REF Presentation REF Presentation 77

Chaps 11 & 12Chaps 11 & 12

Government Programs: Government Programs:

FHA and VA LoansFHA and VA Loans

I.I. Federal Housing Federal Housing AdministrationAdministration

II.II. Aka F.H.A. (TQ)Aka F.H.A. (TQ)

Federal Housing Federal Housing AdministrationAdministration The Federal Housing Administration (FHA) was The Federal Housing Administration (FHA) was

created by Congress in 1934 as part of the created by Congress in 1934 as part of the NATIONAL HOUSING ACTNATIONAL HOUSING ACT..

The FHA’s primary function is to insure loans. The FHA’s primary function is to insure loans. FHA approved lenders are insured against FHA approved lenders are insured against losses caused by borrower default. losses caused by borrower default. (TQ=INSURE LOANS NOT BUY LOANS OR SELL (TQ=INSURE LOANS NOT BUY LOANS OR SELL LOANS ETC.)LOANS ETC.)

As the insurer, the FHA incurs full liability for As the insurer, the FHA incurs full liability for losses resulting from default and property losses resulting from default and property foreclosure. foreclosure.

The FHA insurance program is called the The FHA insurance program is called the Mutual Mortgage Insurance Plan ( MMI).Mutual Mortgage Insurance Plan ( MMI).

Housing and Economic Housing and Economic Recovery Act of 2008Recovery Act of 2008

Enacted July 30,2008, this act was passed by the Enacted July 30,2008, this act was passed by the U.S. Congress to primarily address the subprime U.S. Congress to primarily address the subprime mortgage crisis. The law is in effect until mortgage crisis. The law is in effect until September 30, 2011.September 30, 2011.

Summary of Act:Summary of Act:– Increases the FHA loan limit from 95% to 110% of area median Increases the FHA loan limit from 95% to 110% of area median

home price up to 150% of the GSE conforming loan limit, or home price up to 150% of the GSE conforming loan limit, or $625,000$625,000

– Requires a down payment of at least 3.5% Requires a down payment of at least 3.5% (TQ)(TQ)– Places a 12 month moratorium on HUD implementation of risk-Places a 12 month moratorium on HUD implementation of risk-

based premiums (ALREADY EXPIRED SEE NEXT SLIDE)based premiums (ALREADY EXPIRED SEE NEXT SLIDE)– Prohibits seller-financed down paymentsProhibits seller-financed down payments– Allows down payment assistance from family membersAllows down payment assistance from family members

M.I.P. RULES (TQ whole slide!!)M.I.P. RULES (TQ whole slide!!)

BASIC RULES FOR MINIMUM DOWN BASIC RULES FOR MINIMUM DOWN LOANS (PURCHASE) 30 YR LOANLOANS (PURCHASE) 30 YR LOAN– MIN DOWN MIP = 1 % UFMIP (Up Front Mtg. Ins. Premium – MIN DOWN MIP = 1 % UFMIP (Up Front Mtg. Ins. Premium –

added to base loan), SO IF LOAN IS $100,000…you add $1000 to added to base loan), SO IF LOAN IS $100,000…you add $1000 to the loan)the loan)

– MONTHLY MIP = .9 % / YEAR / MONTH (so .9% x total loan MONTHLY MIP = .9 % / YEAR / MONTH (so .9% x total loan amount divided by 12 added to each paymentamount divided by 12 added to each payment This has the effect of have .9 (almost 1) % added to your interest rateThis has the effect of have .9 (almost 1) % added to your interest rate This is all lenders a national program not optionalThis is all lenders a national program not optional

A. FHA LOAN FEATURESA. FHA LOAN FEATURES Any loan intended for submission for FHA Any loan intended for submission for FHA

insurance has a number of features that insurance has a number of features that distinguishes it from a conventional loan. The distinguishes it from a conventional loan. The most significant of these features are:most significant of these features are:

1. Less stringent qualifying standards. TQ1. Less stringent qualifying standards. TQ

2. Low down payment. TQ2. Low down payment. TQ

3. No secondary financing is allowed for the down payment. 3. No secondary financing is allowed for the down payment. TQTQ

4. Some closing costs may cover down payment. TQ4. Some closing costs may cover down payment. TQ

5. FHA mortgage insurance is required for the loan 5. FHA mortgage insurance is required for the loan regardless of the amount of the down payment. TQregardless of the amount of the down payment. TQ

6. No prepayment penalties are allowed. TQ 6. No prepayment penalties are allowed. TQ

7. 7. The property must be owner-occupiedThe property must be owner-occupied. TQ. TQ

B. OTHER CHARACTERISTICS OF B. OTHER CHARACTERISTICS OF FHA LOANSFHA LOANS

The typical FHA loan has a 15 and 30-year terms. The typical FHA loan has a 15 and 30-year terms. The FHA requires their loans to have a first lien position. The FHA requires their loans to have a first lien position.

A lender may only charge a 1% origination fee on an FHA A lender may only charge a 1% origination fee on an FHA loan, but is allowed to charge discount points. TQloan, but is allowed to charge discount points. TQ

The lender is required to obtain an appraisal of the The lender is required to obtain an appraisal of the property from an FHA approved appraiser. TQproperty from an FHA approved appraiser. TQ

Unlike many conventional loans, FHA loans are fully Unlike many conventional loans, FHA loans are fully assumable without any increase in interest rates. assumable without any increase in interest rates. REQUIRES FULL QUALIFICATION INCLUDING APPRAISAL REQUIRES FULL QUALIFICATION INCLUDING APPRAISAL AND CREDIT. SEE ADDITIONAL SLIDE (TQ)AND CREDIT. SEE ADDITIONAL SLIDE (TQ)

A lender is also prohibited from exercising any “due on A lender is also prohibited from exercising any “due on sale” clause on an FHA transfer. sale” clause on an FHA transfer.

FHA loans are not assumable by investors. FHA loans are not assumable by investors.

ASSUMABILITY FHA – TQ’SASSUMABILITY FHA – TQ’S Same rules as established in 1989Same rules as established in 1989

– Buyer must qualifyBuyer must qualify– Seller will want their equitySeller will want their equity– No investors (owner occupied only)No investors (owner occupied only)– Assumption will be through Assumption will be through seller’sseller’s existing lender not a existing lender not a

new lendernew lender Advantage, if rate on seller’s loan is lower than Advantage, if rate on seller’s loan is lower than

marketmarket Disadvantage, if buyer can’t quality anyway it Disadvantage, if buyer can’t quality anyway it

doesn’t matter; no “break” for buyerdoesn’t matter; no “break” for buyer More details to be discussed in break out session More details to be discussed in break out session

if desiredif desired

C. INCOME QUALIFICATIONS C. INCOME QUALIFICATIONS AND MAXIMUM LOAN AMOUNTSAND MAXIMUM LOAN AMOUNTS

There is no minimum (DOLLAR AMT) income There is no minimum (DOLLAR AMT) income requirement for an FHA loan, BUT they must qualify requirement for an FHA loan, BUT they must qualify for loan payment as usual TQfor loan payment as usual TQ

Borrowers must show two years of steady Borrowers must show two years of steady employment and demonstrate that they have employment and demonstrate that they have consistently paid their bills on time. TQconsistently paid their bills on time. TQ

The FHA has a ratio of 29% and 41%. This means The FHA has a ratio of 29% and 41%. This means that the payments for a home loan may not exceed that the payments for a home loan may not exceed 29% of the borrower’s gross monthly income and 29% of the borrower’s gross monthly income and all installment debt, including the home loan all installment debt, including the home loan payment, may not exceed 41%. payment, may not exceed 41%.

These amounts, which vary by state as well as These amounts, which vary by state as well as location within a state, are adjusted yearly. location within a state, are adjusted yearly.

FHA QUALIFICATION RULESFHA QUALIFICATION RULES DEBT RATIOS OF 29% / 41% DEBT RATIOS OF 29% / 41% ARE NOT ARE NOT

“SET IN STONE”“SET IN STONE”– THE RULES ARE FLEXIBLE AS LONG THE RULES ARE FLEXIBLE AS LONG

AS THEY MAKE SENSE AS THEY MAKE SENSE TQTQ– THE PROGRAM IS DESIGNED FOR THE PROGRAM IS DESIGNED FOR

BUYERS TO GET HOMES TO LIVE IN AND BUYERS TO GET HOMES TO LIVE IN AND NOT TO “SAY NO!” TO BUYERSNOT TO “SAY NO!” TO BUYERS of course not everyone gets approvedof course not everyone gets approved it’s just better that’s allit’s just better that’s all

D. MUTUAL MORTGAGE INSURANCE D. MUTUAL MORTGAGE INSURANCE

(MMI) DROP OFF RULE(MMI) DROP OFF RULE THE BOOKS MMI RULES ARE THE OLD RULES THE BOOKS MMI RULES ARE THE OLD RULES

SEE PREVIOUS MMI SLIDE!!! **** TQ TQSEE PREVIOUS MMI SLIDE!!! **** TQ TQ

– When the loan balance drops below 78% of the When the loan balance drops below 78% of the original purchase price, the monthly payment will original purchase price, the monthly payment will automatically be cancelled, provided the borrower automatically be cancelled, provided the borrower has made monthly payments for five years on a has made monthly payments for five years on a thirty-year mortgage.thirty-year mortgage.

– Other common sense rules apply, like your payments Other common sense rules apply, like your payments should be on time….”DUH!”should be on time….”DUH!”

HOPE for HomeownersHOPE for Homeowners When the subprime mortgage crisis reached its peak in When the subprime mortgage crisis reached its peak in

the fall of 2008, the federal government took steps to the fall of 2008, the federal government took steps to help stabilize the American housing market.help stabilize the American housing market.

The Emergency Economic Stabilization Act of 2008 was The Emergency Economic Stabilization Act of 2008 was signed into law on October 3,2008.signed into law on October 3,2008.

Named the HOPE for Homeowners Act, this new law is Named the HOPE for Homeowners Act, this new law is designed to prevent qualified home owners from designed to prevent qualified home owners from defaulting on their loans and avert foreclosures.defaulting on their loans and avert foreclosures.

This is done through refinancing into affordable, fixed-This is done through refinancing into affordable, fixed-rate mortgages.rate mortgages.

HOPE, IT WORKS….HOPE, IT WORKS….

IFIF YOU NEED IT YOU NEED IT YOU ARE IN THE YOU ARE IN THE 10 % TO 20 %10 % TO 20 % THAT GET APPROVEDTHAT GET APPROVED

– AKA “LOAN MODIFICATION”AKA “LOAN MODIFICATION”– DON’T PAY ANYONE TO DO THIS YOU CAN DON’T PAY ANYONE TO DO THIS YOU CAN

AND SHOUD DO IT!! TQAND SHOUD DO IT!! TQ

A. FHA 203b FIXED RATE PROGRAMA. FHA 203b FIXED RATE PROGRAM

With a 203b FIXED RATE PROGRAM, a down payment of With a 203b FIXED RATE PROGRAM, a down payment of 3.5% of the sales price is required. 3.5% of the sales price is required.

Gifts from family members are allowed, as are payments Gifts from family members are allowed, as are payments from government or non-profit agencies that are from government or non-profit agencies that are designed to help first time or low income buyers. designed to help first time or low income buyers.

FHA does not require the borrower to have cash reserves. FHA does not require the borrower to have cash reserves. 2 years of employment prior to application is required. 2 years of employment prior to application is required. All owner occupied one-to-four unit family residences are All owner occupied one-to-four unit family residences are

eligible.eligible.

A REALLY GOOD PROGRAM AS LONG AS YOU FOLLOW A REALLY GOOD PROGRAM AS LONG AS YOU FOLLOW

THE RULES….IT’S THE GOVERNMENT IF YOU DO THIS THE RULES….IT’S THE GOVERNMENT IF YOU DO THIS THEN BE PATIENT, PATIENT, PATIENT TQ TQ TQ!!THEN BE PATIENT, PATIENT, PATIENT TQ TQ TQ!!

B. FHA 251 ADJUSTABLE B. FHA 251 ADJUSTABLE PROGRAMPROGRAM

The FHA 251 ADJUSTABLE PROGRAM is a thirty-year The FHA 251 ADJUSTABLE PROGRAM is a thirty-year adjustable rate mortgage. adjustable rate mortgage.

It is indexed to the one-year Treasury Bill rate and is It is indexed to the one-year Treasury Bill rate and is adjusted annually. adjusted annually.

The adjusted rate may not move higher or lower than 1% The adjusted rate may not move higher or lower than 1% per year. The rate is capped at 5%. per year. The rate is capped at 5%.

Eligible property types, mortgage insurance premiums, Eligible property types, mortgage insurance premiums, closing costs rules, down payment requirements, and closing costs rules, down payment requirements, and qualifying ratios are the same as for the 203b program.qualifying ratios are the same as for the 203b program.

IF RATES WERE LOWER FOR THESE THAN THE FIXED BY IF RATES WERE LOWER FOR THESE THAN THE FIXED BY ABOUT 1% START RATE THEN IT WOULD BE A GOOD ABOUT 1% START RATE THEN IT WOULD BE A GOOD OPTION….OTHER ISSUES COULD MAKE IT BETTER. TQOPTION….OTHER ISSUES COULD MAKE IT BETTER. TQ

If you know your going to move or retire and move, etc. If you know your going to move or retire and move, etc. in 2 or 3 years and rates were good it could be a good in 2 or 3 years and rates were good it could be a good option. FOR NOW THOUGH FIXED IS IT!!! TQoption. FOR NOW THOUGH FIXED IS IT!!! TQ

C. FHA 203k PURCHASE AND C. FHA 203k PURCHASE AND REHABILITATION PROGRAMREHABILITATION PROGRAM

The FHA 203k PURCHASE AND REHABILITATION PROGRAM was The FHA 203k PURCHASE AND REHABILITATION PROGRAM was developed to help revitalize communities and neighborhoods. developed to help revitalize communities and neighborhoods.

Normally, in conventional practice, a homebuyer must first purchase Normally, in conventional practice, a homebuyer must first purchase the home and then obtain construction financing to rehabilitate the the home and then obtain construction financing to rehabilitate the home. home.

The 203k program permits a borrower to obtain a property in need of The 203k program permits a borrower to obtain a property in need of rehabilitation with just one loan. TQrehabilitation with just one loan. TQ

The program allows loans on one-to-four unit family dwellings that are The program allows loans on one-to-four unit family dwellings that are at least one- year old. at least one- year old.

The 203k program also allows loans on mixed use properties. A MIXED The 203k program also allows loans on mixed use properties. A MIXED USE PROPERTY combines a single-family residence with a commercial USE PROPERTY combines a single-family residence with a commercial building. building.

A 203k loan has a minimum requirement of $5,000 in needed repairs A 203k loan has a minimum requirement of $5,000 in needed repairs that cover the health and safety of the occupants. that cover the health and safety of the occupants. TQTQ

1. Steps in the 203k Program1. Steps in the 203k Program

First, after locating a prospective property, the buyer and First, after locating a prospective property, the buyer and his or her real estate agent make a preliminary analysis his or her real estate agent make a preliminary analysis of the extent of repairs necessary and a rough estimate of the extent of repairs necessary and a rough estimate of the cost of the work to be carried out. Up to $35,000 of the cost of the work to be carried out. Up to $35,000 TQ…TQ…

Then a sales contract is executed, including provisions Then a sales contract is executed, including provisions that the borrower has applied for 203k financing and that that the borrower has applied for 203k financing and that the contract is contingent upon approval of this financing. the contract is contingent upon approval of this financing.

The buyer then contacts an approved FHA lender. The buyer then contacts an approved FHA lender. The lender will, at this stage, recommend an FHA-The lender will, at this stage, recommend an FHA-

approved 203k consultant (generally a contractor) to help approved 203k consultant (generally a contractor) to help the buyer draw up the necessary work write-ups and cost the buyer draw up the necessary work write-ups and cost estimates. estimates.

The appraiser will then carry out an (2) appraisals of the The appraiser will then carry out an (2) appraisals of the property. One as is, one as it will be. TQproperty. One as is, one as it will be. TQ

203k (cont.)203k (cont.) FHA then issues a mortgage insurance certificate FHA then issues a mortgage insurance certificate

to the lender. to the lender. Repair work may begin at the time of closing and Repair work may begin at the time of closing and

must be completed within six months. must be completed within six months. The repair funds are disbursed as each stage of The repair funds are disbursed as each stage of

rehabilitation is completed. rehabilitation is completed. Upon overall completion, a final inspection is Upon overall completion, a final inspection is

carried out by the FHA-approved inspector. TQ…carried out by the FHA-approved inspector. TQ… The mortgage will then close and the lender will The mortgage will then close and the lender will

submit the closing documents to FHA. submit the closing documents to FHA. The lender will review the application and issue a The lender will review the application and issue a

conditional commitment and statement of conditional commitment and statement of appraised value. appraised value.

D. FHA TITLE I PROGRAMD. FHA TITLE I PROGRAM

The FHA TITLE I PROGRAM is designed to The FHA TITLE I PROGRAM is designed to allow homeowners to finance light repairs allow homeowners to finance light repairs or permanent improvements to their or permanent improvements to their homes. homes.

Loans of up to $25,000.00 will be insured Loans of up to $25,000.00 will be insured for a maximum of twenty-five years. for a maximum of twenty-five years.

The borrower also pays a mortgage The borrower also pays a mortgage insurance premium for a Title I loan. insurance premium for a Title I loan.

III. VA Loan GuarantiesIII. VA Loan GuarantiesNEXT!!!NEXT!!!

Title 1 Loans are Title 1 Loans are currently not in play. currently not in play.

The program does still The program does still exist, there just aren’t exist, there just aren’t

any lenders in the any lenders in the game right now TQ!game right now TQ!

VA Loan VA Loan Guaranties*Guaranties*

In 1944, a grateful U.S. Congress passed the In 1944, a grateful U.S. Congress passed the Serviceman’s Readjustment Act to provide Serviceman’s Readjustment Act to provide returning World War II veterans with education, returning World War II veterans with education, medical, and home loan benefits to help them medical, and home loan benefits to help them readjust to civilian life. readjust to civilian life.

This law is often referred to as the G.I. BILL. TQThis law is often referred to as the G.I. BILL. TQ Veteran’s benefits are managed by the Veteran’s benefits are managed by the

DEPARTMENT OF VETERANS AFFAIRS (VA). DEPARTMENT OF VETERANS AFFAIRS (VA). One very important benefit is the VA home loan One very important benefit is the VA home loan

guaranty**. The difference between FHA is that guaranty**. The difference between FHA is that VA is a “gaurantee” of a portion of the loan, not VA is a “gaurantee” of a portion of the loan, not mortgage insurance of the whole loan amount. mortgage insurance of the whole loan amount. TQTQTQTQ

A. VA LOAN GUARANTY A. VA LOAN GUARANTY

CHARACTERISTICSCHARACTERISTICS The VA program has a The VA program has a

number of features number of features that are attractive to that are attractive to borrowers who borrowers who qualify:qualify:

1. A VA loan may not have 1. A VA loan may not have prepayment penalties.prepayment penalties.

2. A VA loan may be assumed 2. A VA loan may be assumed by anyone; the new buyer by anyone; the new buyer does not have to be a does not have to be a veteran.veteran.

3. No mortgage insurance is 3. No mortgage insurance is required.required.

4. Funding fees may be 4. Funding fees may be financed.financed.

5. Builder warranty is required 5. Builder warranty is required on new homes.on new homes.

6. Closing costs may be paid 6. Closing costs may be paid by seller.by seller.

Current closing cost items Current closing cost items include:include:1. A maximum 1% origination fee. 1. A maximum 1% origination fee.

2. Appraisal fees are set by Regional VA 2. Appraisal fees are set by Regional VA offices. The fee may not be more than offices. The fee may not be more than is reasonable and customary for the is reasonable and customary for the area.area.

3. Credit report fees may not exceed the 3. Credit report fees may not exceed the cost charged to the lender. Credit cost charged to the lender. Credit research fees of $50.00 charged by research fees of $50.00 charged by Loan Prospector® are allowed.Loan Prospector® are allowed.

4. The veteran may pay for hazard and 4. The veteran may pay for hazard and flood insurance, if required.flood insurance, if required.

5. The veteran may pay for title 5. The veteran may pay for title insurance.insurance.

6. The veteran must pay the VA funding 6. The veteran must pay the VA funding fee.fee.

7. The veteran may pay for recording 7. The veteran may pay for recording fees. fees.

8. The veteran is responsible for prorated 8. The veteran is responsible for prorated interest and property taxes.interest and property taxes.

1. Sale by Assumption1. Sale by Assumption Veterans who obtain loans guaranteed by the VA are legally Veterans who obtain loans guaranteed by the VA are legally

obligated to indemnify (pay back) the United States government obligated to indemnify (pay back) the United States government for any claim paid out by the VA under the loan guaranty. TQ for any claim paid out by the VA under the loan guaranty. TQ (Makes VA loans less popular than the FHA for assumptions.) TQ(Makes VA loans less popular than the FHA for assumptions.) TQ

To facilitate a veteran’s release from liability on a loan a new To facilitate a veteran’s release from liability on a loan a new buyer intends to assume, it is best to include in the sales contract buyer intends to assume, it is best to include in the sales contract a provision to that effect. a provision to that effect.

The sales agreement should provide that the buyer will assume all The sales agreement should provide that the buyer will assume all the seller’s loan obligations, including the liability for indemnity on the seller’s loan obligations, including the liability for indemnity on the VA loan, and that the sale will not be closed unless and until the VA loan, and that the sale will not be closed unless and until the VA approves the credit and income of the purchaser. the VA approves the credit and income of the purchaser.

The seller must apply to the VA for a formal release of liability. The seller must apply to the VA for a formal release of liability.

If the sale closes without first obtaining the release from the VA, If the sale closes without first obtaining the release from the VA, the veteran will find that he or she is fully liable in the case of a the veteran will find that he or she is fully liable in the case of a default.default.

2. Restoration of Entitlement2. Restoration of Entitlement A veteran who has paid off his or her loan, and sold the house A veteran who has paid off his or her loan, and sold the house

on which the loan was secured, may have all his or her on which the loan was secured, may have all his or her entitlement restored. TQentitlement restored. TQ

ENTITLEMENT is the maximum insurance amount that the VA ENTITLEMENT is the maximum insurance amount that the VA will provide for the veteran’s home loan. will provide for the veteran’s home loan.

By act of Congress, the veteran is entitled to the amount by By act of Congress, the veteran is entitled to the amount by virtue of his or her service in the armed forces. virtue of his or her service in the armed forces.

Entitlement may also be restored if the property is sold to Entitlement may also be restored if the property is sold to another veteran who substitutes his or her entitlement for the another veteran who substitutes his or her entitlement for the seller’s. seller’s.

To restore entitlement, the veteran must apply to the VA and To restore entitlement, the veteran must apply to the VA and fill out the necessary forms.fill out the necessary forms.

3. Eligibility3. Eligibility Eligibility requirements for a VA loan vary Eligibility requirements for a VA loan vary

depending on when and where a veteran served depending on when and where a veteran served and the length of the service. and the length of the service.

In general, the periods for active wartime service In general, the periods for active wartime service are:are:

WWII 09/16/40 - 07/25/47WWII 09/16/40 - 07/25/47 Korean Conflict 06/27/50 - 01/31/55Korean Conflict 06/27/50 - 01/31/55 Vietnam Era 08/05/64 - 05/07/75Vietnam Era 08/05/64 - 05/07/75 Persian Gulf War 08/02/90-TBDPersian Gulf War 08/02/90-TBD

Peacetime veterans are also eligible for the Peacetime veterans are also eligible for the periods:periods:

07/26/47 to 06/26/5007/26/47 to 06/26/50 02/01/55 to 08/04/6402/01/55 to 08/04/64 05/08/75 to 09/07/80 (enlisted) 10/16/81 (officer) 05/08/75 to 09/07/80 (enlisted) 10/16/81 (officer)

VA ELIGIBILITY VA ELIGIBILITY CONT #1CONT #1

THE MAIN POINT TO UNDERSTAND ON V.A. THE MAIN POINT TO UNDERSTAND ON V.A. LOANS AND THE ELIGIBILITY IS THAT IT LOANS AND THE ELIGIBILITY IS THAT IT DEPENDS WHEN YOU SERVED IN THE DEPENDS WHEN YOU SERVED IN THE MILITARY, WHAT DATES, POSSIBLY WERE MILITARY, WHAT DATES, POSSIBLY WERE YOU IN A WAR ZONE AND SO ON….IT ISEEMS YOU IN A WAR ZONE AND SO ON….IT ISEEMS ESSENTIALLY FAIR….SO THE DATES OF ESSENTIALLY FAIR….SO THE DATES OF SERVICE ARE ON YOUR DISCHARGE THE “DD-SERVICE ARE ON YOUR DISCHARGE THE “DD-214” THE MILITARY LOVES THEIR NUMBERED 214” THE MILITARY LOVES THEIR NUMBERED AND ACRONYMED PAPERWORK; SOME DAY AND ACRONYMED PAPERWORK; SOME DAY IT WILL MAKE SENSE (POSSIBLY TO YOU!!!) IT WILL MAKE SENSE (POSSIBLY TO YOU!!!) TQ TQTQ TQ

Eligibility (cont.)Eligibility (cont.) Selected reserves and National Guard are Selected reserves and National Guard are

eligible after six years of service. eligible after six years of service. Members of the military who have served in Members of the military who have served in

Iraq and Afghanistan or are currently serving Iraq and Afghanistan or are currently serving are eligible for all benefits. are eligible for all benefits.

The spouse of a serviceperson who died while The spouse of a serviceperson who died while in service. in service.

Lastly, Public Health Service officers, cadets at Lastly, Public Health Service officers, cadets at the service academies, some merchant the service academies, some merchant seamen of WWII, and officers of the National seamen of WWII, and officers of the National Oceanic and Atmospheric Administration may Oceanic and Atmospheric Administration may be eligible as well.be eligible as well.

4. VA Loan Guaranty 4. VA Loan Guaranty AmountsAmounts

The VA does not guarantee the entire amount of a loan. TQ The VA does not guarantee the entire amount of a loan. TQ A veteran’s maximum entitlement is currently $36,000.TQ A veteran’s maximum entitlement is currently $36,000.TQ

TQTQ This may be adjusted upwards on certain loans. This may be adjusted upwards on certain loans.

On October 10, 2008 the President signed the On October 10, 2008 the President signed the VETERANS VETERANS BENEFITS IMPROVEMENT ACT OF 2008BENEFITS IMPROVEMENT ACT OF 2008

The following are highlights of the changes to the The following are highlights of the changes to the program:program:

1. Authority to guarantee adjustable rate mortgages and hybrid ARMs 1. Authority to guarantee adjustable rate mortgages and hybrid ARMs has been extended through 9-30-2012has been extended through 9-30-2012

2. Refinance loans are available for up to 100% of the appraised value 2. Refinance loans are available for up to 100% of the appraised value of a home rather than the previous 89%of a home rather than the previous 89%

3. Guaranty amounts for loans of $417,000 or less are unaffected3. Guaranty amounts for loans of $417,000 or less are unaffected

4. On loans for more than $417,000, the VA will guarantee 25% of the 4. On loans for more than $417,000, the VA will guarantee 25% of the original loan amount up to a maximum guarantyoriginal loan amount up to a maximum guaranty

5. Partial Entitlement5. Partial Entitlement

A veteran who used his entitlement to A veteran who used his entitlement to purchase a home in the past may use purchase a home in the past may use that portion of his remaining that portion of his remaining entitlement to purchase a second entitlement to purchase a second home. TQhome. TQ

EXPLAIN SCENARIO…..EXPLAIN SCENARIO….. Example: Example:

A veteran used the maximum entitlement of A veteran used the maximum entitlement of $25,000 that was available in 1978 to purchase $25,000 that was available in 1978 to purchase a home. Today, he wishes to purchase a second a home. Today, he wishes to purchase a second vacation home. The home is priced at $100,000. vacation home. The home is priced at $100,000. The veteran has $11,000 remaining in The veteran has $11,000 remaining in entitlement ($36,000 - $25,000 = $11,000). entitlement ($36,000 - $25,000 = $11,000).

B. THE VA LOAN PROCESSB. THE VA LOAN PROCESS The first step in the process is to determine if The first step in the process is to determine if

the veteran has a Certificate of Eligibility which the veteran has a Certificate of Eligibility which was given to him/her as part of their discharge was given to him/her as part of their discharge papers. papers.

A A CERTIFICATE OF ELIGIBILITY CERTIFICATE OF ELIGIBILITY notifies the notifies the lender that the veteran is eligible for a VA loan lender that the veteran is eligible for a VA loan and what his or her entitlement will be. and what his or her entitlement will be.

All lenders are responsible for conforming in full All lenders are responsible for conforming in full to VA requirements. TQ (many times the loan to VA requirements. TQ (many times the loan officer goes to get the paperwork for their officer goes to get the paperwork for their client.) Public Information TQ TQclient.) Public Information TQ TQ

This includes the use of VA-approved appraisers This includes the use of VA-approved appraisers and underwriters. and underwriters.

IV. CHAPTER SUMMARYIV. CHAPTER SUMMARY The FHA and VA loan programs are huge federal insurance The FHA and VA loan programs are huge federal insurance

programs that are backed by the full faith and credit of the U.S. programs that are backed by the full faith and credit of the U.S. Government. TQGovernment. TQ

The FHA has been a boon to the lending, construction, and real The FHA has been a boon to the lending, construction, and real estate markets since its beginning. estate markets since its beginning.

MMI TQMMI TQ Additional Programs (203b, 251, 203k)Additional Programs (203b, 251, 203k) Title ITitle I

The VA programs are designed to provide veterans returning to The VA programs are designed to provide veterans returning to civilian life an opportunity to enjoy the benefits of home civilian life an opportunity to enjoy the benefits of home ownership. ownership.

No prepayment penaltiesNo prepayment penalties No mortgage insuranceNo mortgage insurance Liable to U.S. Gov’t (Indemnity)Liable to U.S. Gov’t (Indemnity) AssumableAssumable Entitlement/Partial EntitlementEntitlement/Partial Entitlement

Seller FinancingSeller Financing

Which lenders do seller Which lenders do seller financing?financing?

Trick Question!Trick Question!NONE! TQNONE! TQ

Seller FinancingSeller Financing In tight money markets, it’s not uncommon for In tight money markets, it’s not uncommon for

a seller to make a deal to finance part of the a seller to make a deal to finance part of the purchase price. TQpurchase price. TQ

Mortgage money from traditional lenders may Mortgage money from traditional lenders may be too costly in terms of interest rates, or be too costly in terms of interest rates, or simply unavailable. simply unavailable.

Buyers may be unable to come up with the Buyers may be unable to come up with the necessary cash for the down payment necessary cash for the down payment required by a conventional mortgage, or required by a conventional mortgage, or simply wish to take advantage of the low simply wish to take advantage of the low interest rate on the seller’s existing mortgage. interest rate on the seller’s existing mortgage.

In any case, sellers can often enhance the In any case, sellers can often enhance the salability of their properties by offering salability of their properties by offering financing in the form of purchase money financing in the form of purchase money mortgages or land contracts. TQ mortgages or land contracts. TQ

I. Purchase Money I. Purchase Money

Mortgage/Trust DeedMortgage/Trust Deed

A A PURCHASE MONEY MORTGAGE PURCHASE MONEY MORTGAGE is given by a is given by a buyer to a seller to finance the purchase. buyer to a seller to finance the purchase.

The seller is the The seller is the MORTGAGEEMORTGAGEE or or BENEFICIARYBENEFICIARY. . TQTQ

The advantage of this arrangement is that sellers The advantage of this arrangement is that sellers are not bound by institutional policies regarding are not bound by institutional policies regarding loan ratios, interest rates, or qualifying standards. loan ratios, interest rates, or qualifying standards. (THEY CAN MAKE THEIR OWN (THEY CAN MAKE THEIR OWN U/W DECISION). TQU/W DECISION). TQ

The seller is taking a risk with a purchase money The seller is taking a risk with a purchase money mortgage, but it may be justified if it allows the sale mortgage, but it may be justified if it allows the sale to proceed or enables the seller to get a higher to proceed or enables the seller to get a higher price for his or her home.price for his or her home.

Because the profit from the sale is spread over Because the profit from the sale is spread over several years, the seller may benefit from a lower several years, the seller may benefit from a lower rate of income taxation.rate of income taxation.

A.A. UNENCUMBERED PROPERTYUNENCUMBERED PROPERTY(THE BEST SCENARIO – TQ)(THE BEST SCENARIO – TQ)

FREE & CLEARFREE & CLEAR– The simplest form of purchase money financing is where The simplest form of purchase money financing is where

the seller has the seller has clearclear title to the property, title to the property, freefree of any of any mortgages or other liens. mortgages or other liens.

– The buyer and seller simply negotiate the amount and The buyer and seller simply negotiate the amount and terms of their financing arrangement and draw up the terms of their financing arrangement and draw up the appropriate documents. appropriate documents.

Purchase money financing may take any of the many Purchase money financing may take any of the many forms discussed in earlier chapters, such as variable forms discussed in earlier chapters, such as variable interest rates, graduated payments, or partial interest rates, graduated payments, or partial amortization with balloon payment. amortization with balloon payment.

Virtually the only limit is the imagination of the parties Virtually the only limit is the imagination of the parties & the legality & title insurability of the transaction.& the legality & title insurability of the transaction.

Example: – Grandma Perkins decides to move to her sister’s farm in

the country and wants to sell her townhouse. The mortgage on the townhouse has long since been paid. Mr. and Mrs. Jenkins want to buy the townhouse, but cannot qualify for conventional financing. However, Grandma believes they are honest and reliable people who can be trusted to pay off a loan, so she offers them the following deal: sales price of $90,000, with $8,000 down and the balance in the form of a purchase money loan, secured by deed of trust with Grandma as the beneficiary. Interest will accrue at the rate of 6% for the first year, and increase ½ of 1% per year until it reaches 7.5%, where it will stay for the balance of the 30-year loan term. Payments are to be interest only for the first six years, and the principal then fully amortized over the balance of the term.

B. ENCUMBERED PROPERTYB. ENCUMBERED PROPERTY

Because many residential properties are Because many residential properties are encumbered by existing mortgages or encumbered by existing mortgages or deeds of trust, seller financing often deeds of trust, seller financing often involves assumption or refinancing of involves assumption or refinancing of existing debt. existing debt.

1. Assumption1. Assumption

If the seller’s existing mortgage does not If the seller’s existing mortgage does not contain an alienation clause (due-on-sale contain an alienation clause (due-on-sale clause), it is assumableclause), it is assumable. TQ. TQ

The buyer can simply agree to take over The buyer can simply agree to take over payment of the seller’s debt with the terms of payment of the seller’s debt with the terms of the note unchanged. the note unchanged.

The property still serves as the basic security The property still serves as the basic security for the loan, but the buyer becomes primarily for the loan, but the buyer becomes primarily liable for repayment of the debt. liable for repayment of the debt.

2. Assumption and Release2. Assumption and Release

An assumption can take two forms. An assumption can take two forms.

In the first case, it is an agreement strictly In the first case, it is an agreement strictly between the buyer and seller. The buyer between the buyer and seller. The buyer assumes liability for the loan, but the seller is assumes liability for the loan, but the seller is not completely released from responsibility; he not completely released from responsibility; he or she remains secondarily liable. or she remains secondarily liable.

In order for the seller to be relieved of this In order for the seller to be relieved of this responsibility, he or she must obtain a release responsibility, he or she must obtain a release from the lender. from the lender.

3. Alienation Clause3. Alienation Clause

The seller’s existing mortgage may contain an The seller’s existing mortgage may contain an ALIENATIONALIENATION CLAUSECLAUSE, which is designed to , which is designed to restrict the seller’s right to transfer the property. restrict the seller’s right to transfer the property.

The clause may be triggered by the transfer of title The clause may be triggered by the transfer of title or by the transfer of significant interest in the or by the transfer of significant interest in the property (e.g., a long-term lease). property (e.g., a long-term lease).

The alienation clause may give the lender the right The alienation clause may give the lender the right to declare the entire loan balance immediately due to declare the entire loan balance immediately due and payable, the right to raise the interest rate on and payable, the right to raise the interest rate on the loan, or the right to do either at its option.the loan, or the right to do either at its option.

C. PURCHASE MONEY SECOND C. PURCHASE MONEY SECOND MORTGAGEMORTGAGE

If the buyer does not have sufficient cash to cover the If the buyer does not have sufficient cash to cover the difference between the sales price and the institutional difference between the sales price and the institutional financing, a purchase money second mortgage can be financing, a purchase money second mortgage can be the key to closing the sale. TQ (the key to closing the sale. TQ (riskriskier for the seller!ier for the seller!))

Seller-sponsored second mortgages are subject to the Seller-sponsored second mortgages are subject to the same lien priority rules as institutional mortgages. same lien priority rules as institutional mortgages.

In the event of default and foreclosure, the first In the event of default and foreclosure, the first mortgage is paid in full from the proceeds of sale before mortgage is paid in full from the proceeds of sale before any proceeds are allocated to the second mortgage. any proceeds are allocated to the second mortgage.

Sellers who take back second mortgages should keep Sellers who take back second mortgages should keep this in mind when negotiating the amount of seller this in mind when negotiating the amount of seller financing. financing.

D. SELLER-SPONSORED D. SELLER-SPONSORED WRAP-AROUND FINANCINGWRAP-AROUND FINANCING

The The WRAPAROUND MORTGAGE WRAPAROUND MORTGAGE is a loan is a loan transaction in which the lender assumes transaction in which the lender assumes responsibility for an existing mortgage.responsibility for an existing mortgage.

The “wrap” is sometimes used to get The “wrap” is sometimes used to get around the provisions of an alienation around the provisions of an alienation clause (which limits the ability to assume a clause (which limits the ability to assume a loan). loan).

The attractiveness of the wrap-around is The attractiveness of the wrap-around is that it enables the buyer to obtain that it enables the buyer to obtain financing at below market interest rates financing at below market interest rates while still providing a market rate of return while still providing a market rate of return for the seller. for the seller.

E. WRAP-AROUND VS. ASSUMPTION E. WRAP-AROUND VS. ASSUMPTION PLUS SELLER SECONDPLUS SELLER SECOND

In an assumption, the buyer receives the In an assumption, the buyer receives the benefit of an existing low interest rate loan. benefit of an existing low interest rate loan.

If the transaction is structured with a wrap-If the transaction is structured with a wrap-around loan at market rates, the seller receives around loan at market rates, the seller receives the benefit of the existing low interest rate the benefit of the existing low interest rate loan and is able to receive a very attractive loan and is able to receive a very attractive rate of return on the portion of the financing rate of return on the portion of the financing that is actually extended by the seller.that is actually extended by the seller.

A wrap-around transaction can also be A wrap-around transaction can also be structured so that the seller receives above structured so that the seller receives above market rates on the credit actually extended market rates on the credit actually extended and, at the same time, the buyer pays below and, at the same time, the buyer pays below market rates on the total amount financed.market rates on the total amount financed.

F. RESALE OF PURCHASE F. RESALE OF PURCHASE MONEY SECURITIESMONEY SECURITIES

If a seller wants the option of cashing out at some time If a seller wants the option of cashing out at some time in the future, he or she can do so without giving up the in the future, he or she can do so without giving up the ability to offer purchase money financing. ability to offer purchase money financing.

If the seller desires to resell his or her loan If the seller desires to resell his or her loan immediately or in the future, the seller should use immediately or in the future, the seller should use standard Fannie Mae forms for writing the financing standard Fannie Mae forms for writing the financing agreement with the buyer. agreement with the buyer.

The seller then has the option, at any time, of ordering The seller then has the option, at any time, of ordering the approved lender to pass the loan through to Fannie the approved lender to pass the loan through to Fannie Mae, thereby cashing out the seller.Mae, thereby cashing out the seller.

DO NOT ASSUME THE ABOVE IS CORRECT TQ TQ DO NOT ASSUME THE ABOVE IS CORRECT TQ TQ

II. Land ContractII. Land Contract

Usually used to sell…..LAND! TQUsually used to sell…..LAND! TQ

In some areas, a popular form of purchase money financing is In some areas, a popular form of purchase money financing is the land contract. the land contract.

The distinguishing feature of a land contract is that the seller The distinguishing feature of a land contract is that the seller retains legal title to the property until the buyer has made all of retains legal title to the property until the buyer has made all of

the payments on the contract.the payments on the contract.

Land ContractLand Contract

SEE THE CONTRACT CAN BE SIMPLE….TQ, BUT PROBABLY WON’T BE!! TQ

A. CONTRACT SUBJECT TO EXISTING A. CONTRACT SUBJECT TO EXISTING

MORTGAGEMORTGAGE It is rare to find a seller whose property is not encumbered by It is rare to find a seller whose property is not encumbered by

some form of mortgage lien. some form of mortgage lien. The simplest way to do this is to make the contract subject to the The simplest way to do this is to make the contract subject to the

existing mortgage. existing mortgage.

The contract is written for the full purchase price, but the buyer’s The contract is written for the full purchase price, but the buyer’s property rights under the contract are subject to the rights of the property rights under the contract are subject to the rights of the seller’s mortgagee. seller’s mortgagee.

The seller remains liable to make the payments on the loan and The seller remains liable to make the payments on the loan and the property may be foreclosed if the seller defaults. the property may be foreclosed if the seller defaults.

The obvious problem with this arrangement, from the buyer’s The obvious problem with this arrangement, from the buyer’s point of view, is how to make sure the seller does not default on point of view, is how to make sure the seller does not default on the loan payments. the loan payments.

The solution is to include in the contract a provision requiring the The solution is to include in the contract a provision requiring the seller to make timely payments on his or her loan and allowing seller to make timely payments on his or her loan and allowing the buyer to make such payments directly to the lender if the the buyer to make such payments directly to the lender if the seller fails to do so. TQ TQseller fails to do so. TQ TQ

1. Contract Escrow1. Contract Escrow In a CONTRACT ESCROW, the buyer makes payments into the In a CONTRACT ESCROW, the buyer makes payments into the

escrow account, and the escrow agent pays the seller’s loan escrow account, and the escrow agent pays the seller’s loan payments out of the account. The balance in the account (after payments out of the account. The balance in the account (after the loan payments are made) is disbursed to the seller. In this the loan payments are made) is disbursed to the seller. In this fashion, the buyer is protected from the consequences of a fashion, the buyer is protected from the consequences of a default by the seller. GOOD LUCK FINDING THE ESCROW CO. TO default by the seller. GOOD LUCK FINDING THE ESCROW CO. TO DO THIS ….TQDO THIS ….TQ

2. Estoppel Letter2. Estoppel Letter It is always good practice, in any transaction where an It is always good practice, in any transaction where an

existing mortgage is to be left in place, to obtain the existing mortgage is to be left in place, to obtain the lender’s written consent to the proposed transaction. lender’s written consent to the proposed transaction.

This is not essential where there is no alienation clause This is not essential where there is no alienation clause in the seller’s promissory note or mortgage. in the seller’s promissory note or mortgage.

The lender’s consent is given in the form of a letter, The lender’s consent is given in the form of a letter, called an called an ESTOPPEL LETTERESTOPPEL LETTER, acknowledging the , acknowledging the transfer and waiving the lender’s right to accelerate the transfer and waiving the lender’s right to accelerate the loan on account of the transfer. loan on account of the transfer.

By writing the letter, the lender is By writing the letter, the lender is ESTOPPEDESTOPPED (legally (legally prevented) from later trying to accelerate the loan on prevented) from later trying to accelerate the loan on the basis of the sale. the basis of the sale. UNLESS THEIR UNLESS THEIR FORMS/PAPERWORK PROHIBIT THIS!!! TQFORMS/PAPERWORK PROHIBIT THIS!!! TQ

B. CONTRACT WITH B. CONTRACT WITH ASSUMPTION OF EXISTING ASSUMPTION OF EXISTING

MORTGAGEMORTGAGE If the seller does not wish to remain liable for If the seller does not wish to remain liable for

the mortgage payments, but the buyer cannot the mortgage payments, but the buyer cannot (or will not) refinance the debt, the buyer may (or will not) refinance the debt, the buyer may be able to assume (take over) the seller’s be able to assume (take over) the seller’s mortgage and pay the balance of the purchase mortgage and pay the balance of the purchase price under a contract. price under a contract.

In this arrangement, the buyer becomes In this arrangement, the buyer becomes personally liable for payment of the mortgage personally liable for payment of the mortgage debt; the buyer makes one payment to the debt; the buyer makes one payment to the mortgagee and another payment to the seller.mortgagee and another payment to the seller.

C. CONTRACT PLUS C. CONTRACT PLUS ASSUMPTION PLUS ASSUMPTION PLUS

INSTITUTIONAL SECONDINSTITUTIONAL SECOND In some transactions, the seller will be willing to In some transactions, the seller will be willing to

let the buyer assume the existing mortgage let the buyer assume the existing mortgage and also be willing to finance part of the price and also be willing to finance part of the price on a land contract, but he or she will desire at on a land contract, but he or she will desire at least a partial cash-out of his or her equity, least a partial cash-out of his or her equity, perhaps to use as a down payment on another perhaps to use as a down payment on another purchase.purchase.

If the buyer cannot come up with the cash from If the buyer cannot come up with the cash from his or her own assets, there is still an his or her own assets, there is still an alternative: an institutional second mortgage.alternative: an institutional second mortgage.

1. Lien Priority1. Lien Priority

2. Deeds and Security2. Deeds and Security

III. Other Forms of III. Other Forms of Creative FinancingCreative Financing

A. LEASE/OPTIONA. LEASE/OPTION

The lease/option plan is comprised of two The lease/option plan is comprised of two elements: a lease, and an option to purchase elements: a lease, and an option to purchase the leased property within a specific time the leased property within a specific time period (usually within the term of the lease). period (usually within the term of the lease).

An An OPTIONOPTION is an agreement to keep open, is an agreement to keep open, for a predetermined period of time, an offer for a predetermined period of time, an offer to purchase or sell property.to purchase or sell property. TQTQ– OPTIONEEOPTIONEE– OPTIONOROPTIONOR

1. Consideration for an 1. Consideration for an OptionOption

To be enforceable, an option must be supported by To be enforceable, an option must be supported by consideration. consideration.

The The CONSIDERATION ($$ USUALLY $$)CONSIDERATION ($$ USUALLY $$) is is something of value given by the optionee to the something of value given by the optionee to the optionor in return for a commitment to sell the optionor in return for a commitment to sell the property to the optionee at some time in the future. property to the optionee at some time in the future.

The consideration is usually a sum of money, but it The consideration is usually a sum of money, but it can be anything of value. can be anything of value.

It is sometimes called the It is sometimes called the OPTION MONEYOPTION MONEY. .

2. Other Option Essentials2. Other Option Essentials An option is required to include all of the terms An option is required to include all of the terms

of the underlying contract of sale. of the underlying contract of sale.

This means that a binding contract is formed at This means that a binding contract is formed at the moment the optionee exercises his or her the moment the optionee exercises his or her option to purchase. option to purchase.

Required information includes, but is not Required information includes, but is not necessarily limited to, the following:necessarily limited to, the following:

1. names and addresses of the optionor and the optionee;1. names and addresses of the optionor and the optionee;2. date of the option;2. date of the option;3. nature and amount of consideration;3. nature and amount of consideration;4. words indicating that an option is being given;4. words indicating that an option is being given;5. date option expires; and5. date option expires; and6. purchase price and essential terms.6. purchase price and essential terms.

3. How Does a Lease/Option 3. How Does a Lease/Option Work?Work?

The seller/landlord leases the property to the The seller/landlord leases the property to the buyer/tenant for a specific term (six months, buyer/tenant for a specific term (six months, one year, etc.), with the provision that part of one year, etc.), with the provision that part of the rental payments may be applied to the the rental payments may be applied to the purchase price if the tenant decides to buy purchase price if the tenant decides to buy before the lease expires.before the lease expires.

The essential terms of a lease/option, in The essential terms of a lease/option, in addition to the option requirements addition to the option requirements recited previously, include:recited previously, include:

1. rental amount;1. rental amount;2. rent credit, if any;2. rent credit, if any;3. reference to security deposit, if any;3. reference to security deposit, if any;4. a statement that a default by the optionee/lessee in 4. a statement that a default by the optionee/lessee in

connection with the lease agreement will result in a connection with the lease agreement will result in a forfeiture of option rights; andforfeiture of option rights; and

5. type of acceptable financing.5. type of acceptable financing.

4. Advantages and 4. Advantages and Disadvantages of the Disadvantages of the

Lease/OptionLease/Option The main advantage of the lease/option The main advantage of the lease/option

is keeping a sale alive until the parties is keeping a sale alive until the parties are in a position to close. are in a position to close. TQTQ

The primary disadvantage of the The primary disadvantage of the lease/option is that the “seller” lease/option is that the “seller” cannot sell the property to anyone cannot sell the property to anyone other than the tenant during the other than the tenant during the term of the option.term of the option. TQ TQ

5. Ways to Structure a 5. Ways to Structure a Lease/OptionLease/Option

Crediting rental payments may be done Crediting rental payments may be done in a variety of ways, depending on the in a variety of ways, depending on the needs of the buyerneeds of the buyer

-(What the future lender looks for!!)TQ-(What the future lender looks for!!)TQ Rental payments may be credited Rental payments may be credited

towards the amount needed for a down towards the amount needed for a down payment if the buyer is short on cash payment if the buyer is short on cash (DOCUMENTATION)(DOCUMENTATION)

Payments can be used to reduce the Payments can be used to reduce the amount of financing required (amount of financing required (only the only the amount that is over what the current amount that is over what the current “normal” rent would be.TQ“normal” rent would be.TQ

B. LEASE CONTRACT SEPARATE B. LEASE CONTRACT SEPARATE FROM OPTION CONTRACTFROM OPTION CONTRACT

A problem with the lease/option agreement is A problem with the lease/option agreement is that too often the optionee/tenant does not that too often the optionee/tenant does not exercise the right to purchase. exercise the right to purchase.

The result is wasted effort, with no sale and no The result is wasted effort, with no sale and no commission.commission.

A more forceful, and consistently more A more forceful, and consistently more successful, method of structuring lease/option successful, method of structuring lease/option arrangements is to treat the lease and the arrangements is to treat the lease and the option as two separate contracts. option as two separate contracts.

TRIPLE-NET LEASE TRIPLE-NET LEASE - in addition to rent, - in addition to rent, buyer is responsible for payment of property buyer is responsible for payment of property taxes, insurance and utilities. taxes, insurance and utilities.

C. LEASE/PURCHASE OR C. LEASE/PURCHASE OR LEASE/SALELEASE/SALE

A lease/purchase or lease/sale is quite similar A lease/purchase or lease/sale is quite similar to a lease/option. to a lease/option.

The primary difference is that, along with a The primary difference is that, along with a lease, the buyer and seller sign a purchase lease, the buyer and seller sign a purchase and sale agreement instead of an option. and sale agreement instead of an option.

Most agents believe that a lease/purchase Most agents believe that a lease/purchase arrangement is more likely to result in a arrangement is more likely to result in a successful sale than a lease/option. successful sale than a lease/option.

As with a lease/option, the most reliable As with a lease/option, the most reliable indicator of a successful lease/purchase is indicator of a successful lease/purchase is usually the amount of money put up by the usually the amount of money put up by the buyer. $$ TQbuyer. $$ TQ

D. EQUITY EXCHANGESD. EQUITY EXCHANGES When a buyer cannot come up with sufficient cash When a buyer cannot come up with sufficient cash

for a sale, for a sale, the difference can be made up with the difference can be made up with other assetsother assets, such as land, another house, cars, , such as land, another house, cars, boats, or any other property in which the buyer boats, or any other property in which the buyer has an equity interest and that the seller would be has an equity interest and that the seller would be willing to accept as part of the down payment. willing to accept as part of the down payment.

If the transaction involves an exchange of real If the transaction involves an exchange of real estate that is used in a trade or business, or is estate that is used in a trade or business, or is held for the production of income or investment, held for the production of income or investment, somesome or all of the capital gain can be deferred in a or all of the capital gain can be deferred in a “tax-free” exchange.“tax-free” exchange.

E. PARTICIPATION LOANE. PARTICIPATION LOAN In a In a PARTICIPATION LOAN PARTICIPATION LOAN or shared equity loan, the or shared equity loan, the

buyer enters into a form of partnership with an investor buyer enters into a form of partnership with an investor who provides cash for the sale. who provides cash for the sale.

The investor may be the seller, a bank, or any private The investor may be the seller, a bank, or any private investor. investor.

Instead of charging interest, the investor in a participation Instead of charging interest, the investor in a participation plan receives a percentage of the plan receives a percentage of the EQUITY EQUITY (the difference (the difference between the property’s value and the indebtedness between the property’s value and the indebtedness secured by the property). secured by the property).

Participation loans can be fairly complex in comparison to Participation loans can be fairly complex in comparison to other creative financing methods. other creative financing methods.

Agreements such as these should be clearly spelled out, Agreements such as these should be clearly spelled out, with provisions for all possible contingencies. with provisions for all possible contingencies.

The services of an experienced real estate attorney should The services of an experienced real estate attorney should always be obtained when preparing participation plan always be obtained when preparing participation plan financing.financing.

IV. Broker’s ResponsibilitiesIV. Broker’s Responsibilities

Biggest one is don’t get sued! TQBiggest one is don’t get sued! TQKeep everything on the up and up! TQKeep everything on the up and up! TQ

Be honest! TQBe honest! TQTell the Truth, even if you’re going to Tell the Truth, even if you’re going to

lose money. TQlose money. TQ

Just do it right, get help, use an attorney Just do it right, get help, use an attorney and be sure everything is signed and and be sure everything is signed and notarized and the deposit money is notarized and the deposit money is

verified! TQverified! TQ

Broker’s ResponsibilitiesBroker’s Responsibilities

The old saying “where there’s a will, there’s a The old saying “where there’s a will, there’s a way” is particularly true of creative finance. way” is particularly true of creative finance.

The advantages of open-minded negotiation The advantages of open-minded negotiation among buyer, seller, lender, and agent cannot among buyer, seller, lender, and agent cannot be overemphasized. be overemphasized.

However, when using an arrangement that has However, when using an arrangement that has not been tried and proven by others in the not been tried and proven by others in the past, the greatest care should be taken by the past, the greatest care should be taken by the broker to protect the rights of all parties broker to protect the rights of all parties through detailed specification of all terms of through detailed specification of all terms of the agreement, preferably with the advice and the agreement, preferably with the advice and assistance of legal counsel. assistance of legal counsel.

V. CHAPTER SUMMARYV. CHAPTER SUMMARY

Seller financing provides an almost limitless variety of creative Seller financing provides an almost limitless variety of creative alternatives to institutional financing and is particularly alternatives to institutional financing and is particularly attractive in tight money markets when loans from institutional attractive in tight money markets when loans from institutional lenders often have prohibitive interest rates. lenders often have prohibitive interest rates.

Seller financing is also attractive to borrowers who cannot Seller financing is also attractive to borrowers who cannot qualify for an institutional loan. qualify for an institutional loan.

However, for seller financing to be a feasible alternative, the However, for seller financing to be a feasible alternative, the seller must not have an immediate need for cash from the sale. seller must not have an immediate need for cash from the sale.

Most seller-financed sales are of properties that are Most seller-financed sales are of properties that are encumbered by previous financing. encumbered by previous financing.

Chapter Summary (cont.)Chapter Summary (cont.)

There are various ways to structure such a There are various ways to structure such a transaction, and they include:transaction, and they include:

AssumptionAssumption Wrap-around FinancingWrap-around Financing Land Contract Subject to Existing FinancingLand Contract Subject to Existing Financing Contract with Assumption of Existing MortgageContract with Assumption of Existing Mortgage Contract Plus Assumption Plus Institutional Second MortgageContract Plus Assumption Plus Institutional Second Mortgage Lease OptionLease Option Lease Contract Separate from Option ContractLease Contract Separate from Option Contract Lease/Purchase Lease/Purchase Equity ExchangeEquity Exchange Participation PlanParticipation Plan

Finally, professional brokers and agents who are Finally, professional brokers and agents who are involved in creative financing need to exercise involved in creative financing need to exercise caution, enlisting the services of a qualified real caution, enlisting the services of a qualified real estate attorney. estate attorney. TQ TQTQ TQ

Final Tip of the Night!Final Tip of the Night!

Sometimes, Sometimes, if youif you

have tohave to, wear a tie…., wear a tie….

Hmmmmmm…….what is the??

Essay Question:

Why I (you) would write up a lease option/land contract in today’s market? (1 PAGE, 5 paragraphs!)