Hello,

 

Upper-level business finance expertise required for the attached assignment. Thank you

Real Estate urgent

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Financing Residential Real Estate
Lesson 6:
Basic Features of a Residential Loan
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Introduction
This lesson will cover:
amortization
repayment periods
loan-to-value ratios
mortgage insurance and loan guaranties
secondary financing
fixed and adjustable interest rates

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Amortization
Loan amortization refers to how principal and interest are paid to lender during loan term.

Amortized loan: borrower required to make regular installment payments that include principal as well as interest.
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Amortization
Payments for fully amortized loan are enough to pay off all principal and interest by end of loan term.
Payment amount same throughout term.
Every month, interest portion of payment gets smaller, principal portion gets larger.
Fully amortized loan
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Amortization
Partially amortized loan: requires regular payments including principal and interest.
But payments not enough to pay off debt by end of loan term.
Balloon payment required to pay remainder of principal.
Partially amortized loan
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Amortization
Interest-only loan: calls for regular payments that cover only interest accruing, without paying any of principal, either:
during entire loan term, or
during specified interest-only period at
beginning of term.
Interest-only loan
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Amortization
If payments interest-only during limited period:
at end of that period, amortized payments must begin
payment may increase sharply at end of interest-only period
Interest-only loan
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Repayment Period
Number of years borrower has to repay loan.
Also called loan term.

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Repayment Period
Until 1930s, typical repayment period for mortgage was 5 years.
If lender didn’t renew loan, balloon
payment required.
Now 30 years is standard repayment period.
15-, 20-, and 40-year loans also available.

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Repayment Period
Length of repayment period affects:
amount of monthly payment
total amount of interest paid over life of loan
May also affect interest rate charged.
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Repayment Period
Longer repayment period reduces amount of monthly payment.
30-year loan more affordable than 15-year loan.

Shorter repayment period:
higher payment amount
equity builds faster
more difficult to qualify for
Monthly payment amount
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Repayment Period
Shorter repayment period substantially decreases total amount of interest paid on loan.
Total interest for 15-year loan less than half total interest for 30-year loan.
Total interest
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Repayment Period
Advantages of 15-year loan:
lower interest rate
total interest much less
clear ownership in half the time

Disadvantages of 15-year loan:
higher monthly payments
15-year vs. 30-year loan
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Repayment Period
20-year loan is compromise between 15-year and 30-year loan.
Monthly payments higher than 30-year loan.
But not as high as 15-year loan.
20-year loans
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Repayment Period
Some lenders offer 40-year loans, but they aren’t common.
Monthly payments even more affordable than 30-year loan.
Most commonly used in areas with very high housing costs.
40-year loans
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Summary
Amortization & Repayment Period
Amortization
Fully amortized
Partially amortized
Balloon payment
Interest-only loan
Loan term

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Loan-to-Value Ratio
Loan-to-value ratio (LTV): expresses relationship between loan amount and value of home being purchased.
With 80% LTV, loan amount is 80% of home’s value.
Higher LTV = smaller downpayment
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Loan-to-Value Ratio
Because downpayment is smaller, higher LTV loans riskier than lower LTV loans.
Borrower has less money invested, won’t try as hard to avoid default.
If foreclosure necessary, property may not sell for enough to pay off debt and costs.
Higher LTV = higher risk
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Loan-to-Value Ratio
Lenders set maximum LTV for particular loan program or loan type.
In transaction, maximum LTV determines:
maximum loan amount
minimum downpayment

Key factor in determining “how much house” borrower can buy.
Maximum LTV
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Loan-to-Value Ratio
Lenders traditionally protected themselves by setting low LTV limits.
Traditional maximum: 80%
Higher LTVs allowed only in special
programs (FHA, VA).
Maximum LTV
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Loan-to-Value Ratio
In recent years, loans with higher LTVs widely available.
With higher maximum LTVs, people without much cash can buy homes.
Maximum LTV
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Mortgage Insurance/Loan Guaranty
Purpose of mortgage insurance or guaranty: to protect lender from foreclosure loss.
Also encourages lenders to make loans that would otherwise be too risky.

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Mortgage Insurance/Guaranty
Mortgage insurance works like other insurance:
policyholder pays premiums
insurer provides coverage for certain
losses, up to policy limit
Mortgage insurance
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Mortgage Insurance/Guaranty
Policy protects lender against losses from borrower default and foreclosure.
Mortgage insurance company agrees to indemnify lender.
If foreclosure sale proceeds fall short,
insurer will make up difference.
Mortgage insurance
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Mortgage Insurance/Guaranty
With loan guaranty, third party (guarantor) takes on secondary legal responsibility for borrower’s obligation to lender.
If borrower defaults, guarantor must reimburse lender for losses.
Loan guaranty
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Secondary Financing
Secondary financing: second loan obtained to pay part of downpayment or closing costs required for primary loan.
May be provided by institutional lender, private third party, or property seller.

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Secondary Financing
Lender of primary loan often restricts type of secondary financing borrower can use.
Intended to prevent secondary loan from increasing default risk.
Borrower must qualify for combined payment on both loans.
Borrower still required to make small downpayment from own funds.

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Summary
LTV Ratio and Other Features
Loan-to-value ratio
Maximum loan amount
Minimum downpayment
Mortgage insurance
Indemnify
Loan guaranty
Guarantor
Secondary financing

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Fixed or Adjustable Interest Rate
Fixed-rate mortgage: interest rate charged on loan remains constant throughout loan term.
When market rates rise or fall, loan rate
stays the same.
Considered standard.
Fixed-rate mortgages
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Fixed or Adjustable Interest Rate
Adjustable-rate mortgage (ARM): allows lender to adjust loan’s interest rate to reflect changes in cost of money.
Transfers rate fluctuation risk to borrower.
ARM’s initial interest rate often lower than market rate for fixed-rate loan.
Adjustable-rate mortgages
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Adjustable-Rate Mortgages
Borrower’s initial rate determined by market rates at time loan is made.
Interest rate on loan tied to index.
Index: published statistical report used
as indicator of changes in cost of money.
Lender chooses index when loan is made.
How ARM works
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Adjustable-Rate Mortgages
Loan’s interest rate periodically adjusted to reflect changes in index rate.
If index rate has increased, lender
raises interest rate charged on loan.
If index rate has decreased, lender lowers interest rate charged on loan.
How ARM works
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Adjustable-Rate Mortgages
note rate
index
margin
rate adjustment period
payment adjustment period
lookback period
interest rate cap
payment cap
negative amortization cap
conversion option
ARM features
ARM may have some/all of these features:
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ARM Features
Note rate: ARM’s initial interest rate, as stated in promissory note.
Some ARMs have teaser rate: discounted initial rate that doesn’t include the margin typically added to the index rate.
Note rate
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ARM Features
When loan is made, lender chooses one of several published indexes, such as:
Treasury securities index
11th District cost of funds index
LIBOR index
Index
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ARM Features
Margin: difference between index rate and interest rate lender charges borrower.
Lender adds margin to index to cover
administrative expenses and provide profit.
Margin stays same throughout loan term,
even when interest rate changes.
Margin
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ARM Features
ARM’s interest rate adjusted only at specified intervals.
For example, every 6 months, once a year, or every 3 years.
One-year adjustment period most common.
Rate adjustment period
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ARM Features
At end of period, lender:
checks index for increase or decrease
raises or lowers loan’s rate based on
change in index rate
Rate adjustment period
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ARM Features
Hybrid ARM: combination of ARM and fixed-rate loan, with two-tiered adjustment structure.
Longer initial period, with more frequent adjustments after that.
Example: 3/1 hybrid ARM
Rate adjustment period
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ARM Features
Determines when lender changes payment amount to reflect change in interest rate.
Most ARMs have payment adjustment at same time as rate adjustment.
With some loans, payment adjusted
less frequently than interest rate.
Mortgage payment adjustment period
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ARM Features
Typical lookback period is 45 days.
Loan’s rate and payment adjustments determined by what index was 45 days before end of adjustment period.
Lookback period
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ARM Features
When ARM’s payment amount is adjusted, borrower may experience payment shock.
Occurs when:
market rates/index rise dramatically
sharp increase in loan’s interest rate
payment amount increases drastically
Interest rate cap
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ARM Features
To protect borrower from payment shock, most ARMs have interest rate cap:
limits how much loan’s interest rate can increase per adjustment period and over life of loan
Interest rate cap
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ARM Features
Payment cap: directly limits how much loan’s payment amount can increase.
Cap applies only to principal and interest
payment, not tax and insurance portion.
Many ARMS have only interest rate cap,
with no payment cap.
Mortgage payment cap
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ARM Features
Negative amortization: when unpaid interest is added to loan’s principal balance, increasing amount owed.
Normally, balance goes down steadily as principal is paid off.
Negative amortization causes principal
balance to go up.
Negative amortization
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Negative Amortization
ARM features that can lead to negative amortization:
payment cap without rate cap
payments adjusted less often than interest rate
Features causing NA
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Negative Amortization
Many ARMs structured to prevent negative amortization.
But if NA is possible, loan may have negative amortization cap.
Limits amount of unpaid interest that
can be added to principal balance.
When limit is reached, loan must be recast.
Negative amortization cap
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Negative Amortization
Each month, borrower chooses payment option:
P&I payment based on 15-year amortization
P&I payment based on 30-year amortization
interest-only payment
minimum (limited) payment
Option ARMs
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Negative Amortization
Minimum payment option doesn’t cover interest, resulting in negative amortization.
After negative amortization limit reached and loan recast, many borrowers default.
Option ARMs no longer widely available.
Option ARMs
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ARM Features
If ARM has conversion option, borrower allowed to convert loan to fixed-rate mortgage.
Conversion typically can take place only during limited period
Lender usually charges conversion fee.
Conversion option
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Summary
Fixed or Adjustable Interest Rate
Fixed-rate mortgage
Adjustable-rate mortgage
Index
Note rate
Margin
Rate and payment adjustment periods
Lookback period
Interest rate and mortgage payment caps
Negative amortization
Option ARM
Conversion option

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3/9/2020 Sample Content Topic

https://purdueglobal.brightspace.com/d2l/le/content/115691/viewContent/9226902/View 1/1

Introduction: As a sales agent you are responsible for
protecting your client in the process of buying a home. Clients
often look to their agents to review documents and reports to
assure that they are treated fairly. In this Assignment, you are
reviewing closing documents for accuracy at the request of the
clients. Be sure and review the learning activity in order to be
prepared to address this unit’s Assignment.

Assignment Details

The following Course Outcome is assessed in this Assignment:

MT431-2: Report the closing documents for a real estate sales
scenario to a client.

Read the scenario and respond to the checklist items.

Scenario: Henri and Lila are about to close on their new home.
You are a sales agent for the clients and have been asked by
them to review the closing documents for accuracy. You find
three errors on the closing disclosure and proceed to explain
the three errors and what the corrections should be.

Checklist:

Explain which closing disclosure calculations on pages 2 and
3 of closing cost details (under loan costs and other costs)
are incorrect, show the corrected calculations, and the actual
math used to make your determination.

Explain which closing documents should be redone so they
are accurate and who is responsible for redoing these at the
bottom of the document.

Access the Unit 6 Assignment grading rubric.

Submit a Microsoft Word document with your response to all
the checklist item to the Unit 6 Assignment Dropbox.

Assignment Details 

Check out this website: https://kapextmediassl-a.akamaihd.net/business/Media/MT431/MT431_1904C/LA6/story_html5.html

https://kapextmediassl-a.akamaihd.net/business/MT431/1904c/student_closing_disclosure x

https://kapextmediassl-a.akamaihd.net/business/MT431/1904c/rubrics/u6_rubric

Closing Disclosure: This form is a statement of final loan terms and closing costs. Compare this document with your loan estimate.

Closing Information:

Date Issued: 4/15/2013

Closing Date: 4/15/2013

Disbursement Date: 4/15/2013

Settlement Agent: Epsilon Title Co.

File # 12-3456

Property: 456 Somewhere Ave.

Anytown, ST 12345

Sales Price: $180,000

Transaction Information:

Borrower: Michael Jones and Mary Stone

123 Anywhere St.

Anytown, ST 12345

Seller: Steve Cole and Amy Doe

321 Somewhere Dr.

Anytown, ST 12345

Lender: Ficus Bank

Loan Information:

Loan Term: 30 years

Purpose: Purchase

Product: Fixed Rate

Loan Type: Conventional X FHA VA

Loan ID# 123456

7

89

MIC# 000654321

Loan Terms:

Loan Amount: $162,000 Can this amount increase after closing? NO

Interest Rate: 3.875% Can this amount increase after closing? NO

Monthly Principal & Interest: $761.78 Can this amount increase after closing? NO

Prepayment Penalty: Does this loan have these features? YES, as high as $3240 if you pay off the loan during the first two years.

Balloon Payment: No

Projected Payments

Payment Calculation:

Principal & Interest in years 1–7: $761.78; In years 8–30: $761.78

Mortgage insurance in years 1–7: + 82.35; In years 8–30: none

Estimated Escrow in years 1–7: $206.13; In years 8–30: $206.13

Estimated Total Monthly Payment in years 1–7: $1050.26; In years 8–30: $967.91

Estimated Taxes, Insurance & Assessments: $356.13 a month

This estimate includes:

X Property Taxes; In escrow? YES

X Homeowner’s Insurance; In escrow? YES

X Other Homeowner’s Association Dues; In escrow NO

Costs at Closing:

Closing Costs: $9,712.10 Includes $4,694.05 in Loan Costs + $5,018.05 in Other Costs-$0 in Lender Credits.

Cash to Close: $14,147.26 Includes Closing Costs.

CLOSING DISCLOSURE

LOAN COSTS

Borrower-Paid

Seller-Paid

Paid by Others

A. Origination Charges

$1,802.00

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0.25% of Loan Amount (Points)

At closing:
$1,000.00

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Application Fee

$300.00

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Underwriting Fee

$1, 097.00

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B. Services Borrower Did Not Shop For

$236.55

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Appraisal Fee: to John Smith Appraisers Inc.

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$405.00

Credit report Fee: to Information Inc.

Before closing: $29.80

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Flood Determination Fee: to Info Co.

At closing: $20.00

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Flood Monitoring Fee: to Info Co.

At closing: $31.75

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Tax Monitoring Fee: to Info Co.

At closing: $75.00

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Tax Status Research Fee: to Info Co.

At closing: $80.00

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C. Services Borrower Did Shop For

$2,655.50

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Pest Inspection Fee: to Pests Inc.

At closing: $120.50

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Survey Fee: to Surveys Inc.

At closing: $85,00

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Title – Insurance Binder: to Epps Title Co.

At closing: $650.00

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Title – Lender’s Title Insurance: to Epps Title Co.

At closing: $500.00

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Title – Settlement Agent Fee: to Epps Title Co.

At closing: $500.00

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Title – Title Search: to Epps Title Co.

At closing: $800.00

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D. TOTAL LOAN COSTS (Borrower Paid)

$4,694.05

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Loan Costs Subtotals (A+B+C)

At closing: $4,664.25
Before closing: $29.80

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OTHER COSTS

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E. Taxes and Other Government Fees

$85.00

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Recording Fees: Deed: $40.00 Mortgage: $45.00

At closing: $85.00

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Transfer Tax: to any State

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At closing: $950.00

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F. Prepaids

$2,120.80

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Homeowner’s Insurance premium (12 mo.) to Insurance Co.

At closing: $1,209.96

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Mortgage insurance premium (? Mo.)

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Prepaid Interest ($17.44 per day from 4/15/13 to 5/1/13)

At closing: $479.25

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Property Taxes (6 mo.) to Any County USA

At closing: $631.80

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G. Initial Escrow Payment at Closing

$412.25

Homeowner’s Insurance $100.83 per month for 2 mo.

At closing: $201.66

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Mortgage Insurance Premium
( mo.)

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Property Taxes $105.30 per month for 2 mo.

At closing: $315.90

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Aggregate Adjustment

At closing: -0.01

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H. Other

$2,400.00

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HOA Capital Contribution: to HOA Acre Inc.

At closing: $500.00

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HOA Processing Fee: to HOA Acre Inc.

At closing: $150.00

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Home Inspection Fee: to Engineers Inc.

At closing: $750.00

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Before closing: $750

Home Warranty Fee: to XYZ Warranty Inc.

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$450.00

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Real Estate Commission: to Alpha Real Estate Broker

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$5,700.00

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Real Estate Commission: to Omega Real Estate Broker

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At closing: $5,700.00

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Title – Owner’s Title Insurance (optional): to Epps Title Co.

At closing: $1,000

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I. TOTAL OTHER COSTS (borrower-Paid)

$5,018.05

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Other Costs Subtotals (E +F+G+H)

At closing: $5,018.05

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J. TOTAL LOSING COSTS (Borrower-Paid)

$9,712.10

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Closing Costs Subtotals (D + I)

At closing: $9,682.30; Before Closing: $29.80

At closing: $12,800.00; Before closing: $750.00

$405.00

Lender Credits

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Calculating Cash to Close: Use this table to see what has changed from your Loan Estimate.

Cash to Close

Loan Estimate

Final

Did this change?

Total Closing Costs (J)

$8,054.00

$9,712.10

Yes: See Total Loan Costs (D) and Total Other Costs (I)

Closing Costs Paid Before Closing

$0

-$29.80

Yes: You paid these Closing Costs before closing

Closing Costs Financed (Paid from your Loan Amount)

$0

$0

No

Down Payment/Funds from Borrower

$18,000.00

$18,000.00

No

Deposit

-$10,000.00

-$10,000.00

No

Funds for Borrower

$0

$0

No

Seller Credits

$0

-$2,500.00

Yes: See Seller Credits in Section L

Adjustments and Other Credits

$0

$1,035.04

Yes: See details in Sections K and L

CASH to Close

$16,054.00

$14,147.26

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Summaries of Transactions: Use this table to see a summary of your transaction.

Borrower’s Transaction

Seller’s Transaction

K. Due from Borrower at Closing: $189,762.30

M. Due to Seller at Closing:——– $180,080.00

Sale Price of Property: ——————-$180,000.00

Sale Price of Property:——————-$180,000.00

Sale Price of Any Personal Property Included in Sale: blank

Sale Price of Any Personal Property Included in the Sale: blank

Closing Costs Paid at Closing (J):——– $9,682.30

Adjustments

Adjustments for Items Paid by Seller in Advance:

Adjustments for Items Paid by Seller in Advance:

City/Town Taxes: blank to blank

City/Town Taxes: blank to blank

County Taxes: blank to blank

County Taxes: blank to blank

Assessments blank to blank

Assessments blank to blank

HOA Dues 4/15/13 to 4/30/13:————-$80.00

HOA Dues 4/15/13 to 4/30/13: —————$80.00

L. Paid Already by or on Behalf of Borrower at Closing:—————————– $175,615.04

N. Due from Seller at Closing: $115,665.04

Deposit:———————————– $10,000.00

Excess Deposit:

Loan Amount:————————– $162,000.00

Closing Costs Paid at Closing (J): $12,800.00

Existing Loan(s) Assumed or Taken Subject to: blank

Existing Loan(s) Assumed or Taken Subject to: blank

blank

Payoff of First Mortgage Loan:——– $100,000.00

Seller Credit:——————————- $2,500.00

Payoff of Second Mortgage Loan: blank

Other Credits:

blank

Rebate from Epps Title Co. —————$750.00

blank

Adjustments:
blank

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Adjustments for items Unpaid by Seller

Adjustments for items Unpaid by Seller

City/Town Taxes: 1/2/13 to 4/14/13:—-$365.04

City/Town Taxes: 1/2/13 to 4/14/13:——- $365.04

County Taxes: blank to blank

County Taxes: blank to blank

Assessments: blank to blank

Assessments: blank to blank

CALCULATION

CALCULATION

Total Due from Borrower at Closing (K): ———
——————————————– $189,762.30

Total Due to Seller at Closing (M):— $180,080.00

Total Paid Already by or on Behalf of Borrower at Closing (L):———————– $175,615.04

Total Due from Seller
at Closing (N):————————— $115,665.04

Cash to Close:

X From Borrower: ——————–$14,147.26
To Borrower: blank

Cash: From Seller
X To Seller: ———————————$64,414.96

ADDITIONAL information About This Loan

Loan Disclosures:

Assumption

If you sell or transfer this property to another person, your lender

Not Selected will allow, under certain conditions, this person to assume this loan on the original terms.

X will not allow assumption of this loan on the original terms.

Demand Feature

Your loan

Not Selected has a demand feature, which permits your lender to require early repayment of the loan. You should review your note for details.

X does not have a demand feature.

Late Payment

If your payment is more than 15 days late, your lender will charge a late fee of 5% of the monthly principal and interest payment.

Negative Amortization (Increase in Loan Amount)

Under your loan terms, you

Not Selected are scheduled to make monthly payments that do not pay all of the interest due that month. As a result, your loan amount will increase (negatively amortize), and your loan amount will likely

become larger than your original loan amount. Increases in your loan amount lower the equity you have in this property.

Not Selected may have monthly payments that do not pay all of the interest due that month. If you do, your loan amount will increase (negatively amortize), and, as a result, your loan amount may

become larger than your original loan amount. Increases in your loan amount lower the equity you have in this property.

X do not have a negative amortization feature.

Partial Payments

Your lender

X may accept payments that are less than the full amount due (partial payments) and apply them to your loan.

Not Selected may hold them in a separate account until you pay the rest of the payment, and then apply the full payment to your loan.

Not selected does not accept any partial payments.

If this loan is sold, your new lender may have a different policy.

Security Interest

You are granting a security interest in 456 Somewhere Ave., Anytown, ST 12345

You may lose this property if you do not make your payments or satisfy other obligations for this loan.

Loan Calculations

Loan Calculations Items:

Amount:

Total of Payments. Total you will have paid after you make all payments of principal, interest, mortgage insurance, and loan costs, as scheduled.

$285,803.36

Finance Charge. The dollar amount the loan will cost you.

$118,830.27

Amount Financed. The loan amount available after paying your upfront finance charge.

$162,000.00

Annual Percentage Rate (APR). Your costs over the loan term expressed as a rate. This is not your interest rate.

4.174%

Total Interest Percentage (TIP). The total amount of interest that you will pay over the loan term as a percentage of your loan amount.

69.46%

Other Disclosures:

Appraisal

If the property was appraised for your loan, your lender is required to give you a copy at no additional cost at least 3 days before closing.

If you have not yet received it, please contact your lender at the information listed below.

Contract Details

See your note and security instrument for information about

• what happens if you fail to make your payments,

• what is a default on the loan,

• situations in which your lender can require early repayment of the loan, and

• the rules for making payments before they are due.

Liability after Foreclosure

If your lender forecloses on this property and the foreclosure does not cover the amount of unpaid balance on this loan,

X state law may protect you from liability for the unpaid balance. If you refinance or take on any additional debt on this property, you may lose this protection and have to pay any debt remaining even after foreclosure. You may want to consult a lawyer for more information.

Not Selected state law does not protect you from liability for the unpaid balance.

Refinance

Refinancing this loan will depend on your future financial situation, the property value, and market conditions. You may not be able to refinance this loan.

Tax Deductions

If you borrow more than this property is worth, the interest on the loan amount above this property’s fair market value is not deductible from your federal income taxes. You should consult a tax advisor for more information.

7

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Financing Residential Real Estate
Lesson 7:
The Financing Process
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Introduction
This lesson will cover:
shopping for a loan
applying for a loan
application processing
closing

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Shopping for Loan
For home buyers, shopping for mortgage loan involves:
assessing wants, needs, finances
choosing lender
comparing rates, fees
evaluating financing options

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Shopping for Loan
To establish price range before house hunting begins, buyers should find out what financing they qualify for.
Assessing buyer’s position
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Assessing Buyer’s Position
Preapproval:
formal process performed by mortgage broker or lender

For preapproval, buyer must:
complete loan application
provide documentation of income, assets, debts, credit history
Preapproval
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Assessing Buyer’s Position
Lender gives buyer preapproval letter, agreeing to loan up to specified amount.
Valid only for limited period.

Advantages of preapproval:
tool in negotiations with sellers
streamlines closing process
Preapproval
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Assessing Buyer’s Position
Prequalification:
informal process performed by real estate agent or using online mortgage calculator
provides rough estimate of maximum loan amount
rarely done anymore
Prequalification
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Choosing Lender
Several ways to find lender:
research
referrals
mortgage broker
buyer’s bank
Identifying potential lenders
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Choosing Lender
Involves reviewing print, online, other media advertisements.
Followed up with phone calls.
Talk to loan officers.

Newspaper may have mortgage comparison chart.
Research
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Choosing Lender
Referral often best way to find good lender.
Ask family, friends, co-workers.
Talk to real estate agents.
Agents should not accept referral fees.
Referrals
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Choosing Lender
Mortgage broker specializes in bringing buyers and lenders together.
Presents buyers with options offered by multiple lenders.
Research still necessary to find good
broker.
Mortgage broker
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Choosing Lender
Banks sometimes offer special financing to established customers.
One location for handling all financial matters.
Buyer’s bank
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Choosing Lender
Buyers should talk to 3 or 4 lenders before submitting application.
Ask each lender for written estimate of loan costs, closing costs.
Good loan originator puts buyers at ease, explains process thoroughly.
Interviewing prospective lenders
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Choosing Lender
Buyers should also consider lender’s reputation.
Expertise, efficiency, stability, honesty.
Get references from mortgage broker’s recent customers.
Look for customer satisfaction information online.
Interviewing prospective lenders
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Summary
Preapproval & Choosing Lender
Preapproval
Preapproval letter
PITI
Loan originator
Loan officer
Mortgage broker
Referral
Estimate of costs

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Loan Costs
Primary consideration for most buyers in choosing lender is how much loan will cost.
In addition to interest rate, cost of loan may include:
loan origination fee
discount points
miscellaneous charges
mortgage broker’s fee

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Loan Costs
Point: percentage point.
1 point = 1% of loan amount.
Some lenders use “points” to refer to
origination fee and discount points together.
Others use “points” to refer only to discount points.
Points
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Loan Costs
Origination fee: pays lender’s expenses, such as staff compensation, cost of facilities, other overhead.
Charged in almost every mortgage
transaction.
Typically around 1% of loan amount.
Usually paid by borrower.
Loan origination fee
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Loan Costs
Lump sum paid at closing to increase lender’s upfront yield (profit) on loan.
In exchange for upfront payment, lender charges lower interest rate.
May save borrower money in long run,
depending on how long loan in place.
Discount points
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Loan Costs
Discount points charged can vary depending on market conditions and other factors.
Might charge 4 to 6 points for
1% interest rate reduction.

Discount points
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Loan Costs
May be paid by buyer or seller.
Buydown: paying discount points to “buy down” buyer’s interest rate.
When buyer pays points, buyer pays lender in cash at closing.
When seller pays points, amount withheld from loan, deducted from seller’s proceeds.
Discount points
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Loan Costs
Lenders often charge borrowers other fees, such as:
application fee
document preparation fee
underwriting fee
Miscellaneous fees
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Loan Costs
Buyers working with mortgage broker usually charged mortgage broker’s fee.
Fee may be one or two percent, but generally won’t make loan more expensive.
Broker gets loan at wholesale price, marks it up to retail price, keeps overage as fee.
Mortgage broker’s compensation
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Comparing Cost of Loans
Various fees charged in addition to interest make it hard to compare loans offered by different lenders.
Truth in Lending Act (TILA): federal consumer protection law requiring lenders to disclose loan costs in using loan estimate form.
Truth in Lending Act
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Truth in Lending Act
APR most important TILA disclosure.
APR expresses relationship between amount financed and finance charge as a percentage.
To determine which of two loans is more expensive, compare APRs, not just interest rates.
Annual percentage rate
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Truth in Lending Act
Finance charge is another key TILA disclosure. It includes:
interest
origination fee
discount points (paid by buyer)
mortgage broker’s fee
finder’s fee
service fee
mortgage insurance/guaranty fees
Finance charge
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Truth in Lending Act
Does NOT include:
title insurance costs
credit report charges
appraisal fee
discount points paid by seller
Finance charge
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Loan Costs
Some lenders offer no-fee loans or low-fee loans.
No major loan fees (origination fee, points).
Only financing charge is interest.
Interest rate often much higher.
Helpful for buyers with little cash for
closing.
No-fee or low-fee loans
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Evaluating Financing Options
First-time buyers may benefit from home buyer counseling before deciding what financing option is best for them.
Home buyer counseling
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Evaluating Financing Options
Department of Housing and Urban Development (HUD) administers Housing Counseling Assistance Program.
Open to anyone looking for home or
applying for mortgage.
Also for renters and people who already own home.
Home buyer counseling
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Evaluating Financing Options
Program intended to educate people about home ownership responsibilities:
making mortgage/rent payments
maintaining home
avoiding foreclosure/eviction

Counselor may prepare action plan to help buyer achieve goals.
Home buyer counseling
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Summary
Loan Costs & Financing Options
Origination fee
Discount points
Buydown
Mortgage broker’s fee
Truth in Lending Act
APR
Finance charge
No-fee or low-fee loan
Home buyer counseling

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Applying for Loan
After buyers have chosen lender, next step is to apply for loan.
Loan interview: buyers talk with loan originator.
Originator helps buyers:
choose best financing option
prepare application
Loan interview
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Loan Interview
During loan interview, originator may enter information into automated underwriting system.
System provides preliminary evaluation of what buyers are likely to qualify for.
Does not guarantee preapproval.
Prequalifying during interview
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Loan Interview
Loan originator may require deposit to cover certain expenses:
application fee
credit report fee
other preliminary charges
Deposit
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Loan Interview
If buyers have already signed purchase agreement, loan originator reviews contract.
Main concerns:
terms of financing contingency
closing date
Contract and closing date
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Loan Application Form
First section of form asks about:
type of loan
loan amount
loan term
interest rate
Type and terms of loan
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Loan Application Form
Second section asks for:
property address/legal description
purpose of loan (purchase, construction, refinancing)
how buyer will take title
source of downpayment
Property information and purpose
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Loan Application Form
Third section asks about applicant(s):
name
social security number
date of birth
years of schooling
marital status
dependents (number, age)
Borrower/co-borrower information
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Loan Application Form
Each applicant must also provide:
name and address of employer
number of years at job
position held
type of business
Employment information
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Loan Application Form
This section asks about:
primary employment income
overtime, bonuses, or commissions
other sources of income
current rent or mortgage payment
Income and monthly housing expense
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Loan Application Form
Assets may include:
good faith deposit
money in bank
investments
Liabilities may include:
car loan
credit cards
alimony/child support
Assets and liabilities
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Loan Application Form
Application also asks for information about transaction, including:
purchase price
cost of land
prepaid expenses
closing costs
Details of transaction
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Loan Application Form
Applicants must answer questions about:
outstanding judgments, lawsuits
bankruptcies
foreclosures or deeds in lieu
alimony/child support
citizenship
Declarations
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Loan Application Form
Applicants also must state:
whether any portion of downpayment
was borrowed
whether property is to be primary residence
any other property owned in last three years
Declarations
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Applying for Loan
Federal law requires mortgage brokers and lenders to disclose on loan estimate form:
APR and total interest as a percentage
estimates of all closing costs
whether lender will service loan or transfer servicing

Must also provide booklet with information on closing.
Federal disclosure requirements
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Applying for Loan
Lenders must provide all disclosures within 3 business days after application submitted.
Disclosures not required if application
rejected before 3-day deadline.
If any costs change, new disclosures
must be made before closing.
Federal disclosure requirements
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Applying for Loan
Sharp increase in rates might increase monthly payment so buyers no longer qualify. Should ask lender about lock-in.
Lock-in: lender guarantees certain interest rate for specified period.
Float: interest rate will move up or down with market interest rates until closing.
Locking interest rate
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Applying for Loan
Lock-in period should extend beyond expected loan processing time.
Lock-in is matter of contract between lender and borrower; terms should be in writing.
Locking interest rate
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Summary
Applying for Loan
Uniform Residential Loan Application
Good faith estimate of closing costs
Rate lock-in
Float

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Application Processing
After application form filled out:
verification forms sent to employers, banks
credit reports, credit scores obtained
if purchase agreement exists:
appraisal ordered
title report ordered

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Application Processing
After verification forms returned and reports received, loan processor puts together loan package and sends it to underwriting department.
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Underwriting Decision
Underwriter reviews loan package, applies appropriate qualifying standards to buyers.
Automated underwriting system usually used.
Loan is either:
approved
rejected
approved subject to conditions

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Underwriting Decision
If underwriter approves loan, lender issues letter that commits lender to making loan.
Does impose conditions.
Like a preapproval letter, but more detailed.
Preapproval letter usually issued before borrower finds a property; commitment letter once underwriter has evaluated a particular property.

Commitment letter
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Underwriting Decision
If loan denied, lender must provide written explanation within 30 days.
Buyers may want to:
apply to different lender
apply for different type of loan
wait and take steps to improve finances
Rejection
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Closing Loan
Last stage of financing process coordinated with closing of property sale.
In many areas, closings handled through escrow.
Escrow: neutral third party holds money and documents for buyer and seller until transaction ready to close.
Escrow
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Closing Loan
Closing agent (escrow agent):
makes sure all requirements are taken care of before closing date
disburses purchase price, delivers deed when conditions in purchase agreement are satisfied
Closing agent
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Closing Loan
Closing agent may be:
independent escrow agent
employee of lender
title company
lawyer
real estate broker
Closing agent
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Closing Loan
Alternatively, parties may meet in person to exchange funds and documents in roundtable closing (“passing papers”).
No funds are held in escrow, and process is coordinated by third party.
Roundtable closing
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Closing Loan
Clearing and insuring title
Inspections and repairs
Loan documents issued and signed
Funding loan
Preparing closing disclosure
Recording documents
Disbursing funds
Steps in closing process
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Steps in Closing Process
Any liens that would have higher priority than new mortgage or deed of trust must be removed.
Doesn’t include property tax or special
assessment liens.
To remove lien:
seller pays amount owed
release obtained and recorded
Clearing and insuring title
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Steps in Closing Process
Lender will require extended coverage title insurance policy to protect its lien priority.
Usually paid for by buyer.
Clearing and insuring title
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Steps in Closing Process
Lender may require inspections or tests, such as:
pest control inspection
soil percolation test
flood hazard inspection
Based on inspection report, lender decides whether to require repairs or other corrective steps.
Inspections and repairs
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Steps in Closing Process
Once loan has been approved, lender forwards loan documents to closing agent.
Buyer:
deposits funds required for closing into escrow
signs loan documents
Loan documents and buyer’s funds
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Steps in Closing Process
Lender often requires buyer to make deposit into impound account at closing.
Ensures real estate taxes, insurance will be paid on time.
Portion of buyer’s monthly payment goes
into impound account.
Lender pays taxes and insurance out of
account when due.
Impound account
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Steps in Closing Process
Buyer will also pay interim interest (prepaid interest) at closing, since:
buyer’s first payment is not due on first day of month immediately after closing, and
mortgage interest paid in arrears, after it accrues.
Interim interest
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Steps in Closing Process
Funding the loan: when lender releases buyer’s loan funds to closing agent. Happens only after:
buyer signs loan documents,
lender reverifies buyer’s employment and
other information, and
any other conditions imposed by lender have been satisfied.
Funding loan
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Steps in Closing Process
Closing disclosure form itemizes each party’s charges and credits.
Buyer must receive closing disclosure at least three days before closing.
Closing disclosure
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Steps in Closing Process
Closing agent records deed, other documents, disburses funds to parties.
Title company issues policies.
Lender gives buyer copy of final loan documents.
Buyer gives lender copy of hazard insurance policy.
Final steps
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Summary
Application Processing & Closing
Loan package
Conditional commitment
Preapproval
Final commitment
Closing agent
Escrow
Interim interest
Impound account
Funding loan

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