Chapter 12- Real Estate Finance

Megan would like to purchase a home appraised at $270,000. She has a down payment of $27,000. What is the Loan to Value for this property? $270,000 - $27,000 = $243,000 Loan

$243,000 / $270,000 = .9 or 90% Loan to Value

total loan interest calculation: You borrow $100,000 for 30 years. Monthly loan payments are $734. How much interest will be paid over the life of the loan?

$734 X 360 (30 year loan at 12 months of payments) = $264,240 total in Principal & Interest payments $264,240 - $100,000 = $164,240

mortgage features a down payment:

-A buyer usually wants to pay a certain amount "down" on the mortgage as a way to keep the mortgage payments low. -For example, a buyer may wish to pay $20,000 in cash and borrow the remainder in a loan. The amount of money the borrower has available will determine the down payment. -The Earnest Money Deposit could be part of the down payment and/or the closing costs, but not all of it. The balance of the down payment is paid at closing.

Property taxes are always paid first and they do not have to be recorded. They include:

-Ad valorem taxes -special assessment taxes

role of FMNA GNMA AND THE FHLMC

-FNMA buys conventional, FHA- and VA-backed loans and pooled mortgages; guarantees payment on mortgage-backed securities; -GNMA guarantees payment on certain types of loans; -FHLMC buys and pools mortgages; sells mortgage- backed securities

escrow (impound account)

-Most lenders require the borrower to place money in a special account for the payment of taxes and insurance (and when applicable, private mortgage insurance). -This assures the lender that the taxes and insurance will be paid on time as the borrower pays a portion to the escrow each month. -RESPA has rules dictating the amount of allowable escrow funds that are held by the lender.

loan to value ratio (LTV)

-This is a phrase most often used by lenders. -The ratio represents the amount of the loan in relation to the sales price or appraised value. If the loan is $80,000 and the value is $100,000, the LTV is 80%; meaning 80% of the value is being borrowed. The ratio also shows that the buyer will be required to pay a cash down payment of $20,000.

Equity is the difference between the

-amount owed on the property and the value of the property. -When a seller sells a property, after all the costs have been subtracted, the remainder is the equity. -The equity may be used to reinvest in other property or taken in cash.

If there are any questions or confusion regarding the contents of the promissory note, a Certified Public Accountant (CPA) or an Attorney should be contacted to ensure everything is understood by the party signing the note. When a casual promissory note is drawn up between two individuals, the IRS requires

-an interest rate. -A CPA can help determine if the interest rate stated in the promissory note is too low and if it will result in penalties or automatically be raised. If the loan is interest free, the IRS may consider it a gift and require that a gift tax be paid on it.

TYPES OF REAL ESTATE LOANS

-conventional loans -fha insured loans -va GUARANTEED LOANS -COMMON LOAN STRUCTURES -SELLER FINANCING -SPECIAL PURPOSE LOANS

discount points

-is actually pre-paid interest. A lender charges discount points to recoup interest payments upfront. Technically, paying discount points is a way to buy down your interest rate. One point equals one percent of the loan amount. -hese extra points are not included in the loan and may be charged to obtain a lower-than-market rate for the borrower or a better yield (profit) on the loan for the lender.

intrest

-is the fee or amount the borrower pays to borrow someone else's money. -For example, a mortgagor borrows 100,000 for a loan at a rate of 7% interest for 30 years. This means the borrower will pay 7% each year on the unpaid balance of the loan. The higher the interest payment, the higher the mortgage payment will be. Interest on housing is currently deductible on Federal Income Tax, however interest deductions have been limited since the passage of massive tax reform that began January 1, 2018. Check with your tax advisor just to be sure.

There are two types of security instruments for a real estate loan:

-mortgage -note

Generally, a mortgage (or deed of trust) is obtained by

-pledging property as collateral and promising to repay the loan with a schedule of payments to the mortgagee. A mortgage is an encumbrance upon a property.

A promissory note should have several essential elements, including

-the amount of the loan, the date by which it is to be paid back, the interest rate, and a record of any collateral that is being used to secure the loan. Other interest-rate options, like discounting or compensating balance requirements, can also be included. Default terms (what happens if a payment is missed or the loan is not paid off by its due date) should also be detailed in the promissory note.

in a title theory also known as a deed of trust state

-the borrower gives title through a deed of trust to the lender, who is referred to as the beneficiary during the time of the loan. The borrower keeps a possessory right to the home and holds an Equitable Title. With a Deed of Trust , a third party trustee is involved and holds Naked Title to the property. This means the trustee can sell the property without court action in a case of default. A Deed of Reconveyance is issued upon full payment of the loan to return title to the trustor.

other clauses that may be contained in the mortgage instrument

1. mortgage insurance 2. the borrowers right to reinstate after acceleration 3. the due on sale clause 4. condemnation 5. hazardous substances

A mortgage is a legal contract. As such, certain elements must be in place and specific provisions must be included. These are the duties of the borrower in a mortgage or Deed Of Trust:

1. promise to pay 2. taxes and insurance 3. covenant and good repair

typical clauses in a mortgage

1. the acceleration clause 2. funding for taxes and insurance (ESCROW) 3. the prepayment and repayment penalties clause 4. late payment fees 5. defeasance fee 6. protection of the lenders rights

Megan wants to purchase a $245,000 home. She is seeking a conventional loan that requires a 20% down payment. How much will her loan be

245,000 X .8 (100% - 20% down) = $196,000

financial components of a loan: annual percentage rate (APR)

Annual Percentage Rate (APR) includes interest and all other finance charges; lender must disclose on residential properties

taxes and insurance: deed of trust elements

Borrower assures the payment of all real estate taxes on the property given as security, and to maintain adequate insurance to protect the property

covenant of good repair

Borrower will assure maintenance of the property in good repair at all times

the borrowers right to reinstate after acceleration

If the borrower is in default (has not made their payments), they are entitled to an opportunity to reinstate their loan after the bank has issued a notice of default. Generally, before the sale of the property on the courthouse steps the borrower has the opportunity to make up all past due payments, along with any penalty, legal, and sale fees to bring the loan current. This is called an Equity of Redemption or Equitable Redemption and is a right of the borrower through Florida Law. Upon a borrower's "resetting" of the loan through this means, the loan will then proceed normally as if no payments were missed.

the loan to value ratio example

Many loans are based upon the amount of loan to down payment. Most conventional loans require a 20% down payment or an 80 percent Loan to Value ratio.

these elements need to be in the deed of trust: promise to pay

Means payment of the debt in accordance with the terms of the note

subordination agreements

Occasionally, a lender may be willing to take a secondary payment position for a property in foreclosure. For example, if the first mortgage has a balance of $20,000 and a new second has a balance of $50,000, the second may wish to become the first and the first become the second in the line of priority. If both lenders are agreeable, they have the option to agree to a subordination agreement that changes the priority of liens for foreclosure.

mortgage insurance

Private Mortgage Insurance (PMI) may be required for a conventional loan when the risk is high. Mortgage Insurance protects the lender in case of a default by the borrower. This is not a requirement should the borrower place 20% down for the loan and has a credit score that is acceptable to the lender.

truth in lending and regulation z

Reg Z implements Truth-in-Lending Simplification and Reform Act and Consumer Credit Protection Act

condemnation

Should the property be condemned for taking through eminent domain, the lender would declare first rights on the proceeds from the municipality or taking entity.

national flood insurance act

borrowers of "federally-related loans" must obtain flood insurance if property is in designated flood-hazard area

how does the federal reserve control the flow of money

T-bills; reserve requirement, discount rate

There are two theories used when pledging property for a mortgage. These theories

These theories determine how the mortgage company holds interest in the property. Each of these theories affects how a foreclosure would take place if it became necessary for non-payment of the loan.

protector of lenders rights

This clause may allow the lender to inspect the property, ensures that the borrower will occupy, preserve and protect the property and that the borrower does nothing to impair the value of the lender's lien on the property. These requirements may be all encompassing or specific to a mortgage type or borrower's loan credentials.

THE PREPAYMENT AND PREPAYMENT PENALTY CLAUSE

This is a clause that allows the borrower or mortgagor to pay the loan earlier than the schedule detailed in the mortgage contract. Occasionally, the lender may charge extra interest or an additional fee if the loan is paid off before a "seasoning" time for the lender to earn enough interest to justify the loan (usually 120 days or less). If a prepayment penalty is present, the mortgage document will state the penalty for paying off the loan early, for whatever the seasoning expectation of the interest is for that mortgagee. Many newer mortgages do not have a prepayment penalty. However, most subprime loans do contain a prepayment penalty, as the first five years of the loan are a risk factor for the mortgagor and they take an unusual risk in allowing such loans.

defeasance clause

This is the clause that provides for a satisfaction piece to be issued when the mortgage has been paid in full.

funding for taxes and insurance (ESCROW)

Unless waived by the lender, most mortgages provide for collection of taxes and insurance to protect the mortgagee's asset (the property). RESPA limits the amount allowed for this to one year and also requires that any overages be refunded to the mortgagor at the end of the fiscal year. More recently, HOA fees and condo fees may or may not also be collected as part of this arrangement. The resulting payment to the Mortgagor is called PITI or Principle, Interest, Taxes and Insurance.

the principal

When used as a money reference, the Principal is the total loan amount borrowed or, the remainder of the amount owed at any given time.

There are two parts to a mortgage loan:

a pledge (promise to pay) and the collateral

common loan structures

amortizing, negative amortizing, interest only, fixed rate, adjustable rate, senior, junior, fixed or graduated payment, balloon, buydown

mortgage mechanics

borrower gives lender note and mortgage; lender gives borrower funds and records a lien

initiating a loan application: the loan applications

borrower provides personal and property data; supporting documentation: appraisal report, credit report, purchase contract, income and/or employment verification

the secondary mortgage market

buys existing loans to provide liquidity to primary lenders; Fannie Mae, Ginnie Mae, Freddie Mac, investment firms, life insurance companies, pension funds

financial components: original principal

capital amount borrowed on which interest payments are calculated

line priority is established in

chapter 714 of the Florida Statutes

financial components of a loan: intrest

charge for the use of money; rate fixed or variable

All mortgage satisfactions are filed with the

clerk of court for the county where the property is located and subsequently provided to the mortgagee within 60 days of the final payment. Failure to release the lien could result in a suit from the mortgagor to the mortgagee.

Note: The implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2014 requires the lender to

disclose if they will service the loan or sell the loan to another finance company. (The primary and secondary markets will be discussed later.) The Note can be included in the financing process as either a separate document or included in the mortgage or deed of trust. The note makes the borrower personally liable for the loan.

net worth

extent to which applicant's assets exceed liabilities as a further source of reserves

VA-guaranteed loans

guaranteed loans granted by VA-approved lenders to qualified veterans

hazardous substances

his clause forbids the presence, use, disposal, storage and release of any hazardous substances that is a violation of Environmental Law or creates an environmental condition, which would adversely affect the value of the property. Hazardous substances are defined as toxic or hazardous such as gasoline, kerosene, other flammable or toxic petroleum products, toxic pesticides and herbicides, volatile solvents, materials containing asbestos or formaldehyde and radioactive materials.

mortgage clauses: the acceleration clause

if a borrower defaults on the loan (does not make payments, etc.), the lender can call the entire balance due and payable immediately. Without this clause in the mortgage or Deed Of Trust, the lender would not have the power or right to foreclosure without suing each month for the monthly payment.

income qualifications

income ratio and debt ratio qualify borrower's income; income ratio applied to gross income determines housing expense maximum; debt ratio takes revolving debt into account

FHA insured loans

insured loans granted by FHA-approved lenders to borrowers who meet FHA qualifications

the PITI payment

is an acronym for Principal, Interest, Taxes and Insurance. The borrower pays a certain amount each month consisting of these elements. This is also called a budget mortgage payment.

hypothecation

is an alternate term used when one pledges to secure a loan with something of value. The property that the buyer is purchasing is hypothecated to secure the mortgage.

loan servicing

is the collection of mortgage payments and the related bookkeeping for the lender who holds the Note. Usually a loan servicing company is paid a percent of the lender's proceeds as a fee to perform loan-servicing duties.

the word mortgage or Mortgage Instrument defines a

loan secured by real property. To mortgage a property is to pledge the property as collateral for the money borrowed on the property.

the mortgage in the secondary position is called the

junior mortgage

promissory note

legal instrument executed by borrower stating debt amount, loan term, method and timing of repayment, interest rate, promise to pay; may repeat other provisions from mortgage document or deed of trust; negotiable instrument assignable to a third party

equal credit opportunity act

lender must evaluate applicant according to applicant's own income and credit information

RESPA provisions

lender must provide CFPB booklet explaining loans, settlement costs and procedures; lender must provide CFPB Loan Estimate of settlement costs within three days of application; lender must provide CFPB Closing Disclosure three days before loan consummation

credit evaluation

lender obtains credit reports to evaluate applicant's payment behavior

cash qualification

lender verifies applicant's sources of cash for down payment; extra cash enhances income qualification evaluation

the promissory note is

lender's Personal Property and it is a readily negotiable item. The Note can be sold to another financing company either on the primary or secondary market.

the loan application process includes

lenders must accept all completed applications and notify applicants about disposition of application

florida is a

lien theory state

loan commitment

written pledge by lender to grant loan under specific terms; firm, lock-in, conditional, take-out

mechanics of a loan transaction: instruments

note or mortgage or trust deed

When signing a promissory note, both the lender and the person receiving the loan should be fully aware of and completely understand the

note's language. This is important especially if the seller is financing the property. One obvious way to do this is to read the promissory note carefully and in its entirety before committing a signature to it.

FINANCIAL COMPONENTS OF A LOAN: POINT

one percent of the loan amount, charged by lender at origination to obtain required return

the primary mortgage market

originates mortgage loans directly to borrowers; savings and loans, commercial banks, mutual savings banks, life insurance companies, mortgage bankers, credit unions

financial components of a loan: term

period of time for repayment of interest and principal

conventional loans

permanent, long-term loans not insured by FHA or guaranteed by VA

Mortgage loan underwriting

process of evaluating the buyers ability to pay and the value of the property

equal credit opportunity act

prohibits discrimination in lending

The Promissory Note or Note is the

promise to repay the mortgage by the mortgagor. It is evidence of the borrower's debt owed to the lender. When a lender decides to sue to collect money owed on a mortgage, they sue on the note.

truth in lending and regulation z provisions:

provisions: lender must disclose finance charges and APR prior to closing; borrower has limited right of rescission; lender must follow disclosure requirements in advertising

seller financing : purchase money mortgages

purchase money mortgages: loans by the seller to the property buyer for all or part of the purchase price; contract for deed: installment sale where seller finances buyer and retains title until contract terms are met

loan-to-value ratio

ratio: relationship of loan amount to property value, expressed as a percentage

chapter 17-

real estate finance

the mortgage market: supply and demand for money

relationship between money supply and demand affects interest rates, consumer prices, availability of mortgage money

financial components of a loan: loan balance

remaining unpaid principal at any point in the life of the loan

mortgage document and trust deed

● may include clauses covering payment of principal and interest, prepayment, late charges, escrow for taxes and insurance, liens, insurance requirements, occupancy and maintenance, lender's rights, private mortgage insurance, inspection, and other conditions of performance

mortgage document and trust deed

● the legal documents which pledge the property as collateral for the loan

When the loan - backed by a mortgage is paid in full, it is said to be

satisfied

Each of these instruments has specific rights and responsibilities and they should not be confused with each other. A mortgage is the

security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property.

late payment fees

should the mortgagor be late on any payment, the penalty for the late payment is spelled out in the mortgage. This eliminates any confusion as to the terms of the mortgage and the importance of timely payments.

real estate settlement and procedures act

standardized settlement practices

the due on sale clause

states that the full balance of the loan may be called due (repaid in full) upon sale or transfer of ownership of the property used to secure the note. This prevents the seller from allowing a purchaser to assume the loan for a specific property. This clause is sometimes referred to as an Alienation Clause. A VA mortgage will normally not have a Due on Sale Clause as it is allowed to be assumed. Under a ruling in 1982 by Congress (the Garn-St. Germaine Depository Institutions Act) lenders cannot enforce the due-on-sale clause in certain situations even though ownership has changed. If there is a divorce or legal separation and ownership between spouses - changes where the property was jointly owned, then becomes owned by a single spouse, the lender cannot enforce the due-on-sale clause. The same is true if the borrower transfers the property to their children via will or gift and the property is transferred to a relative (who is living on the property), or if the property is transferred to a living trust and the borrower is the trust's beneficiary.

As discussed in the chapter about deeds, the priority of liens is important in matters of foreclosure. A first mortgage always

takes priority over other mortgage liens such as home improvement loans, second mortgages etc. However, a first mortgage does not take priority over taxes or the cost of sale EVER.

the lien theory state

the borrower keeps legal title to the property during the period of the loan and the lender places a lien against the property. Florida is a lien theory state.

the parties to a mortgage include:

the morgator (the borrower) who give a mortgage and the mortgagee who agrees to lend the fund based on the mortgages promise( lender)

financial components of a loan: payment

the periodic payment of interest and/or principal

Further, the mortgage may have a requirement for lender authorization prior

to making any major alterations to the property

trust deed mechanics

trust deed conveys title from the borrower/trustor to a third- party trustee who holds title on behalf of the lender/beneficiary until the debt is repaid

mechanics of a loan transaction: mortgage financing

using borrowed money secured by a mortgage to finance the purchase of real estate

The priority of other liens are based on the time of recording:

usually first in the lineup is the First mortgage because it is typically filed before any other liens.

closing a loan

usually simultaneous with closing of real estate transaction; transfer of funds, signing of documents, escrow deposits

The priority of liens in foreclosure is critical because it indicates

who gets paid first