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Chapter 9Real Estate Finance Practices andClosing Transactions

IN THIS CHAPTER

• Various loans the buyer may use to finance real property.

• The types of mortgage loans: 1. Conventional loans 2. FHA or VA mortgage loans

• Methods of closing, items required at closing, and proration calculations.

CONVENTIONAL LOANS

• A loan that has is not government insured or guaranteed.

• Can be either uninsured or insured

• Private mortgage insurance (PMI)

CONVENTIONAL MORTGAGES TERMS

• Junior Mortgage• Term Mortgage/ Non-Amortizing

Loan• Amortizing Mortgage• Fifteen-Year Mortgage• Balloon Mortgage• Open-End Mortgage

CONVENTIONAL MORTGAGE TYPES

• Budget Mortgage• Graduated Payment Mortgage

(GPM)• Adjustable Rate Mortgage (ARM)• Renegotiated Rate Mortgage• Graduated Payment Adjustable

Mortgage• Reverse Annuity Mortgage (RAM)• Shared Appreciation Mortgage

(SAM)

CONVENTIONAL MORTGAGES

• Growing Equity Mortgage (GEM)• Participation Mortgage• Package Mortgage• Blanket Mortgage• Construction Mortgage• Purchase Money Mortgage• Land Contract• Leasehold Mortgage

FHA-INSURED LOANS

• Insured by an agency of the U.S. Department of Housing and Urban Development (HUD)

• Created during the Depression of the 1930s

• FHA-insures loans to protect lenders against financial loss

• Popular program is the FHA 203(b) loan

• FHA Mortgage Insurance Premium (MIP)

VA-GUARANTEED LOANS

• The VA guarantees repayment of the top portion of the loan to the lender in the event of default by the borrower

• Certificate of reasonable value (CRV)

• Loan amount may be 100 percent

Eligibility

To be eligible for a VA-guaranteed loan, the borrower must qualify as a veteran or the surviving spouse of a veteran under requirements of the Department of Veteran Affairs.

CLOSING COSTS

1. Discount points 2. loan origination fee or loan service charge3. Appraisal fee4. Attorney’s fee5. Survey fee6. Credit report charge7. Assumption fee if buyer is assuming loan8. Private mortgage insurance premium9. Mortgage title insurance premium10. Cost of termite inspection and

certification

Loan Origination

• Application• Authorizations

1. Verification of employment. 2. Verification of rent or mortgage.3. Verification of bank account balance.4. Verification of outstanding loans.5. Verification of sales contract deposit.6. Verification of pension (if applicable).7. Authorization to release information.8. Consent to credit check and

verification.

Loan Processing

• Appraisal• Credit Report• Application Review• Loan Underwriting• Buyer Ability to Pay• Buyer Willingness to Pay• Property Valuation• Discount Points

FINANCING LEGISLATION• Truth-in-Lending Simplification and

Reform Act (TILSRA)• Disclosure of APR• Three day right of rescission• Regulation Z• State of Michigan Usury Laws– Private party lender is limited to a

maximum rate of 11% interest on loans secured by a first lien on residential real property, a land contract, or a land lease.

LEGISLATION

• Real Estate Settlement Procedures Act (RESPA)

• Equal Credit Opportunity Act (ECOA)

CLOSING

• Face-to-Face Closing• Escrow Closing• Title Companies

Closing Preliminaries• Survey• Pest Inspection• Title Examination, Insurance, and

Defects• Property Inspection• Insurance• Perc, Soil, Well, and Septic Tests

Additional Documents

• Bill of sale of personal property• Certificate of occupancy• Closing or settlement statement • Deed• Note• Disclosure statement• Estoppel certificate• Flood insurance policy• Hazard insurance policy• Land contract• Lease• Lien waivers• Mortgage• Mortgage guarantee insurance policy• Option and exercise of option• Sales contract

PRORATIONS• Unpaid real estate taxes• Rents• Interest on seller’s mortgage

assumed• Prepaid taxes and insurance

premiums• Utilities billed and paid in advance

Rules and Methods

• Buyer pays the costs for the day of closing (for exam purposes.)

• Every year is considered to have 360 days; every month has 30 days.

• Real estate taxes & interest may be paid in arrears or advance.

CHAPTER TERMINOLOGY REVIEW accrued expensesadjustable rate mortgage (ARM)annual percentage rate (APR)appraisalballoon mortgageballoon paymentblanket mortgagebudget mortgagecertificate of reasonable value (CRV)closing statementconstruction mortgageconventional mortgage loancooling-off periodcreditsdebitsdisclosure statementdiscount pointsEqual Credit Opportunity Act (ECOA)Federal Housing Administration (FHA)FHA-insured loansgood faith estimate

more CHAPTER TERMINOLOGY REVIEW graduated payment adjustable mortgagegraduated payment mortgage (GPM)growing equity mortgageGuaranteed Loan Programimpound accountjunior mortgageland contractleasehold mortgageloan origination feeloan-to-value ratiomarginMichigan usury lawsmortgage insurance premium (MIP)negative amortizationopen-end mortgagepackage mortgagepartial release clauseparticipation mortgageperc testPITI paymentprepaid expenses

more CHAPTER TERMINOLOGY REVIEW prepayment penaltyprivate mortgage insurance (PMI)prorationpurchase money mortgageReal Estate Settlement Procedures Act (RESPA)reverse annuitymortgage (RAM)Rural Housing Service (RHS)settlementshared appreciation mortgage (SAM)soil testtake-out loanterm mortgageTruth-in-Lending Act (TILA)/ Regulation ZunderwritingVA-guaranteed loanvendor’s affidavitwell and septic report