Chapter 15: Real Estate Finance
Types of Conventional Loans
- standard fixed-rate mortgage - graduated payment mortgage (GPM) - pledged account mortgage (PAM) - buydown - open-end loan - blanket mortgage - wraparound mortgage
Two Categories of Mortgage Loans
1) Conventional Loans 2) Government-Backed Loans
Index
A benchmark interest rate that reflects general market conditions. The index changes based on the market.
Deed in Lieu of Foreclosure
A defaulting borrower who faces foreclosure may avoid court actions and costs by voluntarily deeding the property to the mortgagee. This is accomplished with a deed in lieu of foreclosure, which transfers legal title to the lender. - The transfer does not terminate any existing liens on the property. - ALSO KNOWN AS: "friendly foreclosure"
Satisfaction of Mortgage
A document (certificate) acknowledging the payment of a mortgage debt.
Promissory Note
A document that describes the amount of money borrowed, the terms under which it will be repaid, and any conditions that relate to either the borrowing of the money or the consequences in event of default. - ALSO CALLED: a "note" or "bond" - Establishes legal evidence of the debt incurred - A mortgage always needs a note to be legally valid.
Veterans Administration (VA)
A federal agency created to provide a loan guaranty program that enables qualified veterans to finance real estate purchases with a higher loan-to-value ratio than is normally possible with conventional financing. - A downpayment on a motor home WOULD NOT meet the criteria for this type of loan. - Allows veterans to purchase a home with no money down.
USDA Rural Housing Service
A federal agency that has various programs available to aid low-to-moderate-income rural residents to purchase, construct, repair, or relocate a dwelling and related facilities. Qualified homebuyers can get loans with minimal closing costs and no down payment.
Mortgage
A financing instrument that creates a lien against a property. - The lender who gets the mortgage is the mortgagee, and the borrower who gives the mortgage is the mortgagor. - The borrower retains the rights of ownership (title) to the property while the property becomes encumbered by the lien. - REQUIRES A PROMISSORY NOTE TO BE VALID.
Shared Equity Mortgages (SEM)
A form of participation mortgage in which the lender shares in the appreciation of a mortgaged property if and when the property sells.
Deficiency Judgment
A judgment against a debtor for the amount of a debt remaining unpaid after the collateral has been repossessed and sold. - The mortgagee may be request this if the sale does not yield sufficient funds to cover the amounts owed. - This enables the lender to attach and foreclose a judgment lien on other real or personal property the borrower owns.
Graduated Payment Mortgage (GPM)
A loan in which the monthly principal and interest payments increase by a certain percentage each year for a certain number of years and then level off for the remaining loan term. - This is a conventional loan.
Package Mortgage
A loan that includes all the personal property and appliances that are installed on the property.
Reverse Annuity Mortgage (RAM)
A mortgage in which the lender uses the borrower's house as collateral to buy an annuity for the borrower from a life insurance company; also called an equity conversion. - The lender makes payments to the borrower.
Purchase Money Mortgage
A mortgage is given by the seller to the buyer to cover all or part of the sale price. Seller financing.
Pledged Account Mortgage (PAM)
A mortgage loan which requires the borrower to make graduated payments and at the same time provides the lender with full monthly payments. This unique feature is accomplished by the borrower pledging a savings account to the lender from which supplemental payments are made on behalf of the borrower during the first few years of the loan. The regular payments are lower than usual. - This is a conventional loan.
Blanket Loan (Mortgage)
A mortgage that covers more than one piece of real estate. Often used by a developer in the financing of undeveloped lots. Contains a partial release clause. - A subdivision developer would most likely apply for this type of loan. - Conventional loan
Sale of Property
A property with an existing mortgage can sell in one of three ways: 1) Free and clear 2) Subject to a mortgage 3) Loan assumption
Bridge Loan
A short-term loan that covers the period between the end of one loan and the beginning of another. - Not used much anymore. - Obtained by those who have not yet sold their previous property, but must close on a purchase property. This loan becomes the source of their funds for the down payment.
Due on Sale Clause
A statement in a mortgage or deed of trust entitling the lender to declare the entire principal balance of the debt immediately due and payable if the borrower sells the property during the mortgage term. - ALSO KNOWN AS: alienation clause, a non-assumption clause, a call clause, or a right-to-sell clause - This clause has the effect of eliminating the possibility that a new buyer can assume the existing loan unless the lender permits it. In most cases, the lender would agree to the loan assumption only after increasing the interest rate, charging the new buyer an assumption fee, requiring additional down payment money; or even requiring all three conditions.
Straight Repayment Plan
ALSO KNOWN AS: "Interest-only" - Monthly payments are allocated only to interest. - Might be a good choice for a buyer who plans to own the property for a short time and believes the property will appreciate during that time.
ARM Loan
Adjustable Rate Mortgage - Interest is based on a selected economic indicator index AND the gross national product.
Wraparound Mortgage
Allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. - A conventional loan
Free and Clear Cash Sale
Although not very common, this type of property sale is the simplest. The parties get attorney representation, the seller provides the deed and the buyer pays in cash.
Mortgage Insurance Premium (MIP)
An FHA loan requirement which is a percentage of the loan amount. The borrower can pay this one-time premium at closing or the charge could be financed with the loan.
Grace Period
An agreed-upon time period after the payment is due in which the borrower can still make the payment and not be considered in default.
OPEN END LOAN (revolving line of credit)
An expandable loan which gives a borrower a limit up to which he or she may borrow. - A conventional loan.
Points (or Discount Points)
Charges used to raise the effective cost of the mortgage loan, which must be paid in full at the time of the closing. They represent prepaid interest, and the lender charges them to get additional income on the loan. - These are paid at closing and are equal to 1 percent of the loan amount. - Two (2) points on a $75,000 loan would be $1,500 ($75,000 x .01 x 2 points). - Points are a means of raising the effective interest rate of the loan. This in turn facilitates the lender's ability to sell the loan to the secondary mortgage market at competitive rates. - The rule of thumb is 1/8 percent for each discount point. So, a charge of 4 points would increase a 7 ¼ percent mortgage to a 7 ¾ percent yield. 4 points x 1/8 percent = 4/8 = ½ percent 7 ¼ + ½ = 7 ¾
Home Equity Loan (HEL)
Credit line offered by mortgage lenders that allows a homeowner to borrow money against the equity in their home.
The Federal Housing Administration (FHA)
Does not build homes or loan money directly. They insure loans made by approved lending institutions, including qualified mortgage companies, savings and loan associations and commercial banks. - These government backed loans protect lenders against any loss they would suffer from a borrower's default.
Default
Failure to pay back a loan (mortgage). - The lender has the right to bring legal action through the courts to satisfy the debt. This is called a judicial foreclosure, since it must be ordered by the court.
PMI (Private Mortgage Insurance)
Insurance that protects the lender in case the borrower defaults and is unable to repay the loan. Generally a borrower must pay PMI if their equity is less than 20% of the home's value. - This allows the borrower to make a smaller down payment.
Prepayment Penalty Clause
Lenders typically do not want loans that are bringing in high interest to be paid off early. Consequently, a lender will try to control prepayments by including this clause that allows the lender to assess a penalty to the borrower for paying early. Typically, the penalty is a certain percentage of the original loan amount or a percentage of the current outstanding balance.
Fixed-Rate Loan
Loan for which the interest rate does not change (up or down) over the life of the loan. - 30-year mortgages are the most common example because the payment is stable and there is always the opportunity to pay the balance down or to refinance for a better rate at a later date.
Mortgage Fees
Methods used by lenders to increase their investment. Loan origination fee - Typically 1 percent of the loan amount, although it could be higher. It covers the lender's cost for generating the loan. Points or Discount Points - Points represent prepaid interest, and the lender charges them to get additional income on the loan. Points are paid at closing and are equal to 1 percent of the loan amount. Two (2) points on a $75,000 loan would be $1,500 ($75,000 x .01 x 2 points).
Government-Backed Loans
Mortgage loans that are offered by a traditional lender but are backed by government agencies including: - The Federal Housing Administration (FHA) - The Department of Veterans Affairs (DVA) - sometimes simply referred to as VA - Rural Housing Service (RHS) - State of New York Mortgage Association (SONYMA)
Homeowners Protection Act (of 1998)
PMI loans made after July 1999 are now regulated by Federal law. Under this act private mortgage insurance (PMI) must terminate automatically when the borrower reaches a 22 percent equity position based on the original value of the property at the time the loan was originated with no allowance for appreciation or depreciation if the loan was written after July 29, 1999, and the borrower is current on mortgage payments.
PITI
Principal, Interest, Taxes, Insurance - These are the four common parts of a mortgage payment.
Judicial Foreclosure
Proceeds from the foreclosure sale are used to repay the remaining debt on a mortgage loan that was in default.
SONYMA (State of New York Mortgage Association)
Program offers below-market interest rate mortgages to low-and- moderate-income households who must be first-time homebuyers except in target areas. SONYMA mortgages are insured by private mortgage insurance. - Funding comes from proceeds from tax-exempt mortgage revenue bonds.
Term Mortgage
Requires the mortgagor to pay interest only during the mortgage term, with the principal due at the end of the term.
Mortgage Repayment Plans
Straight (Interest-only): Monthly payments are allocated only to interest. Amortized: A borrower makes a periodic (usually monthly) payment of principal plus interest. Balloon payment: A loan that has one large final payment due when the loan matures. Adjustable-rate: Interest rates change periodically, usually every one, three or five years.
Mortgage Assumption
The act of acquiring title to a property that already has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments. - For example, Jim Jones is the mortgagor of a property for which Commercial Lending is the mortgagee. Jim sells his property to Hal Barks, who becomes the principal guarantor on the mortgage note and is primarily liable for any deficiency judgment that might arise from any default and foreclosure action. However, Jim is still liable as security on the note if Hal defaults.
Loan Origination Fee
The amount charged by a bank or other lender to process the loan papers. Typically 1 percent of the loan amount, although it could be higher. It covers the lender's cost for generating the loan.
Right of Redemption
The legal ability to buy back one's property (reclaim) that has been foreclosed on within the time specified in each state after a judicial sale by paying the debt, interest and certain costs. - New York State does NOT have a right of redemption period post-foreclosure sale. Once the property is sold at the public auction to the highest bidder, the original foreclosed owner has no right to satisfy the entire amount owed the lender. - The right of redemption be exercised in New York between default and sale of property
Payment Cap
The limit on the amount the monthly payment can be increased on an adjustable rate mortgage when the interest rate is adjusted.
Conventional Loan (Mortgage)
The most common type of loan and is generally viewed as the most secure. Most conventional loans require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property's sale price. - These loans are are typically uninsured which means that the mortgage itself provides the only security for the loan. - Have traditionally been designed as standard fixed-rate loans. - The loan-to-value limit set for conventional loans on single-family residences is 85%. - A borrower can get a conventional loan with a lower down payment by insuring the loan through a private mortgage insurance program (PMI). The PMI payments will terminate once the loan has been repaid to a certain level.
Margin
The number of percentage points added to the index by the mortgage lender to set your interest rate on an adjustable-rate mortgage (ARM) after the initial rate period ends.
Mortgage Clauses
These are provisions that should be included in a mortgage document. - Identification of participants - Property description - Attachment of note - Property taxes - Insurance - Preservation and Maintenance of Property - Defeasance Clause - Acceleration Clause - Signatures and acknowledgment - Prepayment Penalty - Due-On-Sale Clause
Acceleration Clause
This clause outlines what will happen if the borrower defaults on the loan (fails to pay the mortgage), maintain the property, or perform any other agreement, stipulation, or condition contained in the mortgage. Any failure on the part of the borrower can result in the lender's accelerating the mortgage and taking whatever steps are needed to recover the investment. - Due-On-Sale Clause (a.k.a., alienation clause)
Defeasance Clause
This clause states that if the borrower repays the debt when due, the words of grant are void, the mortgage is canceled, and the title is given back to the borrower.
Construction Mortgages
Used to finance the construction of improvements to property, such as homes, apartments and office buildings.
