© 2013 All rights reserved. Chapter 6 Real Estate Finance1 New York Real Estate for Salespersons, 5th e By Marcia Darvin Spada Cengage Learning

© 2013 All rights reserved. Chapter 6 Real Estate Finance2 Chapter 6 Real Estate Finance (Mortgages)

© 2013 All rights reserved. Chapter 6 Real Estate Finance3 Chapter 6 Key Terms  Acceleration clause  Adjustable rate mortgage (ARM)  Alienation (due on sale) clause  Amortization  Assignment  Buydown  Default  Discount points  Grace period  Inflation

© 2013 All rights reserved. Chapter 6 Real Estate Finance4 Chapter 6 Key Terms (continued)  Loan-to-value ratio  Margin  Mortgage/mortgagor /Mortgagee  Negative amortization  Payment cap/rate cap  Prepayment penalty clause  Promissory note  Release clause  Satisfaction of mortgage  Usury laws

© 2013 All rights reserved. Chapter 6 Real Estate Finance5 Mortgagor and Mortgagee The borrower gives a mortgage to the lender Mortgagor The lender receives a mortgage from the borrower Mortgagee

© 2013 All rights reserved. Chapter 6 Real Estate Finance6 Mortgage Clauses Mortgage Note or Bond Alienation Clause Acceleration Clause Prepayment Penalty clause Defeasance Clause

© 2013 All rights reserved. Chapter 6 Real Estate Finance7 Monthly Mortgage Payment P = Principal I = Interest T = Taxes I = Insurance

© 2013 All rights reserved. Chapter 6 Real Estate Finance8 Elements of Foreclosure Priority/ Subordination Deficiency judgment Equity of Redemption Deed in lieu of foreclosure Foreclosure

© 2013 All rights reserved. Chapter 6 Real Estate Finance9 Sale of Mortgaged Property  Sale Free and Clear  Sale Subject to a mortgage  Sale in which buyer assumes mortgage debt

© 2013 All rights reserved. Chapter 6 Real Estate Finance10 Conventional and Government Loans Conventional loan No participation by a government agency Government loan Guaranteed, insured or funded by a government agency

© 2013 All rights reserved. Chapter 6 Real Estate Finance11 Specific loans and Payments Mortgage AmortizedBalloonBlanket Adjust- able rate Straight- term

© 2013 All rights reserved. Chapter 6 Real Estate Finance12 Junior Financing Home equity loan Gap financing Open-end mortgage

© 2013 All rights reserved. Chapter 6 Real Estate Finance13 Special Types of Mortgages Special Mortgages Graduated payment Pledged account Reverse annuity Package Shared appreciation

© 2013 All rights reserved. Chapter 6 Real Estate Finance14 A Purchase Money Mortgage

© 2013 All rights reserved. Chapter 6 Real Estate Finance15 Construction Mortgage  Short term loan  Disbursed in stages  Interest not charged until the money has been disbursed  When project is complete, converted to permanent long-term loan called take-out or end loan

© 2013 All rights reserved. Chapter 6 Real Estate Finance16 Types of Government Loans  FHA-insured loans  VA Guaranteed loans  Rural Housing Service  State of New York Mortgage Association (SONYMA)

© 2013 All rights reserved. Chapter 6 Real Estate Finance17 The Primary and Secondary Mortgage Market Sold to secondary mortgage market Primary lender Mortgage Assignable (conforming Loans)

© 2013 All rights reserved. Chapter 6 Real Estate Finance18 Secondary Mortgage Market Organizations NameOwnershipPurchases Fannie Mae (FNMA) Privately ownedFHA, VA, RHS, conventional Ginnie Mae (GNMA) HUDVA, FHA, RHS Freddie Mac (FHLMC) Savings. savings and loan banks Members of Fed. Home Loan Bank, other banks

© 2013 All rights reserved. Chapter 6 Real Estate Finance19 Truth-in-Lending Act oDoDisclosure oCoCooling off period oAoAdvertising (Regulation Z) oPoPenalties

© 2013 All rights reserved. Chapter 6 Real Estate Finance20 Lender’s Criteria for Granting a Loan $ Investment quality of the property $ Loan-to-value ratio $ Borrower’s ability to repay loan

© 2013 All rights reserved. Chapter 6 Real Estate Finance21 Loan-to-Value Ratio Ratio of loan amount to property value Loan ÷value = ratio  Example: Loan = $144,000 Value = $160, ,000 = 90% 160,000

© 2013 All rights reserved. Sale Leaseback Chapter 6 Real Estate Finance22

© 2013 All rights reserved. Chapter 6 Real Estate Finance23 Mortgage Loan Origination Loan Approval Underwriting- Documentation review Loan processing- Application review Uniform Residential Loan Application Form

© 2013 All rights reserved. Chapter 6 Real Estate Finance24 Qualifying Ratios Monthly Housing Expense Total Obligations Fixed rate conventional loan 28%36% Adjustable rate Conventional loan 28 %36% FHA loans 31%41% VA loansNone 41%

© 2013 All rights reserved. How to Secure FHA Financing  FHA does not make mortgage loans  FHA-insured loans protects lenders against financial loss  Buyer pays for this insurance protection by paying an upfront mortgage insurance premium  FHA does not set maximum sales price, only a maximum loan amount  FHA insured mortgages require mortgage insurance Chapter 6 Real Estate Finance25

© 2013 All rights reserved. FHA Mortgage Advantages Credit criteria for a borrower are not as strict Borrower’s allowable costs can be partially wrapped into loan 100% of down payment and closing costs can be gifted Loans are assumable Disadvantages With a 30-year FHA loan, and a down payment of more than 5% of the loan amount, the upfront mortgage insurance premium (MIP) is 2.25 percent of the loan amount in addition to the 1.10 percent annual renewal premium that a borrower pays for the life of the loan FHA limits the amount that can be borrowed Chapter 6 Real Estate Finance26

© 2013 All rights reserved. Predatory Lending What is it?  High-cost (subprime loans) include conventional first mortgages that have an interest rate of more than 8 percent and junior mortgages that have a high interest rate of more than 9 percent  High-cost loans also include conventional loans for more than $50,000 when the points and fees exceed 5 percent of the loan Chapter 6 Real Estate Finance27

© 2013 All rights reserved. Predatory Lending  Lender may target certain ethnic group  Takes advantage of consumer  Lender makes unaffordable loans based on assets of borrower, not ability to repay  Induces refinancing  (flipping)  Fraud regard true nature of loan obligation Chapter 6 Real Estate Finance28

© 2013 All rights reserved. Predatory Lending Practices- What is it?  High-cost (subprime loans) include conventional first mortgages that have an interest rate of more than 8 percent and junior mortgages that have an interest rate of more than 9 percent  High-cost loans also include conventional loans for more than $50,000 when the points and fees exceed 5 percent of the loan Chapter 6 Real Estate Finance29

© 2013 All rights reserved. Subprime Loans  Borrowers considered subprime if they have a less- than-perfect credit report  Subprime lenders  companies that provide loans to home-buyers who do not have good credit histories or who are risky candidates for loans because of their incomes Chapter 6 Real Estate Finance30

© 2013 All rights reserved. New York Anti-Predatory Lending Law Many restrictions on high-cost (subprime) loans that are first or junior (second) mortgages Loans covered under New York Law Maximum indebtedness of $300,000 For family or personal reasons Apply to one- to four-unit property that is the borrower’s personal residence Chapter 6 Real Estate Finance31