© 2016 OnCourse Learning California Real Estate Finance Fesler & Brady 10th Edition Chapter 10 Processing, Closing, and Servicing Real Estate Loans

Objectives After completing this chapter, you should be able to: – List the items that make up a loan package. – Describe the process by which conventional, FHA, and DVA loans are approved. – List and explain borrowers’ closing costs. – Describe the difference between “assuming” a loan and taking the property “subject to” the loan. – List rights that prospective borrowers have under the Fair Credit Reporting Act in the event errors are shown in their credit reports. – Cite the chief provisions of the Truth-in-Lending Law.

Outline Processing the Loan How is a Loan Approved? Closing the Loan After the Loan: Rights and Responsibilities Handling Loan Takeovers

Processing the Loan Start with FNMA/FHLMC standard application Form 1003 (See Figure 10.1, pp ) – Employment – Income – Assets – Debts – Credit history Equal Credit Opportunity Act (See slide) Real Estate Settlement Procedures Act (See slide) Verify information on application (See slide) – Credit report (Equifax, Experian, TransUnion) – Credit Score – Employment – Bank accounts Assemble loan package (See slide) Loan committee decision

Equal Credit Opportunity Act Ask married, unmarried, or separated But not divorced or widowed Ask if paying alimony or child support But not if receiving unless want it considered No questions about birth control methods Notify in 30 days Borrowers may provide information about blemishes

Real Estate Settlement Procedures Act Written estimate of settlement or closing costs – aka Loan Estimate Form – Within three days Does not include amounts for taxes, insurance or prorations Department of Housing and Urban Development booklet on closing costs provided to borrower One day before settlement must receive an itemized list of closing costs Escrow and/or title companies must use a HUD-1 Settlement Sheet Real Estate Agents cannot generate unearned referral fees

Verifying the Information on the Application Written verification of employment – Three months of pay stubs – Two years of W-2 forms – Tax returns Self-employed Real estate owners Written verification of checking and savings accounts – Three months Credit Report

Loan Package Borrower’s loan application Appraisal of property Verification of employment Verification of bank statements Credit report Purchase contracts Escrow instructions Preliminary title report “Source of the funds” documentation Other – Tax returns – W-2

How is a Loan Approved? Conventional lenders – Loan Committee – Authorized individual (with $ limits) FHA Direct Endorsement System DVA Automatic System Fair Credit Reporting Act – If rejected can ask credit agency for information All info on file Sources of info All creditors the agency reported to in last six months

Closing the Loan Usually handled by title or escrow company Loan documents for escrow – Promissory note (Figure 10.2) – Deed of trust (Figure 10.3) – Truth-in-Lending Law Disclosure Statement (Figure 10.4) APR – Closing Costs

APR Borrow $50,000 7% interest 120 monthly payments $580.54/month Prepaid finance charge $2,000 Proceeds $48, monthly payments $580.54/month 7.928% interest (APR)

Closing Costs Nonrecurring – Loan origination fee – Title policy – Escrow fee – Credit report – Appraisal – Tax service – Recording fees – Notary fees – Pest control inspection fee Recurring – Tax proration – Hazard insurance premium – Flood insurance in flood zones – Prepaid interest

After the Loan: Rights and Responsibilities Make loan payments – Monthly billing system – Coupons – Automatic withdrawals Pay late charges – FHA & DVA (4% of monthly payment) – Cal-Vet ($4 flat fee) – Conventional loans (6% of monthly, $5 minimum) Make prepayments – 20% max of original loan per year – Goes toward reduction of principal – No penalties beyond three years (California law) Receive reserve analysis annually

Handling Loan Takeovers Loan assumptions – Borrower is given release of liability (novation) Could be “subject to” – Buyer pays seller – Seller pays lender each month

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