Financing, Valuation and Appraisal
Financing
Loan basics
Conventional, FHA, VA, and USDA loans differ in down payment, mortgage insurance, and underwriting. Key measures: loan-to-value (loan divided by value or price), points (prepaid interest, one point = 1% of the loan), and the APR, which is higher than the note rate because it folds in certain fees. PMI is required on high-LTV conventional loans and must be canceled at the borrower's request at 80% LTV based on original value, and automatically at 78%.
Michigan mortgage and foreclosure law
Michigan is a lien-theory state using mortgages rather than deeds of trust. Default is typically handled by foreclosure by advertisement - a non-judicial process with publication and posting requirements - followed by a statutory redemption period (generally six months, with longer periods in specified cases). Judicial foreclosure is also available. Michigan licenses mortgage loan originators, and mortgage brokers and lenders are separately regulated.
Federal disclosure rules
TRID requires the Loan Estimate within three business days of application and the Closing Disclosure at least three business days before consummation. RESPA prohibits kickbacks (Section 8), prohibits requiring the buyer to use a particular title company (Section 9), and limits escrow cushions (Section 10), generally to one-sixth of annual disbursements.
Seller financing
Land contracts and purchase-money mortgages are common in Michigan, especially for buyers who cannot obtain institutional financing. The licensee should recommend legal and tax advice rather than draft the instrument.
Traps
Confusing points with the origination fee; quoting APR as the note rate; assuming FHA mortgage insurance always drops off at 78% LTV; overlooking that escrow impounds raise the monthly payment above principal and interest.
Worked example
A $200,000 loan at 6% for 30 years has a payment factor of roughly $6.00 per $1,000 borrowed, so principal and interest = 200 x $6.00 = $1,200 per month, before taxes, insurance, and mortgage insurance.
Valuation and Appraisal
The three approaches
Sales comparison is the primary approach for residential property. The appraiser selects closed comparable sales, then adjusts the comparables toward the subject: if the comparable has a feature the subject lacks, subtract; if the subject has a feature the comparable lacks, add. Cost approach (land value plus replacement cost new minus depreciation) suits new or special-purpose property. Income approach capitalizes net operating income or applies a gross rent multiplier and suits rental and commercial property. Reconciliation weights the approaches and produces a final opinion of value.
Principles an exam will test
Highest and best use, substitution, contribution, conformity, and the difference between market value and price. Depreciation is physical deterioration, functional obsolescence, or external (economic) obsolescence. Market conditions adjustments are time adjustments.
Appraisal versus CMA
A comparative market analysis by a licensee is an opinion of price used to develop a listing or offer; it is not an appraisal. Federally related appraisals must be performed by licensed or certified appraisers following USPAP.
Michigan connection
Assessed value is 50% of market value, so a home worth $250,000 should be assessed at $125,000. Assessed value is not proof of market value and is never a substitute for an appraisal.
Traps
Adjusting the subject toward the comparables (backwards); using an asking price as a comparable sale; forgetting the time adjustment for a stale sale; treating a CMA as an appraisal.
Worked example
A duplex produces $36,000 in net operating income. A market-derived capitalization rate is 9%. Value = $36,000 / 0.09 = $400,000. Using the gross rent multiplier instead: monthly rent $3,000 x GRM 115 = $345,000.