12. Real Estate FINANCE
If you owe $12,000 on a loan and you pay $1,080 interest, what would your interest rate be?
$1,080 (interest paid) ÷ by $12,000 (loan amount) =.09 or 9%. (interest rate)
Clauses in a mortgage or Deed of Trust
- Acceleration Clause - Alienation Clause - Prepayment and Prepayment Penalty Clause - Defeasance Clause -Borrower's Right to Reinstate after Acceleration -Due on sale clause -Hazardous Substances
Mortgage Concepts
- Mortgage (or deed of trust) is obtained by pledging property as collateral and promising to repay the loan with payments and times agreed upon with the mortgagee. - A mortgage is an ENCUMBRANCE upon a property. - There are two theories used when pledging property for a mortgage. States differ in their interpretation of who owns mortgaged property: 1. Lien theory 2.Title theory
Valid mortgage or trust deed financing agreement require
- a NOTE as evidence of debt - the MORTGAGE or TRUST DEED as evidence of collateral pledge In addition the borrower signs PROMISSORY NOTE for the amount borrowed, and create a personal liability for the borrower to repay the loan.
Mortgage Features / Financial component of a loan
- down payment - loan - To Value Ratio (LTV) -Equity -Interest and Interst rate -Loan Servicing - Escrow (impound account) -PITI - Principal - Discount points - Loan origination fee -Yield - Take out commitment - Estoppel certificate
Loan-To Value Ratio (LTV)
- most often used by lenders. The ratio represents theAMOUNT OF THE LOAN IN RELATION TO SALES PRICE OR APPRAISED VALUE. If the loan is $80,000 and the value is $100,000, the LTV is 80%; meaning 80% of the value is being borrowed. The ratio also shows that the buyer will be required to pay a $20,000 cash down payment.
If the total amount of interest paid is $6,000 per year and the loan amount if $50,000, what is the interest rate?
6000 ÷ $50,000 = .12 or 12% is the answer.
- APR -
Annual Percentage Rate Law requires lender on RESIDENTIAL property to compute and disclose APR,that includes other finance charges in addition to the basic interest rate in the calculation.
Interest Math Problems
Calculating interest, interest rates and principal in a mortgage payment will be math questions asked on the examination. Use the "T" formula to determine the interest on a loan. Interest ___________________________________ Loan Amount | Interest Rate Put the amount of interest into the calculator first; then divide by either the loan amount or the interest rate and the result will be either the loan amount or the interest rate
Acceleration Clause
If a borrower defaults on the loan (does not make payments, etc.) the lender can call the ENTIRE BALANCE DUE and payable immediately. Without this clause in the mortgage or deed of trust, the lender would not have the power or right to foreclosure without suing each month for the monthly payment.
Deficiency judgment
If there is NOT enough money for all the liens to be paid, the court may issue a deficiency judgment against the borrower. The total assets of the borrower are then available for collection by the debt holder. Everything is available to the debt holder including cars, boats, campers, airplanes etc.
If the interest on a loan at 9% for 8 months was $5,400, what was the amount of the loan?
Interest must always be annualized!!!! First divide $5,400 by 8 to see how much interest is per month so it can be annualized. $5,400 ÷ 8= $675 per month. Multiply the interest times 12 months to get annualized interest ($675 x 12= $8,100). This is the annualized interest. Put into the formula: Annualized interest $8,100 _____________________________________ ? | Interest Rate 9% Annualized interest of $8,100 ÷ interest rate of 9% = loan amount of $90,000.
Promissory note
Is the PROMISE TO REPAY the debt. This is similar to an I.O.U. and is it the primary EVIDENCE that there is a loan between the lender and the borrower. The promissory note defines the payment terms including the interest rate, the date of repayment, prepayment penalties if any, purchase price and penalty if there is a default. It is the LENDER'S lender's personal property and it is a READILY negotiable item. The note can be sold to another financing company either on the primary or secondary market. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2014 requires the lender to disclose if they will service the loan or sell the loan to another finance company. ( The note can be included in the financing process as either a separate document or included in the mortgage or deed of trust. The note makes the borrower personally liable for the loan.
Escrow (impound) account:
Most lenders require the borrower put money in a special account for the payment of taxes and insurance (and sometimes private mortgage insurance). This assures the lender that the taxes and insurance will be paid while the borrower has a loan. The federal government has rules regarding the amount of money allowed to be escrowed by the lender.
Alternative Methods of Purchasing
Most sales contracts provide for the buyer to obtain a new loan and purchase the property using that new loan. There are, however, some other ways of financing a loan. - Assumption of a mortgage -Assumption or Subject to Mortgage - Novation
Subordination Agreements:
Occasionally, a lender may be willing to take a secondary position in the line of foreclosure. For example, if the first mortgage has a balance of $20,000 and a new second has a balance of $50,000, the second may wish to become the first and the first become the second in the line of priority. If both lenders are agreeable, they sign a subordination agreement which changes the priority for foreclosure.
Mrs. Smith paid $7200 in interest this year on her loan. The rate is 5%. What is her loan amount?
Put $7200 in the calculator first; divide by 5%. $7200 ÷ .05 or 5% = $144,000 is the loan amount. You can just enter 5 and the percent key on your calculator to put in the interest rate. To check your math, take $144,000 times 5% and you should get the annualized interest of $7200 per year.
Bridge loan
SHOR TERM LOAN for the buyer, usually six months to one year in duration. It is used to get into a new house to complete the sale by providing money borrowed on the old house. This is a second mortgage on the old house and the buyer will end up paying payments on two houses simultaneously until the old house is sold and closed. The terms for each bridge loan are set by the lender; some bridge loans require monthly principal and interest payments, others charge a large interest payment at the end of the loan period.
Yield
The ROI return on an investment or the amount of profit, stated as a percentage of the amount invested; the rate of return. In real estate, yield refers to the EFFECTIVE ANNUAL AMOUNT of income that is being accrued on an investment. The yield, or profit, to a lender is the spread or DIFFERENTIAL between the COST of acquiring the funds lent and the interest rate charged.
Junior mortgage
The mortgage called in the secondary position.
Buydown financing
The payment is subsidized at the beginning by a builder or other party for a 3 to 5 year period. Thereafter, the purchaser takes over and pays the regular payment amount. This is a financing technique used to reduce the monthly payment for the borrower during the initial years. Usually the cost to the builder is built into the home. Payments on the loan will increase after the subsidy ends
Loan Instruments
There are two parts to a mortgage loan: 1. pledge (or promise to pay) 2. collateral.
Hazardous Substances
This clause forbids the presence, use, disposal, storage and release of any hazardous substances that is a violation of the Environmental Law or creates an environmental condition which would adversely affect the value of the property. Hazardous substances are defined as toxic or hazardous such as gasoline, kerosene, other flammable or toxic petroleum products, toxic pesticides and herbicides, volatile solvents, materials containing asbestos or formaldehyde and radioactive materials.
Estoppel certificate
This is a letter that SHOW the CURRENT BALANCE of the loan and is used by lenders when selling the note from one lender to another. The estoppel certificate states the amount that is currently due and it "stops" the new lender from charging any more than that amount. In essence, it is a "pay-off letter" from one lender to another. Estoppel certificates are further used when closing the sale of a home to show the total payoff amount for the loan.
Mechanics of loan transaction
When a BORROWER gives a note promotion to repay the borrowed money and executes a mortgage on the RE for which the money is being borrowed as security, the financing method is called MORTGAGE FINANCING.
Deed of Reconveyance
When a deed of trust is used, the document entered into the record to prove payment is called a "Deed of Reconveyance." DEED WILL CLEAT THE LIEN This is recorded at the county recorder's office and delivered back to the trustor, the original maker of the deed of trust. The Deed of Reconveyance is sometimes called a RELEASE deed.
Deed of release
When a mortgage is used, proof of payment may be called a SATISFACTION PIECE or a deed of release. In either case, in order to clear the title, the document is put into the record at the county recorder's office in the county where the property is located. This frees the mortgagor from any further claim from this lender.
Results of the Foreclosure
When the foreclosure is complete, the sale of the property will result in the bills being paid. The priority of liens in foreclosure is important: it indicates who gets paid first. 1. Cost of the sale (paid to the county for advertising, legal fees etc.) This is normally paid with the price of the purchase. 2.Property taxes (These do not have to be recorded.) Ad Valorem Taxes, Special Assessment Taxes, and any Community Development District Taxes 3.First mortgage or Deed of Trust or the first lienor 4. All other mortgages and other types of liens recorded by date of recording including mechanic and materialman's liens. If there is excess money left from the sale, the mortgagor (the borrower) will receive the money.
Satisfaction of a Mortgage
When the loan - backed by a mortgage is paid in full, it is said to be "satisfied." Types of satisfaction pieces: 1. Deed of Reconveyance 2. Deed of release
Principal
When used in a money reference, principal is the loan amount borrowed or the remainder of the amount owed. In an amortizing loan, part of the principal is repaid periodically along with interest, so that the PRINCIPAL BALANCE DECREASES over the time of loan. Remaining principal is called: LOAN or REMAINING BALANCE.
Types of security instruments for a real estate loan
a Mortgage and a Note Each of these instruments has specific rights and responsibilities and they should not be confused with each other.
Alienation Clause
also called the "due on sale" clause The mortgagee or beneficiary declares the entire balance of the loan due and payable when any interest in the property IS TRANSFERRED WITHOUT the written consent of the lender. When this clause is present, the loan cannot be assumed by new purchaser. The reasoning for this is that the lender wishes to know who owns the property, that the purchaser is qualified, and that the property is held intact and unencumbered for the duration of the loan.
The deed of trust
conveys title to the property in question from the BORROWER / TRUSTOR to a TRUSTEE as SECURITY for the loan. TRUSTEE is a third party fiduciary to the trust. While the loan is in place, the TRUSTEE holds the title on BEHALF of the LENDEr, who is BENEFICIARY of the trust. On repayment of the loan, the BORROWER receives the title from the trustee in the form of a DEED OF RECONVEYANCE.
Non judicial Foreclosure
does not require the court to foreclose. In a deed of trust the third party called the Trustee has what is called a "NAKED TITLE " which is a claim on the property without possessory rights. If payment is not made as scheduled, the trustee can foreclose the property. Proper notice is given (per state law) and the property is sold on the court house steps. Equitable and Statutory Redemption are present for a much shorter time period, usually as little as 1-5 days. A nonjudicial foreclosure is much faster to process than a judicial foreclosure
Priority of Liens
first mortgage always takes priority over other mortgage liens such as home improvement loans, second mortgages etc. However a first mortgage does NOT take priority OVER taxes or the cost of sale The priority of liens in foreclosure is important: it indicates who gets paid first. - Property taxes (These do not have to be recorded.) - Ad Valorem Taxes - Special Assessment Taxes - All other liens are based on the time of recording, Usually first in the lineup is the First mortgage
Hypothecation
is an alternate term used when one pledges to secure a loan with something of value. The property that the buyer is purchasing is hypothecated to secure the mortgage.
Loan Servicing
is the collecting of the mortgage payment by the lender or by a group he selects to collect it. Usually a loan servicing company is paid a percent of the lender's proceeds to service the loan.
Default
is the failure to complete the contract as specified. The most common default is the nonpayment of the mortgage loan by the buyer. Most deeds of trust and mortgages call for notice to be given to the purchaser of his default and that after the appropriate time period, the property may be sold on the courthouse steps: Judicial and Nonjudicial Foreclosures
PITI payment
this stands for; Principal Interest Taxes Insurance. The borrower pays a certain amount of payment each month consisting of these elements. This is also called a BUDGET MORTGAGE payment.
Interest and Interest rate
- is the fee or amount the borrower pays to use someone else's money. - is charge for use of the lender's money. May be paid in ADVANCE as the beginning of the payment period, or in ARREARS at the end of the payment period according the terms on the note. - it is a % applied t principal to determine amount of interest due -Rate may be fixed or variable/adjustable rate loan For example, a mortgagor borrows 100,000 for a loan at a rate of 7% interest for 30 years. This means the borrower will pay 7% each year on the unpaid balance of the loan. The higher the interest payment, the higher the mortgage payment will be. Interest on housing is currently deductible on Federal Income Tax
Down Payment
A buyer usually wants to pay a certain amount "down" on the mortgage to keep the loan payments low. - For example, a buyer may wish to pay $20,000 in cash and borrow the remainder in a loan. The amount of money the borrower has to spend will determine the down payment. - The Earnest Money Deposit is part of the down payment, but NOT all of it. - The balance of the down payment is paid at closing.
Duties of borrower
A mortgage is a legal contract. As such, certain elements must be in place and specific provisions must be included. Duties of the borrower in a mortgage or deed of trust: - Promise to Pay - Means payment of the debt in accordance with the terms of the note - Taxes and Insurance - Borrower assures payment of all real estate taxes on the property given as security, and to maintain adequate insurance to protect the property - Covenant of good repair - Borrower will assure maintenance of the property in good repair at all times Further, the mortgage may have a requirement for lender authorization prior to making any major alterations to the property.
Deed in lieu of foreclosure
If the borrower does not want to go through foreclosure, he may choose to use a deed in lieu of foreclosure instead, if the lender is willing. In this deed, the borrower gives all rights and claims to the property to the lender in settlement of the debt. However, this procedure has a high cost. If a deed in lieu of foreclosure is given, a borrower may not be able to get a new loan on a different property for 7 years or more. A deed in lieu of foreclosure is considered by lenders a significantly bad credit risk just as bankruptcy is.
Borrower's Right to Reinstate after Acceleration
If the buyer is in default (has not made his payments), the buyer is entitled to the opportunity to reinstate his loan after the bank has issued notice to him of his default. Generally, five days before the sale of the property on the courthouse steps the buyer has the opportunity to make up all past due payments, along with any penalty fees to bring the loan current. The loan will then proceed normally.
Discount points
Is pre-paid interest. A lender charges discount points to make more money on a loan. "ONE POINT EQUALS ONE PERCENT OF THE LOAN AMOUNT" The lender charges this as PRE-PAID INTEREST at closing by funding only the face amount of the loan minus the discount points. The BORROWER, however, just repay the full loan amount, along with the interest calculated on the full amount These extra points are not included in the loan and may be charged to obtain a lower-than-market rate for the borrower or a better yield (profit) on the loan for the lender. For example, one point on a $100,000 loan is $1000. It is important for the real estate professional to understand how discount points affect the actual interest paid and to note the rate so that when the buyer reviews the truth in lending with his or her closing statement they can understand the actual costs of borrowing.
a Promissory Note or Note
Is the promise to repay the mortgage by the mortgagor. It is evidence of the debt owed by the borrower. When a lender decides to sue to collect money owed on a mortgage, they SUE ON THE NOTE. Note should have several essential elements, including the amount of the loan, the date by which it is to be paid back, the interest rate, and a record of any collateral that is being used to secure the loan. Other interest-rate options, like discounting or compensating balance requirements, can also be included.. Default terms (what happens if a payment is missed or the loan is not paid off by its due date) should also be spelled out in the promissory note.
a Mortgage
Is the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property.
Contract for Deed (Installment Contract)
Known by three different names: - the contract for deed - installment contract - land contract. " In a contract for deed, the seller does not give the buyer the legal title to the property until the final payment is made. " This means if there is a contract for five years, during which time the buyer pays the seller a set amount of money and interest, the buyer only has EQUITABLE title in the property until the end of the five year period and the final payment is made. The seller retains the LEGAL title during that time period. If the buyer defaults, the seller keeps what the buyer has already paid plus the property itself. The advantage to the seller: payment for the total purchase price is spread over a five year period (or whatever the time frame is). The seller will only pay income tax on the amount received in that year, rather than the total amount. The disadvantage to the buyer: seller can encumber the property at any time since the seller has the legal title. The property is subject to encumbrance by another lien, an easement or mechanic's lien. When the buyer has only equitable title, he could lose some interest in the property if the seller encumbers the property during the loan period. Most attorneys advise the buyer to have the title of the property put into escrow by the seller so that neither buyer nor seller has access to the title during the holding of the contract for deed period. This will insure some safety on the part of the buyer.
Loan Origination fee
Lenders charge a fee to originate (prepare the paperwork) necessary for the loan. One point equals one percent of the loan value. The cost of originating a $500,000 loan would be $5,000. These fees help the lender increase the profit margin and cover expenses.
Effects of Foreclosure on the Property
Like all legal issues affecting the property, the title will be tied up during the time the property is in default. The attachment, lis pendens and actual foreclosure will make it difficult to transfer title, if not impossible. For the lender, foreclosures are time consuming and expensive, due to legal fees. Once the foreclosure is completed, and the time periods for equitable and statutory redemption are completed, the title is cleared and the property becomes whole again.
Short Sale
Short sales are an agreement from the bank to accept a price for a property, less than the mortgage, at the current market value. The seller for a short sale would need to have a hardship to show the reason that they either need to sell (Job relocation), or cannot make their payments (job loss or hardship costs that make it difficult if not impossible to make mortgage payments. Loan modification programs were also introduced in 2008 that allowed property owners to rework their mortgages at lower payments and rates to assist them in retaining their homes.
Prepayment and Prepayment Penalty Clause
This is a clause which allows the borrower or mortgagor to pay the loan earlier than the schedule called for in the mortgage contract. Occasionally, the lender may charge extra interest or an additional fee if the loan is paid off before the normal completion date (for example, if a loan is paid off in 10 years rather than 30 years.) If a prepayment penalty is present, the mortgage document will state the penalty for paying off the loan early, usually six months interest or a flat fee. Many newer mortgages and deeds of trust do not have a prepayment penalty. However, most subprime loans do contain a prepayment penalty.
Defeasance Clause
This is the clause that provides for a SATISFACTION PIECE to be issued when the mortgage (deed of trust) has been paid in full
Wrap-Around Mortgages
This mortgage is also rarely used except in a time of HIGH INTEREST RATES. A wrap-around mortgage REQUIRES ADDITIONAL financing from a SECOND lender; one payment for two loans. The new lender pays the first loan but charges a higher interest rate for a second deed of trust (second mortgage). The original loan must be assumable with NO ALIENATION CLAUSE and must be the type of loan where the original first mortgage is not disturbed. Example: A buyer wants to purchase a property but interest rates are high and the buyer cannot obtain a complete new loan at the high rate. The purchaser discovers that the seller has an FHA or VA loan. The buyer assumes the first and "wraps the second around the first" to make one loan payment. advantage: the buyer has a lower total interest rate. disadvantage: if second lender does not make the payment to the first on the time schedule set by the first, late fees can be charged.
Title theory
Those that regard the MORTGAGE document as a CONVEYANCE of the ownership from the MORTGAGOR to the MORTGAGEE are called TITLE-THEORY states also known as a DEED OF TRUST state, the borrower GIVES TITLE through a DEED OF TRUST to the lender, who is referred to as the BENEFICIARY during the time of the loan. The borrower keeps a possessory right to the home and holds an "EQUITABLE title". With a deed of trust, a third party trustee is involved and holds "NAKED TITLE" to the property. This means the trustee can sell the property without court action in a case of default. A deed of reconveyance is issued upon full payment of the loan to return title to the trustor.
Lien theory
Those that regard the mortgage as a "LIEN" held by the MORTGAGEE (LENDER) agains the property OWNER by the MORTGAGOR (BORROWER) are called LIEN-theory states. In a lien theory state, the borrower KEEPS LEGAL TITILE to the property during the period of the loan and the lender places a lien against the property. Florida IS a lien theory state.
POINTS
from the view of a lender or investor, the amount loaned in a mortgage loan is the lender's CAPITAL INVESTMENT, and the INTEREST paid by the BORROWER is the RETURN EARNED by the INVESTED CAPITAL. it is often that case hat a lender needs to earn a greater return that the interest rate alone provide. EX: lender may require additional yield on low-interest VA loan which has an interest rate maximum. In such case, the lender CHARGES UP FRONT "DISCOUNT POINTS" to make up the difference between the interest rate on the loan and the REQUIRED return. This effectively raises the yield of the loan to the lender.
- Usury-
is charging of excessive interest tares on loans, many states have laws agains this. such states have a maximum rate, that is either a flat rate o a variable rate then to an index as the prime lending rate.
Equity
is the DIFFERENCE between the amount OWED on the property and the VALUE of the property. When the seller sells the property, after all the costs have been subtracted, the remaining money is the equity. The equity may be used to reinvest in other property or taken in cash.
Take Out Commitment
is the second phase of lending on COMMERCIAL development. An interim lender will want the permanent lender to give a letter of commitment before beginning a commercial development. It is never used in residential lending.
Mortgage
or Mortgage Instrument is a loan secured by real property. - Stating the pledge of the BORROWER (mortgagor) to the LENDER (the mortgagee). - pledges the borrower's ownership interest in the real estate in question as collateral against performance of the debt obligation. To mortgage a property is to pledge a property as collateral for the money borrowed on the property. The parties to a mortgage are MORTGAGOR(borrower) who gives a mortgage to the MORTAGAGE (the lender).
Judicial foreclosure
requires the court to foreclose the property. In every state there is a time period of notice to the borrower regarding the waiting period for the bank or lienor to foreclose. The lienor determines the loan is in default and proper notice is published in the legal newspaper of the county. Further notice is given to the borrower at his or her last known address. The borrower has a time period to make-up any deficiencies up to the time that the sale is finalized by the court. This is called Equitable or Equity of Redemption. If the lienee does not make up for the deficiencies filed, the court will order the property sold to the highest bidder on the court house steps. The loan will be paid in its order of priority. After the sale, depending on state law, the borrower has a time frame in which to make up the costs of the sale as well as the loan and any penalties and claim the property reclaimed. This is called STATUTORY REDEMPTION. Equitable Redemption--Foreclosure---Statutory Redemption
Due on sale clause
states that the full balance of the loan may be called due (repaid in full) upon sale or transfer of ownership of the property used to secure the note. This prevents the seller from allowing a purchaser to assume the loan for a specific property.
LVT loan- to- value ratio
to protect loss, lender usually lend only a portion of the property's value. It is relationship to the property value, expressed as a percentage EX: if LVT is 80%, lrndr lend 80% on $100 0000