Chapter 6

Subject To

"Subject to" an existing Mortgage or Deed of Trust. If the clause in the deed states that the buyers are purchasing the property "subject to the existing loan" the buyers acknowledge the existing loan, and promises to pay the obligation. If the buyer does not pay the original borrower will be held responsible. If the original borrower (grantor) does not pay the buyer (grantee) will lose the property, and thus his or her equity, in a foreclosure sale.

Buying/Selling Securities

"The Fed" is buying or selling securities or bonds. When they are buying bonds, there is more money in the market, interest rates lower, and the economy is stimulated. When they are selling bonds, there is less money available in the market, interest rates rise and the economy is slowed. This could take from six months to a year to have an effect on the economy. If there is an increase in the availability of money, interest rates would go down. To tighten the economy, the Federal Reserve would Increase discount rates Sell securities Raise reserve requirement

Rescission Clause

(Does not apply to residential purchase money or first mortgage or deed of trust loans) A clause in a contract, required by some state subdivided land sales laws, that informs a purchaser of his/her rescission rights as provided by state law. HOME IMPROVEMENTS - APPLIANCES - FURNITURE!! 3 day right of rescission applies here.

A mortgage or deed of trust, if recorded, must be recorded in the:

-City, county or municipality where the property is located -Junior mortgages are second mortgages or deeds of trust. -The priority of junior liens is determined by the date and time of recording.

Economic, Environmental, or External Obsolescence

-External obsolescence is a loss of value resulting from extraneous factors that exist outside of the property itself. It is a type of depreciation caused by environmental, social, or economic forces over which an owner has little or no control. -If there is a change in zoning, external obsolescence is likely to occur, as in the following examples: to a residence if an industrial plant is built next to it to a well-maintained house in a deteriorating neighborhood to a motel where a new highway is being built that results in difficult access to the motel. Other causes might be proximity to nuisances and changes in land use or population. Also called locational, economic or environmental obsolescence. -External obsolescence is generally considered incurable since this form of value loss is beyond the control of the individual property owner. Moreover, the costs to cure would be virtually impossible to calculate or even apply.

Major warehousing agencies in the Secondary Mortgage Market are:

-Federal National Mortgage Association or Fannie Mae (FNMA) -Government National Mortgage Association or Ginnie Mae (GNMA) -Federal Home Loan Mortgage Corporation or Freddie Mac (FHLMC)

Disadvantages of Real Estate Investment:

-Real estate is not highly liquid. -The purchaser of investment property must be prepared to "invest" for the long haul. -There is a high degree of risk in buying and selling investment real estate because market conditions are changing all the time.

Following are the requirements to receive an FHA loan:

-The borrower must have cash for a down payment & closing costs. -The borrower is charged a one-time Mortgage Insurance Premium (MIP) which provides insurance to the lender in addition to the real estate in case of borrower default on the loan. There is an upfront portion paid at closing and a monthly premium paid as well. The upfront portion may be added to the loan amount. -Lender can charge points and the borrower or the seller or both can pay them. -There are no prepayment penalties allowed on FHA loans. -Loans are assumable with certain qualifying conditions depending upon when the original loan was obtained. (You just need to know that FHA loans are assumable.) -The mortgaged real estate must be appraised by an approved FHA appraiser. -FHA regulations set minimum standards for the type and construction of buildings and credit-worthiness of borrowers.

Functional Obsolescence

-a loss of value of an improvement due to functional inadequacies, often caused by age or poor design. -For example, functional obsolescence may be attributable to such things as outmoded plumbing fixtures, inadequate closet space, poor floor plan, excessively high or low ceilings, or antiquated architecture.

Physical Depreciation

-a reduction in utility or value resulting from an impairment of physical condition, which deterioration can be divided into either curable (painting/routine maintenance) or incurable types (20 year old foundation and framing). -Physical depreciation is a form of depreciation caused by the action of the physical elements, such as wind or snow, or just ordinary wear and tear.

Rural Economic and Community Development (RECD)

-makes loans for home purchases or construction in rural areas and small communities outside metropolitan areas -Loans are either made directly by RECD or made by a private lender with RECD guaranteeing a certain percentage

ORDER OF PAYMENT IN FORECLOSURE

1 Cost of Sale - advertising, attorney fees, trustee fees, etc. 2 Special assessment taxes, and general taxes which are called "ad valorem", according to value taxes, are paid after the costs of the sale. 3 The first mortgage, which is determined by the order of recording. 4 Whatever is recorded next would then be paid because of a foreclosure.

Steps in the Sales Comparison Approach

1.) Identify comparable sales. 2.) Compare comparables to the subject and make adjustments to comparables. If the subject property is better, add value to the comparable. If the comparable property is better, subtract value from the comparable. In making adjustments, one always adjusts the values of the comparables - never the subject. 3.) Reconcile values indicated by adjusted comparables for the final value estimate of the subject. The appraiser here is careful to give more weight to more similar properties, and less weight to less similar properties in arriving at the final value estimate. Note that weighting and reconciliation is not an averaging exercise, but a judgmental evaluation based on all value indicators.

If an appraiser is hired to determine Market Value he/she is looking for what the sales price would most likely be in an open market if the following conditions were met:

1.) Payment must be in cash or its equivalent - the appraiser assumes the buyer is either paying cash for the property or is in the process of obtaining a loan. 2.)Buyer and seller must be unrelated and acting without undue influence, menace or duress. - The transaction is "arms-length" meaning there is no relationship between the buyer and seller. (Father and daughter) A few more examples of "arms-length transactions." To establish value the appraiser must assume: that neither the seller nor the buyer have been forced into a contract to purchase or sell the property. the seller is not being forced to sell at a reduced price because of an impending divorce or other similar situation. a buyer is not being forced to purchase because he/she has been transferred to a new town, and the family is on the way to town. The property must be marketed for a reasonable time in an open and free-flowing market. Both buyer and seller must be well-informed consumers.

How many discount points yeild 1%

8

Budget Mortgage

A Budget Mortgage is a loan which has a payment composed of principal, interest, taxes and insurance.

"Subject to mortgage"

A grantee [buyer] taking title to a real property "subject to" a mortgage [that a seller is letting the buyer take over] is NOT personally liable to the lender [mortgagee] for the payment of the mortgage note. In the event of a foreclosure the buyer would lose his/her equity. If the buyer doesn't pay, the seller would have to pay, and if the seller doesn't pay, the property gets foreclosed on, and the buyer loses the property.

Part Purchase Money

A mortgage given as part of the buyer's consideration (cash) for the purchase of real property, and delivered at the same time that the real property is transferred as a simultaneous part of the transaction. It is commonly a mortgage taken back by a seller from a purchaser in lieu of purchase money.

Participation Mortgage

A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate. Example - An insurance company teams with a bank and a purchaser to buy a property.

Open-end Mortgage/deed of trust

A mortgage or Deed of Trust in which the mortgagor/trustor is allowed to re-borrow against principal that has already been paid so far. The full loan is secured by the same original mortgage/deed of trust. A lender is allowed to increase the outstanding balance of a loan up to the original amount of the loan, in order to advance additional funds to the borrower as the funds are needed. Example - A farmer needs to borrow money to plant his/her crop. The bank agrees to lend the farmer up to a certain amount of money based on the value of the property. The farmer can borrow all of the money at one time, or borrow it as needed. After the crop grows, and the farmer hopefully is able to harvest it, sell it, and make a profit he/she can repay the loan without a prepayment penalty. If it is a bad year for the farmer, as long as payments continue to be made the bank will be happy to accept the interest on the loan. Of course, if the farmer does not pay, foreclosure can occur.

Grant Program (Down Payment Assistance):

A program that provides buyers with a "gift" of money to use toward their down payment or closing costs which never has to be paid back. Some popular programs include AmeriDream, Nehemiah, Housing Action Resource Trust (HART) and Partners in Charity. Some lenders also accept "gift letters" which acknowledge that the down payment money was a gift from a relative and does not need to be repaid.

Straight Term Loan

A type of a loan where only interest is paid is called a Straight Term Loan. The borrower must be prepared to pay the entire principal at the end of the time period!

Balloon Loan

A type of loan where interest and principal are paid on an equal basis until the final payment, which is larger, is called a Balloon or a Partially Amortized Loan. A balloon is the remaining balance that is due at the maturity of a note or obligation. This type of loan is also referred to as partially amortized.

Clauses in a Mortgage or Deed of Instrument of Trust are:

Acceleration Clause: If a borrower defaults on the loan (misses payments, etc.) the lender can call the entire balance due and payable immediately. The mortgagee or beneficiary (lender) benefits because of the presence of an acceleration clause. Without this clause in the mortgage or deed of trust the lender would not have the power or right to foreclose. Escalation Clause: This clause is found in an adjustable rate mortgage and in some leases. In a mortgage, it allows the interest rate to adjust over the life of the loan. In a lease, it allows the lease payment to adjust over the life of the lease. Alienation Clause: "Due on Sale Clause". The mortgagee or beneficiary declares the entire balance of the loan due and payable when the property is transferred. When this clause is contained in the Mortgage or Deed of Trust, it prevents the assumption of the loan by a new purchaser. This clause is the right by which the lender has to say, "no one can assume this loan or have any interest in the property without permission from me!" You will learn later in this chapter that this type of clause is not allowed in an FHA (Federal Housing Administration) or VA (Veteran's Administration) loan.

Chronological Age:

Actual age in years of the building, based on building date. The "Chronological Age" of a building cannot be changed. If the building is 20 years old the "Chronological Age" is 20 years.

Wraparound

Additional financing from a second lender. One payment - two loans. The new lender pays the first loan, but charges higher interest for a second. Original loan must be assumable with no alienation clause. Type of loan where the original 1st mortgage is not disturbed Example - You are interested in purchasing a property, but interest rates are high, and your lender will not make you a loan. You and your lender discover that the seller has an FHA or a VA loan. Remember, that this type of loan cannot have an alienation (due on sale) clause. Your lender agrees to assume the seller's mortgage, and make you a loan for the entire amount you need to purchase the property.

Contract for Deed

Also called an installment land contract where the buyer does not receive legal title until the final payment is made. Seller is vendor, buyer is the vendee. Seller keeps legal title until the debt is paid in full. Buyer receives equitable title until debt is paid in full.

Truth to Lendor Trigger terms

Amount or percentage of down payment= The amount or percentage of down payment Amount of any installment= Terms of repayment Finance charge in dollars or that there is no charge for credit=Annual percentage rate and if increase is possible Number of installments=Total finance charge Period of repayment= Total # of payments and due dates

Conformity

An appraisal principle of value based on the concept that the more a property or its components are in harmony with the surrounding properties or components, the greater the contributory value. (The more the properties are alike, the more they retain value.) Example: A million dollar home in a neighborhood of one hundred thousand dollar homes will not usually return the investment. Conversely, a one hundred thousand dollar home in a neighborhood of million dollar homes may benefit because of the value of the million dollar homes.

Closings that must comply with TRID include:

Any closed end-loan secured by real property, including unimproved property.

Lending Laws

Are laws that are for consumer protection in lending. (Equal Credit Opportunity Law, Truth in Lending (Regulation Z), and the Real Estate Settlement Procedures Act which we will discuss later in this section)

Regression and Progression

As stated on the previous slide, regression and progression occur between dissimilar properties. This means the value of the better quality property is affected adversely by the presence of the lesser quality property and a lesser house will benefit from a larger house.

Assemblage, Competition and Change

Assemblage - The combining of two or more adjoining lots into one large tract. This is usually done to increase the value of the individual lots because a larger building capable of producing a larger net return may be erected on the larger parcel. The resulting "added value" is called "plottage value." Competition - is when one business attracts another business of similar type; together they may make more money than they would have singularly. Too much competition is ruinous. As an example, just look at what some of the large chain stores have done to the downtown areas in small towns. On the other hand, shopping centers in large cities attract shoppers every day. Change - real property is constantly changing- expanding, stabilizing, declining or rebirth. We are all familiar with areas that have or may be going through these changes. Example: downtown Chicago has gone through all of the cycles above, and many other areas of the country are experiencing the same.

Government National Mortgage Association or Ginnie Mae (GNMA)

Buys FHA loans or VA loans. Referred to as "Ginnie Mae." "Ginnie Mae is controlled by an agency of the Department of Housing and Urban Development. When "Ginnie" and "Fannie" work together it is called the Tandem Plan. It is a mortgage subsidy program offered by Congress from time to time through the Government National Mortgage Association. When assistance is needed, GNMA is authorized to purchase certain mortgages at below market interest rates so that borrowers can be granted low-interest loans. GNMA then sells these loans in the secondary market at deep discounts, the discount loss being the amount of the subsidy. When these programs are available, they are offered through, or "in tandem" with, local mortgage lenders, generally administered under a contract with the Federal National Mortgage Association (FNMA).

Federal Home Loan Mortgage Corporation or Freddie Mac (FHLMC)

Buys conventional loans. Referred to as "Freddie Mac." HUD (Department of Housing and Urban Development) is the regulator for Ginnie Mae and Freddie Mac. You must be able to recognize these three major players in the secondary market by their Full Names, Nicknames and Initials. Note: In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship under the federal government's Federal Housing Finance Agency.

Property appreciates in value due to inflation and due to an increase in the intrinsic value of the property.

Cash Flow: is the total amount of money remaining after all expenditures have been paid including taxes, operating costs, and mortgage payments. Leverage: is the use of borrowed funds. Selling shares (securities) of FNMA, GNMA, and FHLMC requires a securities license.

The promissory note is

Considered to be PERSONAL PROPERTY (readily negotiable) that can be bought and sold. Lenders sell their "Paper" or notes in the secondary mortgage market to free up money so they can make more loans. The Secondary Mortgage Market is the market in which these notes are exchanged and funds are provided directly to institutional lenders. They are holding warehouse agencies, which purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors.

If the proceeds from the foreclosure sale are not sufficient to cover the debt, the lender can go to court and seek:

Deficiency judgment against the borrower. This is a general lien and would apply to all of the borrower's assets. Deed in lieu of foreclosure is referred to as a "friendly foreclosure." Lender and borrower agree that the lender will become the owner of the property instead of going through the formal foreclosure process. However, this process does not clear any junior liens.

Effective Age:

Differs from the actual age (chronological age) by such variable factors as depreciation, quality of maintenance, and the like. Remodeling can extend the economic life of a structure by reducing or mitigating the impact of actual age and increasing the structures life expectancy. Example: If a person maintains a building keeping it in good repair the "Effective Age" is reduced. So a 20 year old building with this improvement may be effectively 18 years old.

Steps involved in the Cost Approach:

Estimate the value of the land alone as if vacant. Determine either the replacement or reproduction cost of the improvements. Deduct all accrued depreciation. Add the estimated land value to the depreciated replacement or reproduction cost.

VA vs FHA

FHA and VA will allow buyer to pay more than appraised value, if they pay the difference in CASH. Remember - FHA & VA do not allow prepayment penalties. FHA & VA loans cannot have an alienation (due on sale) clause in the promissory note, mortgage or deed of trust. The difference between VA & FHA is FHA insures & VA guarantees repayments of loans.

Reverse Annuity Mortgage (RAM)

Homeowner receives monthly payments based on accumulated equity rather than a lump sum. Loan must be repaid upon the death of the owner or sale of the property. Most advantageous for senior citizens who own their own home - house rich/cash poor.

Mortgage and Deed of Trust Principles

In a mortgage there are two parties involved: MORTGAGOR = Borrower MORTGAGEE = Lender In a Deed of Trust, there are three parties involved. They are: Trustor = Borrower Beneficiary = Lender Trustee = Bank Vice President or anyone else designated by the lender. The trustee holds naked legal title and has the right to foreclose, with directions from the beneficiary. This is often referred to as non-judicial foreclosure. Under a Deed of Trust, the beneficiary (lender) holds the promise to repay (Promissory Note) from the borrower. Under a Deed of Trust, the trustee holds the security (Deed of Trust) for the debt. A mortgage or deed of trust document and a promissory note are similar in that they are both contracts between the borrower and the lender.

The following can usually be deducted on income tax returns:

Interest payments made on first and second homes that meet the necessary qualifications; Certain loan origination fees and discount points; Loan prepayment penalties and real estate property taxes.

Closing Disclosure Delivery Requirements

It must be delivered at least three days prior to closing. Having their final loan terms and costs available three days prior to closing enables consumers to review their final loan costs and terms and ask questions prior to coming to the closing table. It provides time for the consumer to get answers to any questions and possibly negotiate any changes that occurred. The creditor is generally responsible for insuring that the Closing Disclosure is delivered to the buyer no later than three business days before consummation. The creditor may contract with a settlement agent to provide the Closing Disclosure on behalf of the creditor. Important definitions to consider for complying with delivery of the Closing Disclosure include: Business day means all calendar days except Sundays and legal public holidays specified in 5 U.S.C. 6103, or the observed legal holiday. For example, if Fourth of July falls on Sunday, the observed holiday is Monday. Consummation is defined under Regulation Z as the time that a consumer becomes contractually obligated on a credit transaction The settlement agent must provide the seller with the Closing Disclosure, and that may be done at consummation.

According to the TRID rule:

Lenders must give a copy of the booklet, "Your home loan toolkit" to every person at the time of application for a loan. Lenders must provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application. A Closing Disclosure, a form designed to detail all financial particulars of a transaction, must be delivered to the borrower at least three days before closing. The actual time frame is based on the method of delivery. The settlement agent must also provide the seller with the Closing Disclosure, which may be done at consummation. As before, RESPA prohibits kickbacks or unearned fees paid to lender for referring customers to insurance agencies, etc. R E S P A K (a memory tool to help you remember that RESPA prohibits KICKBACKS to real estate licensees.)

Package Mortgage

Loan on real estate, plus fixtures, and appliances; always includes personal property as well as real property. Used extensively in the sale of condominiums (the property comes with the refrigerator, stove, drapes, washer and dryer).

Blanket Mortgage:

Loan on several pieces of land. Blanket mortgages usually contain a Partial Release Clause. This is a clause in a mortgage/deed of trust under which the mortagee/beneficiary agrees to release certain parcels from the lien of the blanket mortgage/deed of trust upon payment by the mortgagor/trustor of a certain sum of money. Example - A builder purchases 100 acres of land, and develops it into 100, 1 acre lots. As the lots are sold, in order to give the purchaser clear title, that lot needs to be released from under the blanket mortgage. So the builder pays the lender for the lot, and can now issue a deed to the purchaser. (Usually a General Warranty Deed)

Takeout Loan:

Long term permanent financing for large construction projects, usually commercial. Replaces construction loan on large commercial projects.

Graduated Payment Plan

Lower payments first year, then payments increase. Example: FHA 245 program is a graduated payment plan loan. You will have to remember this FHA program plan number and its purpose. Monthly payments will go up!!! This is an excellent loan for a young executive (doctor, lawyer) whose income will increase over the years.

Two types of security instruments

MORTGAGE or a DEED OF TRUST. These instruments are both used for the same purpose; they create the collateral for a loan by promising the property in case of default by the borrower. The major differences in the two instruments are the number of parties involved, and the method of foreclosure on default.

Transfer Tax

Many states charge what is called a transfer tax when the property is conveyed by one of the following means: Deed Contract for deed Lease Sublease Assignment One purpose of the tax is to collect reliable data on the fair market value of the property to help establish more accurate property tax assessments. Transfer taxes are paid by the seller or lessor. The tax may be paid by the purchase of tax stamps or by payment of a transfer fee. Note: If your state charges a transfer tax, the computation of that tax will be covered in your state-specific license course.

Types of loans

NON-RECOURSE LOAN: A loan in which the borrower is not held personally liable on the note. The lender of a non-recourse loan generally feels confident that the property used as collateral will be adequate security for the loan. NON-RECOURSE CLAUSE: Real estate loans are often sold in the financial market. When a non-recourse clause is included in the sale's agreement, the seller of the security is not liable if the borrower defaults. DEFAULT: The non-performance of a duty or obligation that is part of a contract. The most common occurrence of default on the part of a buyer or lessee is nonpayment of money when due. A default is normally a breach of contract, and the non-defaulting party can seek legal remedies to recover any loss. A buyer's good faith inability to obtain financing under a contingency provision of a purchase agreement is not considered a default (the performance of the contract depends on the buyer getting the property financed), and in this case the seller must return the buyer's deposit. CONDITIONAL APPROVAL (conditional or qualified commitment): A written pledge by a lender to lend a certain amount of money to a qualified borrower on a particular piece of real estate for a specified time under specific terms. It is more formal than a preliminary loan approval. After reviewing the borrower's loan application, the lender usually decides whether to make a commitment to lend the requested funds. This application contains such information as the name and address of the borrower, place of employment, salary, bank accounts, credit references, and the like. UNDERWRITING: The analysis of the extent of risk assumed in connection with a loan. Underwriting a loan includes the entire process of preparing the conditions of the loan, determining the borrower's ability to repay and subsequently deciding whether to give loan approval. APPRAISAL FEES: An appraiser's fees are typically based on time and expenses; fees are never based on a percentage of the appraised value. IMPOUNDS: A fund of the buyer's money that the lender sets aside for future needs relating to the parcel of property. Most lenders require an impound account to cover future payments of insurance and taxes. Sometimes this is referred to as the buyers' escrow (not the brokers'). DISINTERMEDIATION: The process of individuals investing their funds directly instead of placing money with banks, savings and loans and other savings institutions. Disintermediation has a direct influence on the scarcity of money or surplus of money available for mortgages. ESTOPPEL CERTIFICATE: A legal doctrine by which a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct or silence. For example, a mortgagor/trustor who certifies that he or she has no defense against the mortgagee/beneficiary would be estopped to later assert any defenses against a person who purchases the mortgage in reliance on the mortgagor's certificate of no defense. Another example: Depending upon the area of the country you live in, the title company or escrow company want to know how much you owe the lender on the day of closing so they can withhold that amount from the proceeds of closing. The title company or escrow company ask the lender to sign an estoppel certificate with this information. If the lender makes a mistake they are estopped from making a claim against the title company or escrow company for the mistake. (The lender may come after the borrower claiming the borrower knew how much they owed.) EXCULPATORY CLAUSE: A clause sometimes inserted in a mortgage note in which the lender waives the right to a deficiency judgment. As used in a lease, a clause that intends to clear or relieve the landlord from liability for tenants' personal injury and property damage. It may not, however, protect the landlord from injuries to third parties.

Conventional Insured Loans

No government guarantees of insurance but insurance from private insurance companies. Private Mortgage Insurance (PMI) is insurance provided by a private insurer that protects the lender against loss in the event of a foreclosure and deficiency. Insurance is required for all loans with less than 20% down payment. Largest private insurer is M.G.I.C. - MORTGAGE GUARANTEE INSURANCE CORPORATION. The amount a lender will loan is generally based on the appraised value for loan purposes or the sale price whichever is lower. Remember, whether an FHA, VA or conventional loan is made to a consumer the lender and/or investor: Is concerned with the current and future value of the property. Is concerned with the income and income potential of the loan applicant. Is concerned with the attractiveness of other investments that could be made for a better return. A lender or investor is really not interested or concerned with the loan applicant's need of financial assistance.

Conventional Loans

No government guarantees or insurance. Loans obtained at local savings and loans, mortgage brokers and mortgage bankers. Minimum down payment of 20%. However, there are conventional loans available with lower down payments if the buyer is willing to pay a Private Mortgage Insurance premium (PMI). Conventional Loans normally require a larger down payment (20% down or more) than FHA or VA, but do not require insurance with 20% or more down payments. Most loans are packaged by the lenders and sold in the secondary market to Fannie Mae or Freddie Mac.

Foreclosing on a deed of trust

Non-Judicial foreclosure is required to foreclose on a Deed of Trust. The lender does not have to go through the courts to foreclose; and it is therefore, a quicker process. The trustee, in a Deed of Trust, holds, "Naked Legal Title" (one without possessory rights), and can claim the property without going through the courts. The Equitable Right of Redemption gives the borrower the right to clear up the debt prior to the foreclosure sale. The Statutory Right of Redemption gives the borrower a certain amount of time after the sale to clear the debt.

Savings and Loans

Once the leading mortgage lending institution, S&Ls were adversely impacted by the financial crises in the 1980s. Their leadership role in mortgage lending has been largely supplanted by institutional banks regulated by the Federal Reserve and insured by FDIC. S&Ls are now regulated by the Federal Housing Finance Board (FHFB) and deposits are insured by the Deposit Insurance Fund. Deposits are insured for at least $250,000.

Sale-Leaseback

Owner sells his or her improved property and at the same time, signs a long-term lease. Example, A commercial property is sold on the condition that the new owner lease it back to the seller at the time title passes. Grantor (original seller) becomes the lessee and the grantee (new owner of the property) becomes the lessor. In a sale-leaseback the grantor (original seller) had a "Freehold estate". After the sale, the new tenant (the original grantor) ends up with a "Less than freehold estate" (a leasehold estate).

Duties of the borrower in a mortgage or deed of trust:

Payment of the debt in accordance with the terms of the note. Payment of all real estate taxes on the property given as security. Maintenance of adequate insurance. Maintenance of the property in good repair at all times. Obtain lender authorization prior to making any major alterations to the property.

A monthly loan payment consists of:

Principal - The amount borrowed from the lender. Interest - The amount paid to the lender for allowing the money to be borrowed. Taxes - The amount due to the government for the privilege of private ownership of real property. Insurance - The amount paid to the insurance company in case of damage to the property. There could also be mortgage insurance due.

Anticipation

Property can increase or decrease in value in expectation of something in the future such as appreciation or rezoning. Examples: If a person discovers that an airport is going to be built in an area and buys the land in "Anticipation" of a future value. Another example would be if a person has knowledge that a zoning change is about to take place, which will make the property more valuable and buys the property in "Anticipation" of a future value increase.

Also remeber

RECD does not make direct loans to the public in areas with a population of more than 35,000 - FHA never makes direct loans - VA will make a direct loan if there are no lenders in the area where a veteran wants to buy property. FHA insures loans only for one-to four-family housing. The FHA section 203 B program requires a minimum down payment with the maximum loan based on local market conditions, which vary across the nation. This is the "standard" and most popular type of FHA loan. FHA has other programs: FHA 234 - for loans on condominiums FHA 245 - Graduated Payment Plan Mortgage FHA 203K - Allows the purchaser to borrow enough money to rehabilitate a property FHA also has an Adjustable Rate Mortgage Program (ARM)

Securities Law

Real property securities must be registered with the Securities and Exchange Commission (SEC) and depending on the type of sale may also fall under the regulation of state securities law (blue-sky laws). If an agent suspects a property may be a real property security, he or she should refer the seller to a securities professional for advice.

he Primary Mortgage Market financing sources are:

Savings and loans Banks Insurance companies Mortgage brokers Mutual savings banks

Federal National Mortgage Association or Fannie Mae (FNMA)

Sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor. Fannie Mae was established in 1938 for the purpose of purchasing FHA loans from loan originators to provide some liquidity for government insured loans. Please note the following about the Federal National Mortgage Association: Buys FHA loans, VA loans, and conventional loans. FNMA is referred to "Fannie Mae." Largest purchaser in secondary market. Finally, Fannie Mae and Freddie Mac are both private companies under the conservatorship of the Federal Housing Finance Agency (FHFA) since 2008.

Bridge Loan

Short term interim loan for buyer, usually six months to one year in duration. May be placed on former house to buy new house until first house sells.

Cost can be determined by one of three methods:

Square Foot cost: Using outside measurement, how many square feet times a cost for either replacement or reproduction of the improvement. Unit in Place: In the "Unit In Place Method", the replacement cost of a structure is estimated based on the construction cost per unit of measure of individual building components, including material, labor, overhead and builder's profit. Most components are measured in square feet, although items such as plumbing fixtures are estimated by cost. The sum of the components is the cost of the new structure. Quantity Survey method: The quantity and quality of all materials (such as lumber, brick, and plaster) and the labor are estimated on a unit cost basis. These factors are added to indirect costs (for example, building permit, survey, payroll, taxes and builders profit) to arrive at the total cost of the structure. Because of the detail and the time consumed, this method is usually used only in appraising historical properties. It is however the most accurate method of appraising new construction.

Advantages of Real Estate Investment:

Tax benefits - a Capital Gain is the profit realized from the sale or exchange of an asset; Capital gain exclusion on principal place of residence of $250,000 per individual (up to $500,000 for a couple); The cost of improvements may be depreciated or deducted over an arbitrary period of time, but land can never be depreciated. (We will discuss this more in the Valuation section.) Most homeowner's insurance policies contain a "Coinsurance clause" that requires the homeowner to maintain insurance equal to at least 80 % of the replacement cost of the improvements.

II. Cost Approach

The Cost Approach primarily relies on the original cost of the property's land and improvements, the cost to reproduce or replace the property's improvements, and the degree to which the improvements have depreciated. The Cost Approach is primarily used for properties with limited comparable data or income data or for properties where the original cost is particularly applicable, such as brand new homes. Other examples would include non-income producing buildings, government properties or unique-purpose buildings such as a school, museum, or library. In applying the Cost Approach, the appraiser may employ one of two forms of improvement cost: the cost to reproduce the improvement, and the cost to replace an improvement. The distinctions are as follows: Reproduction cost: to replace with the same materials as the original construction Replacement cost: to replace with current materials and methods with similar utility and function to the original improvement

Loan Estimate Delivery Requirements

The Loan Estimate must be delivered within three business days of loan application. Signature of the applicant(s) is permitted but not required. If a mortgage broker receives a consumer's application, either the creditor or the mortgage broker may provide a consumer with the Loan Estimate. If the Loan Estimate is not provided to the consumer in person, the consumer is considered to have received the Loan Estimate three business days after it is delivered or placed in the mail. Note: For purposes of this rule, a loan application exists once consumer has submitted 6 items (3 pertaining to customer and 3 pertaining to property) to the lender. Those items are: Name Borrower's Income Borrower's Social Security number Property address Estimated value of property Amount of mortgage loan sought by the consumer.\ Also, a business day is a day on which the creditor's offices are open to the public for carrying out substantially all of its business functions. This definition of "business day" applies only to the Loan Estimate or revision of the Loan Estimate. It does not apply to the Closing Disclosure.

Sales Comparison Approach:

The Sales Comparison Approach is primarily used for appraising residential property and vacant land. This approach compares the subject property to similar properties and makes adjustments on the basis of the date of the sale, the location, the physical features and/or amenities. The underlying premise of the Sales Comparison Approach is the principle of substitution. This principle holds that if a buyer will pay a certain price for a property, he or she will pay a similar price for a 'substitute' property of similar characteristics. The Sales Comparison Approach consists of comparing sale prices of recently sold properties that are comparable with the subject, and making dollar adjustments to the price of each comparable to account for competitive differences with the subject. After identifying the adjusted value of each comparable, the appraiser weights the reliability of each comparable and the factors underlying how the adjustments were made. The weighting yields a final value range based on the most reliable factors in the analysis.

Loan Assumption

The act of acquiring title to property that has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments. (The buyer is "Taking over" the seller's responsibilities)

Physical life

The actual age or life of a structure that is considered habitable. Thus the physical life is defined by the durability of its structural components. Example: A building sitting vacant without a tenant has a "Physical Life" but there is no economic life because there is no income.

Appraisal Process:

The appraisal process is outlined below: 1.) State the problem: The appraiser determines why he/she has been hired to make an appraisal on the property. As stated earlier, is the job to determine market, insurance, salvage, and/or tax value? 3.)Gather, record and verify the necessary data: The appraiser should use all tools available. The appraiser uses the three appraisal processes (sales comparison, cost, and income approaches. (More later in this section about these approaches to value.) 3.) Analyze and Interpret using the following information: - Neighborhood Analysis: A gathering of facts about a neighborhood to determine the appeal to the buyer. These facts include: employment stability, convenience to employment, convenience to shopping, adequacy of public transportation, recreation facilities, adequacy of utilities, property compatibility, protection from detrimental conditions, police and fire protection, general appearance of properties, appeal to the market, zoning ordinances, topography and building codes. -Neighborhood Cycle: The process of neighborhood change, involving the four phases of change (See Principle of Change which is covered in Unit 2). 4.) Site Analysis: Gathering of facts about a particular location. These include: estimate of highest and best use, identification of key features and identification of possible legal or physical problems. Example, if an appraiser is comparing a home with another property that had low taxes, good community programs, and was located in a convenient area, he/she should conclude that this home has economic desirability. Estimate Land Value: For appraisal purposes, land never depreciates in value. Estimate the value of the property by each of the three approaches to value (explanation to follow): Sales comparison Cost Income Reconcile estimated values for the final value estimates: This is the final step in the appraisal process, in which the appraiser reconciles the estimates of value received from the Sales Comparison, Cost and Income approaches to arrive at a final estimate of market value for the subject property. An appraiser never averages comparable sales to obtain a final value. The appraiser evaluates all three methods of appraising property, Sales Comparison, Cost, Income, and determines which would be best to use for the property in question. Example: If an appraiser is asked to appraise a single family home or a vacant lot the approach to value most often used is the Sales Comparison. Assuming recent comparable sales can be found the appraiser would compare the subject property to the comparable and determine value. If there are no comparable properties then the appraiser may have to use the Cost Approach to value, and determine replacement cost of the components of the property. Usually, this approach is used for unusual properties where comparable properties cannot be found. (Church, school, post office etc.) Lastly, the appraiser may apply the Income Approach if the property is income producing. Usually, this is not the case in a residential property. Report final value estimates - Types of Appraisal Reports: Letter: A short business letter stating all essential data but not including supporting data. Short or Form: Contains all basics of a regular appraisal and is used primarily for homes. Narrative: The most comprehensive of all appraisal reports. Used for commercial and investors.

Following are requirements to receive an FHA loan:

The borrower is charged a one-time insurance premium which provides security to the lender in addition to the real estate in case of borrower default. There is a one-time charge paid at closing by the borrower or some other party. (seller) There is also a renewal premium paid monthly. The lender can charge points, and either the borrower or the seller can pay them.

Buydown

The payment is subsidized at the beginning by a builder or other party for a 3 to 5 year period, and thereafter, the purchaser takes over and pays the regular payment amount. -This is a financing technique used to reduce the monthly payment for the home buying borrower during the initial years. -As interest rates climbed in the late '70's and early '80's many families could not qualify for sufficient loans needed to purchase a home. This type of help from a builder or from the borrower him/herself allowed a family to qualify for a lower interest rate loan.

Truth In Lending Law (Regulation Z):

The purpose of this law is DISCLOSURE. The law requires lenders to disclose to buyers the true cost of obtaining credit so that the borrower can compare the costs of various lenders. -The regulation requires that the consumer be fully informed of all finance charges, as well as the true annual interest rate, before a transaction is consummated. The truth in lending law does not control interest rates.....does not control costs to close a transaction. (RESPA - The Real Estate Settlement Procedures Act covers costs to close. This law will be covered later.) Truth In Lending applies to residential loans, federally related 1-4 family properties, non-commercial properties, and family farms. Commercial transactions are not covered under the Truth in Lending law.

Vendor

The seller of realty - the seller under contract for deed.

Settlement Agent Duties

The settlement agent does the closing, calculates the costs involved and fills out the closing statements. The agent must also fill out all the papers that are necessary for the particular transaction, which may include filing IRS forms. A settlement agent could be an attorney, a real estate broker, a closer from the title company or a lender.

Principles of Real Estate Value: The Law of Supply and Demand

The value of a property increases when the supply is short and decreases when there is too much. Similarly, the value increases when the supply is short, and decreases when there is little demand. Example: In an area where few properties are sold from year to year, when a property is placed on the market, it will usually sell quickly. Conversely, when there are many properties to choose from, the market for an individual property will be in less demand. If a large employer in an area closes, the likely effect on the area's real estate values will reflect the principle of supply and demand.

VA Loans (Veterans Administration)

The veteran must have served 181 days active service in the military since 1940. The maximum eligibility for each veteran is $104,250 and the maximum loan amount with no down payment is $453,100 (for 2018) . Lenders will generally lend up to 4 times your available entitlement without requiring a down payment, provided the veteran's income and credit qualify and the property appraises for the asking price. There is no maximum VA loan but lenders will generally limit VA loans to $453,100. This is because lenders sell VA loans in the secondary market, which currently places a $453,100 limit on the loans. For loans up to $453,100, it is usually possible for qualified veterans to obtain no down payment financing. (These numbers change from time to time and there are counties that are considered "High-Cost counties" and their loan limits are higher.) VA will guarantee real property, mobile homes and plots for the mobile home. The VA requires that a veteran assume liability for the loan. If a veteran does not pay the mortgage as agreed there will be a foreclosure. The property must be owner-occupied for at least one year. A qualified veteran may borrow up to 100% of the loan with no down payment. Veteran must first apply for a: Certificate of Eligibility in order to obtain a VA loan. The amount of the loan is limited to the amount shown on the Certificate of Reasonable Value. The house must qualify with an appraisal and is issued a: Certificate of Reasonable Value. Loans may be assumed by non-veterans, but veteran still liable. VA will lend money in rural areas where there is no financial institution available (200 acre residence for example.) Points can be paid by either the seller or the buyer. VA does not allow prepayment penalties to be charged if a veteran pays off a loan early. If a veteran has died his/her widow or widower may be eligible for a VA loan. In order to be eligible for a VA loan, the widow or widower may not be married again at the time of application.

There are three major laws regarding financing.

Truth in Lending Law RESPA Equal Opportunity Act

Construction Loan

Two types 1) The lender commits the full amount of the loan to the borrower, but makes partial progress payments as the building is being completed after lien waivers have been obtained 2) High interest rate to builders, usually one percent over prime rate to be loaned for "spec homes." It is converted to Take-out on a long term basis. A builder's construction loan is considered by lenders to be a much higher risk loan than a residential home loan.

The following are items a lender will look at when deciding to qualify a property:

Type of property (residential, commercial, agricultural) Location Area zoning Value range Neighborhood Actual age/Effective age/Remaining economic life Condition (repairs and predications) Special clearances (code compliance, well and septic certifications etc.) Overall marketability

Satisfaction Piece

When the borrower has paid the entire balance, the lender is required to execute a satisfaction of mortgage or a release deed of trust. Examples of Satisfaction Pieces are: Satisfaction of Mortgage - A certificate issued by the mortgagee when a mortgage is paid in full. Upon payment in full of the debt secured by a mortgage, it is said that the mortgage is "satisfied." Deed of Reconveyance (deed of release) - A document used to transfer legal title from the trustee back to the borrower (trustor) after a debt secured by a deed of trust has been paid to the lender (beneficiary.) The Satisfaction Piece puts on public record that the loan was paid, and that the lender no longer has a lien on your property. Recording the satisfaction piece releases the Mortgage or Deed of Trust lien. When a mortgage or deed of trust is paid off, a defeasance clause allows the lender to release the mortgage or deed of trust rights and issue a Satisfaction Piece.

Equal Credit Opportunity Act

a lender can base lending decisions on an individual's: Income Net worth Job stability Credit rating Income would most interest a lender when making a loan. If a person applying for a loan is relying on income from child support for repayment of a loan, the income must be revealed to the lender. The Equal Credit Opportunity Act is a law for lenders that prohibits them from discriminating against race, color, religion, national origin, sex, marital status, age or dependency on public assistance in the granting of credit to consumers.

A Prepayment penalty

clause is a clause that allows a lender to charge extra interest if the loan is paid off before the normal completion date. Example: If a borrower sells his or her property after 10 years of ownership, and the original loan was for 30 years, the mortgage or deed of trust could indicate that the lender (mortgagee or beneficiary) could charge the borrower a prepayment penalty on the balance of the loan. Once again, you will learn later that this clause is not allowed on an FHA or VA loan.

Adjustable Rate Mortgage

contains an escalator clause that allows the interest to adjust over the loan term. An ARM is tied to an index, and the rate of the loan goes up or down, depending on the caps, margin and adjustment period. -Yearly caps limit the amount of the interest rate that may be charged during any one adjustment period. -Lifetime caps set the maximum amount for payments. How often the loan rate may be changed is determined by the Adjustment Period.

The REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

created to ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs. The Act is administered by the Consumer Financial Protection Bureau (CFPB). Previously, RESPA required lenders to provide a HUD "Guide to Settlement" booklet and a Good Faith Estimate (GFE) of all costs related to settlement to borrowers within 3 days of loan application. RESPA also required the use of the HUD-1 settlement statement at closing plus a final good faith estimate and Truth-in-Lending Statement. Effective October 1, 2015, the real estate industry has new requirements as specified in the TILA/RESPA Integrated Disclosure (TRID) Rule.

What is the goal of an appraiser?

determine the market value, insurance value, salvage value, and/or the tax value of a property. Compensation of the appraiser is based on time and effort never on the established price of the property.

Federal Housing Administration (FHA)

insures loans on real property made by qualified or approved lending institutions. The Department of Housing and Urban Development oversees the FHA.

Adjustable-rate Loan

interest rate fluctuates and is usually tied to an index; increases are capped for each period and for the term of the loan. INDEX is often tied to U.S. Treasury securities. The interest rate is usually the index plus a premium called the Margin.

In order to be considered a creditor under TRUTH IN LENDING, a lender must

lend funds 25 times a year and/or must lend the funds for at least 5 housing loans annually. An owner of property advertising acreage for sale could advertise "no down payment." The owner is not considered a lender under Truth In Lending guidelines.

Contribution

means the value of any component of a property is what it adds to the value of the whole or what its absence detracts from the whole. Example: A fully remodeled kitchen or bathroom adds to the value of a property. A kitchen or bathroom that has not been remodeled would subtract from value. Think of the items that would be the most important to you as a consumer, and usually they will add value to a property. While a finished basement that is below grade is nice to have if you live there, the seller may not realize full value from the improvement. Appraisers will not give full value to the improvement, if it does not have a walkout from that level. These types of components either add or subtract from value.

depreciation is divided into 3 classes according to its cause:

physical deterioration functional obsolescence external obsolescence

Subordination clause

subsequent mortgage or deed of trust takes priority. Example, the first deed or mortgage holder becomes the second deed or mortgage holder in the order they were recorded in priority - the second becomes the first. This clause is further defined as a "change in priority positions between holders of liens on a Mortgage or Deed of Trust in case of foreclosure." You are probably familiar with the definition of the word "Subrogation." But be sure that the differences between "Subordination" and "Subrogation" are clear to you. Subrogation is the substitution of a third person in place of a creditor to whose rights the third person succeeds in relation to the debt. Example, a title company that pays a loss within the scope of its policy is subrogated to any claim that the buyer has against the seller for a loss. Or if you have an automobile accident, your insurance company will pay any claims against you.

Principles of Real Estate Value.: Substitution

the maximum value of a property tends to be set by the cost of purchasing an equally desirable and valuable substitute property. (Comparison shopping- basis for Sales Comparison approach.) Example: this is the principle used when determining value based on the Sales Comparison approach to value. This principle is based on the fact that similar properties will bring similar values. (Substituting one property for another.)

Principles of Real Estate Value.:Highest and Best Use

the possible use of a property that would produce the greatest net income and thereby develop the highest value. Example: An area of the municipality has developed into commercial office buildings. If there is a vacant piece of land or a single family home in the area one could assume that the highest and best use for this property at that time would be for an office building. This is the first "principle" that an appraiser should determine when establishing value. An appraiser would ask him/herself, "What is the highest and best use for this property at this time".

promissory note

the promise to repay the debt. It is an I.O.U. It is the primary evidence that there is a loan between the lender and the borrower. If a person only signs a note, without using property as collateral, it is referred to as a DEBENTURE. A DEBENTURE is defined as a long-term note that is not secured by a specific property. A promissory note is a negotiable instrument, which means that the lender can sell the note to a third party. Example, the lender feels he/she can make more money lending on something other than your mortgage. He/she decides to sell your promissory note to another lender. You receive a notification in the mail to pay the new lender. You did nothing wrong, you have been paying on time for the last 15 years, but now you will pay another party. By the way, it is always a good idea to check with the original lender to be sure your note sold to a new lender.

"Assumed"

the purchaser is accepting the debt and is, therefore, personally liable for the entire debt. The bank could require the original seller to remain secondarily liable if the new borrower does not pay. The seller would no longer be liable if the lender will consider a novation*. *Novation is a second contract to assume liability for the debt for the purchaser and relieve the liability to the seller. Tax and Insurance Escrows (also may be called an Impound or Reserve Account) As a result of a lender requiring tax and/or insurance escrows, a "Budget Mortgage or Deed of Trust" occurs. By placing money in the account, the lender is assured that the bills will be paid. The lender (mortgagee or beneficiary) also benefits from holding the money.