Chapter 15: Math & Trust Funds for the Loan
Agent
By Dr. D. Grogan
M.C. “Buzz” Chambers
©2011 Cengage Learning
Preview

Many facets of the loan business include using various
math computations. Many real estate students begin in
the loan business and find that they need to become
more proficient in math. This chapter covers the
common areas of real estate mathematics used by loan
agents, including the use of a financial calculator, loanto-value (LTV) ratio, debt ratio, amount of interest paid
throughout the life of a loan, reading a payment factor
chart, loan comparison, and legal requirements for
handling of trust fund accounting records correctly to
maintain a DRE license.
©2011 Cengage Learning
Student Learning Objectives
1. Determine maximum loan amount and sales price, including LTV ratio.
2. Calculate the buyer qualifying ratios: front-end ratio and back-end
ratio.
3. Read a payment factor chart to determine the total monthly payment.
4. Compare different loan amortization schedules for alternative loans.
5. Contrast alternative financing programs, including second and third
trust deeds, and private-party carryback financing.
6. Use a financial calculator to obtain annual percentage rate (APR).
7. Determine the investor’s rate of return for a real estate loan.
8. Maintain DRE trust fund account record logs of client funds.
9. Differentiate between trust funds and non-trust funds.
10. Outline trust fund bank account requirements for record keeping.
©2011 Cengage Learning
15.1 Introduction




Loan agents are expected to use mathematic
calculations daily for loan purposes.
Key strokes for a real estate financial calculator
are part of the job.
Reading manual payment factor and
amortization charts are used.
An example of a $425,500 appraised value is
used in this chapter with different math.
©2011 Cengage Learning
15.2 LOAN-TO VALUE RATIO (LTV)
The LTV is the amount of the loan in relationship to the value of the
property, expressed as a percentage.
Example:
The LTV for the $425,500 appraised value for a property, where the
buyer puts a 20% cash down payment, would be:
$425,500 = the appraised value of the property
- 81,100 = down payment of 20%
$340,400= amount of new loan
$ 340,400 ÷ $ 425,500 = 80% LTV
©2011 Cengage Learning
BORROWER QUALIFYING INCOME


The monthly payment used to qualify a borrower
consist of adding the principal, interest, property
taxes, and insurance together. Even if the borrowers
pay their own taxes and insurance separately, the
mortgage loan broker uses the total PITI for loan
qualification purposes.
Any other items considered housing expenses such
as mortgage insurance, homeowner association dues,
flood insurance, and land lease payment , are added.
©2011 Cengage Learning
Front-End Ratio:






It is the total housing expense/debt in relationship
to the borrower’s gross monthly income.
For example, using the $425,500 value with a
20% down payment, the loan amount is
$340,400.
For a 30-year loan at 7.5%, the principal and
interest payment is $2,380.13/month.
Property taxes are 1.25% x $425,500 =
$443.23/month.
Insurance is $340,400 x .035% = $99.28/month
Total Housing Expense = $2,922.64 PITI
©2011 Cengage Learning
Front –End Ratio

Example (cont):


Gross month income of borrower = $10,852
Total Housing Expense = $2,922.64
$2,922.64 / $10,852 = 27% borrower front-end ratio
Front-end ratio should not exceed 29%
Borrower 27% does not exceed the 29% maximum
©2011 Cengage Learning
BORROWER QUALIFYING INCOME
Back-End Ratio:
Consist of total housing expense/debt plus installment and revolving
debt, usually with payments of at least 6 or 9 months remaining.
Example: The Martinez family has (1) a $389 monthly car payment with
their credit union, (2) a car payment of $106 to ABC Car Sales, and
(3) total credit card debt of $3,500 total unpaid balance, with a
minimum of 5% monthly payment, or $150 per month. This results
in $645 per month ($389 +$106=$150) for long-term non-housing
debt.
©2011 Cengage Learning
Back-End Ratio:
Add the Total Housing Expense of $2,922.64
And the Total long-term debt of $645/month
For a total of $3,567.64 TOTAL DEBT.
Divide the $3,567.64 total debt/ $10,852 gross
monthly income with results of 33.0% back-end
ratio.
The 33% does not exceed the 38% maximum.
©2011 Cengage Learning
15.4 PAYMENT FACTOR CHART
1.
2.
3.
4.
The mortgage loan broker may have to read a monthly payment
factor chart, as shown in Figure 15.1.
This chart shows both the 15-year, and 30-year payment factor for
each $1,000. To read this chart, read down the column to locate
the interest rate in question, which is located on the left side of the
chart under Rate.
Read across the heading to either the 15-year or 30-year P&I
Factor. Then multiply the loan amount (not the sales price) by that
factor. The answer will then need to be changed by moving the
decimal point three places to the left, or by dividing the answer by
$1,000.
This monthly payment factor chart is beneficial when a financial
calculator is not available or when a visual-learner borrower wants
to “see” how to obtain the payment.
©2011 Cengage Learning
Amortization Table
12 ½ % 30 Years Loan $155,700
1.
2.
3.
Look down the 30 year column for the
monthly payment on $100,000
Next, determine the monthly payment
for $50,000, $5,000 and $700 using the
same method
Then add the amounts together.
Amount
$100,000
50,000
5,000
700
$155,700
Payment
$1,067.26
533.63
53.37
7.48
$1,661.74
Term Amt
20 Years
25 Years
30 Years
40 Years
$100
1.14
1.10
1.07
1.05
200
2.28
2.19
2.14
2.10
300
3.41
3.28
3.21
3.15
400
4.55
4.37
4.27
4.20
500
5.69
5.46
53.34
5.25
600
6.82
6.55
6.41
6.30
700
7.96
7.64
7.48
7.35
800
9.09
8.73
8.54
8.40
900
10.23
9.82
9.61
9.45
1000
11.37
10.91
10.68
10.49
2000
22.73
21.81
21.35
20.98
3000
34.09
35.72
32.02
31.47
4000
45.45
43.62
42.70
41.96
5000
56.81
54.52
53.37
52.45
6000
68.17
65.43
64.04
62.94
7000
79.53
76.33
74.71
73.43
8000
90.90
87.23
85.39
83.92
9000
102.26
98.14
96.06
94.41
10,000
113.62
109.04
106.73
104.90
20000
227.23
218.08
213.46
209.79
30000
340.85
327.11
320.18
314.68
40000
454.46
436.15
426.91
419.57
50,000
568.08
545.18
533.63
524.46
100,000
1136.15
1090.36
1067.26
1048.92
©2011 Cengage Learning
$155,700 @ 12 ½% - 30 year
The Principle & Interest Payment Factor for:
 30 years is: 10.672578 x 155,700 = $1661.74
 15 years is: 12.325221 x 155,700 = 1919.04

Difference per month
$ 257.30
©2011 Cengage Learning
15.5 Amortization Comparison
$425,500 sales price
X 20% cash down payment
$340,400 loan amount
$425,500 sales price
X 10% cash down payment
$382,950 loan amount
©2011 Cengage Learning
Figure 15.2 Example 1: (Term: 15-year, fully
amortized) (Rate: fixed, 7 ¼ % interest)
Event
Start Date
Amount
1 Loan
10/1/2005
340,400.00
Points 1.500
Prorate Days 16 @ 68.55
Other Charges
0.00
2 Payment
01/31/2005
Grand Totals
Date
After 2020
Number
Period
End Date
Monthly
10/01/2020
1
5,106.00
1,096.84
3,107.39
180
Payments Paid
559,330.20
Interest
218,930.20
©2011 Cengage Learning
Principal
340,400
Figure 15.3 Example 2:
(Term: 30-year, fully amortized)
(Rate: fixed, 7 ½ % interest
Event
Start Date
1. Loan
10/1/2005
Points 1.500
Prepaid Days 30 @ 35.42
Other Charges
2. Payment
11/1/2005
Amount
340,400.00
5,106.00
Date
2020 Totals
Grand Totals After 2020
Payments
28,561.56
856,846.80
0.00
2,380.13
©2011 Cengage Learning
Number
1
Period
End Date
360
Monthly
01/01/2035
Interest
19,511.51
516,446.80
Principal
9,050.05
340,400.00
Figure 15.4 Example 3:
(Term: 30-year, fully amortized)
(Rate: fixed, 71=2 % interest) paying one extra payment per year
Event
Start Date
1. Loan
10/1/2005
Points 1.500
Prepaid Days 30 @ 35.42
Other Charges
2. Payment
11/1/2005
3. Payment
02/1/2029
Date
2020 Totals
Grand Totals After 2020
Amount
Number Period End Date
340,400.00
1
5,106.00
0.00
2,578.47
2,164.44
Payments
30,941.64
721,557.57
©2011 Cengage Learning
279
1
Monthly 01/01/2029
Interest
14,786.38
381,157.57
Principal
16,155.26
340,400.00
Figure 15.5 Example 4:
(Term: 30-year, fully amortized)
(Rate 7 1/2% interest) paying an extra 4 1/2% per year beginning in year 2
Event
1. Loan
Points 1.500
Prepaid Days 30 @ 35.42
Other Charges
2. Payment
3. Payment
Grand Totals
Start Date
10/1/2005
11/1/2005
11/1/2006
Date
2020 Totals
After 2020
Amount Number
340,400.00 1
5,106.00
0.00
2,380.13
2,487.24
Payments
53,291.40
610,347.30
©2011 Cengage Learning
12
12
Period
End Date
Monthly
Monthly
10/1/2006
10/1/2007
Interest
2,712.35
269,947.30
Principal
50,579.05
340,400.00
Figure 15.6 Example 5: (Term: 30-year, fully amortized) (Rate 7 1/2%
interest) paying interest only for the first five years
Event
1. Loan
Points 1.500
Prepaid Days 30 @ 35.42
Other Charges
2. Payment
3. Payment
Start Date
10/1/2005
11/1/2005
11/1/2010
Date
2020 Totals
Grand Totals After 2020
Amount
340,400.00
5,106.00
0.00
Interest Only
2,515.53
Payments
30,186.36
882,309.00
©2011 Cengage Learning
Number
1
Period
End Date
60
300
Monthly
Monthly
10/1/2010
10/1/2035
Interest
20,621.51
541,909.00
Principal
9,564.85
340,400.00
Summary: 3, 4, & 5
Example 3: A 30 year, fully amortized at 7 1/2% interest, adding one extra
payment per year, payable with an extra one-twelfth per month increase in
the monthly payment (equal to 13 payments per year instead of 12
payments per year, but paid in 12 payments).
Example 4: A 30-year loan, fully amortized at 7 ½%, in which at the end of
each year an increased monthly payment by 4 1/2% is calculated, so that
the first 12 months’ payments remain the original contract monthly payment,
but each subsequent year begins with a once-a-year increase in the
monthly payment at month 13, month 25, month 37, month 49, month 61,
etc.
Example 5: A 30-year, fully amortized loan at 7.5% interest, with interestonly payments for the first five years and then fully amortized for the
remaining 25 years.
©2011 Cengage Learning
Example 6: Comparing a (1)[90% LTV lst T.D. loan @ 7 ½% with PMI] to an (2) [80%
LTV lst with a 10% LTV 2nd T. D. @ 9 ½ % with no PMI]
$2,743.50 PI
165.95 PMI (382,950 - .52% ‚ 12
= $165.95)
$2,909.45 (P) + (I) + (MI)
$165.95 of each payment each
month is not tax deductible
$425,500 - 80% = $340,400 @ 7.5%
int. 30/30
$425,500 - 10% = $ 42,550 @ 9.5%
int. 30/15
$340,400 the payment would be
$2,380.13 PI
$ 42,550 the payment would be
$357.78 PI
$2,737.91 PI
The difference between the payment for the 90-10 and the payment for the 80-10-10
loan amounts to $171.54 per month. The savings for one year would amount to
$2,058.48, and over a 30 year loan the borrower would save over $61,754.40 in interest.
©2011 Cengage Learning
Example 7: Private-party carry-back financing, with three loans (Term: [(1) 30-year, fully amortize
lst T.D.@ 7 ¾%], plus [(2) (2nd T.D. @ 9% amortized over 30 years, but due in 15 years] plus [(3)
T.D. @ 11%, interest only/straight note, due in 5 years])
New 1st trust deed of $235,000 @
7.75%, 30/30
(54% LTV)
New 2nd trust deed of $125,000 @ 9.0%,
30/15
(29% LTV)
New 3rd trust deed of $ 75,500 @ 11.0%
interest only for 5 yrs (17% LTV)
$435,500
-0$435,500
The payments would be:
(principal, interest)
1st TD $1,684.29 PI
2nd TD $1,005.78 PI
3rd TD $692.08 I
Total loan amount
(100% CLTV)
Down payment
Sales Price
©2011 Cengage Learning
$3,382.15 PI
Computing the Rate of Return
1st TD of $235,000 @ 7.75%
2nd TD of $125,000 @ 9.0%
3rd TD of $75,500 @ 11.0%
©2011 Cengage Learning
=
=
=
$18,212.50
$11,250.00
$8,305.00
$37,767.50
Example 7

The difference between the 90% loan with PMI and the private-party
carry-back finance is $472.70, or $15.76 per day. When borrowers are in
a position in which they are able to pay a higher payment, the privateparty carry-back loan may be more advantageous than the traditional 9010 with PMI. With no cash for a down payment, the borrower needs to
finance the closing costs and the loan amount, which enables a borrower
to purchase a home rather than rent and to save cash for a future
purchase. An additional savings to the borrower is that after 5 years,
when a borrower’s income typically has increased, the third trust deed
would be paid off, which could lower the monthly payment by $692.08.
Beginning the sixth year, the monthly payment would include only the
first and second trust deeds. In another ten years, the second trust deed
would likewise terminate.
©2011 Cengage Learning
Example 8: Two-step mortgage, private party carry-back (Term: [(1)existing fully
amortized lst T.D.@ 7 ½%, 25 years remaining, paid off in one year upon
refinancing], plus [(2) New 2nd T.D. @ 10% straight note, due in one year])
Step 1:
Value: $425,500
Total loans would be $121,000 ($96,000 first amortized for 30 years +
$25,000 second due in one year) or a new combined loan to value
(CLTV) of 28%.
Pay off all debts, the car, and credit cards ($10,974 + $3,341 = $14,315)
Because of the age of the property, the private party lender may require
items that enhance the value of the property, such as replacing the carpet
and air conditioner.
Funds available for closing cost (investor fee, broker fee, credit report,
escrow, title insurance, recording fee, etc.)
©2011 Cengage Learning
Example 8: Two-step mortgage
•
•
•
•
Help a borrower at the current time on this loan and be in a position
to do a refinance in one year, when the second trust deed becomes due.
Allow the borrower to reduce current debts and provide time to
improve the FICO score.
By the end of the first year, the borrower could show proof of making the
payments on the first trust deed on time, with no late payments during the past
12 months.
The borrower would have established a longer period on the job, with 21 months
instead of 9 months.
At the end of the one-year period, the loan broker could assist the borrower
in obtaining a refinance loan that would demonstrate 21 months on the job, a
credit score in the mid-600 range, with increased income—the $2,340 base
pay, plus the $1,340 social security income, for a total of $3,680. The new
loan would include the current unpaid balance on the existing first trust deed
of approximately $96,000 plus $27,500 that includes the current unpaid
balance on the second plus the closing costs needed to close the loan.
©2011 Cengage Learning
Example 8: Two-step mortgage
(cont)
This new loan of $128,000 at 71/2 % interest, amortized over 30 years,
would have a monthly payment as follows:
$894.99
102.48
176.00
$1,173.47
principal and interest
property taxes
homeowner association dues
a PITI
$1,173.47 / 3,680 = 31.88% front-end and back-end ratio
The borrower would end up with no debt. The new loan would confirm to
FNMA guidelines with very conservative new LTV of 30% ($128,000 ‚
$425,500).
©2011 Cengage Learning
15.6 Financial Calculators



Hewlett-Packard
(www.hp.com/country/us/en/prodserv/calculator.
html)
Texas Instruments
(http://education.ti.com/educationportal/sites/US
/productCategory/us_financial.html)
Calculated Industries: Real Estate Master
(www.calculated.com/cat11/Real+Estate+Calcul
ators.html)
©2011 Cengage Learning
FINANCIAL CALCULATORS
A. The mortgage loan broker makes use of calculations as an ongoing process in the daily
activity of the job. The DRE allows applicants for the real estate licensee examination to
utilize a calculator that they are comfortable using, but they must also become proficient
in the key strokes for the required daily applications.
B. The majority of real estate licensees use one of 3 calculators.
1. The Hewlett-Packard series of calculators has been predominantly used by those
working in financial institutions, including stock and brokerage houses and for advanced
appraisal techniques. Today, nonresidential real estate persons tend to stay with HP
calculator.
2. The Texas Instruments Business Analysis (BA II) has been predominantly used at 4year universities for finance majors and those working primarily with stocks and bond
calculations.
3. The Real Estate Master, by Calculated Industries, is used primarily for everyday real
estate calculations by real estate salespersons and brokers to determine loan payment,
unpaid loan balance, front-end and back-end ratios and buyer qualifying (hence, the
name of their calculating is Qualifier Plus).
©2011 Cengage Learning
BROKER TRUST ACCOUNT
FUNDS
1. Definition of trust funds includes:
a. Funds received on behalf of others
b. Creates a fiduciary responsibility to the owner of the funds
c. Any thing of value received by a licensee for another in the performance of a real
estate activity
d. Funds used in the performance of an act for another
e. Funds being held for the benefit of others
2. The funds include:
a. Buyer’s initial deposit on an offer to purchase
b. Buyer’s up front deposit to pay for fees such as a credit report
c. Principals money used to pay for points, fees or charges
d. Promissory notes received, held for or payable to or for a principal, secured
directly or collaterally by a lien on real property
e. Deposits made into an escrow account, title company account, real estate s
ales broker, or property management trust fund account
f. Uncashed items (checks, notes) instructed to be held by a principal
©2011 Cengage Learning
BROKER TRUST ACCOUNT
FUNDS (cont)
3. Non trust funds are those that belong to the broker or business office:
a. General operating funds
b. Rents and deposits for broker-owned real estate
c. Funds used for broker-owned loans on notes
d. Commissions earned from collection of principal funds, placed into the trust account, then
calculated as a fee and paid from the principal’s balance from the trust fund
i.
Earned commissions may remain in the trust account up to a maximum of 30
days.
ii.
Earned commissions must be paid out to a broker, not directly to a
salesperson or employee of the broker.
4. Benefit of having a trust account
a. Physical separation and accounting control over trust funds avoids commingling of broker
funds with the funds of the principal
b. Trust funds cannot be frozen under pending litigation against the broker or during probate
of the broker’s estate
Each owner has FDIC insurance up to $125,000 rather than just one broker bank account.
©2011 Cengage Learning
Bank Deposit


Trust funds must be placed into
broker trust account
Broker may deposit personal
business funds into trust
account:


Up to $200 maximum
To maintain bank charges for the
account
©2011 Cengage Learning
Trust Bank Account

Must be a Demand account




No prior notice required to withdraw funds
Non-interest bearing account
Neutral depository
Must reconcile at least once each month
©2011 Cengage Learning
Trust Account Withdrawals

Requires signature of designated broker
Salesperson licensed to the broker needs
written authorization to sign the account

Unlicensed employee may sign if




Fidelity bond indemnifying the broker
Fidelity bond for maximum amount of funds
accessible to the employee at any time
Broker may not take anticipated commissions,
only funds actually earned and received
©2011 Cengage Learning
Records Required:







Date funds received, deposited &
disbursed
Name of party received from & disbursed
to
Amount of funds received & disbursed
Check number received & disbursed
Form of funds received: cash, note, check
Interest earned for principal
Balance in account for EACH principal on
daily basis and for the entire account
©2011 Cengage Learning
Trust Fund Law for Licensee

“In the business”




Acquisition for resale, sale or exchange with the
public of 8 or more notes in 1 year
Transaction must name the broker
Salespersons prohibited from dealing direct with
the public
Broker must licensed by DRE
©2011 Cengage Learning
Trust account must:




Designate the account as a TRUST
ACCOUNT
Name the broker as TRUSTEE
Be maintained at a bank in California
Account servicing for an investor of a note:




FNMA, GNMA, FHLMC, FHA, DVA
Trustee of a pension fund over $15,000,000
Licensed residential mortgage lender or servicer
Licensed real estate broker selling the loan
©2011 Cengage Learning
Records Maintained





Broker must retain for three years
Keep copies of all receipts & checks
After 3 years, broker should check with IRS
All trust account records must be available to
DRE for examination
Non-compliance with trust funds may result
in:


Revocation or suspension of DRE license
Financial liability to the principal for damages
©2011 Cengage Learning
Advance Fees

Handler: A broker who claims, demands,
charges, receives, collects or contracts to
collect funds while employed to obtain loans.

Funds: Any amount of money collected to
cover the cost of services performed in
arranging a loan.
©2011 Cengage Learning
DRE Advance Fee Requirements:





A written advance-fee agreement.
Materials submitted to DRE Commissioner at
least 10 days prior to use.
Approval of agreement & materials.
Fees must be payable to the broker.
Exemption: Appraisal fee & credit report fee
are not deemed an advance fee.
©2011 Cengage Learning
Reconciliation of Accounting Records






Name of the agent and the principal.
Description of services rendered.
Identification of account where funds placed.
Amount of advance fee collected.
List names & addresses of persons for the loan.
Amount collected or disbursed from the fees:



Services rendered
Commission paid to field agents & representatives
Overhead costs and profit
©2011 Cengage Learning
Threshold Account
When a broker meets the business
activity of:
 20 or more loans aggregating $2
million.
 Loan collections aggregating
$500,000 on behalf of a non-exempt
lender.
©2011 Cengage Learning
DRE Threshold Account




Quarterly trust fund status report with DRE
Annual Trust fund report file with DRE
Annual review of trust fund financial
statements by DRE
Broker must furnish each principal:


Verified copy of accounts, quarterly
Verified copy of accounting when the contract
is completed
©2011 Cengage Learning
TRUST FUND ACCOUNTING
1. When a broker maintains a trust account, certain records must be kept. Brokers
are instructed to maintain generally accepted accounting principles in the
handling of a trust account to be in compliance with DRE Regulation 2831. The
record should set forth in chronological order the following information in
columnar form:

Date funds were received

Name of party from whom funds were received

Amount of funds received

Date of deposit of the trust funds

Check number and date of trust fund disbursement

Name of entity to whom trust funds were disbursed

Daily balance for each separate principal’s funds

Daily balance of trust account
2. In addition to keeping records for all funds received, the broker must keep a
separate record for each beneficiary and transaction.
3. The broker must account for all funds that have been deposited into the broker’s
trust account and any interest earned on the trust funds on deposit.
©2011 Cengage Learning
Audits & Examinations



Broker must furnish authorization for
examination of financial records of trust funds.
Broker pays cost of audit if final desist & refrain
order, or after disciplinary hearing awarded
finding broker in violation of real estate law.
Commissioner may seek recovery of costs.
©2011 Cengage Learning
Trust Fund Violations



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Restricted License: B & P Section 10148
Broker pays estimated average hourly salary for
all persons performing audits, including travel
time to and from auditor’s work.
Respondent has 60 days from receipt of invoice
to pay.
Commissioner may suspend the restricted
license pending a hearing if payment not made
timely.
Suspension remains until paid in full.
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