Section 16, Unit 1, Lesson 1 - 6

Triggering term

A term that requires disclosure of other terms related to the loan; if any such term is used, all terms must be disclosed

Mortgagor/Borrower's Duties to loan

Pay the debt Pay real estate taxes Replenish escrow funds if they run low Pay charges and assessments against the property (so no liens can be placed, which would endanger the lender's interest in the property) Keep the property in good condition (again, protecting the lender's collateral for the loan) Maintain property and hazard insurance

amortization

process of paying off a loan by making periodic payments on the principal and interest * Debt that is paid off by making regular, periodic payments

novation

process that replaces the original borrower with the new borrower as the maker of the note * lender need to know so not with purchase subject to existing financing.

promissory note

promise of borrower to pay certain sum to another party under certain terms * used in Lien theory state *negotiable instrument - can be transferred

satisfaction of mortgage (a release of mortgage)

release of mortgage when loan paid in full

due-on-sale clause (aka, alienation clause)

requires the borrower to repay the loan on the property when selling or transferring ownership of the property

Contingency Sale

sale dependent on would-be buyer selling their current home

Purchase Money Mortgage

seller financing in which a mortgage is given by the buyer to the seller toward the purchase price; buyers use this as down payment financing.

Wrap-Around Mortgage

seller's mortgage remains in place, but the seller is receiving payments from the new buyer and therefore is financing the purchase * usually short term

Release of liability

simply a written agreement that the lender won't hold the original borrower liable for the loan in case of default with assumption of loan

periodic cap (aka subsequent cap or period cap)

subsequent adjustment dates

Hypothecation

the action of pledging real property as security for a debt (i.e. mortgage for property)

Alternative Mortgage Instrument (AMI)

type of mortgage other than a fixed-rate, fully amortizing mortgage loan. * most common ARM

Bond (aka mortgage bond)

used to secure the mortgage instead of a promissory note

Items required both mortgages and deeds of trust to make them valid

* Accurate legal description of the property * loan details and repayment schedule in attached note * Notarized borrower's signature * Recorded in county land records

Construction Loans

* temporary financing for construction purposes * loan is not given at once; disbursements are made at intervals as phases of construction are completed * when construction complete converts to loan-term financing loan

Shared Equity Mortgage (SEM)

* used most often in commercial lending borrower agrees to the lender's participation in the net income from the commercial property or enterprise in order to obtain the loan. The lender may receive interest and a share of the owner's profits.

Types of Residential Mortgages

1. Fixed-rate loan 2. Graduated Payment Mortgage 3. Growing-Equity Mortgage 4. Bridge Loans 5. Alternative Mortgage Instrument (AMI) 6. Adjustable Rate Mortgage (ARM) 7. Term Mortgage 8. Construction Loans 9. Shared Appreciation Mortgage (SAM)

Equity Loans

1. Home Equity Loan 2. Reverse Annuity Mortgage (RAM) 3. Shared Equity Mortgage (SEM)

Seller Financing

1. Wrap-Around Mortgage 2. Purchase Money Mortgage 3. Contract for Deed

Two common contingencies

1. seller accepts offer but keep home on market- if better comes in, first buyer has 72 hours right of refusal to take contingency off. 2. seller accepts offer and take home off market to wait for buyer to sell their home

Promissory note includes:

1. terms of repayment (principal and interest) 2. length of loan 3. late fees 4. prepayment penalties 5. description of what is borrower default 6. consequences of default (foreclosure?) 7. accurate date of rights

How many parties in mortgage?

2 (mortgager/borrower and mortgagee/lender)

How many parties in deed of trust?

3 (Trustor/borrower, Beneficiary/lender, and Trustee)

Obligor

A borrower or mortgagor of promissory note

Shared Appreciation Mortgage (SAM)

A financing arrangement in which the borrower receives a below-market interest rate by allowing the lender to receive equity or percentage in future appreciation in value.

Mortgage

A legally binding document that is a lien against a property and gives mortgagee (lender) right to foreclose on property if mortgager (borrower) defaults

Graduated Payment Mortgage

A loan in which the payments are adjusted (usually up) at specified periods over the life of the loan * fixed interest rate * creates negative amortization * payments easier in beginning when income may be lower

Adjustable Rate Mortgage (ARM)

A loan with a rate that fluctuates based on the economic index with which it's associated

caps

ARM limit on how much the interest rate can increase from the current rate when it's adjusted

Contract for Deed

Allows the seller to provide financing by providing credit to the buyer but retains title until all paid

Mortgagee/Lender Rights

Foreclose on property if mortgagor defaults Possess property (after foreclosure) if mortgagee is purchaser at sale Assign or transfer the mortgage

Purpose of Promissory Note

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

Mortgagee/Lender Duties

Keep escrow funds (for prepaid taxes and insurance) safe in a lending institution Use the escrow funds to pay the escrow items

Mortgagor/Borrower's Rights

Possess property during mortgage term Equity of redemption Receipt of title upon paying mortgage in full Release of lien upon paying mortgage in full

A fixed-rate loan

Principal and interest stay same over time * most traditional

hen 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

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

The trustee executes and records a deed of reconveyance and the lender returns the note to the borrower.

Who holds title with deed of trust?

Trustee for beneficiary

Assumption of Loan

When buyer assume previous loan of seller. (maybe because interest rate lower) *both buyer and seller are liable for payment * alienation can't be enforced with sale from parent to child, between spouses, result of divorce, relative as result of death

Partially amortized loans

a fixed interest rate and low payments for first few years. then borrowers owe a balloon payment—a lump sum—when the loans mature * more common with commercial loans versus residential loans

Discount Points

an up front charge to make up for difference between the rate the borrower is receiving * borrow can pay upfront to reduce rate, monthly payments or both

mortgager

borrower

Lien Theroy

borrower holds title and owns house but promissory note signed by borrower gives lender right to seize and sell should borrower default * lender needs court order to foreclose

Title Theory

borrower receives deed but lender keeps title and owns house until loan paid off * lender can foreclose without court order.

Home Equity Loan

borrower's equity in the primary residence is used as collateral to purchase a second home or an investment property

"Subject to"

buyer gets the deed to the property, without lender's consent, the new buyer makes the payments on the seller's loan as if nothing has changed (i.e. investors buying at risk of foreclosure may find that a seller is more than willing to take this risk)

prepayment penalty

clause puts the borrower on notice that if the loan is paid off before a specified period of time, the lender may be owed additional interest

Power of sale

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

initial cap

first interest rate adjustment

acceleration clause

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

Growing Equity Mortgage

interest rate remains the same, and the monthly payments increase over time according to a set schedule * no neg. amortization, first payment is amortized * decreases term of loan and saves interest to borrower

mortgagee

lender

defeasance clause

lender agrees to discharge the mortgage once the borrower's paid off the loan in full

Obligee

lender or holder of note

Reverse Annuity Mortgage (RAM

loan made using the equity in the property, but the homeowner continues living in the home while lender makes payments to the homeowner and gains corresponding ownership of the property over time * older homeowners who want to use equity in home as income

lifetime cap

maximum amount the interest rate can increase from the initial rate through the life of the loan

Term Mortgage

mortgage in which the periodic payments go to interest only, and the entire principal amount is due at the end of the term as a balloon payment

Who hold title with mortgage?

mortgagee/lender

Negative amortization

occurs when a borrower's loan payment is actually less than the interest charged, meaning the loan's outstanding balance increases (i.e. deferred interest loans and graduated payment mortgages)

Bridge Loans or swing loans

offer temporary (usually 90-day) funding until permanent financing can be obtained.

a non-amortized loan

one where the payments go only toward interest, not to the principal

prepayment penalties

penalties charged for early repayment of the loan, resulting in the lender receiving less overall interest than agreed

interest

the charge for the use of the money

Usury

the illegal action or practice of lending money at unreasonably high rates of interest. * vary by state * doesn't apply to private lenders