Most loan programs are known as Amortized Loans. With an amortized loan, the payments apply toward interest charges as well as paying down the debt or principal. With each payment the debt is reduced and therefore the interest expense is reduced after each payment as well. This is how it works:
Level Payment Amortized - This form can be "averaged-out" over the length of the loan to create a Level Payment Amortized loan. Rather than start out with a high payment and pay a reduced amount each year, the debtor/borrower simply pays a level amount each year.
When you see the word blanket, this means that the loan is covering several different properties at once. Blanket loans are mainly used with commercial loans for businesses that need to own several different locations. Blanket loans are popular with builders and developers who buy large tracts of land, then subdivide them to create many individual parcels to be gradually sold one at a time.
Combined Payment - Each amortized loan payment is securing two or more pieces of real property under the blanket loan document.
Release - Since the owner might want to sell one of the blanketed pieces of real property, the blanket loan has a release (partial release) clause.
Release Clause - Any parcel that is under the blanket and sold, can be released under the release clause.
When a person purchases a furnished condominium, the purchase includes personal property such as the furnishings, appliances, patio furniture, etc. The Package Loan pays for all of this as well as the condominium unit. This type of loan is secured by the real property (condominium) and the personal property (furnishings). It has the following characteristics:
A balloon loan is not utilized very often. The reason is that it requires the debtor to make a large final payment at the end of the loan contract. A balloon loan would be used by someone who doesn't plan to stay with the property for very long such as 5 years. The payments are lower than a standard amortized (level payment) loan where the debt is completely paid off at the end. If the owner sells 5 years into the loan, the sale proceeds would simply pay off the loan. If the owner doesn't sell, the owner would have to make a balloon payment at the end of the loan contract or refinance with another loan.
Different Than an Amortized Loans - A balloon loan is just like most loans in that it has a series of payments like an amortized loan, but it will have one very large payment at a specific future date which is usually at the end of the loan.
Open End Loan
This is utilized by contractors when building a speculation (spec) home that they plan to sell when it is completed. The contractor is given a line of credit up to a maximum. The contractor can utilize the money in any amounts, at any time, but never more than the credit limit set by the lender.
Open End - An Open End Loan is an amortized loan where the borrower can borrow amounts as needed up to a stated maximum. The borrower pays interest on the loan balance outstanding at the end of each month.
No Time Limit - There is no time limit on the loan outstanding. The business can continually use the loan money as needed in the course of business
Interim Loan (Construction Loan)
This loan is utilized by homeowners or contractors during the construction of a single new home. It is like a "line-of-credit." The lender sets a maximum dollar amount that can be used. The borrower/debtor utilizes money from this loan and pays expenses as needed.
Requirements - Money involved with the home construction are disbursed at specified intervals of construction. The money are loaned by the lender after certain points of construction are completed.
Owed Interest - Interest is only paid on the amount of money that has been disbursed by the lender.
Final Payment - The final payment is made after the mechanics/construction lien period expires or the contractor lifts the lien on the property.
Holding Agreement - If the contractor does not want to make loan payments on the spec home, the lender will require a "holding agreement" on the entire property until the lender gets paid in full upon sale of the property by the contractor.
High Interest Rate - This interim loan has a very high interest rate because it is high risk (contractor could mess things up). It is based on one single project, a paper work nightmare at the end of each month, and short term/temporary form. It is often called a Floor Loan because some will automatically transform into a mortgage loan when construction is completed.
Not Assumable - An interim loan is not intended as a permanent, long-term financing vehicle. Once the financed project is completed, the owner will replace it with a "Take-Out Loan" (permanent financing).
Any loan that is not backed by the Federal government is known as a conventional loan. This means that the lender is exposed to a possible loss if they have to foreclose on the mortgagor of financed real property.
Less Governmental Regulation - Because the Federal Government are not going to provide insurance or directly guarantee the loan, there are less Federal regulations that have to be followed by the lender. The only Federal regulations that the lender has to contend with are the standard loan regulations when using Federal Funds for loans.
Lender Sets Policy -The lender is limited by their charter and banking laws. If the lender is Federally chartered, the lender has to follow the regular Federal lending regulations. If they are State chartered, they have to follow the State lending regulations. Other than these minor areas, the lender is able to set their own lending practices regarding the financing of real property.
Lender's LTV is Lower - Since these loans are without insurance or any government guarantees, the Loan to Value Ratio (LTV) will be much lower. The maximum percentage is 80-97%. This means the buyer has to put 20-3% down in order to obtain a conventional loan. If the purchaser/borrower can't come up with 10-20% down, conventional loans do allow secondary loans to finance part of the remaining difference. These secondary loans are exactly that. If foreclosure ensues, the conventional loan would have to be paid in full first and if there are moneys left over, the secondary loans would be paid off next.
Lender Fully At Risk (not insured/guaranteed) - Because the lender is taking on additional risk under conventional loans, the interest rates charged by the lender will be higher.
Private Mortgage Insurance
Remember, the Federal Government does not provide insurance or guarantees to the lender of conventional loans. Private Mortgage Insurance PMI program that can be purchased by the borrower to insure a conventional loan. The cost of the insurance is usually paid by the borrower/home owner on a monthly basis with the mortgage payment.
PMI - Private Mortgage Insurance is similar to FHA insured loans. PMI protects the lender against foreclosure losses if the borrower defaults on the mortgage.
Risk Reduced - If the borrower/home owner agrees to buy PMI, the lender can increase the LTV to as high as 97%.
Lender Advantage - With the use of PMI, the lender has the advantage of conventional interest rates (higher) PLUS foreclosure protection in the event that the borrower/home owner defaults on the mortgage payments.
MGIC - The largest private insurer is the Mortgage Guarantee Insurance Corporation or MGIC. It is often times called "Magic Insured Loans."
Term of Loan - The PMI program has the following characteristics:
We will now look at the various types of lenders who provide conventional loans for home mortgages and trust deeds.
Commercial Banks - A commercial bank is one that provides all the services that we need in our daily lives. The main emphasis is to provide checking, credit card services, and savings accounts. A commercial bank will also provide commercial loans for business. Their main area of loan services is personal loans for our automobile, boat, home improvement, etc.
Offering Mortgages - In the past, commercial banks did not actively participate in providing financing for the purchase of a home. After the Reagan years, with all the deregulation of the banking community, Savings and Loans started providing checking services and commercial banks started providing more mortgage programs. Today, the commercial banks are very active lenders in the home mortgage business.
Federal or State Chartered - A commercial bank can be chartered (authorized) under the jurisdiction of the State where it is located OR it can be chartered under the Federal Government. The choice is usually based on expenses and the length of the time that the bank has been in existence.
Federally Chartered - The Federal Charter is usually chosen when the commercial bank wishes to complete banking across State boundaries. The Federal Charter is more expensive and the regulations are greater.
Commercial banks can offer the following forms of loans:
FHA and VA - FHA and VA loans for home mortgages. The commercial bank has to be authorized by the appropriate agency in order to do so. The commercial bank can provide insured FHA loans as well as guaranteed VA loans for residential housing.
Conventional Loans - Conventional loans are utilized by commercial banks on a considerable basis. This is especially true for home and auto loans.
Building (Interim) Construction Loans - Commercial banks also provide what are called Building (Interim) Loans to finance home construction. These loans are very high interest loans and for short term periods of time. The loan exists only during the construction period of a new home. When the completed home is sold, the proceeds pay off the Building (Interim) Loan.
Vacant Land - Some commercial banks will offer loans on vacant land. Buying land without plans of construction is considered speculation by some commercial banks. A bank would certainly finance the land purchase if a residence is to be built on the land within a few years.
The following are the characteristics of mortgages issued by lenders for the purchase of residential housing:
Alienation Clause - Pretty much all mortgage loans have an Alienation Clause, which prevents any of these loans from being assumable by a purchaser in the future. The lenders pretty much want to deal one-on-one with buyers. They don't want an old mortgage to be assumed by someone they know nothing about.
Discount Points - The lenders actively participate with discount points which allows them to negotiate the actual interest rate that they provide the borrower.
1st Mortgages - Commercial banks like to issue 1st mortgages only; first priority at foreclosure. They do not like to issue 2nd mortgages UNLESS it is a home equity loan for cars, furniture, bill consolidation, etc. These home equity loans are high interest loans that give them a better rate of return.
Financing Real Estate
99% of residential purchases are financed by loans from a lending institution. There are different types of lenders, but they pretty much follow the same lending practices and loan requirements. That is, the requirements a purchaser must follow before the lending institution will finance the purchase of their client's home.
Hypothecation is the practice where (usually through a letter of hypothecation) a borrower pledges collateral to secure a debt or a borrower, as a condition precedent to a loan, has a third party (usually an affiliate) pledge collateral for the borrower. The borrower retains ownership of the collateral, but the creditor has the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a mortgage agreement, in which the consumer's house becomes collateral until the mortgage loan is paid off.
Hypothecation - Buyer offers a note promising to pay on the loan thus places a lien (hypothecates) on the property allowing the lender to foreclose on the house if note payments are not paid as contracted.
Pledge - The buyer offers a note (only) without a lien on the property. This is usually done when the seller owned the house "free and clear" and becomes the lender. The buyer makes monthly agreed upon payments to the seller until the note is paid off. If payments are not paid, the seller can only sue the buyer for not making contracted payments.
CONCERNS OF A LENDER
Quality of Collateral - Quality of the real property as collateral for the loan.
Value - Is the home worth the purchase price? Is the house worth more or less than the price the purchaser paid? To determine this, the lender will usually require a licensed appraiser to provide an opinion. This appraiser has several different methods that can be utilized in determining value and we will go over appraisal a little later in the course.
Quality of Title - Will the purchaser obtain a fee simple absolute estate without a "cloud on title?" If there is a cloud on title, or the possibility of one, it could present difficulties in the future. A cloud may disallow the lending institution from financing the purchase.
The Federal Government - As you will see later in the course, the Federal government provides most of the money for institutions to lend. The Federal government has very stringent requirements that have to be met before Federal money can be utilized to finance the purchase of a home.
Loan To Value Ratio
When a buyer applies for a loan, the lending institution will also look at what is called the Loan To Value Ratio of the home they would finance. The value is determined by the appraisal of the house. The loan ratio is a percentage of the appraised value. We have to use the appraised value, rather than the purchase price, because this shows us the market value if the lender has to foreclose on the loan and sell the home.
Loan To Value (LTV) - A percentage of the appraised value. In determining the feasibility of a loan on a newly purchased home, a lender will utilize a predetermined formula. This formula is a percentage of the appraised value or sales price, whichever is less.
Washington Seller's Disclosure Form
Seller Disclosure Law - It is a part of a chapter in Title 64 of the RCWs; http://apps.leg.wa.gov/RCW/default.aspx?cite=64.06&full=true
Revised Code of Washington
Residential Property Only - The property disclosure statement law only applies to sellers of residential real property. When the seller of a residential dwelling puts their home up for sale, the seller must disclose the characteristics and problems associated with their home. This is done on the State's property disclosure statement form 17. Residential real estate includes the following:
Up to 4-Plex - Residential housing would include family living units from one to four dwelling units. Any owner of a 4-plex (4 residences) would have to abide by the property disclosure statement law. Single residence, duplex, triplex, and a 4-plex.
Condominium Requirements - Residential condominiums sold by the owner are not covered by the public offering statement requirement of the Washington Condominium Act. The seller does not have to offer a POS. The owner/seller does have to follow the property disclosure statement law instead.
Time-Shares Exempt - Residential time-shares are not covered by the written disclosure laws. The reason is because the time-share act is more stringent than the property disclosure statement law.
Seller's Disclosure LawThe Property Disclosure Statement requirement does not have to be provided by the seller under the following circumstances:
Example: A rent to buy contract. The vendee is not taking title to the property until later.
Non-Exempt Transfer - If a sale, gift, or transfer is not one of the former exempt transfers, the Seller's Property Disclosure Statement Form shall be filled out by the seller unless the buyer has expressly waived their right.
Example: A buyer desires the home as soon as possible and the seller is overseas somewhere. If the buyer signs a document waiving their right to the form, the sale can proceed.
Not Part of the Sales Agreement - The disclosure form is not to be construed to be part of any written agreement between the buyer and seller. The form is:
The Buyer - Once reading the disclosure form, the buyer can request repair, back out of the transaction, or accept the property as is.
Act - In 1973 the State of Washington established the laws and regulations that apply to the owner/landlord and tenant relationship. It established monetary requirements, notice and eviction rights, harassment regulations, and other rental/lease characteristics.
Effective 1973 - The Landlord Tenant Act has been in effect since 1973. It has also been revised numerous times since.
Purpose - The Act recognizes the basic differences and needs between the residential renter and a commercial renter. The Act specifically outlines the rights and duties of landlords and tenants in this rental relationship.
Residential Housing - The Act applies only to what the Act calls "Dwelling Units" and not commercial space.
"Dwelling Units" - By definition a Dwelling Unit includes a home, residence, sleeping place included within a residence, multi-plex, apartment, and rental mobile home. Basically, any facility that can be utilized as a permanent residence for a tenant would be regulated by the Landlord Tenant Act.
Exemptions Under the Act - The Landlord Tenant Act exempts the following from its jurisdiction:
Institutions - An incidental residence in an institution whether it is a public or private facility.
Example: A person staying at a nursing home would be exempted from the Act.
Purchase Agreements - Occupants under a real estate purchase contract or an earnest money agreement are considered to be a buyer and not a tenant.
Transient Lodging - Halfway homes, hostels, hotels, motels, etc. are considered transient lodging and exempt under the Act.
Agricultural Land - When a person rents farmland and the residence is incidental to the rented land, the residence is exempt.
Agricultural Housing - Seasonal housing for agricultural workers is exempt under the Act.
Manager Occupancy - When an employee manager of the landlord is a tenant, but occupancy is based on employment in or about the premises, the Act exempts this relationship.
Landlord Duties - The main duty of a landlord is to maintain the premises so that it is fit for human habitation. The Act then goes on to determine what maintaining human habitation means. The landlord under the Act must provide:
Example: The tenant's children draw pictures on the hall walls with crayons.
The study of system of rules which a particular country or community recognizes as regulating the actions of its members and which it may enforce by the imposition of penalties.