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Principles of California Real Estate

Principles of California Real Estate. Lesson 10: Applying for a Residential Loan. Applying for a Residential Loan. This lesson will cover four topics: choosing a lender the loan application process basic loan features residential financing programs. Choosing a Lender Types of lenders.

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Principles of California Real Estate

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  1. Principles of California Real Estate Lesson 10: Applying for a Residential Loan

  2. Applying for a Residential Loan This lesson will cover four topics: • choosing a lender • the loan application process • basic loan features • residential financing programs

  3. Choosing a LenderTypes of lenders • Buyers may choose the type of lender they want, although most distinctions between mortgage lenders no longer exist.

  4. Choosing a LenderTypes of lenders • Buyers may choose the type of lender they want, although most distinctions between mortgage lenders no longer exist. • The types of lenders include: • savings and loans • commercial banks • savings banks • credit unions • mortgage companies

  5. Types of LendersSavings and loans Savings and loans: • emphasize home purchase loans

  6. Types of LendersSavings and loans Savings and loans: • emphasize home purchase loans • get most of their loan funds from the savings of individuals

  7. Types of LendersCommercial banks Commercial banks: • traditionally made short-term business loans

  8. Types of LendersCommercial banks Commercial banks: • traditionally made short-term business loans • now accept more long-term deposits and offer more long-term loans

  9. Types of LendersSavings banks Savings banks: • are owned by small depositors rather than stockholders

  10. Types of LendersSavings banks Savings banks: • are owned by small depositors rather than stockholders • are relatively rare today

  11. Types of lendersCredit unions Credit unions: • serve only members of a particular group

  12. Types of lendersCredit unions Credit unions: • serve only members of a particular group • specialize in small personal loans

  13. Types of lendersMortgage companies Mortgage companies: • are not depository institutions

  14. Types of lendersMortgage companies Mortgage companies: • are not depository institutions • act as loan correspondents (an intermediary between an investor with money to lend and a home buyer looking for financing)

  15. Types of lendersMortgage companies Mortgage companies: • are not depository institutions • act as loan correspondents (an intermediary between an investor with money to lend and a home buyer looking for financing) • act on behalf of large investors

  16. Types of lendersMortgage companies Mortgage companies: • are not depository institutions • act as loan correspondents (an intermediary between an investor with money to lend and a home buyer looking for financing) • act on behalf of large investors • make the most mortgage loans

  17. Types of lendersMortgage companies Mortgage companies: • sell their loans to investors on the secondary market

  18. Types of lendersMortgage companies Mortgage companies: • sell their loans to investors on the secondary market • often service the loan for a fee

  19. Types of lendersMortgage companies Mortgage company ≠ Mortgage broker

  20. Types of lendersMortgage companies Mortgage company ≠ Mortgage broker A mortgage broker simply arranges loans, bringing borrowers and lenders together for a commission.

  21. Types of LendersSeller financing Seller financing: When the seller extends credit to the buyer.(Most important source of private financing.)

  22. Types of LendersSeller financing Seller financing: When the seller extends credit to the buyer.(Most important source of private financing.) • Seller financing is important when: • buyer’s income is inadequate • interest rates are high • buyer has poor credit history

  23. Types of LendersSeller financing • The buyer makes a downpayment and then gives the seller a mortgage, deed of trust, or land contract for the rest of the price.

  24. Types of LendersSeller financing • The buyer makes a downpayment and then gives the seller a mortgage, deed of trust, or land contract for the rest of the price. • Alternately, the buyer may finance much of the purchase price through an institutional lender and finance the rest through the seller (this is called secondary financing).

  25. SummaryChoosing a Lender: Types of Lenders • Savings and loans • Commercial banks • Savings banks • Credit unions • Mortgage companies • Mortgage brokers • Seller financing

  26. Choosing a LenderLoan costs Buyers also want to compare loan costs when choosing a lender.

  27. Choosing a LenderLoan costs Buyers also want to compare loan costs when choosing a lender. Loan costs include: • interest charges • origination fees • discount points • lock-in fees

  28. Loan CostsOrigination fees Origination fee: An administrative charge for processing the loan.

  29. Loan CostsOrigination fees Origination fee: An administrative charge for processing the loan. • The fee is paid at closing.

  30. Loan CostsOrigination fees Origination fee: An administrative charge for processing the loan. • The fee is paid at closing. • Also known as a loan fee, service fee, or administrative charge.

  31. Loan CostsDiscount points Discount points: A fee paid to the lender at closing to increase the lender’s yield (or profit) on the loan.

  32. Loan CostsDiscount points Discount points: A fee paid to the lender at closing to increase the lender’s yield (or profit) on the loan. • One point is equal to 1% of the loan amount. Two points are equal to 2% of the loan amount.

  33. Loan CostsDiscount points • The more discount points a borrower pays, the lower the interest rate will be.

  34. Loan CostsDiscount points • The more discount points a borrower pays, the lower the interest rate will be. • The seller may choose to pay the buyer’s discount points to lower the buyer’s interest and make the loan more affordable.

  35. Loan CostsDiscount points • The more discount points a borrower pays, the lower the interest rate will be. • The seller may choose to pay the buyer’s discount points to lower the buyer’s interest and make the loan more affordable. • This is known as a buydown.

  36. Loan CostsLock-ins Lock-in fee: A fee paid to the lender by the buyer to ensure that the interest rate will be guaranteed for a certain period.

  37. Loan CostsLock-ins Lock-in fee: A fee paid to the lender by the buyer to ensure that the interest rate will be guaranteed for a certain period. • Without a lock-in, the lender may change the loan’s interest rate at any point before closing.

  38. Loan CostsTruth in Lending Act • The Truth in Lending Act (TILA) is a federal consumer protection law that requires lenders to disclose the total cost of obtaining a loan.

  39. Loan CostsTruth in Lending Act • The Truth in Lending Act (TILA) is a federal consumer protection law that requires lenders to disclose the total cost of obtaining a loan. • TILA is implemented through Regulation Z, a Federal Reserve regulation.

  40. Loan CostsTruth in Lending Act TILA applies to consumer loans: • used for personal, family, or household purposes

  41. Loan CostsTruth in Lending Act TILA applies to consumer loans: • used for personal, family, or household purposes • paid off in more than four installments or involving finance charges

  42. Loan CostsTruth in Lending Act TILA applies to consumer loans: • used for personal, family, or household purposes • paid off in more than four installments or involving finance charges • for $25,000 or less or secured by real property

  43. Loan CostsTruth in Lending Act TILA does NOT apply to: • loans made to corporations or organizations

  44. Loan CostsTruth in Lending Act TILA does NOT apply to: • loans made to corporations or organizations • loans made for business, commercial, or agricultural purposes

  45. Loan CostsTruth in Lending Act TILA does NOT apply to: • loans made to corporations or organizations • loans made for business, commercial, or agricultural purposes • seller-financed transactions

  46. Loan CostsTruth in Lending Act If a loan is covered by TILA, the lender must disclose the loan’s: • total finance charge

  47. Loan CostsTruth in Lending Act If a loan is covered by TILA, the lender must disclose the loan’s: • total finance charge • annual percentage rate (APR)

  48. Loan CostsTruth in Lending Act Total finance charge: The sum of all fees the borrower will have to pay, including interest, origination fees, discount points, service fees, mortgage insurance premiums.

  49. Loan CostsTruth in Lending Act Total finance charge: The sum of all fees the borrower will have to pay, including interest, origination fees, discount points, service fees, mortgage insurance premiums. • The finance charge does NOT include seller-paid points, appraiser fees, or credit report fees.

  50. Loan CostsTruth in Lending Act Annual percentage rate (APR): The cost of the loan expressed as an annual percentage of the loan amount.

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