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Chapter 15: Math

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Title: Unit 15: Trust Fund Handling for Mortgage Loan Brokerage Author: P AND D GROGAN Last modified by: TL User Created Date: 3/1/2001 12:18:34 PM – PowerPoint PPT presentation

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Title: Chapter 15: Math


1
Chapter 15 Math Trust Funds for the Loan Agent
By Dr. D. Grogan M.C. Buzz Chambers
2
Preview
  • Many facets of the loan business include using
    various math computations. Many real estate
    students begin in the loan business and find that
    they need to become more proficient in math. This
    chapter covers the common areas of real estate
    mathematics used by loan agents, including the
    use of a financial calculator, loan-to-value
    (LTV) ratio, debt ratio, amount of interest paid
    throughout the life of a loan, reading a payment
    factor chart, loan comparison, and legal
    requirements for handling of trust fund
    accounting records correctly to maintain a DRE
    license.

3
Student Learning Objectives
  • 1. Determine maximum loan amount and sales price,
    including LTV ratio.
  • 2. Calculate the buyer qualifying ratios
    front-end ratio and back-end ratio.
  • 3. Read a payment factor chart to determine the
    total monthly payment.
  • 4. Compare different loan amortization schedules
    for alternative loans.
  • 5. Contrast alternative financing programs,
    including second and third trust deeds, and
    private-party carryback financing.
  • 6. Use a financial calculator to obtain annual
    percentage rate (APR).
  • 7. Determine the investors rate of return for a
    real estate loan.
  • 8. Maintain DRE trust fund account record logs of
    client funds.
  • 9. Differentiate between trust funds and
    non-trust funds.
  • 10. Outline trust fund bank account requirements
    for record keeping.

4
15.1 Introduction
  • Loan agents are expected to use mathematic
    calculations daily for loan purposes.
  • Key strokes for a real estate financial
    calculator are part of the job.
  • Reading manual payment factor and amortization
    charts are used.
  • An example of a 425,500 appraised value is used
    in this chapter with different math.

5
15.2 LOAN-TO VALUE RATIO (LTV)
  • The LTV is the amount of the loan in
    relationship to the value of the property,
    expressed as a percentage.
  •  
  • Example
  • The LTV for the 425,500 appraised value for a
    property, where the buyer puts a 20 cash down
    payment, would be
  • 425,500 the appraised value of the property
  • - 81,100 down payment of 20
  • 340,400 amount of new loan
  •  
  • 340,400 425,500 80 LTV

6
BORROWER QUALIFYING INCOME
  • The monthly payment used to qualify a borrower
    consist of adding the principal, interest,
    property taxes, and insurance together. Even if
    the borrowers pay their own taxes and insurance
    separately, the mortgage loan broker uses the
    total PITI for loan qualification purposes.
  • Any other items considered housing expenses such
    as mortgage insurance, homeowner association
    dues, flood insurance, and land lease payment ,
    are added.
  •  
  •  

7
Front-End Ratio
  • It is the total housing expense/debt in
    relationship to the borrowers gross monthly
    income.
  • For example, using the 425,500 value with a 20
    down payment, the loan amount is 340,400.
  • For a 30-year loan at 7.5, the principal and
    interest payment is 2,380.13/month.
  • Property taxes are 1.25 x 425,500
    443.23/month.
  • Insurance is 340,400 x .035 99.28/month
  • Total Housing Expense 2,922.64 PITI

8
Front End Ratio
  • Example (cont)
  • Gross month income of borrower 10,852
  • Total Housing Expense 2,922.64

2,922.64 / 10,852 27 borrower front-end ratio
Front-end ratio should not exceed 29
Borrower 27 does not exceed the 29 maximum
9
BORROWER QUALIFYING INCOME
  •  
  • Back-End Ratio
  • Consist of total housing expense/debt plus
    installment and revolving debt, usually with
    payments of at least 6 or 9 months remaining.
  • Example The Martinez family has (1) a 389
    monthly car payment with their credit union, (2)
    a car payment of 106 to ABC Car Sales, and (3)
    total credit card debt of 3,500 total unpaid
    balance, with a minimum of 5 monthly payment, or
    150 per month. This results in 645 per month
    (389 106150) for long-term non-housing debt.

10
Back-End Ratio
  • Add the Total Housing Expense of 2,922.64
  • And the Total long-term debt of 645/month
  • For a total of 3,567.64 TOTAL DEBT.
  • Divide the 3,567.64 total debt/ 10,852 gross
    monthly income with results of 33.0 back-end
    ratio.
  • The 33 does not exceed the 38 maximum.

11
15.4 PAYMENT FACTOR CHART
  •  
  • The mortgage loan broker may have to read a
    monthly payment factor chart, as shown in Figure
    15.1.
  • This chart shows both the 15-year, and 30-year
    payment factor for each 1,000. To read this
    chart, read down the column to locate the
    interest rate in question, which is located on
    the left side of the chart under Rate.
  • Read across the heading to either the 15-year or
    30-year PI Factor. Then multiply the loan amount
    (not the sales price) by that factor. The answer
    will then need to be changed by moving the
    decimal point three places to the left, or by
    dividing the answer by 1,000.
  • This monthly payment factor chart is beneficial
    when a financial calculator is not available or
    when a visual-learner borrower wants to see how
    to obtain the payment.

12
Amortization Table 12 ½ 30 Years Loan -
155,700
Term Amt 20 Years 25 Years 30 Years 40 Years
100 1.14 1.10 1.07 1.05
200 2.28 2.19 2.14 2.10
300 3.41 3.28 3.21 3.15
400 4.55 4.37 4.27 4.20
500 5.69 5.46 53.34 5.25
600 6.82 6.55 6.41 6.30
700 7.96 7.64 7.48 7.35
800 9.09 8.73 8.54 8.40
900 10.23 9.82 9.61 9.45
1000 11.37 10.91 10.68 10.49
2000 22.73 21.81 21.35 20.98
3000 34.09 35.72 32.02 31.47
4000 45.45 43.62 42.70 41.96
5000 56.81 54.52 53.37 52.45
6000 68.17 65.43 64.04 62.94
7000 79.53 76.33 74.71 73.43
8000 90.90 87.23 85.39 83.92
9000 102.26 98.14 96.06 94.41
10,000 113.62 109.04 106.73 104.90
20000 227.23 218.08 213.46 209.79
30000 340.85 327.11 320.18 314.68
40000 454.46 436.15 426.91 419.57
50,000 568.08 545.18 533.63 524.46
100,000 1136.15 1090.36 1067.26 1048.92
  1. Look down the 30 year column for the monthly
    payment on 100,000
  2. Next, determine the monthly payment for 50,000,
    5,000 and 700 using the same method
  3. Then add the amounts together.

Amount Payment 100,000
1,067.26
50,000
533.63
5,000
53.37
700
7.48
155,700 1,661.74
13
155,700 _at_ 12 ½ - 30 year
  • The Principle Interest Payment Factor for
  • 30 years is 10.672578 x 155,700 1661.74
  • 15 years is 12.325221 x 155,700 1919.04
  • Difference per month
    257.30

14
15.5 Amortization Comparison
  • 425,500 sales price
  • X 20 cash down payment
  • 340,400 loan amount

425,500 sales price X 10 cash down
payment 382,950 loan amount
15
Figure 15.2 Example 1 (Term 15-year, fully
amortized) (Rate fixed, 7 ¼ interest)
  • Event Start Date Amount
    Number Period End Date
  • 1 Loan 10/1/2005 340,400.00 1
  • Points 1.500 5,106.00
  • Prorate Days 16 _at_ 68.55 1,096.84
  • Other Charges 0.00
  • 2 Payment 01/31/2005 3,107.39 180 Monthly 10/01/
    2020

Date
Payments Paid Interest
Principal Grand Totals After 2020 559,330.20 218
,930.20 340,400
16
Figure 15.3 Example 2 (Term 30-year, fully
amortized) (Rate fixed, 7 ½ interest
  • Event Start Date Amount Number Period End Date
  • 1. Loan 10/1/2005 340,400.00 1
  • Points 1.500 5,106.00
  • Prepaid Days 30 _at_ 35.42
  • Other Charges 0.00
  • 2. Payment 11/1/2005 2,380.13 360 Monthly 01/
    01/2035

Date Payments Interest
Principal 2020 Totals 28,561.56 19,511.51 9,0
50.05 Grand Totals After 2020 856,846.80 516,446.8
0 340,400.00
17
Figure 15.4 Example 3 (Term 30-year, fully
amortized) (Rate fixed, 712 interest) paying
one extra payment per year
  • Event Start Date Amount Number Period
    End Date
  • 1. Loan 10/1/2005 340,400.00 1
  • Points 1.500 5,106.00
  • Prepaid Days 30 _at_ 35.42
  • Other Charges 0.00
  • 2. Payment 11/1/2005 2,578.47 279
    Monthly 01/01/2029
  • 3. Payment 02/1/2029 2,164.44 1

Date
Payments Interest
Principal 2020 Totals 30,941.64 14,786.38 16,155
.26 Grand Totals After 2020 721,557.57 381,157.57
340,400.00
18
Figure 15.5 Example 4 (Term 30-year, fully
amortized) (Rate 7 1/2 interest) paying an
extra 4 1/2 per year beginning in year 2
  • Event Start Date Amount Number Period End Date
  • 1. Loan 10/1/2005 340,400.00 1
  • Points 1.500 5,106.00
  • Prepaid Days 30 _at_ 35.42
  • Other Charges 0.00
  • 2. Payment 11/1/2005 2,380.13 12
    Monthly 10/1/2006
  • 3. Payment 11/1/2006 2,487.24 12
    Monthly 10/1/2007

Date Payments Interest Principal 2020
Totals 53,291.40 2,712.35 50,579.05 Grand
Totals After 2020 610,347.30 269,947.30 340,400.00

19
Figure 15.6 Example 5 (Term 30-year, fully
amortized) (Rate 7 1/2 interest) paying interest
only for the first five years
Event Start Date Amount Number Period End Date 1.
Loan 10/1/2005 340,400.00 1 Points 1.500
5,106.00
Prepaid Days 30 _at_ 35.42 Other Charges
0.00 2.
Payment 11/1/2005 Interest Only 60 Monthly 10/1/20
10 3. Payment 11/1/2010 2,515.53 300 Monthly 10/1/
2035

Date Payments Interest Principal 2020
Totals 30,186.36 20,621.51 9,564.85 Grand
Totals After 2020 882,309.00 541,909.00 340,400.00
20
Summary 3, 4, 5
  • Example 3 A 30 year, fully amortized at 7 1/2
    interest, adding one extra payment per year,
    payable with an extra one-twelfth per month
    increase in the monthly payment (equal to 13
    payments per year instead of 12 payments per
    year, but paid in 12 payments).
  • Example 4 A 30-year loan, fully amortized at 7
    ½, in which at the end of each year an increased
    monthly payment by 4 1/2 is calculated, so that
    the first 12 months payments remain the original
    contract monthly payment, but each subsequent
    year begins with a once-a-year increase in the
    monthly payment at month 13, month 25, month 37,
    month 49, month 61, etc.
  • Example 5 A 30-year, fully amortized loan at
    7.5 interest, with interest-only payments for
    the first five years and then fully amortized for
    the remaining 25 years.

21
Example 6 Comparing a (1)90 LTV lst T.D. loan
_at_ 7 ½ with PMI to an (2) 80 LTV lst with a
10 LTV 2nd T. D. _at_ 9 ½ with no PMI
  • 425,500 - 80 340,400 _at_ 7.5 int. 30/30
  • 425,500 - 10 42,550 _at_ 9.5 int. 30/15
  • 340,400 the payment would be 2,380.13 PI
  • 42,550 the payment would be 357.78 PI
  • 2,737.91 PI
  • 2,743.50 PI
  • 165.95 PMI (382,950 - .52 12 165.95)
  • 2,909.45 (P) (I) (MI)
  • 165.95 of each payment each month is not tax
    deductible

The difference between the payment for the 90-10
and the payment for the 80-10-10 loan amounts to
171.54 per month. The savings for one year would
amount to 2,058.48, and over a 30 year loan the
borrower would save over 61,754.40 in interest.
22
Example 7 Private-party carry-back financing,
with three loans (Term (1) 30-year, fully
amortized lst T.D._at_ 7 ¾, plus (2) (2nd T.D. _at_
9 amortized over 30 years, but due in 15 years
plus (3) (3rd T.D. _at_ 11, interest only/straight
note, due in 5 years)
  • New 1st trust deed of 235,000 _at_ 7.75, 30/30
    (54 LTV)
  • New 2nd trust deed of 125,000 _at_ 9.0, 30/15
    (29 LTV)
  • New 3rd trust deed of 75,500 _at_ 11.0 interest
    only for 5 yrs (17 LTV)
  • 435,500 Total loan amount
  • (100 CLTV)
  • -0- Down payment
  • 435,500 Sales Price
  • The payments would be
  • (principal, interest)
  • 1st TD 1,684.29 PI
  • 2nd TD 1,005.78 PI
  • 3rd TD 692.08 I
  • 3,382.15 PI

23
Computing the Rate of Return
  • 1st TD of 235,000 _at_ 7.75 18,212.50
  • 2nd TD of 125,000 _at_ 9.0 11,250.00
  • 3rd TD of 75,500 _at_ 11.0 8,305.00
  • 37,767.50

24
Example 7
  • The difference between the 90 loan with PMI and
    the private-party carry-back finance is 472.70,
    or 15.76 per day. When borrowers are in a
    position in which they are able to pay a higher
    payment, the private-party carry-back loan may be
    more advantageous than the traditional 90-10 with
    PMI. With no cash for a down payment, the
    borrower needs to finance the closing costs and
    the loan amount, which enables a borrower to
    purchase a home rather than rent and to save cash
    for a future purchase. An additional savings to
    the borrower is that after 5 years, when a
    borrowers income typically has increased, the
    third trust deed would be paid off, which could
    lower the monthly payment by 692.08. Beginning
    the sixth year, the monthly payment would include
    only the first and second trust deeds. In another
    ten years, the second trust deed would likewise
    terminate.

25
Example 8 Two-step mortgage, private party
carry-back (Term (1)existing fully amortized
lst T.D._at_ 7 ½, 25 years remaining, paid off in
one year upon refinancing, plus (2) New 2nd
T.D. _at_ 10 straight note, due in one year)
  • Step 1 Value 425,500
  • Total loans would be 121,000 (96,000 first
    amortized for 30 years 25,000 second due in
    one year) or a new combined loan to value (CLTV)
    of 28.
  • Pay off all debts, the car, and credit cards
    (10,974 3,341 14,315) Because of the age
    of the property, the private party lender may
    require items that enhance the value of the
    property, such as replacing the carpet and air
    conditioner.
  • Funds available for closing cost (investor fee,
    broker fee, credit report, escrow, title
    insurance, recording fee, etc.)

26
Example 8 Two-step mortgage
  • Help a borrower at the current time on this loan
    and be in a position to do a refinance in one
    year, when the second trust deed becomes due.
  • Allow the borrower to reduce current debts and
    provide time to improve the FICO score.
  • By the end of the first year, the borrower could
    show proof of making the payments on the first
    trust deed on time, with no late payments during
    the past 12 months.
  • The borrower would have established a longer
    period on the job, with 21 months instead of 9
    months.

At the end of the one-year period, the loan
broker could assist the borrower in obtaining a
refinance loan that would demonstrate 21 months
on the job, a credit score in the mid-600 range,
with increased incomethe 2,340 base pay, plus
the 1,340 social security income, for a total of
3,680. The new loan would include the current
unpaid balance on the existing first trust deed
of approximately 96,000 plus 27,500 that
includes the current unpaid balance on the second
plus the closing costs needed to close the loan.
27
Example 8 Two-step mortgage (cont)
  • This new loan of 128,000 at 71/2 interest,
    amortized over 30 years,
  • would have a monthly payment as follows
  • 894.99 principal and interest
  • 102.48 property taxes
  • 176.00 homeowner association dues
  • 1,173.47 a PITI
  • 1,173.47 / 3,680 31.88 front-end and back-end
    ratio
  • The borrower would end up with no debt. The new
    loan would confirm to FNMA guidelines with very
    conservative new LTV of 30 (128,000
    425,500).

28
15.6 Financial Calculators
  • Hewlett-Packard (www.hp.com/country/us/en/prodserv
    /calculator. html)
  • Texas Instruments (http//education.ti.com/educati
    onportal/sites/US/productCategory/us_financial.htm
    l)
  • Calculated Industries Real Estate Master
    (www.calculated.com/cat11/RealEstateCalculators.
    html)

29
FINANCIAL CALCULATORS
  •  
  • A. The mortgage loan broker makes use of
    calculations as an ongoing process in the daily
    activity of the job. The DRE allows applicants
    for the real estate licensee examination to
    utilize a calculator that they are comfortable
    using, but they must also become proficient in
    the key strokes for the required daily
    applications.
  • B. The majority of real estate licensees use one
    of 3 calculators.
  • 1. The Hewlett-Packard series of calculators has
    been predominantly used by those working in
    financial institutions, including stock and
    brokerage houses and for advanced appraisal
    techniques. Today, nonresidential real estate
    persons tend to stay with HP calculator.
  • 2. The Texas Instruments Business Analysis (BA
    II) has been predominantly used at 4-year
    universities for finance majors and those working
    primarily with stocks and bond calculations.
  • 3. The Real Estate Master, by Calculated
    Industries, is used primarily for everyday real
    estate calculations by real estate salespersons
    and brokers to determine loan payment, unpaid
    loan balance, front-end and back-end ratios and
    buyer qualifying (hence, the name of their
    calculating is Qualifier Plus).
  •  

30
BROKER TRUST ACCOUNT FUNDS
  •  1. Definition of trust funds includes
  • a.  Funds received on behalf of others
  • b.  Creates a fiduciary responsibility to the
    owner of the funds
  • c.  Any thing of value received by a licensee
    for another in the performance of a real estate
    activity
  • d.  Funds used in the performance of an act for
    another
  • e.  Funds being held for the benefit of others
  • 2. The funds include
  • a.  Buyers initial deposit on an offer to
    purchase
  • b.  Buyers up front deposit to pay for fees
    such as a credit report
  • c.  Principals money used to pay for points,
    fees or charges
  • d.  Promissory notes received, held for or
    payable to or for a principal, secured directly
    or collaterally by a lien on real property
  • e.  Deposits made into an escrow account, title
    company account, real estate s ales broker, or
    property management trust fund account
  • f.   Uncashed items (checks, notes) instructed
    to be held by a principal

31
BROKER TRUST ACCOUNT FUNDS (cont)
  • 3.  Non trust funds are those that belong to the
    broker or business office
  • a.  General operating funds
  • b.  Rents and deposits for broker-owned real
    estate
  • c.  Funds used for broker-owned loans on notes
  • d.  Commissions earned from collection of
    principal funds, placed into the trust account,
    then calculated as a fee and paid from the
    principals balance from the trust fund
  •                 i.      Earned commissions may
    remain in the trust account up to a maximum of 30
    days.
  •                ii.      Earned commissions must
    be paid out to a broker, not directly to a
    salesperson or employee of the broker.
  • 4.  Benefit of having a trust account
  • a.  Physical separation and accounting control
    over trust funds avoids commingling of broker
    funds with the funds of the principal
  • b.  Trust funds cannot be frozen under pending
    litigation against the broker or during probate
    of the brokers estate
  • Each owner has FDIC insurance up to 125,000
    rather than just one broker bank account.

32
Bank Deposit
  • Trust funds must be placed into broker trust
    account
  • Broker may deposit personal business funds into
    trust account
  • Up to 200 maximum
  • To maintain bank charges for the account

33
Trust Bank Account
  • Must be a Demand account
  • No prior notice required to withdraw funds
  • Non-interest bearing account
  • Neutral depository
  • Must reconcile at least once each month

34
Trust Account Withdrawals
  • Requires signature of designated broker
  • Salesperson licensed to the broker needs written
    authorization to sign the account
  • Unlicensed employee may sign if
  • Fidelity bond indemnifying the broker
  • Fidelity bond for maximum amount of funds
    accessible to the employee at any time
  • Broker may not take anticipated commissions, only
    funds actually earned and received

35
Records Required
  • Date funds received, deposited disbursed
  • Name of party received from disbursed to
  • Amount of funds received disbursed
  • Check number received disbursed
  • Form of funds received cash, note, check
  • Interest earned for principal
  • Balance in account for EACH principal on daily
    basis and for the entire account

36
Trust Fund Law for Licensee
  • In the business
  • Acquisition for resale, sale or exchange with the
    public of 8 or more notes in 1 year
  • Transaction must name the broker
  • Salespersons prohibited from dealing direct with
    the public
  • Broker must licensed by DRE

37
Trust account must
  • Designate the account as a TRUST ACCOUNT
  • Name the broker as TRUSTEE
  • Be maintained at a bank in California
  • Account servicing for an investor of a note
  • FNMA, GNMA, FHLMC, FHA, DVA
  • Trustee of a pension fund over 15,000,000
  • Licensed residential mortgage lender or servicer
  • Licensed real estate broker selling the loan

38
Records Maintained
  • Broker must retain for three years
  • Keep copies of all receipts checks
  • After 3 years, broker should check with IRS
  • All trust account records must be available to
    DRE for examination
  • Non-compliance with trust funds may result in
  • Revocation or suspension of DRE license
  • Financial liability to the principal for damages

39
Advance Fees
  • Handler A broker who claims, demands, charges,
    receives, collects or contracts to collect funds
    while employed to obtain loans.
  • Funds Any amount of money collected to cover the
    cost of services performed in arranging a loan.

40
DRE Advance Fee Requirements
  • A written advance-fee agreement.
  • Materials submitted to DRE Commissioner at least
    10 days prior to use.
  • Approval of agreement materials.
  • Fees must be payable to the broker.
  • Exemption Appraisal fee credit report fee are
    not deemed an advance fee.

41
Reconciliation of Accounting Records
  • Name of the agent and the principal.
  • Description of services rendered.
  • Identification of account where funds placed.
  • Amount of advance fee collected.
  • List names addresses of persons for the loan.
  • Amount collected or disbursed from the fees
  • Services rendered
  • Commission paid to field agents representatives
  • Overhead costs and profit

42
Threshold Account
  • When a broker meets the business activity of
  • 20 or more loans aggregating 2 million.
  • Loan collections aggregating 500,000 on behalf
    of a non-exempt lender.

43
DRE Threshold Account
  • Quarterly trust fund status report with DRE
  • Annual Trust fund report file with DRE
  • Annual review of trust fund financial statements
    by DRE
  • Broker must furnish each principal
  • Verified copy of accounts, quarterly
  • Verified copy of accounting when the contract is
    completed

44
TRUST FUND ACCOUNTING
  • 1. When a broker maintains a trust account,
    certain records must be kept. Brokers are
    instructed to maintain generally accepted
    accounting principles in the handling of a trust
    account to be in compliance with DRE Regulation
    2831. The record should set forth in
    chronological order the following information in
    columnar form
  •       Date funds were received
  •       Name of party from whom funds were
    received
  •       Amount of funds received
  •       Date of deposit of the trust funds
  •       Check number and date of trust fund
    disbursement
  •       Name of entity to whom trust funds were
    disbursed
  •       Daily balance for each separate
    principals funds
  •       Daily balance of trust account
  • 2. In addition to keeping records for all funds
    received, the broker must keep a separate record
    for each beneficiary and transaction.
  • 3. The broker must account for all funds that
    have been deposited into the brokers trust
    account and any interest earned on the trust
    funds on deposit.

45
Audits Examinations
  • Broker must furnish authorization for examination
    of financial records of trust funds.
  • Broker pays cost of audit if final desist
    refrain order, or after disciplinary hearing
    awarded finding broker in violation of real
    estate law.
  • Commissioner may seek recovery of costs.

46
Trust Fund Violations
  • Restricted License B P Section 10148
  • Broker pays estimated average hourly salary for
    all persons performing audits, including travel
    time to and from auditors work.
  • Respondent has 60 days from receipt of invoice to
    pay.
  • Commissioner may suspend the restricted license
    pending a hearing if payment not made timely.
  • Suspension remains until paid in full.
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