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.