New York Real Estate for
Salespersons, 5th e
By Marcia Darvin Spada
Cengage Learning
© 2013 All rights reserved.
Chapter 6 Real Estate Finance
1
Chapter 6
Real Estate Finance
(Mortgages)
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Chapter 6 Real Estate Finance
2
Chapter 6 Key Terms
Acceleration clause
Adjustable rate
mortgage (ARM)
Assignment
Alienation (due on
sale) clause
Default
Amortization
Buydown
Discount points
Grace period
Inflation
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Chapter 6 Real Estate Finance
3
Chapter 6 Key Terms (continued)
Loan-to-value ratio
Margin
Prepayment penalty
clause
Mortgage/mortgagor
/Mortgagee
Promissory note
Negative
amortization
Satisfaction of
mortgage
Payment cap/rate cap
Usury laws
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Release clause
4
Mortgagor and Mortgagee
The borrower gives a
mortgage to the
lender
Mortgagor
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The lender receives a
mortgage from the
borrower
Mortgagee
5
Mortgage Clauses
Mortgage
Note or
Alienation
Bond
Clause
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Acceleration Prepayment
Penalty
clause
Clause
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Defeasance
Clause
6
Monthly Mortgage Payment
 P = Principal
 I = Interest
 T = Taxes
 I = Insurance
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7
Elements of Foreclosure
Foreclosure
Priority/
Subordination
Deficiency
judgment
Deed in lieu
of foreclosure
Equity of
Redemption
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8
Sale of Mortgaged Property
Sale Free and Clear
Sale Subject to a mortgage
Sale in which buyer assumes
mortgage debt
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9
Conventional and Government
Loans
Conventional loan
Government loan
No participation by a
Guaranteed, insured
government agency
or funded by a
government agency
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Chapter 6 Real Estate Finance
10
Specific loans and Payments
Amortized
Straightterm
Balloon
Mortgage
Adjustable
rate
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Blanket
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11
Junior Financing
Home equity loan
Open-end mortgage
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Chapter 6 Real Estate Finance
Gap financing
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Special Types of Mortgages
Special
Mortgages
Graduated
Pledged
Reverse
payment
account
annuity
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Package
Shared
appreciation
13
A Purchase Money Mortgage
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14
Construction Mortgage
 Short term loan
When project is
 Disbursed in stages
complete, converted to
permanent long-term
 Interest not charged
loan called take-out or
end loan
until the money has
been disbursed
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Chapter 6 Real Estate Finance
15
Types of Government Loans
FHA-insured loans
VA Guaranteed loans
Rural Housing Service
State of New York
Mortgage Association
(SONYMA)
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The Primary and Secondary
Mortgage Market
Mortgage
Assignable
Sold to secondary
mortgage
(conforming
Loans)
market
Primary
lender
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Chapter 6 Real Estate Finance
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Secondary Mortgage Market
Organizations
Name
Ownership
Purchases
Fannie Mae
(FNMA)
Privately owned
FHA, VA, RHS,
conventional
Ginnie Mae
(GNMA)
HUD
VA, FHA, RHS
Freddie Mac
(FHLMC)
Savings. savings
and loan banks
Members of Fed.
Home Loan Bank,
other banks
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18
Truth-in-Lending Act
o Disclosure
o Cooling off period
o Advertising (Regulation Z)
o Penalties
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Chapter 6 Real Estate Finance
19
Lender’s Criteria for Granting a
Loan
$ Investment quality
of the property
$ Borrower’s ability
to repay loan
$ Loan-to-value ratio
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Loan-to-Value Ratio
Ratio of loan amount
to property value
Loan ÷value = ratio
Example:
Loan = $144,000
Value = $160,000
144,000 = 90%
160,000
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Chapter 6 Real Estate Finance
21
Sale Leaseback
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22
Mortgage Loan Origination
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23
Qualifying Ratios
Monthly Housing
Expense
Total
Obligations
Fixed rate
conventional loan
28%
36%
Adjustable rate
Conventional loan
28 %
36%
FHA loans
31%
41%
VA loans
None
41%
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How to Secure FHA Financing
 FHA does not make
mortgage loans
 FHA-insured loans
protects lenders against
financial loss
 Buyer pays for this
insurance protection by
paying an upfront
mortgage insurance
premium
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 FHA does not set
maximum sales price,
only a maximum loan
amount
 FHA insured mortgages
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require mortgage
insurance
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FHA Mortgage
 Advantages
 Credit criteria for a
borrower are not as
strict
 Borrower’s allowable
costs can be partially
wrapped into loan
 100% of down
payment and closing
costs can be gifted
 Loans are assumable
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 Disadvantages
 With a 30-year FHA loan, and a
down payment of more than 5%
of the loan amount, the upfront
mortgage insurance premium
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(MIP) is 2.25 percent of the loan
amount in addition to the 1.10
percent annual renewal premium
that a borrower pays for the life
of the loan
 FHA limits the amount that
can be borrowed
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Predatory Lending
What is it?
 High-cost (subprime loans)
 High-cost loans also include
include conventional first
conventional loans for more
mortgages that have an
than $50,000 when the points
interest rate of more than 8
and fees exceed 5 percent of
percent and junior mortgages
the loan
that have a high interest rate
of more than 9 percent
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Predatory Lending
Lender may target
certain ethnic group
Takes advantage of
consumer
Induces refinancing
(flipping)
Fraud regard true nature
of loan obligation
Lender makes
unaffordable loans
based on assets of
borrower, not ability to
repay
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Predatory Lending PracticesWhat is it?
High-cost (subprime
loans) include
conventional first
mortgages that have
an interest rate of
more than 8 percent
and junior
mortgages that have
an interest rate of
more than 9 percent
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 High-cost loans also
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include conventional
loans for more than
$50,000 when the points
and fees exceed 5
percent of the loan
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Subprime Loans
 Borrowers considered subprime if they have a less-
than-perfect credit report
 Subprime lenders
 companies that provide loans to home-buyers who
do not have good credit histories or who are risky
candidates for loans because of their incomes
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New York Anti-Predatory Lending Law
Many restrictions on high-cost (subprime) loans that
are first or junior (second) mortgages
Loans covered under New York Law
Maximum indebtedness of $300,000
For family or personal reasons
Apply to one- to four-unit property that is the
borrower’s personal residence
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Chapter 6 Real Estate Finance
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