REAL ESTATE FINANCE PRESENTATION 6

1. REAL ESTATE FINANCEPRESENTATION 6 CHAPTERS 8 & 9 Loan Processing Conventional Financing

2. Chapter 8 Overview of the Loan Process I. The Loan Process

3. A. THE LOAN APPLICATION The first step in obtaining a real estate loan is to fill out the loan application. TQ! The home buyer sets up an appointment with the lender. The buyer will attend this appointment armed with a good deal of personal and financial data, which will be the basis of the lender’s decision whether or not to make the loan. During the initial interview, the buyer will learn about the various types of financing programs offered by the lender. The lender will also require a deposit to cover the expenses that must be paid up front. USUALLY PAID BY CREDIT CARD NOW! ONCE A HOME IS FOUND, THE PURCH. ARGMNT IS REVIEWED. (FIGURE 8-1) TQ!

4. The lender notes the type of loan provided, i.e., Conventional, FHA, VA, as well as the loan amount, and the interest rate. A. (Section I) TYPE OF MORTGAGE AND TERMS OF LOAN

5. B. (Section II) PROPERTY INFORMATION The application begins with a section on the property. Questions as to the type of loan sought, the terms of the loan, location and legal description of the property, the property’s value, and the manner of taking title must be completed.

6. C. (Section III) BORROWER INFORMATION/INCLUDING DEPENDENTS

7. D. (Section IV) EMPLOYMENT INFORMATION

8. E. (Section V) MONTHLY INCOME AND COMBINED HOUSING EXPENSE INFORMATION

9. F. (Section VI) ASSETS AND LIABILITIES

10. G. (Section VII) DETAILS OF TRANSACTON

11. H. (Section VIII) DECLARATIONS

12. I. (Section IX) ACKNOWLEDGEMENT AND AGREEMENT

13. J. (Section X) INFORMATION FOR GOVERNMENT MONITORING PURPOSES

14. FIRST STEP IS TO HAVE THE BUYER GET “PRE” QUALIFIED….BUT WHAT IS THAT? You won’t find the word “pre-qualified” anywhere but it’s the process of looking at the buyers credit, income, and assets….and getting the loan officer’s “blessing”….and a MAXIMUM purchase price based on this information. TQ! Then you go out with a buyer and show homes, find one in the right price range, and then write it up.!!!Most of the time it’s done using “WINFORMS” software or wrtitten by hand as shown next.

15. Figure 8-1 RPA-CA REVISED 11/07 (PAGE 1 OF 8) Print Date

16. Filling Out The Loan Application As mentioned earlier, the buyer fills out a loan application at the initial interview with the lender. TQ! (This could be over telephone/internet/in person/via fax/mail)…. TQ! Lenders expect the loans they make to be repaid without collection, loan servicing, or foreclosure problems. Therefore, employment stability, income potential, history of debt management, and net worth are important considerations to the lender. TQ!

17. OFFER PROCESS • THE BUYER’S AGENT WRITES AN OFFER **TO PRESENT TO THE SELLER!! • IMPORTANT TERMS INCLUDE • PRICE • CLOSING DATE (LENGTH OF ESCROW) • LOAN TYPE/DOWN PAYMENT • CLOSING COST BETWEEN BUYER/SELLER • INSPECTIONS • ALL THESE AFFECT THE LOAN APPROVAL **TQ!

18. 1. Credit Scoring CREDIT SCORING give lenders a fast, objective measurement of your ability to repay a loan or make credit payments. Factors that are used to calculate your score include: Payment History TQ! Amounts Owed TQ! Length of Credit History TQ! New Credit TQ! Types of Credit Use TQ! FICO SCORES

19. B. ANALYSIS OF THE BORROWER AND THE PROPERTY Once the application has been properly filled out, the lender can begin gathering other pertinent information on the buyer. CREDIT REPORT APPRAISAL TQ! (QUALIFYING PROPERTY, IN DETAIL NEXT SECTION) THE APPRAISAL IS HOW THE PROPERTY IS QUALIFIED! TQ! After examining the application, the lender may also ask the buyer to submit further information, including: 1. a copy of any divorce decree (to verify any child support or alimony obligations and any settlement agreement that may be the source of the down payment); 2. an investment account record; 3. pension plan documentation; 4. tax returns (if the buyer is self-employed or retired and living on investment income); and 5. any other documentation that may have an effect on the buyer’s income or credit status.

20. 1. Equal Credit Opportunity Act The federal EQUAL CREDIT OPPORTUNITY ACT prohibits discrimination based on age, sex, race, marital status, color, religion, or national origin. Senior citizens, young adults, and single persons must be considered on the basis of income adequacy, satisfactory net worth, job stability, and satisfactory credit rating. Lenders must apply their credit guidelines to each potential borrower in the same manner. TQ!

21. C. PROCESSING THE LOAN APPLICATION When the credit report, verification forms, preliminary title report, and appraisal have all been received by the lender, a loan package is put together and submitted to the underwriting department. The loan underwriter thoroughly examines the loan package and then makes the decision to approve it, reject it, or approve it under certain conditions. A conditional approval usually requires the submission of additional information, such as: 1. the closing statement from the sale of the buyer’s previous home; 2. pay stubs to verify employment; 3. a final inspection report; and 4. a commitment for private mortgage insurance (PMI) if the down payment is less than 20% of the purchase price.

22. THE LOAN APPLICATION CAN ONLY BE COMPLETED AND THE LOAN APPROVED AFTER THE PROPERTY IS IN ESCROW!!! TQ! THE “PRE-QUALIFICATION” IS PRIOR TO THE SELECTION OF A PROPERTY!! TQ!

23. D. CLOSING THE LOAN-BRIEFLY After the conditions are met, all the necessary documents are prepared for closing. The mechanics of closing are normally the responsibility of the escrow agent. If there are no unforeseen problems (USUALLY “ISSUES” ARISE!) during closing, the loan papers are signed and sent to the funding department. The loan funds are then disbursed to the proper parties. “table funding” vs. “dry” funding The first no conditions are left and closes the day docs are signed, wire sent prior to signing the docs TQ! The second, mostly in this area, docs are signed, then sent back for review, then funding in next 48hrs. TQ!

24. III. Loan Application Checklist • In order to properly fill out the loan application, the borrower will need to know a variety of information that may not be easily recalled from memory. Need a ‘list’ of “evidence” for accurate loan application. TQ

25. LOAN PROCESS • The loan process consists of four general steps: • 1. Filling out the loan application; • 2. Analyzing the borrower and property; • 3. Processing the loan application; and • 4. Closing the loan. • TQ ALL ABOVE!!

26. To ensure that all necessary data is at the borrower’s fingertips, it would be wise for him or her to take the following information to the initial interview: 1. The purchase agreement. 2. A residence history. 3. Employment history. 4. Income. 5. A list of assets. 6. A copy of a gift letter. 7. A list of liabilities. 8. A Certificate of Eligibility for VA loans. 9. If there is to be the sale of a present home.

27. Each of these steps can be simplified if the borrower (and real estate agent) knows what is required of him or her. By supplying all the necessary data the lender needs, the borrower can ensure a much smoother loan process for all concerned. Some of the information the lender will require include the following: 1. The purchase agreement 2. A residence history 3. An employment history 4. Income information 5. A list of assets 6. A copy of any gift letter 7. A list of liabilities

28. Conventional Financing

29. Conventional Loans A CONVENTIONAL LOAN is any loan not insured or guaranteed by a government agency. NOT FHA NOT VA NOT USDA

30. A. AMORTIZED LOANS Conventional loans made over the past several decades have generally been long-term, fixed rate, fully amortizing loans. An AMORTIZED LOAN is one that provides for repayment within an agreed period (term) by means of regular level payments (usually monthly), which include a portion for principal and a portion for interest. TQ As each payment is received, the appropriate amount of principal is deducted from the debt and the remainder of the payment, which represents the interest, is retained by the lender as earnings or profit.

31. Figure 9-1

32. 15-YEAR, FIXED RATE MORTGAGE The 15-year, fixed rate mortgage has gained increasing popularity over the last few years. Before the advent of the Federal Housing Administration in 1934, most 15-year loans involved partial or no amortization with balloon payments at the conclusion of their terms. In the past two decades, there has been small increase in fixed rate mortgages that are amortized over a 15-year period.

33. 1. Advantages of 15-Year Mortgages A 15-year mortgage saves money. TQ One advantage is that lenders will frequently offer lower fixed interest rates because the shorter term means less risk for the lender. TQ

34. Figure 9-2

35. 2. Disadvantages 15-Year… TQ A 15-year mortgage requires higher monthly payments. Larger down payments are often required. In addition, the homeowner loses the tax deduction on the interest payments sooner because homeownership is attained sooner. Lastly, because borrowers usually have the option of making extra payments on a 30-year mortgage, they can choose to retire the debt early, without being legally obligated to make the higher payments.

36. C. CONFORMING VS. NONCONFORMING LOANS The particulars of the conventional loan programs detailed in this chapter reflect the criteria established by the national secondary market investors. But when a loan does not meet secondary market criteria, it’s considered NONCONFORMING and is not salable on the secondary market. JUMBO LOANS HARD MONEY LOANS Today the trend is almost exclusively towards CONFORMING LOANS, that is, loans that meet secondary market standards.

37. D. 80% CONVENTIONAL LOAN For many years now, the standard conventional loan-to-value ratio (LTV) has been 80% of the appraised value or the sales price, whichever is less. TQ With this type of loan the buyer makes a 20% down payment and obtains a 30-year, fixed rate conventional loan for the balance of the purchase price. If a buyer does not have enough money for a 20% down payment but still wants a conventional loan, he or she has a number of options, including: 1. A 90% conventional loan with a 10% down payment. 2. A 95% conventional loan with a 5% down payment. 3. A down payment of 10% with a conventional loan for up to 75% and the seller carrying a second mortgage for the remaining portion of the purchase. Example:$120,000 sales price $90,000 75% first mortgage $18,000 15% second mortgage (seller’s) $12,000 10% down payment $120,000

38. LOAN ORIGINATION FEE To cover the administrative costs of making a real estate loan, the lender will always charge a LOAN ORIGINATION FEE, also called a “loan fee” or “loan service fee.” The loan fee is a percentage of the loan amount, not the sales price. On conventional loans it is usually 1%. Example: $120,000 sales price x .80 80% loan-to-value ratio $96,000 loan amount x 1% loan fee $1200 loan fee To make fees over this the Yield Spread Premium comes into ‘play’

39. SECONDARY FINANCING In some cases a “second trust deed” may be allowed as part of the financing. NOT very likely in todays market. What was going on prior to the “mortgage meltdown”, was a first at 80%LTV and a second at 20%LTV This is a case of what has changed and what doesn’t happen now in today’s market: The borrower must make a 10% down payment. Term not to exceed 30 years or to be less than five years. No prepayment penalty permitted. Scheduled payments must be due on a regular basis. No negative amortization. The buyer must be able to afford the payments on both the first and second mortgages.

40. SECOND TRUST DEED SCENARIO • IF A HOMEOWNER, OR INVESTOR HAS “EQUITY” IN A PROPERTY, THEN…. • It is possible to have a 2nd Trust Deed used for cash out. BUT if one has enough equity they can probably just get a new 1st Trust Deed! • This would be more logical since rates are so low! TQ

41. 1. Fully Amortized Second Mortgage A five-year, $9,000 fully amortized second mortgage bearing 9.25% interest will cost the borrower approximately $190.12 per month. When underwriting the loan, the lender will include this amount in the borrower’s monthly housing expense. Example: $632.00 payment on 10%, 30-year, and $60,000 first mortgage (includes principle, interest, real estate taxes, and insurance) +$190.12 payment on 9.75%, five-year, $9,000 second mortgage (fully amortized) $822.12 total housing expense

42. 2. Partially Amortized Second Mortgage with Balloon Payment If a second mortgage is fully amortized, the monthly payments will be larger than if it is only partially amortized over the same period. The thinking behind the partially amortized mortgage is that the smaller monthly payments make the total housing expense less burdensome for the borrower, and thus easier to qualify for the loan. Example: $632.00 payment on 10%, 30-year, $60,000 first mortgage (includes taxes and insurance) +$77.32 payment on 9.75%, five-year, $9,000 second (partially amortized, based on 30-year repayment schedule) $709.32 When compared to the example for the fully amortized second mortgage, it’s clear the partially amortized second mortgage eases the qualifying burden somewhat.

43. 3. Setting Up a Partial Amortization Schedule The above example states that the payments for the partially amortized mortgage are based on a 30-year repayment (amortization) plan. This means the payments were scheduled as though the debt would be paid in full over a 30-year period, even though the entire balance would be due and payable after five years. BALLOON PAYMENT

44. 4. Interest-Only 2nd Mortgage The second mortgage can call for “interest only,” which will reduce the amount of the monthly payments still more. Of course, if no principal is paid during the term of the loan, the balloon payment will be the original amount. NOT COMMON IN TODAY’S MARKET TQ TQ!!! Monthly interest-only payments are computed by multiplying the mortgage debt by the stipulated interest and dividing that figure by 12 (months). Example: $9,000 x .0975 = $877.50 $877.50 ÷ 12 = $73.13 monthly interest payment NOT COMMON IN TODAY’S MARKET TQ TQ

45. Lender First & Second Mortgage The seller does not necessarily have to carry the second mortgage when secondary financing is included. The lender, for example, can make a normal 80% loan and a 10% second loan. The buyer makes a 10% down payment. A typical lender second under these circumstances might have payments based on 30-year amortization with a five-year CALL PROVISION (balloon payment in five years), or it might be a fully amortized ten-year loan.

46. PRIVATE MORTGAGE INSURANCE (PMI) When borrowers begin making down payments of less than 20% of the sales price, lenders regard the loan as more risky. Under these circumstances, the lender will require the borrower to pay for private mortgage insurance as protection against loss. TQ The presence of mortgage insurance reduces the lender’s risk of loss in the event of a borrower default. Needless to say, the smaller down payment requirement of the 90% loan made it very popular with buyers, sellers, and real estate agents. Mortgage insurance is sometimes available for loans with up to 95% LTV.

47. How Mortgage Insurance Works When insuring a loan, the mortgage insurance company shares the lender’s risk, but actually assumes only the primary element of risk. This is to say the insurer does not insure the entire loan amount, but rather the upper portion of the loan. TQ The amount of coverage can vary, but typically it’s 20% to 25% of the loan amount. Example: 20% coverage $200,000 sales price x.90 LTV $180,000 90% loan x.20 amount of coverage $36,000 amount of policy

48. Figure 9-4 The chart is intended to serve only as a general example of how it works, not as a current price guide.

49. 2. One-Time PMI Premium Some private mortgage insurance companies offer one-time premium programs as an alternative to the traditional program of an initial premium plus renewal premiums. Under this alternative, the initial premium and renewal premiums are combined into a single, one-time premium. The one-time premium is financed over the loan term rather than paid as a lump sum; the premium amount is simply added to the mortgage amount before calculating the monthly payment. MAIN POINT TO TAKE AWAY, NOT AS LIKELY TO HAPPEN AS MONTHLY PMI PAYMENTS IN TODAYS MARKET. TQ REMEMBER THINGS ALWAYS CHANGE TQ

50. 3. Cancellation Once the increased risk of borrower default is eliminated, usually when the loan balance has been reduced to 80% or less of the home’s present value, the mortgage insurance has fulfilled its purpose. The mortgage insurance policy is a contract between the insurer and the lender—not the borrower—so only the lender can cancel it. In many cases, the lender either did not cancel the policy, or cancelled it without passing the savings on to the borrower. CURRENT LAW IS ALL PMI LOANS THE INSURANCE DROPS OFF WHEN LTV REACHES 78% OF ORIGINAL SALE PRICE!! TQ