Chapter 9
Real Estate Finance
Practices and
Closing Transactions
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IN THIS CHAPTER
• Various loans the buyer may use to finance
real property with a lending institution.
• The types of mortgage loans:
1. Conventional loans
2. FHA or VA mortgage loans
• Methods of closing, items required at
closing, and proration calculations.
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CONVENTIONAL LOANS
• one that has no participation by an
agency of the federal government
• can be either uninsured or insured
• private mortgage insurance (PMI)
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CONVENTIONAL MORTGAGES
TERMS
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Junior Mortgage
Term Mortgage
Amortizing Mortgage
Fifteen-Year Mortgage
Balloon Mortgage
Open-End Mortgage
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CONVENTIONAL MORTGAGE
TYPES
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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)
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CONVENTIONAL MORTGAGES
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Growing Equity Mortgage (GEM)
Participation Mortgage
Package Mortgage
Blanket Mortgage
Construction Mortgage
Purchase Money Mortgage
Land Contract
Leasehold Mortgage
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FHA-INSURED LOANS
• 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)
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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 of CRV
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Eligibility
To be eligible for a VA-guaranteed loan,
the borrower must qualify as a veteran
under requirements of the Department
of Veteran Affairs.
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CLOSING COSTS
1. Discount points
2. loan origination fee or loan service charge
3. appraisal fee
4. Attorney’s fee
5. Survey fee
6. Credit report charge
7. Assumption fee if buyer is assuming loan
8. Private mortgage insurance premium
9. Mortgage title insurance premium
10. Cost of termite inspection and certification
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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.
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Loan Processing
Appraisal
Credit Report
Application Review
Loan Underwriting
Buyer Ability to Pay
Buyer Willingness to Pay
Property Valuation
Discount Points
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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
– unqualified 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.
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LEGISLATION
• Real Estate Settlement Procedures Act
(RESPA)
• Equal Credit Opportunity Act (ECOA)
• Michigan Consumer Protection Act
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CLOSING
• Face-to-Face Closing
• Escrow Closing
• Title Companies
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Closing Preliminaries
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Parties
Survey
Pest Inspection
Title Examination, Insurance, and Defects
Property Inspection
Insurance
Perc, Soil, Well, and Septic Tests
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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
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PRORATIONS
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unpaid real estate taxes
rents
interest on seller’s mortgage assumed
prepaid taxes and insurance premiums
utilities billed and paid in advance
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Rules and Methods
• Buyer or the seller may pay the costs of
the day of closing.
• Every year is considered to have 360
days; every month has 30 days.
• Real estate taxes & interest are paid in
arrears.
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CHAPTER TERMINOLOGY REVIEW
accrued expenses
adjustable rate mortgage (ARM)
annual percentage rate (APR)
appraisal
balloon mortgage
balloon payment
blanket mortgage
budget mortgage
certificate of reasonable value (CRV)
closing statement
construction mortgage
conventional mortgage loan
cooling-off period
credits
debits
disclosure statement
discount points
Equal Credit Opportunity Act (ECOA)
Federal Housing Administration (FHA)
FHA-insured loans
good faith estimate
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more CHAPTER TERMINOLOGY REVIEW
graduated payment adjustable mortgage
graduated payment mortgage (GPM)
growing equity mortgage
Guaranteed Loan Program
impound account
junior mortgage
land contract
leasehold mortgage
loan origination fee
loan-to-value ratio
margin
Michigan Consumer Protection Act
Michigan usury laws
mortgage insurance premium (MIP)
negative amortization
open-end mortgage
package mortgage
partial release clause
participation mortgage
perc test
PITI payment
prepaid expenses
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more CHAPTER TERMINOLOGY REVIEW
prepayment penalty
private mortgage insurance (PMI)
proration
purchase money mortgage
Real Estate Settlement Procedures Act (RESPA)
Regulation Z
reverse annuity
mortgage (RAM)
Rural Housing Service (RHS)
settlement
shared appreciation mortgage (SAM)
soil test
take-out loan
term mortgage
Truth-in-Lending Simplification and Reform Act (TILSRA)
underwriting
VA-guaranteed loan
vendor’s affidavit
well and septic report
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