Finance Chapter 6B

LAND CONTRACT ADVANTAGES/DISADVANTAGES

ADVANTAGES -freedom from institutional loan qualifying standards -Deferral of income taxation -Flexibility of terms DISADVANTAGES -Can't be resold to Fannie Mae

EQUITABLE TITLE

An interest in real property created upon the execution of a valid sales contract.

CONSIDERATION

Anything of value given to induce another person to enter into a contract. An option must be supported by consideration to be enforceable.

USES FOR LEASE/OPTIONS:

-Profit-buyer plans on selling for profit -Speculation-buyer thinks property will increase in value -Investment -Comparison-Buyer thinks property is a good deal but want to investigate other properties before deciding -Time to acquire cash -Qualifying - buyer can't qualify for loan but may change shortly -Rent credit-property owner agrees to credit part of the lease payments to the down payment, loan amount or sale price

USES FOR LEASE/PURCHASES:

-Time to acquire cash -Qualifying -Rent credit

COMMUNITY REINVESTMENT ACT (CRA)

A federal law passed in 1977 and updated in 1995 to emphasize that regulated financial institutions have a continuing obligation to help meet the credit needs of the local communities in which they operate (especially low-income neighborhoods).

BI-WEEKLY MORTGAGE

A fixed-rate mortgage set up like a standard 30-year conventional loan. The main difference is that the borrower makes a payment every two weeks instead of once a month. This helps borrower pay off a mortgage earlier. Usually paid off in 24.8 years instead of 30 years.

LEASE/OPTIONS

A lease/option is when a seller leases property to someone for a specific term, with an option to buy the property at a predetermined price during the lease term. 2 elements: LEASE-contract where one party pays rent to the other in exchange for possession of real estate OPTION-A contract giving one party the right to do something within a designated time, without obligating him to do it. OPTIONEE - prospective purchaser OPTIONOR - property owner

LEASE/PURCHASE

A lease/purchase is when a seller leases property to someone for a specific term, with the tenant agreeing to buy the property at a set price during or following the lease term. Equivalent to a sale. Consists of two elements: LEASE PURCHASE CONTRACT

SHARED APPRECIATION MORTGAGE (SAM)

A loan where the lender charges below-market interest in exchange for a share of the borrower's equity.

PURCHASE MONEY MORTGAGE

A mortgage given by a buyer to a seller to secure part or all of the money borrowed to purchase property. First lien position

GRADUATED PAYMENT MORTGAGE (GPM)

A mortgage with low initial monthly payments, which gradually increase over time.

INTEREST ONLY MORTGAGE

A non-amortized home loan where, for a set period (usually early in the loan), the majority of the monthly payment goes toward interest; payments are due at regular, pre-determined intervals.

LAND CONTRACT

A real estate installment agreement where the buyer makes payments to the seller in exchange for the right to occupy and use the property, but no deed or title is transferred until all, or a specified portion, of the payments have been made. *Seller retains legal title to the subject property. Buyer only has possession and equitable title NEVER ATTEMPT TO WRITE LAND CONTRACT TERMS, CLAUSES, OR ANY OTHER LEGAL CLAUSE OR DOCUMENT YOURSELF!

HOMEBUYER ASSISTANCE PROGRAMS

Can include down payment assistance (DAP), subsidized mortgage interest rates, help with closing costs, or a combination of these. My be offered by government or non-profit organizations to promote home ownership or by lenders as part of their obligation under the Community Reinvestment Act.

PURCHASE MONEY SECOND MORTGAGE

Holds second lien position

HYBRID ARMs

Often advertised as 3/1, 5/1, or 7/1 ARMs, these hybrid ARMs are a mix, or a hybrid, of a fixed-rate period and an adjustable-rate period. The interest rate is fixed for the first few years of the loans, (e.g. five years in a 5/1 ARM). After that, the rate may adjust annually until the loan is paid off. First number tells you the fixed interest rate period and the second number tells you how often the rate will adjust after the initial period.

USES FOR EQUITY EXCHANGE

Often used when a buyer can't come up with sufficient cash for a purchase so the difference can be made up with other assets the seller would be willing to accept as part of the down payment (land, another house, cars, boats)

ASSUMPTION

One party agrees to take over payments of another party's debt, with the terms of the note remaining the same. FHA and VA permit assumptions (with a credit check of the buyer). Seller needs to get permission from the lender which is referred to as getting a "full release of liability"

OHIO HOUSING FINANCE AGENCY (OHFA)

Program that offers both down payment assistance and interest rate subsidies. State agency that assists first-time homebuyers. 2.5% down payment assistance grant based on the purchase price OR a 3% grant from a second mortgage.

FIRST TIME HOME BUYER LOANS OR COMMUNITY HOME BUYER PROGRAMS

Some of the generic names for the various programs lenders have created in response to the Community Reinvestment Act

STRUCTURED MORTGAGES THAT ARE NO LONGER AVAILABLE

Subprime loans, low doc, or no doc loans

GROWTH EQUITY MORTGAGE (GEM) (Unavailable)

WAS a fixed rate mortgage set up like a 30-year conventional loan, but payments increased regularly, like an ARM.

PAYMENT OPTION ARMs (Unavailable)

WAS an adjustable rate mortgage that allowed the borrower to choose among several payment options each month. Options included: -Traditional payment of principal and interest -Interest-only payment -Minimum payment They had a built-in reacalculation period, usually every five years. This meant that the monthly payments could increase greatly at each recast

SUBPRIME MORTGAGES

WERE for borrowers with credit scores that did not meet traditional, conforming, or FHA/VA guidelines. Usually had higher rates. More likely to have a prepayment penalty, a balloon payment or both.

LOW DOC OR NO DOC LOANS (Unavailable)

WERE mortgage loans that required less than full documentation of income, employment, and assets.

PARTICIPATION PLAN (Shared Equity Plan)

When a buyer and another investor (or seller, lender, etc) enter into a partnership, with the buyer paying an equity share in lieu of interest. Primarily used in the financing of commercial real estate.

REVERSE MORTGAGE

When a homeowner mortgages her home and, in return, receives a monthly check from the lender. These help elderly homeowners maintain financial security or achieve other financial goals converting their home's equity into cash **must be over 62

SELLER FINANCING

When a seller extends credit to a buyer to finance the purchase of the property; this can be INSTEAD OF, or IN ADDITION TO, the buyer obtaining a loan from a third party, such as an institutional lender. Two of the most common seller financing vehicles are PURCHASE MONEY MORTGAGES and LAND CONTRACTS

EQUITY EXCHANGE (Tax-deferred exchange, tax-free exchange, or Section 1031)

When value in one property is traded for value in other. -Properties must be exchanged -Properties must be like-kind property -Properties must be held for use in a trade or business or as an investment Parties defer paying taxes until a capital gain is realized - usually when sold in the future.

a typical hybrid ARM loan might also be called a(n)

a. 7/1 ARM b. option ARM c. piggyback loan d. VA loan **ANSWER: A Interest rate stays the same for the first seven years, then adjusts annually.

In Ohio, to learn more about first-time homebuyers loans, you should check with the

a. Federal Reserve Bank b. Home Loan Bank Board c. Ohio Housing Finance Agency d. Veterans Administration ANSWER: C

One disadvantage to a lease/option agreement is that it

a. allows prospective buyers to occupy the property for an extended period of time before a commitment to buy is made b. can result in no sale (and no commission) c. requires only a minimal cash investment from the tenant/prospective buyer d. all of the above **ANSWER: D

Quiz A reverse mortgage is available to persons who

a. are over age 62 b. are under age 55 c. own a home with a large outstanding mortgage d. all of the above ANSWER: A

Quiz Bob, the buyer, takes over Sally's, the seller, mortgage. Bob is now personally liable for the debt and agrees to pay the balance of the purchase

a. assumption and release b. encumbered property cash-out c. land contract subject to an existing mortgage d. land contract with assumption of an existing mortgage ANSWER: D