CHAPTS 15

Overview of Real Estate Finance

  • Real Estate Finance is the discipline that deals with the financial aspects of real estate development and investment.

Mortgages

  • Mortgage Definition: A mortgage is a financing instrument that creates a lien against a property.
  • Promissory Note: Establishes legal evidence of the debt incurred in a mortgage transaction. A mortgage always requires a promissory note to be legally valid.

Components of Monthly Mortgage Payment (PITI)

  • Monthly mortgage payments are generally composed of four parts:
    • Principal: The amount borrowed that gets paid down over time.
    • Interest: The cost of borrowing the principal amount, expressed as a percentage.
    • Taxes: Property taxes that are assessed by the local government.
    • Insurance: Homeowners insurance that protects the property against various risks.
    • Collectively referred to as PITI.

Default and Foreclosure

  • Default Definition: When the borrower fails to fulfill the financial obligations of the mortgage.
  • Lender's Rights: In the case of default, the lender can bring legal action through courts to recover the debt.
  • Foreclosure Definition: The legal process whereby the lender sells the property securing the loan to satisfy the debt. This may involve a lengthy legal process.

Additional Fees

  • Lenders often charge additional fees when a borrower takes a loan, including:
    • Loan Origination Fees: Fees charged by the lender for the process of obtaining a mortgage.
    • Points/Discount Points: Fees paid at the closing of the loan, expressed as a percentage of the total mortgage amount.

Title Transfers and Mortgage Assumptions

  • Subject To Mortgage: If a grantee takes title to a property "subject to" a mortgage, that individual is not personally liable to the lender for mortgage payments. The seller remains responsible.
  • Mortgage Assumption: Acquiring title to a property with an existing mortgage and agreeing to adhere to its terms and make payments.
  • Satisfaction of Mortgage: A certificate issued by the lender upon the full repayment of a mortgage, indicating the debt has been satisfied.

Repayment Plans

  • Several types of repayment plans for mortgages:
    • Straight (Interest-Only) Repayment: Monthly payments cover only the interest, not the principal.
    • Amortized Repayment: Combines periodic payments of both principal and interest.
    • Balloon Payment Mortgage: One large final payment due at the loan's maturity.
    • Adjustable Rate Mortgage (ARM): Interest rates adjust periodically, commonly every 1, 3, or 5 years.

Types of Loans

Categories of Loans

  • There are generally two categories of loans available in the marketplace:
    • Conventional Loans: Most common type of mortgage, often viewed as secure.
    • Government-Backed Loans: Loans that are insured or guaranteed by government entities.
Conventional Loans
  • Common Characteristics:
    • Typically require a down payment of 20% or more (loan is 80% or less of the property's sale price).
    • Often uninsured, with traditional designs being fixed-rate.
  • Fixed-Rate Loans: Most common fixed-rate mortgage is the 30-year mortgage, known for stable payments and the possibility of refinancing.
  • Private Mortgage Insurance (PMI): Allows borrowers to obtain loans with lower down payments, where PMI payments terminate after the loan reaches a certain valuation level.
  • Graduated Payment Mortgage (GPM): Monthly payments increase at a specified percentage for several years before leveling off.
  • Pledged Account Mortgage (PAM): Similar to GPM; it involves contributing money to an account pledged to the lender.
  • Buydown: An upfront payment at closing that reduces the monthly mortgage payment, typically provided as an incentive by the builder or assisting family members.

Government-Backed Loans

  • Types of government-backed loans include:
    • Federal Housing Administration (FHA) Loans: Does not directly loan but insures loans made by approved lenders, protecting against borrower defaults.
    • Department of Veterans Affairs (DVA or VA) Loans: Offers veterans a chance to purchase homes with no down payment; the VA guarantees the top portion of the loan to make it more acceptable to lenders.
    • Rural Housing Service (RHS) Loans: Aids low-to-moderate-income rural residents with minimal closing costs and no down payment for purchasing, constructing, or relocating homes and facilities.

Special Loan Types

  • Open-End Loan: An expandable loan allowing a borrower to draw money up to a certain limit.
  • Blanket Mortgage: Covers multiple properties, often used by developers.
  • Wraparound Mortgage: Enables a borrower with an existing loan to take another loan without paying off the first.
  • Bridge Loan: A short-term loan covering the gap between two loans.
  • Purchase Money Mortgage: A loan technique where a buyer borrows funds from the seller and lender.
  • Construction Mortgages: Loans provided to finance property improvements like homes or apartments.
  • Home Equity Loan: Allows homeowners to borrow against the equity built up in their property.
  • Package Mortgage: Includes personal property and appliances in the loan.
  • Reverse Annuity Mortgage: Involves the lender making payments to the borrower.
  • Shared Equity Mortgage: A participation style mortgage where the lender shares in the appreciation of the property upon sale.