Real Estate

Real estate is a legal term (in some jurisdictions, such as the United Kingdom, Canada, Australia, USA and The Bahamas) that encompasses land along with improvements to the land, such as buildings, fences, wells and other site improvements that are fixed in location—immovable.[1] Real estate law is the body of regulations and legal codes which pertain to such matters under a particular jurisdiction and include things such as commercial and residential real property transactions. Real estate is often considered synonymous with real property (sometimes called realty), in contrast with personal property (sometimes called chattel or personalty under chattel law or personal property law). However, in some situations the term "real estate" refers to the land and fixtures together, as distinguished from "real property", referring to ownership of land and appurtenances, including anything of a permanent nature such as structures, trees, minerals, and the interest, benefits, and inherent rights thereof. Real property is typically considered to be Immovable property[2] The terms real estate and real property are used primarily in common law, while civil law jurisdictions refer instead to immovable property. In law, the word real means relating to a thing (res/rei, thing, from O.Fr. reel, from L.L. realis "actual," from Latin. res, "matter, thing"),[3] as distinguished from a person. Thus the law broadly distinguishes between "real" property (land and anything affixed to it) and "personal" property (everything else, e.g., clothing, furniture, money). The conceptual difference was between immovable property, which would transfer title along with the land, and movable property, which a person would retain title to. The oldest use of the term "Real Estate" that has been preserved in historical records was in 1666.[3] This use of "real" also reflects the ancient and feudal preference for land, and the ownership (and owners) thereof. Some people have claimed that the word real in this sense is descended (like French royal and Spanish real) from the Latin word for 'king'. In the feudal system (which has left many traces in the common law) the king was the owner of all land, and everyone who occupied land paid him rent directly or indirectly (through lords who in turn paid the king), in cash, goods or services (including military service). Property tax, paid to the state, can be seen as a relic of that system, as is the term fee simple. However, this derivation of real is a misconception. With the development of private property ownership, real estate has become a major area of business, commonly referred to as commercial real estate. Purchasing real estate requires a significant investment, and each parcel of land has unique characteristics, so the real estate industry has evolved into several distinct fields. Specialists are often called on to valuate real estate and facilitate transactions. Some kinds of real estate businesses include: • Appraisal: Professional valuation services • Brokerages: A mediator who charges a fee to facilitate a real estate transaction between the two parties. • Development: Improving land for use by adding or replacing buildings • Net leasing[7] • Property management: Managing a property for its owner(s) • Real estate marketing: Managing the sales side of the property business • Real estate investing: Managing the investment of real estate • Relocation services: Relocating people or business to a different country • Corporate Real Estate: Managing the real estate held by a corporation to support its core business—unlike managing the real estate held by an investor to generate income Within each field, a business may specialize in a particular type of real estate, such as residential, commercial, or industrial property. In addition, almost all construction business effectively has a connection to real estate.

Professional university-level education in real estate is primarily focused at the graduate level. Focus in towards the commercial real estate sector, primarily real estate development or investment rather than residential real estate sales conducted by a REALTOR. See also graduate real estate education for a discussion and list of university-level real estate programs. "Internet real estate" is a term coined by the internet investment community relating to ownership of domain names and the similarities between high quality internet domain names and real-world, prime real estate.

[edit] Residential real estate
The legal arrangement for the right to occupy a dwelling is known as the housing tenure. Types of housing tenure include owner occupancy, Tenancy, housing cooperative, condominiums (individually parceled properties in a single building), public housing, squatting, and cohousing. The occupants of a residence constitute a household. Residences can be classified by, if, and how they are connected to neighboring residences and land. Different types of housing tenure can be used for the same physical type. For example, connected residents might be owned by a single entity and leased out, or owned separately with an agreement covering the relationship between units and common areas and concerns.

'Single-family detached home' Major physical categories in North America and Europe include: • Attached / multi-unit dwellings • Apartment - An individual unit in a multi-unit building. The boundaries of the apartment are generally defined by a perimeter of locked or lockable doors. Often seen in multistory apartment buildings. • Multi-family house - Often seen in multi-story detached buildings, where each floor is a separate apartment or unit. • Terraced house (a.k.a. townhouse or rowhouse) - A number of single or multi-unit buildings in a continuous row with shared walls and no intervening space. • Condominium - Building or complex, similar to apartments, owned by individuals. Common grounds are owned and shared jointly. There are townhouse or rowhouse style condominiums as well. • Cooperative (a.k.a. "co-op) - A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit. • Semi-detached dwellings • Duplex - Two units with one shared wall.

• Single-family detached home • Portable dwellings • Mobile homes - Potentially a full-time residence which can be (might not in practice be) movable on wheels. • Houseboats - A floating home • Tents - Usually very temporary, with roof and walls consisting only of fabric-like material. Major categories in India and Asian Subcontinent include • • • • • • • Housing Societies.( CGHS) Condominiums. [JJ Colonies Jughi Jhopri Hutments]. [Builder Flats]. [Chawls]. [Havelis]. [Lal Dora]- where people carry out commercial and residential activities both.

the size is measures in Gaz (square yards) Quila , Marla , Beegha, and acre. The size of an apartment or house can be described in square feet or meters. In the United States, this includes the area of "living space", excluding the garage and other non-living spaces. The "square meters" figure of a house in Europe may report the total area of the walls enclosing the home, thus including any attached garage and non-living spaces, which makes it important to inquire what kind of surface definition has been used. It can be described more roughly by the number of rooms. A studio apartment has a single bedroom with no living room (possibly a separate kitchen). A one-bedroom apartment has a living or dining room separate from the bedroom. Two bedroom, three bedroom, and larger units are common. (A bedroom is defined as a room with a closet for clothes storage.) See List of house types for a complete listing of housing types and layouts, real estate trends for shifts in the market and house or home for more general information.

Market sector value According to The Economist, "developed economies'" assets at the end of 2002 were the following:
• • • • • • Residential property: $48 trillion; Commercial property: $14 trillion; Equities: $20 trillion; Government bonds: $20 trillion; Corporate bonds: $13 trillion; Total: $115 trillion.

That makes real estate assets 54% and financial assets 46% of total stocks, bonds, and real estate assets. Assets not counted here are bank deposits, insurance "reserve" assets, natural resources, and human assets. It is not clear if all debt and equity investments are counted in the categories equities and bond.

[edit] Mortgages in real estate
In recent years, many economists have recognized that the lack of effective real estate laws can be a significant barrier to investment in many developing countries. In most societies, rich and poor, a significant fraction of the total wealth is in the form of land and buildings. In most advanced economies, the main source of capital used by individuals and small companies to purchase and improve land and buildings is mortgage loans (or other instruments). These are loans for which the real property itself constitutes collateral. Banks are willing to make such loans at favorable rates in large part because, if the borrower does not make payments, the lender can foreclose by filing a court action which allows them to take back the property and sell it to get their money back. For investors, profitability can be enhanced by using an off plan or pre-construction strategy to purchase at a lower price which is often the case in the pre-construction phase of development.[citation needed] But in many developing countries there is no effective means by which a lender could foreclose, so the mortgage loan industry, as such, either does not exist at all or is only available to members of privileged social classes. A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably. In many jurisdictions, though not all (Bali, Indonesia being one exception[1]), it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed.

Mortgage loan basics
[edit] Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.[clarification needed] As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk. Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property (see commercial mortgages). Although the terminology and precise forms will differ from country to country, the basic components tend to be similar: • Property: the physical residence being financed. The exact form of ownership will vary from

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country to country, and may restrict the types of lending that are possible. Mortgage: the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property. Borrower: the person borrowing who either has or is creating an ownership interest in the property. Lender: any lender, but usually a bank or other financial institution. Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer.[2] Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size. Interest: a financial charge for use of the lender's money. Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.

Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system. Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country. Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization). In the United States, the largest firms securitizing loans are Fannie Mae and Freddie Mac, which are government sponsored enterprises. Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.

[edit] Mortgage loan types
There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.

• Interest: interest may be fixed for the life of the loan or variable, and change at certain predefined periods; the interest rate can also, of course, be higher or lower. • Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization. • Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid. • Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment. The two basic types of amortized loans are the fixed rate mortgages (FRM) and adjustable rate mortgages (ARM) (also known as a floating rate or variable rate mortgage). In many countries, floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are typically considered "standard." Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period. Historical U.S. Prime Rates In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. In the U.S., the term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve. The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to-income, downpayments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well. Depending upon the circumstances, there are various other methods, clauses, and innovations involving mortgages. Graduated payment mortgage loan have increasing costs over time and are geared to young borrowers who expect wage increases over time. Balloon payment mortgages have only partial amortization, meaning that amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term, and at the end of the term a balloon payment is due. When interest rates are high relative to the rate on an existing seller's loan, the buyer can consider assuming the seller's mortgage.[3] Budget loans include taxes and insurance in the mortgage payment;[4] package loans add the costs of furnishings and other personal property to the mortgage. Buydown mortgages allow the seller or lender to pay something similar to

mortgage points to reduce interest rate and encourage buyers.[5] Homeowners can also take out equity loans in which they receive cash for a mortgage debt on their house. Foreign nationals due to their unique situation face Foreign National mortgage conditions. In the United Kingdom, flexible mortgages allow for more freedom by the borrower to skip payments or prepay. Offset mortgages allow deposits to be counted against the mortgage loan. in the UK there is also the endowment mortgage where the borrowers pay interest while the principal is paid with a life insurance policy. Commercial mortgages typically have different interest rates, risks, and contracts than personal loans. Participation mortgages allow multiple investors to share in a loan. Builders may take out blanket loans which cover several properties at once. Bridge loans may be used as temporary financing pending a longer-term loan. Hard money loans provide financing in exchange for the mortgaging of real estate collateral. • • • • • Reverse mortgage Repayment mortgage Seasoned mortgage Term loan or Interest-only loan Wraparound mortgage

[edit] Loan to value and downpayments
Main article: Loan-to-value ratio Upon making a mortgage loan for the purchase of a property, lenders usually require that the borrower make a downpayment; that is, contribute a portion of the cost of the property. This downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in which the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property. The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.

[edit] Value: appraised, estimated, and actual
Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are: 1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available. 2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal. 3. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances.

[edit] Equity or homeowner's equity
The concept of equity in a property refers to the value of the property minus the outstanding debt, subject to the definition of the value of the property. Therefore, a borrower who owns a property whose estimated value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's equity of $100,000.

[edit] Payment and debt ratios
In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from location to location. Some lenders may also require a potential borrower have one or more months of "reserve assets" available. In other words, the borrower may be required to show the availability of enough assets to pay for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or other loss of income. Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances.

[edit] Standard or conforming mortgages
Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income going to mortgage debt. A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard mortgages. For example, banks and mortgage brokerages in Canada face restrictions on lending more than 80% of the property value; beyond this level, mortgage insurance is generally required.[6]

[edit] Repaying the capital
There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.

[edit] Capital and interest
The most common way to repay a loan is to make regular payments of the capital (also called principal) and interest over a set term. This is commonly referred to as (self) amortization in the U.S. and as a

repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices. Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.

[edit] Interest only
The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investmentbacked mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt. Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).

[edit] No capital or interest
For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year. These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages, depending on the country. The loans are typically not repaid until the borrowers die, hence the age restriction. For further details, see equity release.

[edit] Interest and partial capital
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a

capital and interest (repayment) basis.

[edit] Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - obtain. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt. In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government; in some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.

[edit] Mortgage lending: United States
Main article: Mortgage underwriting in the United States

[edit] Origination
Main article: Loan origination In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting a loan application and documentation related to his/her financial history and/or credit history to the underwriter, which is typically a bank. Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer. Origination is regulated by laws including the Truth in Lending Act and Real Estate Settlement Procedures Act (1974). Credit scores are often used, and these must comply with the Fair Credit Reporting Act. Additionally, various state laws may apply. Underwriters receive the application and determine whether the loan can be accepted. If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. Documentation and credit history can be used to categorize loans into high-quality A-paper, Alt-A, and subprime. Loans may also be categorized by whether there is full documentation, alternative documentation, or little to no documentations, with extreme "no income no job no asset" loans referred to as "NINJA" loans. No doc loans were popular in the early 2000s, but were largely phased out following the subprime mortgage crisis. Low-doc loans carry a higher interest rate and were theoretically available only to borrowers with excellent credit and additional income that may be hard to document (e.g. self employment income). As of July 2010, no-doc loans were reportedly still being offered, but more selectively and with high downpayment requirements (e.g., 40%).[7] The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-doc and low-doc loans.

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Credit Report 1003 — Uniform Residential Loan Application 1004 — Uniform Residential Appraisal Report 1005 — Verification Of Employment (VOE) 1006 — Verification Of Deposit (VOD) 1007 — Single Family Comparable Rent Schedule 1008 — Transmittal Summary Copy of deed of current home Federal income tax records for last two years Verification of Mortgage (VOM) or Verification of Payment (VOP) Borrower's Authorization Purchase Sales Agreement 1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) - used if borrower is self-employed

[edit] Closing costs
In addition to the downpayment, the final deal of the mortgage includes will include closing costs which includee fees for "points" to lower the interest rate, application fees, credit check, attorney fees, title insurance, appraisal fees, inspection fees, and other possible miscellaneous fees.[8] These fees can sometimes be financed and added to the mortgage amount. In 2010, one survey estimated that the average total closing cost United States on a $200,000 house was $3,741.[9]

[edit] Predatory mortgage lending
There is concern in the U.S. that consumers are often victims of predatory mortgage lending [2]. The main concern is that mortgage lenders and brokers, operating legally, are finding loopholes in the law to obtain additional profit. The typical scenario is that terms of the loan are beyond the means of the borrower. The borrower makes a number of interest and principal payments, and then defaults. The lender then takes the property and recovers the amount of the loan, and also keeps the interest and principal payments, as well as loan origination fees.

[edit] Financing industry
Mortgage lending is a major sector finance in the United States, and many of the guidelines that loans must meet are suited to satisfy investors and mortgage insurers. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S., the Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by offering a guarantee on the mortgage payments of certain conforming loans. These loans are then securitized and issued at a slightly lower interest rate to investors, and are known as mortgage-backed securities (MBS). After securitization these are sometimes called "agency paper" or "agency bonds". Whether or not a loan is conforming depends on the size and set of a guidelines which are implemented in an automated underwriting system.[10] Non-conforming mortgage loans which cannot be sold to Fannie or Freddie are either "jumbo" or "subprime", and can also be packaged into mortgage-backed securities. Some companies, called correspondent lenders, sell all or most of their closed loans to these

investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate. Securitization allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. Investors in conforming loans, meanwhile, gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds. Securitization has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past. The increased amount of lending led (among other factors) to the United States housing bubble of 2000-2006. The growth of lightly regulated derivative instruments based on mortgage-backed securities, such as collateralized debt obligations and credit default swaps, is widely reported as a major causative factor behind the 2007 subprime mortgage financial crisis.

[edit] Delinquency
At the start of 2008, 5.6% of all mortgages in the United States were delinquent.[11] By the end of the first quarter that rate had risen, encompassing 6.4% of residential properties. This number did not include the 2.5% of homes in foreclosure.[12]

[edit] Mortgages in the UK
Main article: UK mortgage terminology

[edit] The mortgage loans industry and market
There are currently over 200 significant separate financial organizations supplying mortgage loans to house buyers in Britain. The major lenders include building societies, banks, specialized mortgage corporations, insurance companies, and pension funds. Over the years, the share of the new mortgage loans market held by building societies has declined. Between 1977 and 1987, it fell drastically from 96% to 66% while that of banks and other institutions rose from 3% to 36%. The banks and other institutions that made major inroads into the mortgage market during this period were helped by such factors as: • relative managerial efficiency; • advanced technology, organizational capabilities, and expertise in marketing; • extensive branch networks; and • capacities to tap cheaper international sources of funds for lending.[13] By the early 1990s, UK building societies had succeeded in greatly slowing if not reversing the decline in their market share. In 1990, the societies held over 60% of all mortgage loans but took over 75% of the new mortgage market – mainly at the expense of specialized mortgage loans corporations. Building societies also increased their share of the personal savings deposits market in the early 1990s at the

expense of the banks – attracting 51% of this market in 1990 compared with 42% in 1989.[14] One study found that in the five years 1987-1992, the building societies collectively outperformed the UK clearing banks on practically all the major growth and performance measures. The societies' share of the new mortgage loans market of 75% in 1990-91 was similar to the share level achieved in 1985. Profitability as measured by return on capital was 17.8% for the top 20 societies in 1991, compared with only 8.5% for the big four banks. Finally, bad debt provisions relative to advances were only 0.4% for the top 20 societies compared with 2.8% for the four banks.[15] Though the building societies did subsequently recover a significant amount of the mortgage lending business lost to the banks, they still only had about two-thirds of the total market at the end of the 1980s. However, banks and building societies were by now becoming increasingly similar in terms of their structures and functions. When the Abbey National building society converted into a bank in 1989, this could be regarded either as a major diversification of a building society into retail banking – or as significantly increasing the presence of banks in the residential mortgage loans market. Research organization Industrial Systems Research has observed that trends towards the increased integration of the financial services sector have made comparison and analysis of the market shares of different types of institution increasingly problematical. It identifies as major factors making for consistently higher levels of growth and performance on the part of some mortgage lenders in the UK over the years: • the introduction of new technologies, mergers, structural reorganization and the realization of economies of scale, and generally increased efficiency in production and marketing operations – insofar as these things enable lenders to reduce their costs and offer more price-competitive and innovative loans and savings products; • buoyant retail savings receipts, and reduced reliance on relatively expensive wholesale markets for funds (especially when interest rates generally are being maintained at high levels internationally); • lower levels of arrears, possessions, bad debts, and provisioning than competitors; • increased flexibility and earnings from secondary sources and activities as a result of politicallegal deregulation; and • being specialized or concentrating on traditional core, relatively profitable mortgage lending and savings deposit operations.[16]

[edit] Mortgage types
The UK mortgage market is one of the most innovative and competitive in the world. There is little intervention in the market by the state or state funded entities and virtually all borrowing is funded by either mutual organisations (building societies and credit unions) or proprietary lenders (typically banks). Since 1982, when the market was substantially deregulated, there has been substantial innovation and diversification of strategies employed by lenders to attract borrowers. This has led to a wide range of mortgage types. As lenders derive their funds either from the money markets or from deposits, most mortgages revert to a variable rate, either the lender's standard variable rate or a tracker rate, which will tend to be linked to the underlying Bank of England (BoE) repo rate (or sometimes LIBOR). Initially they will tend to offer an incentive deal to attract new borrowers. This may be: • A fixed rate; where the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or have more onerous early repayment charges and are therefore less popular than shorter

term fixed rates. • A capped rate; where similar to a fixed rate, the interest rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years. • A discount rate; where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three). • A cashback mortgage; where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan. These rates are sometimes combined: For example, 4.5% 2 year fixed then a 3 year tracker at BoE rate plus 0.89%. With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan within the incentive period or a longer period (referred to as an extended tie-in). These penalties used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge. [edit] "Self Cert" mortgage Mortgage lenders usually use salaries declared on wage slips to work out a borrower's annual income and will usually lend up to a fixed multiple of the borrower's annual income. Self Certification Mortgages, informally known as "self cert" mortgages, are available to employed and self employed people who have a deposit to buy a house but lack the sufficient documentation to prove their income. This type of mortgage can be beneficial to people whose income comes from multiple sources, whose salary consists largely or exclusively of commissions or bonuses, or whose accounts may not show a true reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are usually higher than for normal mortgages and the loan to value ratio is usually lower. [edit] 100% mortgages Normally when a bank lends a customer money they want to protect their money as much as possible; they do this by asking the borrower to fund a certain percentage of the property purchase in the form of a deposit. 100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers, but almost always carry a higher interest rate on the loan. USDA (United States Department of Agriculture) also offers 100% loan to value programs for borrowers with an income not exceeding 115% of median income. Borrowers must not currently own a home but does not need to be a first time home buyer. This type of program is offered through lending institutions. USDA also offers a direct program, referred to as a Section 502 loan, to very low and low income borrowers. Very low income borrowers are defined as 50% below the median income. Low income borrowers are defined as 50-80% of median income. This type of program subsidizes the borrower's mortgage payment USDA programs are targeted to certain areas and may not be available in all counties.

[edit] Together/Plus mortgages A development of the theme of 100% mortgages is represented by Together/Plus type mortgages, which have been launched by a number of lenders in recent years. Together/Plus Mortgages represent loans of 100% or more of the property value - typically up to a maximum of 125%. Such loans are normally (but not universally) structured as a package of a 95% mortgage and an unsecured loan of up to 30% of the property value. This structure is mandated by lenders' capital requirements which require additional capital for loans of 100% or more of the property value.

[edit] UK mortgage process
UK lenders usually charge a valuation fee, which pays for a chartered surveyor to visit the property and ensure it is worth enough to cover the mortgage amount. This is not a full survey so it may not identify all the defects that a house buyer needs to know about. Also, it does not usually form a contract between the surveyor and the buyer, so the buyer has no right to sue in contract if the survey fails to detect a major problem. For an extra fee, the surveyor can usually carry out a building survey or a (cheaper) "homebuyers survey" at the same time.[17]

[edit] Mortgage lending in Continental Europe
Within the European Union, the Covered bonds market volume (covered bonds outstanding) amounted to about EUR 2 trillion at year-end 2007 with Germany, Denmark, Spain, and France each having outstandings above 200,000 EUR million[18]. In German language, Pfandbriefe is the term applied. Pfandbrief-like securities have been introduced in more than 25 European countries – and in recent years also in the U.S. and other countries outside Europe – each with their own unique law and regulations. However, the diffusion of the concept differ: In 2000, the US institutions Fannie Mae and Freddie Mac together reached one per cent of the national population. Furthermore, 87 per cent of their purchased mortgages were granted to borrowers in metropolitan areas with higher income levels. In Europe, a wider market has been achieved: In Denmark, mortgage banks reached 35 per cent of the population in 2002, while the German Bausparkassen achieved widespread regional distribution and more than 30 per cent of the German population concluded a Bauspar contract (as of 2001)[19].

[edit] Costs
A study issued by the UN Economic Commission for Europe compared German, US, and Danish mortgage systems. The German Bausparkassen have reported nominal interest rates of approximately 6 per cent per annum in the last 40 years (as of 2004). In addition, they charge administration and service fees (about 1.5 per cent of the loan amount). In the United States, the average interest rates for fixedrate mortgages in the housing market started in the tens and twenties in the 1980s and have (as of 2004) reached about 6 per cent per annum. However, gross borrowing costs are substantially higher than the nominal interest rate and amounted for the last 30 years to 10.46 per cent. In Denmark, similar to the United States capital market, interest rates have fallen to 6 per cent per annum. A risk and administration fee amounts to 0.5 per cent of the outstanding debt. In addition, an acquisition fee is charged which amounts to one per cent of the principal[19].

[edit] Recent trends
On July 28, 2008, US Treasury Secretary Henry Paulson announced that, along with four large U.S.

banks, the Treasury would attempt to kick start a market for these securities in the United States, primarily to provide an alternative form of mortgage-backed securities.[20] Similarly, in the UK "the Government is inviting views on options for a UK framework to deliver more affordable long-term fixed-rate mortgages, including the lessons to be learned from international markets and institutions". [21] George Soros's October 10, 2008 Wall Street Journal editorial promoted the Danish mortgage market model.[22] A survey of European Pfandbrief-like products was issued in 2005 by the Bank for International Settlements;[23] the International Monetary Fund in 2007 issued a study of the covered bond markets in Germany and Spain,[24] while the European Central Bank in 2003 issued a study of housing markets, addressing also mortgage markets and providing a two page overview of current mortgage systems in the EU countries.[25]

[edit] History
While the idea originated in Prussia in 1769[26], a Danish act on mortgage credit associations of 1850 enabled the issuing of bonds (Danish: Realkreditobligationer) as a means to refinance mortgage loans [27]. With the German mortgage banks law of 1900, the whole German Empire was given a standardized legal foundation for the emission of Pfandbriefe. An account from the perspective of development economics is available.[28]

[edit] Mortgage insurance
Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over 80%, and employed in the event of foreclosure and repossession. This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%. In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset.

[edit] Islamic mortgages
Main article: Islamic economic jurisprudence The Sharia law of Islam prohibits the payment or receipt of interest, which means that practising Muslims cannot use conventional mortgages. However, real estate is far too expensive for most people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.[citation needed] Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as the United Kingdom and India) there is a Stamp Duty which is a tax charged by the government on a

change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be charged twice. Many other jurisdictions have similar transaction taxes on change of ownership which may be levied. In the United Kingdom, the dual application of Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate Islamic mortgages.[29] An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price. Both of these methods compensate the lender as if they were charging interest, but the loans are structured in a way that in name they are not, and the lender shares the financial risks involved in the transaction with the homebuyer.[citation needed]

[edit] Other terminologies
Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it may be related to the legal mortgage rather than to the loan. Advance This is the money you have borrowed plus all the additional fees. Base rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate. Bridging loan This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property. Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc. Early redemption charge / Pre-payment penalty / Redemption penalty This is the amount of money due if the mortgage is paid in full before the time finished. equity This is the market value of the property minus all loans outstanding on it. First time buyer This is the term given to a person buying property who has not owned property within the last three years. Loan origination fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount. Sealing fee This is a fee made when the lender releases the legal charge over the property. Subject to contract This is an agreement between seller and buyer before the actual contract is made.