In Harmonize, write a brief summary of the textbook Chapters 9 & 10 to include the following paragraphs with headings: an overview, 3 key concepts, and a summary. Each “key concept” must include the textbook page numbers. Each paragraph needs a minimum of 3 sentences. Use the template format provided below. Refer to the model assignment (sample) following the template. In addition to the paragraph and sentence requirement, your initial discussion must have a minimum of 200 words.After writing your discussion, you must reply to at least 2 other student discussions with feedback of at least 50 words. This is your “peer engagement” component of your grade. NOTE: Spelling and grammar are important, so please spell-check and read your work out loud to catch and correct any errors prior to submitting.TEMPLATE:OverviewKey Concept from Chapter 9Key Concept from Chapter 10Key Concept from Chapter 9 or 10SummarySAMPLE:Model assignment: Reflection Summary SAMPLE.pdfDownload Reflection Summary SAMPLE.pdfBELOW IS A SAMPLE REFLECTION SUMMARY. DO NOT COPY THE CONTENTS. IT IS A SAMPLE ONLY TO ILLUSTRATE THE STRUCTURE.Course: BRE 126, Real Estate FinanceStudent Name: Ima SuccessToday’s Date: 02/20/2022Textbook Author: Huber, W.Chapters # 9 – 10OverviewThe topics of Chapter 9 and 10 are introduction to real estate principles. This chapter covers four important concepts for the real estate student. First, the real estate licensing in California is discussed, along with the real estate market. Second, the historical influence of real property is examined. Third, the difference between real property and personal property is spelled out clearly. And last, the chapter concludes by analyzing various methods of land description. These concepts are important because they may be on the real estate exam for licensees.Key Concept from Chapter 9I learned that real estate can be a profitable professional (p. 4). One of the reasons it can be profitable is because the compensation to agents is based on the sales price of the house. In California, real estate values are typically high, which translates into a high commission. The commission is always paid to the broker, but the real estate salesperson receives a portion. Many real estate agents are using social media to promote their services.Key Concept from Chapter 10The second thing I learned is that property owners have a “bundle of rights” (p. 5). It means they have control of certain things because they own the real estate. Generally, people view it as a bundle of sticks, with each one of them being a “right” the owner has. Their types of rights vary based on their level of ownership. For example, homeowners have the right to possess (live in) their houses – unless they rent out the house to tenants. In that case, the tenant now has the right to possess the house.Key Concept from Chapter 9The third concept I learned is the definition of real property (p. 6). There are four things that define real property: land, affixed to the land, appurtenant to the land, or immovable. These items “tests” are what separates real property from personal property. For example, a refrigerator can be moved out of the house, so it is considered personal property. However, a fence is permanently dug into the ground so it becomes part of the real property, along with the land and the house.SummaryThis was an interesting chapter and I learned a lot about real estate. Real estate has a long and colorful history in California. There are several types of land description methods, which will probably be on the state real estate exam. I know I will have to study some of the concepts further, such as the MARIA acronym of determining personal versus real property. In addition to the knowledge of concepts, real estate involves math calculations.
Victor Valley College
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2
Education without morals
like adding a motor to a
rowboat without a
rudder.
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? Reflection Summary
due by beginning
of EACH class
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Conventional Financing
“Educating Generations, Building Communities”
I.
Conventional Loans
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Part I.
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Conventional Loans
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“Educating Generations, Building Communities”
? A CONVENTIONAL LOAN is any loan not insured or
guaranteed by a government agency
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“Educating Generations, Building Communities”
? 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
? 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
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Finance
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“Educating Generations, Building Communities”
? 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 increased use of
fixed rate mortgages that are amortized over a 15-year
period
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“Educating Generations, Building Communities”
? A 15-year mortgage saves money
? One advantage is that lenders will frequently offer lower fixed
interest rates because the shorter term means less risk for the
lender
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“Educating Generations, Building Communities”
? A 15-year mortgage requires higher monthly payments
? Larger down payments are often required to reduce the monthly
payments
? 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
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“Educating Generations, Building Communities”
? 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
? Today the trend is almost exclusively towards
CONFORMING LOANS, that is, loans that meet secondary
market standards
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“Educating Generations, Building Communities”
? 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
? 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:
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“Educating Generations, Building Communities”
1.
A 90% conventional loan with a 10% down payment (requires PMI)
2.
A 97% conventional loan with a 3% down payment (requires PMI)
3.
A down payment of 10% with a conventional loan for up to 80% and the
seller carrying a second mortgage for the remaining portion of the
purchase (no PMI)
?
Example:$200,000 sales price
$ 160,000 80% first mortgage
$ 20,000 10% second mortgage (seller’s)
$ 20,000 10% down payment
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$ 200,000
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“Educating Generations, Building Communities”
? 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 will range from 1-3% or more
?
Example:
$200,000
sales price
x .80
80% loan-to-value ratio
$160,000
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loan amount
x .02%
2% loan fee
$3,200
loan fee
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“Educating Generations, Building Communities”
? When a purchaser borrows money from any source to pay a portion of the
required down payment or settlement costs, it is called SECONDARY
FINANCING
? Conventional lenders allow secondary financing, provided the following
requirements are met
? The borrower must make a 5% 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
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“Educating Generations, Building Communities”
? A five-year, $20,000 fully amortized second mortgage bearing
8% interest will cost the borrower approximately $405.53 per
month
? When underwriting the loan, the lender will include this amount
in the borrower’s monthly housing expense
? Example:
$1,207.61 payment on 6%, 30-year, and $160,000 first mortgage (includes
principle, interest, real estate taxes, and insurance)
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+$405.53
payment on 8%, five-year, $20,000 second mortgage (fully
amortized)
$1,613.14
total housing expense
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“Educating Generations, Building Communities”
? 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:
$1,207.61
payment on 6%, 30-year, $160,000 first mortgage (includes taxes and
insurance)
+ $146.75
payment on 8%, five-year, $20,000 second (partially amortized,
based on 30-year repayment schedule)
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$1,354.36
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“Educating Generations, Building Communities”
? When compared to the example for the fully amortized second
mortgage, it’s clear the partially amortized second mortgage
eases the qualifying burden somewhat
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? 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 (BALOON PAYMENT)
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“Educating Generations, Building Communities”
? 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
? Monthly interest-only payments are computed by multiplying
the mortgage debt by the stipulated interest and dividing that
figure by 12 (months)
Example:
$20,000 x .08 = $1,600.00
$1,600 ÷ 12 = $133.33 monthly interest payment
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“Educating Generations, Building Communities”
? 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 and the buyer makes a 10% down payment
? A typical lender second under these circumstances might
have payments based on 30-year amortization with a fiveyear CALL PROVISION (balloon payment in five years), or it
might be a fully amortized ten-year loan
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“Educating Generations, Building Communities”
? 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
? 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
97% LTV
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“Educating Generations, Building Communities”
? 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
? 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
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amount of coverage
$36,000 amount of policy
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? The chart is
intended to serve
only as a general
example and not
as a current price
guide
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“Educating Generations, Building Communities”
? 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
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“Educating Generations, Building Communities”
? 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
? FHLMC revised its mortgage insurance cancellation rule in
1985 to prevent this (Loaded Couponing) and other practices
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“Educating Generations, Building Communities”
? In the early 1980s, 1990s, and 2000s the amount of past-due
mortgages and foreclosures began to rise dramatically
? These increases in loan delinquencies and foreclosures
prompted the mortgage insurance industry to raise its premiums
and to institute new underwriting guidelines
? Most loan defaults occur between the third and fifth year of the
life of the loan
? High inflation rates in the 1975 to 1985 period almost always
ensured that the selling price of the home would exceed the
original mortgage balance
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“Educating Generations, Building Communities”
? When inflation levels lowered and the economy became
depressed, the values of the homes declined drastically, and
homeowners were unable, in many cases, to sell their homes for
enough money to cover the amount that had been loaned on
them
? As a result of this experience, mortgage insurance companies
began to exert considerable effort to increase the quality of the
loans they insure in an attempt to avoid future losses. These
efforts resulted in both new policies, procedures, and new
products
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“Educating Generations, Building Communities”
? Ninety-percent loans became increasingly popular with the
advent of private mortgage insurance
? The qualifying standards for such loans tend to be more stringent
and lenders adhere to those standards more strictly (even
though the loan is insured)
? When seeking a 90% loan, the buyer must make at least a 5%
down payment out of his or her own cash reserves
? The rest of the down payment may be a gift from a family
member, equity in other property traded to the seller, or credit
for rent already paid under a lease/purchase
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“Educating Generations, Building Communities”
? Ninety-percent loans became increasingly popular with the
advent of private mortgage insurance
? The qualifying standards for such loans tend to be more stringent
and lenders adhere to those standards more strictly (even
though the loan is insured)
? When seeking a 90% loan, the buyer must make at least a 5%
down payment out of his or her own cash reserves
? The rest of the down payment may be a gift from a family
member, equity in other property traded to the seller, or credit
for rent already paid under a lease/purchase
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“Educating Generations, Building Communities”
? Underwriting guidelines are extremely strict for 95% loans, more
so than they have been in the past, due to the high foreclosure
rate of high loan-to-value loans
? Owner occupancy is required for a 95% loan
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“Educating Generations, Building Communities”
? Loans as an example of stricter underwriting requirements for 95%
loans, Fannie Mae guidelines state that the borrower should fall into
one of the following three sets of circumstances:
1. The borrower has a good mortgage payment history, good
credit, sufficient financial assets, and a credit history indicating
the borrower is willing and able to devote a substantial portion of
his or her income to a mortgage payment.
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“Educating Generations, Building Communities”
2. The borrower has no mortgage payment history (first-time buyer),
good credit, sufficient financial assets, and the borrower’s total
monthly debt service-to- income ratio is 30% or less.
3. The borrower has no mortgage payment history, but has good
credit, sufficient financial assets and financial reserves to carry the
mortgage payment. The borrower must normally have on deposit
sufficient cash, or other very liquid assets, to cover two months’
mortgage payments (principal, interest, taxes, insurance, and
mortgage insurance) after the down payment and closing costs.
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“Educating Generations, Building Communities”
? HARP was a program instituted by congress October 2008 in an
attempt to help stabilize the U.S. Financial system and prevent
avoidable foreclosures
? The program expires December 31, 2016
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“Educating Generations, Building Communities”
? Some noninstitutional lenders have been willing to waive
verification of employment or documentation of income if the
borrower is willing to make a larger than normal down payment,
usually at least 25-30%, and has good credit
? In addition to the simplified, faster qualifying procedure, these low
loan-to-value ratio loans are often more expensive because the
lender is exposed to greater risk
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“Educating Generations, Building Communities”
? Agents should not take chances when writing sales that call for
assumption of existing conventional loans
? Don’t give buyers and sellers advice on whether a loan is
assumable, unless it is a certainty
? Don’t discover after the sale what the lender plans or is entitled to
do
? Find out before creating the sale’s contract, even if it means not
making the sale at all
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“Educating Generations, Building Communities”
? Prepayment penalties discourage early payment of a loan, and
this runs counter to most lenders’ objectives in today’s real estate
market
? Fannie Mae and FHLMC don’t have prepayment penalties in their
standard promissory notes and mortgages or trust deeds
? In many states, lenders are prohibited from charging prepayment
penalties beyond the first five years of the life of the loan for loans
on owner-occupied, one-to-four-unit dwellings
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“Educating Generations, Building Communities”
I.
Conventional Loans
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“Educating Generations, Building Communities”
? Read Next Chapter
? Write Reflection Summary
? Study for Quiz
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“Educating Generations, Building Communities”
? Schedule 1 hour of study every day
? Plan to be early!
? Always be ready
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Only what you put into it!
? Take Notes
? Stay Engaged
? Think of How to Apply
? Ask Questions
? Participate / Share
? Do Activities
? Be Grateful
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“Educating Generations, Building Communities”
? Educate yourself by attending class
? Assignments & Activities
? Read every day
? Never stop learning!
“The more you LEARN the more you EARN.”
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Student Learning Objectives met
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Victor Valley College
Victor Valley College
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2
Education is not the filling
of a pail, but the lighting
of a fire.
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3
? Reflection Summary
due by beginning
of EACH class
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Alternative Financing
“Educating Generations, Building Communities”
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
Discount Points
Buydown Plans
FNMA/FHLMC Limits on Buydowns
Adjustable-Rate Mortgages
The Growth Equity Mortgage
Reduction Option Mortgage
Bi-Weekly Loans
Home Equity Conversion Mortgages
Shared Appreciation Mortgages
Hard Money Makers and Arrangers
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Part I.
Pricing Your Services
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“Educating Generations, Building Communities”
? Before discussing specific alternative financing programs, it is
important to explain discount points, often referred to simply as
“points.”
? A POINT is one percentage point (one percent) of the loan amount.
? For example, with a $100,000 loan, one point would be $1000; six
points would be $6,000.
? DISCOUNT POINTS are used to increase the lender’s yield from the loan
without raising the interest rate.
?
NOMINAL RATE
?
EFFECTIVE RATE
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“Educating Generations, Building Communities”
? Keep in mind that discounts are computed based on the loan
amount, not the sales price.
?
Example:
$222,000
sales price
$177,600
loan amount
6% discount
$177,600
loan amount
x.06
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$10,656
discount
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“Educating Generations, Building Communities”
? Payment of discount points has long been a part of most VA
loans
? Lenders, then, have traditionally required the seller to pay
enough points to increase the lender’s yield on VA loans to a
rate that is competitive with conventional loans
? Under VA regulations, the buyer is prohibited from paying any
discount points
? Any points required by the lender must be paid by the seller or a
third party, such as a builder
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“Educating Generations, Building Communities”
? While the buyer is not prohibited from paying discount points on
conventional or FHA loans, in most instances the seller is the one who
pays the points as a way of reducing the interest rate to be paid by the
buyer
? In effect, this makes the property more marketable
? When the seller (or a third party) pays points to reduce the buyer’s
interest rate, it is called a BUY-DOWN
? It is far easier to sell property if the buyer’s interest rate is relatively low
BRE – 126 Real Estate
Financeaffordable
2/4/2021
and
11
“Educating Generations, Building Communities”
? The number of points to be paid is often computed on the
assumption that it takes six points to increase the lender’s yield
on a 30-year loan by 1%.
? This is a “rule of thumb” approach to computing yields and
should be confirmed with the lender before a final quote is
made.
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$90,000 proposed 30-year loan
11% required yield
10% interest rate preferred by borrower
$90,000
x.06 (six points to increase lender’s yield)
$5,400 discount (usually paid by seller)
$90,000
– 5,400
$84,600 advanced by lender after discount
$90,000 note
x.10 nominal rate paid by borrower
$9,000 interest paid by borrower
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$9,000 ÷ $84,600 = 11% yield to lender
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Part II.
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Buydown Plans
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“Educating Generations, Building Communities”
? One of the easiest and most agreeable ways to make expensive
loans less expensive is the “buy-down”
? The seller, builder, or any other person, including the buyer,
makes a lump sum payment to the lender at the time the loan is
made
? The money that has been paid to the lender is used to reduce
the borrower’s monthly payments either early in or throughout
the life of the loan
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“Educating Generations, Building Communities”
? The following example will utilize high interest rates, as these are
precisely the sort of market conditions under which buy-downs
become popular
? Example:
$160,000
$ 9,600
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30-year, 6% loan
buy-down (6 points)
$952
quoted 6% loan payment
– 854
buyer’s payment at 5%
$98
savings resulting from buy-down
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“Educating Generations, Building Communities”
? There are two fairly obvious advantages to a buy-down plan:
1. The buyer’s monthly payment is lower than normal.
2. The lender evaluates the buyer on the basis of the reduced
payment, thereby making it easier to qualify for the loan.
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“Educating Generations, Building Communities”
? A buy-down can be permanent or temporary
? If a portion of a buyer’s interest rate is permanently bought down
(e.g., for 30 years), the lender’s nominal rate (the rate stated in
the promissory note) will be reduced by that amount
Example: Lender quotes 6% for a 30-year loan of $160,000. Builder
agrees to buy-down the note rate to 5%. Lender agrees to make
the loan at this rate if Builder makes a lump sum payment to Lender
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of $9,600 to buy down the interest rate by 1%.
18
?
“Educating Generations, Building Communities”
? There are two ways to be completely accurate when
determining a permanent interest rate buy-down.
? One way is to obtain a discount/yield table booklet from a
lender or title company and learn to use it; the other way is to
call your lender for a quote.
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“Educating Generations, Building Communities”
? When interest rates are high, temporary buy-downs are very
popular as a means of reducing a buyer’s payments—
sometimes substantially—in the early months or years of the
loan.
? Many buyers feel they can grow into a larger payment but need
time to get established. Temporary buy-down plans take two
forms: level payment and graduated payment.
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“Educating Generations, Building Communities”
? A LEVEL PAYMENT BUY-DOWN PLAN calls for an interest reduction that is
constant throughout the buy down period.
? Example: Lender makes a 30-year loan for $160,000 at 6% interest. The
seller agrees to buy-down the purchaser’s interest rate to 4% for three
years.
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“Educating Generations, Building Communities”
? A GRADUATED BUY-DOWN PLAN calls for the largest subsidies in the first
year or two of the loan, with progressively smaller subsidies in each of
the remaining years of the buy-down period.
? Example: Lender makes a 30-year loan for $160,000 at 6% interest.
Builder agrees to buy-down purchaser’s interest rate by 3% the first
year, 2% the second year, and 1% the third year.
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“Educating Generations, Building Communities”
? To be as accurate as
possible, use the
yield/discount tables
previously mentioned or
obtain a quote from your
lender
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“Educating Generations, Building Communities”
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24
Part III.
FNMA/FHLMC Limits on
Buydowns
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“Educating Generations, Building Communities”
? Fannie Mae and FHLMC guidelines impose limits on discounts, buydowns, and other forms of contributions by sellers, or other interested
parties
? Contributions are limited to a percentage of the sales price or
appraised value, whichever is less.
? If the contributions exceed Fannie Mae and FHLMC guidelines, the
contribution amount must be deducted from the value or sales price
before determining the maximum loan amount (with the exception of
contributions by an employer or immediate family member), which are
not subject to these limits.
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? Example:
$100,000 sales price (principal residence)
105,000 appraised value
90,000 90% loan
6,000 maximum contribution
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Part IV.
Adjustable-Rate Mortgages
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“Educating Generations, Building Communities”
? Perhaps the most popular and widely accepted form of alternate
financing is the adjustable rate mortgage, universally referred to as
an ARM
? Because the ARM shifts the risk of interest rate fluctuations to the
borrower, lenders normally charge a lower rate for an ARM than for
a fixed rate loan
? Although the majority of borrowers prefer the security of a fixed
rate, ARMs have maintained a place in the market despite
comparatively low mortgage rates
? Generally, as interest rates rise and fall, so does the popularity of
adjustable
rate mortgages
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“Educating Generations, Building Communities”
? An ADJUSTABLE RATE MORTGAGE (ARM) is a mortgage that permits
the lender to periodically adjust the interest rate so it will
accurately reflect fluctuations in the cost of money
? ARMs are made primarily by banks and mortgage companies
? The ARM passes the risk of fluctuating interest levels on to
borrowers, where many lenders feel it belongs
? With an ARM, it is the borrower who is affected by interest
movements
? If rates climb, the borrower’s payments go up; if they decline, the
payments go down
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? The borrower’s interest rate is determined initially by the cost of
money at the time the loan is made
? Once the rate has been set, it is tied to one of several widely
recognized and published indexes, and future interest adjustments
are based on the upward and downward movements of the index
? An INDEX is a statistical report that is a generally reliable indicator
of the approximate change in the cost of money
? At the time a loan is made, the index preferred by the lender is
selected, and thereafter the loan interest rate will rise and fall with
the rates reported by the index
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“Educating Generations, Building Communities”
? Adjustable-Rate Mortgages
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“Educating Generations, Building Communities”
? There are several elements that give form to an adjustable rate
mortgage. They include:
1. the index
2. the margin
3. the rate adjustment period
4. the interest rate cap
5. the mortgage payment adjustment period
6. the mortgage payment cap
7. the negative amortization cap and
8. a conversion option
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“Educating Generations, Building Communities”
? Most lenders try to use an index that is very responsive to
economic fluctuations.
? Thus, most ARMs have either a Treasury rate (usually one-year) or
the cost of funds as an index.
? The COST OF FUNDS INDEX (COF) is an average of the interest rates
savings and loan associations pay for deposits and other
borrowings with a certain range of maturities.
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? The M