Real Estate Finance
FINANCING
Learning Objectives:
1. Sources of Financing
2. Types of loans
3. Loan Terms
4. Underwriting
5. Traditional Third Party Financing
6. Non-Traditional Third Party Financing
7. Application to a residential real estate investment
OUTLINE
1. Sources of Financing
a. Primary and Secondary Markets
i. The Primary Market: This is where the loan is originated. When you are ready to buy your house, you either contact a lender (at a bank or credit union) or a mortgage broker to establish a relationship for borrowing funds for the purchase of your home. It is during this process that the amount of the loan is analyzed (the amount you can borrow), the terms are reduced to writing through the Good Faith Estimate (GFE), which includes the interest rate, discount points, payback period, down-payment, and escrows, the appraisal, the type and form of loan are selected (conventional, FHA, VA), and whether the loan originator will hold and service the loan or sell it. The old GFE provided a statement as to the number of loans the originator sold (e.g., 0-25%; 26-50%; 51-75%; or 76-100%).
ii. The Secondary Market: If a loan originator decides to sell the loan, it will generally be sold in the secondary market. Two purchasers of loans in the secondary market up until September 2008 were Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSE’s), and provided a vehicle for the secondary market. Up until September 7, 2008, they guaranteed about one-half of the US mortgage debt. When an originator sells its loans in the secondary market, this provides capital back to the loan originators to issue on new loans (which creates an efficient primary market). For a little more background on GSE’s, these entities are privately owned, but must conform to standards set by Congress, and are subject to congressional oversight. Loans that are sold in the secondary market must use standard (uniform) documentation, including the application,
Learning Objectives:
1. Sources of Financing
2. Types of loans
3. Loan Terms
4. Underwriting
5. Traditional Third Party Financing
6. Non-Traditional Third Party Financing
7. Application to a residential real estate investment
OUTLINE
1. Sources of Financing
a. Primary and Secondary Markets
i. The Primary Market: This is where the loan is originated. When you are ready to buy your house, you either contact a lender (at a bank or credit union) or a mortgage broker to establish a relationship for borrowing funds for the purchase of your home. It is during this process that the amount of the loan is analyzed (the amount you can borrow), the terms are reduced to writing through the Good Faith Estimate (GFE), which includes the interest rate, discount points, payback period, down-payment, and escrows, the appraisal, the type and form of loan are selected (conventional, FHA, VA), and whether the loan originator will hold and service the loan or sell it. The old GFE provided a statement as to the number of loans the originator sold (e.g., 0-25%; 26-50%; 51-75%; or 76-100%).
ii. The Secondary Market: If a loan originator decides to sell the loan, it will generally be sold in the secondary market. Two purchasers of loans in the secondary market up until September 2008 were Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSE’s), and provided a vehicle for the secondary market. Up until September 7, 2008, they guaranteed about one-half of the US mortgage debt. When an originator sells its loans in the secondary market, this provides capital back to the loan originators to issue on new loans (which creates an efficient primary market). For a little more background on GSE’s, these entities are privately owned, but must conform to standards set by Congress, and are subject to congressional oversight. Loans that are sold in the secondary market must use standard (uniform) documentation, including the application,