©2011 Cengage Learning
California Real Estate
Principles
Chapter 8
Part I: Real Estate Lenders
©2011 Cengage Learning
Chapter 8 Part I
1.
2.
3.
Compute loan qualifying ratios
List institutional and non-institutional
lenders
Describe how private mortgage
insurance has changed lending
practices in California
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Qualifying The Buyer
Lender’s concern:
•Character (desire)
•Credit
history
•Capacity (ability)
•Income
to make the payments
•Capital (assets)
•Reserves
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to convert to cash
Credit
 A buyer’s credit is the most important
factor that influences a lender
 Consumer’s should be encourage to
protect their credit
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Credit Report
 Information varies from credit bureau
to credit bureau.
 A credit report is a detailed history of
the borrower’s indebtedness over
time.
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Credit Bureaus
 Equifax www.equifax.com
 Experian www.experian.com
 TransUnion www.transunion.com
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Credit Scores
FICO (Fair Isaac Company) developed a system of
scoring by comparing a person’s credit report with
many other credit reports to determine the risk of
lending to the borrower.
 Credit scores have advantages over credit reports:
 Results can be delivered instantaneously
 Credit decisions are fairer
 Older credit problems count for less
 More Credit is Available
 Credit rates are lower
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Composition of FICO Score
 Payment History – 35%
 Amounts Owed – 30%
 Length of credit History – 15%
 New Credit – 10%
 Types of Credit in Use – 10%
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Front End Ratio
 Monthly housing payment includes
payment of principal + interest +
taxes + insurance + dues+ PMI.
 Divide monthly housing payments
by gross income to determine the
front end ratio.
Monthly housing payment
=
Gross monthly income
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percentage %
Back End Ratio
 Total monthly expenses includes total
monthly housing payments + long term
debt.
 Divide total monthly expenses by gross
monthly income to determine the back
end ratio.
Total monthly expenses
Gross monthly income
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=
percentage %
Ratios
Conventional
(%)
FHA DVA
Front End
28%
31%
Back End
36%
43%
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41%
Ratio Terms
 GROSS MONTHLY INCOME = All stable, legal
income before taxes.
 MONTHLY HOUSING PAYMENT = Projected
monthly loan payments + ½ of estimated property
taxes and insurance premium monthly + PMI and
association dues.
 LONG TERM DEBT = Monthly payments that
continue for six months or longer.
 TOTAL MONTHLY EXPENSE = Monthly housing
payments + monthly long term debts.
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Loans
LTV = Loan-to-value
Appraised Price or Sales Price (lesser value) x 80% = Maximum loan
Loan Origination fee
1 point = 1% of the loan amount
Appraisal fees
Credit Report fee with extensive information
Escrow and Title fees are negotiable
Beneficiary Demand Statement showing existing
loan balance
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Monthly Payment
It’s A PITI to have to make the payment!
ssociation dues
rincipal
nterest on the loan
axes on the property
nsurance
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Conventional Qualifying Ratios
Example:
 Gross monthly income $4,000
 Long term debts $500
 $4,000 [x] 28% [=] $1,120 for PITI
$4,000 [x] 36% [=] $1,440 for PITI and debts
500 debts
= $ 940
The lower of the two.
For the above: $1120 vs. $940 =
Maximum payment of $940 per month for PITI
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California Loan Market







High demand
Increasing population
Numerous large financial institutions
Use of mortgage companies for out-of-state lenders
Escrow and title companies provide fast service
Loan security is Trust Deed not a mortgage contract
Active secondary market to trade loans for cash to
generate more loans
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Lenders
 Institutional
 Savings & Loan
 Banks
 Insurance Companies
 Non-Institutional






Mortgage Companies
Mortgage Brokers
Real Estate Investment Trusts (REIT)
Pension Funds
Credit Unions
Individuals
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Savings & Loan or Commercial Banks
Insurance
Companies
Thrift Institutions
Charter
Federal & State
Federal & State
State
Loan-to-value
ratio
Usual maximum 90%
(Can go to 95%)
Usually 80%
75%
Loan term
30 + years
30 + years
25 to 30
Interest rates
Usually at the higher end
of the market
Usually middle of the
market
Usually at the lower end of
the market
Favorite real
estate loans
Prefer conventional
made on single family
dwellings, apartments
buildings, mobile homes,
condominiums
Prefer construction loans
with backup takeout loan
assured from another
lender; Equity home loans
Business loans
Prefer high quality loans
Larger commercial and
industrial properties with AAA
tenants Hotels and office
buildings -FHA/VA
(Can go to 95%)
FHA/VA backed
Customer
Greatest share of market
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Present or former
Lend through loan
correspondents-mortgage
companies
Second Deed of Trust
Junior Lien
Purpose
Close the gap between the sales price and the first
loan plus down payment
Private lenders
Short term loan on single family dwellings
Mortgage brokers: agents for private loans
Mortgage bankers: lend their own or other’s funds
Real Estate Investment Trust (REIT)
Created by Federal law; involves at least 100 investors
Credit Unions are a group of voluntary savers
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Private Mortgage Insurance
(PMI)
 Required on LTV greater than 80%
 Lender reimbursed if borrower defaults
 Premiums paid by borrower
 PMI sold by private insurance companies
 Strict credit requirements due to higher risk
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