# Real Estate Finance Study Set 1

## Quiz 8 :Underwriting and Financing Residential Properties

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A loan with the following terms is being made: Fixed rate, constant monthly payment. Closing date February 9th. 9% interest rate. Prepaid interest due at closing. $70,000 mortgage loan amount.$1,500 loan discount points to be paid by the buyer/borrower to the lender. 25-year term, monthly payments, fully amortizing. a. Calculate the APR for federal truth-in-lending purposes. b. Do you think that the APR calculated in (a) reflects the likely return that the lender will receive over the term of the loan List specific reasons that the lender's actual return might be different from the APR.
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Annual Percentage Return
Mr. X is a local resident of the USA. He made a fixed rate loan of amount $70,000 for 25 year at 9% annual return. Payment as Installment should be paid on the monthly basis. The borrower/buyer should pay to Mr. X,$1,500 as discount point.
(a)
Calculation of Annual percentage rate (APR) is provided in Excel sheet.
Rows B2 to Row B7 provide the information about the loan and screen shot is provides below:
Under the calculation box net present value of Mortgage loan is calculated by the actual loan minus the prepaid expenses. Cell (E12) shows the value of net present value of loan. Total number of period of installment is shows in cell (E13) which is calculated by multiplication of number of year and number of payment in a year.
In cell (E16) value of installment per month is calculated by following formula:
Where,
Rate is 9%
Nper is 300
PV is $70,000 Use the following screenshot to calculate the PMT: In cell (E16) value of PMT is calculated as$587.44.
Based on PMT value of APR is calculated in Cell E(19) which is calculated by following formula:
Nper is 300
PMT is $587.44 PV is net present value of loan that is$68,500
Use the following screenshot to calculate the RATE:
From the calculation it is fount that APR monthly is 0.77% which shows in Cell (E19). Based on value of monthly APR, annual APR is calculated in cell (E20). Thus APR for the loan is
(b)
Actual value of return may differ from the annual percentage return because of following reasons:
1. In the APR calculation it is assume that prepaid expenses is paid by buyer/borrower is at the time of loan disbursement but in actual scenario prepaid expenses may pay later or before the loan disbursement.
2. The lender has some other operating expenses in disbursement of loan which is not considered in the APR calculation.
3. Lender's salary is not considered in APR calculation.

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What is the legislative intent of federal truth-in-lending disclosures, and what specific disclosures are required under the act
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Federal Truth-in-Lending (FTL):
Federal truth-in-lending deals with the cost of mortgage credit, lenders are required to disclose financial information given in the mortgage loan agreement to individuals purchasing one to four family residences. Under this act, the commercial real estate transactions are generally excluded.
The specific disclosures required under Federal Truth-in-Lending act are:
The financial information: The intent of federal truth-in-lending legislation necessitates lenders in disclosing financial information to its borrowers contained in loan agreements and should be in uniform manner.
Cost of Credit: The effective cost of credit to the borrower on an annual basis must be disclosed using actuarial method.
Amount financed: Deducting any finance charges which are paid at closing, the mortgage amount is calculated.
Number of payments: The number of time the payment made by a borrower must be disclosed in federal truth-in-lending legislation.
Amount of payments: The monthly payments amount in dollars needs to be disclosed. In case the amount of payment each month varies due to the cost of mortgage insurance, then the highest and the lowest payment amounts will be disclosed.
Filing fees: The fees for liens against the loan assets must be disclosed as statutory fees by the lender.

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For what items may a lender require escrow accounts from a borrower
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Escrow Account
An Escrow account is defined as a not interest bearing account in to which a buyer prepay the monthly installment and property taxes and seller deposit the earnings taxes.
This type of account is used for real estate purposes held by a neutral party during the phase of transaction between buyer and seller. Escrow account is generally required in very few type of estate.
Escrow account is generally created by lender to protect himself from the default of the buyer.
Type of Estate in which escrow account is required is mention below:
1. The Estate in which the loan amount is very high. In this type of estate the lender require escrow account.
2. The Estate whose depreciation value is very high, the lender require escrow account.
3. When loan to value of estate is more than 80 percent, lender require escrow account.
4. When the probability of hazards on the estate is very high even then the lender require escrow account.
In US escrow payment is part of mortgage payment. This amount is over the principal and interest amount. It is also used to pay insurance and taxes.

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List the closing cost items, which require RESPA disclosure. What items may be excluded from disclosures under the act What form can these disclosures take
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You are a new loan officer with Alpha Mortgage, and the manager of the loan department has just presented a problem to you. He is unable to complete the APR calculation on an adjustable rate mortgage which a borrower applied for yesterday. The loan features initial payments based on a 10 percent rate of interest, while the current composite rate on the loan is 13 percent. No discount points have been paid by any party to the transaction, and any difference between borrower payments and the interest payment required at the composite rate will be accrued in the mortgage balance in the form of negative amortization. The mortgage amount desired by the borrower is $65,000 for a 30-year term, but a one-time mortgage insurance premium of$2,400 is being funded as a part of the loan amount, making the total loan balance $67,400. The borrower is paying$1,600 in prepaid finance charges at closing. a. Determine the APR, assuming that the ARM is made with a 2 percent annual and 5 percent over-the-life interest rate cap. b. In what way does the APR disclosure aid the borrower in understanding the terms of this specific loan agreement What are some of the problems with the APR calculations on ARMs
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What types of fees and conditions are prohibited under RESPA
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What assumptions about future composite rate of interest on an adjustable rate mortgage is made when determining the APR for federal truth-in-lending disclosures
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When would the cost of credit life insurance be included in the finance charge of an APR calculations for the truth-in-lending disclosures
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On August 20, Mr. and Mrs. Cleaver decided to buy a property from Mr. and Mrs. Ward for $105,000. On August 30, Mr. and Mrs. Cleaver obtained a loan commitment from OKAY National Bank for an$84,000 conventional loan at 10 percent for 30 years. The lender informs Mr. and Mrs. Cleaver that a \$2,100 loan origination fee will be required to obtain the loan. The loan closing is to take place September 22. In addition, escrow accounts will be required for all prorated property taxes and hazard insurance; however, no mortgage insurance is necessary. The buyer will also pay a full year's premium for hazard insurance to Rock of Gibraltar Insurance Company. A breakdown of expected settlement costs, provided by OKAY National Bank when Mr. and Mrs. Cleaver inspect the uniform settlement statement as required under RESPA on September 21, is as follows: a. What are the amounts due from the borrower and due to the seller at closing b. What would be the disclosed annual percentage rate as required under the Truth-in-Lending Act c. When will the first regular monthly mortgage payment be due from the borrower