Section 16: Real Estate Financing: Mortgage Loans

Power of sale

Allows a lender to sell a property if the buyer defaults on payments without going through a formal court proceeding

Judicial foreclosure

Foreclosure process requiring court proceedings

The acronym PITI is a reference to what real estate-related concept?

Mortgage payment

What is amortization?

Paying off a loan over time

Name the foreclosure: The borrower has until the specified deadline to pay his debt in full; otherwise the court awards legal title to the lender.

Strict

Blanket Lien

The lender places a lien against any current or future property the borrower owns, until the losses are recovered

Jacqueline found a ready, willing, and able buyer for her client's condo, with a sales price of $20,000 more than the asking price. However, the appraisal came in just under the asking price. Which number will the lender use to calculate the loan-to-value ratio?

The smaller number

For borrowers with mortgages, there are two basic theories of home ownership...

Title Theory and Lien Theory

When calculating loan-to-value ratios, which of the following will be used by the lender? a. appraisal value b. the greater of the sales price or appraisal valye c. the lesser of the sales price or appraisal value d. the sales price

c. The lesser of the sales price or appraisal value

North Carolina is a _________________ foreclosure state

non-judicial

As the interest portion of the mortgage payment decreases, more of the payment is applied to ___________

principal

Your client hates the fact that out of her $1,027 monthly payment, more than $900 is going toward interest. What do you tell her?

"That's amortization for you."

Your clients have been in their home for seven years, have made $12,000 of improvements, and have $130,000 left on their mortgage. The home recently appraised for $283,000. Using these figures, how much equity do they have in the property?

$153,000

A buyer is purchasing a property for $400,000. His lender's loan-to-value ratio is 80%. How much is the buyer financing?

$320,000

A buyer is purchasing a property for $500,000. His lender's loan-to-value ratio is 90%. How much is the buyer financing?

$450,000

Calculation for amortization loan

(Loan amount ÷ 1,000) × factor = monthly payment of principal and interest

How to calculate loan-to-value ratio

(amount financed/property value)x100

How is interest paid per month calculated?

(principal x interest rate)/ 12

What is the maximum LTV ratio for specific types of loans?

-Conventional: Possibly as high as 95%* (depends on loan value, type, and borrower credit score) -Fannie Mae conforming: Ranges from 60% up to 97% (depends on loan, property, and transaction type and borrower credit score) -Freddie Mac conforming: Ranges from 70% up to 95% -FHA-insured: Up to 96.5% -VA-guaranteed: Up to 100%

To make the calculation for a monthly payment for amortized loan, you'll need to know the:

-Interest rate on the loan -Term of the loan -Amount of the loan

A promissory note should include:

-The terms of repayment -The length of the loan -Late fees -Any prepayment penalties -A description of the circumstances under which the borrower may default -A description of what happens if the borrower defaults (such as foreclosure) -An accurate date (in case the chronological order of property rights ever needs to be determined)

In real estate, a point is _______ of the loan amount

1%

Loan origination fees are typically between....

1% and 3%

During a private foreclosure sale, anyone who wants to offer an upset bid must file it within __________ after the preliminary report is filed

10 days

When a borrower is in default, the trustee/lender is required to give the borrower (and all interested parties) notice of a pre-sale hearing no fewer than _______________________ before the pre-sale hearing

10 days

During foreclosure, the lender is obligated to give the general public notice of the foreclosure sale via posting a notice in a location the clerk of court specifies for _____________ before the sale

20 days

During foreclosure, a lender must send notice to borrower and mayor at least _______ prior to intended foreclosure sale date

30 days

Defeasance clause

A clause used in leases and mortgages that cancels a specified right upon the occurrence of a certain condition, such as cancellation of a mortgage upon repayment of the mortgage loan.

short sale

A distressed homeowner sells a property for less than is owed; requires lender approval Ex. Tallah did a short sale on her home; she owed $240,000 and it only brought $225,000. Her lender may pursue the difference in a deficiency judgment.

Discount points

A fee charged by the lender to give the borrower a lower interest rate

Loan Origination Fee

A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount.

How's interest defined as it's related to a mortgage loan payment?

A fee paid to lenders for the use of their money

Buydown

A financing technique in which the buyer obtains a lower interest rate by buying down the interest rate at the time the loan is made

Deficiency judgment

A legal condition in which a court issues a personal judgment against a foreclosed homeowner or short sale seller when the sales proceeds aren't enough to cover the debts owed

Mortgage

A legally binding document that creates a lien (security interest) on a piece of property and gives the mortgagee (lender) the right to foreclose on property if the mortgagor (borrower) defaults

Non-conforming loan (jumbo loan)

A loan that doesn't meet the Feds qualification standards (cannot be sold to Fannie Mae or Freddie Mac) Ex. Harry's loan was a non-conforming loan; therefore he paid a higher rate as the lender assumed a higher risk.

Prepayment penalty

A monetary penalty that's imposed on a borrower for paying off a loan before its intended term ends Ex. Prepayment penalties have been nearly eliminated under new lending rules.

Due on sale clause (Alienation clause)

A mortgage clause that requires the borrower to repay the loan on the property when selling or transferring ownership of the property

After getting into a fender bender, Parker had to buy a new car. To make the down payment on the car, he had to skip a couple of his mortgage payments. He received a notice from his lender indicating the remaining amount of his loan is due immediately and in full. What clause in his mortgage stipulates this?

Acceleration

Stacy has gone into default on her mortgage. Her lender is demanding that the entire loan balance be paid in full. Which mortgage clause permits her lender to do this?

Acceleration

Private mortgage insurance (PMI)

An insurance requirement that protects the lender when it approves a loan with more than 75% to 80% of the purchase being financed

Principal

Balance on the loan - the actual amount owed

True or False: If a buyer can assume an existing loan, it's always better to do so rather than applying for a new loan.

False

True or False: When a buyer assumes an existing loan, the original borrower is no longer liable if that buyer defaults on the loan.

False

True or False: All private and public lenders are subject to usury laws.

False Private lenders aren't subject to usury laws, so use caution when working with them.

Forgiven debt from a short sale must generally be reported as income to the IRS. This means the buyer may be out a house, out any proceeds from the sale, and later face a whopping tax bill. What was put into place to relieve this burden?

Further Consolidated Appropriations Act

Acceleration clause

Gives the lender the right to make all monies owed immediately due and payable in the even of borrower default

Equity equation formula

Home's appraised value - loan debt = equity

In a mortgage, the property is used as collateral for the loan. What's the term for the process of pledging something as collateral?

Hypothecation

Foreclosure by Entry and Possession

In several states (e.g., Maine, Massachusetts, New Hampshire, and Rhode Island), the lender may ask the court for permission to physically take possession of the property after default has occurred and foreclosure is imminent. If court permission is obtained, the mortgagee can take the property peacefully and in the presence of a witness. If the mortgagor is unable to redeem the property, the mortgagee may sell it by trustee sale.

Mortgage, homeowners, and flood ______ may be included the mortgage payment.

Insurance

In the early years of a mortgage loan term, which portion of the payment is likely to be the largest?

Interest Interest receives proportionally more of the mortgage payment in the beginning; over time, more and more of the payment goes toward principal.

What two numbers do you need to use an amortization chart?

Interest rate and term (15 years, 30 years, etc)

What purpose does the promissory note serve?

It's a promise the buyer makes to the lender that the note will be repaid in full.

Name the foreclosure: The property is sold by the court after the lender has provided sufficient public notice.

Judicial

A calculation that describes the amount being borrowed compared to the value of a property is called ______ ratio.

Loan-to-value

How do you calculate total interest paid?

Monthly interest and interest payment x total number of payments - original loan amount

Name the foreclosure: This is permitted if a power-of-sale clause is included in the mortgage or note. Public notice still provided. Judicial

Non-judicial

Jan is in default. She received a notice from her lender with mediation and foreclosure alternatives, but her situation doesn't change. The lender proceeds with a public sale of the property, as permitted by the power-of-sale clause in her deed of trust. What is this an example of?

Non-judicial foreclosure

How do you calculate the new principal balance

Original principal - amount of payment applied to principal

What's the name of the clause that's standard in a deed of trust, can be included in a mortgage, and allows the lender to foreclose non-judicially?

Power of sale

What does the acronym PITI or PITT stand for?

Principal, Interest, Taxes, Insurance

Violet purchased a house from Nick, and assumed the existing loan. Nick wants to make sure he isn't liable if Violet ever defaults. What can he do to remove his name from the loan agreement?

Request a novation

Rusty received an acceleration letter from his mortgage lender. What is the most likely reason for receiving this letter?

Rusty is two or three months in default.

Deed of trust

Similar to a mortgage, in this document, the borrower conveys title for the property to a trust, which holds it as security for the lender

Lien Theory

The borrower holds the title and owns the house, but a promissory note signed by the borrower gives the lender the right to seize and sell the house should the borrower default

Mortgagor

The borrower in a mortgage, usually the homeowner

Title theory

The borrower receives the deed, but the lender keeps the title and owns the house until the borrower pays off the loan ex: Purchasing an automobile through financing with a dealership

Foreclosure by Advertisement

The borrower who has defaulted on the mortgage is notified by the lender of the impending foreclosure, and that the property will be sold at public auction. The winner of the auction becomes the new owner of the property, but doesn't get possession until the previous owner has vacated the property. This often requires legal action, to dispose of the default and bring an order of eviction.

Equity

The difference between a home's appraised value and debt owed on it

What is PITI used for?

The four components of a monthly mortgage payment

Trustor

The individual creating the trust Ex. Lisa's parents, as trustors, decided to make Lisa the trustee as she has always been the sensible one of their children.

When a borrower has paid off the loan, how is the release handled if the security instrument is a mortgage?

The lender executes and records a satisfaction of mortgage and returns the note to the borrower.

Mortgagee

The lender in a mortgage

How do borrowers know they are in default?

The lender sends a notice to the borrower when default occurs, but prior to beginning foreclosure proceedings.

Beneficiary

The person entitled to the benefit of a trust arrangement Ex. Mr. and Mrs. Thomas created a shared living trust. Each put co-owned and separately owned property into the trust. When Mr. Thomas dies, Mrs. Thomas takes over as trustee and distributes her husband's trust property to the beneficiaries he named in the trust document. Her property stays in the living trust.

Trustee

The person in charge of carrying out the terms of the trust Ex. Lisa was the trustee for her parents' estate, and acted on behalf of herself and her siblings, as beneficiaries.

Right of redemption

The right of a delinquent homeowner facing foreclosure to pay all amounts owed and cancel the foreclosure

Foreclosure by Writ of Entry

This additional action is used in Maine, Massachusetts, and New Hampshire. In the case of foreclosure by writ of entry, the mortgagee asks the court for a writ of entry action. This means the borrower is given a final deadline when delinquent payments are due, and after that time, the mortgagee becomes the full legal owner of the property.

How many parties are there with a deed of trust?

Three - Trustor, beneficiary/lender and trustee

What is the trustee's role when a deed of trust is used to secure property for a loan?

To hold legal title to the property on behalf of the beneficiary until the loan is repaid

True or False: A buyer who assumes an existing loan may have to meet the lender's qualification standards.

True

True or False: In a 3-2-1 buydown, it is set to full interest rate in the fourth year

True

How many parties are there with a mortgage?

Two - mortgagor and mortgagee

Discount point

Type of prepaid interest that borrowers pay to lower a loan's interest rate

Promissory note

a promise on the part of the borrower to repay a certain sum of money to another perty under a certain set of terms

Which of the following options describes a loan's beginning balance? a. Amount of payment that will be applied to the interest b. Amount of payment that will be applied to the loan balance c. Amount to be sent as payment each month d. Loan balance before the monthly payment is applied

d. Loan balance before the monthly payment is applied

The interest portion of the payment generally __________ over the life of the mortgage

decreases

The amount of principal in each payment is considered _________

equity build=up

Default

failure to pay a loan

Taxes

includes property taxes, which is the cost of public services divided by the value of property for the area

Insurance

may include mortgage, home-owner's, and/or flood insurance

How is the amount of a loan payment that's applied to principal calculated?

monthly principal and interest payment - interest paid per month

A check is an example of a....

negotiable instrument

Use an amortization chart to calculate the monthly ___________ and __________ on a given loan

principal and interest payment

Interest

the "fee" paid back to the lender for the use of their money

Negotiable instrument

the holder may transfer the right to receive payments to a third party, and that third party may enforce the promissory note and the other loan documents

Loan-to-Value Ratio

the maximum percentage of the value of a property that the lender is willing to loan

To calculate the amount a buyer will pay in points....

we multiply the loan amount by the points (or the percentage) Loan amount x points = points amount