Unit 12

What is the defeasance clause?

"Defeats" the prior action when the borrower has made the final payment on the loan. In title theory states- requires the lender to convey legal title tot eh borrower once the debt is repaid in lien theory states- requires the lender to release the mortgage lien when debt is repaid

What are the 2 things the mortgagee (lender) can do if there is a default on the mortgage?

1. Initiate a suit on the promissory note - sue on the note, obtain judgement, and then execute judgement against any real or personal property of the mortgagor. 2. Initiate a foreclosure proceeding - mortgagee accelerate the due date of all remaining payments and then files a lawsuit to foreclose

What are the 6 agreements when you have a mortgage?

1. Promise to repay (repay principal and interest) 2. Taxes and liens (agrees to pay all taxes assessments, and fines) 3. Property insurance (mortgagor promises to keep property insured against loss under a extended coverage policy) 4. Occupancy (must use property as principal residence for at least 1 year) 5. Maintenance and covenant good repair (keep property in good condition) 6. Covenant against removal (can't remove building)

What are the 2 ways you can purchase a property that is encumbered by an outstanding mortgage loan?

1. Subject to mortgage: makes the buyer NOT personally liable to the lender for payment of the mortgage debt. The buyer takes title to the property knowing that the seller is still legally responsible for the notice even though the buyer will be making mortgage payments. 2. Assumption of an existing mortgage: buyer is agreeing to assume the sellers debt. Obligates the buyer to execute a promissory note and become primarily liable for the debt. However, the seller is still liable for the debt on the original promissory note.

How long does the borrower have once they receive a "notice of acceleration"?

30 days from the date of the notice to pay all sums secured by the mortgage instrument. If they fail to pay this, the borrower is considered to be in default.

What is a contract for deed (land contract)?

A financing devise used when the buyer does not have sufficient cash to make a down payment that is acceptable to the seller. The buyer makes a small down payment, and then the seller finances the rest of the purchase price. Seller retains legal title until loan is repaid.

What is buydown?

A financing techniques used to temporarily lower the interest rate on a mortgage loan. The developer/seller pays an up front fee to the lender. The lender then reduces the interest rate, generally for the first one to three years.

What are construction loans?

A loan used to finance the construction of homes, apartments, office buildings, etc. The lender commits the full amount of the loan but disburses the funds in payments called draws as the construction progresses.

What is a receivership clause?

Allows a receiver to be appointed to collect income from the property and use that income to make mortgage payments in the event of default. These usually happen on income-producing properties.

What is a pre payment clause?

Allows the borrower to pay off part or all of the debt, without penalty or other fees, before maturity. In FL, you have the right to prepay a mortgage loan unless the mortgage states otherwise. This may include a prepayment penalty if you have an early payment!

What is the due on sale clause

Allows the mortgagee to call due the loan balance plus interest. If the property or any interest in the property is sold/transferred without the lenders permission the lender may require immediate payment in full.

What are discount points?

An added loan fee often charged by lenders to increase the yield on a lower than market interest loan and to make the loan more competitive with higher rate interest loans. Borrowers often pay discount points up front in order to gain a long term lower interest rate, which appeals to buyers.

What is a mortgage?

An instrument that pledges the property as security (collateral) for a debt. It is the legal doc that represents the lien on the real estate that secures the debt. Must be in writing to be enforceable.

Whats the acceleration clause?

Authorizes the mortgagee to accelerate or advance the due date of the entire unpaid balance if the mortgagor fails to fulfill any promises stated in the mortgage instrument. This clause gives the lender the power to declare the entire unpaid mortgage loan due and payable and to foreclose on the property if the mortgagor does not pay. Foreclosure can't happen until the entire debit is delinquent. Without this clause, the mortgagee could sue a delinquent mortgagor for only the month payments that are behind.

What is a lien theory?

Borrower retains title to the property. If the borrower defaults, the lender will foreclose to recover money owed. FL is a lien theory state.

How do you calculate discount points?

Discount points are based on loan amount, not the selling price. 1% = 1 point. Ex: A lender charges 3 points on a 200k loan. How much will the buyer pay in discount points? 200,000 x 0.03 = $6,000 in discount points

What is the loan originator fee?

Fee for processing a mortgage application. Typically 1 - 2 % of the mortgage amount is charged.

What is the right to reinstate?

Gives mortgagor right to have foreclosure proceedings stopped provided the mortgagor pays all the sums that would be due if no acceleration had taken place

What is a blanket mortgage?

It pledges several parcels as security for the loan. The developer then uses the proceeds from the sale of individual lots to pay off the blanket mortgage loan. A partial release clause (commonly found in blanket mortgages), releases individual parcels from the blanket mortgage lien upon payment of a specified amount.

What does PITI stand for?

Monthly... PRINCIPAL INTEREST TAXES INSURANCE PAYMENT

What are the two parties to a mortgage?

Mortagagor (borrower) Mortgagee (lender) The mortgagor owns the property and the mortgagee owns the mortgage. A mortgage is regarded as an investment or chattel (personal property) by the mortgagee.

What's and escrow (impound) account?

Most lenders require borrowers to pay in advance monthly installments for property taxes and hazard insurance.. The monthly escrow payment is 1/12 of the estimated annual expense for property taxes & hazard insurance. These payments are held in an escrow account for the borrower. When the payments become due, the lender pays these fee's from this escrow account.

What is the promissory note?

Must be included in all mortgages in FL. It is a promise to repay. It serves as evidence of debt, and makes the borrower personally liable for the obligation. The note is a separate legal instrument and must be signed by borrower. Should state the amount of debt, interest rate, repayment method, and term/time for repayment. It will also list penalties if the borrower doesn't make the monthly payments. The lender can "call" the loan (demand repayment of entire loan before the end of the term) if the borrower violates the mortgage. The note is usually not recorded.

What is hypothecation?

Pledging property as collateral. Pledging property as security for repayment of a loan without surrendering possession of the property.

What is mortgage lien priority?

Priority of mortgage liens is normally determined by the order in which the liens are recorded. The first mortgage loan to be executed and recorded is the "first mortgage". If the property owner takes out a second mortgage, it's called a "junior mortgage". The holder of the first mortgage can voluntarily take a lower priority through a subordination agreement. Meaning it alters the normal rule of giving priority to the first recorded mortgage loan. So your junior mortgage can take priority over your first mortgage.

What two instruments are involved in a mortgage loan?

Promissory note (promise to repay) Mortgage (creates lien interest)

What's a down payment?

The amount of cash a purchaser will pay at the time of purchase. Any earnest money pledged when the original offer was made, will be applied to the down payment at closing.

What are surplus funds when talking about foreclosure?

The difference between what is owed to the mortgagee and the sale amount. Whatever funds are in excess are paid to the mortgagor. If there are not enough funds to satisfy the outstanding debt, the mortgagee may request that the court issue a deficiency judgement against the person who signed the note. When granted, a deficiency decree can extend to include all real and personal property belonging to the maker of the note.

What's equity? What's the equity formula?

The monetary interest the owner has in property over and above the mortgage indebtedness. When buying a property, the owners initial equity is the down payment. The greater the equity, the less risk for the mortgagee. Here is the formula: current market value - mortgage debt = equity.

What is a due on sale clause?

This prevents another party from assuming the mortgage and requires that the mortgage debt be paid in full when the property is sold.

What is a title theory?

Title to the mortgaged property is conveyed to the lender through a mortgage deed or to a trustee through a deed of trust. If borrower defaults, the lender may take possession of property. The borrower retains equitable title to the property. Once the debt is paid in full, the lender conveys legal title to the borrower. Georgia is a title theory state.

What is a land development loan?

Used when purchasing raw land to finance the installation of the onsite and offsite improvements including sewers, streets, & utilities

What is an estoppel certificate?

Verification showing unpaid interest and principal on mortgage loan and no default. The purpose is to stop a claim that the amount owed is different from the actual unpaid balance.

What is a takeout commission?

When a developer/contractor obtains a written commitment from a financial institution certifying that permanent financing will be provided when the project is completed. The financial institution is willing to become the permanent lender after construction is completed.

What is loan servicing?

When lenders handle the loan payment collection and record keeping for the mortgages they originate. This is an additional source of income for mortgages.

What is "assignment" of a mortgage?

When ownership of a mortgage is transferred from one company or individual to another. It is a legal instrument stating that the mortgagee transfers the mortgage and the promissory note to the new owner. The assignee becomes the new owner of the debt and security investment.

What is a deed in lieu of foreclosure?

When parties settle the default on a property without going to court. Also called a friendly foreclosure. The borrower gives title (deed) to the lender to avoid judicial foreclosure. The lender takes title to the property subject to existing liens.

What does it mean if the borrower is in default?

When the borrower does not fulfill their obligations of repayment of debt, property taxes, maintenance, upkeep, and keeping the property insured.

What is satisfaction of mortgage?

When the mortgagor pays the debt in full. The mortagagee (lender) must send the recorded satisfaction to the mortagaor (borrower) within 60 days. The mortgage lien is then removed.

What's a short sale?

Where the net proceeds at closing will not satisfy the payoff amount of mortgages and other liens on the property. The seller is attempting to sell the house for less than what is owed. The mortgage company has to approve a short sale.

What is "equity of redemption"?

allows the mortgagor to prevent foreclosure from occurring by paying the mortgagee the principal and interest due plus any expenses the mortgagee has incurred in attempting to collect the debt and initiating foreclosure proceedings.

What is the equation for calculating LTV?

loan amount / sale price (value) = LTV

What is Lis Pendens?

notice recorded in the public records of a pending legal action involving real estate. Ex: a lender initiating a lawsuit to foreclose on a mortgage will file a lis pendens to inform the public that a legal action is pending. That way if the owner attempts to sell the property this will poop up when a title search is conducted.

What is the Loan to value ratio LTV?

relationship between the amount borrowed and the appraised value (or purchase price) of a property. Lenders use this ratio to measure the financial risk associated with lending and borrowing money. The HIGHER the LTV the lower the lenders safety cushion should the borrower default.

What is interest?

the cost for use of borrowed funds. Can either be due at the end or beginning of a pay period. Due at end of payment period (common) = arrears Due at the beginning of each period = advance