Real Estate Finance I Book - Champions School of RE

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Table of Contents Copyright 2010© Champions School of Real Estate™

Table of Contents

Table of Contents Chapter 1 – Introduction to Residential Finance Page 5 Chapter 2 – How Loans Are Repaid Page 27 Chapter 3 – Residential Apppraisal Page 37 Chapter 4 – Conventional and Government Loans Page 59 Chapter 5 – Title and Closing Page 91 Chapter 6 – Property Condition and Inspections Page 111 Bibliography Page 129 Answers to Chapter Pre-Test Questions Page 131 Homework Page 133

4 Copyright 2010© Champions School of Real Estate™

Introduction

Introduction Real estate agents representing buyers and sellers must have knowledge of a wide range of disciplines, including finance, inspections, title, and insurance. While by no means an expert in these fields, the agent should be able to discuss these topics, and should have a list of experts in each area to which they can refer their clients. Understanding the many details of a transaction from contract to close helps the real estate professional build lifetime client loyalty. This knowledge and attention to detail helps the agent bring real value to the process as they “stay ahead” of the many issues that arise in a transaction. This course takes the agent from the signing of the contract through closing, and addresses many of the tasks that are essential for a successful transaction. Because of the diverse needs of individual buyers and sellers, every transaction will be different. No attempt has been made to cover or anticipate every demand that will be placed on the agent. From Contract to Close The contract to close period begins when the contract becomes a binding agreement and ends upon the closing of the transaction. Many things must happen during this period, and they often must be done within specific timeframes. In this period, many people from different disciplines are involved including:

1. Title examiners 2. Mortgage brokers/bankers 3. Inspectors 4. Appraisers 5. Surveyors 6. Pest control companies 7. Insurance agents 8. Contractors 9. Buyers 10. Sellers 11. Real estate agents

In Chapters 1-4 we discuss the mortgage loan process from an agent’s perspective. For most buyers obtaining a mortgage loan is a somewhat rare event in which they have little expertise. Because of the complexity of the mortgage loan process, they find themselves confused by the many decisions that must be made in obtaining a loan. In Chapter 5 title insurance and the closing process is discussed. Agents must be comfortable discussing issues that arise in a transaction. Included is a discussion of the title commitment and some of the issues that might delay or terminate a transaction. Prorations and typical entries found on the HUD 1 settlement statement are discussed. Chapter 6 addresses the all-important inspection process. Common issues with options periods and property condition are also discussed.

Chapter 1 –

Introduction to Residential Finance


Chapter 1 –Introduction

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Finance

Chapter 1: Introduction to Residential Finance Pre-test

1. ____________ is the process of making a lending decision.

2. __________________________ in a contract means that all provisions must be carried out on

time.

3. If financing approval has not been obtained, and the buyer’s time is about to run out, the buyer might lose their _________________ if they fail to close.

4. A federally-mandated form that gives a borrower information regarding loan costs and settlement charges is a _______________________.

5. When comparing loan offers from different lenders, the borrower can use the ____________________ found in the GFE.

6. Some expenses may be paid in the form of a seller contribution or other means. However, the borrower actually must have the funds on hand for the _______________________.

Fill in the letter of the word which makes the above sentence correct.

a. Good faith estimate b. Earnest money c. Down payment d. Underwriting e. Shopping chart f. Time is of the essence


Chapter 1 – Introduction

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Finance

Chapter 1 – Introduction to Residential Finance While considerable real estate is purchased by cash buyers, most will need some form of financing. Residential lending is complicated by the fact that these loans are quite large compared to the average borrower’s income and ability to repay. Because of this, a mortgage loan goes through a fairly long processing procedure as the lender verifies the borrower’s ability to repay and the sufficiency of the collateral in the event the buyer fails to do so. While the agent does not have to be knowledgeable in all aspects of mortgage lending, they do have a role which includes:

1. Arranging for the prequalification of buyers 2. Discussing general mortgage loan programs that buyers might consider 3. Answering finance and closing related questions 4. Providing buyers with a list of potential lenders 5. Preparing the contract with all terms of sale, including financing conditions 6. Tracking important dates from contract to close, including monitoring the time the buyer has to

obtain financing approval Throughout this text we will use a sample transaction in the majority of the forms and math examples. Bill and Sally Homeowner are purchasing a home, and will be obtaining an FHA loan with a minimum down payment of 3.5%: Sale Price $250,500 Down Payment: -8,768 Base Loan Amount: $241,732 Add: FHA UFMIP* 5,438 Total Loan Amount $247,170 *The FHA Upfront Mortgage Insurance premium is discussed in Chapter 3 The home is a resale, and we will be using the TREC-Promulgated One To Four Family (Resale) contract, which will be referred to in this book as “the contract”. Buyer Prequalification Note: Buyer prequalification is generally done prior to entering into a contract to purchase, and is therefore not a part of the contract to close process. Because of its importance in the financing process, it is included here for reference. Understanding the prequalification process and its limitations is important to agents, buyer and sellers. Under ideal circumstances the buyer was prequalified for a loan prior to beginning the search for a home. Prequalification benefits not only the buyer, but the seller and agents in several ways:

1) Buyers are able to be more realistic when setting their pricing goals 2) The buyer’s agent has a better understanding of the buyer’s ability to pay 3) The buyer’s agent can avoid showing properties that the buyer cannot afford 4) Sellers are somewhat reassured that the buyer has sufficient income and credit to close the

transaction



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Prequalification and preapproval letters are prepared on standard forms promulgated by the Texas Department of Savings and Mortgage Lending (SML). The standard prequalification is prepared using Form A, Conditional Prequalification Letter, and can be obtained from one or more lenders as one of the first steps in the house hunting process. Only after identifying a property can the buyer move from prequalification to preapproval. When the buyer is preapproved, they will obtain a Form B, Conditional Approval Letter. Regardless of the prequalification or preapproval letter, it is important that all parties understand that the letter is not an absolute guarantee that the lender will ultimately fund a loan for the buyer. The process of approving a loan is called underwriting. This may be done via an automated system, or, it may be done by an individual known as an underwriter. All loans go through the underwriting processError! Bookmark not defined.. In underwriting a lending decision is made based upon the information that the lender has assembled regarding the borrower and the property being financed. All prequalification and preapproval letters are subject to underwriting approval or other conditions. Prequalification When the buyers are prequalified, they provide basic information to the lender including income, debt and credit history. A prequalification letter does not obligate the lender to

extend credit, and it does not obligate the borrower to the lender.



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The lender may or may not have obtained a credit report and other information that will be considered in underwriting. As mentioned earlier, prequalification is a great benefit, but its value should not be over sold, especially to the seller. When the prequalification letter is issued the lender may know very little about the borrower’s history. Conditions that affect the borrower’s creditworthiness or ability to pay may be discovered during the underwriting process that were unknown or not disclosed in the prequalification process. Preapproval The Preapproval of a buyer is a considerably more involved process, and is provided to the buyer using Form B, Conditional Approval Letter. A preapproval requires an application from the borrower and the identification of a specific property. Therefore, buyers will begin their property search with a Form A, Conditional Qualification Letter at best. Even with Form B in hand there are many qualifying conditions that must be met for a successful closing. Buyers and sellers must be cautioned that neither of the two letters guarantee ultimate approval for a loan. So, now we have a contract between the buyer and seller. The buyer has been prequalified or preapproved. A vast array of tasks must be completed in the coming days and weeks as the loan process moves ahead.



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Loan Application There are a number of issues and critical dates that must be tracked by agents. The contract is delivered to the title company after it has been signed by all parties. When financing is involved, and if in the contract the parties checked Paragraph 4A(2)(a) in the contract, the TREC Third Party Financing Condition Addendum will be attached. In the Third Party Financing Condition Addendum the buyer must make application for a loan “promptly”. Because of the time limitation imposed for obtaining financing approval, this must be done as quickly as possible. The mortgage application form (Fannie Mae 1003) is discussed in detail in Chapter 4.

As a rule, if the buyer complies with the provisions of the contract and the Third Party Financing Condition Addendum, they will be refunded their earnest money and the contract terminated if they cannot obtain financing. Paragraph 4 and the addendum differentiate between property approval and the financing approval of the borrower. While the borrower has the time limitation stipulated in the



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addendum, the lender is under no such constraints. The lender can, at any time prior to closing, decide that the property does not meet their approval, thus rejecting the loan.

Time is of the essence. Note the bold print in the first paragraph of the Third Party Financing Condition Addendum. “Time is of the essence” means that the time allotted for loan approval will strictly enforced. Agents should carefully monitor the time allowed for financing approval. If

financing approval has not been obtained, and the buyer’s time is about to run out, four options exist for the buyer:

1. Let the time expire and take their chances. The contract will no longer be subject to financing approval, and they might well lose their earnest money if they fail to close because they could not be approved for financing.

2. Obtain an extension of time from the seller. 3. Secure loan approval from the lender. 4. Terminate the contract.



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The seller would be under no obligation to grant an extension of time for loan approval. If the seller verbally agrees to an extension of time for loan approval, the agent must follow up and get the agreement in writing. The agreement to extend must be signed by all parties. The failure to put verbal agreements in writing has been the source of major problems for agents that results in failed transactions, lost business and even litigation. Paragraph 8 of the Contract Amendment (above) is used for the extension of time for loan approval. How Loans are Priced From the lender’s perspective, a mortgage represents an investment in an annuity. The lender invests in the mortgage and receives regular monthly payments of principal and interest from the borrower (as with an annuity). All investors are interested in the yield on their investments. The yield is the return that the investor receives over the life of the loan. Lenders generally make loans in anticipation of their sale to investors in the secondary market. The yield requirements of these investors is the primary determinate of mortgage rates. The yield on a loan is determined by the rate of interest charged on the loan and the discount points charged by the lender at closing. One point discount is one percent of the loan amount, and is an up-front payment of interest paid by borrowers to reduce the interest rate on the loan. The rate and points charged on a loan are a function of many factors including the prevailing rates in the market, the type of property being financed, the term of the loan, and the borrower’s credit, income and down payment, just to name a few. Therefore different borrowers will have different financial profiles that result in them being quoted differing rates and terms. Let’s say that a borrower is quoted a rate of 6% per annum on a particular mortgage product, and, at this rate, the lender is charging no discount points. A loan with no discount points is known as a “par loan” – a loan that is made at the current market rate of interest. The borrower, with the 6% quote, goes shopping for a better deal. After all, who does not want to get a loan at a lower rate of interest? Their quest will be quickly satisfied when they find a lender who will be happy to quote them a rate of 5.75%, 5.5%, or even less. Does the lender have cheaper money to lend? Are they simply being generous? The answer to both of these questions is probably “no”. The lender quoting the lower rate added discount points to the quote to compensate for the lower rate. If the current market supported the quote of a loan at 6% with no discount points, a loan made at a lower rate is clearly “below market” The loan can be sold to investors, but only at a discount. Investors will buy the loan, but will discount it because it is below market – they might purchase a $100,000 loan made at below market rates, but might only pay $98,000 for it. The lender is going to need to recover the loss incurred in making the loan at a below market rate. Discount points, which are pre-paid interest, accomplish this for the lender. Therefore, the lower the rate offered the borrower, the higher the fees (points) that must be paid. A loan offered to the borrower at a higher rate may result in lower fees. The Federal Reserve Given that the lender is going to sell the borrower’s loan in the secondary market, mortgage rates must be affected by changes in the global financial markets. Actions taken by the Federal Reserve have a fairly immediate effect on short-term rates, but their impact on mortgage rates is less direct.



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The country's economic performance is influenced by many factors--economic performance abroad, fiscal policy determined by the legislative and executive branches of government, and monetary policy carried out by the Federal Reserve. The Federal Reserve's most critical role is to keep the economy healthy through the proper application of monetary policy. The objective of monetary policy is to influence the country's economic performance to promote stable prices, maximum sustainable employment, and steady economic growth. How the Fed Guides Monetary Policy The Fed's monetary policy actions affect prices, employment, and economic growth by influencing the availability and cost of money and credit in the economy. This in turn influences consumers' and businesses' willingness to spend money on goods and services. The Fed uses three monetary policy tools to influence the availability and cost of money and credit: open market operations, the discount rate, and reserve requirements. Open Market Operations The Fed's most flexible and often-used tool of monetary policy is its open market operations for buying or selling government securities. The Federal Open Market Committee (FOMC) sets the Fed's monetary policy, which is carried out through the trading desk of the Federal Reserve Bank of New York. If the FOMC decides that more money and credit should be available, it directs the trading desk in New York to buy securities from the open market. The Fed pays for these securities by crediting the reserve accounts of banks involved with the sale. With more money in these reserve accounts, banks have more money to lend, interest rates may fall, and consumer and business spending may increase, encouraging economic expansion. To tighten money and credit in the economy, the FOMC directs the New York trading desk to sell government securities, collecting payments from banks by reducing their reserve accounts. With less money in these reserve accounts, banks have less money to lend, interest rates may increase, consumer and business spending may decrease, and economic activity may slow down. The Discount Rate The discount rate is the interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a short-term basis. Unlike open market operations, which interact with financial market forces to influence short-term interest rates, the discount rate is set by the boards of directors of the Federal Reserve Banks, and it is subject to approval by the Board of Governors. Under some circumstances, changes in the discount rate can affect other open market interest rates in the economy. Changes in the discount rate also can have an announcement effect, causing financial markets to respond to a potential change in the direction of monetary policy. A higher discount rate can indicate a more restrictive policy, while a lower rate may be used to signal a more expansive policy. Reserve Requirements By law, financial institutions, whether or not they are members of the Federal Reserve System, must set aside a percentage of their deposits as reserves to be held either as cash on hand or as reserve account balances at a Reserve Bank. The Federal Reserve sets reserve requirements for all commercial banks, savings banks, savings and loans, credit unions, and U.S. branches and agencies of foreign banks. Depository institutions use their reserve accounts at Federal Reserve Banks not only to satisfy reserve



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requirements, but also to process many financial transactions through the Federal Reserve, such as check and electronic payments and currency and coin services. So, the actions of the Federal Reserve partly affect rates. Rates are also affected by government spending and borrowing, and the general state of the economy overall. So, how does the smart shopper compare offers from different lenders? Perhaps a Good Faith Estimate will help. Good Faith Estimate (GFE) A Good Faith Estimate (GFE) is a detailed loan quote provided by a lender. For many years lenders have given prospective borrowers Good Faith Estimates. Each lender had their own form for a Good Faith Estimate, and in many cases it was difficult to compare loan offers based on the GFE.

On January 1, 2010, a new nationwide standardized GFE became mandatory. The GFE lists a variety of charges, and may give the borrower several options that will affect their rate of interest, monthly payment, and fees. The GFE is divided into several important sections. Let’s look at each in detail.



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Important Dates

The Important Dates section of the GFE includes key dates of which the buyer should be aware:

• Line 1 discloses the date and time through which the interest rate offer is good.

• Line 2 discloses the date through which “All Other Settlement Charges” are good. This date must be open for at least 10 business days from the date the GFE was issued to allow the buyer to shop and consider other offers. While this and other elements of the GFE might help the borrower shop for a loan, there are some obvious pitfalls. By the time the GFE has been prepared, the buyer/borrower may have already made loan application and may have already selected a loan product.

• Line 3 discloses the interest rate lock time period, such as 30, 45 or 60 days, on which the GFE

is based. “Locking in” the rate and points at the time of application or during the processing of the loan will keep the interest rate and points from changing until the rate lock period expires.

• Line 4 discloses the number of days prior to going to settlement that the buyers must lock the

interest rate. Line 4 is often left blank.



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Summary of your loan

The summary of the borrower’s loan terms discloses the loan amount, loan term, the initial interest rate and the principal, interest and mortgage insurance portion of the monthly mortgage payment. It also informs the buyer’s if the interest rate can increase, if the loan balance can rise, whether the mortgage payment can rise and if there is a prepayment penalty or balloon payment.

In the example above, the loan amount is $247,170, which will be paid over 30 years at an interest rate of 5.25 percent. The monthly mortgage payment is $1,475.67, which includes principal, interest and mortgage insurance, but does not include any amounts to pay for property taxes and homeowner’s insurance.

In our example, the loan has a fixed interest rate. Since the interest rate cannot rise, the ‘no’ box was checked. This example does not contain a balloon payment or a prepayment penalty. A prepayment penalty is a charge that is assessed if the buyer’s pay off the loan within a specified time period, such as three years. A balloon payment is due on a mortgage that usually offers a low monthly payment for an initial period of time. After that period of time elapses, the balance must be paid by the borrower,or the amount must be refinanced.

Escrow account information

The GFE also includes a separate section referred to as ‘‘Escrow account information,’’ which indicates whether or not an escrow account is required. This account holds funds needed to pay



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property taxes, homeowner’s insurance, flood insurance (if required by the lender) or other property-related charges. If the GFE specifies that the loan will have an escrow account, the buyer will have to pay an initial amount at settlement to start the account and an additional amount with each month’s regular payment. Summary of the borrower’s settlement charges

The final section on page 1 of the GFE contains the adjusted origination charges and the total estimated charges for other settlement services which are detailed on page 2 of the GFE. As mentioned earlier, the price of a home mortgage loan is stated in terms of an interest rate and settlement costs, which include discount points. The borrower can often pay lower total settlement costs in exchange for a higher interest rate and vice versa.



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The Borrower’s Adjusted Origination Charges, Block 1-2

Block 1, “Our origination charge” contains the lenders and the mortgage broker’s charges and point(s) for originating the loan. Block 2, “The borrower’s credit or charge point(s) for the specific interest rate chosen.”

• If box 1 is checked, the credit or charge for the interest rate is part of the origination charge shown in Block 1.

• If box 2 is checked, the borrowers will pay a higher interest rate and receive a credit to reduce the adjusted origination charge and other settlement charges.

• If box 3 is checked, the borrowers will be paying point(s) to reduce the interest rate and will pay higher adjusted origination charges.

After adding or subtracting Block 2 from Block 1, “The borrower’s Adjusted Origination Charge” is shown in Block A. In the example shown, the origination charge is $8,976.96. No points were paid to reduce the interest rate. Instead, because of the interest rate chosen, the offer contains a $4943.40 credit that reduces the adjusted origination charge to $4033.56.



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The Borrower’s Adjusted Origination Charges, Block 3-11 In addition to the charges to originate the loan, there are other charges for services that will be required. For some of the services, the lender will choose the company that performs the service (Block 3). Lenders usually permit the borrower to select the settlement service provider for “Title services and lender’s title insurance” (Block 4). “Owner’s title insurance” is also disclosed (Block 5). Other required services that the borrower may shop for are included in “Required services that the borrower can shop for” (Block 6).

• Block 3 contains charges for required services for which the lender selects the settlement service provider. These are not “shoppable” services and will include items such as the property appraisal, credit report, flood certification, tax service and any required mortgage insurance.

• Block 4 contains the charge for title services, the Lender’s title insurance policy and the

services of a title company to conduct the settlement.

• Block 5 contains the charge for an Owner’s title insurance policy that protects the buyer’s interests. NOTE: Under RESPA, the seller may not require the borrower, as a condition of the sale, to purchase title insurance from any particular title company. Note that in Texas the seller typically pays for the owner’s title policy. The cost of the policy must be shown in the GFE as a cost to the borrower even if the contract stipulates that the seller will pay for it. This and other inconsistencies will be sorted out with the lender and corrected on the HUD-1 Settlement Statement at closing.

• Block 6 contains charges for required services for which the buyer may shop. Some of these

items may include a survey or pest inspection.



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• Block 7 contains charges by governmental entities to record the deed and documents related to the loan. Recording fees are charged per page, and therefore vary depending upon the size of the document recorded.

• Block 8 contains charges by state and local governments for taxes related to the mortgage and

transferring title to the property. Texas does not have transfer fees (taxes) on real estate transactions.

• Block 9 contains the initial amount the borrower will pay at settlement to start the escrow account, if required by the lender.

• Block 10 contains the charge for the daily interest on the loan from the day of settlement (closing

and funding) to the first day of the following month. The exact amount of this charge is dependent upon what day of the month the loan is funded.

• Block 11 contains the annual charge for any insurance the lender requires to protect the property such as homeowner’s insurance and flood insurance.

Total Estimated Settlement Charges

The charges for All Other Settlement Services”, Blocks 3 through 11, are totaled in Block B. Blocks A and B are added together resulting in the total estimated settlement charges associated with getting the loan. These Blocks are carried forward to the bottom of page 1 of the GFE.



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There are three different categories of charges that the borrower will pay at closing:

• Charges that cannot increase at settlement • Charges that cannot increase in total more than 10% • Charges that can increase at settlement

The borrower can use this as a guide to understand which charges can or cannot change. The borrower should compare the GFE to the actual charges listed on the HUD-1 Settlement Statement to ensure that the lender is not charging more than permitted. Written list of settlement service providers A written list will be given to the borrower that includes all settlement services that the borrower is required to have, and those for which the borrower is allowed to shop. The borrower may select a provider from this list or they can choose their own qualified provider. If the buyer chooses a name from the written list provided, that charge must fall within the 10% tolerance category. If the buyer selects their own service provider, the 10% tolerance will not apply.



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Using the tradeoff table

The “tradeoff table” on page 3 will help the buyer understand how the loan payments can change based upon different choices made available by the lender. If they pay higher settlement charges, they will be charged a lower rate of interest. If they pay less in settlement charges, they will be charged a higher rate of interest. The loan originator must complete the first column with information contained in the GFE. If the loan originator has the same loan product available with a higher or lower interest rate, the loan originator may choose to complete the remaining columns. If the second and third columns are not filled in, the borrower may ask lender if they have the same loan product with different interest rates. Notice the relationship between the initial interest rate, monthly payment and settlement charges. As the rate increases, settlement charges are reduced. Of course, the payment increases accordingly. As the rate decreases, settlement charges increase, and the monthly payment is reduced.



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Using The Shopping Chart

The borrower can use this chart to compare similar loans offered by different loan originators by filling in each column with the information shown in the “Summary of the borrower’s loan” section from the first page of all the GFEs they receive. As mentioned earlier, the borrower may not be shopping at this point, as they may have already made application with a lender. After a loan product has been selected, the borrower should notify the loan originator that they would like to proceed with the loan. The borrower should keep the Good Faith Estimate so it can be compared to the final settlement costs stated on the HUD-1 Settlement Statement. The buyer or agent might ask the lender and closer if there are any changes in fees between the GFE and the HUD-1 Settlement Statement. Some charges cannot be increased, and the lender must reimburse the buyer if those charges were increased. New Home Purchases If the buyer is purchasing a new home that is being built or has not yet been built, the GFE could change. If the GFE can change, the loan originator must notify the borrower that the GFE may be revised at any time up to 60 days before settlement. Changed Circumstances If there are changes involving the borrower’s credit, the loan amount, the property value, or other information that was relied upon in issuing the original GFE, a revised GFE may be issued. Only the charges affected by the changed circumstance may be revised. When the borrower selects a loan product and a lender, they must submit a formal application to the lender. The standard application used in the industry is known as a “Fannie Mae 1003”, or simply a “1003”. The application form is discussed in detail in Chapter 4



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Loan Processing Once the application is complete, the file moves into the processing phase. During this phase the loan processor will “build a file” that will be used to make an underwriting decision. The information contained in the application will be verified, and a wide range of information will be collected on the borrower and the property. Credit reports will be ordered, possibly from all three major national credit reporting agencies: Experian, Equifax, and TransUnion. Because not all creditors report to all three, each reporting agency will report a different credit score for the borrower. If three reports are obtained, the lender will use the middle score for underwriting. If two reports are obtained, they will use the lower of the two scores. The borrower’s funds will need to be verified. While some expenses may be paid in the form of a seller contribution or other means, the borrower actually must have the funds for the down payment on hand. The source of the down payment may not be a loan of any kind. Employment will also need to be verified. If the employment status of the primary borrower or co-borrower changes prior to closing, the change must be reported to the lender.

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Chapter 2 –

How Loans Are Repaid


Chapter 2 – How Loans Are Repaid

Chapter 2: How Loans Are Repaid Pre-test

1. A ________ mortgage is a mortgage whose rate does not change during the term of the loan.

2. ____________ is the process of repaying a loan over time through periodic payments of principal and interest.

3. A mortgage whose rate will change over time with changes in the money market is known as an

_________.

4. ___________ is the percentage of the sale price or appraised value that the lender is willing to lend.

5. When calculating the monthly payment, the lender will add an amount equal to 1/12 of the

annual taxes and insurance for deposit into the _____________. Fill in the letter of the word, which makes the above sentence correct.

a. Adjustable Rate Mortgage b. Fixed Rate c. Escrow Account d. Loan to Value Ratio e. Amortization


Chapter 2 – How Loans are Repaid

Fixed Rate Mortgages The fixed rate mortgage loan has dominated residential lending in the United States for many years. The typical mortgage loan is for a term of 15 or 30 years, with the rate remaining fixed for the entire term of the loan. Most of these loans are fully amortized. In an amortizing loan, the monthly payment includes an amount that is applied to interest that is due, with the remainder of the loan payment being applied to the outstanding loan balance (also known as the principal balance). This monthly payment is referred to as P&I – principal and interest. As the loan is repaid, the balance of the loan is reduced over time until it is fully amortized (paid in full). Consider a loan for $247,170 for 30 years with a fixed rate of interest at 5.25% per annum (per year). The monthly payment is $1,364.88, which includes principal and interest. In the first year of the loan, the principal balance is reduced $3,485.23. Note that the interest portion of the payment goes down each month as a result of amortization.

Pmt No.

Total Payment Principal Interest

Ending Balance

Cumulative Interest

1 1,364.88 283.51 1,081.37 246,886.49 1,081.37 2 1,364.88 284.75 1,080.13 246,601.73 2,161.50 3 1,364.88 286.00 1,078.88 246,315.73 3,240.38 4 1,364.88 287.25 1,077.63 246,028.48 4,318.01 5 1,364.88 288.51 1,076.37 245,739.98 5,394.39 6 1,364.88 289.77 1,075.11 245,450.21 6,469.50 7 1,364.88 291.04 1,073.84 245,159.17 7,543.34 8 1,364.88 292.31 1,072.57 244,866.86 8,615.91 9 1,364.88 293.59 1,071.29 244,573.27 9,687.21

10 1,364.88 294.87 1,070.01 244,278.40 10,757.21 11 1,364.88 296.16 1,068.72 243,982.23 11,825.93 12 1,364.88 297.46 1,067.42 243,684.77 12,893.35

Notice that the amount of interest is reduced with each monthly payment. In a like manner, the amount of principal reduction goes up with each monthly payment. So, how is the change calculated with each monthly payment? When dealing with loans, we must always first calculate the dollar amount of one years’ worth of interest. The rate on this loan is 5.25% per year. The annual calculation is done based upon last month’s loan balance. For example, when the borrower makes payment number five, the annual interest is based upon the ending balance after payment number four was applied. Therefore, one years’ worth of interest would be: $246,028.48 X 5.25% = $12,916.50 Because we are collecting monthly payments, the interest due each month is equal to the annual interest divided by twelve: $12,916.50 ÷ 12 = $1,076.37 When payment number five is made in the amount of $1,364.88, the interest due of $1,076.37 will be deducted and the balance will be applied to principal, reducing the loan balance once again. $1,364.88 – $1,076.37 = $288.51 (applied to principal)



Next month, when another payment is made the math is repeated again until the loan is paid in full. Later in the life of the loan the loan balance is reduced to the point that monthly interest is less than the principal reduction. This happens at payment number 203, which is 16 years and 11 months into this loan:

Pmt No.


Ending Balance

Cumulative Interest

199 1,364.88 672.92 691.97 157,490.94 181,932.44 200 1,364.88 675.86 689.02 156,815.08 182,621.46 201 1,364.88 678.82 686.07 156,136.26 183,307.52 202 1,364.88 681.79 683.10 155,454.48 183,990.62 203 1,364.88 684.77 680.11 154,769.71 184,670.73 204 1,364.88 687.76 677.12 154,081.95 185,347.85

The loan is fully amortized in 30 years, bringing the balance to zero:

Pmt No.


Ending Balance

Cumulative Interest

357 1,364.88 1,341.26 23.63 4,059.08 244,151.91 358 1,364.88 1,347.12 17.76 2,711.95 244,169.67 359 1,364.88 1,353.02 11.86 1,358.94 244,181.54 360 1,358.94 1,352.99 5.95 0.00 244,187.48

The loan will be paid off (fully amortized) more quickly if the borrower makes additional principal payments over time. So far we have discussed amortization and loan payments, which include principal and interest (P&I). Most borrowers have a payment plan that includes principal, interest, taxes and insurance (PITI). When determining the total monthly PITI payment, the lender will add an amount equal to 1/12 of the annual taxes and 1/12 of the annual homeowner’s insurance. Consider our sample transaction: Sale Price $250,500 Loan Terms (From above) Down Payment: -8,768 $247,170 @5.25% for 30 years fixed Base Loan Amount: $241,732 Add: FHA UFMIP* 5,438 Total Loan Amount $247,170 *The FHA Upfront Mortgage Insurance premium is discussed in Chapter 3 Annual property taxes are $4,500. Annual homeowners insurance is $1,500. This loan is an FHA loan, and therefore has a monthly FHA Mortgage Insurance Premium (MIP) of $110.79.The total monthly payment, PITI will be:



Monthly loan payment (P&I) $1,364.88 Mortgage Insurance Premium (MIP) 110.79 Monthly Taxes ($4,500 ÷ 12) 375.00 Monthly Insurance ($1,500 ÷ 12) 125.00 Total Monthly Payment: $1,975.67 The borrower will be qualified for the loan based upon the total monthly payment, which is usually referred to as the “house payment”. Some borrowers will want to pay off their mortgages early. Any payments of additional principal during the term of the loan will speed up the payoff of the loan. Many borrowers use the bi-weekly payment plan to do this. In the bi-weekly plan, the borrower makes one-half of a payment every two weeks throughout the year. A thirty-year mortgage will be paid off in just over 25 years. When a borrower makes a one-half payment every two weeks during the year they actually make thirteen full payments as opposed to the usual twelve. This accelerates the loan payoff, and saves the borrower almost five full years of principal and interest payments.



Adjustable Rate Mortgages – ARM High inflation and unsettled interest rates of the 1970’s, lead to the development of alternative methods of financing mortgage loans. In the 1970’s these alternative repayment plans were viewed as a means of assisting borrowers in qualifying for a loan larger than they would have otherwise qualified for using a standard fixed interest rate product. Alternative loan products allowed many Americans to purchase a home at a time when fixed interest products were at historically high rates. The most widely used alternative loan was as an Adjustable Rate Mortgage (ARM). A major risk undertaken by lenders on long-term mortgages is the risk that rates will increase in the future. If a lender is holding a portfolio of loans at rates in the 6% range, the portfolio looses considerable value if rates move significantly higher in the future. The adjustable rate mortgage is preferred by lenders because it limits the lender’s exposure to rising interest rates. Since the 1970’s, lenders have often encouraged borrowers to consider ARM programs by offering initial interest rates that are lower than traditional fixed rate loans. In effect, the lender is offering a lower initial rate in exchange for the borrower taking on more of the lenders risk of higher interest rates in the future. In an adjustable rate mortgage the borrower obtains a loan for a certain term, perhaps 15 or 30 years. The loan is funded at an initial rate of interest that will remain fixed for a period of time. That period will vary depending on the loan product. Rate changes in an ARM are determined by increases or decreases in a funds index that is not under the control of the lender. ARM Terminology Initial Rate - The rate at which an ARM program begins is called the initial rate. The initial rate and payment amount on an ARM will remain in effect for a limited period of time. The initial rate can range from 1 month to 5 years or more.

Adjustment Period - The interest rate and monthly payment will change every month, three months, six months, 1 year, 3 years, 5 years or 7 years. The period between rate changes is called the adjustment period. For example, a loan with an adjustment period of 1 year is called a 1-year ARM, and the interest rate and payment can change once every year; a loan with a 3-year adjustment period is called a 3-year ARM.

Index - The index is what the lender uses as an instrument for measuring changes in interest rates. It is the lender’s barometer of change in interest rates. One of the major protections offered to borrowers who accept an ARM loan is that any change in the rate of interest must be tied to the change in the index.1 As the index rate moves up, so does the interest rate charged by the lender to the consumer resulting in higher monthly payments to the borrower. As the index rate moves down, the interest rate charged by the lender to the consumer goes down, resulting in lower monthly payments to the borrower.

Wiedemer, John. Real Estate Finance. 8th Edition. United State of America: South-Western/Thomson Learning, 2001



Lenders base ARM rates on a variety of indices. Among the most common indices are:

• 1 Year Constant Maturity Treasury Rate (CMT) • 11th District Cost of Funds Index – COFI • London Interbank Offered Rate - LIBOR

The LIBOR is a standard financial index used in U.S. capital markets, and can be found in the Wall Street Journal. The LIBOR is fixed on a daily basis by the British Bankers' Association, and is the world's most widely used benchmark for short-term interest rates. It is also the rate upon which many ARMs are based. Margin - The percent added to the index in order to calculate the payment interest rate is known as the margin. Margins vary from one lender to another, remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates. Lenders use a variety of margins depending upon the loan program and adjustment periods. Note Rate - The rate that determines the amount of interest charged to the borrower. Discounted Initial Rate (“teaser rate”) - A lower interest rate is offered by the lender during the first year or more of the loan. These interest rate concessions are used as incentives to attract borrowers to ARM products. Interest-rate Caps - An interest-rate cap places a limit on the amount the interest rate can increase or decrease. Rate caps limit how much interest can be charged, and come in three types:

• Per Adjustment Cap - This caps limits how much a payment may increase or decrease in any subsequent adjustment. In most cases, lenders base the per adjustment cap on the initial or starting rate. The per adjustment applies regardless of the rate change indicated by the Index+Margin. Per adjustment caps vary by lender, and are often in the 1% - 2% range.

• Lifetime Cap - Limit the interest rate increases over the life of the loan. This is a worst case scenario, and determines the highest the payment will ever go regardless of increases in the Index. The lifetime cap is normally in the 5% - 6% range.

• Initial Adjustment Cap - ARM’s that offer a fixed rate period during the first years of the loan usually have an initial rate cap that is higher than the per adjustment cap. In many ARM’s the interest payment rate may increase as much as 6% higher than the first year rate.

• Payment Cap – some ARM products have a payment cap that limits payment increases to a maximum dollar amount. In some cases payment caps have resulted in a loan that has negative amortization for a period of time. Negative amortization occurs when the monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. If a scheduled rate adjustment would give the borrower a payment that would exceed the payment cap, the payment is capped at the maximum amount. The remainder of the unpaid payment is added to the loan balance.



ARM Cap Lingo5-1 ARM – Rate is fixed for the first 5 years of the loan. These loans often adjust annually after 5 years.

2/6 ARM – 2% per adjustment cap and a 6% lifetime cap

6/2/6 Arm – 6% initial adjustment cap, 2% per adjustment cap and a 6% lifetime cap.

Making the Decision: Fixed Rate vs ARM For the borrower planning to remain in their home in the long term, the fixed rate mortgage is probably the best choice. The fixed rate mortgage is also ideal for the borrower who is adverse to risk, or who believes that the trend in mortgage rates is upward. An additional benefit of a fixed rate loan is that it is predictable, which allows the homeowner to budget and plan for the future with greater certainty. If a buyer plans to sell in the near future, an ARM might be a better choice. A buyer with a 5-1 ARM might well move before there is an opportunity for a rate hike (or reduction). An ARM might also be an ideal product for the borrower that believes that the trend in mortgages rates is downward. An ARM might be a desirable product for a borrower that wants to qualify at a lower initial rate to give them more purchasing power. ARMs with initial fixed periods of three years or more are underwritten at the initial note rate, which allows the borrower to qualify for a larger loan. ARMs with initial fixed periods of six months or one year are underwritten at the rate that could be in effect at the end of the first year (the “second year” rate), which negates some of the benefit if the borrower is trying to qualify for a larger loan through the ARM. One risk factor that should be considered in selecting an ARM is the possibility of rate increases in the future that could make the payment difficult for the borrower to pay on a timely basis. Other Loan Plans Balloon Note Balloon loans are beneficial to some borrowers, especially those who do not plan to stay in their home for an extended period of time. In a balloon loan the principal is amortized over a period of time, possibly 15 or 30 years. The the difference between a balloon loan and a fully-amortizing loan is that the loan balance is due before the loan fully amortizes, possibly in one, five or ten years. Consider the following five year balloon: Loan Amount: $247,170.00 Rate: 5.25% Term: 30 years

Payment: $1,364.88



If this loan was made as a five year balloon, payments 1-59 would be $1,364.88. Payment 60 would be outsanding loan balance, which would be $227,765.89 assuming that no additional principal payments had been maded:

Payment # Payment Principal Interest Balance58 1,364.88 363.61 1,001.27 228,497.89 59 1,364.88 365.20 999.68 228,132.69 60 1,364.88 366.80 998.08 227,765.89

A balloon loan can be benefical to the borrower because the loan is generally made at a lower rate of interest. The lender is willing to accept a lower rate of interest because they know that the loan will be paid in full in five years vs. thirty. Interest Only Interest only loans are loans that do not amortize, either for a period of time, or for the entire term. The borrower makes payments of interest only. The loan balance at the end of the interest only period is the same as initially borrowed unless the borrower chose to make principal payments along the way. The loan might be for a 30 year term, with an interest only period that might run for 3 to 10 years. If the interest only period is for five years, the borrower has the benefit of lower payments in years 1-5, with a significant payment increase in the remaining 25 of the loan. This payment is higher because the loan is fully amortized over 25 years as opposed to 30 years. The interest only option might be a good choice for the buyer that plans to stay in their home for a short period of time. If the buyer anticipates a transfer in the not too distant future, they can benefit from a lower payment and qualify for a larger mortgage. Because traditional loans amortize very little in the first few years of their term, the loan balance will be not that much more with an interest only as opposed to an amortizing loan. Interest only loans are typically ARMs. Construction to Permanent Most mortgage financing plans provide only permanent financing. The lender will not usually close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made. When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling, additional financing to do the rehabilitation construction, and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. Fannie Mae and FHA both have construction-to-permanent loan products for properties with up to four living units. The FHA 203(k) program and similar conventional programs are designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property.



To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. The construction to permanent loan allows the funding of the repairs through a series of draws. A draw is an advance against a construction loan that is funded to the borrower as the construction progresses. This gives the lender some assurance that the project will be completed on budget and that the builder/remodeler will not run out of funds prior to completion. When all repairs have been completed the loan is then closed into a permanent loan. The first draw is generally for the purchase of the property. Three or more draws against the loan are taken down as work progresses on the property. This loan has somewhat higher fees because the lender must physically inspect the job as work progresses.

Chapter 3 –

Residential Appraisal


Chapter 3 – Residential Appraisal

Chapter 3: Residential Appraisal Pre-test

1. The ________ data approach is used as the best indicator of value for existing properties.

2. ____________ refers to the loss in desirability of the style, layout, or function of an element of a property over time.

3. _________ is the highest price likely to be paid for a property, assuming that the property was

available to all potential buyers at a realistic price or a reasonable length of time, and neither buyer or seller was prevented from learning all the facts about the property and its place in the market.

4. ___________ is the reasonably probable and legal use of vacant land or an improved property,

which is physically possible, appropriately supported, financially feasible and results in the highest value.

5. Types of depreciation include physical deterioration, functional obsolescence, and

____________obsolescence. Fill in the letter of the word which makes the above sentence correct.

a. Functional obsolescence b. Market c. Highest and best use d. Market value e. external



Chapter 3: Residential Appraisal An appraisal is defined as the appraiser’s estimate or opinion of value. Because lenders use appraisals to determine the market value of the property being used to collateralize the loan, they are a critical component of any transaction where financing is involved. If the borrower does not repay the loan, the lender may be forced to sell the home to recover the loan amount. This process is known as foreclosure. The lender must ensure that the home’s value is great enough to cover the loan amount plus interest and the costs of foreclosure. The loan-to-value ratio is the percentage of value that a lender is willing to finance. Lenders establish loan-to-value guidelines so that their mortgage loans will be made in a prudent manner. Since an appraiser gives an expert’s opinion of a home’s value, the lender will use it to make sure that the loan amount does not exceed the established loan-to-value ratio. For example, if the loan limits the loan-to-value ratio to a maximum of 90%, and the appraised value of the home is $100,000, then the maximum loan amount permitted under that program is $90,000. When calculating the loan-to-value ratio, the lender will use the sale price or appraised value, whichever is lower. An appraisal that is less than the sale price will generally result in:

1. Termination of the transaction 2. Reduction of the sale price by seller to match the appraised value 3. Payment of the difference between sale price and appraised value by the buyer/borrower

The seller is under no obligation to reduce the sale price to match a low appraisal, and the buyer is under no obligation to pay the excess if an appraisal comes in low. Buyers and sellers rely on appraisals to help them make good business decisions. Lenders need appraisals to ensure that they don’t approve loans for more than the property’s worth. In some cases appraisals are required by law. Sellers often find an appraisal valuable because it prevents them from offering the home at an unrealistically high or low price. Buyers, who may be acting on emotions and personal preferences rather than objective reason, need appraisals to prevent them from paying too much for the home. How Lenders Handle Appraisals For residential mortgage loan underwriters, appraisal reports normally have a shelf-life of three months. If the appraisal report is older than 3 months but less than 12 months old, most lenders will accept it as long as the appraiser can issue a re-certification letter, which states that the appraiser has reviewed current data and that the original value estimate is still valid. When the appraisal report is completed, mortgage lenders will submit it to underwriting. The underwriter will review the appraisal data to confirm that the property meets the program requirements. The underwriter will occasionally submit the report through a formal appraisal review, conducted by an in-house specialist or an independent appraiser. The goal of the appraisal review is to double-check the final value. If the appraisal review returns with a lower appraisal value, the underwriter must accept that lower value.



There are two types of appraisal reviews:

• Desk review. Most lenders, especially for conforming loan programs, conduct simple desk reviews – nominally at their desk. Such reviews simply go through a checklist of items as they analyze the appraisal report for completeness and acceptable conclusions.

• Field review. Many non-conforming lenders, especially when dealing with high-LTV loans,

will order a field review of the appraisal. An independent third-party appraiser will be contracted to review the appraisal report and then actually verify the accuracy of the data, elements and procedures used by the original appraiser.

Lite Appraisals Increasingly, many conforming lenders require and accept lighter version of the standard appraisal report for their underwriting. Instead of a full-blown appraisal report, an exterior or “drive-by” appraisal is deemed acceptable. These exterior-only appraisals do not require the research and legwork of the standard appraisal report; so the costs are usually lower. A drive-by appraisal is often requested when the buyer is highly qualified for the loan and the loan-to-value ratio is low. Principles of Residential Appraisals As mentioned earlier, an appraisal is an opinion or estimate of value. The property being appraised is referred to as the “subject property”. Residential mortgage lenders typically employ an appraiser to obtain an impartial estimate of the market value of a piece of property that will be pledged as security, or collateral, for a mortgage. Appraisers are not supposed to produce appraisal reports for the purpose of meeting specific valuation goals set by the party ordering the report. The appraiser’s estimation of value is based on their knowledge, experience, research, analysis of pertinent data, and judgment. Lenders depend on the appraiser’s judgment which is substantiated by relevant facts. Principle of Substitution At the core of appraising is a basic economic concept referred to as the principle of substitution. According to this principle, the value of a commodity is influenced by the cost of acquiring a substitute or comparable item. An informed person acting rationally would pay no more for an item than he or she would to acquire an equally desirable substitute. Therefore, the prices at which similar items are sold in a market tend to be similar, and the value of one item can be inferred from the price at which a similar item is sold. In applying the principle of substitution to real estate valuation, one assumes that buyers, acting rationally, will pay no more for one property than they would for an equally desirable, comparable property. However, certain features of real estate and the real estate market complicate how the principle of substitution applies in appraisals.

• Each parcel of real estate is unique. No two properties have identical characteristics; even those that are physically alike have different locations. The market typically reacts to such differences through variations in prices. Therefore, the value of one property cannot automatically be inferred from the prices at which other properties have been sold, no matter how similar they may be.



• Most buyers need to obtain a mortgage loan. The types, terms, and costs of available financing affect purchase decisions. For example, high interest rates mean many buyers can only afford to purchase less expensive houses. Therefore, mortgage terms affect the volume of real estate transactions and hence the supply, demand, and the price of homes.

• Only a few buyers and sellers are interested in exactly the same type of property. Emotions – such as a seller’s sentimental attachment or a buyer’s personal preferences – can have a significant effect on the supply, demand, and price for a particular type of property in a given area. For example, one person may view the “gingerbread” on a Victorian-style house as being too costly to maintain; another person may view the same ornamentation as a desirable architectural feature that adds value.

• The real estate market is heavily regulated by the government. Federal, state, county, and local regulations govern the ownership and transfer of real estate. Zoning laws often limit the use, and hence the availability, of real estate.

• Buyers and sellers in real estate markets are not always well-informed. If the parties are not fully aware of all of the applicable details, a property’s selling price may be higher or lower than if both parties to the transaction were equally well-informed.

Appraisals help overcome the difficulties of objectively estimating the value of properties. Market Value Market value is one of the most commonly misunderstood appraisal concepts. Many sellers and buyers are certain that a given property has some specific market value, and they mistakenly believe that the appraiser’s task is to discover this finite value. Because the appraisal is an estimate or opinion of value, two or more appraisers operating independently of each other will arrive at different values. This difference does not necessarily indicate that one is in error. A firm grasp of the concept of value is essential to understanding appraisal methods. The question “What is the value of the property?” is foremost in the minds of all real estate buyers, sellers, investors, and lenders. The Appraisal Standards Board of the Appraisal Foundation (a non-profit group that sets appraisal standards) defines market value as follows:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

Implicit in this definition is the consummation of a sale as of specified date and the passing of title from seller to buyer under conditions whereby:

• Buyer and seller are typically motivated. That means that neither the buyer nor the seller is under any undue pressure to buy or sell quickly

• Both parties are well informed or well advised, and acting in what they consider their best interests

• A reasonable time is allowed for exposure in the open market • Payment is made in terms of cash in United States dollars or in terms of financial arrangements

comparable thereto; and



• The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone with the sale.

Market value is the highest price likely to be paid for a property, assuming that the property was available to all potential buyers at a realistic price or a reasonable length of time, and that neither buyer nor seller was prevented from learning all of the facts about the property and its place in the market. These are, of course, ideal conditions. Seldom, if ever, do such perfect circumstances occur in one sale. For this reason, price and market value often vary. It is essential to recognize that value does not necessarily equal price. Price is the amount of money for which a particular property sold. Many factors can cause a price to rise above or fall below market value. A family might be willing to pay a premium for property located next to the home of a close relative. On the other hand, a seller might be willing to substantially reduce an asking price in order to sell immediately and obtain funds quickly to buy a home near a new job. The Appraisal Process The value of a property may be affected by social, economic, governmental, and environmental influences. An appraiser must be always aware of these influences and possible changes in them that would affect market value. The appraiser’s observations are noted on the appraisal. Appraisers are licensed or certified by the state in which they practice. Appraisers must follow a standard procedure known as the Uniform Standards of Professional Appraisal Practice (USPAP). These standards have been established by the Appraisal Standards Board (http://www.appraisalfoundation.org). Fannie Mae and Freddie Mac have been instrumental in standardizing appraisal reporting through the widespread adoption of the Uniform Residential Appraisal Report (URAR), which is known as a Fannie Mae Form 1004 or a Freddie Mac Form 70. In the business the URAR is commonly referred to as simply a “1004”. Information Collected By Appraisers The appraisal includes a large variety of information that must be read and analyzed by the loan officer or processor. The appraiser examines the property to determine its worth and to provide the lender with a risk assessment. Whether the house will be single-family, multi-unit, condominium or construction affects the type of information that the appraiser must gather, which partially explains why the appraisal for a four-unit building costs more than the appraisal for a single-family home. The appraisal will contain the market value and an analysis of the following eight data categories:

• Property & Lender information • Neighborhood description • Site description • Improvements to the site • Cost Approach Analysis (if required) • Market data analysis • Income approach analysis (if required)

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• Reconciliation of value estimates • Additional support documents

Subject Property

This first section presents information about the property, prospective borrower and lender. The homeowner should especially examine this section to confirm the appraiser’s researched information about real estate taxes, homeowner’s association dues and census tracts. Contract

The contract is generally analyzed by the appraiser. Of particular concern would be excessive financial assistance to the buyer/borrower from the seller that would call into question the value of the property. Neighborhood Information

The appraisal describes the property’s neighborhood, providing the following information:

• Location. The appraisal must label the property as (1) urban, (2) suburban or (3) rural. • Build up. A neighborhood’s level of development is measured with one of four

classifications: (1) “fully developed” means that there is little or no potential for future development; (2) “rapid” usually indicates a hot market; (3) “steady” areas are average; (4) “slow” applies to depressed areas with much potential but no action.

• Property Value Movement. The appraiser’s determination whether the property value is (1) increasing, (2) remaining stable or (3) declining.



• Demand and supply. This market indicator estimates whether (1) there is a shortage of marketable properties in the area, (2) there is a balance between the area’s supply and demand, or (3) there is an oversupply of marketable properties in the area.

• Marketing time. The appraiser verifies the area’s listings and sales records to determine how long it is taking to sell properties: (1) under 3 months; (2) between 4-6 months or (3) over 6 months. Option 3 (over 6 months) may be problematic as it indicates a slow market, which creates a drag on property values.

• Present land use. An estimate how the neighborhood’s parcels are currently improved and developed: (1) single-family, (2) properties with 2-4 units, (3) multi-family apartments, (4) commercial, (5) industrial, or (6) vacant.

• Changes in land use. The probability of the area’s land usage drastically changing in the future: (1) not likely, (2) likely, or (3) already taking place. If the report indicates options 2 or 3, some lenders may request more information to determine if those changes will affect the property’s market value.

• Predominant occupancy. An estimate of which type of occupancy is most prevalent in the area: (1) by the owner, (2) by tenants, or (3) mostly vacant. Option 3 (mostly vacant) can be bad news as it often indicates a depressed or declining neighborhood.

• Price and age ranges. The range of market values and building ages for comparable properties in the area. Obviously, the subject property’s appraised value should fall within this range.

• Description of favorable or unfavorable factors that will affect marketability. The appraiser addresses the demand for the property and provides brief reasons supporting favorable or unfavorable conditions.

• Neighborhood boundaries. The neighborhood’s geographical boundaries must be described. The appraiser will usually identify the streets or landmarks that make up the property’s boundary.

Site Description

The property’s site is described. The site appraisal section provides the following categories of information.

• Lot Dimension. The area size of the property is usually described in square feet or acres. Some lenders limit allowable site size.

• Zoning classification. The local zoning classification of the property is indicated in this entry.

• Highest and best use for the property. The appraiser should indicate that present use would be the best use for the property. There are may be exceptions which could be a problem for a lender.

45



• Utilities. The main utilities are identified; electricity, gas, water, sanitary sewer, storm

sewer, and are they public or other. The “other” entry refers to private utilities maintained by the individual or a subdivision.

• Topography. Refers to the physical features of the property. The appraisal must indicate whether it is level or sloped. This could be an issue, if landslide or flooding problems exist in the area.

• Size and Shape. The appraiser indicates that the size and shape of the property are standard or irregular as compared to the neighborhood.

• Drainage. Indicates whether the property’s drainage is adequate or inadequate. • View. If the view of the property adds or detracts from its relative market value, then the

appraisal must provide a description of the view amenity. This might include items such as lakes and golf courses

• Landscaping. The appraiser should provide a general description of the property’s landscaping.

• Driveway. Does the property have a driveway and is it adequate • Flood zone designation. The appraiser will identify if the property is located in a flood

zone and reference a federal flood map to determine property’s status. • Off-site improvements. The categories of off-site improvements consist of (1) the

street, (2) the curb and gutter, (3) the sidewalk, (4) any street-lights, and (5) the alley. The appraiser must describe the existence of any such off-site improvements, as well as whether such improvements are public or private.

• Comments. In this entry, the appraiser should describe any easements, encroachments, zoning problems, or other adverse or positive characteristics of the property being appraised.

Improvements to the Site



These improvements refer to the house and other structures build on the property.

• General descriptions. This portion provides information about the building and other improvements to the subject property lot.

• Exterior descriptions. The appraiser must indicate the material type and condition of at least the following six exterior elements of the structure: (1) foundation, (2) exterior walls, (3) roof surface, (4) gutters and down spouts, (5) window type, and (6) storm sashes.

• Description of the foundation. The condition of the basement and cellar areas may add or reduce the total value of the property. This section must describe the following items as applicable; (1) slab, (2) crawl space, (3) sump pump, (4) dampness, (5) settling of the foundation, (6) infestation, and (7) the overall condition and finish of the basement.

• Insulation. The existence of any insulation in the roof, ceiling, walls, and floor as well as the insulation’s R-rating, if known.

• Surfaces. The type and condition of the property’s interior surfaces are described. The type and condition of the floors, walls, trim and finish, bath floor, bath wainscot, and doors are reported by the appraiser.

• Heating. The property’s heating system is described: type of heater, fuel used by heating unit, and unit’s condition.

• Cooling. If the property does have some sort of cooling system, the appraiser must indicate the type (central or other), its condition.

• Kitchen equipment. The appraiser must describe and evaluate the condition of the kitchen equipment. Items such as refrigerators, range/ovens, automatic trash disposal units, dishwashers, fans/hoods above stove, compactors, washers and dryers, and microwave ovens are detailed.

• Attic. The attic is described: the type of stairs, the existence of a drop stair or scuttle the condition of the floor (whether it is finished or unfinished) and heating.

• Improvement analysis. Applicable improvements are evaluated as good, average, fair or poor.

• Car storage. The car storage features are described by the appraiser: number of cars it can accommodate; type (garage or carport); attached or detached; and evaluation of adequacy.

• Comments. The appraiser details any required repairs. The appraiser may provide any addition information as required.

Highest and Best Use A site’s value arises from its potential or actual use. The characteristics of the site itself (for example, size and topography) make certain uses possible and other impossible. Zoning regulations and deed restrictions may further limit the possible uses to only a few. Different uses of a site may result in different site values. For these reasons, the appraiser must determine the highest and best use of the site, which may be defined as follows:

• The reasonably probable and legal use of vacant land or an improved property, • Which is physically possible, appropriately supported, financially feasible and • That results in the highest value.

The concept of highest and best use is most important in an area where zoning changes occur or are possible. For example, say a dilapidated single-family home occupies a site zoned for multifamily dwellings. The appraiser must consider whether the land is appropriate for apartment development and, if so, what its value would be. If the land alone might be sold for $30,000 and rebuilt for multifamily use, then the present value of the land is $30,000, less the cost of removing the existing structure.



Assume the cost to remove the existing structure is $11,000. Therefore, the value of the property for multifamily use is only $19,000. If the property’s value in its existing condition as a home (however dilapidated) is $25,000, the property’s highest and best use would be single-family residential – at least for the time being. Three Approaches to Estimating Value After gathering all necessary data on the neighborhood, site, and improvements, the appraiser is ready to begin the third major step in the valuation process: using some or all of the three approaches to value. These three methods are the sales comparison approach, the cost approach, and the income approach. As mentioned earlier, by using three different methods of estimating value, the appraiser can use the results obtained from each as a check against the others.



Sales Comparison Approach



In Sales Comparison approach, the appraiser focuses on current market forces in the determining the subject property’s estimated value. The appraiser will gather at least three comparison sales. These comparison sales are referred to as “comparables” or “comps” in the appraisal business. Some lenders require four or more comparables. These comparables are recently sold properties of a similar type, size, quality and locale as the subject. The sales comparison approach is a standard part of all appraisal reports, and is generally considered the most reliable approach because it is based on verifiable market events. The sales comparison approach is used as the best indicator of value for existing properties. In an ideal world the appraiser would locate comparable sales that exactly match the subject property. While an exact match is not generally possible, the appraiser must select sales that are most like the subject. When there are differences between the subject property and a comparable sale, the appraiser must make adjustments to value. Note the columns in the Sales Comparison Approach section of the URAR. For each comparable sale there is an adjustment column. In this column the appraiser makes adjustments to value based upon differences between the subject and the comparable. The comparable sale may differ from the subject property because it has a superior feature. When a comparable sale has a superior feature, the appraiser must apply a negative adjustment to the sale. Consider the appraisal of a home without a fireplace. Under ideal circumstances the appraiser would select three or more comparables that have no fireplaces. If the appraiser cannot locate a suitable comparable without a fireplace, one will be used that does. The comparable is then superior to the subject because it has a fireplace. This calls for an adjustment, and in this case the comparable sale will be reduced by the appraiser’s estimate of the market value of the fireplace. The appraiser must estimate the value that the fireplace added to the sale of the comparable. This is known as “contributory value”, and is often a source of great anxiety and confusion to sellers. The appraiser might consider the contributory value of the fireplace to be $1,500 in this particular neighborhood. A common complaint from sellers is that the fireplace cannot be built for anywhere near $1,500, and this is probably true. In this case the appraiser is not interested in the cost of a fireplace; the market is the only concern at this point. In a like manner the subject may be in some way superior to a comparable sale. The subject property might have two and a half baths while a suitable comparable sale has only two. In this case the comparable sale will be adjusted upward, reflecting the appraiser’s estimate of the contributory value of the half bath. A special concern to the agent is the over-improved property. Over-improved properties often present appraisal problems. Sellers, hoping to recover their investment in the home, are often dismayed when the appraiser’s opinion of value falls far below what they have spent on improvements.



Cost Approach Analysis

The cost approach to the market value of the property considers how much a new structure of this size and type would currently cost to build. The appraiser applies current industry and market price estimates for the underlying land, building supplies and construction costs. After determining the replacement cost of the structure, the appraiser calculates a value for depreciation. Depreciation is the reduction in value of property from causes such as deterioration or obsolescence. Types of depreciation include physical deterioration, functional obsolescence and external obsolescence. The appraiser then subtracts depreciation from the new cost to determine the depreciated value of the structure. The next step in the cost approach is to add the land value to arrive at a total estimated value. The appraiser estimates the value of the land as if it were vacant. While land values may decrease in the market, land is treated as a separate item under the cost approach, and is never depreciated. Physical deterioration is the loss in a property’s value due to daily wear and tear. All properties experience this type of depreciation over time. However, with above-average maintenance and upkeep, some properties experience less physical deterioration. Examples of physical deterioration that an appraiser should note on the appraisal report include a leaky roof, a badly cracked driveway, or an overall need for repainting. Because it involves factors under the control of the property owner, physical deterioration is the easiest form of depreciation to cure. This type of deterioration can be addressed through repairs and systems replacement done by the owner or a contractor. Of special interest in a residential appraisal is the age of the improvements. The appraiser is concerned with age in two areas:

• Chronological Age – The actual age of the property in years. If the house is 20 years old, it has a chronological age of 20.

• Effective Age – The appraiser’s estimate of the age of the house based upon its on-going maintenance and upgrades. A house may be well maintained and had updates over the years. Therefore, the appraiser might determine that a 20 year old house might have an effective age of 10.

The concept of chronological age and effective age is important because of the method used to calculate Physical deterioration in residential appraisals. According to HUD, a home has a life expectancy of 60 years. Given a 60 year life, a 20 year old home would have a depreciation factor of 20/60, or 1/3.



The appraiser who deems the property maintained and upgraded sufficiently to justify an effective age of 10 years will use a depreciation factor of 10/60 or 1/6, which is one-half of the depreciation based upon chronological age.

Depreciation Based Upon Chronological Age VS Effective Age 2500 Square foot home – 20 Years Old - Replacement cost @ $75.00/ft = $187,500

Chronological Age Effective Age Replacement Cost $187,500.00 Less Depreciation: 20 years ÷ 60 = .3333 $187,500 X .3333 - 62,500.00 Depreciated Building Value 125,000.00 Add Land: + 30,000.00 Cost Approach Value $155,000.00

Replacement Cost $187,500.Less Depreciation: 10 years ÷ 60 = .1666 $187,500 X .1666 - 31,250.Depreciated Building Value 156,250.Add Land: + 30,000.Cost Approach Value $186,250.

Functional obsolescence is the loss in desirability of the style, layout, or function of an element of a property over time. For example, a residential heating system featuring steam radiators may adequately warm the rooms, but it is functionally obsolete because buyers today prefer heating methods that are less obvious and take up less space. External obsolescence refers to the loss in value of a property caused by factors outside the property itself. Such influences include the oversupply and consequent drop in demand for a particular kind of property; government actions, such as zoning changes or condemnation proceedings; and proximity to undesirable land uses, such as highways or factories. External obsolescence is sometimes referred to as environmental or economic obsolescence. Income Approach Analysis

The income approach will not be used in a typical residential transaction because it applies only to income-generating rental property. The income approach will be used when the sale is to an investor purchasing the home as a rental property. This calculation begins with a review of comparable rental rates and market values in the subject’s area. These rates are then used to compute a gross rent multiplier (GRM). The GRM is calculated as follows: The appraiser might find that, on average, properties in the area are selling at a GRM of 80, being 80 times their monthly gross rental income. If a property will potentially rent for $1500 per month, we can calculate its value as follows: $1500 X 80 = $120,000 Value This approach will also normally review current operating expenses and average market rental rates in the subject’s area.

Sales Price GRM = Gross Monthly Income



Reconciliation of the Value Estimates

This section evaluates the conclusion of the three value-appraising approaches to determine the market value of the property. Because the three approaches to value examine very different criteria, their values will be different, sometimes by a wide margin. The appraiser, faced with two or three values, must “reconcile” the differences. In this process the appraiser considers all of the factors and available information to arrive at a single appraised value. Reconciliation does not imply the use of any set formula or weighted average. Reconciliation of values is at the appraiser’s discretion, and the appraiser’s rationale will be explained in the narrative. In many cases the market data approach will be the only method used in the appraisal. The lender may or may not require a calculation of the cost approach. The primary benefit of including the cost approach is to serve as a cross-check against the value indicated in the market data approach. The lender might be concerned if the market data approach suggests that the resale value of an existing home exceeds the cost of building new, as a great difference between the two could be an indication of an “over heated” market. As mentioned earlier, the income approach is not generally used unless the home is being purchased as a rental property. Project Information for PUDs

A Planned Unit Development (PUD) is a subdivision that includes individually owned lots together with shared ownership of common facilities such as tennis courts, swimming pools, parks and greenbelts. The appraiser will make a reasonable effort to collect the information about the facilities, their percentage of completion, and who is in control of the common facilities.



Comments and conditions of appraisal







Final reconciliation

The appraiser must provide the final market valuation and sign the report. Additional Documents from the Appraiser In addition to the preceding list of analyzed categories, the appraiser will also include the following seven items in his or her report.

• Sketch of the subject building or unit. • Photographs of the property • Photographs of the comparables (properties used for comparison) • Local maps, indicating the location of subject & comparable properties • Flood maps • Rental survey (for properties that are being purchased for investment purposes) • Operating income and expense statements (for properties that are being purchased for

investment purposes) • Copy of most recent property survey, if available • Background information about the appraiser • Appraisal certification



Appraisal Factors that Affect Loan Approval The existence of certain physical factors may make the property ineligible for maximum financing. In such cases, the lender may reject the loan outright or impose a much lower loan-to-value ratio limit. Some of the factors that may cause such ineligibility include the following appraisal findings.

• Economic obsolescence • Major functional obsolescence • rural property < 25% built up (indicates a rural area with a very low population) • Buildings are not typical of the area • Items that affect the marketability or livability of the property • Any condition that affects the health or safety of an occupant

Chapter 4 –

Conventional and Government Loans


Chapter 4 – Conventional

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Chapter 4: Conventional and Government Loans Pre-test

1. A ________________ loan is a loan that is made by a lender who does not sell the loan in the secondary market.

2. A government loan insured by the _____ provides the lender with default insurance that will pay a claim to a lender in the event of default.

3. A government loan that is fully guaranteed by the US government is a _____ loan.

4. The ________ ratio compares the borrowers proposed house payment to their gross monthly income.

5. The _______ is an upfront insurance premium charged when an FHA loan is closed.

Fill in the letter of the word which makes the above sentence correct.

a) FHA b) Front c) VA d) UFMIP e) Portfolio



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Chapter 4: Conventional and Government Loans Residential mortgages are divided into two broad categories: Conventional loans and government loans. For our purposes, a government loan is either an FHA or a VA loan. All other loans are known as conventional loans and are loans that have no federal government guarantees or insurance as found in FHA or VA loans. Borrower Qualification Regardless of the type of loan, the borrower must demonstrate the ability and the willingness to make timely payments. Creditworthiness is determined in a thorough analysis of the buyer’s situation. For many years lenders have referred to the four “Cs” of good lending: Character, Capacity, Capital and Collateral: Character is a measure of the willingness of a borrower to make on-time payments. Credit character is revealed in the borrower’s credit report. Credit scores are obtained from up to three of the major credit data repositories: Experian, TransUnion and Equifax. All three of them provide credit scores on consumers using the FICO scoring system developed by Fair Isaac and Company. Not all creditors report to all three of the data repositories. Therefore, each consumer will have three different numeric scores. When a lender obtains a report from all three, they use the middle score for qualifying purposes. When they obtain two reports, they use the lower of the two scores. The borrower’s credit score has a direct impact on the loan terms that they will be offered. As a buyer’s agent it is important to understand that the buyer might be qualified for a loan, but at a higher rate than initially quoted. As the borrower’s loan is being processed the agent must realize that the lender now knows much more about the borrower’s financial picture than does the agent. In any event, the credit score will in large part determine the program to be selected (FHA, Conventional, etc) and the terms of the loan. Capacity is a measure of the borrower’s ability to repay the debt, and is demonstrated through current earnings and job stability. The lender is concerned with both the quantity of income and its stability. In determining capacity, the lender must weigh the borrower’s income against their current debt. One measure of an individual’s ability to pay is through the use of ratios. In Conventional and FHA lending, two ratios are applied. They are referred to in the industry as the “front ratio” and the “back ratio”. The front ratio is used to qualify a borrower for a loan based upon the proposed house payment and their combined gross monthly income (GMI). The house payment is the monthly payment of principal, interest, taxes and insurance (PITI). In conventional lending a front ratio of 28% is used. For FHA loans the front ratio is 31%.



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The back ratio is the ratio of the borrower’s total recurring monthly debts (such as the house payment, payments on all installment debts, monthly payments on all junior liens, alimony, car lease payments and other recurring payment obligations.

Qualification Using Ratios Gross Monthly Income: $7,500.00

FHA

Front Ratio: $7500 X .29 = $2,175.00 Back Ratio: $7,500 x .41 $3,075.00

Conventional Conforming Front Ratio: $7500 X .28 = $2,100.00 Back Ratio: $7,500 x .36 $2,700.00

We can see that the FHA borrower would qualify for a larger loan because of the more lenient qualifying ratios. The back ratios used in the above example standard guidelines.. The underwriter has some latitude in applying the ratios, and can exceed them if justified. The back ratio must not exceed 55% for FHA loans, and may not exceed 45% on conventional conforming loans. Not all borrowers will qualify for the maximum loan allowed under the ratios Both ratios will be applied, and in the above example, the FHA borrower would qualify for a $2,175 house payment (PITI) so long as the sum of the house payment plus their regular recurring obligations do not exceed $3,075. The income of the borrower is also critical. The lender will verify all sources of income and evaluate both their reliability and longevity. In qualifying for a VA loan, a substantially different system is used by the Department of Veterans Affairs. VA underwriting utilized two different methods for evaluating a borrower’s ability to pay. The primary method of evaluating a veteran's income is the residual income method. Under this method, the underwriter determines that a veteran has sufficient income to cover day-to-day living expenses after paying housing expenses, taxes, and other debts such as car payments and credit card payments. Under the residual income method, expenses are estimated based upon family size and geographic area (high cost vs. low cost). A backup method to the residual income method is the application of a 41% back ratio. The 41% ratio is not required, but is used when the residual income is less than sufficient. Capital is the sum of all assets that the borrower has accumulated. Saving accounts, investments and other assets demonstrate a level of financial responsibility on the part of the borrower. Collateral is something of value that can be pledged as security for repayment of the loan. In a residential transaction, the property being purchased is used as security for the debt. The sufficiency of collateral is determined through an appraisal of the property.



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Conventional Loans Most conventional loans are made in anticipation of their sale to investors in the secondary market. Loans that are not sold in the secondary market are called portfolio loans because the lender holds the loan in their investment portfolio. The two largest and most influential purchasers of mortgages in the secondary market are Fannie Mae and Freddie Mac. If a lender intends to sell a conventional loan to Fannie Mae or Freddie Mac, the loan must conform to their standards for purchase. Conventional loans that meet these standards are known as conventional conforming loans. Elements of a conventional conforming loan include requirements for both the borrower and the property. Additionally, the documents used in the loan package must conform to Fannie Mae/Freddie Mac standards. Fannie Mae Loan Limits The US Congress sets Fannie Mae upper loan limits for 1-4 unit properties.

# of Living Units

Maximum Original Principal Balance

for 2010

1 $417,000 Loan limits are higher in certain high-cost

2 $533,850 areas. For current limits visit fanniemae.com

3 $645,300

4 $801,950 If a residential property contains five or more living units, the sale is considered a commercial transaction.



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The Fannie Mae 1003 Application - Collecting Information During the application and processing stage, all pertinent information about the borrower is collected so the loan can be properly underwritten. The entire process will move more quickly if all required information is collected up-front. When the borrower schedules the appointment with the Loan Officer, have him or her tell the borrower what information to bring. There are a couple of methods of saving time in the application process. If the borrower has time, the Loan Officer can gather the information over the phone and run the loan through an Automated Underwriting System (AUS), thus reducing the documentation the borrower has to gather before the initial meeting. One other option is that the Loan Officer can fax an application to the borrower and have them fax it back before the appointment. The standard loan application in use is the Uniform Residential Loan Application, better known as the Fannie Mae 1003, or just simply a “1003”. Listed below are the fields that need to be completed for each section of the 1003.

I. Type of Mortgage and Terms of Loan

In this section the lender indicates the type of loan applied for and loan amount. Some additional information is included such as the note rate and term.



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II. Property Information and Purpose of Loan

In this section basic information is collected on the property and on the transaction itself. Some of this information is obtained from the borrower. Other information might be obtained from tax records or the contract:

1. Legal description 2. The year the property was built 3. Purpose of the loan. 4. Occupancy: primary residence, second home or investor property 5. Type: construction-permanent or refinance 6. How title will be held 7. The source of down payment must be listed and must be verified to show the borrower has

sufficient funds to close. Sources of down payment may include:

* Note: If the down payment is cash on hand or from a sale of assets, that money must be in the bank so that it can be verified.

• Earnest Money Deposit on Sales Contract

• Checking and Savings Accounts

• Sales Proceeds of other property • Gifts (or Grants) from a Church, Municipality or Nonprofit Organization

• Gift from Relative • Retirement Accounts

• Government Bonds • Stocks

• Trust Account • Cash-on-Hand

• Sale of Assets



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III. Borrower Information

The borrower will be asked to provide the following:

1. The full name of the primary borrower. This should be the name that was used on the contract. 2. Social security number, home phone, age of the borrower, and number of years of school

completed. 3. The marital status of the borrower. Note: Federal regulations state that borrowers are only

permitted to be asked, "Are you married, unmarried or separated?" If the borrower states he or she is unmarried, the lender cannot ask if they are single, widowed or divorced because this is a violation of the Equal Credit Opportunity Act.

4. Borrower’s present address, and if the borrower rents or owns their current residence. If the borrower has been living at their present address less than two years, they will need to provide their former addresses as well.



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IV. Employment Information

The borrower will provide the name and address of their current employer, and the number of years they have been on their current job. The lender will also want to know how long the borrower has been employed in this line of work. If the borrower has been at their current job less than 2 years, the former employment information should be included.

V. Monthly Income and Combined Housing Expense Information



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When establishing income, the borrower will need to provide proof of income in the form of W-2s and/or tax returns. Requirements are based upon program, and the lender will inform the borrower of the requirements. Income can come from many sources including:

• Salary • Wages • Overtime

• Bonus • Commissions • Pension

• Net rental income • Alimony • Child support

• Inheritance or Trust • Dividend/interest income

• Company car allowance

• Military income • Part-time job • VA benefits



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VI. Assets and Liabilities



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The lender will want to verify that the borrower has sufficient funds to pay the down payment and closing costs and has some reserves to deal with emergencies. The Cash Deposit is the amount of earnest money the borrower paid to the title company, as stated in the contract. On all checking and savings accounts the borrower should be ready to provide the name of the bank and account numbers for each account. Assets in the form of stocks and bonds should be listed with the stock name and number of shares as well as the approximate value. The current cash value and the face value of each life insurance policy should be listed for each policy, and the borrower should list any funds they have in retirement accounts. If the borrower owns their own business, they must indicate the net worth of the business. The make and year of automobiles owned and the estimated value should be provided. Other assets that would be listed would include boats, motorcycles, furniture and other personal property. All liabilities, including the name of the creditor, account number and monthly payment must be listed. Any monthly installment debts that have fewer than 10 months of payment left will not generally be counted against the borrower, but will still be listed on the 1003. However, if the borrower has a large monthly payment that would impact their ability to pay, it will be considered for qualifying purposes even if it has less than 10 months remaining. All properties that the borrower owns should be listed under the Schedule of Real Estate Owned. If the borrower received rental income it will be included and from the monthly mortgage payment.



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VII. Details of Transaction

The information listed here pulls through from the Good Faith Estimate. The final figure should be the same as the amount reflected on the Good Faith Estimate.



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VIII. Declarations

The borrower and any co-borrower must answer all of the above questions.



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Acknowledgment and Agreement

If the application was taken face to face, this information is completed. If the application was taken by mail or telephone, it is not. This section will always include the interviewer's name, signature, and date.



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Government Loans and Programs

State and Federal government agencies play a relatively minor role as direct lenders in the residential real estate market. Their role is primarily to regulate certain aspects of the industry and to encourage home ownership through loan insurance and guaranty programs.

The State of Texas plays a role in affordable housing through the Texas Department of Housing and Community Affairs (TDHCA) is the state’s agency responsible for affordable housing, housing related and community service programs, as well as the regulation of the state’s manufactured housing industry. The Department’s services address a broad spectrum of housing and community affairs issues that include low-interest mortgage financing, emergency food and shelter, rental subsidy, and energy assistance.

The mission of the Department is to serve the State’s extremely low to moderate-income populations. Funding priority is given to those populations most in need of services: extremely low, very low, and low income households and individuals. The Department accomplishes this mission by acting as a conduit for federal grant funds for housing and community services. However, because several major housing programs require the participation of private investors and private lenders, TDHCA also operates as a housing finance agency. TDHCA also serves as a financial and administrative resource that helps provide essential services and affordable housing opportunities to Texans who qualify for this assistance based on their income level. Additionally, the Department is a resource for educational materials and technical assistance for housing, housing related, and community services matters. For more information on the TDHCA and its activities visit their website at www.tdhca.state.tx.us. A significant federal law that affects lenders is the Community Reinvestment Act.This federal law was passed to insure that banks would serve the needs of the community in which they were chartered to do business. It prohibits redlining. Redlining is the practice of refusing to provide financing in a particular area because of location. The act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low-and moderate-income neighborhoods, consistent with safe and sound operations. It was enacted by the Congress in 1977, and was substantially revised in May 1995. CRA examinations are conducted by the federal agencies that are responsible for supervising depository institutions, including the Federal Reserve, Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. Texas Veteran’s Loan Program The Texas Veteran’s Land Board Housing Assistance Program is a benefit that every buyer with a military background should consider. To participate in the program, the veteran obtains an FHA, VA or conventional loan from a participating lender. The qualification process is the same for any other FHA, VA or conventional loan. The difference is that the loan is that the loan is sold to the Texas Veteran’s



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Land Board, as opposed to a secondary market purchaser such as Fannie Mae or Freddie Mac. The primary benefit to the veteran is that the rate on the Veteran’s Land Board loan is often up to one percent below prevailing market rates. For more information, visit their website at texasveterans.com. Government Loan Programs Government loans are divided into two categories: FHA and VA. FHA loans are fully insured by the Federal Housing Administration, which is a part of the Department of Housing and Urban Development (HUD). VA loans are partially guaranteed by the Department of Veterans Affairs. Both FHA and VA loans are available through participating lenders. Federal Housing Administration – FHA The Federal Housing Administration, (FHA), was established in 1934 to improve the construction and financing of housing. A part of the United States Department of Housing and Urban Development (HUD), FHA provides mortgage insurance on single-family, multifamily and manufactured homes throughout the United States and its territories.

Since its creation, FHA has had a major influence on real estate financing. Many of the mortgage loan programs which are taken for granted today were initiated by the FHA. Before FHA it was common practice to make real estate loans for short periods of time. Loans at that time tended to be shorter term interest only loan. The result was that every few years borrowers had to renegotiate loans with their lenders. This created problems particularly during the great Depression of the 1930’s. During the Great Depression lenders were not willing or able to renew loans and as a result, massive foreclosures occurred. Major loan reforms spearheaded by FHA include:

1. Fully amortized loans 2. Low down payment 3. Low interest rates 4. Mandatory collection of taxes and hazard insurance premiums in an escrow

account 5. Standards for borrower qualification

The FHA is not a lender. FHA is a mortgage insurance program that protects the lender from loss in the event of default by the borrower. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default. Loans must meet certain requirements established by FHA to qualify for insurance. FHA Mortgage Insurance Premiums Because FHA is a mortgage insurance program, premiums are paid into a pool of funds, out of which claims are paid when a borrower defaults on a loan. The cost of the mortgage insurance is passed along to the borrower in the form of a Mortgage Insurance Premium (MIP). The borrower pays two premiums, an upfront premium at closing, and an annual premium. Upfront Mortgage Insurance Premium (UFMIP): When a loan is funded, the FHA charges an upfront mortgage insurance premium (UFMIP). For home purchase (Purchase Money Mortgages), the



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rate is 2.25% of the loan amount. The UFMIP can be paid at closing or added to the loan at funding. The UFMIP can be added to the loan even if it causes the loan to exceed the appraised value of the property. Up Front Mortgage Insurance Premium (UFMIP) Sales Price/Value X LTV = Base Loan Amount Base Loan Amount X 2.25% = Up Front Mortgage Insurance Premium (UFMIP) Base Loan Amount + UFMIP = Total Loan Amount with UFMIP In our sample transaction we have the following: Sale Price $250,500 Down Payment (3.5%) -8,768 Base Loan Amount: $241,732 The loan-to-value ratio is 96.5% (100% - 3.5%). The UFMIP is 2.25% of the base loan amount: $241,732 X 2.25% = $5,438 Base Loan Amount 241,732 Add: FHA UFMIP* 5,438 Total Loan Amount $247,170 Annual Premium: The annual premium is based on the loan to value ratio (LTV), and is shown in basis points. A basis point is equal to 1/100 of a point, or 1/100 of 1% of the loan amount. The annual premium is paid on a monthly basis, and is added to the borrower’s monthly payment.

LTV Annual for Loans Greater Than 15 Years

LTV Annual for Loans Less Than/Equal to 15 Years

< 95% .5% < 90% -None- > 95% .55% > 90% .25%

The monthly MIP renewal premium applies to all FHA loans and is 0.55% of the Base Loan amount per year on a 30-year loan (0.25% on a 15-year loan) divided by 12 and added to the principle and interest monthly payment. The LTV in our sample transaction is 96.5%, and the loan is for a 30 year term. The Annual Premium will be: Base Loan Amount X 0.55% MIP / 12 months = Monthly MIP 241,732 X 0.55% = $1,329.53 The monthly payment for the annual premium will be $1,329.53 ÷ 12 = $110.79 Removal of MIP



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Effective for all FHA loans closed after January 1, 2001, the FHA annual MIP is to be automatically cancelled under the following three conditions:

1. Mortgages with terms of more than 15 years are canceled when LTV reaches 78%, provided annual MIP has been paid for at least 5 years.

2. Mortgages with terms of 15 years or less with LTV ratios 90% or higher are canceled when LTV reaches 78%.

3. Mortgages with terms of 15 years or less with LTV ratios of less than 90% are not charged annual mortgage insurance premiums.

Loan Limits FHA loan limits by property size, as follows:

One-Unit $271,050 Two-Unit $347,000 Three-Unit $419,400 Four-Unit $521,250

Areas designated as “high cost” have higher limits:

One-Unit $729,750

Two-Unit $934,200 Three-Unit $1,129,250 Four-Unit $1,403,400



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FHA Loan Programs 203b Fixed Rate Program. 10 to 30 year terms – The most commonly used FHA program 251 Adjustable Program. Available as 1,3,5,7,10 year adjustable rate. 1% /5% Caps 203k Purchase and Rehabilitation Program – Used for the rehab of 1-4 family properties 234c Condominium Program Condominium Project Eligibility. The condominium project must be on HUD's approved condominium list, which can be found at https://entp.hud.gov/idapp/html/condlook.cfm. Down payment and Maximum Mortgage Requirements An amount equal to not less than 3.5 percent of the appraised value of the property Closing costs Closing costs may not be used to help meet the minimum 3.5% down payment requirement. Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages. LTV For purchase money mortgages, the LTV is 96.5 percent, i.e., 100% - 3.5% down payment requirement. The examples that follow will use 96.5 percent and apply it to the lesser of the appraiser’s estimate of value or the adjusted sales price. The examples do not include UFMIP or closing costs to be paid by the borrower. Calculation of the maximum mortgage The maximum mortgage is calculated by applying 96.5 percent to the lesser of either a) the appraiser’s estimate of value or b) the contract price for the property minus any required adjustments. Sale Price: $218,000 Appraiser’s Estimate of Value: $220,000 Maximum Mortgage: $218,000 x 96.5% = $210,370 Down payment: $218,000 – 210,370 = $7630 In the above example, the appraiser’s estimate of value is $220,000, which is $2,000 greater than the sale price of $218,000. Because the loan amount is a maximum of 96.5% of the lesser of the sale price or appraised value, the loan amount based upon the sale price of $218,000.The upfront mortgage insurance premium can be added to the loan amount without concern for its effect on loan limits or appraised value. The example does not consider any closing costs that must be paid by the borrower.



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Seller Concessions When the seller agrees to pay some of the buyer’s expenses, we have a seller concession. Sellers are permitted to provide financing concessions up to 6 percent of the sales price.

Borrower Eligibility

Generally, FHA will insure mortgages made to individuals only. FHA will also insure mortgages made to state and local government agencies and approved nonprofit organizations.

Borrowers, Co-Borrowers and Cosigners Borrowers and Co-borrowers take title to the property and are obligated on the mortgage note and must also sign the security instrument. The co-borrower's income, assets, liabilities, and credit history are considered in determining creditworthiness. Cosigners do not hold ownership interest in a property, but are liable for repaying the obligation and must sign all documents with the exception of the security instruments. The cosigner's income, assets, liabilities, and credit history are considered in determining creditworthiness for the mortgage and the cosigner must complete and sign the loan application.

The following conditions also apply to co-borrower and cosigner eligibility:

1. A co-borrower or a cosigner may not be a party that has a financial interest in the transaction, such as the seller, builder, real estate agent, etc. Exceptions may be granted if the seller and co-borrower/cosigner is related to the owner by blood, marriage or law.

2. An individual signing the loan application must not be otherwise ineligible for participation.

3. Unless otherwise exempted (e.g., military service with overseas assignments, U.S. citizens living abroad), any non-occupying co-borrowers or cosigners must have a principal residence in the United States.

Citizenship and Immigration Status

Citizenship of the United States is not required for eligibility. When a mortgage loan applicant indicates on the loan application that he or she holds something other than U.S. citizenship, the lender must determine residency status from the documentation provided by the borrower.

Resident Aliens

For those borrowers with lawful permanent resident alien status, FHA will insure the mortgage under the same terms and conditions as U.S. citizens. FHA will also insure a mortgage made to a nonpermanent resident alien provided that the property will be the borrower's principal residence, the borrower has a valid SSN, and the borrower is eligible to work in the U.S. as evidenced by an Employment Authorization Document (EAD) issued by BCIS. Non-U.S. Citizens with no lawful residency in the U.S. are not eligible for FHA-insured mortgages.



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Borrower's Age

There is no maximum age limit for a borrower. The minimum age is the age at which the mortgage note can be enforced legally in the state or other jurisdiction in which the property is located. In Texas the minimum age would be eighteen.

Eligible Properties Single-family residences, approved HUD condo projects, PUDs, 1-4 family dwellings and rural property are eligible. Rural property is limited to 10 acres. Commercial use is not permitted and the property cannot be income producing. The land to value ratio should not exceed 30% for rural property. If the land to value ratio exceeds 30%, the relative value of the home being financed is low, making the sale more of a “land deal” as opposed to a home sale. Ineligible Properties Non-HUD approved condo projects or condo projects ineligible for approval, condotels co-ops, manufactured housing, working ranches, board and care home, earth-berm homes, commercial properties, vacant land, leaseholds, unique properties. Properties with a resale date ! 90 days following the acquisition by the seller. Borrowers are permitted to have one owner occupied loan. Exceptions to this are permitted or the following:

! Relocation ! Increase in family size ! Borrower is vacating a jointly owned property ! Borrower is a non-occupying co-borrower

Ratios

! Maximum Ratios of 31/43%. Higher ratios may be eligible with compensating factors determined by the underwriter.

Income

! Full income documentation is required on all loans with the exception of Streamline Refinances. Streamline Refinances are refinances of existing FHA loans that can be done with less documentation that would be required for a new loan. If the transaction is not a Streamline Refinance, wage earner borrowers are to provide the most recent 30 days pay stubs and the most recent two year W2’s. Self employed borrowers are to provide the most recent two years 1040’s and 1065’s, 1120S or 1120’s if applicable. If the transaction is a Streamline Refinance, income documentation is not required

Assets

! Asset documentation is required on all transactions with the exception of Streamline Refinances. If the transaction is not a Streamline Refinance, borrower to provide the most recent 60 days bank statements. If the transaction is Streamline Refinance, asset verification is not required



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! Acceptable sources of liquid assets include checking, savings, money market accounts, CD’s, stocks, mutual funds, trust funds, gift funds, cash on hand

Gift Funds

! Gift funds are acceptable and may be used for the entire down payment. Gift funds are not acceptable for reserves

! Subject must be owner occupied ! Donor must be a relative, domestic partner, or fiancé ! A gift letter is required. The letter needs to include the name, address and phone

number of the donor, the relationship to the borrowers, the amount of the gift, and no re-payment is required

! Evidence of the transfer of the gift funds from the donor to the borrower is required ! Gift funds cannot be cash on hand or be from a party related to the transaction (i.e.

agent, builder, broker, seller) Cash Reserves

! Cash reserves are not required on owner occupied, 1-2 unit properties. At underwriter’s discretion, cash reserves may be required as a compensating factor

! 3-4 unit properties require 3 months PITI in reserve ! Gift funds are not an acceptable source for reserves ! Funds borrowed against a 401K, IRA, thrift savings plan, etc., or equity in other

properties are not acceptable sources for reserves Appraisals

! A full appraisal from an FHA approved appraiser is required ! The property must have been appraised/inspected within 12 months of the date of

the note. If the appraisal is > 6months, an update of value is required ! If the appraiser determines that the property value has declined, a new appraisal is

required

Escrow Accounts

! Escrow of taxes and insurance required for all transactions regardless of LTV. Non-Allowable Closing Costs

! Tax Service Fee Department of Veteran Affairs –VA The Servicemen’s Readjustment Act, more commonly known as the GI Bill of Rights, was signed into law by President Franklin D. Roosevelt on June 22, 1944. This comprehensive program provided returning World War II service men and women with many medical benefits, educational benefits and low interest loans to help the veteran assimilate back into civilian life. Section 501 of the act provides for a real estate loan that is partially guaranteed by the Department of Veterans Affairs (VA). The VA Loan process is unlike any other mortgage loan program. The loan is a benefit that has been earned by



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the veteran for serving the United States of America. The VA’s primary interest is to help the veterans and their families. Special consideration is often extended to the veteran during the acquisition of a mortgage loan. VA Loan Guaranty VA’s loan guaranty program has benefited more than 18 million veterans and dependents. From 1944, when this program was established as part of the original GI Bill, through September 2006, VA has guaranteed more than 18.1 million home loans valued at $913 billion. In fiscal year 2006, VA guaranteed 142,726 loans valued at $24 billion.2 VA loans are made by a lender, such as a mortgage company or bank. VA's guaranty on the loan protects the lender against loss if the payments are not made, and is intended to encourage lenders to offer veterans loans with more favorable terms. This guaranty reduces the lenders risk. Should the veteran default on their payments, the lender is compensated by the VA for any losses incurred by a foreclosure up to the guaranty limit. Most lenders will lend up to four times the guaranty, for a single family home, with no down payment by the veteran purchaser. As of 2010, the maximum guaranty is 104,250. Therefore, the maximum VA loan is:

$ 104,250 X 4 = $ 417,000 Maximum VA Loan Amount Exceptions to the “No Down Payment” If the purchase price exceeds the reasonable value of the property, a down payment covering the difference must be made in cash from the borrower’s own resources. If a veteran has less than full entitlement available, a lender may require a down payment in order to meet secondary market requirements. Eligibility of a Veteran Active Duty Military A Statement of Service will be provided by the military unit, this document identifies the military personnel and lists his/her dates of entry on their current active duty period as well as how long they have served in the military. Discharged Veteran If the veteran is discharged from regular active duty after January 1, 1950, a copy of DD Form 214, Certificate of Release or Discharge from Active Duty, is required. If the veteran does not have their DD Form 214, the Standard Form 1880, Request Pertaining to Military Records, will be necessary to apply for proof of military service, regardless of whether the veteran served on regular active duty or in the selected reserves. This request form is not processed by the VA; rather, it is completed and mailed to the National Personnel Records Center (NPRC).

Department of Veterans Affairs, Houston, Texas. Houston RLC Training Guide. Revised 06/17/2009



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Who is Eligible Veterans who were discharged under conditions other than dishonorable AND who meet the service requirements are eligible for VA home loan benefits. Eligibility is additionally determined by the timeframe in which the veteran served and the number of days of active duty. Reserves / National Guard The veteran must complete a total of 6 years in the Selected Reserves or National Guard with an honorable discharge and not be otherwise eligible. Active Duty Service Personnel A member of the military who is currently serving on active duty is eligible after having served on continuous active duty for at least 181 days (90 days during the Gulf War period) unless discharged or separated from a previous qualifying period of active duty service. How to Obtain a Certificate of Eligibility (COE) The veteran completes VA Form 26-1880, Request For A Certificate Of Eligibility For VA Home Loan Benefits, along with an application that has been signed and dated. Attach a copy of DD214, Certificate of Separation from Active Duty. Active duty personnel will need to furnish a Statement of Service letter. Discharge Papers must be included with application. If not available, the veteran can obtain them by contacting their branch of service. Restoration of Entitlement To qualify for restoration of entitlement, one of the following requirements must be met:

• The prior VA loan must be paid in full and the property disposed of OR

• The prior VA loan must have been assumed by an eligible veteran who substituted his/her

entitlement.

Documents Required for Restoration

• VA Form 26-1880, completed, signed and dated by the veteran.

• Evidence that previous loan is paid in full.

• Proof of Military Service



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Eligible Loan Purposes Eligible veterans may obtain loans to:

• Buy an existing home. • Build a home. • Simultaneously purchase and improve a home. • Refinance an existing mortgage loan. • Cash-out refinance. • Convert an adjustable rate mortgage to a fixed rate. • Improve a home by installing energy-related features.

Occupancy The veteran must certify that he or she intends to personally occupy the property as his or her primary residence. Adjustable Rate Mortgages (ARMS) Traditional VA can guarantee loans made with the one-year ARM feature. The interest rate may be increased or decreased a maximum of one percent on an annual basis. The maximum increase in the interest rate over the life of the loan is 5 percent. Hybrid Adjustable Rate Mortgage

VA may also guarantee loans with the Hybrid ARM feature. The interest rate on a Hybrid ARM remains fixed for a period of at least 3 years, after which the rate can be adjusted annually. If the initial interest rate remains fixed for less than 5 years, the first rate adjustment is limited to a maximum increase or decrease of one percent and the maximum increase in the interest rate over the life of the loan is 5 percent. If the initial interest rate remains fixed for 5 years or more, the first rate adjustment is limited to a maximum increase or decrease of two percent and the maximum increase in the interest rate over the life of the loan is 6 percent. After the first rate adjustment, subsequent annual adjustments are limited to a maximum of two percent.

VA Qualification

Residual Income

VA's minimum residual incomes (balance available for family support) are a guide. They should not automatically trigger approval or rejection of a loan. Instead, consider residual income in conjunction with all other credit factors. If residual income is marginal, other indicators such as the applicant's credit history, and in particular, whether and how the applicant has previously handled similar housing expense will be considered. Consideration will also be given to the effect of the purchase on the borrower's typical monthly expenses. For example, a family purchasing in a higher priced neighborhood may feel a need to incur



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higher-than-average expenses to support a lifestyle comparable to that in their environment, whereas a substantially lower priced home purchase may not compel such expenditures. Also considered are the ages of the applicant's dependents in determining the adequacy of residual income. Debt-to-Income Ratio VA’s debt-to-income ratio is a ratio of total monthly debts' payments (housing expense, installment debts, etc.) to gross monthly income. It is a guide and, as an underwriting factor, it is secondary to the residual income. It should not automatically trigger approval or rejection of a loan. Instead, the ratio is considered in conjunction with all other credit factors. Itemized Fees and Charges The veteran may pay any or all of the following itemized fees and charges, in amounts that are reasonable and customary.

Charge Description Appraisal and Compliance Inspections

• The veteran can pay the fee of a VA appraiser and VA compliance inspectors. • The veteran can also pay for a second appraisal if he or she is requesting reconsideration of value. • The veteran cannot pay for an appraisal requested by the lender or seller for reconsideration of value. • The veteran cannot pay for appraisals requested by parties other than the veteran or lender.

Recording Fees The veteran can pay for recording fees and recording taxes or other charges incident to recordation.

Credit Report The veteran can pay for the credit report obtained by the lender. For Automated Underwriting cases, the veteran may pay the evaluation fee of $50 in lieu of the charge for a credit report. For "Refer" cases, the veteran may also pay the charge for a merged credit report, if required.

Prepaid Items The veteran can pay that portion of taxes, assessments, and similar items for the current year chargeable to the borrower and the initial deposit for the tax and insurance account.

Hazard Insurance The veteran can pay the required hazard insurance premium. This includes flood insurance, if required.

Flood Zone Determination

The veteran can pay the actual amount charged for a determination of whether a property is in a special flood hazard area, if made by a third party who guarantees the accuracy of the determination. The veteran can pay a charge for a life-of-the-loan flood determination service purchased at the time of loan origination. A fee may not be charged for a flood zone determination made by the lender or a VA appraiser.



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Whenever the charge relates to services performed by a third party, the amount paid by the borrower must be limited to the actual charge of that third party.

Lender's 1 Percent Flat Charge

In addition to the "itemized fees and charges," the lender may charge the veteran a flat charge not to exceed 1 percent of the loan amount.

The lender's flat charge is intended to cover all of the lender's costs and services which are not reimbursable as "itemized fees and charges."

Attorney's Fees

The lender may not charge the borrower for attorney's fees. Reasonable fees for title examination work and title insurance can be paid, however, by the borrower. They are allowable itemized fees and charges.

VA does not intend to prevent the veteran from seeking independent legal representation. Therefore, the veteran can independently retain an attorney and pay a fee for legal services in connection with the purchase of a home. Closing documents should clearly indicate that the attorney's fee is not being charged by the lender, but is being paid by the veteran as part of an independent arrangement with an attorney.

Title Examination and Title Insurance

The veteran may pay a fee for title examination and title insurance, if any. If the lender decides that an environmental protection lien endorsement to a title policy is needed, the cost of the endorsement may be charged to the veteran.

Special Mailing Fees for Refinancing Loans

For refinancing loans only, the veteran can pay charges for Federal Express, Express Mail, or a similar service when the saved per diem interest cost to the veteran will exceed the cost of the special handling.

VA Funding Fee Unless exempt from the fee, each veteran must pay a funding fee to VA. Mortgage Electronic Registration System (MERS) Fee

The veteran may pay a fee for MERS. MERS is a one-time fee for the purpose of electronically tracking the ownership of the beneficial interest in a loan and its servicing rights.

Survey The veteran can pay a charge for a survey, if required by the lender or veteran. Any charge for a survey in connection with a condominium loan must have the prior approval of VA.



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The 4 Percent Limit

Any seller concession or combination of concessions which exceeds 4 percent of the established reasonable value of the property is considered excessive, and unacceptable for VA-guaranteed loans.

Normal discount points and the payment of the buyer's normal closing costs are not counted in total concessions for determining whether concessions exceed the 4 percent limit. Excessive concessions would include certain allowances for repairs, and would also include excessive contributions to the purchaser’s closing costs.

VA Funding Fee

With few exceptions, the law requires that VA be paid a funding fee on guaranteed loans.

Funding Fee Tables

Purchase and Construction Loans

Type of Veteran Down Payment Percentage of Loan Amount for First Time Use

Regular Military None 5% or more (up to 10%) 10% or more

2.15% 1.50% 1.25%

Reserves/ National Guard

None 5% or more (up to 10%) 10% or more

2.4% 1.75% 1.50%

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Chapter 5 – Title and Closing

9! Copyright 2010© Champions School of Real Estate™

Chapter 5 –

Title and

Closing

Chapter 5: Title and Closing Pretest

1. Examination of the public records in Texas is the method by which __________ of real property is determined.

2. In the TREC One to Four Family Contract, the title company has 20 days from when they received the contract to deliver the _______________.

3. In Paragraph 6D of the contract, the seller has a pre-determined number of days in which to __________ to issues that they have with the commitment, exception documents and survey.

4. _______________ is the process of dividing expenses between the buyer and seller at closing.

5. The contract stipulates that the buyer should pay the sale price in ___________ at closing.

6. The _______________ section of the GFE lists charges that cannot increase in total more than

10%. Fill in the letter of the word which makes the above sentence correct.

a. Object b. Good funds c. Ownership d. Commitment e. Tolerance f. Proration


Chapter 5 –

Title and Closing

Chapter 5: Title and Closing Title companies in Texas perform many functions in a transaction, including title examination, escrow services, transaction closing and the closing of a loan. When buyers purchase a property, they want to be reasonably certain that they are “getting good title” to a property. Because of the substantial sum that the lender is loaning the borrower, they have a title concern as well. But, what is “title”, and what constitutes “good title”? Many products routinely bought and sold are conveyed by the passing of a title in the form of a written document. Trucks, cars, boats and even outboard motors come with a recordable title in Texas. This physical document is evidence of ownership, and that ownership is transferred by signing the title and passing it to the new owner. Some states have a title process known as the Torrens system. Under the Torrens system a property owner obtains a certificate much like an automobile title that is recorded in the public records. Texas does not use the Torrens system, and in Texas a purchaser of real estate does not receive a physical title. Ownership of real estate in Texas is determined by an examination of the public records. At the title company, this examination is performed by a title examiner, using their own database of county records known as an abstract plant. A deed to a property is often (and mistakenly) thought by buyers and sellers to be the same as a title. In fact, a deed is a document that conveys an interest in real estate from one party to another. However, a person’s willingness to sign a deed is not necessarily an indication that they are the legal owner of a property. History is rife with stories of land scams involving sellers who did not own the property that they were selling. Of course, most transactions do not include an element of fraud, and most sellers own the property they are placing on the market! Title issues do arise in transactions, and most of these issues can be cured (corrected) in a timely manner that does not delay a closing. Title Examination The title company will open a file (open title) upon receipt of a contract. It is imperative that the contract be delivered to the title company in a timely manner after all parties have signed.


Chapter 5 –

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The title company will begin the title examination that will be used to prepare a title commitment. A title examination is research that is done by an examiner, who is sometimes referred to as an abstractor. In examining title the examiner will look at the title history of the property described in the contract. The examination process includes building a chain of title, which is a complete title history on a property. This history will include past conveyances, most often by deed or will. The examiner will determine the ownership of the surface and mineral estate, the existence of oil and gas leases, recorded rights of way and any unreleased encumbrances such as liens and judgments. What a Title Policy Doesn’t Cover In general, a title policy won’t cover problems with title that occur after the date of the policy. It will also not protect the buyer from problems that the purchaser creates or from problems unrelated to the purchaser’s or the lender’s property interests. The policy also will not cover any special exceptions – such as a public utility easement – added by the title company during the title examination process. These exceptions must be listed in Schedule B of the policy. The company must make the purchaser aware of each exception and describe it using common language so that the purchaser can easily locate the reason for the exception in public records. In addition, a title policy generally will not cover the following promulgated exceptions found in all Texas policies:

1. Restrictive covenants limiting how the property may be used. Schedule B lists these restrictions.

2. Certain taxes and assessments. The title policy ensures that all property taxes and assessments are paid for the most current year available. However, certain tax exemptions claimed by previous owners could result in more taxes being assessed against the property in the future. The lender may ask that its mortgagee policy delete the exception for “subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership.” In such cases, the title company may require that the taxes be calculated and paid. The issue here is the possibility of there being rollback fees or other assessments that might become due because of the sale of the property.

3. Utility easements created by the dedication deed or plat for the subdivision in which the property is located.

4. Liens created as part of the financing described in Paragraph 4. That is, the policy does not cover the penalties of the purchaser’s failure to pay for the property.

5. Reservations or exceptions otherwise permitted by this contract or as may be approved by buyer in writing (for example, a reservation of all or part of the minerals).

6. The standard printed exception as to marital rights. This would relate to Homestead, community property or survivorship rights of any spouse of any insured.

7. The standard printed exception as to waters, tidelands, beaches, streams, and related matters. This exception addresses a number of issues including the rights of government entities and others to access land from the mean low tide line to the vegetation line, and issues relating to the construction of bulkheads and other improvements on waterfront properties.

8. The standard printed exception as to discrepancies, conflicts, shortages in area or boundary lines, encroachments or protrusions, or overlapping improvements. Buyer, at Buyer’s expense may have the exception amended to read, "shortages in area".

As to #8 above, the buyer may well want to have the exception removed. The removal of an exception is done by modifying the standard policy with an endorsement. This can be done if the title company is provided with a satisfactory survey of the property and the payment of a fee for the endorsement.

9!Copyright 2010© Champions School of Real Estate™

Chapter 5 –

Title and Closing

When the buyer or agent discuss financing with the mortgage broker, the broker may stipulate that the lender does not require a survey. While that may be true, the lender in many cases requires an endorsement to the title policy removing exception to areas and boundaries. If such an endorsement is required, it will trigger a requirement for an acceptable existing or new survey. Be sure to determine lender requirements early so as to avoid a last minute closing delay for want of a survey. Other items and issues not covered by a title policy include

1. Violations of building and zoning ordinances and other laws and regulations related to land use, land improvements, land division, and environmental protection.

2. Losses resulting from rights claimed by “parties in possession,” such as renters or anyone else occupying the land. If the purchaser objects to the exception, the title company may inspect the property and delete the exception from the policy. The title company may charge for the inspection.

3. Condemned land, unless a condemnation notice appeared in the public record on the policy date or the condemnation occurred before the policy date.

4. Homestead, community property, or survivorship rights of a policyholder’s spouse. Texas homestead laws address the rights of a spouse or survivors of a property owner.

In Paragraph 6B of the TREC One To Four Family Contract (Resale), the title company has 20 days in which to issue a title commitment. The title commitment is based upon the results of the title examination, and outlines the exceptions and conditions for the issuance of a title insurance policy.

Paragraph 6C addresses surveys. If the seller has an existing survey that is to be used, 6.C.(1) is checked and the seller is given a certain number of days in which to produce the survey. Note that the seller is also required to provide an affidavit (T-47) along with the survey. The survey must be acceptable to the title company and the buyer’s lender. One possible issue is that the seller’s survey WAS NOT done for the buyer, and while the buyer may rely on the survey, the buyer did not purchase it, nor did the buyer hire the surveyor. The buyer, then, may have no cause of action against the surveyor in the event the survey is incorrect.


Chapter 5 –

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The TREC 1-4 Family Contract form [Paragraph 6.A.(8)] provides that the buyer, at buyer’s expense, may have the exception for encroachments amended to read “shortages in area” only. The buyer should require that the title company delete the exception for encroachment and overlapping improvements under Schedule B.2 of the title commitment. This would at least give the buyer title coverage for any discrepancies or encroachments on the property. Paragraph 6C(1) of the contract provides that within the specified time the seller is to deliver both a copy of the existing survey and the affidavit to the buyer. To comply fully with the paragraph, the seller should deliver both items in a timely manner —preferably together. A recurring issue in this area is the seller’s failure to provide the T-47 affidavit along with the survey. If the survey is unacceptable to either the lender or the title company, Paragraph 6.C.(1) has a provision for a new survey to be obtained either at the seller’s or buyer’s expense. Paragraphs 6.C.(2) and (3) will be used if a new survey is to be obtained at either buyer’s or seller’s expense. It might be advisable to ensure that the buyer has obtained loan approval prior to paying for a survey if it is to be obtained at buyer’s expense in either 6.C.(1) or 6.C.(2).

The time allowed for objections in Paragraph 6D is often very limited, often as little as three days. Because of this limitation, the buyer must make a decision regarding title and survey issues, and may need to seek the advice of an attorney. The title commitment is divided into sections called “schedules”. Schedule A includes basic information on the property and the transaction. It would be a good idea to verify that the owner of the property listed in Schedule A is actually the seller who signed the contract, and that the legal description is correct. Schedule B lists exceptions from coverage, including the standard promulgated exceptions. It will list a number of items including easements, extraterritorial jurisdiction issues and building setbacks that are of interest. Schedule C of the commitment lists exceptions to title (items not covered by the policy). These issues range from minor issues that can be easily resolved all the way up to and including deal-killing problems that cannot be resolved in a timely manner, if ever. One of the more common issues discovered is unreleased liens that are still of record that may need to be resolved prior to closing. Other issues include judgments that have been filed, lis pendens (pending lawsuits affecting the property) and unpaid taxes or other assessments.


Chapter 5 –

Title and Closing

The buyer, seller and agents should read the commitment and discuss with the title company any curative measures that need to be taken prior to closing.

The agent should always refrain from expressing any opinion as to the quality or sufficiency of title or of the adequacy of a survey. Under no circumstances should the agent attempt to dissuade a buyer or seller from seeking legal advice from an attorney.

Owner’s and Mortgagee’s Title Policy If the transaction includes financing, the title company will issue two policies. The Owner’s policy is for the benefit of the buyer, and is in effect so long as the purchaser owns the property. The policy is written with protection to the purchaser up to the purchase price of the property. While the question of who pays for owner’s policy is negotiable, it is normally paid for by the seller. The lender’s coverage is known as the mortgagee’s title policy. It is issued in the amount of the loan, and the coverage decreases as the loan is amortized. The lender’s policy is normally paid for by the buyer.

Title Policy Premiums

The premium for a title policy is paid only once, at the closing of the sale. Title insurance premium rates are set by the Texas Department of Insurance (TDI) and are based on the property’s sale value using a sliding scale. For example, the basic premium for a $50,000 property is $503, and the basic premium for a $100,000 property is $843.

Title companies add extra charges for tax certificates and escrow fees, recording fees, and delivery expenses.

TEXAS TITLE INSURANCE PREMIUM RATES EFFECTIVE FEBRUARY 1, 2007

Policies Up To And Including

Basic Premium

Policies Up To And

Including

Basic Premium

Policies Up To And

Including

Basic Premium

Policies Up To And

Including

Basic Premium

$10,000 $229 $32,500 $383 $55,000 $536 $77,500 $690 10,500 233 33,000 386 55,500 539 78,000 694 11,000 235 33,500 390 56,000 544 78,500 698 11,500 239 34,000 393 56,500 547 79,000 702 12,000 243 34,500 397 57,000 550 79,500 703 12,500 246 35,000 400 57,500 554 80,000 707 13,000 250 35,500 404 58,000 558 80,500 711 13,500 254 36,000 407 58,500 560 81,000 715 14,000 257 36,500 410 59,000 564 81,500 717 14,500 260 37,000 413 59,500 567 82,000 721 15,000 262 37,500 417 60,000 571 82,500 725 15,500 266 38,000 421 60,500 575 83,000 729 16,000 270 38,500 425 61,000 578 83,500 731 16,500 274 39,000 427 61,500 581 84,000 734 17,000 277 39,500 431 62,000 585 84,500 739 17,500 281 40,000 434 62,500 589 85,000 742 18,000 285 40,500 438 63,000 591 85,500 745 18,500 287 41,000 440 63,500 594 86,000 748 19,000 290 41,500 445 64,000 598 86,500 752 19,500 293 42,000 448 64,500 602 87,000 756 20,000 298 42,500 452 65,000 605 87,500 759 20,500 301 43,000 454 65,500 608 88,000 762 21,000 305 43,500 458 66,000 612 88,500 766 21,500 308 44,000 461 66,500 617 89,000 770 22,000 312 44,500 465 67,000 620 89,500 772 22,500 315 45,000 469 67,500 621 90,000 775 23,000 318 45,500 472 68,000 625 90,500 779 23,500 321 46,000 475 68,500 629 91,000 783 24,000 325 46,500 479 69,000 632 91,500 787 24,500 328 47,000 481 69,500 635 92,000 789 25,000 332 47,500 485 70,000 640 92,500 793 25,500 335 48,000 489 70,500 644 93,000 797 26,000 339 48,500 493 71,000 647 93,500 801 26,500 342 49,000 496 71,500 649 94,000 802 27,000 345 49,500 499 72,000 652 94,500 806 27,500 348 50,000 503 72,500 656 95,000 811 28,000 352 50,500 506 73,000 660 95,500 814 28,500 355 51,000 508 73,500 663 96,000 816 29,000 359 51,500 512 74,000 667 96,500 820 29,500 362 52,000 516 74,500 671 97,000 824 30,000 366 52,500 520 75,000 674 97,500 828 30,500 369 53,000 523 75,500 676 98,000 830 31,000 373 53,500 527 76,000 680 98,500 834 31,500 376 54,000 530 76,500 683 99,000 838 32,000 379 54,500 533 77,000 687 99,500 841

100,000 843

Chapter 5 – Title and

Closing


Chapter 5 –

Title and Closing

Premiums are calculated as follows for policies in excess of $100,000:

1. For policies of $100,001 - $1,000,000 Basic Premium (1) Subtract $100,000 from policy amount. (2) Multiply result in 1(1) by $.00534 and round to nearest whole dollar. (3) Add $843 to result in 1(2).

4. For policies of $15,000,001 - $25,000,000 Basic Premium (1) Subtract $15,000,000 from policy amount. (2) Multiply result in 4(1) by $.00257 and round to nearest whole dollar. (3) Add $59,409 to result in 4(2).

2. For Policies of $1,000,001 - $5,000,000 Basic Premium (1) Subtract $1,000,000 from policy amount. (2) Multiply result in 2(1) by $.00439 and round to nearest whole dollar. (3) Add $5,649 to result in 2(2).

5. For policies in excess of $25,000,000 Basic Premium (1) Subtract $25,000,000 from policy amount. (2) Multiply result in 5(1) by $.00154 and round to nearest whole dollar. (3) Add $85,109 to result in 5(2).

3. For policies of $5,000,001 - $15,000,000 Basic Premium (1) Subtract $5,000,000 from policy amount. (2) Multiply result in 3(1) by $.00362 and round to nearest whole dollar. (3) Add $23,209 to result in 3(2).

What a Title Policy Covers If someone claims an interest in the purchaser’s property, a title company will defend the title in court and pay for any actual loss under these circumstances:

• A lien is filed against the title because a previous owner failed to pay o a mortgage or deed of trust o a judgment, tax, or special assessment o a charge by a homeowners or condominium association

• There is a lien on the property for labor and materials furnished by a contractor without the purchaser’s consent. Generally, the policy protects the purchaser if they buy a house already built, but not if the purchaser owns the land and contracts with a builder to build their home.

• There are other liens or claims that aren’t listed in the policy exceptions. • Leases, contracts, or options that were not recorded in the public records and disclosed to the

purchaser. • The title policy failed to disclose legal restrictions on how the property can be used. • There is an easement that isn’t in public records and that the purchaser does not know about.

The title policy assures the purchaser a legal right of access to the property • Someone didn’t properly sign a document in the chain of title, or a notary public made an error

on the document, made an error in recording the document at the county clerk’s office, or failed to deliver the deed according to statutory requirements.

• A deed or other document in the chain of title is invalid as a result of forgery, fraud against the rightful owner, a signature given under force, or a signature given by a person legally incompetent to sign or claiming to be someone else.

An additional service provided by title companies is the handling of escrow. Buyers typically offer earnest money that is held by the title company. Lenders release loan funds to title companies with instructions for their disbursement after closing. They also must deal with disputes between parties when conflicting demand is made for the release of earnest money.

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!8 Copyright 2010© Champions School of Real Estate™

Chapter 5 –

Title and Closing

When all requirements have been met under the contract, the parties are ready to close. Because the closing date in the contract is an “on or before” date, closing can be scheduled when all parties are ready and the loan is ready to be funded. The closing might be done with all parties at the same time. Some agents prefer to schedule separate closings for the seller and the buyer. Regardless, agents should attend the closing and be prepared to answer questions raised by their clients. Under RESPA rules residential closings must be performed using the standard HUD-1 closing statement. Let’s take a close look at the HUD-1, which is based upon the GFE in Chapter 2.

The first section of the HUD-1 includes the identification of the borrower, seller and the property being sold. It also identifies the type of loan.

At closing a wide variety of fees will be collected from both the buyer and seller, and certain expenses will be prorated between the parties. Proration is the process of dividing expenses such as property taxes and HOA fees between the buyer and seller.

99Copyright 2010© Champions School of Real Estate™

Chapter 5 –

Title and Closing

100. Gross Amount due from Borrower Line 101: The contract sale price is the sale price from the contract (Paragraph 3C in the One to Four Family Contract). If the contract sale price includes any tangible personal property value included, the personal property value will be deducted and added back in line 102 (rare). Line 103: Entered here will be the settlement charges to be paid by the borrower. The settlement charges are totaled in line 1400. Adjustment for items paid by seller in advance Lines 106-107: If the seller had already paid the taxes for 2010, we would see an entry here for tax proration. Property taxes are paid on a calendar year basis from January 1 through December 31, and become due at the end of the year. If we were closing near the end of the year and the seller had paid the property taxes for the year, and adjustment would appear in line 106. In this case, the sale is closing on October 8, 2010, and no taxes have been paid for 2010 by the seller. Line 108: Assessments are most often homeowner association(HOA) fees. HOA fees are typically paid at the beginning of the year for the current year. The seller probably paid the HOA fee for 2010 back in January. Because the buyer is taking possession of the home on October 9, the seller will be refunded the HOA fee for the remainder of the year. The seller generally is charged through the day of closing, so the seller is due a refund of $134.25, which represents the HOA fee from the day after closing through the end of the year. Note the entry for the proration. Line 108 is called a debit – a charge to the buyer. Look across to the seller’s column, and you will see a credit in the same amount in line 408. When a party to a transaction is charged for an item on the HUD-1 it is a debit. When they are the recipient of funds it is a credit. Line 120: Gross Amount Due from Borrower is the sum of line 101-112. In this sale the borrower/buyer must pay the agreed sale price, settlement charges, and HOA fees for the remainder of the year. 400. Gross Amount Due to Seller Line 401: The seller is due the agreed to sale price, which comes from the contract. Adjustments for items paid by seller in advance Lines 406-407: As mentioned above, the seller would receive a credit had they already paid the property taxes for the tax year 2010. Line 408: As discussed above, the seller is receiving a credit for HOA fees from the day after closing through the end of the year. Line 420: Gross Amount Due to Seller is the sum of lines 401-412. In this case we only had one adjustment, so the seller is due the contract sale price plus a refund of their HOA fee.


Chapter 5 –

Title and Closing

200. Amount Paid by or in Behalf of Borrower In this section we begin adding up what has or will be paid in behalf of borrower. These payments reduce the amount of cash that the borrower needs to bring to closing. Line 201: When the buyer and seller entered into a contract, the buyer provided earnest money, which was deposited with the title company. That earnest money has been “waiting” for the closing, and shows up as a credit to the buyer. Line 202: The buyer is borrowing $247,170 for the purchase for the home. The loan amount is shown as a credit to by buyer’s purchase. Lines 206-208: When the borrower obtained a Good Faith Estimate (GFE) from their lender, a number of items related to the closing were shown in the GFE as buyer-paid items. For example, the GFE indicated that the buyer was paying for the Owners Title Policy, in spite of the fact that sellers typically pay for it. The notion that the buyer was paying for the title policy was even carried forward from the GFE to the HUD-1 on line 1109 as a buyer charge. In line 207 we are correcting the discrepancy by giving a credit in the amount of $1,647 to the buyer. Now look across to the seller’s column and see the corresponding debit in line 507. The credits in lines 206 and 208 correct the same error. This built-in error is not the doing of the lender or title company, but is a result of recent changes in federal law mandating the use of a new HUD-1 and GFE. These new forms became mandatory on January 1, 2010. 500. Reductions in Amount Due to Seller Line 501: This line is rarely used, but would be used if the seller’s real estate broker or some other outside party who is not the settlement agent has received and holds a deposit against the sales price (earnest money) which exceeds the fee or commission owed to that party. Line 502: is used to record the sum of seller charges that are totaled on line 1400. Line 503: is a debit to the seller if the buyer is assuming the seller’s existing mortgage loan. Lines 504-505: These are used when the seller has an existing first or second mortgage that is being paid off at closing. These debits will include the seller’s outstanding loan balance plus charges for accrued interest. Lines 506-508: Again we have the correction from the GFE discussed in line 207 (above).


Chapter 5 –

Title and Closing

Adjustments for items unpaid by seller

Line 213: Here we have the proration of taxes between the buyer and seller through the day of closing. Property taxes are paid on a calendar year basis from January 1 through December 31. This sale is closing on October 8, 2010. The seller has been in the home from January 1 through the closing date. The purchaser will be obligated to pay taxes for the entire year when they become due in December. In this case they chose to enter the sum of the taxes in line 213 rather than lines 210 and 211. Line 213 is a credit to the buyer. Look across to line 513, and you can see the corresponding debit to the seller.

Line 300-303: These are summary lines for the borrower’s transaction. Line 303 indicates the cash due from or to the borrower. In most cases the borrower will need to bring cash (good funds – cashier’s check or wire transfer) to closing. The cash to borrower box will be checked if the borrower’s earnest money deposit exceeds the amount due. The cash to borrower box would also be checked in a cash-out refinance.

Lines 700-704: Total broker fees are enumerated here.


Chapter 5 –

Title and Closing

800. Items Payable in Connection with Loan Line 801: “Our origination charge” comes from the GFE, and includes all charges received by the loan originator, except for any charges for the specific interest rate chosen (points). Notice that this charge is not listed in either the buyer’s or the seller’s column. This line must include any amounts received for origination services, including administrative and processing fees, performed by or on behalf of the loan originator. Line 802: “Your credit or charge (points) for the specific interest rate chosen,” states the charge or credit adjustment as applied to “Our origination charge”, if applicable. This number is not listed in either the borrower’s or seller’s column. For a mortgage broker originating a loan in its own name, the amount shown on Line 802 will be the difference between the initial loan amount and the total payment to the mortgage broker from the lender. The total payment to the mortgage broker will be the sum of the price paid for the loan by the lender and any other payments to the mortgage broker from the lender, including any payments based on the loan amount or loan terms, and any flat rate payments. For a mortgage broker originating a loan in another entity’s name, the amount shown on Line 802 will be the sum of all payments to the mortgage broker from the lender, including any payments based on the loan amount or loan terms, and any flat rate payments. In either case, when the amount paid to the mortgage broker exceeds the initial loan amount, there is a credit to the borrower and it is entered as a negative amount. When the initial loan amount exceeds the amount paid to the mortgage broker, there is a charge to the borrower and it is entered as a positive amount. For a lender, the amount shown on Line 802 may include any credit or charge (points) to the borrower. Line 803: “Your adjusted origination charges,” states the net amount of the loan origination charges, the sum of the amounts shown in Lines 801 and 802. This amount must be listed in the columns as either a positive number (for example, where the origination charge shown in Line 801 exceeds any credit for the interest rate shown in Line 802), or as a negative number (for example, where the credit for the interest rate shown in Line 802 exceeds the origination charges shown in Line 801). Lines 804-808: These lines are used for items found in the “Required services that we select” section of the GFE. Each provider must be identified by name and the amount paid recorded either inside the columns area as paid at closing, or outside of the columns if the payment was made outside of closing (POC).


Chapter 5 –

Title and Closing

900. Items Required by Lender to be Paid in Advance Line 901: If interest is collected at closing an entry will be made here. The interest collected at closing will be a calculation of daily interest from closing to the date for which interest will be collected from the first regular monthly payment. Line 902: If mortgage insurance premiums are due at closing, they will be entered here. This would include any monthly mortgage insurance premiums and any upfront premiums. In this case we have a charge for the FHA Upfront Mortgage Insurance Premium (UFMIP). Line 902 would not include any collection of mortgage insurance premiums in the reserve account. These would be listed in line 1003. Line 903: The lender will require the prepayment of homeowner’s insurance for one year. This line does not include collection of homeowner’s insurance for reserve accounts, which will be listed in line 1002.

1000. Reserves Deposited with Lender Line 1001: The initial escrow deposit is brought over from the GFE, and should equal the sum of lines 1002-1007. Line 1002: The lender generally requires the escrow of taxes and insurance (hazard, flood, etc.). Line 1002 is the initial deposit for insurance. The amount of the initial deposit varies depending on the circumstances. The lender wants to be certain that there will be sufficient funds in the escrow account when the policy must be renewed in a year. This transaction is closing on October 9, 2010. In line 903 we see that the borrower paid for one year of hazard insurance. This new policy will expire on October 8, 2011, and the lender will receive an invoice for the insurance premium in September. The borrower’s first payment, which will be due on December 1, 2010, will include insurance escrow equal to 1/12 of the annual premium. When the insurance bill arrives in September, the borrower will have paid nine or ten monthly payments, which is not sufficient to pay for the renewal of a one year policy. Therefore, the lender collects a number of months in advance at closing to ensure that there will be sufficient funds to pay the renewal. Line 1003: Because this is an FHA loan, the borrower must pay an annual mortgage insurance premium (MIP). The monthly payment includes 1/12 of the annual premium, and the lender will collect two months cushion at closing. Line 1004: Similar to insurance, the lender wants to ensure that there are sufficient funds when taxes become due. In this case the lender is collecting 12 months worth of taxes. Property taxes for the year become due at the end of the calendar year. Therefore, in December, the lender will pay property taxes for a full year. Of course, at that time the borrower will have only made one monthly payment. It is important to note that the 13 months of taxes is not entirely out of pocket for the borrower. In line 213 we credited the buyer with $4,080.33 for taxes unpaid by the seller from 1/9/09 to 10/09/09.


Chapter 5 –

Title and Closing

Line 1007. The Aggregate Adjustment is an accounting function that recognizes that, when the lender uses line item accounting to determine the initial escrow deposit, the calculation results in the collection of too much money under RESPA guidelines. This results in an overage in the escrow account. This overage occurs because lenders make payments out of the escrow account at various time throughout the year, and will schedule these payments to take advantage of discounts or to avoid penalties. The timing of payments out of the account results in the account having too large a balance or “cushion” at times. In aggregate accounting, the lender projects collections from the borrower as they make monthly PITI payments into the account, and expenses as they pay out of the account for taxes and insurance as they become due. This analysis of the account is known as a trial balance, and the lender can see at what point the account will approach a zero balance. They then make adjustments for the acceptable “cushion” allowed under RESPA, and calculate the aggregate adjustment, which is almost always a negative number. In other words, the line item accounting collects too much from the borrower and the aggregate accounting corrects the overage.

1100. Title Charges include amounts collected for expenses paid to attorneys and settlement agents. Included would be charges for work performed by the title company and others, including fees directly related to the transfer of title such as title examination, title search and document preparation. This section would also include fees for the title insurance policy and fees for conducting the closing (escrow fee). Line 1101: This is taken directly from the borrower’s Good Faith Estimate. Line 1102: The closing fee is commonly referred to as the escrow fee, and is a fee charged by the title company for conducting the closing. Notice that it is not in either column, but is listed to the left. This is because the $600 escrow fee is included in line 1101. However, the confusion does not end here. It is customary that the buyer and the seller split the escrow fee equally. The rules for completing the GFE and HUD-1 do not recognize or allow for this fact, and require that the entire charge be shown as a charge to the buyer. So, as to line 1101, we have included in this number a $600 charge, half of which is being paid by the seller. This error is recognized and corrected in lines 208 and 508 where we find a debit to the seller and a credit to the buyer of $300. Line 1103: The Owner’s Title Insurance policy premium is generally paid by the seller. Once again we have a conflict between GFE/HUD-1 and the reality of the transaction. Per the requirements of the GFE, it is listed here as a charge to the buyer. The discrepancy is corrected in lines 207 and 507 with a debit to the seller and a credit to the buyer of $1,629.00. Line 1104: The lenders (mortgagee’s) title insurance policy is normally paid for by the buyer. It is not listed in the buyer’s column because it is included the line 1101.


Chapter 5 –

Title and Closing

Lines 1105-1106: These lines display the dollar amount of the owner’s and lender’s coverage, respectively. They are not entered in the buyer’s or seller’s column. Lines 1108-1108: This area shows the portion of the total title insurance premiums (including any endorsements) retained by the title agent and the underwriter. These figures are never entered in the buyer’s or seller’s columns. Lines 1109-1111: Title related expenses paid to third parties would be listed here. The name of the provider and the service provided must be listed.

1200. Government Recording and Transfer Charges Line 1201: Total recording charges are taken directly from the GFE. Line 1201: The recording charge for the deed and the mortgage are listed here. Charges for recording are based upon the number of pages in the recorded document. These fees are not listed in the buyer’s or seller’s column because they are included in line 1201. Lines 1202-1205: Not used in Texas.

1300. Additional Settlement Charges Line 1301: This is taken from the GFE. Line 1302: The survey charge of $378.00 is included in line 1301 and is therefore listed outside of the columns. Line 1304: The seller agreed to pay for a one-year home warranty, and is charged here in the amount of $490.00. Line 1305: The seller is paying $100.00 for a resale certificate. The resale certificate includes all the legally required HOA disclosures as well as a copy of the deed restrictions for the buyer. It protects the seller from later claims by the buyer that the seller did not disclose any of a range of HOA-related issues. The resale certificate also notes any outstanding unapproved structures or modifications as well as any outstanding account balance due the association.


Chapter 5 –

Title and Closing

1400. Total Settlement Charges is the sum of all items in the buyer’s and seller’s columns. Comparison of HUD-1 and GFE The comparison chart is prepared using the exact information and amounts from the GFE and the actual settlement charges shown on the HUD-1. The comparison chart is comprised of three sections: “Charges That Cannot Increase”, Charges That Cannot Increase More Than 10%:, and “Charges That Can Change”. Charges That Cannot Increase g

The amounts shown in Blocks 1 and 2, in Line A, and in Block 8 of the borrower’s GFE are entered in the appropriate line in the Good Faith Estimate column. The amounts shown on lines 801, 802,803 and 1203 of the HUD-1 are entered in the corresponding line in the HUD-1 column. In our example there is no discrepancy between the GFE and the HUD-1. Charges That In Total Cannot Increase More Than 10% g

A description of each charge from Blocks 3 and 7 on the borrower’s GFE is entered on separate lines. This would include the amount shown the borrower’s GFE for which the loan originator selected the provider or for which the borrower selected a provider identified by the loan originator. A description is entered on a separate line in this section, with the amount shown on the borrower’s GFE for each charged entered in the corresponding line in the GFE column. The amounts shown in the GFE and HUD-1 for this section must be separately totaled and entered in the designated line. If the total for the HUD-1 column is greater than the total for the GFE column, the amount of increase is entered both as a dollar amount and as a percentage in the appropriate line. In our example, only one charge came in high – government recording charges. While the increase from $86.00 to $104.00 exceeds 10%, we have no problem because the 10% rule applies to the total of this section. In total the increase is only .72%, which is well within the 10% tolerance.


Chapter 5 –

Title and Closing

Charges That Can Change g g

The amounts entered in Blocks 9, 10 and 11 on the GFE are entered in the appropriate blanks in the GFE column. Third party settlement services for which the borrower selected a provider other than one identified by the lender will be listed in this section. The amounts shown on the HUD-1 for each charge in this section are entered in the appropriate blanks in the HUD-1 column. Loan Terms

Because the title company does not analyze loan documents, this section is completed based upon information provided by the lender. This final comparison allows the buyer to ensure that the terms that they are getting are what was quoted in the GFE.

Chapter 6 –

Property Condition and Inspections


Chapter 6 –

Property Condition and

Inspections

Chapter 6: Property Condition and Inspections Pretest

1. Pursuant to Paragraph 7(D) of the One to Four Family Contract, all purchases are ___________.

2. The option fee described in Paragraph 23 must be paid directly to the seller or to the seller’s

__________.

3. If the buyer needs additional time for an option, they should obtain an ___________________

4. ________ issues licenses and sets minimum standards for home inspectors in Texas.

5. A ___________ is an assessment that a purchaser might obtain if they were concerned about

the energy efficiency of a home. Fill in the letter of the word which makes the above sentence correct.

a. HERS Rating b. Extension c. TREC d. “As is” e. Broker


Chapter 6 –


Inspections

Chapter 6: Property Condition and Inspections Inspections are a critical component of any home purchase. Buyers are strongly encouraged to obtain inspections during the option period, and to do a final walk-through inspection prior to closing. In Paragraph 7(D) of the TREC Promulgated One to Four Family Contract (Resale), the purchaser acknowledges that they are purchasing the property in its present condition. That would appear to make all sales “as is”. This is often a great concern of the buyer.

In Paragraph 7.D.(1) the buyer accepts the property without any specific requirements from the seller. If Paragraph 7.D.(2) is checked, the buyer is stipulating some repair, or might be restating a seller promise. Remember, because this contract is completed when the buyer makes an initial offer, this section must be filled out without the benefit of having performed any inspections. Therefore, if used, the items stipulated in 7.D.(2) would most often be items that the buyer noticed that they want repaired before closing. If 7.D.(2) is used, be specific, and avoid the insertion of open-ended statements such as “anything found in the inspection report” or other such broad statements that would seem to put no limit on the seller’s obligation to do repairs. Some buyers will object to the purchase of a property in its “as is” condition. The use of the option period Paragraph 23 makes the “as is” purchase palatable to buyers. The option gives the buyer the unrestricted right to terminate the contract and receive a refund of their earnest money if proper notice is given during the option period.

While Paragraph 23 makes no mention of inspections and other matters, this is the period in which the purchaser makes a decision to proceed with or terminate the transaction.


Chapter 6 –


Inspections

The option period should be of sufficient length to give the buyer time to obtain their inspection reports. The initial inspection might have observations in it that require additional inspections. For example, if the inspection report suggests settling in the foundation, the buyer might want to obtain a foundation inspection. Other specific inspections may be needed for HVAC systems or pools and spas. The option fee specified in Paragraph 23 is often a “token fee”, and is subject to negotiation. It is important that the fee be paid because it is the consideration for the option. The fee can be paid to the seller, or can be received on behalf of the seller by the listing broker. The fee must be paid within two days of the effective date of the contract. The fee will or will not be credited to the sales price at closing. The box crediting the option fee to the sales price at closing is most often selected, if for no other reason than the fact that the contract is drafted by the buyer’s agent. The fee should not be paid to a third party such as a title company. If the fee is not paid directly to the seller or listing broker there is a risk that the buyer will not have a valid option. The buyer must understand that the fee is consideration for the seller’s grant to them of the right to terminate. If the buyer elects to terminate, the earnest money will be refunded, but the option fee will not. Time is of the essence. Strict compliance with the time is required. If the buyer has a 10 day option, the period begins the day after the effective date of the contract and terminates at the end of the 10th day. If the buyer fails to exercise their termination option, the earnest money goes “hard”. The buyer then runs the risk of losing their earnest money if they later try to terminate the transaction without cause under the contract.


Chapter 6 –


Inspections

If the buyer needs additional time they must negotiate a new option with the seller, and the buyer’s agent should contact the listing agent and request more time. Of course, the seller is under no obligation to grant such a request. If the seller grants an extension of time, the agents must commit the extension to writing. An additional option fee must be paid as consideration for the extension. In too many cases agents discuss and agree to amendments verbally and fail to commit the changes to writing. Failure to do so can lead to misunderstanding that might jeopardize the transaction or even result in litigation. The buyer’s agent should monitor the option date with great care and do their best to have their buyer ready to make an informed decision as the expiration date nears.


Chapter 6 –


Inspections

Buyers are strongly urged to obtain a formal inspection done by a licensed inspector. In Texas inspectors are licensed through and regulated by the Texas Real Estate Commission (TREC). The general public shares many misconceptions when it comes to inspections and their scope. A home inspection is not a warranty. An inspection is defined as the process of looking at and examining accessible items, parts, systems, or components and the reporting of observed deficiencies. A real estate inspection is a limited visual survey and basic operation of the systems and components of a building using normal controls and does not require the use of specialized tools or procedures. The purpose of the inspection is to provide the client with information regarding the general condition of the residence at the time of inspection. The State of Texas publishes minimum standards for home inspections. Inspectors may provide a higher level of inspection performance than required by these standards of practice and may inspect parts, components, and systems in addition to those described by the standards of practice.

The inspector will prepare a written inspection report noting observed deficiencies and other items required to be reported. The report will be delivered to the person for whom the inspection was performed. The report should be passed directly to the buyer. The agent must refrain from giving their opinion of the condition of the property or the validity of any findings in the report The inspector will inspect items that are deemed by the inspector to be accessible. The inspector is under no obligation to inspect items that would involve an undue hazard to the inspector. They will not move moving furnishings or large, heavy, or fragile objects. When confronted with doors or access panels, many inspectors define “accessible” as any area that can be reached without the use of tools, and will not disassemble items other than covers or panels intended to be removed for inspection. Certainly any attempt to access an area that would result in damage to property would be out of the question. As a rule most inspectors will avoid the use of a ladder other than when gaining access to the roof or attic space. An inspection does not address cosmetic issues that are not related to structural performance, operability, or water penetration. The inspection report will cite certain deficiencies. A deficiency is a condition that, in the inspector's reasonable opinion, adversely and materially affects the performance of a system or component or constitutes a hazard to life, limb, or property. General deficiencies include but are not limited to inoperability, material distress, water penetration, damage, deterioration, missing parts, and unsuitable installation. In a standard home inspection, there is no assumption that the inspector will use specialized tools and their related procedures such as thermal imaging equipment, moisture meters, and gas leak detection

NOTE: The following discussion is a general description of the inspection process and some of the standards of practice followed in Texas, and is included here for reference only. It is not meant to be an exhaustive discussion of the inspection process or of the standards of practice. Much of the terminology that follows is of a technical nature that might only be understood by licensed inspectors or contractors. Agents are reminded that they should never become the “middleman” interpreter of the results of an inspection.


Chapter 6 –


Inspections

equipment. Likewise, environmental testing equipment and devices, elevation determination devices, and ladders capable of reaching surfaces over one story above ground surfaces would not be used. General Requirements

The inspector will operate fixed or installed equipment and appliances in at least one mode with ordinary controls at typical settings and visually inspect accessible systems or components from near proximity to the systems and components, and from the interior of the attic and crawl spaces. The inspector is not required to inspect:

1. Items other than those listed in the TREC Standards of Practice 2. Elevators 3. Detached structures, decks, docks, fences, or waterfront structures or equipment 4. Anything buried, hidden, latent, or concealed 5. Automated or programmable control systems, automatic shut-off, photoelectric sensors, timers,

clocks, metering devices, signal lights, lightning arrestor system, remote controls, security or data distribution systems, or solar panels

The inspector is generally not a pest inspector. Therefore, the inspection will not address the presence or absence of pests, termites, or other wood-destroying insects or organisms. Likewise, the inspection is not an environmental assessment, and the report will not address the presence, absence, or risk of asbestos, lead-based paint, mold, mildew, or any other environmental hazard. The following is a brief discussion of the major areas addressed in a typical home inspection. PLUMBING The inspector will report the static water pressure, location of the water meter, and the location of main. In the inspection report the inspector notes the following deficiencies or conditions:

There are specific limitations when inspecting plumbing systems. The inspector is not required to operate any main, branch, or shut-off valves and will not operate or inspect sump pumps or waste ejector pumps. Plumbing items that are not required to be inspected or reported include: • Any system that has

been winterized • Any system that has

been shut down or secured

• Free-standing appliances

• Solar water heating systems

• Water Filter systems • Private water supply systems

• Water wells • Pressure tanks • Sprinkler systems

• The lack of fixture shut-off valves • Active leaks • Lack of dielectric unions, when applicable • Low or high water pressure • Deficient water supply pipes and waste pipes • Installation and termination of

the vent system • Sufficiency of water supply • Functional drainage at fixtures • Orientation of hot and cold faucets • Mechanical drain stops • Installation, condition, and operation of

commodes • Fixtures, showers, tubs, and

enclosures • Condition of the gas distribution system • Water supply valve


Chapter 6 –


Inspections

• Fire sprinkler systems

• Clothes washing drains or floor drains

• Circulating pumps • Effectiveness of

backflow or anti-siphon devices

• Swimming pools • Quality, potability,

or volume of the water supply

When inspecting water heaters, the inspector will report as deficient units that are inoperative and units that have leaking or corroded fittings or tanks. Other issues that might be reported include the lack of a cold water shut-off valve, an unsafe location, or the lack of a properly installed pan and drain system. The water heater must be in a location that is safe, appropriate and that has adequate access and clearances. Operationally, the inspector will verify that the water heater has a pressure and temperature relief valve that operates manually and that does not exhibit leaks, damage corrosion or an improper location. For gas and electric units the inspector will report deficiencies in areas such as heating elements, conductors, gas leaks, and shut-off valves. For gas units, deficiencies in combustion and dilution air will be reported, as well as the vent pipe, draft hood, draft, proximity to combustibles, and vent termination point and clearances. ELECTRICAL The inspector reports issues with the grounding system, service entrance, and electrical cabinets. Cabinets and boxes that are not properly secured to the structure are noted, as are boxes that are not appropriate for their location or have deficiencies in clearances and accessibility. Electrical deficiencies noted would include:

• Conductors not protected from the sharp edges of boxes

• Failure of operation of installed arc-fault circuit interrupter devices.

• Deficiencies in the type and condition of the wiring

• Deficiencies in the compatibility of overcurrent devices and conductors

• Panel installed a hazardous location • Lack of a main disconnecting means • Lack of required arc-fault circuit

interrupting devices

There are specific limitations for service entrance and panels. The inspector is not required to inspect or report on the following:

• Determination of the present or

future sufficiency of service capacity amperage, voltage, or the capacity of the electrical system

• Test arc-fault circuit interrupter devices when the property is occupied or damage to personal property may result, in the inspector's reasonable judgment

• Voltage drop calculations • Verify the effectiveness of overcurrent devices

• Operate overcurrent devices. The inspector will report the type of branch circuit conductors and manually test the accessible smoke alarms by use of the manufacturer's approved test or by the use of canned smoke and report deficient or missing ground-fault circuit interrupter protection in bathroom, garage, and outdoor receptacles.


Chapter 6 –


Inspections

APPLIANCES

• splash guard • door gasket

• control and control panels • exterior casing

• dish racks • grinding components

• rollers • spray arms • soap dispenser • door springs • dryer element • door latch • rinse cap • secure mounting of the unit • backflow prevention

• secure mounting of the unit

Dishwasher. The inspector shall report as Deficient inoperative unit(s), rust on the interior of the cabinet or components, failure to drain properly, the presence of active water leaks, and deficiencies in the following areas: Food waste disposer. The inspector shall report as deficient inoperative unit(s), unusual sounds or vibration level, the presence of active water leaks and deficiencies. Range exhaust vent. The inspector shall report as deficient inoperative unit(s), a vent pipe that does not terminate outside the structure, if the unit is not of a re-circulating type or configuration, inadequate vent pipe material, unusual sounds or vibration levels from the blower fan(s), blower(s) that do not operate at all speeds and deficiencies in the:

• filter • vent pipe • light and lens • secure mounting of the unit • switches

Electric or gas ranges, cooktops, and ovens. The inspector shall report as deficient inoperative unit(s), the lack of a gas shut-off valve, gas leaks, and deficiencies in the:

1!8Copyright 2010© Champions School of Real Estate™

Chapter 6 –


Inspections

• gas connector materials and connections

• thermostat accuracy (within 25 degrees at a setting of 350°F)

• door gasket(s), hinges, springs, closure, and handles

• thermostat(s) sensor support

• secure mounting of the unit

• heating elements or burners

• controls and control panels

• clearance to combustible material

• gas shut-off valve(s) and location(s)

• lights and lenses • anti-tip device • glass panels • door latch • drip pans

Microwave oven. The inspector shall inspect built-in units and report as deficient inoperative unit(s) and deficiencies in the:

• controls and control

panels • handles • the turn table

• interior surfaces • door and door seal • glass panels • lights and lenses • secure mounting of

the unit

• operation, as determined by heating a container of water or with other means of testing.

Trash compactor. The inspector shall report as deficient inoperative unit(s), unusual sounds or vibration levels and deficiencies in secure mounting of the unit.

• Mechanical exhaust vents and bathroom heaters. The inspector shall report as deficient:

inoperative unit(s) • unusual sounds, speed, and vibration levels • vent pipes that do not terminate outside the structure • a gas heater that is not vented to the exterior of the structure • the lack of an exhaust ventilator in required areas


Chapter 6 –


Inspections

Garage door operators. The inspector shall report as deficient inoperative unit(s), door locks or side ropes that have not been removed or disabled, and deficiencies in:

Doorbell and chimes. The inspector shall report as deficient inoperable unit(s) and deficiencies in components. Dryer vents. The inspector shall report as deficient improper routing and length of vent pipe, inadequate vent pipe material, improper termination, the lack of a dryer vent system when provisions are present for a dryer; and damaged or missing exterior cover. Specific limitations for appliances. The inspector is not required to:

• operate or determine the condition of other auxiliary components of inspected items

• test for microwave oven radiation leaks

• inspect self-cleaning functions

• test trash compactor ram pressure

• determine the adequacy of venting systems

HVACThe inspector report will identify the type of heating system and the energy source. Reported heating system deficiencies might include:

• Inoperative unit • Deficiencies in thermostats • Inappropriate location • Inadequate access and clearances • Deficiencies in mounting and

operation of window units • Deficiencies in the controls and

operating components of the system • Operation of heating elements • Condition of conductors • Gas leaks • Lack of a gas shut-off valve • Deficiencies in: conditioned,

combustion, and dilution air • Deficiencies in gas shut-off valves

and locations • Deficiencies in: gas connector

materials and connections • Deficiencies in the vent pipe, draft

hood, draft, proximity to combustibles, and vent termination point and clearances.

The cooling system will be inspected, and the inspector report the type of system report as deficiencies such as

• Inoperative unit • Inadequate access and clearances

• Inadequate cooling as demonstrated by its • Noticeable vibration of the

• automatic reversal during the closing cycle

• condition and operation of the garage door operator

• installation • electronic sensors • the control button • emergency release components

1!"Copyright 2010© Champions School of Real Estate™

Chapter 6 –


Inspections

• Inadequate cooling as demonstrated by its performance in the reasonable judgment of the inspector

• Noticeable vibration of the blower fan or condensing fan

• Deficiencies in the condensate drain and auxiliary/secondary pan and drain system

• Water in the auxiliary/secondary drain pan

• A primary drain pipe that terminates in a sewer vent

• Missing or deficient refrigerant pipe insulation

• Deficiencies in thermostats • Damaged casings on the coils • Condensing unit lacking adequate

clearances or air circulation • Deficiencies in mounting and

operation of window or wall units

• Dirty evaporator or condensing coils, where accessible

• Damaged ducting or insulation, improper material, or improper routing of ducts

• Absence of air flow at accessible supply registers in the habitable areas of the structure

• Deficiencies in the condition of fins, location, levelness, or elevation above ground surfaces

The inspector will also report deficiencies in duct fans, filters, grills or registers, the location of return air openings, gas piping, sewer vents, and electrical wiring, or junction boxes in the duct system, plenum(s), and chase(s).


Chapter 6 –


Inspections

The inspector is not required to inspect or report on: • Program digital thermostats or controls • Inspect winterized evaporative

coolers • Test for pressure of the system

refrigerant, type of refrigerant, or refrigerant leaks

• Verify the accuracy of thermostats • Verify compatibility of components • Operate setback features on thermostats

or controls

• Inspect humidifiers, dehumidifiers, air purifiers, motorized dampers, electronic air filters, multi-stage controllers, sequencers, heat reclaimers, wood burning stoves, boilers, oil-fired units, supplemental heating appliances, de-icing provisions, or reversing valves

• Operate radiant heaters, steam heat systems, or unvented gas-fired heating appliances

• Operate cooling equipment when the outdoor temperature is less than 60 degrees Fahrenheit

• Verify the integrity of the heat exchanger • Operate heat pumps when temperatures may damage equipment

• Determine types of materials contained in insulation

• Determine sizing, efficiency, or adequacy of the system

• Determine uniformity of the supply of conditioned air to the various parts of the structure

The general inspection is not a structural foundation inspection. However, the inspector looks at the home and reports on conditions that might lead a buyer or seller to obtain a more in-depth structural inspection. The inspection report contains observations in the following areas: Foundations The inspector inspects slab surfaces, foundation framing components, subflooring, and related structural components, and reports the type of foundation and the vantage point from which the crawl space was inspected. The inspector reports present and visible issues:

• Open or offset concrete cracks • Separation of walls from ceilings or floors

• Framing or frieze board separations • Wall, floor, or ceiling cracks • Sloping floors, countertops, cabinet

doors, or window/door casings • Crawl space drainage that does not

appear to be adequate • Rotating, buckling, cracking, or

deflecting masonry cladding • Binding, out-of-square, non-latching,

warped, or twisted doors or frames • Deteriorated materials • Exposed or damaged reinforcement • A crawl space that does not appear

to be adequately ventilated • Damaged beams, joists, bridging,

blocking, piers, posts, pilings, or subfloor

• Soil erosion, subsidence or shrinkage adjacent to the foundation and differential movement of abutting flatwork such as walkways, driveways, and patios

• Out-of-square wall openings or separations at wall openings or between the cladding and window/door frames


Chapter 6 –


Inspections

• Damaged retaining walls related to foundation performance

• Non-supporting piers, posts, pilings, columns, beams, sills, or joists

An inspector is not required to enter a crawlspace or any area where headroom is less than 18 inches or the access opening is less than 24 inches wide and 18 inches high, nor are they required to provide an exhaustive list of indicators of possible adverse performance, or inspect retaining walls not related to foundation performance. Extreme wet/dry cycles combined with expansive clay soils contribute to major foundation problems in much of Texas. Proper grading and drainage is an important part of foundation maintenance. The inspector reports deficiencies such as improper or inadequate grading around the foundation, erosion, water ponding, and deficiencies in installed gutter and downspout systems. The inspector is not required to inspect flatwork or detention/retention ponds (except as related to slope and drainage) or determine area hydrology or the presence of underground water. The inspector is not required to determine the efficiency or operation of underground or surface drainage systems. Roofing The inspector will inspect the roof covering materials from the surface of the roof and report the type of roof covering, vantage point from where the roof was inspected, and any levels or surfaces that were not accessed. The inspector will report evidence of previous repairs to roof covering materials, flashing details, skylights, and other roof penetrations, and evidence of water penetration. The inspector will report as deficient:

• Roof covering that is not appropriate for the slope of the roof

• Fastening of roof covering material – based on random sample

• Roof covering materials • Flashing details • Skylights • Other roof penetrations

The inspector is not required to determine the remaining life expectancy of the roof covering, identify latent hail damage, determine the number of layers of roof covering material, or provide an exhaustive list of locations of water penetrations or previous repairs. The inspector is likewise not required to inspect the roof from the roof level if, in the inspector's reasonable judgment, the inspector cannot safely reach or stay on the roof or significant damage to the roof covering materials may result from walking on the roof. Roof structure and attic The inspector will report the vantage point from which the attic space was inspected, and note the presence of and approximate average depth of attic insulation and thickness of vertical insulation, when visible. The inspector will also note the observed evidence of water penetration and:

• Attic space that does not appear to be adequately ventilated

• Deficiencies in installed framing members and decking

• Deficiencies in attic ventilators • Missing insulation • Deflections or depressions in the

roof surface as related to the adverse performance of the framing and the roof deck

• Deficiencies in attic access ladder and access opening


Chapter 6 –


Inspections

The inspector is not required to enter attics or unfinished spaces where openings are less than 22 inches by 30 inches or headroom is less than 30 inches. They are also not required to operate powered ventilators or provide an exhaustive list of locations of water penetrations. Interior Walls, Ceilings, Floors, and Doors. The inspector will report evidence of water penetration, and will report deficiencies in doors and hardware that do not operate properly and deficiencies related to structural performance or water penetration. The lack of fire separation between the garage and the residence and its attic space is also reported. The inspector is not required to report cosmetic damage or the condition of floor, wall, or ceiling coverings, paints, stains, or other surface coatings, cabinets or countertops, or provide an exhaustive list of locations of water penetration. Exterior Walls, Doors, and Windows. The inspector will report evidence of water penetration, and report the following deficiencies:

• The lack of functional emergency escape and rescue openings in all sleeping rooms

• The lack of a sufficient door between the residence and an attached garage (fire protection)

• Missing or damaged screens • Deficiencies related to structural performance or water penetration

• Deficiencies in claddings and water resistant materials and coatings

• Deficiencies in flashing details and terminations

• Deficiencies in the condition and operation of exterior doors, garage doors, and hardware

• Deficiencies in window operation and components

The inspector is not required to report the condition or presence of awnings, shutters, security devices, or systems. The inspector is also not required to determine the cosmetic condition of paints, stains, or other surface coatings. Exterior and Interior Glazing The inspector will inspect the window and door glazing and report deficiencies in insulated windows that are obviously fogged or display other evidence of broken seals. The report will also include deficiencies in glazing, weather stripping, and glazing compound in windows and exterior doors, and the absence of safety glass in hazardous locations The inspector is not required to exhaustively observe insulated windows for evidence of broken seals or exhaustively observe glazing for identifying labels or identify specific locations of damage.


Chapter 6 –


Inspections

Interior and exterior stairways The inspector will report deficiencies in:

• Spacing between intermediate balusters, spindles, or rails for steps, stairways, guards, and railings in excess of prescribed limits.

• Deficiencies in steps, stairways, landings, guardrails, and handrails. The inspector is not required to exhaustively measure every stairway component. Fireplace and Chimney The inspector shall report deficiencies in the following areas:

• Built-up creosote in visible areas of the firebox and flue

• The presence of combustible materials in near proximity to the firebox opening

• The absence of fire blocking at the attic penetration of the chimney flue, where accessible

• Deficiencies in lintel, hearth, hearth extension, and firebox

• Deficiencies in the damper • An inoperative circulating fan • Deficiencies in gas log lighter valve

and location • Deficiencies in combustion air vents

• Chimney structure, termination, coping, crown, caps, and spark arrestor

The inspector is not required to verify the integrity of the flue, perform a chimney smoke test, or determine the adequacy of the draft.

Porches, Balconies, Decks, and Carports The inspector will inspect balconies, attached carports, and attached porches and abutting porches, decks, and balconies that are used for ingress and egress. Deficiencies reported might include:

• On decks 30 inches or higher above the adjacent grade, spacings between intermediate balusters, spindles, or rails that permit passage of an object greater than four inches in diameter

• Deficiencies in visible footings, piers, posts, pilings, beams, joists, decking, water proofing at interfaces, flashing, surface coverings, and attachment points of porches, decks, balconies, and carports

• Deficiencies in, or absence of, required guardrails and handrails. The inspectors is not required to exhaustively measure the porch, balcony, deck, or attached carport components or enter any area where headroom is less than 18 inches or the access opening is less than 24 inches wide and 18 inches high. Pest Inspection In Texas, any person who reports on wood destroying insects in a home must be licensed by the state as a wood destroying insect inspector. These licenses are issued by the Texas Structural Pest Control Board at www.tspcb.state.tx.us. Some TREC licensed home inspectors are also licensed wood destroying insect inspectors, and therefore, may inspect a home for termites, etc. if hired for that purpose. However, under the home inspector license issued by TREC, the inspector MAY NOT comment on whether termite infestations exist. They may comment on any visible damage regardless of


Chapter 6 –


Inspections

the underlying cause and note it as “in need of repair” on their report, but may not assess that the damage was specifically caused by wood destroying insects. It would be prudent for the buyer to obtain a pest inspection and a termite certificate. Some lenders require a termite certificate on all of their transactions. Green Audit/Energy Audit

Buyers are increasingly concerned with the energy efficiency of the homes they purchase. They may be driven by a number of very different motivations in seeking a home that is considered “green”. The concept of green encompasses a wide range attributes in a home, including the materials used in construction, site selection, building orientation and indoor air quality. Energy efficiency is a critical component of green living, and is of importance to buyers who do not necessarily identify themselves as “green”.

There are a number of methods of evaluating or estimating the energy efficiency of a home. Certainly certifications such as the U.S. Green Building Council Leadership in Energy Efficiency and Design (LEED) and EnergyStar™ can be an important feature.

The reality is that most homes in the resale market do not have a certification, and some of those that do may no longer be performing to the standard under which they were certified. A purchaser might want to have a third party perform an energy audit on the home they plan to purchase.

In fact, some jurisdictions require energy audits on most home sold within their boundaries. The City of Austin, TX requires that all homes over ten years old be audited when resold. A number of exemptions to the rule exist that can be found at www.austinenergy.com. The audits may be performed by an individual certified by one of two organizations, Residential Energy Services Network or the Building Performance Institute. While the Austin audit requirement is mandatory, it does not require that the seller of a property do any upgrades as a result of the inspection

The Residential Energy Services Network (RESNET), a not-for-profit membership corporation, is a national standards making body for building energy efficiency rating systems.

RESNET Standards are recognized in the Mortgage industry for capitalizing energy efficiency in mortgages, and by the federal government for verification of building energy performance for federal tax credit qualification and EPA EnergyStar labeled homes. RESNET is also recognized by various state and local governments for minimum energy code compliance.


Chapter 6 –


Inspections

A rating gives the homeowner or prospective purchaser a relative energy use index called the HERS® Index. A HERS Index of 100 represents the energy use of the "American Standard Building" and an Index of 0 (zero) indicates that the Proposed Building uses no net purchased energy (a Zero Energy Building). On this index a lower score is better than higher. A HERS index below 100 would indicate that the home is more energy efficient than the standard.

Discussion of green features in general and energy efficiency performance carries liability for the agent. The agent should take care to not overstate the potential for energy savings in any particular property. The energy costs of operating a home are extremely variable, and are highly dependent upon the lifestyle of the occupants.

Liability can best be limited by discussing green features and certifications without discussing specific savings targets. Green building and marketing is the subject of the NAR® REBAC Green Designation Course. The course includes a detailed discussion of marketing green properties in a manner that limits the liability of the agent.

*****************************

Bibliography

1!"Copyright 2010© Champions School of Real Estate™

Bibliography

Bibliography 20-Hour Mortgage Loan Origination Manual II, Champions School of Real Estate, 2010 Federal Reserve, www.federalreserve.gov Real Estate Finance, Wiedemer, John, South-Western/Thomson Learning, 2001

Residential Energy Services Network (RESNET) www.resnet.us Texas Department of Housing and Community Affairs, http://www.tdhca.state.tx.us/ Texas Real Estate Commission – Standards of Practice for Inspectors, www.trec.state.tx.us TREC 2010 Mandatory Legal Update Course, Texas Real Estate Commission U.S. Department of Housing and Urban Development, www.hud.gov

Answers to Chapter Pre-Test Questions


Answers to Chapter Pre-Test

Questions

Chapter 1 1. d 2. f 3. b 4.a 5. e 6. c Chapter 2 1. b 2. e 3. a 4. d 5.c Chapter 3 1. b 2. a 3. d 4.c 5.e

Chapter 4 1. e 2. a 3. c 4. b 5.d Chapter 5 1. c 2. d 3. a 4. f 5. b 6. e Chapter 6 1. d 2. e 3. b 4. c 5. a

Homework


Dear Student,

Thank you for choosing Champions for your Correspondence Education! In effort to help you successfully complete your correspondence course, please read and follow the “Instructions for Completing Correspondence/Home Study” handout. (Reference next page)

HOMEWORK POLICY We recommend that you read the book and complete the enclosed multiple-choice homework within a 90-day period (this is just a recommendation to ensure that you have the most current materials; however, it is not mandatory). You may drop off your homework to be graded at any of our six Champions locations in Texas. Upon passing with a 70% or higher, you may proceed immediately with the exam. If you prefer to fax or mail your homework, please allow at least 24-48 hours for your homework to be graded. We will call, fax, or e-mail you any corrected answers.

FINAL EXAM POLICY Be prepared to positively identify yourself with a photo I.D. when taking your final exam. The final exam can be taken at any of our six Champions locations in Texas, a library or college, or with a notary. The final exam is open book (with the exception of Appraisal Licensing courses). You must make a 70% or better (with the exception of Appraisal Licensing courses – you must make a 75% or better) to receive your course completion certificate. If you are not testing at one of our Champions locations, you will need to allow at least 24-48 hours for grading. We will notify you with your grade and your certificate will be mailed or faxed to you (with the exception of Real Estate MCE – your hours are reported to TREC immediately.)

REFUND POLICY Review your materials right away. You have five days to return your materials if you are dissatisfied with the correspondence course you have registered for. Please reference the Enrollment Agreement for our refund policy.

Please reference the next three pages for correspondence instructions, final exam proctor information, and proctoring form to be completed by proctor/notary.

Thank you for choosing Champions School of Real Estate.

Provider #530 in partnership with Lone Star College Tomball Provider #169

13!


1. Read the required textbook and complete the required homework. Please note: All textbooks will have the required homework located at the back. If there is not a homework section included in the textbook, it will be included in a stapled packet.

Please transfer in pencil the multiple choice homework answers onto the provided blue scantron sheet.

2. Return the complete blue scantron answer sheet to Champions to be graded at your convenience, in person, by fax or mail. Please ensure that your name, phone number, and fax (or) e-mail address are written clearly on the front page of the blue completed scantron answer sheet. Additionally, please indicate whether you prefer your corrected homework answers be mailed, faxed or e-mailed back to you. You may return your homework scantron in person, by fax or mail.

CHAMPIONS STATEWIDE FAX NUMBERS Dallas/Plano Campus: (972) 867-4199 Houston West Campus: (281) 496-0044 Coppell/Mid-Cities Campus: (972) 316-2041 San Antonio Campus: (210) 349-7609 Houston FM 1960 Campus: (281) 587-9602 Austin/Round Rock Campus: (512) 244-3545 Houston Galleria Campus: (713) 627-3436 Statewide: (888) 91-CHAMP

Allow 24-48 hours for grading and we will call, fax or e-mail any corrected answers to you. You must pass with a grade of 70% or better to take the final exam.

3. Take the course exam.

Once your homework is graded, you may take your exam at one of the following locations: • Champions School of Real Estate (One of our six locations listed above) Testing times: 8 am - 5 pm (Monday - Friday) 8 am - 4 pm (Saturday) • Local library, city or county school, college or university library, or testing center that has a proctor and will allow

Champions to mail or fax the exam. Please reference the following Proctor Instructions Form.

• Local notary public that will allow Champions to mail or fax the exam. Please reference the following Proctor Instructions Form. If you test off-campus, check with the proctor for testing hours and additional fees that may apply. Please also be prepared to identify yourself with a photo I.D. upon arrival. You must make a 70% or above to pass (with the exception of Appraisal Licensing courses, you must make a 75% or above) and are allowed to use your textbook and corrected homework (with the exception of Appraisal Licensing courses – the final exam is closed book).

4. Receive your certificate.

Upon passing the course, you will then receive your certificate showing completion of the course (with the exception of Real Estate MCE – your hours are reported to TREC immediately). Should you have taken the exam at an off-campus location, your certificate will be mailed to you. It is your responsibility to mail a copy of your certificate to TREC along with the appropriate TREC form. If you are taking a course for MCE credit, you will need to sign and return the alternative delivery methods form. We will then fax it to TREC in order for you to receive MCE credit.


FINAL EXAM PROCTORING INFORMATION This course is TREC approved upon the final results of your final examination and course work. The student must have achieved a 70% or above (with the exception of Appraisal licensing courses – you must make a 75% or better) on the Final Exam to receive the Course Completion Certificate from Champions School of Real Estate. The final examination is an open book and open notes examination (with the exception of Appraisal licensing courses – the final exam is closed book).

Location 1 Champions Dallas/Plano Campus 3721 Mapleshade Lane Plano, TX 75075 (972) 867-4100 (phone)

Initials___________ Date _____________ (972) 867-4199 (fax)

Location 2 Champions Coppell/Mid-Cities Campus 550 North Denton Tap Road Coppell, TX 75019 (972) 316-2020 (phone)

Initials___________ Date _____________ (972) 316-2041 (fax)

Location 3

Champions Houston FM 1960 Campus 5627 FM 1960 West, Suite 100 Houston, TX 77069 (281) 893-4484 (phone)

Initials____________ Date _____________ (281) 587-9602 (fax)

Location 4

Champions Houston Galleria Campus 4543 Post Oak Place, Suite 130 Houston, TX 77027 (713) 629-4543 (phone)


Location 5

Champions Houston West Campus 738 Highway 6 South, Suite 150 Houston, TX 77079 (281) 496-7386 (phone)


Location 6

Champions San Antonio Campus 10000 San Pedro, Suite 100 San Antonio, TX 78216 (210) 349-7600 (phone)


Location 7 Champions Austin/Round Rock Campus 3203 IH-35 South, Suite 520 Round Rock, Texas 78664 (512) 244-3545


LOCATIONS 7&8: PROCTOR MUST FILL OUT THE FOLLOWING PAGE AND RETURN TO CHAMPIONS

Location 7 Any city or county school, college, or university library. A certified librarian must proctor the exam. Any testing center at an accredited college or university including Lone Star College Tomball.

Location 8 Certified Notary (must sign name, print name, notary number and stamp.)

13!


Proctor Instructions

This page to be filled out by Proctor (Please Print)

Proctor’s Name_________________________________________________________________________

Institution Name_______________________________________________________________________

Address_______________________________________________________________________________

City______________________________State______________Zip ______________________________

Phone____________________________Fax_________________________________________________

E-mail_________________________________________________________________________________

Notary Name___________________________________________________________________________

Notary Signature________________________________________________________________________

Notary ID Number_______________________________________________________________________

Please Stamp Here

I________________________________________, destroyed the final exam on_____________. (or)

I,_______________________________________, will mail the original back to

Champions within 24 hours.

Student’s Name__________________________________________ Course #____________________

Course Name____________________________________________ Registration Date______________

Grade________ Date of Final_______________Proctor/Notary Signature____________________________

Thank you for choosing Champions School of Real Estate. www.ChampionsSchool.com PROVIDER #530 IN PARTNERSHIP WITH LONE STAR COLLEGE TOMBALL PROVIDER #169

1!" Copyright 2010© Champions School of Real Estate™

Homework

Real Estate Finance (0421) Homework

Chapter 1

1. Real estate agents have a role in the mortgage lending process including a. Arranging for the prequalification of buyers b. Discussion of general mortgage loan programs that buyers might consider c. Answer finance and closing related questions d. All of the above

2. When considering buyer prequalification, which of the following is not true?

a. Buyer’s are able to be more realistic when setting their pricing goals b. The buyer’s agent has a better understanding of the buyer’s ability to pay c. The buyer’s agent can avoid showing properties that the buyer cannot afford d. Prequalification requires both a loan application and a property to be financed

3. The process of making a lending decision is known as

a. Processing b. Applying c. Underwriting d. Credit Scoring

4. A Form B, Conditional Approval Letter

a. Requires an application from the borrower b. The identification of a specific property c. The mortgage brokers or loan officers license number d. All of the above

5. The statement in the Third Party Financing Condition Addendum that “time is of the essence”

means that

a. Time is money b. Time flies c. The time allowed for loan approval will be strictly enforced d. That all provisions of the contract will be strictly enforced

6. If financing approval has not been obtained, and the buyer’s time is about to run out, the buyer

could terminate the contract or

a. Obtain an extension of time from the seller b. Secure loan approval from the lender c. Take their chances, and let the time expire assuming that they will obtain loan approval d. Any of the above

1!" Copyright 2010© Champions School of Real Estate™

Homework

7. The Good Faith Estimate is prepared using a federally-mandated form.

a. True b. False

8. The GFE Summary of the Borrower’s Loan Terms

a. discloses the loan amount, loan term, and the initial interest rate b. Discloses the principal, interest and mortgage insurance portion of the monthly

mortgage payment. c. Discloses whether the buyer’s interest rate can increase, and if the loan balance can

rise d. All of the above

9. The section of the GFE that assists the borrower in comparing loan offers from different

lenders is known as the

a. Loan chooser b. Shopping Chart c. Good loan calculator d. None of the above

10. At closing, if it is found that some of the charges that cannot be increased were in fact

increased

a. The lender must be reimbursed b. The loan is set aside or cancelled c. The borrower must be reimbursed d. The title company must reimburse the borrower

11. While some expenses may be paid in the form of a seller contribution or other means, the borrower actually must have the funds on hand for the

a. Down payment b. Appraisal fee c. Points d. Brokerage fee

Chapter 2

12. A mortgage loan in which the balance is reduced with regular fixed monthly payments of both principal and interest is known as

a. A buy down loan b. An FHA loan c. An amortizing loan d. A reverse mortgage


Homework

13. When calculating the monthly payment, the lender will add an amount equal to

a. Twelve months insurance and six months taxes b. 1/12 of the annual taxes and insurance c. 1/12 of the annual loan amortization d. An amount sufficient to create the escrow account

14. The rate at which an adjustable rate mortgage begins is called the

a. Index Rate b. Initial Rate c. Adjusted Rate d. Periodic Rate

15. One of the major protections offered to borrowers who accept an ARM loan is that any change in

the rate of interest must be tied to the change in he

a. index b. note rate c. GFE d. Margin

16. An ARM that offer a fixed rate period during the first years of the loan usually have an initial

adjustment cap that is higher than the per adjustment cap.

a. True b. False

17. For the borrower planning to remain in their home in the long term, or the borrower who is

adverse to risk, the best choice in a mortgage would probably be

a. A reverse mortgage b. An adjustable rate mortgage c. An interest-only loan d. A fixed rate mortgage

18. A buyer purchasing a home that needs significant remodeling or upgrades would benefit from

a. A construction to permanent loan b. A conventional loan with a kickback from the seller after closing to cover the

remodeling costs c. A 3-2-1 Draw loan d. A second mortgage obtained after closing


Homework

Chapter 3

19. The percentage of value that a lender is willing to finance is known as the

a. Front Ratio b. Down payment requirement c. Loan to value ratio d. Market value

20. An appraisal that is less than the sale price may result in

a. Termination of the transaction b. Reduction of the sale price by seller to match the appraised value c. Payment of the difference between sale price and appraised value by the

buyer/borrower d. Any of the above

21. An appraisal based upon an exterior view of the property only is known as a

a. Conforming appraisal b. Full appraisal c. Drive-by appraisal d. Review appraisal

22. The most probable price which a property should bring in a competitive and open market under

all conditions requisite to a fair sale is known as

a. Assessed value b. Appraised value c. Market value d. Exchange value

23. Market value and price are always the same.

a. True b. False

24. If the predominant occupancy of a neighborhood is mostly vacant the neighborhood might be

considered to be

a. Too new to appraised b. Growing slowly c. In decline d. Undeveloped

25. The value that the presence of a feature (such as a fireplace) adds to the value of a property is

known as its

a. Improvement cost b. Resale value c. Contributory value


Homework

26. Value in use The actual age of a property is known as its

a. Effective age b. Old age c. Chronological age d. Useful life

27. The age of a property based upon the appraiser’s assessment of the properties’ maintenance and upgrades is its

a. Useful life b. Market age c. Chronological age d. Effective age

28. An appraiser finds that, on average, rental homes in the area are selling for 187,500. Average

rents are $1,900 per month. The appraiser is appraising a home with a projected gross rent of $1,975 per month. What is the value of the home using the gross rent multiplier?

a. $187,503 b. $204,901 c. $194,901 d. $193,266

29. In a full appraisal report, the appraiser will include

a. A sketch of the property b. Flood maps c. Photos of the appraised property and comparables d. All of the above

30. If a property being appraised is found to have significant economic or functional obsolescence or

has condition issues that affect the marketability of the property, the lender might

a. Reject the loan b. Impose lower loan-to-value limits c. Either A or B d. None of the above

Chapter 4

31. A loan that is made by a lender who does not sell the loan is known as a

a. Uninsured loan b. Second loan c. Portfolio loan d. Mortgage backed security


Homework

32. Residential financing is available for properties that contain up to four living units. If a property contains five or more living units the sale is considered to be a

a. Cash sale b. Commercial transaction c. Unconventional transaction d. One that cannot be financed

33. FHA loans are available for

a. Single family homes b. Multifamily properties c. Manufactured homes d. All of the above

34. Lenders bear less risk in making an FHA loan because FHA

a. borrowers generally have higher than average income and credit b. requires a substantial down payment that minimizes risk c. is default insurance that will pay a claim to a lender in the event of default d. requires that the borrower have a higher credit score than other programs

35. When an FHA loan closes, an insurance premium is charged. This charge is known as the

a. UFMIP b. LSMFT c. PMI d. ESD

36. The annual mortgage insurance premium on an FHA loan is cancelled

a. When the LTV reaches 78% on mortgages with a term of more than 15 years provided

the annual premium has been paid for at least 5 years b. When the LTV reaches 78% on loans with LTV ratios of 90% or higher on loans of a

term of 15 years or less c. Either A or B d. None of the above

37. FHA requires a down payment of

a. 0% b. 3.5% c. 5% d. 5.5%

38. FHA allows a portion of the borrower’s down payment to include closing costs.

a. True b. False


Homework

39. Which of the following are true when qualifying the FHA borrower?

a. Maximum Ratios are 31/43% b. Ratios may be exceeded with compensating factors c. Both A and B d. None of the above

40. The FHA borrower can pay their down payment with gift funds provided by all of the following except their

a. Parents b. Brother c. Fiancé d. Real estate agent

41. Escrow of taxes and insurance is required for FHA loans

a. With a LTV of 90% or greater b. Made to borrowers with a credit score under 600 c. Always – all FHA loans require escrow of taxes and insurance d. Unless the borrower agrees to pay an escrow waiver fee

42. A veteran can have more than one VA loan

a. If the prior VA loan was paid in full and the property disposed of b. The prior VA loan was assumed by an eligible veteran who substituted their entitlement c. A or B d. Under no circumstances – a VA loan is a “once in a lifetime” benefit

43. On a VA loan a lender can charge, in addition to itemized fees and charges, an additional charge

not to exceed

a. 2% of the loan amount b. 1% of the loan amount c. 2% of the sales price d. 1% of the sales price

44. Each consumer has three different credit scores from the three major credit reporting agencies

because

a. Some consumers use only one or two of the reporting agencies b. Some consumers have locked their credit file c. Not all creditors report to all of the agencies d. Some of the credit reporting agencies are slow to update their records


Homework

45. A qualifying ratio that compares the borrowers proposed house payment to their gross monthly income is the

a. Back Ratio b. Front Ratio c. Capacity Ratio d. Tolerance Ratio

46. A lender is qualifying borrowers on a 36% ratio which includes house payment and regular

monthly obligations. The borrower has a gross monthly income of $12,500 per month, and regular debt obligations totaling $2,150 per month. What is the maximum monthly payment for which this buyer will qualify?

a. $4,500 b. $2,150 c. $2,350 d. $2,500

Chapter 5

47. Ownership of real estate in Texas is established by

a. Certificates recorded in the Torrens system b. Examination of public records c. The deed to the property d. Certificates of title found in title company records

48. In the TREC One to Four Family Contract, how many days does the title company have to

provide the title commitment?

a. Within 10 days of receiving the contract b. Within 10 days of the effective date of the contract c. Within 20 days of receiving the contract d. Within 20 days of the effective date of the contract

49. How many days does the buyer have to object to title and survey issues?

a. Within 20 days of the effective date of the contract b. Within 10 days of closing c. Within the negotiated number of days in Paragraph 6D d. Anytime up to the moment of closing

50. At closing, prepaid taxes expenses are a

a. Credit to the buyer and a debit to the seller b. Debit to the buyer and a credit to the seller c. Not generally calculated d. Credited to the escrow account


Homework

51. At closing the buyer should pay the sale price in “good funds” which includes

a. Cashier’s check or wire transfer b. Cashier’s check, wire transfer or all cash if in US currency c. Personal checks, a cashier’s check or wire transfer d. Cash in US currency only

52. At closing the buyer will pay interest

a. From the closing date to the date of the first monthly payment b. From the closing date to the date from which interest will be collected from the

borrower’s first monthly payment c. Only on a conventional loan d. At least 30 days, but not more than 2 months per RESPA

53. On the HUD-1, 1000, Title Charges would include all of the following except

a. Charges for work done by the title company b. Title examination fees c. Closing fees or escrow fees d. Points paid by the borrower at closing

54. In the Comparison of HUD-1 and GFE, charges that cannot increase more than 10%

a. Cannot increase more than 10% in total b. No single item in this group can increase more than 10% c. Can increase more than 10% at the option of the lender d. Result in automatic cancellation and rescheduling of the closing

Chapter 6

55. In Paragraph 7(D) of the One to Four Family Contract, the purchaser accepts the property

a. “As is” b. “As is” subject to inspections c. “As is” only if 7(D)(1) is checked d. Always subject to inspections

56. In Paragraph 7(D)(2) of the One to Four Family Contract, the agent should always be sure to add

the words “anything found in the inspection report” in the blanks provided.

a. True b. False

57. The option fee can be paid to

a. The listing broker or seller directly b. Any agent in the transaction c. The title company d. Any of the above


Homework

58. If the buyer needs additional time, and their time under the option is about to expire, the buyer should

a. Not be concerned – options commonly go into “overtime” b. Obtain a verbal agreement of extension c. Obtain a written extension – no additional fee required d. Obtain a written extension and pay an additional option fee

59. Minimum standards for home inspections are promulgated by

a. NAR® b. TREC c. NAHB d. RESPA

60. A purchaser concerned about the energy efficiency of a home might want to obtain a

a. Green Rating b. Energy Star Survey c. HERS Rating d. LEED Certification

Technology

Real Estate Finance I Book - Champions School of RE