California Mortgage Loan Brokerage: A Practical Guide to Residential Loan Brokering and Lending

1. California Mortgage Loan Brokerage: A Practical Guide to Residential Loan Brokering and Lending 

2. � 2008 Dearborn Real Estate Education 1 What Is a Mortgage Broker? Mortgage broker assists consumers with home purchase financing Loan agent works for mortgage broker to perform brokerage activities

3. � 2008 Dearborn Real Estate Education Licensing Mortgage brokers and loan agents in California must be licensed by DRE Licensing requirements same as those for real estate brokers and real estate salespersons

4. � 2008 Dearborn Real Estate Education Employment as loan agent Employment agreement between mortgage broker and loan agent must be in writing Mortgage broker supervises work of loan agent B&P Code specifies licensed mortgage brokerage activities

5. � 2008 Dearborn Real Estate Education Unlicensed employees Unlicensed employees can perform any act that does not require a real estate license Unlicensed employees can never participate in negotiations between borrower and lender

6. � 2008 Dearborn Real Estate Education Mortgage brokerage activities Solicit borrowers or lenders Engage as a principal in buying, selling, or exchanging real property sales contracts or real property-secured promissory notes Perform services for the public in connection with real property sales contracts or real property-secured promissory notes

7. � 2008 Dearborn Real Estate Education Trust fund accounts Required for broker to hold funds belonging to others in connection with a transaction Trust fund accounts must be in neutral escrow depository

8. � 2008 Dearborn Real Estate Education Document retention Three years starting on date transaction closes or date of loan application if transaction not completed Broker pays for any required audit of accounts Failure to disburse funds makes broker liable for license suspension or revocation Delay to increase charges is prohibited

9. � 2008 Dearborn Real Estate Education Real Property Loan Law Limits loan amount and commission on loans of broker�s own funds or funds of third party Requires mortgage loan disclosure statement when a loan is made or negotiated by a mortgage broker

10. � 2008 Dearborn Real Estate Education California Residential Mortgage Lending Act Part of California Financial Code covers licensing of mortgage bankers by California Department of Corporations

11. � 2008 Dearborn Real Estate Education 2 The Mortgage Marketplace Federal Reserve System is the central bank of the U.S. Federal Reserve Board heads 12 regional banks that Require member banks to meet reserve requirements Lend money to member banks at discount rate Member banks lend funds at prime rate

12. � 2008 Dearborn Real Estate Education Other federal agencies Federal Home Loan Bank System 12 Federal Home Loan Banks Supervised by Federal Housing Finance Board FDIC insures deposits up to $100,000 and $250,000 for retirement accounts

13. � 2008 Dearborn Real Estate Education Home Owners� Loan Corp was created by Home Owners� Loan Act of 1933 to refinance loans of defaulting borrowers during Great Depression FHA created in 1934 to insure home loans VA created by GI Bill of Rights

14. � 2008 Dearborn Real Estate Education Secondary mortgage market Fannie Mae (1938) and Freddie Mac (1970) buy loans from lenders to make more funds available for lending Supervised by Office of Federal Housing Enterprise Oversight (OFHEO)

15. � 2008 Dearborn Real Estate Education HUD & Ginnie Mae Department of Housing and Urban Development created in 1965 to establish housing programs and enforce the Fair Housing Act Ginnie Mae (1968) backs securities consisting of loans FHA-insured or VA-guaranteed

16. � 2008 Dearborn Real Estate Education Economy relies on elements of production, known as DUST Demand Utility Scarcity Transferability Real estate is immobile and every parcel is unique

17. � 2008 Dearborn Real Estate Education Primary mortgage market Banks Thrifts Mortgage companies Credit unions Commercial banks State and local housing finance agencies

18. � 2008 Dearborn Real Estate Education CalHFA California Housing Finance Agency created in 1975 Assists first-time buyers with below-market interest loans Provides mortgage insurance Makes loans on multifamily properties

19. � 2008 Dearborn Real Estate Education Federal regulations Truth in Lending Act is implemented by Regulation Z of Federal Reserve Board Requires disclosure of annual percentage rate (APR) Helps consumers compare loan terms and rates Provides rescission rights Imposes limits on home equity lines of credit and closed-end home loans

20. � 2008 Dearborn Real Estate Education Community Reinvestment Act created by Congress in 1977 to encourage financing in neighborhoods of low- and moderate-income residents Home Mortgage Disclosure Act, created by Congress in 1975, requires lending institutions to report public loan data

21. � 2008 Dearborn Real Estate Education Equal Credit Opportunity Act of 1974 prohibits discrimination in consumer lending based on Age Sex Race Color Marital status Religion National origin Receipt of public assistance

22. � 2008 Dearborn Real Estate Education California Fair Employment and Housing Act (FEHA) Prohibits discrimination in sale, rental, lease, or financing of housing on the basis of ? Race ? National origin ? Color ? Ancestry ? Religion ? Familial status ? Sex (including ? Disability gender identity) ? Medical condition ? Sexual orientation ? Source of income ? Marital status Complaint alleging a violation is filed with Department of Fair Employment and Housing

23. � 2008 Dearborn Real Estate Education Credit reporting Fair Isaac Corporation produces the FICO score that considers Number of borrower�s new accts Length of time since borrower opened a new account Number of recent requests for credit Length of time since inquiries were made by lenders Whether borrower has good recent credit history following problems

24. � 2008 Dearborn Real Estate Education California Consumer Credit Reporting Agencies Act requires notice to every applicant for home loan Federal Fair Credit Reporting Act (1970) protects consumer privacy by limiting access to credit history and payment information FCRA amended by Fair and Accurate Credit Transactions Act of 2003 to protect against identity theft

25. � 2008 Dearborn Real Estate Education California Housing Financial Discrimination Act of 1977 (Holden Act) Prohibits discrimination by financial institutions in real estate loan decisions on basis of race, color, religion, sex, sexual orientation, marital status, national origin, ancestry, familial status, disability (physical or mental), medical condition, source of income, or conditions, characteristics, or trends in the neighborhood or geographic area surrounding the subject property (redlining)

26. � 2008 Dearborn Real Estate Education Getting Started as a Loan Agent Loan agent works for principal broker in soliciting and procuring loans, usually on commission basis

27. � 2008 Dearborn Real Estate Education Loan agent should consider Brokerage reputation in community Length of time brokerage in business Loan activity of brokerage Media presence Training offered to agents

28. � 2008 Dearborn Real Estate Education Job interview Set up with principal broker or through office manager Will determine whether or not broker and agent have similar goals and can establish a good working relationship

29. � 2008 Dearborn Real Estate Education Employment decision California law requires written agreement between mortgage broker and loan agent Compensation will be commission, salary, or combination of both Term is usually for one year, renewed automatically unless terminated by broker or agent

30. � 2008 Dearborn Real Estate Education Work Responsibilities Floor time Dress Safety considerations Training Agent will not be right person for every client

31. � 2008 Dearborn Real Estate Education Success as a loan agent Goal-setting Business plan Marketing plan DRE requires agent ID in any advertising Regulation Z enforces Truth-in-Lending Act and requires disclosure of loan terms when financing is included in ad

32. � 2008 Dearborn Real Estate Education Advertising should never indicate a preference for clients that would discriminate on basis of race, national origin, religion, sex, age, marital status, familial status, disability, or any other federal, state or local protected class

33. � 2008 Dearborn Real Estate Education Advertising should focus on AIDA Attention Interest Desire Action Web site is good marketing tool Community events can benefit agent personally and professionally

34. � 2008 Dearborn Real Estate Education Trade groups CAMB�California Association of Mortgage Brokers NAMB�National Association of Mortgage Brokers CAR�California Association of Realtors� NAR�National Association of Realtors� AI�Appraisal Institute

35. � 2008 Dearborn Real Estate Education 4 Primary Mortgage Market Promissory note is purchaser�s promise to repay Security instrument places lien on property until debt is repaid and is usually referred to as a mortgage, although it can take the form of a mortgage or deed of trust

36. � 2008 Dearborn Real Estate Education Institutional lenders Commercial banks, members of Federal Reserve System Federal banks subject to National Bank Act State-chartered banks subject to California Banking Law

37. � 2008 Dearborn Real Estate Education Institutional lenders (cont.) Thrifts (savings and loans) Most federally-chartered and may join Federal Home Loan Bank System Federal or state chartered thrift can be owned by stockholders Loan for more than 1005 of property value must treat amount over 100% as unsecured At least 10% of all assets must be in residential loans

38. � 2008 Dearborn Real Estate Education Institutional lenders (cont.) Credit unions Keep most loans in portfolio Organized under National credit Union Administration Limited to defined field of membership Deposits insured by National Credit Union Share Insurance Fund up to $100,000 per account and $250,000 per retirement account Insurance companies Large commercial projects Subject to California Department of Insurance

39. � 2008 Dearborn Real Estate Education Non-institutional lenders Private individuals Mortgage companies (mortgage bankers) Mortgage loan brokers Non-financial institutions Pension funds College and universities Trusts Estates Mortgage investment companies

40. � 2008 Dearborn Real Estate Education Types of loans Conventional loans have no form of government backing Nonconventional loans have some form of government participation Conforming loans meet Fannie Mae underwriting criteria Nonconforming loans don�t meet Fannie Mae criteria

41. � 2008 Dearborn Real Estate Education Conforming loan limits set by Office of Federal Housing Enterprise Oversight (OFHEO) based on mean home price announced by Federal Housing Finance Board Raised by Economic Stimulus Act of 2008 effective April 1, 2008 to $729,750 Jumbo loan is one that is over the conforming loan limit

42. � 2008 Dearborn Real Estate Education Interest rate stays the same over life of loan

43. � 2008 Dearborn Real Estate Education Adjustable rate mortgage (ARM) Initial loan rate may be �teaser� Index must be chosen Margin is number of percentage points added to index rate Fully indexed rate is index plus margin Frequency of adjustment Periodic adjustment cap and lifetime cap Negative amortization results when payment does not cover indexed rate

44. � 2008 Dearborn Real Estate Education Borrower who owes more than a property�s current market value is upside down

45. � 2008 Dearborn Real Estate Education Hybrid ARM offers fixed interest rate for first few years and annual adjustment after that Interest-only ARM includes no payment toward principal Hard prepayment penalty is an extra fee Soft prepayment penalty is imposed if loan is refinanced, but not if property is sold Conversion of ARM to FRM may require conversion fee

46. � 2008 Dearborn Real Estate Education Fannie Mae requirements Lender verification of borrower�s income, assets, liabilities Borrower DTI ratio that includes PITI as percentage of gross monthly income Borrower�s loan qualification based on fully indexed rate

47. � 2008 Dearborn Real Estate Education Balloon payment is any loan payment more than twice the lowest payment Reverse mortgage Available to homeowners aged 62 or older No income restriction Debt repaid when homeowner no longer occupies residence but limited to proceeds of sale of property

48. � 2008 Dearborn Real Estate Education Impound account is also called escrow account, reserve account, or trust account Required if LTV more than 90% May be required if LTV between 80-90%

49. � 2008 Dearborn Real Estate Education Private mortgage insurance (PMI) required by lender if LTV more than 80% Regulated by federal Homeowner�s Protection Act of 1998 PMI payments on loans originated after January 1, 2007, are tax deduction

50. � 2008 Dearborn Real Estate Education 5 Secondary Mortgage Market Started in 1938 with creation of Fannie Mae Freddie Mac created in 1970 Promissory note from borrower to lender (holder of note) is a negotiable instrument

51. � 2008 Dearborn Real Estate Education Negotiable instrument requires Unconditional promise In writing To pay a specified amount of money On demand or at a stated or determinable future time On the order of a designated person or bearer of note Signature of maker of note

52. � 2008 Dearborn Real Estate Education Defenses to payment of note (negotiable instrument) Lack of consideration Prior payment Cancellation by original note holder Set-off or reduction in amount owed Fraud in the inducement

53. � 2008 Dearborn Real Estate Education Holder in due course takes negotiable instrument For value In good faith Without notice of any defense against its enforcement Holder in due course can transfer note to new assignee

54. � 2008 Dearborn Real Estate Education Mortgage-backed securities (MBS) are subject to rules of Securities and Exchange Commission

55. � 2008 Dearborn Real Estate Education Government-sponsored enterprises (GSEs) Supervised by Office of Federal Housing Enterprise Oversight Subject to Federal Housing Enterprises Financial Safety and Soundness Act of 1992

56. � 2008 Dearborn Real Estate Education GSEs Fannie Mae buys conforming loans and guarantees payments Freddie Mac issues MBS but does not guarantee payments Ginnie Mae buys FHA-insured and VA-guaranteed loans Farmer Mac buys agricultural real estate and rural housing loans

57. � 2008 Dearborn Real Estate Education Non-government MBS Collateralized mortgage obligations (CMOs) Collateralized debt obligations (CDOs) Structured finance CDOs (SFCDOs) Commercial real estate CDOs (CRE CDOs) Collateralized bond obligations (CBOs) Collateralized insurance obligations (CIOs)

58. � 2008 Dearborn Real Estate Education First Interview with Loan Applicant Loan preapproval Conditional loan approval based on applicant�s credit status Indicates buyer is ready, willing, and able

59. � 2008 Dearborn Real Estate Education Initial contact with client Phone Email Fax In person

60. � 2008 Dearborn Real Estate Education Client questionnaire Sales price of property Borrower�s income Borrower�s debts or other financial obligations

61. � 2008 Dearborn Real Estate Education Whom does the loan agent represent? Loan agent represents borrower in dealings with lender Loan agent owes client fiduciary duties Loyalty Good faith Honesty Obedience Full disclosure

62. � 2008 Dearborn Real Estate Education To avoid payment shock, loan agent helps borrower determine realistic level of housing expense

63. � 2008 Dearborn Real Estate Education Non-permanent resident alien home loans Borrower must have valid Social Security Number Copy of borrower�s visa must be provided Borrower�s verification of authorization to work in U.S. required Minimum 10% down payment

64. � 2008 Dearborn Real Estate Education Non-permanent resident alien home loans (cont.) Borrower must have two-year work and credit history Borrower�s assets must be in verified U.S. account No diplomats Foreign nationals may qualify, likely with minimum 20% down payment

65. � 2008 Dearborn Real Estate Education 7 Taking the Loan Application Uniform Residential Loan Application (URLA) Fannie Mae 1003 Freddie Mac 65

66. � 2008 Dearborn Real Estate Education Type of mortgage and terms of loan Property information and purpose of loan�primary residence, secondary residence, investment? Borrower information Employment information

67. � 2008 Dearborn Real Estate Education V. Monthly income and combined housing expense information Income Gross monthly income Base employment income Overtime Bonuses Commissions Dividends/interest Net rental income Other income

68. � 2008 Dearborn Real Estate Education Housing expense Rent First mortgage principal and interest Other financing�second mortgage Hazard insurance premium Real estate taxes Mortgage insurance Homeowner association dues Other housing expense�utilities

69. � 2008 Dearborn Real Estate Education VI. Assets and Liabilities VII. Details of the Transaction VIII. Declarations Outstanding judgments Bankruptcy Foreclosure Lawsuit Direct or indirect loan obligation Loan delinquency Alimony, child support, separate maintenance Borrowed down payment

70. � 2008 Dearborn Real Estate Education VIII. Declarations (cont.) Piggyback loan Collateralized loan obligations Co-maker or endorser U.S. citizenship Permanent resident alien Primary residence Ownership interest in property owned in last three years

71. � 2008 Dearborn Real Estate Education IX. Acknowledgement and Agreement Penalties Loan secured by mortgage or deed of trust Property not to be used for any illegal or prohibited activity Purpose of acquiring home mortgage loan Property will be occupied by borrower And so on. . .

72. � 2008 Dearborn Real Estate Education X. Information for Government Monitoring Purposes Borrower�s ethnicity, race, and sex Voluntary If not provided by borrower, loan interviewer is asked to supply based on observation

73. � 2008 Dearborn Real Estate Education Loan Application Disclosures How title will be taken Joint tenancy Community property Community property with right of survivorship Tenants in common Single Unmarried Widow Widower

74. � 2008 Dearborn Real Estate Education Information Authorization Loan Pricing Notice Housing Financial Discrimination Act of 1977 requires notice and acknowledgment of fair housing law provisions Fair Lending Notice applies to any loan to purchase, construct, rehabilitate, refinance, or perform a home improvement on a 1-4 unit residence

75. � 2008 Dearborn Real Estate Education Privacy Policy Notice to comply with Privacy of Consumer Financial Information Act Patriot Act Disclosure Impound Authorization Borrower�s Certification and Authorization

76. � 2008 Dearborn Real Estate Education Notice to Applicants Special Information Booklet and Good Faith Estimate received Loan application made as of date notice is signed No commitment by mortgage brokerage or lender to make a loan All information provided is accurate Permission given to concerned parties to verify information; federal crime to knowingly make false statements

77. � 2008 Dearborn Real Estate Education Notice to Applicants (cont.) Equal Credit Opportunity Act prohibits creditors discriminating against credit applicants based on race, color, religion, national origin, sex, marital status, age, income from public assistance, or exercise of any right under Consumer Credit Protection Act Flood insurance may be required

78. � 2008 Dearborn Real Estate Education Mortgage broker fee disclosures Items payable in connection with loan Lender�s loan origination fee and loan discount fee Appraisal fee Credit report Lender�s inspection fee Mortgage broker commission Tax service fee Processing fee Underwriting fee Wire transfer fee

79. � 2008 Dearborn Real Estate Education Mortgage broker fee disclosures (cont.) Items to be paid in advance Interest Mortgage insurance premiums paid at closing Hazard insurance for one year County property taxes prepaid by seller VA funding fee, if applicable

80. � 2008 Dearborn Real Estate Education Mortgage broker fee disclosures (cont.) Reserves deposited with lender Hazard insurance Mortgage insurance County property taxes Title charges Settlement or closing escrow fee Document preparation fee Notary fee Title insurance

81. � 2008 Dearborn Real Estate Education Mortgage broker fee disclosures (cont.) Government recording and transfer charges Additional settlement charges Subtotals of initial fees, commissions, costs, expenses Compensation to broker�yield spread premium

82. � 2008 Dearborn Real Estate Education Mortgage broker fee disclosures (cont.) Additional required California disclosures Proposed loan amount and total of costs General information about loan Prepayment penalty, if any Impound account, if any Credit life or disability insurance not a requirement of the loan Any liens to be paid before closing Applicability of Real Estate Law, depending on loan amount Good faith estimate is not a loan commitment

83. � 2008 Dearborn Real Estate Education Truth-in-Lending Act Enforced through Regulation Z of Federal Reserve Board Truth-in-Lending terms Annual percentage rate (APR) Prepaid finance charges Finance charge Amount Financed Total of payments Payment schedule

84. � 2008 Dearborn Real Estate Education 9 Art of Packaging a Loan Begins with Cover letter Submission sheet

85. � 2008 Dearborn Real Estate Education Uniform Underwriting and Transmittal Summary Fannie Mae 1008 Freddie Mac 1077 Automated Underwriting (AU) Fannie Mae Desktop Originator� Freddie Mac LoanProspector�

86. � 2008 Dearborn Real Estate Education Credit report Typed application Handwritten application Income documentation Tax returns, signed and dated Bank statements Current pay stubs for 30-60 days, including year-to-date total Current W-2

87. � 2008 Dearborn Real Estate Education Preliminary title report Purchase contract Uniform Residential Appraisal Report form Disclosures Loan Pricing Notice Truth-in-Lending Statement Privacy Notice Patriot Act disclosure Borrower�s Certification and Authorization

88. � 2008 Dearborn Real Estate Education Authorization to Release Information Financing Freedom Act Mortgage Broker Fee Disclosure Notice of receipt of disclosure Right to copy of appraisal Credit report disclosure Good faith estimate Impounds Lock-in notice

89. � 2008 Dearborn Real Estate Education Final submission procedures Loan agent dates and signs typed loan application Broker review Broker double checks figures and documents Loan agent makes one copy of submission package for file

90. � 2008 Dearborn Real Estate Education 10 Closing the Loan Loan submission using lender�s preferred stacking order Borrower�s credit worthiness based on Credit score LTV down payment Verifiable accounts Verifiable income Low debt to income ratio Verifiable ID Intent to occupy property Excellent rental history Rate lock means timing is critical!

91. � 2008 Dearborn Real Estate Education Escrow preparations Loan documents emailed to loan officer Borrowers notified by mortgage broker of signing date and time Final approval faxed or emailed by lender subject to any prior-to-document conditions Loan docs emailed from lender to escrow after loan processor verifies figures

92. � 2008 Dearborn Real Estate Education Escrow preparations (cont.) Escrow officer prepares documents for signing and itemizes prior-to-funding conditions Escrow officer prepares audit sheet on day title is recorded Borrower�s name and vesting Legal description of property Insurance endorsement Sales price and appraised value Fees and charges, recipients, and amounts Escrow officer may send closing cost estimate to loan agent for review

93. � 2008 Dearborn Real Estate Education The signing Figures based on est. closing date Special instructions sent to escrow by lender Borrower�s name Loan and payment terms Sales price Fees Corrected Fannie Mae 1003 and required info Compliance documentation Tax information, including W-9s Truth-in-Lending Statement Miscellaneous items

94. � 2008 Dearborn Real Estate Education Additional instructions�conventional loan Borrower to Present valid ID at signing Sign final 1003 application Sign and date all documents Title policy Endorsements Lender�s coverage 110% of loan Documents reviewed for accuracy Legal description for deed of trust

95. � 2008 Dearborn Real Estate Education Conditions prior to loan docs Broker provides Corrected 1003 for signing Signed 4506 Cash back not to exceed $2,000 Valid photo ID by all borrowers Title for vesting verified Escrow provides HUD 1 with borrower�s estimate of closing costs Evidence of insurance with lender named as additional insured Explanation to borrower of all fees Evidence of appraisal report payment Evidence of credit report payment

96. � 2008 Dearborn Real Estate Education Purchase transaction docs to borrower at closing Note Deed of trust Grant deed Mortgage Loan Application Disclosure Statement� DRE RE 885 Occupancy affidavit Fair Lending Notice Compliance agreement Notice of availability of real estate appraisal Flood certification IRA W-9 and Form 4506 Loan servicing disclosure documents

97. � 2008 Dearborn Real Estate Education Purchase transaction docs to borrower at closing (cont.) Impound account authorization Title insurance policy Acceleration Alienation Assumption Foreclosure Prepayment Subordination of seller carry back on lot Interim loan for short-term financing Take-out loan when construction finished

98. � 2008 Dearborn Real Estate Education Additional instructions�conventional loan (cont.) Funding in California, before 2 PM lender�s local time (central time if lender�s home office is in Midwest) After closing Escrow department audits file Checks issued to service providers Lender checks details before selling the loan

99. � 2008 Dearborn Real Estate Education Government-SponsoredFinancing CalVet loans are administered by California Department of Veterans Affairs (CDVA) Eligibility Residency in California property Veteran status with minimum active duty service of 90 days, according to DD 214

100. � 2008 Dearborn Real Estate Education CDVA training programs Allow mortgage brokers to originate CalVet loans Only certified mortgage brokerage companies receive 1% CalVet loan origination fee Loan officers must attend CalVet training and sign CalVet Mortgage Broker Agreement Brokerage must originate three completed CalVet loans in two years to finalize certification CDVA limits number of participating brokers

101. � 2008 Dearborn Real Estate Education CalVet loan features Interest rates adjust annually Lowest rate for honorably discharged veteran purchasing single-family home, condo, or manufactured homes on land Rates effective 2-07-08 5.45% Qualified mortgage bonds 5.50% Qualified veterans mortgage bonds 6.10% Unrestricted funds

102. � 2008 Dearborn Real Estate Education CalVet loan features (cont.) Maximum loan amount currently $521,250 Vesting is in CDVA until veteran pays off loan Insurance includes Mandatory life insurance Special hazard insurance Liability insurance If veteran dies before loan is paid off, debt is forgiven Taxes added to payments

103. � 2008 Dearborn Real Estate Education CalVet loan features (cont.) No prepayment penalty Most loans for 30 years No refi except for take-out loans Junior financing allowed if total loans not more than 90% LTV Property must be owner-occupied by veteran within 60 days of closing Property can be rented with CDVA approval but not more than four years over life of loan

104. � 2008 Dearborn Real Estate Education California Veterans Homes are available to California veterans who are retired or disabled

105. � 2008 Dearborn Real Estate Education FHA-insured loans FHA-approved lenders are direct endorsers Loan terms Usually 30 years Interest rate negotiable 1% loan origination fee plus discount point payable to borrower, seller, or another party

106. � 2008 Dearborn Real Estate Education FHA-insured loans (cont.) FHA-insured loans differ from conventional loans Less stringent qualification Secondary financing restrictions prohibited Maximum loan amount depends on local limits and LTV rules Mortgage insurance required on all loans for duration of loan term No prepayment charges Home usually must be owner-occupied but can be second home

107. � 2008 Dearborn Real Estate Education FHA-insured loans (cont.) FHA programs based on fiscal year October 1 through September 30 FHA maximum loan amounts for high-cost areas as of April, 2008 One-unit $ 729,750 Two-unit $ 934,200 Three-unit $1,129,250 Four-unit $1,403,400

108. � 2008 Dearborn Real Estate Education FHA-insured loans (cont.) FHA insurance premium is �% of loan amount for life of loan Income qualification Down payment at least 10% Proposed housing expense 10% or less over current expense Applicant has at least three months reserve mortgage payments Applicant has potential for increased earnings

109. � 2008 Dearborn Real Estate Education FHA-insured loans (cont.) Family members can loan down payment Allowable closing costs specified Allowable refinancing costs specified Assets for closing must include Minimum cash investment Prepaids Discount points borrower pays Upfront MIP, if not financed Any other required costs

110. � 2008 Dearborn Real Estate Education VA-guaranteed loans Eligibility based on length of service in U.S. armed forces during wartime or peacetime and honorable discharge VA guarantee Protects lender against loss Used for purchase, refinance, or construction of owner-occupied dwelling of 1-4 units

111. � 2008 Dearborn Real Estate Education VA-guaranteed loans (cont.) No down payment No maximum loan amount No maximum income limits Underwriting standards more liberal than FHA Usually 30-year FRM No mortgage insurance required No maximum/minimum interest rate set by VA Lender may charge only 1% origination fee and reasonable discount points payable by borrower, seller, or third party

112. � 2008 Dearborn Real Estate Education VA-guaranteed loans (cont.) No prepayment penalty Forbearance for homeowner in temporary financial difficulty Assumable by any qualified buyer Lender handles loan Seller can pay closing costs if allowable concessions no more than 4% of loan amount Veteran does not have to be first-time homebuyer Benefit reusable if loan repaid

113. � 2008 Dearborn Real Estate Education VA-guaranteed loans (cont.) Entitlement amount is $36,000 or up to 25% of Freddie Mac conforming loan limit Loan amount generally is the limit for conforming loans Debt-to-income ratio is 41%

114. � 2008 Dearborn Real Estate Education VA-guaranteed loans (cont.) Funding fee 1.25% if down payment 10% or more 1.50% if down payment 5%-10% 2.15% if down payment less than 5% No funding fee for Veteran with service-connected injury Surviving spouse of veteran who died as result of service-connected injury

115. � 2008 Dearborn Real Estate Education VA-guaranteed loans (cont.) Certificate of reasonable value (CRV) is appraiser�s opinion of property value If CRV is less than the sales price Buyer can make up difference in cash or Seller can accept lower amount as sales price or Transaction can be canceled

116. � 2008 Dearborn Real Estate Education Tax Advantages of Home Ownership Home mortgage interest deduction�IRC �163 Applies to loan value of no more than $1 million secured by borrower�s principal residence and/or second home Loan must be acquisition financing or no later than 90 days from date homeowner takes title

117. � 2008 Dearborn Real Estate Education Mortgage interest deduction (cont.) Loan may not exceed original purchase price of home If refinance, only interest paid on remaining balance of original is deductible unless New loan or refi is for capital improvements or allowable medical or educational expenses or Homeowner borrows home equity loan of up to $100,000

118. � 2008 Dearborn Real Estate Education Mortgage interest deduction (cont.) Points deductible if Loan secured by main home Paying points practice in area Points not more than usual Taxpayer uses cash method of accounting Not paid for separately stated items Not paid with borrowed funds Loan used to buy or build main home Computed as % of loan principal Clearly shown on settlement statement

119. � 2008 Dearborn Real Estate Education Deductibility of property taxes Do not qualify: Special (benefit) assessments Mello-Roos assessments Prop 13 limits property tax to no more than 1% of base year value plus allowed debt Base year value increases to market value at time of reassessment event

120. � 2008 Dearborn Real Estate Education Deductibility of property taxes (cont.) Homeowner�s exemption of $7,000 Veteran�s exemption of $4,000 on property not subject to homeowner�s exemption No reassessment event if Property transferred between spouses Principal residence and up to $1 million in assessed value of other real property transferred between parents and children (grandparents if no surviving parents) Property improvements are made for accessibility by severely disabled person

121. � 2008 Dearborn Real Estate Education Deductibility of property taxes (cont.) Homeowners age 55 or older and those who are severely disabled Can transfer assessed value to new home in same county May be able to transfer assessed value to new home in different county

122. � 2008 Dearborn Real Estate Education Deductibility of property taxes (cont.) Property Tax Postponement Law for taxpayers age 62 or older, or who are blind or disabled Homeowner Assistance Program for taxpayers age 62 or older, or who are blind or disabled Renter Assistance Program

123. � 2008 Dearborn Real Estate Education Deductibility of property taxes (cont.) Property tax payments Two installments 10% penalty for late payment Nonpayment results in tax lien If tax lien is foreclosed, high bidder at public auction receives a tax deed

124. � 2008 Dearborn Real Estate Education Exclusion from taxation of profit on sale of home Maximum profit exclusion $250,000 for single person $500,000 for married couple Property must be occupied as principal residence for at least two of the five years preceding the sale

125. � 2008 Dearborn Real Estate Education Private mortgage insurance (PMI) Usually required if down payment less than 10% of loan amount May be required if down payment 10-20% of loan amount Homeowner�s Protection Act Homeowner can request cancellation of PMI when equity 20% of purchase price or appraised value of home PMI must be cancelled automatically when mortgage paid down to 78% of value (77% for high risk loans)

126. � 2008 Dearborn Real Estate Education PMI (cont.) If not cancelled or terminated earlier, PMI must be removed when borrower has reached midpoint of amortization period Borrower must receive amortization schedule if FRM PMI payments tax deductible on loans originating from January 1, 2007 through December 31, 2010 Deduction phases out on AGI over $100,000 and is eliminated at AGI over $110,000

127. � 2008 Dearborn Real Estate Education Property Appraisal and Insurance Real estate licensee prohibited from performing any appraisal activity that affects the licensee�s compensation Civil Code prohibits persons with interest in real estate transaction from improperly influencing real estate appraisal sought in connection with mortgage loan

128. � 2008 Dearborn Real Estate Education Appraiser/appraisal regulation FIRREA initiated requirement for appraiser licensing by states in federally related transactions Appraisal Subcommittee Appraisal Foundation Appraiser Qualifications Board Appraisal Standards Board Uniform Standards of Professional Appraisal Practice (USPAP)

129. � 2008 Dearborn Real Estate Education California appraiser licensing Office of Real Estate Appraisers (OREA) at www.orea.ca.gov Trainee Residential licensed appraiser Certified residential appraiser Certified general appraiser

130. � 2008 Dearborn Real Estate Education Language of appraisal Appraisal is act or process of developing opinion of value Appraiser is one who performs objective valuation services Market value presumes transfer of property in arm�s-length transaction Real estate means same thing as real property in California

131. � 2008 Dearborn Real Estate Education Three approaches to value Sales comparison approach considers recent sales and listing prices of comparable properties Cost approach adds construction cost to land value Income approach capitalizes income property expected to generate

132. � 2008 Dearborn Real Estate Education The appraisal report Complete appraisal includes full data Limited appraisal provides only specified information Self-contained report includes all pertinent data and reasoning Summary report provides most important data and reasoning Restricted use report contains none of appraiser�s research and reasoning

133. � 2008 Dearborn Real Estate Education Fannie Mae requirements Appraisal must be performed by licensed or certified appraiser Guidelines must be followed Market value defined Desktop Underwriter � AVM Precautions against property flipping Specifies unacceptable practices

134. � 2008 Dearborn Real Estate Education Freddie Mac requirements LoanProspector� AVM Allows Property Inspection Alternative (PIA) Notice about Appraisal of Your Property may be required

135. � 2008 Dearborn Real Estate Education Who pays for the appraisal? Typically, the borrower, who must be provided with a copy of the appraisal, if requested.

136. � 2008 Dearborn Real Estate Education Homeowner�s insurance Should cover: Damage to property Damage or loss to personal possessions in the home Liability caused by injury to someone on the property Temporary living expenses while home is repaired or replaced

137. � 2008 Dearborn Real Estate Education Insurance licensing Fire and casualty broker-agent Life agent Personal lines broker-agent Underwriting criteria determine insurer�s level of acceptable risk Full replacement value is best Actual cash value only pays for prior fair market value of goods

138. � 2008 Dearborn Real Estate Education Flood insurance Usually excluded from homeowner policies Required by lender if property located in flood plain Available through National Flood Insurance Program Administered by FEMA

139. � 2008 Dearborn Real Estate Education Mortgage Fraud and Foreclosure FBI investigates growing number of cases Fraud to acquire property, also called fraud for housing Homebuyer lies about income, debt, or other loan information

140. � 2008 Dearborn Real Estate Education Fraud to acquire cash, also called fraud for profit Property flipping Silent second Nominee loan with straw buyer Fictitious or stolen identity Inflated appraisal Equity skimming Air loan

141. � 2008 Dearborn Real Estate Education Predatory lending Civil Code covers mortgage foreclosure consultants, who may take advantage of homeowners facing foreclosure

142. � 2008 Dearborn Real Estate Education Judicial foreclosure process Judicial foreclosure under mortgage from borrower (mortgagor) to lender (mortgagee) Can avoid court action if mortgage contains power of sale Reinstatement is right of borrower to cure default before foreclosure sale

143. � 2008 Dearborn Real Estate Education Judicial foreclosure process (cont.) Certificate of sale given to successful bidder at foreclosure sale Foreclosed borrower has three-month redemption period Lender executes certificate of discharge to clear cloud on title caused by mortgage lien

144. � 2008 Dearborn Real Estate Education Judicial foreclosure process (cont.) Deficiency judgment for amount of loan not paid by proceeds of forced sale but not if Mortgage was purchase money debt held by property seller or Debt was incurred to pay all or part of purchase price of 1-4 unit owner-occupied dwelling

145. � 2008 Dearborn Real Estate Education Debt forgiveness If lender forgives part of debt, IRA cannot tax the amount forgiven as income to the debtor, according to the Mortgage Forgiveness Debt Relief Act of 2007, signed into law in December, 2007 Law in effect for three years

146. � 2008 Dearborn Real Estate Education Trustee�s sale Trustee�s sale in California transfers title from trustee to purchaser Notices must be in Spanish, Chinese, Tagalog, Vietnamese, or Korean, if contract negotiated in that language Declaration of default from beneficiary (lender) to trustee states basis for default by trustor (borrower)

147. � 2008 Dearborn Real Estate Education Trustee�s sale (cont.) Notice of trustee�s sale no sooner than 90 days after notice of default recorded Trustor has right of reinstatement Beneficiary can credit-bid up to amount of debt owed Trustor has no right of redemption Purchase can take possession of property immediately after sale

148. � 2008 Dearborn Real Estate Education Deed in lieu of foreclosure Alternative to foreclosure only if acceptable to lender

149. � 2008 Dearborn Real Estate Education Bankruptcy Last resort only Subject to Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 For consumers, Chapter 13 and Chapter 7 most appropriate choices under Bankruptcy Law

150. � 2008 Dearborn Real Estate Education Bankruptcy Law Chapter 13 Available to individual who receives regular income, even if self-employed or owner of unincorporated business Individual�s unsecured debts must be less than $207,675 and secured debts less than $922,975 (adjusted to CPI)

151. � 2008 Dearborn Real Estate Education Bankruptcy Law Chapter 13 (cont.) Petition includes assets, liabilities and other documents Plan to pay all or part of debts is subject to court approval Procedure includes meeting of creditors who file claims Discharge from indebtedness given to debtor when all payments made as per plan Allows debtor to save home from foreclosure

152. � 2008 Dearborn Real Estate Education Bankruptcy Law Chapter 7 Chapter 7 means liquidation of debtor�s assets to pay all or part of creditor claims Debtor may be individual, partnership, corporation, or other business entity Petition includes assets, liabilities, and outstanding contracts Procedure includes creditor meeting Discharge available only to individuals and may not clear all debts

153. � 2008 Dearborn Real Estate Education California Homestead Protection Exempts some of homeowner�s equity from forced sale, ranging from $50,000 to $150,000

154. � 2008 Dearborn Real Estate Education 15 Transaction Calculations Loan agent should be able to use financial calculator to compute Percentages Down payments Points Qualifying ratios Annual interest Monthly payments Prorations