Transcript Document

Chapter 13
Georgia Real Estate
An Introduction to the Profession
Eighth Edition
Chapter 13
Types of Financing
Key Terms
• adjustable rate
mortgage (ARM)
• affordable housing
loan
• blanket mortgage
• construction loan
• equity sharing
• graduated payment
mortgage
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negative amortization
option
package mortgage
RAM
seller financing
wraparound mortgage
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Adjustable Rate Mortgages
The interest rate on adjustable rate mortgages
(ARM) is tied to some publicly available index.
It carries an interest rate that is lower than the
rate on a fixed-rate mortgage of similar
maturity.
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Adjustable Rate Mortgages
If interest rates fall, the
monthly payments fall.
If interest rates rise, the
monthly payments rise.
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Adjustable Rate Mortgages
Most ARMs allow
assumption and most allow
prepayment without penalty.
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Interest Rate
The interest rate on an ARM is tied to an index
rate.
The index rate must be readily verifiable by the
borrower and the rate must not be controlled
by the lender.
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Margin
The index rate is added to
the margin. The
combination of these two
becomes the interest rate to
the borrower.
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Adjustment Period
The amount of time that
elapses between
adjustments is the
adjustment period.
The most common
adjustment period is one
year.
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Interest Rate Cap
Lenders are required to disclose an interest
rate cap.
The two most popular caps are 1% and 2% per
year.
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Payment Cap
A payment cap sets a limit on how much the
borrower’s monthly payment can increase in
any one year.
No matter how high a payment is called for by
the index rate, the monthly payment cannot
increase more than the payment cap.
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Negative Amortization
When the required payment exceeds the
monthly cap, the difference is added to the
balance owed on the loan and earns interest
just like the original amount borrowed.
This is called negative amortization. The
balanced owed rises.
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Choosing Wisely
When a lender makes an ARM loan, the lender
must explain to the borrower the worst-case
scenario, in writing.
VA loans are fixed-rate loans. FHA provides an
adjustable rate loan program.
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Graduated Payment Mortgage
In a graduated payment mortgage, the interest
rate and maturity are fixed, but the monthly
payments start artificially low and gradually
rises.
The amount owed on the loan actually
increases during its early years. (negative
amortization).
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Equity Sharing
With equity sharing, in return for providing
financing, the lender wants to share in some of
the benefits normally reserved for the equity
holder.
The equity holder would agree to this to either
get a lower interest rate or get financing when
financing was scarce.
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Package Mortgage
It is possible to include personal property in a
real estate mortgage with a package
mortgage.
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Package Mortgage
An example would be a furnished condo in a
resort community. The loan would be inclusive
of the value of the real estate and the
furnishings.
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Blanket Mortgage
A mortgage secured by two or more properties
is called a blanket mortgage. An example is
when a developer purchases raw land and
develops it into multiple lots.
The original mortgage agreement includes a
clause that specifies how much of the loan
must be repaid before a lot can be released.
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Reverse Mortgage
With a reverse mortgage, the lender can pay
the homeowner a lump sum or monthly
payments as an annuity for the reverse term of
the loan.
The homeowner receives a monthly check, has
full use of the property and is not required to
repay until they sell or die.
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Construction Loan
Under a construction loan, money is advanced
as construction takes place.
The lender will parcel out the loan as the
building is being constructed.
The buyer will obtain a permanent mortgage
from another source to repay the construction
loan.
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Blended-Rate Loan
When interest rates rise, it may be difficult for
buyers to qualify. Many home owners will have
loans with rates below the current market.
A blended-rate loan can be very attractive in a
situation when you want to sell your home and
you do not want to help finance the buyer.
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Blended-Rate Loan
For example, the seller has a loan at 7%. The
current interest rate is 12%. With a blended
loan, the lender could offer the buyer a 9%
loan.
Blended loans are available on FHA, VA and
conventional loans.
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Equity Mortgage
An equity mortgage is a loan where the lender
agrees to make a loan based on the amount of
equity in a borrower’s home.
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Equity Mortgage
The maximum amount is general 70% - 80% of
the home value minus any first mortgage or
other liens against the property.
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Equity Mortgage
It is typically a second mortgage that is used to
tap the increase in equity resulting from rising
home prices without refinancing the first loan.
An equity mortgage uses the home as an asset
against which the homeowner can borrow and
repay as needed.
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Affordable Housing Loans
An affordable housing loan targets first-time
homebuyers and low to moderate-income
borrowers.
HUD offers the “Officer Next Door” program
allowing police officers to buy FHA-foreclosed
properties at half price if the officers live in the
cities where they work.
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Affordable Housing Loans
There is a similar programs for teachers called
“Teacher Next Door.”
Fannie Mae offers flexible mortgages for
school employees, police officers, firefighters
and healthcare workers. It offers 97% and
100% loan programs.
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Credit Criteria
Many low and moderate-income families do
not have checking accounts.
Most affordable housing programs accept
timely payment of rent and utility bills as credit
criteria.
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Conventional Mortgage vs. AIM
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Seller Financing
When a seller is willing to accept part of the
property’s purchase price in the form of the
buyer’s promissory note accompanied by a
mortgage or deed of trust, it is called seller
financing.
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Seller Financing
Seller financing is popular for land sales, on
property where an existing mortgage is being
assumed by the buyer and on property where
the seller prefers to receive the money spread
out over a period of time with interest intead of
lump-sum cash.
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Seller Financing
The seller is responsible for servicing the loan
and subject to losses due to default and
foreclosure.
In Georgia, the term purchase money
mortgage refers to seller financing.
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Wraparound Mortgage
A wraparound mortgage encompasses existing
mortgages and is junior to them. The existing
mortgages stay on the property and the new
mortgage wraps around them.
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Wraparound Mortgage
The seller continues to remain liable for
payment of the first mortgage.
If the seller defaults, the buyer may have an
unwelcome surprise.
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Contract for Deed
A contract for deed, also called an installment
contract or land contract, enables the seller to
finance a buyer by permitting him to make a
down payment followed by monthly payments.
Title remains in the name of the seller.
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Contract for Deed
When the final payment is made to the seller,
or the property is refinanced through a
traditional lender, title is conveyed to the
buyer.
Meanwhile, the seller continues to hold title
and is responsible for paying the mortgage.
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Option
An option is a right, for a given period of time,
to buy, sell, or lease property at a specified
price and terms.
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Option
A common variation is a lease with an option
to buy. The tenant, in addition to paying rent
and using the property, also has the right to
purchase it at a preset price for a fixed period
of time.
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Mortgage Fraud
Mortgage fraud involves obtaining loans with
deceit or misrepresentation.
Georgia became the first state to enact a law
specific to mortgage fraud: the Georgia
Residential Mortgage Fraud Act.
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Illegal Flipping
Illegal flipping is purchasing
a property and then selling
it immediately at a
fraudulent and increased
price.
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Silent Second
A silent second involves increasing the sales
price fraudulently and asking the seller to take
a second loan with the increase in purchase
price.
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Chunking
Chunking is a scheme where the borrower
makes multiple, simultaneous applications for
a loan on one property.
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Identity Theft
An unsuspecting victim has personal
information stolen; it is then used to qualify for
a loan on property.
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Debt Cancellation/Deed Transfer
The security deed of a property is cancelled
and the property then fraudulently transferred
into the name of the fraudster.
The property is then sold to an unsuspecting
purchaser.
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Red Flags of Mortgage Fraud
• False information from parties involved in
the transaction
• Altered information on documents
• Inflated appraisals
• Unexpected costs
• Payments higher than expected
• Required credit insurance
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Red Flags of Mortgage Fraud
• A request for deed or prepaid fees
• Inability to communicate with the buyer or
seller except via a third party
• Multiple contracts
• Being asked to sign blank documents
• Closing statement reflects different price or
seller than contract
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Red Flags of Mortgage Fraud
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Unknown lender issues approval
Simultaneous closings
Inadequate identity documentation
Seller never at principal residence
Property in poor condition but higher price is
offered
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Red Flags of Mortgage Fraud
• Loan involves money to make repairs
• Missing good faith estimate, truth-in-lending
statement, or HUD-1 statement
• Payment or receipt of a kickback from sales
proceeds
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Reporting Mortgage Fraud
If you suspect mortgage fraud in a transaction,
you are required to report it.
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Reporting Mortgage Fraud
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www.grefpac.org
www.gscca.org
www.mortgagefruadblog.org
www.ustaxcourt.gov
www.usgovsearch.com
www.stopmortgagefraud.com
www.mbaa.org/alerts
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Investing in Mortgages
Individuals can invest in mortgage loan pools
through Ginnie Mae and Freddie Mac.
Individuals can also buy junior mortgages at
yields above Ginnie Mae and Freddie Mac
certificates.
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Investing in Mortgages
The best way to determine the value of a
property is by having it appraised by a
professional appraiser who is independent of
the party making or selling the mortgage
investment.
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Investing in Mortgages
The investor should also run a credit check on
the borrower, making certain that the market
value of the property is in excess of the loans
against it and that the property is well
constructed, well located and functional.
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Sale and Leaseback
Under a sale and leaseback, an owneroccupant sells the property and then remains
as a tenant.
The buyer acquires an investment and the
seller obtains capital for other purposes while
retaining the use of the property.
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Land Leases
Land leases are at least 55 years long. Unless
otherwise stated in the agreement,
improvements to the land become the property
of the fee owner at the end of the lease.
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Land Leases
Jekyll Island is a state park. All development
on the island is with land leases.
Potentially, all buildings and development will
become state property at the end of the
leases.
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Land Leases
In a long-term lease, it is common to use stepup rentals. Rents will automatically increase at
set intervals to hedge against inflation.
An alternative is to renegotiate the rents at
various points during the life of a lease so that
the effects of land value changes are more
equal between the lessor and the lessee.
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Land Leases
The property would be reappraised and the
lease rent adjusted to reflect any changes in
the value of the property.
Property taxes are paid by the lessee.
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Financing Overview
When interest rates are fluctuating, borrowers
often gravitate toward adjustable rates, hoping
to avoid the worst if rates go up, and to benefit
from lower monthly payments if the rates come
down.
When interest rates are low, fixed rate loans
are more popular.
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