Chapter 9: Real Estate Finance - Loans

Common Repayment Plans

(1) a single payment of principal and interest at the end of the loan term, (2) interest-only payments(IO/straight loan/term loan), (3) partially amortized with a balloon payment, and (4) fully amortized payments.

(2) main differences between FHA and VA loans

(1) only an eligible veteran may obtain a VA loan, and (2) the VA does not require a down payment up to a certain loan amount, can get 100% financing. As with FHA loans, alienation or prepayment penalty clauses are not allowed in VA loans.

Review - Notes, Trust Deeds, and Mortgages

1. A note is the evidence of a debt. 2. A trust deed or mortgage, even though it is the security for the debt, is still only an incident of the debt. 3. A trust deed or mortgage must have a note to secure, but a note does not need a trust deed or mortgage to stand alone. 4. If there is a conflict in the terms of a note and the trust deed or mortgage used to secure it, the provisions of the note will control. 5. If a note is unenforceable, the presence of a trust deed will not make it valid.

Options for secondary financing

1. Home equity loan/HELOC 2. Seller financing/carryback (2nd trust deed in favor of seller), AITD

What are the most common security instruments in CA?

1. Trust deed (most common - usually when people say "mortgage" in CA they're referring to a trust deed) 2. Mortgage 3. Contract for Sale

Order Proceeds from Trustee Sale are Paid

1. Trustee's fees, costs, and expenses of the sale 2. Any tax and assessment liens that are due and owing 3. Trust deeds, mortgages, and mechanic's liens in their order of priority 4. Defaulting borrower

Requirements for a Valid Promissory Note (6)

1. Unconditional written promise to pay a certain sum of money. 2. Made by one person to another, both legally able to enter into a contract. 3. Signed by the maker, or borrower. 4. Payable on demand or at a definite time. 5. Paid to bearer or to order. 6. Voluntarily delivered by the borrower and accepted by the lender.

What does the trustee do in a deed of trust? (2)

1. foreclose on the property if there is a default on the loan, 2. reconvey the title to the borrower when the debt is repaid in full.

Section 203(b) Residential Loan

30 year, fixed-rate, fully amortized, mortgages with a down payment requirement as low as 3.5%

Novation

AKA substitution of liability original borrower (seller) avoids any responsibility for the loan, transferring to the buyer

purchase-money loan

Any loan made at the time of a sale, as part of that sale

What does a veteran need before applying for a VA loan

Certificate of Eligibility from VA

What does PMI do

Cover's the lender's investment when buyer equity <20%

Who funds construction loans?

Interim construction loans are usually made by commercial banks, whereas standby commitments and takeout loans are arranged by mortgage companies for large investors such as insurance companies

Common Non-Conforming Loans

Jumbo loans Subprime loans

**What are the key differences between promissory notes and security instruments?

Security instruments require collateral/security

Promissory Note

Serves as evidence of the debt. written agreement between a lender and a borrower to document a loan. It is a promise to pay back a certain sum of money (the principal) at specified terms at an agreed-upon time. Negotiable instrument

Amortization

The liquidation of a financial obligation

Parties to a promissory note

The maker is the person borrowing the money, or making the note. The note is a personal obligation of the borrower and a complete contract in itself, between the borrower and lender. The holder is the person loaning the money, or the one holding the note. A subsequent owner of the note is a holder in due course and is called the noteholder.

Section 255 Home Equity Conversion Mortgages

To borrow against equity at age 62+ The program has three options for homeowners: (1) borrow against the equity in their homes in a lump sum, (2) borrow on a monthly basis for a fixed term or for as long as they live in the home, or (3) borrow as a line of credit.

pledged account mortgage (PAM)

a loan made against security, such as money held in a savings account or a certificate of deposit

Negotiable Instrument

a written unconditional promise or order to pay a certain amount of money at a definite time or on demand. A negotiable instrument is easily transferable from one person to another meaning it can be bought and sold. The most common type of negotiable instrument is an ordinary bank check.

prepayment clause

allows a borrower to pay off a loan early or make higher payments without paying a prepayment penalty

Hypothecation how is this different from a pledge?

allows a borrower to remain in possession of the property while using it to secure the loan Hypothecation differs from a pledge because actual possession of pledged property is given to the lender

assumption clause

allows a buyer to assume responsibility for the full payment of the loan with the lender's knowledge and consent

acceleration clause

allows a noteholder to call the entire note due, on occurrence of a specific event such as default in payment, taxes or insurance, or sale of the property

nontraditional mortgage product

any loan other than a fixed-rate, 30-year, fully amortized loan.

negative amortization

borrower makes lower payments than what should be made on a fully amortized loan, resulting in an increased principal

Trust Deed as a Security Instrument

conveys title of real property from a trustor to a trustee to be held as security for the beneficiary for payment of a debt The three parties to a trust deed are the borrower (trustor), lender (beneficiary), and a neutral third party called a trustee. The trustor (borrower) signs the promissory note and the trust deed and gives them to the beneficiary (lender) who holds them for the term of the loan. Under the trust deed, the trustor has equitable title and the trustee has "bare" or "naked" legal title to the property. Possession and equitable title remain with the borrower. When the debt is repaid in full, the beneficiary signs a Request for Full Reconveyance and sends it to the trustee requesting the trustee to reconvey title to the borrower. The trustee signs and records a Deed of Reconveyance to show the debt has been repaid and to clear the lien from the property.

subprime loans

do not meet fannie & freddie credit standards

Energy Efficient Mortgage

enables homeowners to finance the cost of adding energy-efficiency features to new or existing housing

Jumbo loans

exceed loan limit set by fannie & freddie

Confirming loans

follow fannie/freddie guidelines AKA prime loans, A-paper loans

power-of-sale clause

foreclosed non-judicially by a trustee's sale

alienation or due-on-sale clause

if present, lender may accelerate loan if property transfers ownership

Security Instrument

legal document given by the borrower to hypothecate the property to the lender as collateral for a loan, creating a security interest.

Foreclosure

legal procedure used by lenders to terminate all rights, title, and interest of the trustor or mortgagor in real property by selling the property and using the sale proceeds to satisfy the liens of creditors.

Seller Financing Disclosure Statement

legally required with seller financing

conditional commitment from FHA

lender applies for this from FHA to see if they will actually accept the borrower

unsecured loan

lender receives a promissory note from the borrower, without any security for payment of the debt

open-end loan

line of credit

renegotiable rate mortgage

loan in which the interest rate is renegotiated periodically.

shared appreciation mortgage (SAM)

loan in which the lender offers a below-market interest rate in return for a portion of the profits made by the homeowner when the property is sold

rollover mortgage (ROM)

loan in which the unpaid balance is refinanced typically every five years at then current rates.

Certificate of Reasonable Value

maximum VA loan amount, based on appraisal of the house

Section 245 (a) Graduated Payment Mortgage

monthly payment that starts out at the lowest level and increases at a specific rate structured for buyers who expect to be earning substantially more after a few years

Mortgage

mortgage is a lien against the described property until the debt is repaid. There are two parties in a mortgage: a mortgagor (borrower) and a mortgagee (lender). The mortgagor receives loan funds from a mortgagee and signs a promissory note and mortgage. Once signed by the borrower, both the note and mortgage are held by the lender until the loan is paid. Unlike a trust deed, under a mortgage both title and possession remain with the borrower.

conventional loan

no government guarantees

hard money loan

one made in exchange for cash

takeout loan

permanent loan that pays off a construction loan

lock-in clause

prohibits borrowers from paying off a loan in advance. It is not allowed on residential units of less than four units.

Mutual Mortgage Insurance (MMI)

protect lender in case of default on FHA loan used by FHA to finance FHA program

Section 203(k) Rehabilitation Loan

provides the funds to purchase your home and the funds to complete your improvement project all in one loan

How are ARM rates determined

qualifying rate - current rate of chosen index margin - 1-3% rate added that does not change

Effective interest rate

rate the borrower is actually paying (APR)

package loan

secured by more than the land and structure. It includes fixtures attached to the building (appliances, carpeting, drapes, air conditioning) and other personal property.

carry back financing

seller extends credit to a buyer by taking a promissory note executed by the buyer and secured by a trust deed on the property being purchased as a part of the purchase price.

swing loan

temporary loan made on a borrower's equity in his or her home It is used when the borrower has purchased another property, with the present home unsold

Usury

the charging of interest that is unreasonably high or beyond the legal limit set by the state. interest rate on a loan made primarily for personal, family, or household purposes cannot exceed 10% per year.

Equitable title

the interest held by the trustor under a trust deed and gives the borrower the equitable right to obtain absolute ownership to the property when the terms of the trust deed are met.

Contract of Sale (AKA contract for deed)

the seller (vendor) becomes the lender to the buyer (vendee). The vendor pays off the original financing while receiving payments from the vendee on the contract of sale. The vendor and vendee's relationship is like that of a beneficiary and a trustor in a trust deed. vendor - legal ownership vendee - equitable title When the terms are met, the vendor passes title to the vendee

blanket loan

trust deed or mortgage that covers more than one parcel of property usually contains a partial release clause that provides for the release of any particular parcel upon the repayment of a specified part of the loan

(2) types of foreclosure

trustee's sale and by judicial process

subordination clause

used to change priority, lender is giving permission to lower his priority

All Inclusive Trust Deed/Wraparound Mortgage

wraps an existing loan with a new loan, and the borrower makes one payment for both. with seller financing, loan needs to be assumable (FHA/VA)