PART 1.pdf

Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Real Estate Finance & Investments (503241) Part (1) Sufian I. HRAZE, Lecturer [email protected] 1s...

Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Real Estate Finance & Investments (503241) Part (1) Sufian I. HRAZE, Lecturer [email protected] 1st Semester 2021/2022 Department of Finance and Banking Al – al Bayt University Part 1 Key Notes  Office Hours:  Sun & Tue: 14:00 – 15:00, office No. 21.  Thu: 14:00 – 16:00 (on-line)  Med Term Exam: 30/11/2021  Grading:  Med Term Exam: 30%.  Positive Participation: 20%.  Final Exam: 50%.  No Makeup at al. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-2* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -1-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Core Reference  William Brueggeman and Jeffrey Fisher, Real Estate Finance and Investments, Boston, McGraw Hill Education, 16th Edition, 2018. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-3* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Chapter 1 Real Estate: An Introduction Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-4* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -2-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Definitions of Estate and Real Estate  The term estate means “all that a person owns.”  The term real estate means all realty owned as a part of an individual’s estate.  The term estates in real property is used to describe the extent to which rights and interests in real estate are owned. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-5* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Forms of Investment  Real Assets: are physical assets that have value due to their substance and properties.  Financial Assets: are tangible liquid assets that derives value because of a contractual claim of what it represents. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-6* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -3-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 …Forms of Investment Financial Assets Real Assets 1 Equity claims-direct Real estate Common stocks Office building Warrants Apartments Options Shopping centers Personal residence 2 Equity claims-indirect Precious metals Mutual funds Gold Pension funds Platinum Whole life insurance Silver Retirement accounts Continued Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-7* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Financial Assets Real Assets 3 Creditor claims Precious gems Savings account Diamonds Money market funds Rubies Commercial paper Sapphires Treasury bills, notes, bonds Emeralds Municipal notes, bonds Corporate bonds 4 Preferred stock Collectibles Art Antiques Stamps Coins Continued Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-8* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -4-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Financial Assets Real Assets 5 Commodity Other Futures Cattle Options Oil Options on futures Common metals 6 Foreign Currency Leases Cash Equipment Futures Machinery Forward contracts Real estate Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-9* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Who is the Real Estate Developer?  Developer Adds Value  Equity:  must have money at risk  Ownership:  must have control of site  Financing:  must have financial capability to complete project  Tenant/User:  must have tenant or capacity to attract tenant/user Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-10* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -5-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 The Role(s) of the Developer Public Analyst Users Gov/Neighbors Planner Promoter Creator Negotiator Promoter Provider Borrower Employer Negotiator Client Financial Promoter Manager Development Entities Team Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-11* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 When Does Development Occur?  Economic Feasibility:  Property Specific Market Analysis  Regional  Neighborhood  Site Selection  Design Feasibility:  Site  Building Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-12* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -6-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 …When Does Development Occur?  Financial Feasibility  Investment returns on the  Property  Equity  Debt  Construction period  Permanent loan  Regulatory/Legal Feasibility  Timing Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-13* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 The Real Estate Market Characteristics  Highly Stratified, Local Markets  Heterogeneous Product  Private, not Public, Transactions  Unsophisticated Investors  Unorganized Market Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-14* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -7-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Investor Motivations  Pride in Ownership  Personal Control  Self-use and Occupancy  Estate Building  Security of Capital  High Operating Yield  Leverage  Tax Shelter  Capital Appreciation  Portfolio Diversification Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-15* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Investment Disadvantages and Risks  Illiquid  Management  Depreciation of Value  Government Controls  Real Estate Cycles  Legal Complexity Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-16* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -8-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Key Notes  Office Hours:  Sun & Tue: 14:00 – 15:00, office No. 21.  Thu: 14:00 – 16:00 (on-line)  Med Term Exam: 30/11/2021  Grading:  Med Term Exam: 30%.  Positive Participation: 20%.  Final Exam: 50%.  No Makeup at al. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-17* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Chapter 2 Finance to Buy a Home Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-18* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -9-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Introduction  The purpose of this chapter is to  Empower you with knowledge to make wise financial decisions throughout the home buying process  With knowledge, in time you will be able to  Own the house of your dreams with the best mortgage loan available based on your financial circumstances  From this chapter you will learn  The steps you need to take to be a responsible homeowner and  Preserve your biggest life-time investment Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-19* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Agenda  Goals:  Step 1: Before You Start Looking for a Home  Step 2: Understanding Credit  Step 3: Finding a Home  Step 4: Applying for a Loan  Step 5: After You Move In Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-20* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -10-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Overview  This chapter will provide an overall view of each subject on the agenda  At the end of the chapter you will be able to understand how all the individual topics fit together towards the road to homeownership Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-21* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Credit FICO Rate Loan Lender Appraisal Broker Budget Price Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-22* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -11-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Step1: Before You Start Looking For a Home  Owning a home is not for everyone  Some people do not want the responsibility  Others do not want to change their spending habits in order to make monthly and maintenance payments on a home  By the end of this chapter you will  Have a better idea if homeownership is in your best interest Lets start by thinking about advantages and disadvantages of homeownership. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-23* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Homeownership Advantages  Tax benefits  Equity  Control over your environment  Stability  Pride of accomplishing the dream  Stepping stone for your family’s future Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-24* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -12-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 … Homeownership Disadvantages  Not being able to afford a home  No guarantees that property will appreciate in value  Maintenance and repairs  Decreased mobility  Increased responsibility Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-25* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Managing Your Money Before you apply for a mortgage loan  Daily spending diary  Income and expenses  Reducing spending and increasing income  Tips and other budgeting tools  Managing your finances as a homeowner Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-26* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -13-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 How Much Can You Afford to Pay For a Home? $60,000 ? Annual $150,000 Income Debt -$180,000 House Price Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-27* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 How Much Can You Afford to Pay For a Home?  What is your gross income  What is your total monthly debt  How much have you saved towards:  Down payment  Closing costs Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-28* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -14-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Step 2: Understanding Credit  Credit is a privilege  Traditional credit  Non traditional credit  Benefits and savings of good credit  Ordering a credit report  Correcting errors on a credit report  Applying for credit Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-29* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Key Notes  Office Hours:  Sun & Tue: 14:00 – 15:00, office No. 21.  Thu: 14:00 – 16:00 (on-line)  Med Term Exam: 30/11/2021  Grading:  Med Term Exam: 30%.  Positive Participation: 20%.  Final Exam: 50%.  No Makeup at al. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-30* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -15-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Traditional Credit Three types of accounts typically used by creditors that are reported to the credit reporting agencies:  Installment credit agreement  Revolving credit agreement  Open 30-day agreement Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-31* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Nontraditional Credit What if you don’t have a credit history?  Many Lenders and other financial institutions accept non traditional credit:  Rent payments  Gas, electric, and other utilities payments  Childcare or child support payments  Other large recurring expenses Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-32* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -16-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Ordering a Consumer Credit Report  What is a credit report  Why you should get your own credit report  Different types of credit reports  Consumer credit report  In file credit report  Residential mortgage credit report  How to get a consumer credit report Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-33* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 If the Credit Report Has Errors  Under the Fair Credit Reporting Act a consumer can dispute inaccurate information  Credit Scores may change once the information is corrected Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-34* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -17-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 How to Correct Credit Errors  You have the right to have mistakes corrected for free  To correct errors and omissions follow the instructions - on your credit report under the “how to correct errors with a credit reporting agency” section  Inform the credit reporting agency about the errors in writing  Send any additional information that is needed to correct the error Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-35* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Tips to Improve and Manage Your Credit  Your payment history  The amount of outstanding debt  The length of your credit history  The types of credit you use  Open new credit wisely Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-36* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -18-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 What’s In the FICO ( Fair Isaac Corporation) Score? Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-37* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 More About Scores  A “Perfect Score” 800+  Very Good Score 750  Good Score 680  Marginal Score 620  Low Score Under 600 Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-38* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -19-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Improving Your Credit Score FICO® score Score Advice to improve credit component Weight Payment History 35% Pay your bills on time Amount owed 30% Decrease your balances and increase your limit to balance ratio Length of credit 15% Keep older accounts open history Don’t swap accounts constantly New credit 10% Apply for new credit only when you really need it Types of credit used 10% Have a sensible mixture of credit Total 100% Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* 39 * Page-39* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Protecting Your Credit  Fraud and identity theft could ruin your credit  How to avoid it  What to do if you suspect that you are a victim Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-40* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -20-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Laws that Protect the Consumer  Equal Credit Opportunity Act  Fair Housing Act  Truth in Lending Act  Fair Credit Billing Act  Fair Credit Reporting Act  Fair Debt Collection Practices Act  Many States have similar Laws Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-41* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Check Your Knowledge Subject True False Installment loans, revolving loans, and 30 day open agreements reported by Lenders to the credit reporting agencies are part of traditional credit Non traditional credit is accepted by some Lenders with verification of payments, such as rent, utilities, child support and other bills that are paid monthly It does not matter if I don’t pay my debts on time, there are no benefits and savings for good credit The 3 credit reporting agencies are; Experian, Trans Union, and Equifax I can order one credit report from each credit reporting agency for free once a year but I have to pay a small charge if I request my credit score I can correct errors on my credit report by contacting the credit reporting agency and sending proof that identifies the errors If I don’t pay my monthly debt on time my credit report will show the accounts as “delinquent”. Delinquency affects my credit score Payment history has a weight of 30% in your FICO score calculation When I apply for credit, Lenders base their decision on whether I will pay them back as agreed Sufian HRAZE, by looking Realreport at my credit estate Finance & Investments, (503241), and score *Part-1* 42 * Page-42* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -21-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Key Notes  Office Hours:  Sun & Tue: 14:00 – 15:00, office No. 21.  Thu: 14:00 – 16:00 (on-line)  Med Term Exam: 30/11/2021  Grading:  Med Term Exam: 30%.  Positive Participation: 20%.  Final Exam: 50%.  No Makeup at al. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-43* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Step 3: Finding a Home The Home Buying Team:  The Real Estate Professional  The Real Estate Attorney  The Lender Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-44* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -22-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Mortgage Providers  Banks and Savings and Loans  Mortgage Lenders  Credit Unions  USDA Rural Development  Government Agencies  Nonprofit Organizations Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-45* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Shopping for a Mortgage Could Be Daunting You May Feel That You Cannot Do It Alone What are your options?  You could go directly to a Lender  Seek assistance from a Housing Counselor  Work with a Mortgage Broker Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-46* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -23-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 How Mortgage Brokers Earn their Income Fees paid by you Broker points Application fees Other processing fees Yield Spread Premium Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-47* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Selecting a Lender  Knowledgeable  Look out for your own best interests  Knows the mortgage lending laws and common business practices for your area  Good reputation with other customers and with local real estate agents Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-48* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -24-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Getting Pre-Qualified Before Applying For a Mortgage Loan Reasons and advantages The difference between prequalification and pre-approval The down payment Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-49* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 What Type of Property Are You Buying? Single Family  Townhouse, Condo & Coop  Manufactured Home  Modular Housing 2-4 Family Dwelling Duplex, Triplex, Fourplex Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-50* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -25-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Buying a Condominium  Home attached to another home  Share common area  Homeowners’ Association Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-51* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Buying a Cooperative Apartment  You do not own the unit in which you live you own shares in the Corporation managed by a Board of Directors (Coop Board)  Membership in the corporation gives you right to occupy a housing unit  Subject to rules and regulations of the Bylaws which govern the Corporation Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-52* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -26-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 The Purchase Contract The Offer  Negotiating The Contract  Purchase Price  Good Faith Deposit  Escrow  Closing Date 53 Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-53* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 … The Purchase Contract Contingencies  Financing  Appraisal  Clear Title  Property Inspection  Homeowner Warranty  Personal Property Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-54* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -27-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Check Your Knowledge Subject Yes No Are you sure you want to buy a house? Do you have steady income and stable employment? Are there advantages to homeownership? If yes, name one Could you name the home buying team? Do you know what is included in the mortgage payment? Do you know how to calculate quickly how much you can pay for a home? Do you know the difference between pre-qualification and pre- approval? Do you need an attorney to read the purchase contract and attend the closing? Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-55* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Key Notes  Office Hours:  Sun & Tue: 14:00 – 15:00, office No. 21.  Thu: 14:00 – 16:00 (on-line)  Med Term Exam: 30/11/2021  Grading:  Med Term Exam: 30%.  Positive Participation: 20%.  Final Exam: 50%.  No Makeup at al. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-56* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -28-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Step 4: Applying For a Loan New Mortgage Lending Reform Bill Mortgage Providers Prime and Subprime Mortgage Loans  Risk based pricing Mortgage Options Steps Involved in Obtaining a Mortgage Loan Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-57* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Applying for a Mortgage Loan  Credit application  Personal financial information Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-58* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -29-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Verification of Information Provided  Income and employment  Assets  Down payment assistance  Credit  Debt Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-59* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 The Mortgage Payments and Other Costs of Homeownership  Principal  Interest  Taxes  Insurance  Private Mortgage Insurance Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-60* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -30-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 … The Mortgage Payments and Other Costs of Homeownership  Closing costs  Moving expenses  Reserve funds  Home maintenance  Home Owners Association Dues (HOA) if property is a condominium Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-61* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Beware of Fraud During the Application Process  Verify your information on the application  Review your Appraisal report comps  Loans that Include “Benefits” Packed into the Loan  Bait and Switch Loans Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-62* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -31-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Ratios: How Large a Payment Can You Afford? Housing Debts Other Expenses 33% 38% 62% 5% Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-63* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Understanding Ratios  Housing Ratio – generally no greater than 33%  If the monthly gross income is $2,500 the maximum housing expense should be no more than $825  $2,500 * 33% = $825  Total Debt to Income Ratio – generally no greater than 38%  Maximum combination of the mortgage and other revolving and long- term debt should be no more than 38% of the gross monthly income  If the monthly gross income is $2,500, the maximum total debt, including the mortgage should be no more than $950  $2,500 * 38% = $950 64 Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-64* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -32-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Fixed Rate or Adjustable Rate  Fixed Rate Interestrate does not change over the term of the loan Fully amortized Equal payments Most typical – 15 and 30 years  Adjustable Rate Mortgage (ARM) Interestrate fluctuates Payment can change Caps limit fluctuations Hybrids – with fixed periods Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-65* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Mortgage Options: Advantages & Disadvantages Fixed Rate Loans  Advantages Fixed interest rate for the life of the loan Terms of 15, 30 and 40 years Principal and Interest remain the same Loan fully amortizes  Disadvantages Loan must be refinanced to obtain a different rate (in falling markets) Higher initial rate compared to ARMs No flexibility in payment options – must make the fully amortizing payment Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-66* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -33-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Mortgage Options: Advantages & Disadvantages Adjustable Rate Loans  Advantages Start with lower monthly rate Fully amortize except for Payment Option ARM where the minimum payment is made Periodic and life interest rate caps limit the amount the interest rate can increase  Disadvantages Payment Option ARMS may not fully amortize Monthly principal and interest payments vary Adjusted rate may be higher and not affordable Payment shock Potential negative amortization Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-67* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Typical Add-on Fees Description Price in Points Reduced documentation 0.750% = 3/4% Loan-to-value 90.01-95% 0.500% = 1/2% FICO score 660-679 0.250 % = 1/4% Credit score higher than 740 -0.125 = -1/8% Two-unit properties 0.375 = 3/8% High rise condominium or cooperative apartment 0.750 = 3/4% Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-68* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -34-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Pricing Exceptions  Often times Lenders set a base price which Loan Officers utilize to price their loans. The price above or below the base price is considered a pricing exception. Generally, Lenders limit the amount of positive pricing exceptions which are otherwise known as “overages” “Overages increase the cost of the loan  Sometimes Loan Officers price loans below the base price and these are known as an “underage” “Underages” decrease the cost of the loan  Since the price you were quoted may be based on a pricing exception It is important to negotiate interest rates as well as your points and fees Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-69* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Shop & Negotiate  The importance of comparison shopping Compare annual percentage rates (APR)  Mortgage Shopping Worksheet  How to negotiate for a better rate Try asking: “Can you give me a better rate?”  Buy-down interest  Prepayment penalty Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-70* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -35-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Other Things to Negotiate  Lender Fees  Third Party Fees  Seller paying some of the closing costs Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-71* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Important Questions to Ask  What is the interest rate and the points?  What is the Annual Percentage Rate?  What are the other fees?  Is there a prepayment penalty?  Is the rate guaranteed?  Is the rate fixed or an ARM?  If an ARM, what are the annual and life-time caps?  Is there negative amortization?  Do I have to pay mortgage insurance? Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-72* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -36-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 The Loan Closing / Settlement  Preparing for the closing  Who attends the closing  Closing documents Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-73* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Closing Documents  Read every document before signing it Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-74* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -37-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Check Your Knowledge Subject True False A conventional mortgage is insured by the government An adjustable rate mortgage usually offers borrowers a lower starting rate than fixed rate loans The down payment is the only money I will need for a mortgage transaction Interest rates and loan fees are negotiable Non traditional mortgages are mortgages that have negative amortization I don’t need to compare mortgages, there are many mortgage products and they are all good If I qualify, I could get down payments and/or closing cost assistance Subprime loans rates are based on the risk the Lenders take to lend money if I have had credit problems Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-75* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Key Notes  Office Hours:  Sun & Tue: 14:00 – 15:00, office No. 21.  Thu: 14:00 – 16:00 (on-line)  Med Term Exam: 30/11/2021  Grading:  Med Term Exam: 30%.  Positive Participation: 20%.  Final Exam: 50%.  No Makeup at al. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-76* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -38-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Step 5: After You Move In  Making timely payments to the Lender  What to do if you can’t make a payment  Early delinquency and foreclosure prevention Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-77* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Preserving Your Biggest Investment - Your Home  Keeping your home and managing your finances  Preventive maintenance  Appropriate homeowners insurance  Avoid Fraud Beware of offers of credit Refinance wisely Utilize bonded contractors Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-78* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Sufian I HRAZE, Lecturer [email protected] -39-  Al – al Bayt University, Real Estates Finance & Investments (503241) Department of Finance and Banking. Part 1, 1st Semester, 2021/2022 Key Notes  Office Hours:  Sun & Tue: 14:00 – 15:00, office No. 21.  Thu: 14:00 – 16:00 (on-line)  Med Term Exam: 30/11/2021  Grading:  Med Term Exam: 30%.  Positive Participation: 20%.  Final Exam: 50%.  No Makeup at al. Sufian HRAZE, Real estate Finance & Investments, (503241), *Part-1* * Page-79* Department of Finance and Banking, AABU, 1st Semester, 2021/2022. Part 1 Real Estate Finance & Investments (503241) Part (1) Sufian I. HRAZE, Lecturer [email protected] 1st Semester 2021/2022 Department of Finance and Banking Sufian HRAZE, Real estate Finance & Investments, (503241), – al Al De Bayt University partment of Finance and Banking, AABU, 1st Semester, 2021/2022. *Part-1* * Page-80* Sufian I HRAZE, Lecturer [email protected] -40-