Chapter 9: Real Estate Finance - Loans
Common Repayment Plans
(1) a single payment of principal and interest at the end of the loan term, (2) interest-only payments(IO/straight loan/term loan), (3) partially amortized with a balloon payment, and (4) fully amortized payments.
(2) main differences between FHA and VA loans
(1) only an eligible veteran may obtain a VA loan, and (2) the VA does not require a down payment up to a certain loan amount, can get 100% financing. As with FHA loans, alienation or prepayment penalty clauses are not allowed in VA loans.
Review - Notes, Trust Deeds, and Mortgages
1. A note is the evidence of a debt. 2. A trust deed or mortgage, even though it is the security for the debt, is still only an incident of the debt. 3. A trust deed or mortgage must have a note to secure, but a note does not need a trust deed or mortgage to stand alone. 4. If there is a conflict in the terms of a note and the trust deed or mortgage used to secure it, the provisions of the note will control. 5. If a note is unenforceable, the presence of a trust deed will not make it valid.
Options for secondary financing
1. Home equity loan/HELOC 2. Seller financing/carryback (2nd trust deed in favor of seller), AITD
What are the most common security instruments in CA?
1. Trust deed (most common - usually when people say "mortgage" in CA they're referring to a trust deed) 2. Mortgage 3. Contract for Sale
Order Proceeds from Trustee Sale are Paid
1. Trustee's fees, costs, and expenses of the sale 2. Any tax and assessment liens that are due and owing 3. Trust deeds, mortgages, and mechanic's liens in their order of priority 4. Defaulting borrower
Requirements for a Valid Promissory Note (6)
1. Unconditional written promise to pay a certain sum of money. 2. Made by one person to another, both legally able to enter into a contract. 3. Signed by the maker, or borrower. 4. Payable on demand or at a definite time. 5. Paid to bearer or to order. 6. Voluntarily delivered by the borrower and accepted by the lender.
What does the trustee do in a deed of trust? (2)
1. foreclose on the property if there is a default on the loan, 2. reconvey the title to the borrower when the debt is repaid in full.
Section 203(b) Residential Loan
30 year, fixed-rate, fully amortized, mortgages with a down payment requirement as low as 3.5%
Novation
AKA substitution of liability original borrower (seller) avoids any responsibility for the loan, transferring to the buyer
purchase-money loan
Any loan made at the time of a sale, as part of that sale
What does a veteran need before applying for a VA loan
Certificate of Eligibility from VA
What does PMI do
Cover's the lender's investment when buyer equity <20%
Who funds construction loans?
Interim construction loans are usually made by commercial banks, whereas standby commitments and takeout loans are arranged by mortgage companies for large investors such as insurance companies
Common Non-Conforming Loans
Jumbo loans Subprime loans
**What are the key differences between promissory notes and security instruments?
Security instruments require collateral/security
Promissory Note
Serves as evidence of the debt. written agreement between a lender and a borrower to document a loan. It is a promise to pay back a certain sum of money (the principal) at specified terms at an agreed-upon time. Negotiable instrument
Amortization
The liquidation of a financial obligation
Parties to a promissory note
The maker is the person borrowing the money, or making the note. The note is a personal obligation of the borrower and a complete contract in itself, between the borrower and lender. The holder is the person loaning the money, or the one holding the note. A subsequent owner of the note is a holder in due course and is called the noteholder.
Section 255 Home Equity Conversion Mortgages
To borrow against equity at age 62+ The program has three options for homeowners: (1) borrow against the equity in their homes in a lump sum, (2) borrow on a monthly basis for a fixed term or for as long as they live in the home, or (3) borrow as a line of credit.
pledged account mortgage (PAM)
a loan made against security, such as money held in a savings account or a certificate of deposit
Negotiable Instrument
a written unconditional promise or order to pay a certain amount of money at a definite time or on demand. A negotiable instrument is easily transferable from one person to another meaning it can be bought and sold. The most common type of negotiable instrument is an ordinary bank check.
prepayment clause
allows a borrower to pay off a loan early or make higher payments without paying a prepayment penalty
Hypothecation how is this different from a pledge?
allows a borrower to remain in possession of the property while using it to secure the loan Hypothecation differs from a pledge because actual possession of pledged property is given to the lender
assumption clause
allows a buyer to assume responsibility for the full payment of the loan with the lender's knowledge and consent
acceleration clause
allows a noteholder to call the entire note due, on occurrence of a specific event such as default in payment, taxes or insurance, or sale of the property
nontraditional mortgage product
any loan other than a fixed-rate, 30-year, fully amortized loan.
negative amortization
borrower makes lower payments than what should be made on a fully amortized loan, resulting in an increased principal
Trust Deed as a Security Instrument
conveys title of real property from a trustor to a trustee to be held as security for the beneficiary for payment of a debt The three parties to a trust deed are the borrower (trustor), lender (beneficiary), and a neutral third party called a trustee. The trustor (borrower) signs the promissory note and the trust deed and gives them to the beneficiary (lender) who holds them for the term of the loan. Under the trust deed, the trustor has equitable title and the trustee has "bare" or "naked" legal title to the property. Possession and equitable title remain with the borrower. When the debt is repaid in full, the beneficiary signs a Request for Full Reconveyance and sends it to the trustee requesting the trustee to reconvey title to the borrower. The trustee signs and records a Deed of Reconveyance to show the debt has been repaid and to clear the lien from the property.
subprime loans
do not meet fannie & freddie credit standards
Energy Efficient Mortgage
enables homeowners to finance the cost of adding energy-efficiency features to new or existing housing
Jumbo loans
exceed loan limit set by fannie & freddie
Confirming loans
follow fannie/freddie guidelines AKA prime loans, A-paper loans
power-of-sale clause
foreclosed non-judicially by a trustee's sale
alienation or due-on-sale clause
if present, lender may accelerate loan if property transfers ownership
Security Instrument
legal document given by the borrower to hypothecate the property to the lender as collateral for a loan, creating a security interest.
Foreclosure
legal procedure used by lenders to terminate all rights, title, and interest of the trustor or mortgagor in real property by selling the property and using the sale proceeds to satisfy the liens of creditors.
Seller Financing Disclosure Statement
legally required with seller financing
conditional commitment from FHA
lender applies for this from FHA to see if they will actually accept the borrower
unsecured loan
lender receives a promissory note from the borrower, without any security for payment of the debt
open-end loan
line of credit
renegotiable rate mortgage
loan in which the interest rate is renegotiated periodically.
shared appreciation mortgage (SAM)
loan in which the lender offers a below-market interest rate in return for a portion of the profits made by the homeowner when the property is sold
rollover mortgage (ROM)
loan in which the unpaid balance is refinanced typically every five years at then current rates.
Certificate of Reasonable Value
maximum VA loan amount, based on appraisal of the house
Section 245 (a) Graduated Payment Mortgage
monthly payment that starts out at the lowest level and increases at a specific rate structured for buyers who expect to be earning substantially more after a few years
Mortgage
mortgage is a lien against the described property until the debt is repaid. There are two parties in a mortgage: a mortgagor (borrower) and a mortgagee (lender). The mortgagor receives loan funds from a mortgagee and signs a promissory note and mortgage. Once signed by the borrower, both the note and mortgage are held by the lender until the loan is paid. Unlike a trust deed, under a mortgage both title and possession remain with the borrower.
conventional loan
no government guarantees
hard money loan
one made in exchange for cash
takeout loan
permanent loan that pays off a construction loan
lock-in clause
prohibits borrowers from paying off a loan in advance. It is not allowed on residential units of less than four units.
Mutual Mortgage Insurance (MMI)
protect lender in case of default on FHA loan used by FHA to finance FHA program
Section 203(k) Rehabilitation Loan
provides the funds to purchase your home and the funds to complete your improvement project all in one loan
How are ARM rates determined
qualifying rate - current rate of chosen index margin - 1-3% rate added that does not change
Effective interest rate
rate the borrower is actually paying (APR)
package loan
secured by more than the land and structure. It includes fixtures attached to the building (appliances, carpeting, drapes, air conditioning) and other personal property.
carry back financing
seller extends credit to a buyer by taking a promissory note executed by the buyer and secured by a trust deed on the property being purchased as a part of the purchase price.
swing loan
temporary loan made on a borrower's equity in his or her home It is used when the borrower has purchased another property, with the present home unsold
Usury
the charging of interest that is unreasonably high or beyond the legal limit set by the state. interest rate on a loan made primarily for personal, family, or household purposes cannot exceed 10% per year.
Equitable title
the interest held by the trustor under a trust deed and gives the borrower the equitable right to obtain absolute ownership to the property when the terms of the trust deed are met.
Contract of Sale (AKA contract for deed)
the seller (vendor) becomes the lender to the buyer (vendee). The vendor pays off the original financing while receiving payments from the vendee on the contract of sale. The vendor and vendee's relationship is like that of a beneficiary and a trustor in a trust deed. vendor - legal ownership vendee - equitable title When the terms are met, the vendor passes title to the vendee
blanket loan
trust deed or mortgage that covers more than one parcel of property usually contains a partial release clause that provides for the release of any particular parcel upon the repayment of a specified part of the loan
(2) types of foreclosure
trustee's sale and by judicial process
subordination clause
used to change priority, lender is giving permission to lower his priority
All Inclusive Trust Deed/Wraparound Mortgage
wraps an existing loan with a new loan, and the borrower makes one payment for both. with seller financing, loan needs to be assumable (FHA/VA)