Real Estate Mortgage Financing

1. Real Estate Mortgage Financing Real Estate Brokers’ Program Barbara Grodaes

2. Mortgage • An interest in land that is created by a contract. • Security for a loan that lender makes to borrower (mortgagee to mortgagor). • Vehicle used to finance purchase. • Existence is evidence of debt (registered at Land Titles Office).

3. Types of Mortgages • Conventional (not more than 75% of the lending value) • High-ratio (above 75% to 95% of lending value) • Builder’s Loan (advance $$ at construction stages) • Collateral (security to promissory note – not assumable) • Equitable (secured on basis of equity in property) • Blanket (covers 2 or more specific properties) • Switch (mortgage transferred to another lender) • Fully open, closed, limited pre-payment, portable, pre-approved, vendor take-back, reverse.

4. Analyze Loan-to-Value • If conventional, mortgage amount required is [L/A] to use in further calculationsmortgage required = total loan amount • If high-ratio, add Insurance premium % to mortgage amount required and this new amount becomes [L/A] to use in further calculationsmortgage required + insurance premium % = total loan amount

5. Mortgage Insurance • National Housing Act (NHA) protects lenders of high-ratio mortgages from losses resulting from borrower default • NHA provides for mortgage insurance to be available to NHA approved lenders (chartered banks, life insurance companies, credit unions, trust and loan companies authorized) • CMHC and GEMICO – companies that provide mortgage insurance under NHA

6. Mortgage Insurance Premium % of purchase price % of loan • Up to and including 65% 0.50% • Up to and including 75% 0.65% • Up to and including 80% 1.00% • Up to and including 85% 1.75% • Up to and including 90% 2.00% • Up to and including 95% 3.25% • Up to and including 100% 3.45%

7. Relevant Legislation • Law of Property Act (right of the lender is confined to recovery of the land – the lender CANNOT sue the borrower personally). • Dower Act (both spouses must consent to transaction). • Real Estate Act (licenses / registers mortgage brokers). • Canada Interest Act (deals with interest charged on loans secured by mortgages – calculated semi-annually or annually, not in advance, compounded using blended payments). • Fair Trading Act (disclosure requirements for all credit transactions).

8. Lending Value of Property • Lending Value is the selling price or appraised value, whichever is less • Loan-to-Value ratio is the percentage calculated by dividing the loan amount by the value of the property • Mortgages have a good yield and offer good security for the mortgagee

9. Loan-to-Value Calculation • Conventionalloan Loan-to-Value 75% or lower • High-ratioloan Loan-to-Value over 75% to max of 95% • Divide Mortgage required by Sale Price to find Loan-to-Value percentage Mortgage amount required = Loan-to-Value % Sale Price

10. Cash Flow Leveraging • If you can borrow money at an interest rate LOWER than than return on an ‘ALL-CASH’ basis, you will get POSITIVE leverage • SAME rate will get NEUTRAL • HIGHER rate will get NEGATIVE NOI , INVESTMENT

11. Debt Terminology • (ADS) Annual Debt Service12 months of payments (principal and interest) • (DCR) Debt-Coverage Ratioratio of net operating income to annual debt service (Income Producing Properties)Net Operating Income Annual Debt Service(ideal is higher on top, lower on bottom)

12. Equity Take-Out Loans • Basic rule of all lenders for a conventional mortgage is a maximum equity take-out of 75% loan-to-value of the property. • If there is already a loan on the property, remember the equity is 75% of the appraised value less the balance of the existing mortgage.

13. Debt Service Ratios • Gross Debt less than 32% of gross income to pay PITH (+1/2 condo fees) • Total Debt less than 40% of grossincome to pay PITHOD (+1/2 condo fees) PI + T + H + (1/2 cf)+ ODGross Monthly Income Less than 32%Less than 40% x 100 = ___%

14. Priorities of Claim to Land • First priority / exception to rule is Municipal Tax Arrears priority over mortgages (reason lender concerned about tax payments) • Claim must be on Title of land to be valid priority by date and time of registration • Claims against title are Encumbrances • Writ of Enforcement (direction from court - may have priority over mortgage whenever registered) • Builder’s Lien (registered within 45 days of work completed) • First, second, third mortgages, postponement (date/time)

15. 5 Cs of Credit for Qualifying • Character • Capital • Capacity • Collateral • Credit

16. Foreclosure Foreclosure process is procedure mortgage lender may initiate to recover security if mortgagor stops making mortgage payments • Lender issues a Statement of Claim • If no defence filed, application is made to court for Order Nisi/Order for Sale • Normally a six-month period of redemption • If acceptable Offer received, Order for Sale applied for and property sold • If no acceptable Offer, court may grant a Final Order for Foreclosureand lender owns

17. Covenants • A covenant is a promise made under seal and is binding on the part of the promisor apart from the other elements of contract • Borrower’s covenant to pay the principal is the borrower’s Personal Covenant • Gives lender right to sue borrower personally to obtain repayment of the balance outstanding

18. Borrower’s Main Covenants • Repay the principal of the loan • Pay interest on the unpaid balance • Pay the taxes levied upon property • Insure the security against loss by fire • Maintain the property in good repair

19. Costs Associated with Mortgages • Mortgage Insurance Fee (if applicable) • Legal work performed by lawyer • Fire insurance • Tax adjustments • Interest adjustment • Appraisals

20. Payout Penalty Payout Penalty is the greater of 3-month interest penalty or interest differential • Mortgage balance x mortgage interest rate x 3/12 = ___ • Mortgage balance x (mortgage interest rate subtract (-) current interest rate) x number of years remaining on term = ____

21. Averaging Mortgage Interest • You average mortgage interest to determine which is the least cost for your client – refinance a new first mortgageORassume an existing mortgage and arrange a new 2nd mortgage • Determine what is most economical

22. Calculating Averaging

23. Capitalization Rate • V = IR • R = IV • I = RxV V=ValueI=Net IncomeR=Capitalization Rate This formula is used when an investor uses a capitalization rate with the net operating annual income to determine the maximum an investor can pay to achieve the value. Net Income Cap Rate Value

24. Qualify Formula • I = PITG • G = PITI • PIT= GxI PIT=principal, interest, tax payment I=Income G=GDSR or Gross Debt Service Ratio PIT GDSR Income

25. Calculator (Qualifier Plus* IIcx) • Press [On/C], [Set] [x], [Set] [9] • Remember you only have to press [On/C] once to clear what’s on display, twice will cancel everything EXCEPT what you have entered into Term and/or Int! • Set changes the buttons to what is green ([Set] and [M+] is [M-]subtract from memory! OR [Set] and [Amort] is Balance! – LOOK at buttons) • Remember to press [=] to display result

26. Formulas – simple interest • I = P x R x TInterest = principal x rate x timeInterest will be a dollar amountrate will be an interest rate shown in % • if you know the interest and any 2 of the other elements, you rearrange the formula to find the 3rd (I always on TOP)

27. Finding 1 out of 3 (PRT?) • I = PxRxT • P = I (RxT) • R = I (PxT) • T = I (PxR) I=InterestP=PrincipalR=RateT=Time For P, R or T, write out the formula and plug in what you know – multiply what is in brackets FIRST, then divide interest by the (answer)

28. Formulas – compound interest • compound semi-annualI = P x R x TInterest = principal x rate x timesame formula, EXCEPT time is 6/12 • To calculate 1 year of compoundedinterest, PxRx.5=?1, then ADD this answer (?1) to the principalnewPxRx.5=?2 add answers (?1+?2=interest for 1 year)

29. Mortgage Components • [L/A] Loan Amount • [Pmt] Payment • [Term] Number of Amortization Years • [Int] Annual Interest Rate Note: • [Term][Term] Number of periods • [Int][Int] periodic rate of interest • [Pmt][Pmt] will display PIT if annual Tax is entered (be careful because if [Exp] is entered, this will display PITH)

30. Solving Loan Problems • [L/A], [Pmt], [Term] and [Int] are basis for solving loan problemsIf you enter in 3 of the 4 such as [L/A], [Term] and [Int], then press [Pmt], calculator will display blended monthly payment (PI). A second press[Pmt], will display payment including taxes (PIT) as long as annual taxes are already entered. • Once entered, change any variable and re-calculate your new answer with-out re-entering all of the other data! • Don’t press [On/C] [On/C] or you will lose all inputs except [Term] and [Int]! (press only once)

31. Sales Price / Down Payment • In conjunction with [L/A], Sales [Price] and [DnPmt] Down Payment, enter anytwo and solve for the third • [Price] stores or calculates based on [L/A] and [DnPmt] • [DnPmt] stores (either % or $) or calculates based on [L/A] and [Price] • [DnPmt][DnPmt] toggles either % or $Enter Down Payment by entering number less than 100, displays %Enter Down Payment by entering number greater than 100, displays $

32. Calculator Defaults • [Inc] AND [Tax] are annualyou know yearly amount, enter #, press [button]you know monthly amount, enter #, press [Per], then [button] • [Debt] AND [Exp] are monthlyyou know monthly amount, enter #, press [button]you know yearly amount, enter #, divide by [12] [=], then [button] • Number of payments is 12 unless changed –turning [Off] OR pressing [On/C] [On/C] DOES NOT set this back to 12 BUT [Set] [x], [Set] [9] does[Rcl][:]will display #Pmt/Yr to set back to 12, press [1][2] [Set] [:]

33. Estimating Mortgage Balance • Having already entered [L/A] [Pmt] [Term] and [Int], you can estimate balances prior/end of loan by pressing [Amort] button • [Set] [Amort] will give you the remaining balance first - continue pressing [Amort] to scroll through same displays of information as [Amort] alone.

34. Mortgage Balance Keystrokes [Amort] finds total interest, principal and remaining balance • 1st press shows range of periods (you can enter a new range of periods here if you want) • 2nd press shows total interest for period range • 3rd press shows total principal for range • 4th press shows remaining balance at end of range

35. Keystrokes Continued [Amort] & [Set] [Amort] displays information concerningyearswhen preceded by single year or range of years. • [#] [Amort] shows info for that (#)year starting with period range of that year – continue pressing button for more information –total interest and total principal are total for that yearonly and last press will give remaining balance • [#] [Set] [Amort] show same information but starts with remaining balance • [#] [:] [#] [Amort] show information for series ofyears starting with period range – total interest and total principal are total for that period only and last press will give remaining balance • [#] [:] [#] [Set] [Amort] show same information for that seriesofyears but starts with remaining balance

36. Keystrokes Continued [Per] [Amort] displays information concerningpaymentswhen preceded by single payment or range of payments. • [#] [Per][Amort] shows info for that (#)payment starting with period range of that payment – continue pressing button for more – total interest and total principal are total for that paymentonly and last press will give remaining balance • [#] [Set] [Per] [Amort] same information but startsremaining balance • [#] [:] [#] [Per] [Amort] show information for that series ofpayments starting with period range – the total interest and total principal are total for that series of payment only and last press will give you remaining balance • [#] [:] [#] [Set] [Per] [Amort] same information for that seriesofpayments but starts with remainingbalance

37. Interim Financing – Simple Interest • Financing necessary for a short period of days or weeks is Interim Financing. The cost of this financing is calculated using simple interest and you will know the P, R and T however the T is #of days/365I = P x R x TInterest = principal x rate x #of days/365

38. Qualify Using Calculator • First, [Rcl] [Qual1] ensure set at 32.00-40.00. If not displayed as this, enter [3][2] [:] [4][0] [Qual1] • Enter [Inc], [Debt], [Exp] [Tax] and [L/A], then [Qual1] [Qual1] to display GDSR – TDSR • Enter [Inc], [Debt], [Exp] [Tax] (but NOT [L/A]), then [Qual1] [Qual1] to display maximum loan amount qualified for(remember this max includes ins. fees! – not net loan for deal) • Enter [L/A], [Term], [Int] [Tax] and [Exp], then [Qual1] [Qual1] to display Income necessary to verify a mortgage amount

39. Qualify Continued • If qualifying for condo, include ½ condo fees with heat in the [Exp] button • Remember [Qual1] [Qual1] displays different values depending on what you have previously entered • Good idea to [On/C] [On/C] first when you want the [Qual1] [Qual1] to display the different values

40. Using Memory Functions • [Rcl] [M+] recalls and displays total value in memory • [M+]adds displayed value to memory • [Set] [M+]subtracts displayed value from value in memory oradds negative number to memory • [Rcl] [Rcl] displays total value in memory and clears memory • [Set] [Rcl]clears memory without changing displayed value • [Set] [Rcl] [M+]clears memory andputs displayed value intomemory