Prelim-Quiz-24

imputed interest
A purchase-money mortgage held by the seller is exempt from usury
limitations on interest rate. If seller financing is at an
artificially low interest rate, however, the IRS assumes a higher
rate (imputed interest). The seller must charge at least 9% or a rate
equal to the applicable federal rate (AFR), whichever is lower. A
seller who charges less will be taxed as if income were received at
the required rate. An exception is made for certain transfers of
vacant land within a family.

construction loans aka building loan agreements

made to finance the construction of improvements on real estate.
These are always short-term loans. Depending on the type of project,
terms range from 12-24 months. A construction loan can be difficult
to secure unless the applicant works through a recognized builder or
contractor. Payments are made on a scheduled basis to the general
contractor or owner for work that has been completed since the
previous payment. The lender usually inspects the work before each
payment. Every time work is done, call the bank: "Hi I need another
$50,000, this is what we did" (you might need to show receipts). The
title company is going to run a continuance to make sure there are no
liens from contractors and an appraiser is going to go out there and
make sure that the work is really done, and the bank is going to
distribute the money. This kind of mortgage loan generally bears a
higher interest rate because of risks assumed by the lender. The
borrower arranges for a permanent mortgage loan (also known as an
end, or takeout, loan) when the work is completed and they receive a
certificate of occupancy.
- Three types:
- Construction- for either a builder or a buyer, or a person that
owns a lot that wants to build property on that lot
- Rehab- I already own my home and I want to take out $100,000 to do
an addition, $ is distributed over a period of time to do the
construction
- Purchase-rehab - Where one buys a house zoned for only a 2 family
and they want to expand it into a 4 family property

Land contracts
real estate can be purchased under a land contract. Real estate is
often sold on contract when mortgage financing is not available or is
too expensive or when the purchaser does not have a sufficient down
payment. It should be noted that banks do not extend loans in the
form of mortgages on unimproved land. Under the terms of a land
contract, the buyer assumes ownership of the property so long as he
meets the terms of the contract. The payment goes directly to the
seller rather than a third-party lender. You may qualify for a land
contract with little or even poor credit. That decision lies in the
hands of the seller, who solely decides to whom he wishes to sell the
land.

sale and leaseback agreement

A financial transaction in which an owner sells his or her improved
property and, as part of the same transaction, signs a long-term
lease to remain in possession of the premises. The land and building
used by the seller are sold to an investor, such as an insurance
company. The investor then leases back the real estate to the seller,
who continues to conduct business on the property as a tenant. This
enables a business firm that has money invested in a plant to free
that money for working capital.

home equity loan

- A form of second mortgage, homeowners whose property has
appreciated in value may borrow up to new loan-to-value (LTV) ratios
or, in one popular version, establish a line of credit that is based
on the equity position in their home, borrowing against it as they
choose. Some sellers do not realize that their home equity line of
credit is really a second mortgage and must be paid off when they
sell, as any other nonassumable mortgage must be. Your loan-to-value
ratio is another way of expressing how much you still owe on your
current mortgage. Ex: You currently have a loan balance of $140,000.
Your home currently appraises for $200,000. So your loan-to-value
equation would look like this:
$140,000 ÷ $200,000 = .70
-In order to calculate the equity portion eligible for loan, one
would apply the following steps:

1.) Derive the appraised value of the property at time of loan

2.) Multiply the figure from step one by the loan-to-value ratio at
which a lender agrees to provide funds
3.) Subtract any outstanding existing mortgage balance(s)
In formula form it would appear as

(Appraised property value × Loan-to-value ratio) - Any existing

mortgages = Equity amount

home equity loans cont'd/HELOCs

- A second mortgage is always going to be in second position, is
always going to be a fixed rate, and is always going to be similar to
a first mortgage in that you make your principal and interest
payments
- HELOCs are usually interest only payments for the first 10 or 20
yrs but the borrower can use the line of credit, pay it back and then
use it again.
- A line of credit can also be a first mortgage. You can use a line
of credit if you already own a home and want to pull some equity out
of the home (i.e. to do some work on the home). Or you can use a line
of credit to buy a house. That could be your only mortgage. They were
very popular before the crash. A lot of people had home equity loans,
they used the entire line of credit, the value of their home dropped
and they were "under water". A lot of banks that did home equity
loans took huge losses after the values were reduced so a lot of
banks don't really offer second mortgages anymore or home equity
loans anymore. MOst are sold in secondary markets.

-Nonconventional or government-backed loans include those insured by

the Federal Housing Administration (FHA) or guaranteed by the VA, or
Sallie Mae. With both types the actual loan comes from a local
lending institution.
-Loans directly from the government include State of New York
Mortgage Agency (SONYMA) mortgages and Rural Economic and Community
Development Administration (formerly Farmer's Home Administration)
(FmHA) loans.
-Private loans are those made by individuals, often the seller of the
property or a relative of the buyer.