Real Estate Investment and Finance 354-446

What is a conventional mortgage or loan?

The term conventional mortgage or conventional loan is used to describe either: - A mortgage loan that is not guaranteed by the U.S. Department of Veterans Affairs (VA loan) or insured by the Federal Housing Administration (FHA loan). - A fixed-rate, fixed-term mortgage loan, as opposed to an adjustable-rate mortgage (ARM), or one with a balloon payment or other possible future change in rate or terms.

What does prequalify mean?

To prequalify is to estimate the most expensive home a buyer can afford based on the buyer's income and available assets. The exercise, often performed by a real estate broker, does not obligate the buyer to buy a specific home or promise specific financing but merely indicates that the buyer may be able to afford a home in a specific price range. For example, Paul's income is sufficient to prequalify for a $250,000 loan according to the guidelines used for conventional loans. Because Paul can also raise $50,000 for a down payment, he can look at homes costing up to $300,000.

What is a term loan?

A term loan is one with a set maturity date, typically without amortization. It may be called an interest only loan or mortgage. For example, Terry purchases a tract of land for $15,000 and borrows $10,000 from a lender with a five-year term loan. The interest rate is 8%, payable annually. The entire principle is due at the end of the five-year term.

What is a FICO score?

A FICO (Fair Issac Company) score is a credit rating score. It is a measure of borrower credit risk commonly used by mortgage underwriters when originating loans on owner-occupied homes. The score is based on the applicants' credit history and the frequency with which they use credit. Expressed as a number between 308 and 850, the score determines not only whether the loan is approved but also what type of terms the lender is offering. If the score is high enough, generally in the upper 600s the applicant will be afforded a loan with the lowest interest rate and lowest required down payment. A lower score will qualify for less favorable terms. If the score is very low, the borrower may be rejected or settle for a subprime loan.

What is a VA loan or mortgage?

A VA loan (less often called a VA or GI mortgage) is a home loan that is guaranteed by the US Department of Veterans Affairs (VA). Discharged servicemen with more than 120 days of active duty are generally eligible for a VA loan, which typically does not require a down payment. For example, Abel, a veteran of the US Army, wishes to purchase a home. Abel may apply for a VA loan with the Department of Veterans Affairs and, if qualified, may obtain a mortgage loan from a lending institution with no down payment.

What is a balloon mortgage? A balloon payment?

A balloon mortgage is a mortgage with a large final payment (it blows up like a balloon). The balloon payment is the final payment on a balloon loan. The payment is larger than the preceding installment payments and pays the loan in full. For example a balloon mortgage might call for payments of $500 a month for five years, followed by a balloon payment of $50,000, as shown in the figure below. For diagram see #382

What is a blanket mortgage?

A blanket mortgage or blanket loan is a single mortgage that covers more than one parcel of real estate. For example, a developer subdivides a tract of land into lots and obtains a blanket mortgage on the whole tract. A partial release provision in the blanket mortgage allows the developer to sell individual lots over time without retiring the entire blanket mortgage.

What is a budget mortgage?

A budget mortgage is one that requires monthly payments for property taxes and insurance, in addition to interest and principal. For example, Abel borrows $200,000 on a budget mortgage at 6% interest. His monthly mortgage payment is $2,000, which consists of $1,467 principal and interest. $450 for taxes, and $83 for insurance. Having all these expenses in a single payment makes it easier for him to prepare a budget for his monthly expenditures.

What is a co-mortgagor? A co-signer?

A co-mortgagor is one who signs a mortgage contract with another party or parties and is thereby jointly obligated to repay the loan. Generally, a co-mortgagor provides some assistance in meeting the requirements of the loan and receives a share of ownership in the mortgaged property. For example, Brown and Jones agree to purchase and share residence in a home. They jointly apply for and receive a mortgage loan to make the purchase and thereby become co-mortgagors. A co-signer is a person who signed a credit application with another person, agreeing to be fully responsible for the repayment of the loan in the event that the primary borrower defaults. For example, Mrs. Simmons wishes to assist her son in purchasing a home. In addition to providing a portion of the down payment money, she signs the loan application and loan contract as a co-signer and co-mortgagor.

What is a commercial bank?

A commercial bank is a financial institution authorized to provide a variety of financial services, including consumer and business loans (generally short-term), checking services, credit cards, and savings accounts. Certain deposits at most commercial banks are insured by the Federal Deposit Insurance Corporation. Commercial banks may be members of the Federal Reserve System, which is the US central banking system. Although commercial banks do make long-term mortgage loans,they have traditionally sold them in the secondary market. They are good sources for home improvement loans and second loans secured by home equity, as well as business loans.

What is a conforming loan?

A conforming loan is a mortgage loan that is eligible for purchase by Fannie Mae (FNMA) or Freddie Mac (FHLMC). The maximum size of a conforming loan in 2018 was $453,100 when secured by a single-family home (50% more in Alaska, Hawaii, US Virgin Islands, and Guam). The limit is revised each year according to the change in average sales price of conventionally financed single-family homes.

What is a credit union?

A credit union is a federally regulated nonprofit financial institution owned by the members or people who use its services. Credit unions serve groups with a common interest, and only members may use the available service. Credit unions are often established by employers for their employees, or by trade unions for their members. Credit union members may find that they can receive a higher interest rate on their deposits and borrow at a lower interest rate from the credit union than from a commercial bank.

What is a deed to secure debt?

A deed to secure debt is a type of mortgage used in many states whereby property is deeded to a lender to secure a debt. For example, in order to obtain a mortgage loan in certain states, a borrower has to provide a deed to secure debt. This will facilitate the lender's foreclosure process in the event that the borrower defaults on the loan.

What is a deficiency judgement?

A deficiency judgement is a court order stating that the borrower still owes money when the security for the loan does not entirely satisfy a defaulted debt. For example, upon default by the mortgagor (the borrower is unable to pay), a lender forecloses on a mortgage. The unpaid balance of the loan is $102,000. The property is sold at public auction and brings $80,000. The lender then seeks a deficiency judgment against the mortgagor to recover the $22,000 shortage, plus foreclosure expenses.

What is a distress sale?

A distress sale is a sale of real estate where the seller is under compulsion to sell. A distress sale may occur when a seller needs to raise cash to prevent bankruptcy, or when the seller is a lender with a strict limit on the amount of foreclosed property they may hold. Note that the sale price in a distress sale cannot be considered market value because the seller is under compulsion to sell; hence the sale does not meet the test of market value.

What is a due-on-sale clause in a mortgage?

A due-on-sale clause is a provision in a mortgage that states that the full amount of the loan is due when the property is sold. For example, Collins owes $200,000 on a mortgage loan against her house at a 4% interest rate. She wants to sell the house to a buyer who will assume the mortgage. The lender says that the $200,000 loan is due upon the sale of the house, so it cannot be assumed by the buyer. The lender adds that he can waive the due-on-sale provision (thereby allowing an assumption by a creditworthy borrower) if the interest rate is escalated to 6%.

What is a financial intermediary?

A financial intermediary is a firm that collects deposits from individuals and invests them in loans and other securities. These firms include commercial banks, savings and loan associations, credit unions, and mutual saving banks. For example, First National Bank serves as a financial intermediary by taking in deposits and lending the money in mortgage loans and various securities. In doing so, the bank links individual investors with users of credit and financial markets. In recent years, financial intermediaries sell mortgages they originate, selling in the secondary market principally to Fannie Mae or Freddie Mac.

What is a first mortgage?

A first mortgage is the one recorded first. It has priority as a lien over all other mortgages. In cases of foreclosure, the first mortgage will be satisfied (paid-off) before other mortgages. A first mortgage is also called a senior mortgage. For example, a property costing $100,000 is financed with a first mortgage of $75,000, a second mortgage of $15,000, and $10,000 in cash. If the borrower defaults and the property is sold upon foreclosure for $80,000, the holder of the first mortgage will receive the full amount of the unpaid principal, plus legal expenses. The holder of the second mortgage will receive any excess after the first mortgage has been satisfied.

What is a foreclosure sale?

A foreclosure sale is the public sale of a mortgaged property following foreclosure of the loan secured by that property. Depending on the type of foreclosure proceeding, the sale may be administered by an appointed trustee (statutory foreclosure), or by the courts (judicial foreclosure). Proceeds of the sale are used to satisfy the claims of the mortgagee primarily with any excess going to the mortgagor. Anyone may bid on properties at a foreclosure sale. As a practical matte,r however, most properties are acquires by the lender, often for the amount owed on the foreclosed loan.

What is a government-sponsored enterprise (GSE)?

A government-sponsored enterprise (GSE) is a quasi-governmental organization that is privately owned but was created by the government and retains certain privileges not afforded to totally private entities. For example, both Fannie Mae and Freddie Mac are government-sponsored enterprises that were created by the federal government and then transferred to private owners. Majority ownership returned to the government in 2008. Both organizations have the implicit backing of the US Treasury, which allows them to raise funds at lower interest rates than other private concerns.

What is a grace period?

A grace period is the period during which one party may fail to perform without considered in default. For example, a mortgage payment is due on the first of each month, but the borrower has requested and received a ten-day grace period from the lender. If interest is paid on or before the tenth day, the borrower is not in default.

What is a home equity loan?

A home equity loan is a loan whose collateral is the equity a homeowner has established in a principal residence. It is usually secured by a second mortgage on the property, and is generally intended to be used for some non-housing expenditure such as educational expenses. Home equity loans are a popular way to finance purchases or consolidate existing debts while retaining tax deductible status for the interest paid on the loan. Home equity loans are generally available in two forms. A traditional second mortgage provides lump-sum proceeds at the time the loan is closed. The more flexible line of credit home equity loan establishes a credit line that can be drawn upon as needed.

What is a jumbo mortgage?

A jumbo mortgage is a loan for an amount exceeding the statutory limit placed on the size of conforming loans that Freddie Mac and Fannie Mae can purchase. Such loans must be maintained in the lender's portfolio or sold to private investors. These loans are typically required for purchase of luxury homes. Not all lenders offer jumbo mortgages, and those that do may charge a higher interest-rate for the loans.

What is a junior mortgage?

A junior mortgage is any mortgage recorded after the first mortgage. Its claim against the property will be satisfied only after prior mortgages have been repaid. For example, property is purchased for $100,000. A first mortgage is obtained, covering $75,000 of the price. To reduce the cash requirements, a junior mortgage is arranged to cover $15,000 of the price. The remaining $10,000 is paid in cash. A wraparound mortgage is a junior mortgage that includes a first mortgage in its principal balance.

What is a loan application?

A loan application is a document required by the lender before a loan commitment can be offered. The application generally includes the following information: - Name of the borrower. - Amount and terms of the loan. - Description of the subject property to be mortgage. - Borrower's financial and employment data. For example, Laurie wishes to borrow money to purchase a home. At Friendly Savings, she completes a loan application and pays an application fee. Friendly Savings will procure an appraisal, examine Laurie's credit rating, and verify certain information on the application before approving or disapproving the application.

Can a homeowner sell the house and have the purchaser assume the mortgage?

A loan assumption nearly always requires the lender's approval. The lender may charge an assumption fee, change the interest rate, and not release the original borrower. If the loan is assumed, the new owner is responsible for the debt, even though the previous owner is not released.

What is loan commitment?

A loan commitment is an agreement to lend money, usually of a specified amount, at specified terms at sometime in the future. A locked-in interest rate may be included. For example, before commencing development, Able obtains a loan commitment from a construction lender. He was also required to get a takeout financing commitment for a permanent mortgage. On completion of construction, the permanent mortgage will take out (pay off) the construction loan.

What is a mortgage broker? A mortgage banker?

A mortgage broker is someone who, for a fee, originates loans and places them with investors but does not service them. A mortgage banker does the same things as a broker and also services the loans (that is, collects the payments). For example, the Ace Development Company wants to build a shopping center. A mortgage broker charges a 1% fee for both the construction loan (placed with a commercial bank) and the permanent loan (placed with an insurance company). Ace does not have the expertise or contacts to arrange its own mortgage financing.

What is a mortgage escrow account?

A mortgage escrow account is where funds are held for safekeeping until needed, usually without interest; in real estate, this is an account that receives the funds needed for expenses such as property taxes, homeowner's insurance, and private mortgage insurance when they come due. For example, a home buyer must deposit $1,000 monthly for PITI. Of that amount, $600 is for the lender's principal and interest requirement. The remaining $400 is deposited into an escrow account held by the lender or servicer, to pay the insurance premium or property tax when it becomes due. Most lenders require that the escrow account always have a positive balance, and a few pay interest on amounts the borrower has in the account.

What is a mortgage?

A mortgage is a pledge of property as collateral for a debt. A mortgage is often called a mortgage loan or mortgage lien.

What is a nonconforming loan?

A nonconforming loan is one that does not meet the standards of, or is too large (a jumbo mortgage) to be purchased by FNMA or FHLMC. The interest rate is at least half a percentage point higher than for a conforming loan.

What is a package mortgage?

A package mortgage, also called package loan, is a mortgage arrangement whereby the principal amount loaned is increased, because personal property (for example, appliances) as well as real estate serve as collateral. For example, Simmons applied for a package mortgage in order to spread the cost of appliances over 25 years and pay for them with her home mortgage payment. Some people enjoy a very small monthly cost of appliances but should realize that the debt will probably outlive the appliances.

What is a permanent mortgage? A permanent lender?

A permanent mortgage is a mortgage initially written for a long period of time (more than ten years). A permanent lender is one who makes such loans, as contrasted with a construction lender, who makes loans to finance the construction of property. Traditional permanent lenders include credit unions, insurance companies, mortgage bankers, pension funds, REITs, and savings and loan associations. For a house to be built, often a permanent mortgage commitment is required before a construction loan can be arranged. A construction loan, to finance construction, is often called an interim loan.

What is a prepayment clause? A prepayment privilege or penalty?

A prepayment clause is a provision in a mortgage that gives a mortgagor (borrower) the privilege of paying the mortgage indebtedness before it becomes due. The prepayment privilege is thus the right a borrower may have to retire a loan before maturity. When a mortgage is paid off early, the borrower does not have to pay the interest that is not yet due. In return for this waiver of interest, there is often a prepayment penalty. For example, the prepayment clause is a mortgage may allow the unpaid principal to be retired by the owner with a 1% prepayment penalty. A loan on commercial property might be closed (offers no prepayment privileges) for the first five years, after which it could be paid off without penalty.

What is a principal and interest payment (P&I)?

A principal and interest payment (P&I) is a periodic payment, usually paid monthly, that includes the interest charges for the period, plus an amount applied to amortization of the principal balance. P&I is commonly used with amortizing loans. For example, a $1,200 annual principal and interest payment is required at the end of the year by a $10,000 face value amortizing mortgage at a 6% interest rate. Of the first year payment, $600 is required for interest, the remaining $600 reduces the outstanding balance to $9,400.

What is a purchase money mortgage?

A purchase money mortgage is literally any mortgage used to purchase property. In most situations it is intended to mean the same thing as seller financing, as opposed to third-party financing.

What is a reverse annuity mortgage?

A reverse or reverse annuity mortgage is a type of mortgage, designed for elderly homeowners with substantial equity, in which a lender periodically (monthly, for example) pays an amount to the borrower. The loan balance increases with interest and periodic payments, causing negative amortization. The loan is repaid from proceeds of the future sale of the home. For example, Mr. Roper, age 70, who has retired from his job, owns his home free and clear of liens. His pension is inadequate to pay expenses. He seeks a reverse mortgage that will pay him $200 per month. When he dies or perhaps moves into an assisted living facility, the home will be sold and the loan retired.

What is a second mortgage?

A second mortgage is the second one to be recorded. Second mortgages are used at purchase to reduce the amount of a cash down payment, or are used in refinancing to raise cash for any purpose. For example, a house costs $300,000. Available financing is a first mortgage loan covering 80% of value, or $240,000. The required cash down payment is $60,000. A second mortgage is available for an additional $30,000 of value, reducing the down payment to $30,000. The second mortgage will generally carry a higher interest rate than the first mortgage to reflect its inferior position and greater risk compared to the first mortgage.

What is a subordinate mortgage? What is subordination?

A subordinate mortgage is one that has a lower priority than another. The subordinate mortgage has a claim in foreclosure only after satisfaction of the mortgage(s) with priority. For example, a property sold for $3 million at foreclosure. Because $4 million was owed on the first mortgage, nothing was paid on the second mortgage, which was a subordinate mortgage. A second mortgage or junior mortgage is, by its nature, a subordinate mortgage, but a first mortgage can be reduced in priority by subordination if the lender allows. A first mortgage lender will likely subordinate only if given substantial incentives.

What is a subordination clause?

A subordination clause is a provision or document that permits a mortgage recorded at a later date to take priority over an existing mortgage. For example, even though the first mortgage was recently retired, the second mortgage remains a second mortgage because the subordination clause in the second mortgage provides that a new mortgage that replaces the existing first mortgage will become a first mortgage; the second mortgage will not move up in priority. In the absence of a subordination clause in the second mortgage, the second would automatically become the first mortgage when the first mortgage is retired (paid in full).

What is a subprime loan?

A subprime loan is a mortgage loan offered to applicants with less than top-quality credit ratings (sometimes referred to as "B-C lending" because of the letter grade assigned to applicants through credit scoring). Subprime loans typically carry a higher interest rate, more discount points, and a lower maximum loan-to-value ratio compared to a prime loan.

What is accrued interest?

Accrued interst is interest that has been earned and not paid. For example, if 6% interest is earned on a $100 deposit, then $5 of interest has accrued to the depositor.

What is the meaning of amortization? What is an amortization term? A self-amortizing mortgage?

Amortization is the process of paying down (liquidating) a loan. Monthly or periodic payments will include all of the interest due for that month or period, with an additional amount to reduce the principal balance. The amortization term (also known as the full amortization term) is the time it takes to retire a debt through these periodic payments. A self-amortizing mortgage is one that is fully retired over its amortization term, typically 15, 20, 25, or 30 years. The term amortization is ultimately derived from the Latin word for "dead. " When a loan is fully amortized, the mortgage is dead. Mortgagors often celebrate by cremating the mortgage papers after a satisfaction piece or satisfaction of mortgage has been recorded.

What is an Alt-A mortgage?

An Alt-A mortgage is a mortgage loan made to borrowers who have better credit scores than subprime borrowers but provide less documentation than normally required for a loan application. They have been nicknamed "liar loans" because borrowers often inflate their income. Alt-A mortgages typically carry interest rates somewhere between the best rates available and those offered on subprime loans.

What is an FHA loan?

An FHA loan is a home loan insured by the Federal Housing Administration, an agency of the US government. Because of limits placed on principle amounts, an FHA loan is for those with low or moderate income levels. Some FHA loan programs allow 97% of the purchase price to be borrowed.

What is an adjustable-rate mortgage?

An adjustable rate mortgage (ARM) is a mortgage loan whose interest rate fluctuates in accordance with another rate. Commonly, the mortgage rate is indexed (adjusted) annually based on the one-year Treasury bill rate, plus a 2% margin. For example, Sandy obtains an adjustable rate mortgage to finance the purchase of a home. At one-year intervals, the lender may adjust the rate of interest on the loan in accordance with an established index. An ARM may have a maximum annual interest rate change and a maximum life of loan rate. These are called rate caps. Some ARMs instead have a payment cap.

When a mortgage loan is fully paid off, what does the lender provide that can be recorded?

The lender provides a satisfaction piece, which is an instrument for recording and acknowledging final payment of a mortgage loan. This document is also sometimes called a satisfaction of mortgage, release of lien, or release deed.

What is an amortization schedule? What is negative amortization?

An amortization schedule shows, for the end of each month, the required mortgage payment and the unpaid balance. It also shows the breakdown of the mortgage payments between interest and principal reduction. As the mortgage is paid off, the remaining balance is reduced, with the result that the interest is a smaller portion of each succeeding payment, and more of each succeeding payment is devoted to reducing the principle. A loan may be structured to allow a payment that is less than the interest. That situation is called negative amortization. Reverse annuity mortgages create negative amortization.

What is an assumable loan?

An assumable loan is a mortgage loan that allows a new real estate purchaser to undertake the obligation of the loan with no change in loan terms. This is generally true of loans without due-on-sale clauses. Most FHA and VA mortgages are assumable by qualified purchasers. For example, Abel sells a home with an assumable loan to Baker. Baker takes over the payments on the loan and accepts liability under the mortgage note. This obligates to the buyer, Baker, but does not release Able from the debt unless the lender agrees to a novation (to substitute Baker).

What is an acceleration clause in a mortgage loan?

And acceleration clause is a loan provision giving the lender the right to declare the entire amount immediately due and payable upon the violation of a specific loan provision, such as failure to make payments on time. If this clause were not present, then a default on one payment would be just that: one payment in default. This clause makes the full amount of principle due upon the default as specified in the loan. For example, Collins sells her house to Baker, who assumes the existing 8% interest rate mortgage. They do not notify the lender of the sale. Clause 17 in the mortgage states that the full principle accelerates unless the lender approves of the sale. Collins must now pay the balance of the principal.

What is an open-end mortgage?

And open-end mortgage is a mortgage by which the mortgagor (borrower) may secure additional funds from the mortgagee (lender), usually limiting the total amount that can be borrowed. This is similar to a line of credit. For example, Poole obtains an open-and mortgage to purchase a home. Under the mortgage agreement, Poole may borrow additional funds over the term of the loan as long as the unpaid principal does not exceed 80% of the home's appraised value.

What is a chattel mortgage?

Chattels are personal property, not real estate, so a chattel mortgage is a pledge of personal property as security for a debt. For example, if you take out an automobile loan, using the vehicle as collateral, the lender grants you a chattel mortgage.

What is creative financing?

Creative financing is a term used for any financing arrangement other than a traditional mortgage from a third-party lending institution. Creative financing devices include: - Loans from the seller. - Balloon payment loans. - Wraparound mortgages. - Assumption of mortgage. - Sale-leaseback. - Land contract. - Alternative mortgage instruments.

What is a default on a mortgage loan?

Default is a failure to perform a duty, such as missing a certain number of loan payments, which allows the lender to take certain actions, such as posting the property for foreclosure.

What is meant by delinquent in relation to a mortgage?

Delinquent means past due. A borrower is delinquent when payment has not been made after the due date, and any grace period afforded has passed. Normally, delinquency occurs before a default is declared. For example, a mortgage with payments past due for more than ten days could be considered delinquent.

What is distressed property?

Distressed property is real estate that is under foreclosure or impending foreclosure because of insufficient income production. For example, an apartment building is financed with mortgages that require $25,000 in annual debt service. Because of high vacancies and rising expenses, net operating income drops to $20,000. The owners have ceased making loan payments because their resources are insufficient to pay the negative cash flow. The property is considered distressed property.

What is equity? Initial equity?

Equity is the ownership interest or value that the owner has in real estate over and above the liens against it. For example, a property has a current market value of $100,000. The owner currently owes $60,000 in mortgage loans that are against the property. The owner's equity is $40,000. Initial equity is the amount of down payment. It does not include appreciation, mortgage amortization, or transaction costs. For example, Irving's initial equity of $50,000 cash was applied to the purchase of a $250,000 home, purchase was a $200,000 mortgage loan.

What is meant by face value? A discounted loan?

Face value is the dollar amount, shown by words and numbers, on a document. The face value of a loan is the amount that is nominally loaned. A discounted loan is one that is offered or traded for less than its face value. A loan may be discounted based on differences in market interest rates or by its own risk characteristics. If discount points are charged on a mortgage, the loan proceeds will be less than the face value.

What is Fannie Mae (FNMA)? Freddie Mac (FHLMC)?

Fannie Mae (FNMA) and Freddie Mac (FHLMC) are corporations that specialize in buying mortgage loans from mortgage bankers and other loan originators. They add liquidity to the secondary mortgage market. In September 2008. the companies were placed in conservatorship under a newly formed government agency, the Federal Housing Finance Agency (FHFA), in exchange for a $100 billion commitment of government funds to keep the companies solvent. The FHFA runs the companies in place of the executive officers and board, which were abolished through the conservatorship. The US government currently owns 80% of each.

What is forebearance?

Forbearance is a policy of restraint in taking legal action to remedy a default or other breach of contract, generally in the hope that the default will be cured, given additional time. For example, because of a slowdown in the local economy, loan delinquencies increased dramatically at First Savings. Considering that most of the borrowers were longtime customers of the bank and had always honored their commitments, First Savings adopted a policy of forbearance in dealing with a default. Every effort would be made to avoid foreclosure and give the borrowers time to bring the loans up to date.

What is foreclosure?

Foreclosure is termination of the rights of a borrower in the property covered by a mortgage. Statutory foreclosure is effected without court supervision but must conform to laws (statutes). Judicial foreclosure submits the process to court supervision. For example, a lender may use foreclosure to gain possession of mortgaged property after the borrower has missed three payments/

What is meant by joint and several liability?

If a loan contract requires joint and several liability, it means that the creditor can demand full repayment from any and all of those who have borrowed. Each borrower is liable for the full amount, not just the prorated share. For example, Abel and Baker are business partners. They become co-mortgagors when they borrow (or the partnership borrows) $10,000 from a bank, agreeing to joint and several liability. Upon default, the bank can collect the full remaining balance of the $10,000 from either party.

Can a mortgage loan be paid off early?

In nearly all cases, a mortgage can be paid off before maturity, but a penalty may be charged in addition to the unpaid balance. This depends on the prepayment clause in the mortgage loan.

What is interest? An interest rate?

Interest is a charge for the use of money. The interest rate is the periodic percentage of a sum of money that is charged for its use. When money is borrowed, the lender requires payment of interest at a specified interest rate to compensate for risk, deferment of benefits, inflation, and administrative burden. The interest rate is applied each period to the unpaid balance until the loan is paid off.

What is leverage?

Leverage is the use of borrowed funds to increase purchasing power and, ideally, to increase the profitability of an investment. This is also called financial leverage. For example, Collins wishes to invest in real estate. The property costs $100,000 and produces net operating income of $10,000 per year. If she purchases with all cash, her annual rate of return is 10% ($10,000 divided by $100,000). If she leverages the investments by borrowing $75,000, her return on equity may be higher. If the debt cost is 8% ($6,000) annually, the leverage results in a return of 16% ($4,000 cash flow (divided by) $25,000 equity). However, if the debt cost is 12% ($9,000), the leverage is negative because it reduces the return on equity to 4% ($1,000 cash flow (divided by) $25,000 equity).

What is loan origination? What does it involve? What are origination fees?

Loan origination is the process by which a loan is funded, including the due diligence study, financial structure, and loan committee approval. Origination fees are charges to a borrower to cover the costs of issuing the loan, such as credit checks, appraisal, and title expenses.

What is meant by maturity?

Maturity is: - The due date of a loan. A mortgage loan may have a maturity of 30 years. Periodic payments are established so that the loan principal will be amortized (paid off) by the maturity date. - The end of the period covered by a contract. A lease or insurance policy typically has the maturity date at which the contract automatically expires.

What is a mutual savings bank?

Mutual savings banks are state-chartered banks owned by the depositors and operated for their benefit. They are found mostly in the northeastern United States. Many of these banks hold a large portion of their assets in home mortgage loans.

Is the first mortgage (or senior mortgage) the one on which the most money is owed?

No. The first or senior mortgage is the one recorded first. The principle amount owed does not determine priority.

What does PITI stand for?

PITI is an abbreviation for "principal, interest, taxes, and insurance," the four components of payments on a budget mortgage.

What is meant by partial release?

Partial release is a provision in a mortgage that allows some of the property pledged to be freed from serving as collateral. For example, Baker sold three acres of land (shown in the figure below) and accepted a $30,000 purchase money mortgage. Partial releases in the mortgage require that, upon each $10,000 principal payment, one acre be freed from serving as collateral. The sequence of release was platted and described in the mortgage. For diagram see #385

What are points or discount points?

Points or discount points are amounts paid to the lender at the time of origination of a loan, to account for the difference between the market interest rate and the lower face rate of the note. Each point is equal to 1% of the face amount of the loan. The seller of the house often pays the points required on a buyer's loan. For example, a loan of $100,000 face value is made at 6% interest, plus two discount points. The lender provides only $98,000 of funds, deducting $2,000 (2%) for the points. The true rate of interest on the loan about 6 1/4%, because the points are spread over the life of the loan in addition to the 6% interest rate. A buydown occurs when a party pays cash in advance to reduce the contract face interest rate.

What is meant by preapproval?

Preapproval is the practice by a lender of approving a borrower for a certain loan amount. This allows prospective homebuyers to shop with the knowledge, likely to be shared with a seller and broker to demonstrate their financial capability, that the loan will be approved. For example, Peter and Pamela Shea are searching for a new home. They went to a potential lender who preapproved them for a $250,000 loan. They submitted a purchase offer at the same time and for the same amount as another family that was not preapproved. The seller is likely to except the Shae's offer, knowing that their loan will be processed expeditiously.

What is predatory lending?

Predatory lending is the practice, attributed to certain mortgage lenders, of seeking to advantage of the ignorance or gullibility of borrowers with refinancing, home equity lending, or home improvement lending, a subprime lending, predatory lending can take several forms: - Saddling borrowers with more debt than they can handle. - Tricking a borrower into a loan with high rates and junk fees. - Overcharging or charging twice for required services. Most mortgage lenders are in the business to earn income by originating legitimate lending uses deception and misinformation to burden borrowers with unnecessarily costly financing, often in hopes that the borrower will default and allow the lender to acquire the property cheaply.

What is private mortgage insurance?

Private mortgage insurance (PMI) is protection for the lender in the event of default, usually covering a portion of the amount borrowed. The insurance is "private" because it is provided by a private company, not the VA or FHA. PMI may cost 2% of the amount borrowed, plus an ongoing fee paid annually until the mortgage is under 80% of the value of the property. For example, Murray buys a house for $100,000 with a $95,000 mortgage loan. Private mortgage insurance covers the top 20% of the loan in the event that Murray defaults. Murray pays $1,800 at closing and $237.50 annually for PMI.

What is the importance of real estate finance?

Real estate is generally expensive, and most purchasers can't pay for property entirely in cash. Money and credit are the lifeblood of real estate activity. Because of its permanent location and long-lasting improvements, various types of lenders are willing to make long-term loans with the real estate serving as security or collateral. This provides affordable monthly payments to a purchaser and typically a sound loan to the lender. There are many types of loans and provisions or clauses in loans to provide clarity and suitability for both parties.

What is a saving and loan association?

Savings and loan associations (S&Ls) are depository institutions that at one time specialized in originating, servicing, and holding mortgage loans, primarily on owner-occupied residential property. In the past, they could not offer checking accounts. Traditionally, saving and loan associations were distinguished from commercial banks by their emphasis on long-term home mortgage loans, their separate regulation and deposit insurance mechanism, and their affiliation with the Federal Home Loan Bank System. Passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1990 destroyed most of these divisions, so now many S&Ls are little different from commercial banks.

What is seller financing?

Seller financing is a loan from the seller accepted by the seller as part of the purchase price for a property. In other words, the seller is also the mortgage lender. Seller financing may be either a first mortgage or a junior mortgage. Such financing is used as an inducement to a sale when normal third-party financing is expensive or unavailable, or in situations where the existing, first-lien loan may be assumed by the buyer, but the difference between the existing debt and the sales price exceeds the cash resources of the buyer. For example, the Baker's would like to buy Abel's house, which is priced at $200,000. They are permitted to assume Able,s existing $70,000 mortgage., but Abel's equity is $130,000. The Baker's cannot come up with enough cash (or another loan) for such a large down payment, so Abel offers to take a seller-financed second mortgage for $100,000. This reduces the Baker's cash down payment to $30,000.

What is the Federal Deposit Insurance Corporation (FDIC)?

The Federal Deposit Insurance Corporation (FDIC) is a public corporation, established in 1933, to insure deposits in commercial banks and savings and loan associations. The FDIC has its own reserves and can borrow from the US Treasury. If a bank becomes insolvent and cannot pay depositors who want to withdraw their money, the FDIC will refund deposits up to a state amount. The maximum insurance is currently $250,000 per depositor in each bank.

What is the Federal Housing Administration (FHA)?

The Federal Housing Administration (FHA) is an agency, part of the US Department of Housing and Urban Development (HUD), that administers many loan programs, loan guarantee programs, and loan insurance programs designed to make more housing available. For example, Abel wishes to purchase a home but lacks funds for a large down payment. Through a program provided by the Federal Housing Administration, Abel may be able to obtain a loan for up to 97% of the purchase price.

What is the Federal Housing Finance Agency?

The Federal Housing Finance Agency is an agency of the federal government that essentially manages the federal government's involvement in the residential mortgage market. The agency was created by the merger of the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight. Its most notable action to date was the placement of Fannie Mae and Freddie Mac in conservatorship in September of 2008.

What is the Federal Reserve System?

The Federal Reserve System is the central banking system that regulates and provides services to member banks. It also has the responsibility of conducting federal monetary policy. That is, it regulates the supply of money, mainly through its banking system. The system consists of the Federal Reserve Board and series of regional Federal Reserve Banks. Monetary policy is one of two principal types of economic controls held by the US government. The other is fiscal policy, which is government taxation and spending.

What is debt coverage ratio?

The debt coverage ratio is the relationship between net operating income (NOI) and annual debt service (ADS). It is often used as an underwriting criterion for income property mortgage loans. For example, the annual debt service for a mortgage loan on a certain office building is $10,000. The property generates $25,000 in annual gross rent and requires $7,000 for expenses of operation, leaving $18,000 net operating income. The debt average ratio is 1.80, calculated by the following formula: For diagram see card #361.

What is the loan-to-value (LTV) ratio?

The loan-to-value (LTV) ratio expresses the amount borrowed as a percentage of the value of the property purchased--that is, mortgage debt divided by the value of the property. For some purposes, the initial purchase price (cost) is initially treated as value. - Lenders are often constrained as to the maximum loan-to-value ratio on loans they originate. - Loans on commercial property by pension funds, banks, and insurance companies are typically limited to a maximum of 70-80% of value. - Loans on owner-occupied houses or condominiums may reach a 90-95% ratio when mortgage insurance is used. For example, Abel buys a $100,000 house and arranges a $90,000 mortgage loan, resulting in a 90% loan-to-value ratio. Because the LTV ratio is higher than 80%, the lender requires Abel to have mortgage insurance. The insurance is used to pay a portion of the debt in foreclosure. Mortgage insurance is not life insurance.

What is the mortgagor? The mortgagee?

The mortgagor is the owner of real estate finances with a mortgage, the one who pledges the property as security for a loan. The mortgagee is the lender, who holds a lien on property or title to property as security for a debt. The mortgagor (borrower) gives the mortgage (pledge) to the mortgagee (lender).

What are some of the primary financial institutions and intermediaries that are active in real estate finance?

The primary financial institutions and intermediaries that are active in real estate finance are: - Commercial banks - Credit unions - Federal Deposit Insurance Corporations (FDIC) - Federal Housing Administration (FHA) - Federal Housing Finance Agency _ Government sponsored enterprises: Fannie Mae and Freddie Mac - Mortgage bankers - Mortgage brokers - Mutual savings bank - Savings and loan associations

What is the difference between the primary mortgage market and the secondary morrtgage market?

The primary mortgage market includes institutions and lenders that originate mortgage loans, that is, they make new mortgage loans and deal directly with the borrowers. The secondary mortgage market is where already existing mortgage loans are bought. Primary markets are represented by individual lenders, who deal directly with borrowers, not a central market. There is no set meeting place for the secondary mortgage market. Fannie Mae and Freddie Mac hold auctions weekly to buy those mortgages offered at the highest effective rate. Bids are collected from all over the country.

What is the prime rate?

The prime rate is the lowest commercial interest rate charged by banks on short-term loans to their most creditworthy customers. The prime rate is not the same as the long-term mortgage rate, though it may influence long-term rates. Also, it is not the same as the consumer loan rate that is charged on personal property loans and credit cards. Mortgage rates and consumer loan rates are generally higher (sometimes much higher) than the prime rate, but exceptions may occur. For example, Bank of America and Wells Fargo offer a prime rate of 7%. Chevron/Texaco is a prime customer, and at that rate they may borrow loans up to 270 days. Bank of America offers construction loans to qualified builders at four points above the prime tax.

What is usury?

Usury is charging a rate of interest greater than that permitted by state law. In most states, usury limits vary according to the type of lender, type of loan. Federal laws have been passed to preempt certain usury limits under certain conditions. The interest rate that must comply with usury limitations is defined differently in the various states. The stated maximum rate may apply to the face interest rate, effective rage to the borrower, or the actual yield to the lender. Penalties for usury may be severe.

What does subject to mean in the transfer of mortgaged property?

When mortgaged real property is sold subject to the mortgage, the buyer takes title to the property but is not personally liable for payment of the amount due. The buyer must make payments in order to keep the property; if he defaults , however, only his equity in the property is lost. For example, Queen purchases a house from Parson subject to the existing mortgage and does not assume it. Parson's mortgage has an outstanding balance of $140,000, and the sale price is $160,000. Queen pays Parson $20,000 in cash for the equity and takes over payments on the mortgage. Should Queen default, Parson is liable under the promissory note given to the lender. Queen has no further liability, but she has lost the $20,000 she paid, plus all the payments she has made, and has no further ownership interest

Can a second mortgage become a first mortgage?

Yes! If there are two mortgages on real estate, and the first mortgage is fully paid off, the second mortgage will automatically become a first mortgage.

Can a mortgage be recorded in public records the same way a deed to property ownership is recorded?

Yes! It is very important for a lender to record a mortgage. In the event of foreclosure, the priority of a mortgage depends on the priority of recording; that is, the mortgage that is recorded first becomes the first mortgage. Upon a foreclosure, the highest priority mortgage is paid first.

Suppose a property's value has declined. The property owner's current equity has evaporated, and the loan balance exceeds the property value. Can the owner/borrower give a deed in lieu of foreclosure?

Yes. However, the borrower is not relieved of the debt. The borrower agreed tot he loan and must pay it. In some situations, the lender may be willing to strike an agreement to release the borrower using a short sale, possibly accepting a VA guarantee. FHA insurance, or private mortgage insurance, plus some cash to make up for the loss. A deed in lieu of foreclosure is given when the borrower turns the property over to the lender, who agreed not to foreclose. In effect, the borrower hands over the keys, and the lender accepts them with no further expense.