Topic 9 - Real Estate Finance

Seller Financing

purchase money mortgage and the installment land contract, or bond for deed.

Farmer Mac

purchases agricultural loans from original lenders

Open End Loan

the borrower increases his existing mortgage to the original amount (equity loan)

Bare or naked title

The trust deed conveys what type of title to the third party?

conventional and government backed

The two general categories of loans are

blanket mortgage.

The type of mortgage which is usually used by a subdivision developer constructing many homes is a:

Purchase Money Mortgage.

The type of owner financing that is most similar to a conventional mortgage is:

Government National Mortgage Association (GNMA)

acquires loans for urban renewal projects

Buy-down

A way of temporarily lowering the interest rate on a loan by pre-paying some of the interest is a:

partial release clause.

A clause in a blanket mortgage which allows for each property to be released from the mortgage as it is sold is called a:

Prepayment penalties

A clause in a promissory note that gives the lender the right to demand payment in full of the entire unpaid debt if the borrower defaults is called a/an:

subordination clause

A clause which is found in certain types of mortgages that gives permission for another, subsequent lender to assume the rights of a first mortgage lien is called a:

promise

A covenant is the same as a

economic depreciation

A decline in the value of the property caused by forces near the property is called:

Sale and Leaseback

A financing arrangement sometimes used by businesses to raise capital while retaining the use of the property is a:

non-judicial foreclosure

A foreclosure by power of sale is known as a/an:

Federal National Mortgage Association

A group similar to Fannie Mae and Freddie Mac, except that it purchases agricultural loans and issues guaranteed mortgage-backed securities is

The nickname for this group is "Fannie Mae" (FNMA). Federal National Mortgage Association

A group which buys conventional and FHA and VA backed loans is

Multiply the number of thousands of the loan amount by the amortization factor. 50 X 7.65 = $382.50.

A loan is made for $50,000 at 8% interest for 30 years. The factor from the amortization table for $1000 is 7.65. Find the monthly payment, principle and interest.

straight loan

A loan which calls for interest only for the term of the loan

fully amortized loan

A loan which has equal monthly payments consisting of principal and interest

The mortgage (or trust deed)

A security instrument that creates a lien A document that makes property security for the repayment of a debt Mortgagor - person or entity who makes a mortgage, the borrower Mortgagee - party receiving the mortgage, the lender

reverse mortgage

A type of mortgage designed for retirees in which regular monthly payments are made to the borrower based on the equity, and in which the loan is paid from the sale of the property at the owner's death is a

Open end loan

A way of borrowing against the equity in your property without taking out a second mortgage is a/an:

a. The owner of a property (trustor) transfers title to a third party (trustee) in exchange for a loan or other consideration from the lender or beneficiary. (correct) b. The trustee holds the title for the benefit of the lender or beneficiary to secure the loan the lender has made to the trustor. c. As long as the trustor does not go into default, he retains full legal rights to the property. d. The borrower's signature is NOT required on both documents.

All of the following are TRUE of a trust deed EXCEPT:

a. A real estate mortgage always requires a promissory note. b. The promissory note accompanying a mortgage must be notarized. c. In order to give notice of the lien, the mortgage must be recorded. d. A mortgage is a contract between the lender and the seller.

All of the following statements are TRUE Except:

a. The Federal Housing Administration does not have income limits to determine who is eligible for FHA assistance. b. Anyone who is a U.S. citizen, permanent resident, or non-permanent resident with a work visa and who meets the lending guidelines can obtain a loan. c. The FHA sets a maximum mortgage amount that it will insure. d. The FHA does NOT set a maximum mortgage amount that it will insure. (correct)

All of the following statements concerning FHA loans are TRUE EXCEPT:

Equitable right of redemption

Allowing additional time within which to pay a debt is known as:

credit to buyer, debit to seller

An assumption would be listed how on the settlement statement?

Trust deeds

An instrument, like a mortgage, that is employed to pledge an interest in real property in exchange for a loan or other consideration. Involves not two, but three parties. The borrower is the trustor, the lender is the beneficiary, and the added third party is the trustee. The trustee is an impartial party appointed to oversee the trust agreement. The trustee may be a private institution, such as a title company, or it may be a private person.

250,000

An unmarried individual may exclude from income up to ________ of gain realized on the sale or exchange or a residence.

Due on sale

Another name for "alienation clause" is:

Characteristics of Lien Theory

Borrower's and lender's rights are described in a promissory note and mortgage Borrower holds legal title with the lender having a lien The defaulted borrower is allowed to retain possession, title and rights in the property until foreclosure. Borrower, after default, may have equitable right of redemption After foreclosure sale, borrower may have statutory period of redemption.

Clauses in a promissory note

Clause #1: contains the name of the borrower and the lender, the amount of the borrower's debt Clause #2: the late pay clause Clause #3: acceleration clause; gives the lender the right to demand payment in full of the entire unpaid debt in the event of default Clause #4: interest escalation clause, pushes the interest rate up to the highest rate allowed by law if default occurs and the debt is accelerated Clause #5: prepayment clause; provides for a penalty if the loan is paid off early; (not allowed in FHA or VA loans) If the borrower is not permitted to pay off any or all of the loan's balance before the regularly scheduled payment dates, the prepayment penalty clause is called a lock-in clause. Clause #6: joins the promissory note to the mortgage or trust deed

covenants

Clauses or promises in a mortgage which give additional protection to the mortgagee are called

Lien theory

Confers the legal right to attach a claim against a property Real property pledged as collateral, the borrower is said to hypothecate title to the lender Hypothecation means that the lender is given a lien against the borrower's collateral property file foreclosure proceedings if the buyer defaults Borrower holds legal and equitable title.

Mortgage covenants

Covenant to pay taxes and special assessments. Insurance covenant obligates the borrower to hve insurance on the property. Covenant of good repair means keeping the property in good repair Covenant against removal prohibits the mortgagor from removing any property covered by the mortgage. Alienation clause, or due on sale clause, makes the mortgage non-assumable Receiver clause, provides for a receiver to oversee the operations of income producing properties while in foreclosure Owner's rent clause, applies to owner occupied residences in foreclosure. Subordination clause gives the lender's permission for a subsequent lender to assume first mortgage lien rights Subrogation is the right of a title company to receive any damages available to the insured when the title company has made a payment to settle a claim covered by a policy.

Regulation "Z"

Disclosure of Loan Cost Borrower's Right of Rescission Fair Advertising Practice

equitable redemption

During the period of time after the borrower defaults and before the foreclosure sale, the borrower, or another lien holder, can redeem the property by paying the debt. This is called

Redlining

Federal legislation prohibits the lender from refusing to make a loan on a property based solely on undesirability of the location. Systematically discriminating against certain neighborhoods when approving loans is called

TAX DEDUCTIONS

Homeowners may deduct from their gross income: Mortgage interest payments on most first and second homes Real estate taxes Certain loan origination fees Loan discount points (whether paid by buyer or seller) Loan prepayment penalties

subordinated.

If a buyer has a mortgage on a piece of land on which he plans to build a house, he may need to have that loan ______________ in order to get a loan to build the house.

He cannot have a deficiencey judgment entered against him.

If the buyer has acquired the property subject to an existing mortgage, which of the following is true?

sale with appraisement

If the property does not sell for the full amount owed, the creditor may obtain a deficiency judgment.

lien.

In Lien Theory states, the lender holds a/an ________ as collateral against the loan.

title

In Title Theory states, the lender holds the ________ as collateral against the loan.

trustor

In a Trust Deed, the borrower is known as the:

trustor third party is the trustee.

In a Trust Deed, the borrower is known as the:

Financing principles

In the familiar phrase, a ready, willing, and able buyer, the word able means able to pay. The history of real estate financing is the story of the gradual growth of the borrower's rights and the corresponding decline of those of the lender. Today, as in classical times, all loans begin with one essential act - the borrower's promise to repay the debt. This promise to repay and its specific conditions and stipulations are contained in the central instrument of the loan agreement, the promissory note. The promise to repay is backed up by a security arrangement with which the borrower pledges an interest of one kind or another in the property he is financing to the lender. The pledged property is called collateral

Title theory vs. lien theory

In title theory, the borrower deeds his property to the lender. The mortgage conveys title to the borrower when the property is paid for. In lien theory, the borrower gives only a lien right to the lender. The borrower retains title to the property.

Deed of Trust Foreclosure

In which type of foreclosure is the statutory period of redemption eliminated?

Purchase Money Mortgage

In which type of owner financing does the buyer receive title at the time of sale?

Mortgage brokers

Individuals who act as intermediaries between the borrower and the lender, qualifying the buyer and finding lenders are

False

It is okay to refuse a loan solely on the location of the property.

deed in lieu of foreclosure

Known as a "friendly foreclosure".

Title theory

Lender receives a limited form of legal title to the pledged property. The borrower conveys or alienates limited legal title to the lender. Paying off the debt is said to defeat the conveyance. The borrower retains possession of the mortgaged property as long as he does not default on the debt.

Characteristics of Title Theory

Lender's rights are manifested by contract for deed. Lender remains the legal owner of the property until the debt is paid. Borrower retains equitable rights in the property.

THE FEDERAL RESERVE SYSTEM

Maintain sound credit conditions Help counteract inflationary and deflationary trends Create a favorable economic climate Twelve federal districts, each served by a federal reserve bank. All nationally chartered banks must join the Federal Reserve and purchase stock in its district reserve banks.

Non-institutional Lenders

Mortgage Brokers: intermediary between borrower & lender Mortgage Bankers: set up loans using their own capital

Graduated Payment Mortgage

Payments start small and become larger as the mortgage goes on

Tila-respa integrated disclosures

Purpose: to combine disclosure requirements of TILA & RESPA Loan Estimate Disclosure Closing Estimate Disclosure

Reverse Mortgage

Regular monthly payments are made to the borrower based on the equity in the property

Fair Credit Reporting Act (FCRA)

Requires that the lender must provide the applicant with a statement detailing the reasons for rejection within 30 days.

Institutional Lenders

Savings & Loans Commercial Banks Life Insurance Companies Mutual Savings Banks

Debits & credits

Selling price: debit to buyer, credit to seller New loan: credit to buyer, nothing to seller Loan payoff: debit to seller, nothing to buyer Assumption: debit to seller, credit to buyer Deposit: Credit to buyer, nothing to Seller Purchase Money Mortgage: Credit to Buyer, Debit to Seller Pre-paid taxes or insurance: Debit to Buyer, credit to Seller Loan fees: Debit to Buyer, nothing to Seller

False

Subordination is the right of a title company to receive any damages available to the insured when the title company has made a payment to settle a claim covered by a policy.

a. promissory note.

The borrower's pledge to repay the loan is known as the:

promissory note.

The borrower's pledge to repay the loan is known as the:

Promissory note

The borrower's promise to repay the loan. The promissory note is a negotiable instrument A promissory note can be a debt instrument without a mortgage. If so, it is an unsecured note. A signature loan is one having no mortgage and no collateral.

mortgagor

The borrower, or person making the loan is the:

Mortgagor

The borrower, or the person or entity who makes a mortgage is the:

warranty of title clause

The clause in a mortgage that states that the mortgagor has good and clear title to the property and has the right to convey it is the:

granting clause

The clause in a mortgage which pledges the collateral property to the mortgage is called the:

power of sale clause

The clause in a trust deed that allows the trustee to sell the property and repay the beneficiary in case of default is called the

defeasance clause

The clause which provides for removal of the mortgage when the debt is paid is the:

release of mortgage

The collateral in a mortgage is released by what instrument when the debt is paid?

Mortgagee

The covenant's in a mortgage protect the _______________'s interest in the mortgaged property.

Multiply the factor of 7.69 by the number of thousands of the loan amount (150) to get the monthly payment.

The factor from the amortization table for $1000 loan amount at 8.5% interest for 30 years is 7.69. If the loan amount is $150,000 what is the monthly payment, principal and interest?

sale without appraisement

The lender forfeits the right to obtain a deficiency judgment.

The mechanics of the trust deed

The owner of a property (trustor) transfers title to a third party (trustee) in exchange for a loan from the lender or beneficiary The borrower (trustor) executes both a promissory note and a trust deed The trustee holds the title for the benefit of the lender or beneficiary If the trustor does not pay his debt, the trustee may sell the property and turn the proceeds of the sale over to the lender. When the trust deed is paid off, the trustee must give the trustor a deed of reconveyance which transfers the title back to the original owner. The power of sale clause allows the property to be sold without the necessity of going through the court action of a foreclosure. The primary difference between a mortgage and a trust deed is that a mortgage creates a lien and a deed conveys title.

trustee.

The party in a trust deed who is neither the borrower nor the lender is called the ____________.

mortgagee

The person who lends the money is the:

Usury

The practice of charging more that the legally allowable interest is termed:

True

The primary difference between the purchase money mortgage and the contract for deed is that, in the contract for deed, the seller retains legal title to the property until part or all of the debt is paid.

with a purchase money mortgage the buyer receives full title at the time of sale.

The primary difference between the purchase money mortgage and the contract for deed is that:

Capital gain

The profit realized from the sale or exchange of an asset, including real property For married individuals $500,000 if filing jointly If either spouse meets the ownership test; Or both spouses meet the use test; and Neither spouse is ineligible for exclusion by virtue of a sale or exchange of a residence within the last two years.

Equal Credit Opportunity Act (ECOA)

The prohibits discrimination in the lending process based on the applicant's race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. Note that the applicant must be of legal age. Credit applications may only be considered on the basis of: Income Stability of the source of income Net worth Credit rating

Elements of a Mortgage

The provisions of the agreement. Legally competent parties. Mutual consent. Exchange of consideration. Legal purpose. Must be recorded In order to give notice of the lien Real estate mortgages always requires an accompanying promissory note that is notarized When the debt is completely satisfied, the mortgagee cancels the note by executing a satisfaction of judgment The satisfaction should be recorded to insure its legal effectiveness.

executory process Correct

The quickest process for foreclosure is

subrogation

The right of a title company to receive any damages available to the insured when the title company has made a payment to settle a claim covered by a policy is called

The selling price is a debit to the buyer and a credit to the seller. Please review the chart on debits and credits.

The selling price of a property would be listed how on the closing statement?

allodial system.

The system of ownership which allows individuals to own land absolutely, without obligation to political superiors is known as the:

Truth-In-Lending Act

Title 1 of the Federal Consumer Protection Act)

Promissory Note and Mortgage

Under lien theory, what two instruments are used to describe the borrower's and lender's rights?

lien against the property.

Under the Lien Theory, the borrower holds legal title to the pledged property and the lender holds a

hypothecate

Under the Lien Theory, title is said to ___________________ to the lender.

foreclosure by sale

Under which type of foreclosure is the lender required to refund to the borrower any profit realized on the sale of the foreclosed property?

Acceleration clause

What clause gives the lender the right to demand payment in full of the entire unpaid debt in the event of default?

Partial release clause

What clause in a mortgage permits each parcel to be released from the mortgage as it is sold?

Receiver clause

What clause provides for oversight of operations of investment properties during foreclosure?

The property to be sold without going through foreclosure Correct

What does the Power of Sale clause allow for in the case of default?

He may have a smaller cash output to obtain the loan.

What is the advantage to the borrower in owner financing?

Satisfaction of judgment

When the debt is paid, the mortgagee cancels the mortgage by filing what instrument?

alienated.

When the lender holds the title to the property, the borrower has ____________ the title to the lender.

The granting clause

Which clause in a mortgage pledges the collateral property to the mortgage?

Subordination clause

Which clause is used to change the order of priority of mortgages in case of foreclosure?

There is a maximum limit set on the amount of the loan a veteran can obtain.

Which of the following is NOT true concerning VA loans?

Deed of Trust Foreclosure

Which type of foreclosure does not require court action?

Buydowns

a way of temporarily lowering the initial interest rate by pre-paying some of the interest

RESPA

applies to any residential real estate transaction involving a new first mortgage loan. The purpose of RESPA is to ensure that the buyer and the seller are both fully informed of all settlement costs.

Federal National Mortgage Association (FNMA):

buys FHA & VA loans

Federal Home Loan Mortgage Corporation (FHLMC):

buys mortgages from savings & loans

The Blanket Mortgage

covers several properties, but each may be released from the mortgage separately.

Fully Amortized Loan

equal monthly payments consisting of both principal and interest

Partially Amortized Loan

equal monthly payments of both principal and interest with a balloon payment

deficiency judgment

in some states, if the lender is unable to recover his full interest in the foreclosed property, he may seek a __________ ___________, which allows the lender to attach and seize the borrower

Adjustable Rate Mortgage

interest rate fluctuates according to some external index

The Package Mortgage

is secured by both real and personal property

Farm Service Agency (FSA):

offers programs to help families purchase or operate family farms

Straight or Term Loan

payments of interest only for the term of the loan

partial release clause

permits each parcel to be released from the mortgage as it is sold.

Sale and Leaseback:

property is sold, then leased back to the seller as a way of raising capital

Closing Estimate Disclosure Form:

provides disclosures that will be helpful to consumers in understanding all of the costs of the transaction. This form will be provided to consumers: 3 business days before they close on the loan.

Loan Estimate Disclosure Form:

provides disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage for which they are applying. This form will be provided to consumers within: 3 business days after they submit a loan application.

Construction Loan

used for building or repairing property A type of interim financing The loan is paid out in draws at regular intervals after each stage of construction has been completed.

The Wrap-Around Mortgage

used for owner financing Usually combines an assumption with owner financing