1. Chapter 9
Financing Sources in Real Estate
Transactions

2. Objectives
• After reading this chapter, you should be able
to
– Identify the various sources of mortgage loans.
– Understand the difference between a
conventional loan and an insured loan.
– Explain the role of the Federal Housing
Administration (FHA) and Veterans Administration
(VA) in real estate financing.

3. Objectives
• After reading this chapter, you should be able
to
– Explain the purposes of Fannie Mae and Freddie
Mac.
– Understand the difference between a permanent
loan and a construction loan and their relation to
each other.
– Identify and understand the various forms of
mortgage loan payment plans.

4. Sources of Mortgage Loans
• Mortgage loan
– Buyer usually borrows major portion of the
purchase price by pledging the real property
involved as security for a loan
• Mortgage is given by the debtor (property
owner) to the lender

5. Sources of Mortgage Loans
• Savings banks
• Commercial banks
– Main source of short-term loans
– Bridge loan
• Enables borrower to have necessary financing to
purchase real property
– Most loans sold into secondary market

6. Sources of Mortgage Loans
• Life insurance companies
– Mortgage loans constitute a large percentage of
investment portfolio
• Most are mortgages for commercial and industrial
properties
• Also purchase large blocks of government-backed
residential loans

7. Sources of Mortgage Loans
• Credit union
– Nonprofits
• Pension funds
• Mortgage banking companies

8. Sources of Mortgage Loans
• Issuers of mortgage-backed bonds (or conduit
lender)
– Originate or buy pools of residential or
commercial mortgages
– Package these mortgages as pools into a bond
– Sell the bond in the public securities market

9. Types of Loans
• Mortgage loans may be identified as
– Conventional
– Insured
– Guaranteed

10. Types of Loans
• Conventional
– Risk of debt payment depends solely on the
borrower’s ability to pay and the value of the
security provided by the mortgage
– Loan-to-value ratio

11. Types of Loans
• Insured or guaranteed loans
– Third party, government agency, or private
mortgage insurance company guarantees the
lender repayment of a portion of the loan
• Usually 60 to 90 percent of a loan

12. Types of Loans
• FHA-insured loans
– FHA insures financing of a loan by an approved
lender against loss or default
• VA-guaranteed loans
– Similar to FHA
– Guarantees loans to eligible veterans

13. Types of Loans
• Small Business Administration-guaranteed
loans
– Guarantees loans of qualified small business
borrowers

14. Types of Loans
• Subprime lending
– Was one of the more rapidly growing areas of the
residential mortgage market
– Business practice of making mortgage loans to
people who do not have a good credit history or a
stable income
– Borrowers generally pay higher interest rates and
fees for the mortgage than other borrowers

15. Types of Loans
• Private mortgage insurance
– Guarantee the lender that payment on a loan will
be made
• For a fee
– If payments are not made, the mortgage
insurance company buys the loan from the lender
and enforces the debt against the debtor

16. Secondary Market
• Primary market
– Lenders who supply funds to borrowers
– Lenders who loan for the purpose of selling loans
to investors
– Once a mortgage loan is closed in the primary
market, the loan can be bought and sold in the
secondary market

17. Secondary Market
• Primary lenders
– Typically sell loan “paper” to third parties to raise
money for new originating loans
• Loans sold on secondary loan market
– Servicing the loan
• Original lender collects payments

18. Secondary Market
• Fannie Mae and Freddie Mac
– Publicly owned corporations organized to provide
secondary market for single-family and
multifamily residential loans
– Raise money to purchase loans by selling
government-guaranteed bonds at market interest
rates

19. Permanent and Construction Loans
• Permanent loan
– Long-term loan that finances the acquisition of
real property
• Or refinances construction loan on improvements
– Payments amortized
– Debt service
• Payment of principal and interest
– Loan paid in full at its maturity

20. Permanent and Construction Loans
• Construction loans
– For constructing improvements on real property
– Usually short term
– Monthly payments are interest only
• With total payment of all principal and interest due at
maturity
– Usually up to 90 percent
• With retainage of 10 percent reserved for cost
overruns

21. Permanent and Construction Loans
• Interest may be fixed or variable
• Payment plans
– Most mortgage loans amortized
– Fully amortized loan
• Most common

22. Permanent and Construction Loans
• Payment plans
– Straight or term loan
• Periodic payments of interest only, with principal paid
in full at the end of the loan term
– Graduated payment mortgage
• Borrower makes lower monthly payments for the first
few years of the loan and larger payments for the
remainder of the term

23. Permanent and Construction Loans
• Payment plans
– Straight-line amortized loan
• Borrower pays a different amount for each installment
– Balloon note
• Borrower makes payments that will not fully amortize
the amount of the loan by the time the final payment is
due; final payment is then larger than other payments
• Partially amortized loan

24. Permanent and Construction Loans
• Payment plans
– Negative amortization loan
• Borrower makes payments on a mortgage loan that will
not fully pay the interest that is due each month
• Unpaid interest is added to the principal
– Interest-only loan
• Borrower pays interest only for a shorter period of time
• At the end of the interest-only period, payment
amount goes up substantially

25. Housing Recession
• Three factors instrumental in causing the
recession
1. Unprecedented increase in homeownership
through the use of low interest rates
2. Creation of mortgage-backed bonds that
securitized the mortgage payment risk
3. Growth of subprime lending

26. Housing Recession
• Housing recession began in 2008
– Increase in unemployment
• 5.5 percent to 9.5 percent
– Decrease in consumer spending
• Commercial real estate recession began in
2009

27. Housing Recession
• Federal and state governments stepped in to
stabilize the housing market
• Federal Reserve lowered interest rates
– Home mortgage rates decreased from 6 percent
in 2009 to less than 4 percent in 2013

28. Ethics: Overbilling
• It is unethical for an attorney or a paralegal to
overbill a client for services rendered to the
client
– Cannot bill for “phantom” hours
– Cannot bill for time spent researching an issue for
a previous client

29. Summary
• A paralegal may assist an attorney who
represents one of the lending institutions
making either construction or permanent
loans
• The paralegal’s chief duties are to
– Ensure that all requirements for a loan have been
met
– Ensure that all loan documents have been
properly prepared