked to the next so that a “chain” is formed.
Title insurance- A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Title insurance protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title.
All of these above issues must be to the satisfaction of the lender. In other words, for the title to qualify the abstract, chain of title, and the title insurance policy must meet the standards of the lender.
financing resources
Primary Sources of Home Financing
Savings and Loans - Specialize in long term residential loans. They are one of the largest lenders of residential funds. They may be either federally or state chartered. They are part of the Federal Home Loan Bank system. Deposits must be insured for at least $100,000.
Banks - Make short term loans. They are becoming more active in home mortgage loans, FHA, and VA. Examples of short term loans are: Automobile, mobile home, and household loans.
Insurance companies - Prefer large commercial projects, but will make residential loans. They like to have an equity position. They are sometimes partners with developers. This type of lending is called:
Participation financing - A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate.
Mortgage Loan Originators – The Dodd Frank Wall Street Mortgage and Consumer Protection Act created criteria for those who take or assist applications and negotiate terms of mortgages. Mortgage Loan originators who finance any federally related transactions must be registered with the Nationwide Mortgage Licensing System (NMLS). Tthose originators who are not required to be registered with the Nationwide system must be licensed through the Florida Office of Financial Regulation
Mortgage Brokers - A person, corporation, or firm not otherwise in banking or finance, which negotiates, sells, or arranges loans for compensation. They do not finance loans.
Mortgage Bankers provide their own funds for loans. Sometimes this person or entity services the loan as well.
Private individuals such as sellers financing their own properties or private investors, through mortgage brokers. Sellers who finance more than one property in a two year timeframe may be required to register as a Mortgage Loan Originator.
Local governments for bond programs such as community improvement money.
secondary mortgage market
Secondary Mortgage Market
The purpose of the secondary mortgage market is to provide liquidity (funds) for the primary market (institutional lenders). The promissory note is considered to be PERSONAL PROPERTY (readily negotiable) that can be bought and sold. Lenders sell their “Paper” or notes in the secondary mortgage market to free up money so they can make more loans.
The Secondary Mortgage Market is the market in which these notes are exchanged and funds are provided directly to institutional lenders. Secondary market participants are known as warehousing agencies because they purchase mortgage loans, and assemble them into one or more packages of loans which may be held or resold to investors.
Major warehousing agencies in the Secondary Mortgage Market are:
Federal National Mortgage Association or Fannie Mae - (FNMA) - Born out of the great depression, the purpose of FNMA was to buy existing loans from banks thus freeing up cash so that more loans could be made. The American dream of homeownership resulted from this agencies ability to move money in the market. Sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor. Fannie Mae was established in 1938 for the purpose of purchasing FHA loans from loan originators to provide some liquidity for government insured loans.
Quasi Government Corp - was government when originally formed, but is now a private corporation
Buys FHA loans, VA loans, and conventional loans
Referred to as “Fannie Mae”
Largest purchaser in secondary market
Government National Mortgage Association or Ginnie Mae - (GNMA) - Ginnie Mae is controlled by an agency of the Department of Housing and Urban Development. This is a mortgage subsidy program offered by Congress from time to time through the Government National Mortgage Association. When assistance is needed, GNMA is authorized to purchase certain mortgages at below market interest rates so that borrowers can be granted low interest loans. GNMA then sells these loans in the secondary market at deep discounts, the discount loss being the amount of the subsidy.
Buys FHA loans or VA loans
Referred to as “Ginnie Mae”
