California Real Estate Finance
Bond, McKenzie, Fesler & Boone
Ninth Edition
Chapter 10
Processing, Closing, and
Servicing Real Estate Loans
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Objectives

After completing this chapter, you should be
able to:






List the items that make up a loan package.
Describe the process by which conventional, FHA, and
DVA loans are approved.
List and explain borrowers’ closing costs.
Describe the difference between “assuming” a loan
and taking the property “subject to” the loan.
List rights that prospective borrowers have under the
Fair Credit Reporting Act in the event errors are
shown in their credit reports.
Cite the chief provisions of the Truth-in-Lending Law.
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Outline





Processing the Loan
How is a Loan Approved?
Closing the Loan
After the Loan: Rights and Responsibilities
Handling Loan Takeovers
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Processing the Loan

Start with FNMA/FHLMC standard application Form 1003
(See Figure 10.1, pp. 268-272)








Equal Credit Opportunity Act (See slide)
Real Estate Settlement Procedures Act (See slide)
Verify information on application (See slide)






Employment
Income
Assets
Debts
Credit history
Credit report (Equifax, Experian, TransUnion)
Credit Score
Employment
Bank accounts
Assemble loan package (See slide)
Loan committee decision
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Equal Credit Opportunity Act







Ask married, unmarried, or separated
But not divorced or widowed
Ask if paying alimony or child support
But not if receiving unless want it considered
No questions about birth control methods
Notify in 30 days
Borrowers may provide information about
blemishes
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Real Estate Settlement
Procedures Act






Written estimate of settlement or closing costs
 aka Good Faith Estimate
 Within three days
Does not include amounts for taxes, insurance or prorations
Department of Housing and Urban Development booklet on
closing costs provided to borrower
One day before settlement must receive an itemized list of
closing costs
Escrow and/or title companies must use a HUD-1 Settlement
Sheet
Real Estate Agents cannot generate unearned referral fees
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Verifying the Information on
the Application

Written verification of employment



Three months of pay stubs
Two years of W-2 forms
Tax returns



Written verification of checking and savings
accounts


Self-employed
Real estate owners
Three months
Credit Report
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Loan Package










Borrower’s loan application
Appraisal of property
Verification of employment
Verification of bank statements
Credit report
Purchase contracts
Escrow instructions
Preliminary title report
“Source of the funds” documentation
Other
 Tax returns
 W-2
© 2011 Cengage Learning created by Dr. Richard S. Savich.
How is a Loan Approved?

Conventional lenders





Loan Committee
Authorized individual (with $ limits)
FHA Direct Endorsement System
DVA Automatic System
Fair Credit Reporting Act

If rejected can ask credit agency for information



All info on file
Sources of info
All creditors the agency reported to in last six months
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Closing the Loan


Usually handled by title or escrow company
Loan documents for escrow



Promissory note (Figure 10.2)
Deed of trust (Figure 10.3)
Truth-in-Lending Law Disclosure Statement (Figure
10.4)


APR
Closing Costs
© 2011 Cengage Learning created by Dr. Richard S. Savich.
APR




Borrow $50,000
7% interest
120 monthly payments
$580.54/month





Prepaid finance charge
$2,000
Proceeds $48,000
120 monthly payments
$580.54/month
7.928% interest (APR)
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Closing Costs

Nonrecurring









Loan origination fee
Title policy
Escrow fee
Credit report
Appraisal
Tax service
Recording fees
Notary fees
Pest control inspection fee

Recurring




Tax proration
Hazard insurance premium
Flood insurance in flood
zones
Prepaid interest
© 2011 Cengage Learning created by Dr. Richard S. Savich.
After the Loan: Rights and
Responsibilities




Make loan payments
 Monthly billing system
 Coupons
 Automatic withdrawals
Pay late charges
 FHA & DVA (4% of monthly payment)
 Cal-Vet ($4 flat fee)
 Conventional loans (6% of monthly, $5 minimum)
Make prepayments
 20% max of original loan per year
 Goes toward reduction of principal
 No penalties beyond three years (California law)
Receive reserve analysis annually
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Handling Loan Takeovers

Loan assumptions


Borrower is given release of liability (novation)
Could be “subject to”


Buyer pays seller
Seller pays lender each month
© 2011 Cengage Learning created by Dr. Richard S. Savich.
Questions and Comments?
© 2011 Cengage Learning created by Dr. Richard S. Savich.