Florida Real Estate Principles Practices Law 38 th

Florida Real Estate Principles, Practices & Law 38 th Edition Linda L. Crawford Copyright © 2015 Kaplan, Inc. All rights reserved.

Chapter 13 Types of Mortgages and Sources of Financing

Conventional Mortgages Not insured or guaranteed by a government agency – Lender assumes risk of default Nonconventional loans provide some risk protection to lender therefore require a smaller down payment – FHA-insured – VA-guaranteed © 2015 Kaplan, Inc.

Conventional Mortgage Features • Interest rate negotiated between lender and borrower • Due-on-sale clause presents assumption • Prepayment clause • Lower loan-to-value ratio than FHA and VA loans • Conventional requires larger down payment (equity) © 2015 Kaplan, Inc.

Conventional Mortgage Loans • Usually require larger down payments – 20% down payment – 80% loan-to-value ratio – Private Mortgage Insurance (PMI) – Usually insures part of the loan above LTV – Interest rates based on market conditions © 2015 Kaplan, Inc. 80

Qualifying for a Conventional Mortgage • Gross monthly income used to calculate qualifying ratio for borrowers • Total obligation ratio (TOR) – Must not exceed 36% Total monthly obligations ÷ monthly gross income = TOR © 2015 Kaplan, Inc.

Amortized Mortgage – Gradually and killed by equal regular periodic payments • Constant (level) monthly payment • 30 -year and 15 -year terms are common © 2015 Kaplan, Inc.

Mortgage Amortization • Fixed-rate amortized mortgage – Regular periodic payment for fixed (constant) amount – At end of loan term all principal and interest paid in full – Amount of payment for interest gradually decreases as the amount applies to principal gradually increases © 2015 Kaplan, Inc.

Amortizing a level-payment plan mortgage • Information needed to amortize a mortgage – Outstanding debt (principal) – Interest rate – Monthly payment © 2015 Kaplan, Inc.

Amortizing A Mortgage (formula) 1. Principal balance x annual interest ÷ 12 = first month’s interest 2. Monthly mortgage payment – first month’s interest = payment on principal 3. Beginning principal balance – principal payment = new principal balance © 2015 Kaplan, Inc.

Amortization Example A buyer, with a new mortgage of $120, 000 at 6% interest, has monthly principal and interest payments of $719. 46. The buyer wants to know how much of the first two monthly payments will be for interest and how much will be for principal. © 2015 Kaplan, Inc.

Solution $120, 000 x. 06 = $7, 200 ÷ 12 = $600 interest $719. 46 - $600 = $119. 46 principal 1 st payment = $600 interest & $119. 46 principal $120, 000 - $119. 46 = $119, 880. 54 new balance $119, 880. 54 x. 06 = $7, 192. 8324 ÷ 12 = $599. 40 interest $719. 46 - $599. 40 = $120. 06 principal 2 nd payment = $599. 40 interest & $120. 06 principal © 2015 Kaplan, Inc.

Adjustable-Rate Mortgage (ARM) • Interest rate can change • Index – Indicator of cost for lender to borrow funds – Not controlled by lender • Margin (spread) – Usually fixed percentage • Index + margin = calculated interest rate • Adjustment period • Rate caps • Payment cap (negative amortization can occur) • Teaser rate © 2015 Kaplan, Inc.

Custom Mortgages • Partially amortized mortgage – Payments not large enough to pay off loan by end of loan term – Balloon payment – final payment of unpaid principal accrued interest • Biweekly mortgage – Payments made every 2 weeks – Each payment is ½ regular monthly payment – Equivalent of 13 monthly payments a year • Package mortgage – Includes both real and personal property as collateral • Home equity loan • Purchase-money mortgage – Seller financing – Vendor’s lien © 2015 Kaplan, Inc.

Home Equity Conversion Mortgage (HECM) • Reverse mortgage – HECM available through FHAapproved lender © 2015 Kaplan, Inc.

Land Development Loans • Subordination clause – Lender agrees to take a lower priority • Blanket mortgages – Mortgage covers more than one lot – Partial release clause • Releases individual lots from the mortgage © 2015 Kaplan, Inc.

Federal Housing Administration (FHA) • FHA is a government agency within HUD • Functions as an insurance company, insures mortgage loans made by approved lenders • Lenders set interest rates and may charge points • Section 203(b) fixed rate mortgage loans © 2015 Kaplan, Inc.

Characteristics of FHA Mortgage Loans • Loans made by FHA-approved lenders • Lends may charge discount points • Minimum cash investment (down payment) is 3. 5% • FHA sets limits on the amount that can be borrowed depending on the average cost of housing in various regions of country © 2015 Kaplan, Inc.

FHA Loans • Up-front mortgage insurance premium (UFMIP) • Mortgage insurance premium (MIP) – Annual premium paid in monthly installments – Added to monthly payment – Added to monthly housing expense for calculating qualifying ratios © 2015 Kaplan, Inc.

Additional FHA-Insured Loan Features • Fully assumable • Interest rate is negotiable between lender and borrower • No prepayment penalty • Minimum property standards – Appraised by an FHA-approved appraiser © 2015 Kaplan, Inc.

FHA Qualifying Ratios: HER Housing expense ratio (HER) Monthly housing expenses (PITI and MIP) ÷ monthly gross income = HER cannot exceed 31% © 2015 Kaplan, Inc.

FHA Qualifying Ratios: TOR Total obligations ratio (TOR) Total monthly obligations ÷ monthly gross income = TOR cannot exceed 43% © 2015 Kaplan, Inc.

Qualifying Ratios Example What are the housing expense (HER) and total obligation ratios (TOR) for an FHA borrower who has monthly gross income of $4, 800 and housing expense of $1, 344 and total monthly obligations of $1, 920? © 2015 Kaplan, Inc.

Qualifying Ratios Solution $1, 344 ÷ $4, 800 =. 28 (28%) HER 28% Housing Expense Ratio $1, 920 ÷ $4, 800 =. 40 (40%) TOR 40% Total Obligations Ratio © 2015 Kaplan, Inc.

Veterans Affairs Mortgage (VA loan) • Partial guarantee to lender in event of default • Veterans, unremarried surviving spouses of veterans, and active military may apply • Specific eligibility based on period of active duty or period of continuous service • VA loans made by VA-approved lenders • VA can make direct loans © 2015 Kaplan, Inc.

Loan Guarantee • 2014 maximum entitlement (guarantee) is $104, 250 • Entitlement is maximum amount the government guarantees lender in event borrower defaults • Certificate of eligibility • Discount points paid by borrower or seller • TOR may not exceed 41% © 2015 Kaplan, Inc.

VA-Guaranteed Loan Features • • No maximum loan limit VA funding fees Closing costs Assumable (even by nonveterans) • Interest rates based on market and negotiated between borrower and lender • No down payment • Payments include taxes and insurance premiums held in escrow • Maximum loan term is 30 years • No prepayment penalty • No mortgage insurance premiums required © 2015 Kaplan, Inc.

Qualifying for a Loan • Determine buyer’s real property needs • Determine buyer’s economic capability • Mortgage loan underwriting – Quantity and quality of income – Assets of value – Past credit history – Loan-to-value ratio – Credit score © 2015 Kaplan, Inc.

Truth in Lending Act • Federal Regulation Z • Inform consumers of exact credit costs • Credit advertising falls under Federal Trade Commission rules – Bait and switch advertising is a federal offense • Applies to consumer credit – Residential mortgage loans © 2015 Kaplan, Inc.

Required Disclosures • Disclose annual percentage rate (APR) • Disclose finance charge – Total cost of the loan over the full term – Includes interest, discount points, servicing fees, etc. • Disclose total amount financed • Disclose total amount of payments • Disclosures required at loan application – Within 3 business days of accepting loan application – No later than 7 business days before closing © 2015 Kaplan, Inc.

Triggering Terms • Certain credit terms in advertisements – – – Amount or percentage of down payment Number of payments Period (term) of repayment Amount of a payment Amount of finance charge • Must also disclose in ad – Amount or percentage of down payment – Terms of repayment – Annual percentage rate © 2015 Kaplan, Inc.

Equal Credit Opportunity Act (ECOA) • Make credit available without discrimination – – – – Race Color Religion National origin Sex Marital status Age Receipt of public assistance © 2015 Kaplan, Inc.

Real Estate Settlement Procedures Act • RESPA • Consumer protection law – Amount and type of charges at closing – Attempts to eliminate kickbacks and referral fees – Applies to federally related residential loans • Loans secured with a mortgage on one-family to fourfamily © 2015 Kaplan, Inc.

Transactions Exempt from RESPA • • Loan to finance purchase of 25 acres or more Home improvement and refinance loan Loan to finance purchase of vacant lot Assumption of (without lender approval) or subject to existing loan • Construction loan (no permanent conversion) • Construction loan for 1 -4 family structure when lot is owned by borrower • Loan to finance purchase for resale of property © 2015 Kaplan, Inc.

Disclosures Required at Loan Application • Special information booklet • Good faith estimate of closing (settlement) costs • Servicing disclosure statement • If borrower does not receive disclosures at loan application, lender must mail within three business days © 2015 Kaplan, Inc.

Three Business Day Right of Rescission • Borrower has right to cancel loan – Borrower can waive right of rescission • Does not apply to loans to purchase or construct a home • Applies to – Home equity line of credit – Second mortgage – Refinance loan © 2015 Kaplan, Inc.

Additional RESPA Requirements • Affiliated business relationships (AFBA) • Purchase of title insurance • HUD-1 settlement statement – Required for RESPA closing – Copy to buyer one business day before closing • Limits on escrow for taxes and insurance • Kickbacks, fee-splitting, and unearned fees © 2015 Kaplan, Inc.

The Mortgage Market and Money Supply • Law of supply and demand – When available mortgage money decreases, interest rates rise – Interest is the rent paid for money – Tight vs. easy money market © 2015 Kaplan, Inc.

Demand for Mortgage Money • Major influences – Changes in number and size of households – Shifts in geographic preference – Existing inventory of structures – Changing employment rates and income – Changing costs of property services, taxes, maintenance – Changes in construction costs © 2015 Kaplan, Inc. and

Influences on Supply of Mortgage Money • Mortgages are long-term loans • Other demands on long-term money – Corporate stocks and bonds – Government bonds – Refinancing the national debt © 2015 Kaplan, Inc.

Federal Reserve System • The Fed: central banking authority • Tools for conducting monetary policy – Open-market operations – Discount rate – Reserve requirement Board of governors 12 regional Federal Reserve banks Member commercial banks © 2015 Kaplan, Inc.

Open-Market Operations • Sale and purchase of U. S. securities – Principal method used to influence supply of available money • Purchase of securities increases money supply and reduces interest rates • Sale of securities decreases money supply and increases interest rates © 2015 Kaplan, Inc.

Discount Rate • Interest rate member banks pay to borrow from the FED – Short-term interest rate • Increase in discount rate results in less lending and reduces money supply • Decrease in discount rate results in more lending and increases money supply © 2015 Kaplan, Inc.

Reserve Requirements • Amount of funds banks must hold in reserve – Most drastic method to influence money supply – Most banks have large total deposits • Small increase in reserve requirement causes large reduction in money supply • Small decrease in reserve requirement causes large increase in money supply © 2015 Kaplan, Inc.

Federal Home Loan Bank System • FHLBS created to provide regulatory and administrative services to savings associations • 12 district Federal Home Loan Banks (FHLBs) • Office of Thrift Supervision (OTS) regulates member federal savings associations • Member savings associations can borrow from district FHLB for 1 year with no collateral © 2015 Kaplan, Inc.

Federal Deposit Insurance Corporation • FDIC – Insures individual accounts up to $100, 000 per depositor in member institutions – Exercises power through the Deposit Insurance Fund © 2015 Kaplan, Inc.

Primary Mortgage Market • Made up of primary lenders that originate new mortgage loans – Commercial banks – Savings associations – Mutual savings banks – Selected credit unions – Mortgage companies © 2015 Kaplan, Inc.

SAFE Mortgage Licensing Act • Secure and Fair Enforcement of Mortgage Licensing Act (SAFE Act) • Minimum standards for licensing of mortgage loan originators (MLOs) – Employees of banks, SAs, credit unions regulated by Federal banking agency • Register with National Mortgage Licensing System (NMLS) – MLOs not employed by Federal agency regulated institutions • Must also be licensed by states © 2015 Kaplan, Inc.

Mortgage Loan Originator (MLO) • Middleman (agent) between a borrower and a lender • Loan originator license required – If employed by non-federally regulated agency • Do not make or service loans • When loan is approved, MLO earns a loan origination fee © 2015 Kaplan, Inc.

Mortgage Broker • Conducts loan originator duties – Employs loan originators • Does not make loans • Does not service loans • Works with lenders to arrange loans for borrowers • Must be state-licensed if not a federal agency-regulated institution © 2015 Kaplan, Inc.

Mortgage Lender • Makes and services mortgage loans • Sells mortgage loans to noninstitutional investors • Is not a depository institution • Must be state-licensed if not a federal agency-regulated institution © 2015 Kaplan, Inc.

Intermediation and Disintermediation • Intermediation – Thrift institutions provide financial intermediation by consolidating individual savings accounts of depositors and investing in large, diversified projects • Disintermediation – Investors bypass intermediary financial institutions (middlemen) and invest directly © 2015 Kaplan, Inc.

Commercial Banks • Hold demand deposits (checking accounts) • Chartered by the state or federal government (national banks) – Member of the FRS – National or N. A. in name – Make conventional, FHA and VA mortgage loans © 2015 Kaplan, Inc.

Savings Associations • Chartered by the state or federal government – Federally chartered SAs have either Federal or F. A. in their name – Prefer to make conventional mortgage loans, but also make FHA and VA loans © 2015 Kaplan, Inc.

Other Primary Lenders • • Mutual Savings Banks Mortgage Companies Life Insurance Companies Rural Housing Service – US Department of Agriculture © 2015 Kaplan, Inc.

Secondary Mortgage Market • An investor market that buys and sells existing securities • Major entities active in secondary market are – Fannie Mae – Freddie Mac – Ginnie Mae © 2015 Kaplan, Inc.

Fannie Mae • Federal National Mortgage Association (FNMA) • Under federal government conservatorship • Federal Housing Finance Agency (FHFA) has supervisory responsibility • Purchases FHA, VA, and conventional loans meeting its criteria (conforming loans) • Issues mortgage-backed securities which are sold to investors © 2015 Kaplan, Inc.

Freddie Mac • Federal Home Loan Mortgage Corporation (FHLMC) • Under federal government conservatorship • FHFA has regulatory oversight • Purchases loans from savings associations – Primarily conventional loans © 2015 Kaplan, Inc.

Ginnie Mae • Government National Mortgage Association (GNMA) • Government agency, part of HUD • Guarantees securities backed by pools of mortgages • Does not buy mortgages or issue mortgagebacked securities • Acts as a guarantor to investors of certain mortgage-backed securities © 2015 Kaplan, Inc.