National Portion ch. 7 & 8

acceleration clause

a provision in a written mortgage, or note, stating that in the event of default the whole amount of the principal becomes due and payable.

Explaining the Deed of Trust:

"Mortgage" Deed of Trust - BLT Buyer/Borrower: Mortgagor "gets the door" Lender: Mortgagee "gets the fee" Trustee: 2 jobs - 1. release the lien 2. foreclose (power of sale/non-judicial)

alienation clause

"due on sale" clause states that the balance of the secured debt becomes due if the property is sold by the mortgagor without the mortgagees approval.

VA

(The Department of Veterans Affairs) GUARANTEES repayment of the loan. The guarantee is for the top 25% of the loan. The guarantee is free to the veteran and protects the lender. There is a required funding fee and it may be paid by the buyer or seller at closing or included in the loan.

ARM

(adjustable rate mortgage) this is a loan with an interest rate subject to change as conditions in the market change. There are two cap rates (annual and lifetime) limiting the amount of change in the interest rate each year and over the life of the loan. the rate is tied to a readily available index such as treasury bills and will be state as the index + a fixed percent. Ex: Treasury bills + 2%. the margin on an ARM is the % added to the index. (this loan would be a poor choice for those on a fixed income)

Whenever we have a percent or rate we have an all purpose formula based on the following sentence:

- A part is a % of the total. This can be written as [Part = % x Total] or [Part / Total = %] or [Part / % = Total]

RESPA:

- Allows any party to the transaction to choose the title company, and any party can pay for the policy. - Prohibits kickbacks. rebates and referral fees are not a violation of RESPA. a rebate is a return of a portion of the commission to a client within a transaction and may be in any form such as cash, gift certificates, appliances, frequent flyer certificates, etc. a referral commission may only be paid to another license holder. a small referral gift can be given to an unlicensed person who provides a referral to a license holder. (The TX limit is $50 in value, not cash) - Places restrictions on requirements for tax and insurance escrow accounts - no more than two months in advance.

Additional formula information

- Area of a square or rectangle = L x W - The result will be in square units - sq ft, sq yards, etc. - To change square feet to square yards, divide by 9. - 1 acre = 43,560 square feet - 1 mile = 5280 feet - Taxable value divided by 1000 x mills = tax - Loan amount divided by 1000 x loan factor = monthly principal and interest amount

1. Truth-in-lending or consumer credit protection act - TILA

- This act is administered by the consumer financial protection bureau - CFPB. - It covers consumer credit for all real estate loans regardless of value, and for non-real estate loans up to $25,000. The main purpose of the law is to allow consumers to understand the true cost of borrowing money. The APR (annual percentage rate) tells the borrower the exact cost of borrowing. - Broadcast, print and internet advertising are regulated. - Advertising which states only the cash price or the APR is permitted. If any other credit terms are stated, full disclosure of all credit terms must be made. Credit terms are called trigger terms or triggers words. They tell a buyer financing is available without giving enough information. They "trigger" the need for full disclosure. Ex: monthly payment, interest rate, term - The APR is the effective rate of interest (what the borrower actually pays) It is usually higher than the interest rate because it includes all charges, not just interest.

There are two advantage of FHA loans:

1. Qualifying ratios are slightly more lenient allowing borrowers to have more debt and still qualify. 2. LTVs are very high, allowing buyers with little money for a down payment to purchase a property. points on FHA loans can be paid by either the buyer or seller.

Federal Financing Regulations and Regulatory Bodies:

1. Truth-in-lending or consumer credit protection act - TILA (implemented by regulation z or "reg. z") 2. RESPA 3. TRID 4. Equal credit opportunity act - ECOA 5. Community reinvestment act 6. Fair credit reporting act

At closing where financing is involved, two processes are closing:

1. the closing of the loan between the buyer and the lender. this will provide the funds for the second. 2. closing on the property is the execution of the sales contract. the closing or settlement on the property is now called the consummation.

The veteran must obtain a __________ from the VA. Once eligible, the veteran will be issued a certificate based on ability to pay. [Certificate amount x 4 = approved maximum loan amount]

Certificate of Eligibility

The ________ must meet or exceed the sale price. If not, the veteran can cancel the sale, pay the difference between price and appraisal, or ask the seller to renegotiate. He cannot force the seller to renegotiate. VA loan interest rates are set by market conditions.

Certificate of Reasonable Value (CRV or VA appraisal)

The ______ is presented to divide charges and expenses between the buyer and seller. All prorations will be shown as well. We usually prorate through closing day, which means the seller pays for closing day. If we prorate to closing day, then closing day is negotiable.

Closing Disclosure (CD)

At times a seller will offer financing to a buyer. It may be similar to a loan from any other lender or it may be in the form of _______________. (Installment Contract/ Land Contract / Real Estate Contract) This is also an instrument for financing the sale of real property. It is seller financing that does not transfer legal title immediately. This title retention protects the seller. If the buyer defaults, the seller can regain possession. (eviction is cheaper and easier than foreclosure). All money up to that point is considered rent. _______________ benefits the seller. The parties are the vendor and the vendee and both must sign. ______________ is an executory contract. ______________ becomes fully executed when the final loan payment is made and the seller (vendor) delivers the deed to the buyer (vendee).

Contract for Deed

In Texas, we use a ________ instead of a traditional mortgage. The _______ contains a "power of sale" clause that allows for non-judicial foreclosure. Power of sale results in a quick foreclosure. This non-judicial foreclosure is preferred by lenders. The ________ involves three parties: ______________________

Deed of Trust the borrower (trustor), the lender (beneficiary) and the trustee.

The most important government or non-conventional programs include ____ insured and ____ guaranteed loans.

FHA and VA (these loans require FHA/VA approved appraisers)

The VA must be notified prior to a foreclosure by the loan servicer on a VA loan. This is a result of the Serviceman's Readjustment Act (The ______). In addition, anyone trying to foreclose on the property of an active duty veteran for any reason must notify the VA before.

G.I. Bill

the FHA program is overseen by:

HUD

The _____ is the loan amount as a % of either the price or the appraised valued, whichever is lower.

LTV (loan-to-value ratio)

3. In the past both TILA and RESPA required lenders to provide separate disclosure statements to borrowers. In October 2015, the Truth in Lending/RESPA integrated disclosure TRID went into effect. The Dodd Frank Act directed the CFPB to combine the Truth in Lending cost of financing disclosure and the RESPA good faith estimate of closing costs into one form the _____________.

Loan Estimate form (LE) - this form must be provided by the Residential Mortgage Loan Originator (RMLO) to the consumer upon receipt of or within 3 business days of loan application. (business days are Monday-Saturday). the borrower must acknowledge receipt of the LE. the borrower has 10 days after he receives the LE, to respond to the lender and indicate whether he wants to continue with the loan application or cancel it. the Closing Disclosure form (CD) must be received by the consumer at least 3 business days before closing and the lender must have proof of receipt. (Any changes in the loan, APR, loan product, etc. or any last minute negotiations in the contract will trigger a new 3 day waiting period for the CD.

The insurance on the FHA loan is referred to as ____. This is paid monthly in addition to the PITI payment.

MIP (mortgage insurance premium)

_________ loans are the most common choice for financing real property. It falls into two categories - conventional and non-conventional loans.

Mortgage

As opposed to MIP, in the private sector we have ____. It may be required by lenders if a borrower has less than 20% down payment. It allows for the purchase of a home with a small down payment. ____ allows for high LTVs. It also protects or insures the lenders exposure of risk, usually no more than 30% of the loan. ____ is found on high LTV conventional loans.

PMI (private mortgage insurance)

The following is a list of formulas using the Part = % x Total format:

Part a percent total commission = commission rate x sale price interest = interest rate x principle profit = profit rate x original cost tax = tax rate x assessed value loan = LTV rate x sale price sale price = a percent x list price net annual income = capitalization rate x market value a point = one percent x loan appreciation = appreciation rate x original value appreciated value = 100% + appreciation % x original value depreciation = depreciation rate x original value depreciated value = 100% - depreciation % x original value PITI = 28% x monthly income

Generally, the veteran on a VA loan needs $0 down payment, the loan is assumable, and may be prepaid without penalty. Under VA assumption, the original veteran borrower may remain liable for the loan unless he receives a release of liability from the VA.

Release of liability does not result in restoration of entitlement unless the assumption is by a qualified veteran using their own entitlement. On an assumption of a VA loan, the new borrower does not have to be a veteran, but does need VA or lender approval. (parents and siblings are not eligible for a VA loan, neither are dishonorably discharged individuals)

On the CD the buyer is credited for the loan amount and the earnest money deposit.

The seller gets credit for the sale price

4. Equal Credit Opportunity Act - ECOA

This law prohibits discrimination by lenders on the basis of sex, martial status, race, color, religion, age, national origin, or receipt of income from public assistance programs. Lenders can deny credit if your sole source of income is alimony, child support or a pension plan. child support is the most likely reason for denial. Lenders can deny traditional financing if income is commission based. (This law is administered by the Consumer Financial Protection Bureau).

6. Fair Credit Reporting Act

This law states that an applicant for a loan will be entitled to a free copy of their credit report if they are denied a loan. This allows the borrower to determine the reason for the denial of credit.

5. Community Reinvestment Act

This law states that banks must meet the needs of the community in which they are chartered to do business. Redlining, the refusal to lend in a particular geographic area, is prohibited. Only banks can be guilty of redlining under this law. This law is administered by the Consumer Financial Protection Bureau. Fair Housing Laws prohibit redlining by insurance companies.

prepayment clause

a statement in a mortgage that the mortgagor can pay the entire amount of the stated amount prior to the due date in the note. when a loan is pre-paid, the borrower is responsible for interest up to and including the date of pay off. the penalty is generally calculated as a % of the loan balance.

Mortgage clauses:

acceleration, alienation, defeasance, escalation, prepayment, subordination, assumption, straight assumption, assumption "subject to"

We debit the seller with no entry for the buyer for:

accrued interest and existing loan payoff, and fees necessary to furnish marketable title.

subordination clause

allows a lender to move to or take a lower lien position. this clause would be found in a second mortgage, a home improvement loan, or a home equity loan.

escalation clause

allows a lender to raise the existing rate. this clause is usually found in an ARM.

assumption clause

allows a new borrower to take over the payments on an existing loan under specified terms and conditions.

reverse annuity mortgage

allows homeowners 62 years of age or older, for all borrowers involved, to borrow against their equity without making any payments on the amount borrowed. the lender makes periodic payments to the homeowner, based on the equity in the property. the loan comes due when the last surviving borrower leaves the property (due to sale of the property or death) this is the most expensive home equity loan.

A loan processor, working for the lender, will coordinate the loan from application to closing. Lenders will typically require at least: _________________________. Lenders also use qualifying or debt ratios; 28%-36% would be typical debt ratios for conventional loans.

an appraisal of the property, a complete credit report and job history of the borrower and evidence of down payment funds.

Both FHA insured and VA guaranteed loans require owner occupancy and both types of loans are ________.

assumable

blanket loan

covers more than one piece of property (several lots on one note). this loan may contain a release clause allowing the borrower to obtain partial releases of specific lots by making required lump sum payments.

On the CD we debit for _____ and ______ for cash. If a party owes an amount, that is _____, If a party is receiving cash, that is ______.

debit : credit

Points are associated with loans. A point is one percent of the loan amount. There are two types of points. _________ points are prepaid interest and tax deductible. (they raise the return or yield to the lender). ________ points are loan processing fees. (not tax deductible). Points are paid at closing.

discount points origination points

fixed-rate amortized loan

equal, regular payments of principal and interest until the loan is repaid. interest is paid in arrears - at the end of each payment period.

The _________ is responsible for closing the transaction as set forth in the sales contract, or preventing closing unless both the buyer and seller agree to any changes in the contract terms.

escrow agent or settlement agent The release of any existing liens such as tax liens, special assessments, first mortgage lien, etc. and the payment of other closing and settlement expenses will be handled by the escrow agent. The sellers deed and the buyers money are deposited with this agent. The agent records the deed once title conditions and other requirements are met, the title passes to the buyer, the seller receives their funds, the sale is complete.

open-end mortgage

permits additional borrowing on the same note. this is sometimes called a credit card mortgage or a home equity line of credit - HELOC.

The non-government or conventional loan programs consist of a wide variety of types of loans for different purposes and borrowers. These include:

fixed-rate amortized loan, term loan, blanket loan, package loan, budget loan, balloon loan, participation loan, open-end mortgage, ARM, construction loan, reverse annuity mortgage, sub-prime loans

The ____ ratio is 28%, is the % of monthly gross income that can be used to pay the PITI payment on a mortgage loan. (PITI means principal, interest, tax and insurance). The _______ or _______ ratio is 36%, is the % of monthly gross income that can be used to the cover all consumer debt including the PITI.

front back or second

We debit the buyer and credit the seller for:

homeowner association fees, prepaid taxes and fuel in the tank

non-conventional loan

in an effort to encourage homeownership, the federal government insures or guarantees these loans through three agencies: the Federal Housing Administration, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture. all federally backed mortgage loans feature special and relaxed lending guidelines and payment terms.

budget loan

includes principal, interest, taxes and insurance in the monthly payment known as PITI. (many loans including FHA, VA, and most amortized fixed-rate loans are budget mortgages. taxes and insurance are placed in an escrow account. (an escrow account can also be called an impound, trust, or reserve account) the party managing the escrow account is referred to as the loan servicer.

package loan

includes real property plus personal property (a furnished condo)

term loan

interest only until the end of the term, when the entire principal is repaid. this is a zero-amortization loan. also called a straight-loan.

conforming loans

is a standardized loan written on uniform documents that meets the purchase requirements of Fannie Mae and Freddie Mac. (Both the loan amount and the borrow characteristics are factors in determining whether a loan is conforming or non-conforming.)

conventional loan

is one that is not insured or guaranteed by a government agency. (not a FHA or VA loan)

In a ______ theory state when a mortgage loan is used for the purchase of real property, at closing the buyer receives the title and the lender has a _____.

lien

sub-prime loans

loans with risk based pricing - the rates are not published. borrowers are rated A-F where a prime borrower has an A rating. A-minus to F borrowers will pay one to five % higher than those with good credit. This loan would be likely to have a prepayment penalty to protect the lender from loss of interest.

A _______ is a pledge of real property as security for a promissory note. The ________ borrows the money and gives the mortgage as a pledge to the lender. The lender is called the ______. The mortgage is recorded, creating the lien.

mortgage mortgagor mortgagee

A _____ or promissory ____, is the instrument for the debt. It is your personal promise to pay. It is not recorded.

note

When an unscrupulous lender takes advantage of a consumers lack of knowledge regarding lending practices, this is called _______. Actions considered _________ include: steering borrowers to high rate loans, falsifying loan documents, forging signatures, changing terms at closing and requiring credit insurance, to name a few.

predatory lending

We debit the buyer and no entry to the seller for:

prepaid interest and charges associated with the loan like points.

The __________ market is where consumers go to borrow money. It includes: seller financing, mortgage bankers, mortgage brokers, banks, credit unions, etc.

primary

The ________ market is where lenders go for money. It exists for the purchase and sale of existing mortgages to investors. It is designed to provide greater liquidity to the residential real estate market by providing for a steady supply of funds from investors. Lenders sell their loans and thus recover cash for originating more loans. Loans qualified to be purchased in the _______ market are called conforming loans. A non-conforming loan does not meet the _______ market guidelines. Included in this category would be sub-prime loans.

secondary

construction loan

short term loan with funds advanced periodically during the stages of construction. this is a term loan - interest only. the interest rate on this loan is higher than the rate on a permanent loan.

2. RESPA

stands for the Real Estate Settlement and Procedures Act. RESPA regulates closings on 1-4 family residential property with federally related financing. (apartments are not covered) RESPA is administrated by the Consumer Financial Protection Bureau.

defeasance clause

states that the lien is defeated when the debt is repaid

FHA

the Federal Housing Administrations primary purpose is to aid in home financing by insuring the loan. the insurance protects the lender. it insures the whole loan amount, not just the lenders risk. it is paid for by the borrower. the loan requires an approved appraisal, is assumable and may be prepaid without penalty.

assumption "subject to"

the buyer takes over payments, but is not liable for the loan. the original borrower remains liable. this can have an impact on the sellers credit rating.

equity

the difference between the market value of a property and the outstanding debt. at closing, the buyers equity is the amount of the down payment. the sellers equity is the sale price minus the debt on the property.

straight assumption

the new buyer is approved, and takes over payments and liability. this is often called a loan novation. this will not impact the sellers credit rating.

balloon loan

this is a partially amortized loan with a final payment substantially larger than the others. the benefit of this type of loan is a lower interest rate. the main disadvantage is the high cost of refinancing.

In a ______ theory state at closing the lender receives the title and will hold it until the lien is satisfied or paid off.

title

The ______ acts in a fiduciary relationship with the beneficiary. The _____ has two functions in accordance with the Deed of Trust. They will release the lien when the note is paid off, or will foreclosure in the event of default.

trustee

participation loan

two or more lenders invest in one loan. this allows the lenders to share the risk. another form of participation loan allows the lenders to share in the profitability of the property, in addition to collecting principal and interest on the loans. if a lender collects principal and interest and shares in the profits when the property is sold, this is a shared appreciation mortgage.

We debit the seller and credit the buyer for:

unpaid taxes, unearned rent and tenant security deposits

Charging an interest rate higher than the legal limit is referred to as ____. These laws protect consumers.

usury