Chapter 14 Real Estate Financing

deed of trust

- a three party security instrument - conveys bare legal title (naked title) --that is, the title without the right of possession--from the borrower to a third party, called the trustee. -trustee holds legal title on behalf of the lender, the holder of the promissory note, ho is known as the beneficiary.

adjustable-rate mortgage (ARM)

-begins at one rate of interest, then fluctuates up or down during the loan term, based on a specified economic indicator. Common components of an ARM include the following: ---the index is an economic indicator that is used to adjust the interest rate in the loan ---usually, the interest rate is the index rate plus a premium, called the margin. The margin represents the lenders cost of doing business. ----rate caps limit the amount the interest rate may change. Most of ARMs have two types of rate caps -periodic and life-of-the-loan (or aggregate). A periodic rate cap limits the amount the rate may increase over a stated term, usually a year. A life-of-the-loan rate cap limits the amount the rate may increase over the entire of the loan.

Factors that Influence housing affordability

-how long a person wants to live in a particular area -a persons financial situation -housing affordability - tax consequences of owning versus renting property -what might happen to home prices and tax laws in the future.

interest

a charge for the use of money, expressed as a percentage of the remaining balance of the loan. A lender charges interest on the principal (amount borrowed that has not yet be repaid) over the term of the loan, usually monthly. -payments made at the end of a period are known as payments in arrears. -payments may also be made at the beginning of each period known as payments in advance.

comprehensive loss underwriting exchange

a database of consumer claims history that allows insurance companies to access prior claims information in the underwriting and rating process

balloon payment

a final payment that is at least twice the amount of any other payment. The loan is considered a partially amortized loan because some of the principal had been paid, with some still owed at the end of the term. -frequently assumed that if the payments are made promptly, the lenser will extend the ballon payment for another limited term. The lender however, is not legally obligated to grant this extension.

alienation clause

this clause provides that when the property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the moan at an interest rate acceptable to the lender. -especially used when the original loan had a lower interest rate. -also known as a resale clause, due-on-sale clause, or call clause

homeowners insurance

type of insurance that covers your home as well as your possessions inside it in case of damage or loss. A lender will require that a homeowner obtain insurance when the loan is secured by the property. basic form and broad form

"subject to" property purchase

when a property is sold "subject to" the mortgage, the byre is not personally obligated to pay the debt in full. The buyer takes title to the real estate knowing that she must make payments on the existing loan.

release deed

when a real estate loan secured by a deed of trust has been completely repaid, the beneficiary must make a written request that the trustee convey the title to the property back to the grantor. -the trustee executes and delivers a deed of reconveyance (sometimes called a release deed) to the trustor.

mortgage amortization triangle

1.) monthly payment (- months interests) = amount paid toward principal. 2.) principal balance (-amount paid toward principal) =new principal balance. 3.) principal balance X annual interest rate / 12 months= months interest

prepayment penalty

A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost.

acceleration clause

A contract clause giving the lender the right to declare the entire loan amount due immediately because of borrower's default -lenders would rather foreclose on the entire amount instead of the borrowers failed monthly payment.

discount points

A fee charged by the lender at settlement that results in increasing the lender's effective yield on the money borrowed. One discount point equals one percent of the loan amount. -variable amount that benefits the lender -the number of points charged depends on two factors: (1) the difference between the loans stated interest rate and the yield required by the lender (2) how long the lender expects it will take the borrow to pay off the loan NOTE: to determine how many points are charged on a loan, divide the total dollar amount of the points by the amount of the loan.

loan origination fee

A fee charged to the borrower by the lender for making a generating the mortgage loan, or transfer fee. The fee is usually computed as a percentage of the loan amount. -typically is about 1% of the loan amount.

debt to income (DTI)

A homebuyer who is able to provide at least 10% of the purchase price as a down payment, for instance, could be expected to incur a monthly PITI payment of no more than 28% of the borrowers gross (pretax) monthly income. -monthly payments on all debts-normally including long-term debt such as car payments, student loans, or other mortgages- would be expected to not exceed 36% of gross monthly income. NOTE: insurance premiums, utilities, and routine medical care would not be included in the 36% figure but would be expected to be covered by the remaining 94% of the buyers monthly income.

defeasance clause

A necessary mortgage clause in title theory states. When the debt is satisfied, this clause causes title to pass automatically back to the borrower. Satisfaction of mortgage; release from records.

deficiency judgement

A personal judgement levied against the borrower when a foreclosure sale does not produce suffiecient funds to pay the mortgage back in full.

short sale

A sale of real property for an amount that is less than the balance owed on the mortgage loan, usually due to financial hardship. Both the lender and the borrower must consent to a short sale. Following a short sale, the borrower still owes the balance of the mortgage debt (after the sale proceeds are applied) to the lender unless the lender agrees to forgive the remaining debt

strict foreclosure

A strict foreclosure decree sets out the amount due under the mortgage, orders it to be paid within a particular time limit, and provides that if payment is not made, the mortgagor's right and equity of redemption are forever barred and foreclosed. If the mortgagor does not pay within the time designated, then title to the property vests in the mortgagee without any sale thereof.

subordination agreement

A written agreement between holders of liens on a property that changes the priority of mortgage, judgment, and other liens under certain circumstances.

coinsurance

An agreement between an insurer and insured in which both parties are expected to pay a certain portion of the potential loss and other expenses. usually 80%

security interest

An interest in person property or fixtures which secures payment or performance of the obligation. -mortgage loans have two parts: the debt itself and the security for the debt. When the property is mortgaged, the owner must execute (sign) two separate instruments--the financing instrument that creates the debt and the security instrument that specifics the property that the debtor will use as collateral for the debt.

assignment of mortgage

Occurs when ownership of a mortgage is transferred (sold) from one company (assignor) or individual to another (assignee). -happens without changing the provisions of the contract.

negative amortization

Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment, which is why this is called "deferred interest." The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization. ---can result in the borrower owing more than the property is worth.

satisfaction of mortgage

The document that a mortgagee gives a mortgagor after the debt has been completely paid off. -also known as release or discharge

statutory right of redemption

The legal right of a mortgagor to redeem the property after it has been sold at a foreclosure sale. This right is granted by state law for a limited period of time, depending on the state.

equitable right of redemption

The right of a defaulted property owner to recover the property prior to its sale by paying the appropriate fees and charges.

other tax benefits

When a married couple who file joint tax returns sell a principal residence, up to $500,000 in profit can be excluded from capital gains tax. A taxpayer who files singly is entitled to a $250,000 exclusion. -the exclusion may be used repeatedly, as long as the homeowner has both owned and occupied the property as the principal residence for at least 2 of the past 5 years.

nonjudicial foreclosure

When the security instrument contains a power-of-sale clause. In nonjudical foreclosure, no court action is required. -to institute a nonjudicial foreclosure, the trustee or mortgagee will send a notice of default to the borrower indicating the amount that must be paid to make the debt current, as well as the action that will be taken is not satisfied. NOTE: After selling the property, the trustee or mortgagee may be required to file a notice of sale or affidavit of foreclosure.

assumption of mortgage

a buyer who purchases a property and assumes the sellers debt becomes personally obligated for the payment of the entire debt. -If a seller wants to be completely free if the original mortgage loan the seller(s), buyer(s), and lender must execute a novation agreement in writing. Which will maker the buyer solely responsible for any default on the loan.

foreclosure

a legal procedure in which property pledged as security for a debt is sold to satisfy debt. Any unpaid lien holder, regardless off priority position, can initiate foreclosure proceedings; ----however, foreclosure of a junior liens with high priority remain in place and the buyer takes title subject to those liens. ----the purchasers on foreclosure of a debt secured by real property could be the lender and the property than becomes part of the lenders REO (real estate owned) portfolio.

mortgage

a lien on the real property of a debtor. The borrower or mortgagor receives a loan and in return gives a promissory note and mortgage to the lender, called the mortgagee. -a voluntary, specific lien.

reverse mortgage

allows people 62 and older to borrow money against the equity they have built in their home. the homeowners equity diminishes as the loan amount increases. -the reverse mortgage has become a popular method of providing more income while allowing the homeowner to remain in the home. (insured by the FHA)

judicial foreclosure

allows the property to be sold by court order after the mortgage has given sufficient public notice. a public sale is advertised and held,and the RE is sold to the highest bidder.

growing equity mortgage

also called a rapid payoff-mortgage, use see a fixed interest rate,but payments of principal are increased according to an index or schedule. -the total payment thus increases, and the loan is paid off more quickly. -most frequently used when the borrowers income is expected to keep pace with the increasing loan payments,

deed in lieu of foreclosure

also known as a friendly foreclosure, is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings NOTE: it does not eliminate junior loans, and the lender usually lose any rights pertaining to FHA or private mortgage insurance or VA guarantees. In addition it is an adverse element in the borrowers credit history.

promissory note

called the note or financing instrument, is a borrowers personal promise to repay debt according to the agreed terms. A contract signed by the borrower (the maker or payer) with the lender (the payee) which states the amount of the debt. the time and method of payment, the rate of interest. -when executed by the borrower and other necessary parties, the note becomes legally enforceable and fully negotiable instrument of debt.

usury

charging interest on excess of the maximum rate allowed by the law is called usury. As of March 31, 1980, federal law exempts federally related residential first mortgage loans made after that date from state usury

amortized loan

each payment in an amortized loan partially pays off both the principal and interest. - Most mortgage and deed of trust loans are amortized loans. -the word meaning to kill off. -payment ranges from 10-30 years, at the end of the term, the full amount of the principal and all interest due is reduced to zero. Such loans are known as direct reduction loans. -the most frequently used mortgage payment plan is a fully amortized loan or level-payment loan.

straight loan (interest-only loan)

essentially dividers the loan into two amounts to be paid off separately. The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term. -generally now used for home improvements or second mortgages

title theory

in a deed of trust or title theory state, then, the mortgagor actually conveys legal title to the mortgagee (or some other designated individual) and retains equitable title and right of possession. -legal title is returned to the mortgagor only when the debt is paid in full. NOTE: On notification of the borrowers default, the trustee is authorized to sell the secured property, providing the proceeds yo the beneficiary, the lender. IF the sale proceeds are greater than the amount owed on the debt, the borrower receives the difference, less penalty fee and court cost.

note

is an negotiable instrument similar to a check or bank draft. The payee who holds the note may transfer right to receive payment to a third party in one of two ways: (1) by signing the instrument over (that is by assigning it) to the third party (2) by delivering the instrument to the third party Ex: home loans are bought and sold in the secondary mortgage market.

PITI

owners must pay real estate taxes, buy property insurance and repay (with interest) the mortgage loan used to purchase the property what lenders call PITI (principal, interest, taxes, and insurance). -lender consider an prospective borrowers (loan applicant) credit report and score.

determining interest

the amount of interest paid is determined by the agreed annual interest rate, the amount of money borrowed (loan amount) or the amount of money still owed (loan balance) and the period of time the money is held.

hypothecation

the debtor retains the right of possession and control of seared property, while the creditor receives an equitable right to the property.

equity

the difference between the market value of the property and the amount still owed on it is the homeowners equity in the property. The equity can be borrowed against in the future or realized on a sale of the property.

consumer protections

the lender must: -provide billing information in writing -give borrower 2 month warming if the ARM will have a rate change. -promptly credit the borrowers payments -respond quickly when the borrower asks about paying off loan -not charge for insurance the borrower doenst need, or overcharge for insurance the lender provided if the borrower fails to do so. -quickly resolve complaints, within 30-45 business days - have and follow good customer service -contact the borrower to help when the borrower is having trouble making payments -work with the borrower, if the borrower is have trouble paying mortgage, before resorting to foreclosure. -allow borrower to seek review of the decision about a loan workout request.

lien theory state

the mortgagor retains both legal and equitable title to property that services as security for the debt. the mortgage is a lien on the property but the mortgage is nothing more than collateral for the loan -if the mortgagor defaults, the mortgagee must got through formal foreclosure proceeding in court to obtain legal title.

loan-to-value ratio (LTV)

the percentage of the sales price or appraised value, which ever is lede, that the lender is willing to lend. loan amount / (sales price or appraised price (whichever less) X LTCX) (sales price or appraised price (whichever less) X LTV=loan amount loan amount / LTV =sales price or appraised value