RE FINANCE
fixed-rate mortgage
the amount of interest stays the same, or is fixed, for the entire life of the loan. This type of loan is usually popular among risk-averse buyers and for prospective homeowners when interest rates are low.
Cancellation Date
Date when the borrower can apply to have PMI cancelled; occurs when the amortization schedule reaches 80% or the principal is paid down to 80% of the original value
Conventional LOAN
any loan that is neither insured nor guaranteed by the government; requires a down payment of at least 3%
Conventional conforming loans
are loans that conform to the guidelines set by Fannie Mae and Freddie Mac and can be sold on the secondary market to those government-sponsored enterprises (GSEs).
Conventional non-conforming loans
are loans that do not follow Fannie Mae and Freddie Mac guidelines and thus will not be purchased by Fannie and Freddie on the secondary market (although other secondary market buyers may choose to purchase them).
Adjustable-rate mortgages
are mortgages with interest rates that are set to adjust after a certain amount of time. These types of mortgages are also known as variable-rate, floating rate, or hybrid ARM if there is a set introductory interest rate. When the interest rate is adjusted on an ARM, the principal and interest payments are also adjusted to keep the term of the loan the same.
A quitclaim
is a relinquishing of all, if any, current interest. Also, a quitclaim deed uses the wording, "quitclaim" rather than "grant, sell, and convey." A quitclaim is used when a property transfers ownership without being sold — a fairly common occurrence when transfers occur between family members.
Subprime Mortgage-
is a type of mortgage that is normally made to borrowers with lower credit ratings. As a result of the borrower's low credit rating, the lender offers a mortgage with a higher interest rate because the lender views the borrower as having a larger-than-average risk of defaulting on the loan.
specific lien
is one that is specific to a certain property: a mortgage on a home, property taxes on that property, etc.
Habendum Clause - Most Common Types of Interest Conveyed
1. Fee simple estate is the most general and most complete ownership one can hold. A fee simple estate means that the grantor is giving to the grantee full disposal of a property for the grantee's lifetime with the right to do with the property as the grantee sees fit and the right of inheritance for the grantee's heirs. 2. A life estate is more restrictive than fee simple ownership. A life estate limits ownership to the lifetime of the owner or some other party. While a fee simple estate includes inheritance rights for the grantee's heirs, a life estate does not. 3 . An easement, or right-of-way, is the right to use a part of someone's property. It is not ownership in the most traditional or generic sense. For example, if a party wishes to use resources on someone's property or place wiring or pipes through someone's property, then they are likely to obtain a right-of-way. A deed should specifically state any limitations to ownership. However, it is common for deeds to state the absence of any such limitation as well.
Adjustable-Rate Disadvantages
1, Interest is constantly in flux. If interest rates go way up, the borrower will end up paying way more than they began paying in the introductory interest period. 2.The borrower will have to be careful because sometimes the rate caps don't apply to the first adjustment. Yikes! This is something they'll definitely want to discuss/negotiate with their lender. 3. If a borrower isn't super knowledgable about ARMs, they might have trouble negotiating with the lender because there's so much that goes into them. Lenders might use the borrower's lack of knowledge to sign them up for something that isn't very beneficial to them.
Adjustable-Rate Advantages
1. The real big draw toward ARMs is the fact that they offer introductory interest rates that will be lower than fixed-rate. 2. If interest rates are dropping, ARM borrowers will be able to reap the benefits without doing anything. They won't have to refinance to take advantage of lower interest rates. 3. If the borrower doesn't intend to stay in the house long, they'll be able to take advantage of cheap interest before selling their house. If they sell before the adjustment, they won't have to worry about a payment increase.
The Promissory Note
A borrower receives the funds to purchase real property from a lender in exchange for signing a promissory note. The promissory note (sometimes referred to simply as a note) is a contract laying out the agreement of the loan terms between the borrower and the lender. The note is then held by the lender, who can be a financial institution or even the seller (in the case of seller financing). All notes are either secured or unsecured. A secured note has a mortgage or deed of trust as security for the loan. An unsecured note trusts the borrower's word that they will pay the debt.
Actual Notice: EXAMPLE
A buyer views the deed at the tax county office—they have been served actual notice.
Executory Contract:
A contract that has not yet been fully performed (both sides have not yet completed their obligations)
Fixed-Rate Mortgage
A fixed-rate mortgage is exactly what it sounds like. The amount of interest stays the same, or is fixed, for the entire life of the loan. This type of loan is usually pretty popular for prospective homeowners when interest rates are low. If the borrower can get the interest rate locked in at a low rate, they won't have to worry about a change in payment when the rate adjusts in a few years. Or if the rate is low enough, they won't need to worry about refinancing for a better rate.
Home Equity Loans
A home equity loan is a loan in which funds are borrowed using the homeowner's equity for collateral. It's notable that these funds can be used for any purpose, such as remodeling the kitchen or paying for college tuition. In Texas, equity loans are limited to 80% of the value of the property. For example, if a home is worth $215,000, the maximum amount the owner can take out in loans is $172,000. If there is already a mortgage on the house that will take $50,000 to pay off, the owner will be able to get $122,000 in a cash-out equity loan.
Package Mortgage
A package mortgage bundles the mortgage with another loan that finances one or more articles of personal property. The home and the item(s) are purchased together as part of the same transaction. Examples of the kind of items that may be included in a package mortgage are furniture and major appliances.
Purchase-Money Mortgage (Seller Financing)
A purchase-money mortgage, like a wraparound mortgage, involves the buyer receiving funds from the seller in the form of a mortgage loan to purchase the property. In a purchase-money mortgage, however, there is often no encumbrance from an original mortgage remaining on the property as the seller already has paid off the mortgage. If there is an underlying mortgage on the property, it is a wraparound mortgage and will require an attorney to create the purchase agreement.
Constructive Notice EXAMPLE
A title company records a deed at the local tax collector office. The title company has served constructive notice.
Private Mortgage Insurance (PMI)
A type of mortgage insurance that protects the lender if a borrower defaults on a conventional loan; required when the borrower has less than 20% equity;;is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender - not you - if you stop making payments on your loan.
80-10-10 Piggyback Loans
An 80-10-10 loan, also known as a piggyback loan, is really two mortgages in one. Instead of giving the borrower one fixed-rate loan at the current market rate, the borrower receives two loans, one larger loan for 80% of the sale price at the market rate and a smaller loan for 10% of the sale price at a higher interest rate.
Factors Affecting PMI
As you know, PMI is usually required for conventional loans when the down payment (or equity, in the case of refinancing) is less than 20%. Lenders doing conventional loans may be able to offer a higher interest rate instead of PMI at their discretion, but PMI is more common. Mortgage insurance is always required for FHA loans with down payments of less than 20%, but this is a different product called a Mortgage Insurance Premium, or MIP. Private mortgage insurance is supplied by private companies (hence the name), not the lenders themselves. When determining the amount of PMI coverage, they look at the borrower's credit score, lender, down payment amount, and market conditions.
Contract for Deed:
An executory contract in which the seller keeps the title upon sale; the buyer gets the title after making payments over a period of years EX classic executory contract is the contract for deed (or land sales contract), where the seller keeps the title upon completion of the sale and the buyer gets the title after making payments over a period of years.
encumbrance EXAMPLES
Anything that affects the title to the property negatively is an encumbrance. Easements, encroachments, liens, and leases are all examples of encumbrances.
Balloon Mortgage
Balloon Mortgage A balloon mortgage is not fully amortizing. It has a short term, usually five or seven years, but payments based on a longer term, as if it were 30 years, for example. At the end of the loan's term, the often-large remaining balance of the mortgage is due as a lump sum. At this time, the borrower can refinance this amount (if they qualify). Some balloon mortgages have a conversion option that allows the borrower to convert the remaining balance to a 25- or 23-year fixed-rate mortgage, based upon the term of the balloon mortgage. The conversion option usually provides for a rate slightly higher than that of fixed-rate mortgages. The appeal of a balloon mortgage is that it typically has an interest rate that is 0.25% to 0.5% less than comparable fixed-rate mortgages. Those who plan to sell their homes after five or seven years are in an excellent position to take advantage of this rate reduction. The lower rate gives borrowers increased purchasing power because their housing expense is lower and they qualify for larger loans.
lien theory states
Beginning of Loan: In a lien theory state, the mortgagor retains the title to the property, the promissory note serves as the mortgagor's promise to pay the lender for the loan, and the mortgage serves as the mortgagee's collateral for ensuring that the loan does get paid. If the mortgagor defaults, the mortgagee can go through a formal foreclosure proceeding to get the title to the property. End of Loan: When the mortgagor pays off the loan, the mortgage is satisfied and the mortgagee releases their lien on the property. Legal and Equitable Rights: In a lien theory state, the mortgagor retains both the legal and equitable rights to a property. The mortgagor is the owner of the property. Nothing But a Lien: In contrast, the mortgagee (lender) has a lien on the property but no rights to the title. The mortgagee serves as nothing more than collateral to ensure the loan is paid.
The disadvantages of a temporary buydown i
Buydown plans are typically expensive and require a large payment at closing. A buydown is only temporary, and the borrower will have increased monthly payments that may be difficult to afford.
Canceling PMI
By federal law, most monthly private mortgage insurance premiums for loans originated on or after July 29, 1999 are automatically canceled when the borrower builds up 22% equity in their home (based on the original loan balance), or 20% equity if the borrower requests cancellation at that time. If the borrower has financed the premium, they may be eligible for a refund. So-called high-risk loans, however, may be required to keep the insurance for 15 years, whether or not the borrower has built up 22% equity.
executory contracts
Contracts for deed, lease with option to buy, and lease purchase agreements are executory contracts according to Texas laws. There are no fill-in-the-blanks forms to form an agreement on an executory contract.
EXample Growth Equity Mortgage
EX, suppose a borrower takes out a GEM for $80,000 at an interest rate of 7.25% that has annual payment increases for 10 years. The payment increases are determined by the mortgage contract to be 80% of the change in the per capita income growth index.
Reverse Annuity Mortgages EXMPLE
Example, say a real estate license holder has a potential buyer over the age of 62 who just sold his home, has $125,000 cash to buy another home, and wants no house payment. The buyer finds a home he falls in love with, but the sales price is $175,000. The buyer could accomplish his goal by putting down $125,000 and borrowing $50,000 on a reverse mortgage with no payments. Remember: The balance on the $50,000 mortgage will be increasing, which may eat into their $125,000 equity if the value is not increasing at the same rate.
Wraparound Mortgages
FYI: Agents cannot write an offer for a wraparound mortgage. Because there is an encumbrance from the original mortgage, the Texas legislature has concerns for the buyers' protection and wants offers and contracts only written by attorneys. If the purchase-money mortgage is seller financing and has no other encumbrance, agents can write these offers using the TREC Seller Financing Addendum.
Fixed rate advantages
Fixed-rate mortgages are good in a few ways: The payments are always going to be the same. Whatever the interest rate might be in the world, the borrower is protected. Because of the stability, they'll be able to create a monthly budget and not have to worry about it changing because of the house payment.
80-10-10 Piggyback Loans EXAMPLE
For example, suppose a borrower wanted to purchase a home for $150,000. The lender might offer an 80-10-10 loan in which the borrower pays 10% down and receives two loans: one for $120,000 at 7% and the other for $15,000 at 9%.
Construction Mortgage EXAMPLE
For example, suppose that a borrower is constructing a single-family home whose value, when complete, will be $88,000. The construction loan amount, therefore, will be 75% of this, or 0.75 × $88,000 = $66,000. The mortgage contract calls for a series of six draws of $11,000 each over six months at a 10% annual interest rate. The borrower will want to have a long-term mortgage loan of $67,951.98 at the end of the sixth month when the construction loan balance becomes due. (Notice that the borrower pays almost $2,000 in interest for one six-month period.)
Release Clause
For this reason, developers often have a release clause included in the mortgage contract. The release clause states that when specific amounts of repayment are reached, as set forth in the contract, individual parcels of land may be released from the mortgage (that is, they become unencumbered). This gives buyers and their lenders more security.
Freddie Mac and Buydowns
Freddie Mac buys two types of temporary buydown loans: the 2-1 and the 3-2-1 buydowns. The basic 2-1 plan involves a first-year rate reduction of 2 points, lowered to 1 point the second year, and at the fixed note rate for the following years. However, any buydown plan with a greater than 1-point first-year reduction and a second year increase in the interest rate of no more than 1 point falls under the 2-1 heading. The 3-2-1 plan is similar but lasts for three years with a 1-point increase each year up to the note rate. Fannie Mae's requirements for temporary buydowns are less stringent than Freddie Mac's. They require only that the buydown period not exceed 36 months and that the total annual increase in the interest rate not exceed 1%. They allow for increases in the interest rate that are more frequent than annually.
Graduated Payment Mortgage
Graduated payment mortgage (GPM) is a blanket term for a family of loans characterized by low initial payments that increase (or "graduate") at set intervals and by set amounts during the term of the loan. Payments usually increase anywhere between 7.5% and 12.5% annually until reaching a fixed amount that continues for the rest of the term.Some GPMs negatively amortize because the initial payments are not enough to cover all the interest due. This interest becomes compounded into the principal, causing even more interest to be due at the next payment period. However, not all GPMs have this feature. Some loans may have initial payments that cover all and only the interest, which in turn graduate to amortizing payments in the course of the loan term.
Constructive Notice
If a party places their claim to a property in a public record (such as a deed), it is considered that other parties have been served constructive notice. Constructive notice is the legal presumption that individuals will obtain information through due diligence.
Fixed-Rate Disadvantages
If the interest rate is high when the borrower is trying to get a mortgage, their interest rate will stay high for the life of the loan. The only way they would be able to change their interest rate is to refinance, which can be helpful, but can also be a hassle. If the interest rate drops by a lot, the borrower won't be able to take advantage of the drop. Again, their only option would be to refinance. A lot of the time, fixed-rate mortgages are sold to the secondary market, while ARMs stay within the lender's institution. This means that ARMs can usually be more customizable than fixed-rate.
Fully Indexed Interest Rate EXAMPLE
If the margin is 3% and the index is 5%, the interest rate will be 8%. If the index goes down to 3% at the next index reset period, the interest rate on the mortgage will be 6% (margin + index). When these two, the margin and the index, are combined, this is called the fully indexed interest rate.
Habendum Clause - Most Common Types of Interest Conveyed
If the type of interest or use of the property under the deed needs further explanation, then the deed will include a habendum clause.clause generally follows a granting clause as needed. When used, it will contain a phrase describing the extent of ownership. For example, a habendum clause commonly contains the phrase, "To have and to hold." A habendum clause clarifies the type and extent of interest conveyed by the granting clause. If the two are at odds, then the granting clause supersedes. The most common types of interest conveyed are fee simple, life estate, and easement.
Tax Impacts in Mortgage Lending
If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be considered taxable income by the IRS. For the average homeowner who is not losing their home due to foreclosure, there are other ways homeownership affects their taxes. Interest on their mortgage loan is deductible for income tax purposes if it's their primary residence or an investment property. If they are lucky enough to have a Mortgage Credit Certificate on their mortgage loan, part of their interest is even a tax credit. Property taxes (ad valorem taxes) are deductible on both homes and investment property.
Buyer Rebate
Illegal money transfer during the transaction that causes money to go back to the buyer, either at or after closing, without the knowledge of the lender''One of the common forms of rebates happens when the contract calls for money to be paid to a certain vendor for future improvements to be done to the property after closing.
Sale-Leaseback
In a sale-leaseback, the owner of a parcel of real estate sells it and immediately leases it back. This type of arrangement is mostly used by commercial investors who want to turn their illiquid real estate into cash without losing the use of the asset. An investor can claim a tax deduction for rent paid on property they use for business. The selling investor often will reserve the right to repurchase the property at the end of the lease period. A business like Starbucks, for example, may purchase land and fund construction of a new site, and then turn around and sell to an investor with a 10-year triple net lease. This way, Starbucks makes a small profit on the real estate, doesn't have the overhead, and gets to keep using the location.
Recognition Clause
In addition to the release clause, developers often also will include a recognition clause in the blanket mortgage contract. This clause states that a lender who forecloses the developer's mortgage must recognize the rights of the individual homebuyers who have purchased lots from the developer.
The Right to Cancel
In most cases, borrowers have the right to cancel private mortgage insurance if the principal balance of your loan is 80 percent or less of the current fair market appraised value of your home. However, many lenders now seek having the principal balance reduced to 78% (rather than 80%), which has been suggested by Fannie Mae if you reside in the home, and from 65 to 70% for rental property. When a lender forecloses on a home and loses money, they have two choices. They can file a judgement against the borrower for the loss, or they can forgive the debt (which may become taxable income for the borrower).
Title Theory States: Trustor Has Equitable (Secondary) Rights
Legal Rights: The trustee holds on to the rights to property on behalf of the beneficiary (lender). For this reason, the lender has the legal title to the property. Wait. What does the trustor have then? Equitable Rights: The trustor (borrower) is in possession of what are known as equitable rights to the property. It's a secondary and lesser interest in the property than the lender's ownership interest. If the trustor defaults, the beneficiary can foreclose on the property without the involvement of judicial proceedings. It is easier and faster for lenders to file for foreclosure on properties in title theory states.
Lien Theory State
Lien Theory State Security Instrument: Use mortgages as security. Borrower Rights: Mortgagor has the title. Lender Rights: Mortgagee only has a lien on the property; mortgage is strictly collateral. Foreclosure: Mortgagee must go through formal foreclosure procedures in order to obtain legal title. in lien theory state, the trustor owns the property and remains entitled to the rent money until the day the beneficiary goes to the foreclosure sale and obtains title to the property.
Refinancing a Loan
Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments, lower interest rates, take cash out of a home for large purchases, or change mortgage companies. Most people refinance when they have decent equity in their home. Equity is the difference between the amount owed to the mortgage company and the amount the home is worth.
Adjustable-Rate Mortgage (ARM
Mortgages with interest rates that are set to adjust after a certain amount of time
floor rate,
Most ARM's will also have a floor rate, the lowest the loan's interest rate can go. Conversely, most ARM's will also have a rate cap, the highest the loan's interest rate can go. This protects the borrower. There are two types of rate caps: An adjustment period cap limits the amount that the interest rate can increase in any given adjustment period. A lifetime cap puts a hard limit on the amount that the interest rate may increase over the lifetime of the loan, no matter how high the index may increase.
Construction Mortgage
One important type of open-end mortgage is the construction mortgage. In a construction mortgage, the lender pays funds to a borrower in installments, called draws, as the construction progresses. The sum total of these draws is typically 75 percent of the value of the property when it is completed. At the end of the building's construction, the entire loan amount plus the interest accrued becomes due. This is usually paid for with a long-term mortgage that the borrower has arranged for in advance.
How to Avoid PMI
One is to "buy out" your PMI. Some larger banks will let you take a slight increase in the interest rate instead of paying for PMI. This is usually a better bet because: Interest is deductible no matter how much money the buyer makes. A mortgage can be refinanced for a better interest rate down the road, sooner than 78% home equity is reached.
Non-Recourse Loan
One of the best things about reverse mortgages is that they are non-recourse loans. There is no personal liability. If the borrower lived a long life and the balance on the loan now exceeds what the property will sell for, the lender cannot force anyone to pay for the loss. If the heirs choose to let the lender have the property rather than pay the debt, the lender will foreclose on the property, sell it for what they can, and the rest of the loss is the lender's.
Avoid PMI: Tax Deductions are Limited
Only deductible to a point. PMI is tax-deductible only if the adjusted gross income of the married taxpayer is less than $110,000. If married, but filing separately, the cutoff for tax-deductibility is $55,000 individually. If your client earns more than that, unfortunately they will be left out in the cold. Really, PMI being deductible is the only real benefit of having it, so if your client makes more than $110k annually, help them look for other options. Why should borrowers avoid PMI? PMI usually costs .5% - 1% of of the loan annually.
Open-End Mortgage
Open-End Mortgage Open-end mortgages are called "open-end" because they allow the mortgagor to borrow additional funds at a later date on top of the original loan amount. This is useful to a new homebuyer who wishes to buy, for example, furniture or a washer and dryer after the home purchase. With this type of loan, the borrower can take out more money without having to refinance. To pay off the new debts incurred, unlike ARMs whose interest rate changes but not the balance, the monthly payment or the loan term (sometimes both) of open-end mortgages will be increased, often with a concurrent change in the interest rate.
REMEMEBER ARM
Remember, when an interest rate is adjusted on an ARM, the principal and interest payments are also adjusted to keep the term of the loan the same.
CFPB: When is PMI Required?
PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20% of the home's purchase price. If you're refinancing with a conventional loan and your equity is less than 20% of the value of your home, PMI is also usually required. There are several different ways to pay for PMI. Some lenders may offer more than one option, while other lenders do not. Before agreeing to a mortgage, ask lenders what choices they offer. The most common way to pay for PMI is a monthly premium. The premium is added to your mortgage payment. The premium is shown on your Loan Estimate and Closing Disclosure on Page 1, in the Projected Payments section. You will get a Loan Estimate when you apply for a mortgage, before you agree to this mortgage. The premium is also shown on your Closing Disclosure on Page 1, in the Projected Payments section.
Deed of Trust
Parties: Three parties include the trustor (borrower), beneficiary (lender), and trustee (third party holds the title) State: Used in title theory states Rights: Trustee has ownership rights; trustor has equitable rights
Mortgage
Parties: Two parties include the mortgagor (borrower) and mortgagee (lender) State: Used in lien theory states Rights: Mortgagor has equitable and ownership rights; mortgagee has a lien
According to the Consumer Financial Protection Bureau (CFPB):
Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender - not you - if you stop making payments on your loan. PMI for loans originated on or after July 29, 1999 are automatically canceled when the borrower builds up 22% equity in their home (based on the original loan balance), or 20% equity if the borrower requests cancellation at that time.
Reverse Annuity Mortgages
Reverse mortgages can also be used to take cash out of the property, refinance just to eliminate payments, or to set up an annuity where the homeowner actually receives cash each month instead of paying payments each month. A reverse annuity mortgage is sometimes called a RAM. A reverse annuity mortgage is a financial arrangement where the homeowner pledges equity to a lender in exchange for periodic payments of the pledged equity. In essence, it is the periodic receipt of equity liquidation in exchange for an increase of debt owed on the property. It's the opposite of paying down your mortgage. Payments for this type of mortgage are likely to stay the same month-to-month. Because of changes in Texas laws, reverse mortgages can now be used for purchase money.
Assets and Liabilities
Section VI of the application deals with the borrower's assets and liabilities (debts). Aja is putting down a $40,000.00 cash down payment and has two open asset accounts. The borrower has brought the previous two months' statements from these institutions as documentation.
Title Theory State
Security Instrument: Use deeds of trust. Borrower Rights: Trustor has equitable right (secondary) to the title. Lender Rights: Beneficiary has legal title to the property. Foreclosure: Simpler and faster for a lender (beneficiary) to foreclose on a property. (Texas is a title theory state.)
Float-to-Fixed Rate Loans
Some lenders are now offering loans that are much like ARMs, called float-to-fixed loans. Like an ARM, float-to-fixed rate loans have initial interest rates determined by a margin and an index. After the initial float rate period (one or two years, typically) the loan converts to a fixed-rate loan. These loans allow borrowers to take advantage of the lower earlier rates (as with ARMs) but avoid the risk of later rate increases. Freddie Mac offers a float-to-fixed-to-float loan with beginning and ending periods of floating rates, with a fixed interest rate in between. Sometimes float-to-fixed rate loans are known as hybrid ARMs. A variant, the fixed-to-float rate hybrid ARM, will be discussed in more depth in connection with VA loans.
Participation Agreements
Sometimes lenders like to offer to sell interests in their loans to various participants. The agreement that governs this type of sale, and the rights and obligations of the seller and buyer of an interest in the loan, is called a participation agreement. A lender and a participant have similar interests in that each wants the borrower to repay the loan and comply with its obligations under the loan.
Temporary Buydown
Temporary buydown loans are an alternative to the adjustable rate mortgage or graduated payment mortgage. They provide the borrower with the temporary help they need without any chance of negative amortization and with a predictable payment structure. The disadvantage is that there is a higher loan fee for this type of loan. Under a buydown plan, the subsidizing party—the borrower, seller, builder, or other party—establishes a buydown fund, which is collected in cash at closing. The required portion of the payment is paid from the buydown fund on a set schedule. The borrower then makes payments at the bought-down effective rate, which is lower than the actual lending rate. When the temporary buydown period is over, the lending rate returns to normal. The lender is collecting a level payment for the entire term of the loan, and any amortization schedule should be calculated as such. To the lender, this is a level payment fixed rate loan. To the borrower, however, this is a stair step or graduated payment loan.
Premium Amount
The amount of the PMI premium varies with the size of the borrower's down payment, the kind of loan (for example, fixed-rate vs. adjustable rate mortgage), the borrower's credit score, and the amount of coverage the insurance provides. A very general estimate is that PMI costs about $30-70 each month per $100,000 borrowed. That can be more than $100 every month, even for starter homes in most areas. Make sure your clients are aware that private mortgage insurance does not protect the borrower. Lenders require borrowers to have PMI because it protects the lender in case the borrower stops making payments on the loan. Still, there is a possible benefit to homebuyers. They may be able to qualify for a bigger loan as long as it's insured with PMI.
Benchmark:
The benchmark (also known as index) is a way for investors to compare how this mortgage is doing compared to other similar types of mortgages. To find the benchmark for a specific mortgage, they look at things like risk and the style of the investment portfolio. This way, the mortgage has a standard that it can be compared to. The benchmark/index is the number that adjusts when the time comes. It's the adjustable in adjustable rate.
Recording Deeds
The deed of trust gives the trustee the right to foreclose and sell the property in the event of default. Even though a deed does not have to be recorded to be valid, it is important to record a deed to provide constructive notice of ownership.
Growth Equity Mortgage
The growth equity mortgage (GEM, sometimes growing or graduated equity mortgage) is similar to the GPM in that it involves an increasing payment schedule. GEMs do not negatively amortize: All of the payment increases go toward principal—that is, equity—from which the mortgage derives its name. Some GEMs have payment increases that are tied to an index. Unlike ARMs, however, it is the rate of the principal payments increase that is tied to the index rather than the interest rate, which remains constant.
The Housing Expense Ratio
The housing expense ratio for Aja is the Combined Housing Expense ÷ Gross Income. For this transaction, this looks like: $1,238.07 ÷ $4,800.00. The answer is 25.79%. Although Fannie Mae does not use the housing expense ratio, many lenders do, and it is important to be familiar with the means of calculation of these ratios.
Adjustable Rate Mortgages
The interest rate of an ARM loan is locked at the initial rate during the initial rate period. Afterwards, the interest rate can be adjusted every new adjustment period. The lender can adjust the interest rate of an ARM loan by adding the ARM's margin (a fixed value) to the index rate (the published value of an external economic indicator on the lookback date). Example: If Shane's ARM loan has a margin of 1.3% and an index rate of 3.4% on the lookback date, his fully indexed rate for the next adjustment period will be 4.7%. ARM interest rate = margin + index rate
Mortgage Fraud
The mortgage lenders are usually the victims. Forms of mortgage fraud include house flipping, buyer rebates, and falsified statements. 1. House flipping is a type of loan fraud where a property is purchased and then quickly resold at a value that is artificially inflated by false appraisals 2. Buyer rebates are illegal money transfers during the transaction that causes money to go back to the buyer, either at or after closing, without the knowledge of the lender. A popular type of rebate is a contract calling for money at closing for future repairs or improvements to the property 3.Falsified statements are fake financial documents from the buyer
Actual Notice:
The next level of notice; it means that the buyer is actually aware of it.
Who Funds the Buydown?
The reduction in the rate is paid for by money held in an escrow account. This account can be established by the borrower, the seller, the builder, or pretty much any party that desires to do so. The seller, for instance, might desire to fund a buydown so that the buyer can qualify for the loan.
ARM Margin
The spread, also known as the margin, is a fixed amount above the index which the borrower will pay. This is given as a percentage to be added on top of the index. For example, if the spread on a loan is 3%, then the borrower is always paying 3% above whatever the index is at the last adjustment. The rate you get when you add the index and the spread is the fully-indexed rate. There may be a few margin/indexes available for the borrower to choose from, so they should figure out which will work best for them before choosing one.
Rate Caps
The stopping point for the interest on an ARM is called a rate cap. These can limit how high the interest rate can go and also how big the difference can be between old and new payments.
Reverse Mortgage Fees
The upfront fees can be high. The fees are sometimes added to the loan balance at the beginning, eating up equity right away. The best time to get a reverse mortgage is while the borrower feels like they still have many years left to live in the home.
How Reverse Mortgages Work
There a few things you should know about reverse mortgages: The borrower does not have to qualify for the loan. This is because the lender's protection is in the property. The borrower still owns the home. The lender has a lien on the property just like they would with other mortgage loans. There are no monthly payments. This sounds good, but since there are no payments, interest is being added to the amount borrowed every month (negative amortization). So the balance is constantly going up. The longer the borrower has the loan, the higher the balance will get. It is very possible that if the borrower lives a nice, long life, the balance could exceed the value of the property. That's not a problem for the borrower, but what about heirs that would like to keep the property?
A general warranty deed provides these rights to the buyer:
Title Possession Right to sell or encumber the property
Flipping:
Type of loan fraud in which a property is purchased and then quickly resold at a value that is artificially inflated by false appraisals
General liens
attach to everything a person owns. For example, a judgment lien is a general lien. It can attach not only to real estate but to any personal property. Likewise, a federal income tax lien is a general lien.
General Warranty Deed
deed promises that the grantor is conveying the property and warrants to forever defend the property being conveyed to the grantee. The grantor promises to defend against any person making a claim against the property or any part of the property since the beginning of time. This warranty guaranties that the grantor, any of their heirs, or assigns have not previously conveyed an interest in the property to any other person and that it was free from encumbrances at the time it was signed.
Mortgage Relief
he Mortgage Debt Relief Act of 2007 generally allowed taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualified for the relief. The Act expired at the end of 2014. Clients facing short sales or foreclosure should consult with their attorneys and tax consultants.
A granting clause
is a formal statement declaring that the grantor wishes to convey their current interest at that time. No deed may state that a grantor wishes to convey interest in the future. Deeds convey current interest at the time of deliverance only. Sometimes the granting clause is called words of conveyance.
Interest
is the rent paid on money. When someone borrows money from a lender, they must pay the borrowed amount back, plus interest. Interest is a fee charged by the lender, generally stated as a percentage of the borrowed amount. Interest rates are determined by the market (the individual lenders) but are influenced by the Federal Reserve System's open market activities, reserve requirements, and its primary lending discount rate.
payment caps
limit the amount of the monthly loan payment for the borrower, which is stated in dollars and not in percentage points.
periodic rate cap
limits the change in interest year over year and a lifetime rate cap limits the increase of interest for the life of the loan.
advantages of a temporary buydown
nclude low initial payments and the borrower is most often qualified on the basis of the lower initial payments, meaning the buyer qualifications are more relaxed than other loan options. Here, the effective rate is the difference between the note rate and the buydown percentage, and the monthly subsidy required is the difference between the payment that would be collected at the note rate and the payment actually collected at the effective rate. To establish the above buydown at three graduated steps over three years would take a buydown fund of $5,148, the total amount of subsidy required to be paid out over the years.
Encroachment
occurs when a party that is not the property owner interferes with the property owner's land. Encumbrances can also be in the form of private deed restrictions. Deed restrictions can put limitations on the use or maintenance of a property, or require specific standards for improvements, lot sizes, or architectural design.
Mortgage Fraud
real estate fraud is something that's happened a lot in the past and can still happen today. Almost anyone involved in a home buying transaction could be involved in committing fraud: the agents, mortgage broker, appraiser, or title company. The mortgage lenders are usually the victims. Mortgage fraud results in inflated appraisals and property values and bogus documents recorded in public records. A specific type of mortgage fraud that's been (unfortunately) popular is called flipping. To be clear, I'm not talking about the kind of house flipping you see on those HGTV shows. Buying a cheap, distressed house, making truly valuable improvements, and reselling it for a fair price for a profit is not fraud.
Blanket Mortgage
s have more than one collateral property that acts as security for the loan. These mortgages typically are used by land developers and commercial investors, but anyone seeking to consolidate mortgage debts may receive such a loan. As they pay down the loan they can get various properties released of their encumbrances. Blanket mortgages create a blanket lien on the collateral properties. This means that in the event of default, the lender may foreclose on all of the properties thus encumbered. This can cause problems for those who buy a lot from a developer, because the house may still be encumbered by the developer's blanket mortgage. If the developer defaults, the lender may foreclose on all of the collateral property, including lots that already have been sold.
limitation or restriction
sometimes called a subject to clause. This is because a deed without a clear title may convey ownership to a grantee with the phrase "subject to." For example, a deed for a property with an outstanding first mortgage may convey title "subject to an existing first mortgage loan, which the grantee assumes and agrees to pay."
Special Warranty Deed
special" just means limited. So, a special warranty deed is a limited warranty that only guarantees there is nothing against the property since the seller has owned the property (not prior to that time).
Title Theory State USE OF DEEDS OF TRUST
such as Texas, a deed of trust is used instead as the security instrument. As we discussed earlier, a deed of trust involves three parties. Beginning of Loan: The title is not transferred to the trustor (borrower) — the title is transferred to a third party called the trustee who holds the legal title on behalf of the lender. The trustor is in possession of what are known as equitable rights in the property. End of Loan: After the mortgage has been fully paid off, the title then transfers to the owner of the property. In a title theory state, the deed of trust actually conveys legal title to the property to the lender. The lender retains the legal rights, and the borrower only retains certain equitable rights to the property.
executory contracts EXAMPLE
xample of an executory contract is the contract for deed (or land sales contract), where the seller keeps the title upon completion of the sale and the buyer gets the title after making payments over a period of years. Texas currently does NOT have a promulgated contract for deed; therefore, real estate license holders should suggest that both parties obtain the services of an attorney to create or review a contract for deed. Right of Redemption
