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Chapter 8Part I: Real Estate Lenders

California Real Estate Principles

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Chapter 8 Part I

1. Compute loan qualifying ratios

2. List institutional and non-institutional lenders

3. Describe how private mortgage insurance has changed lending practices in California

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Qualifying The Buyer

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Lender’s concern:

•Character (desire)•Credit history

•Capacity (ability)•Income to make the payments

•Capital (assets)•Reserves to convert to cash

Credit

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A buyer’s credit is the most important factor that influences a lender

Consumer’s should be encourage to protect their credit

Credit Report

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Information varies from credit bureau to credit bureau.

A credit report is a detailed history of the borrower’s indebtedness over time.

Credit Bureaus

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Equifax www.equifax.comExperian www.experian.comTransUnion

www.transunion.com

Credit Scores

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FICO (Fair Isaac Company) developed a system of scoring by comparing a person’s credit report with many other credit reports to determine the risk of lending to the borrower.

Credit scores have advantages over credit reports: Results can be delivered instantaneouslyCredit decisions are fairer Older credit problems count for lessMore Credit is Available Credit rates are lower

Composition of FICO Score

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Payment History – 35% Amounts Owed – 30%Length of credit History – 15%New Credit – 10%Types of Credit in Use – 10%

Front End Ratio

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Monthly housing payment includes payment of principal + interest + taxes + insurance + dues+ PMI.

Divide monthly housing payments by gross income to determine the front end ratio.

Monthly housing payment

Gross monthly income= percentage %

Back End Ratio

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Total monthly expenses includes total monthly housing payments + long term debt.

Divide total monthly expenses by gross monthly income to determine the back end ratio.

Total monthly expenses

Gross monthly income= percentage %

Ratios (%)

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Conventional FHA DVA

Front End 28% 31%

Back End 36% 43% 41%

Ratio Terms

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GROSS MONTHLY INCOME = All stable, legal income before taxes.

MONTHLY HOUSING PAYMENT = Projected monthly loan payments + ½ of estimated property taxes and insurance premium monthly + PMI and association dues.

LONG TERM DEBT = Monthly payments that continue for six months or longer.

TOTAL MONTHLY EXPENSE = Monthly housing payments + monthly long term debts.

Loans

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LTV = Loan-to-value

Appraised Price or Sales Price (lesser value) x 80% = Maximum loan

Loan Origination fee1 point = 1% of the loan amount

Appraisal fees

Credit Report fee with extensive information

Escrow and Title fees are negotiable

Beneficiary Demand Statement showing existing loan balance

Monthly Payment

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It’s A PITI to have to make the payment!

ssociation dues

rincipal

nterest on the loan

axes on the property

nsurance

Conventional Qualifying RatiosExample:

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Gross monthly income $4,000Long term debts $500$4,000 [x] 28% [=] $1,120 for PITI

$4,000 [x] 36% [=] $1,440 for PITI and debts - 500 debts

= $ 940 The lower of the two.

For the above: $1120 vs. $940 =

Maximum payment of $940 per month for PITI

California Loan Market

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High demand Increasing population Numerous large financial institutions Use of mortgage companies for out-of-state lenders Escrow and title companies provide fast service Loan security is Trust Deed not a mortgage contract Active secondary market to trade loans for cash to

generate more loans

Lenders

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InstitutionalSavings & LoanBanksInsurance Companies

Non-InstitutionalMortgage CompaniesMortgage BrokersReal Estate Investment Trusts (REIT)Pension FundsCredit UnionsIndividuals

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Savings & Loan or

Thrift Institutions

Commercial Banks Insurance Companies

Charter Federal & State Federal & State State

Loan-to-value ratio

Usual maximum 90% (Can go to 95%)

Usually 80%

(Can go to 95%)

75%

Loan term 30 + years 30 + years 25 to 30

Interest rates Usually at the higher end of the market

Usually middle of the market

Usually at the lower end of the market

Favorite real estate loans

Prefer conventional made on single family dwellings, apartments buildings, mobile homes, condominiums

Prefer construction loans with backup takeout loan assured from another lender; Equity home loans Business loans

FHA/VA backed

Prefer high quality loans Larger commercial and industrial properties with AAA tenants Hotels and office buildings -FHA/VA

Customer Greatest share of market Present or former Lend through loan correspondents-mortgage companies

Second Deed of TrustJunior Lien

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PurposeClose the gap between the sales price and the first

loan plus down paymentPrivate lenders

Short term loan on single family dwellings

Mortgage brokers: agents for private loansMortgage bankers: lend their own or other’s fundsReal Estate Investment Trust (REIT)

Created by Federal law; involves at least 100 investors

Credit Unions are a group of voluntary savers

Private Mortgage Insurance(PMI)

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Required on LTV greater than 80%Lender reimbursed if borrower defaultsPremiums paid by borrowerPMI sold by private insurance companiesStrict credit requirements due to higher risk