Real estate ch. 6

If a Mortgage or Deed of Trust is: assumed

"Assumed" the purchaser is accepting the debt and is, therefore, personally liable for the entire debt. The bank could require the original seller to remain secondarily liable if the new borrower does not pay. The seller would no longer be liable if the lender will consider a novation*. *Novation is a second contract to assume liability for the debt for the purchaser and relieve the liability to the seller.

Budget Mortgage

A Budget Mortgage is a loan which has a payment composed of principal, interest, taxes and insurance.

Title insurance

A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Title insurance protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title.

IMPOUNDS:

A fund of the buyer's money that the lender sets aside for future needs relating to the parcel of property. Most lenders require an impound account to cover future payments of insurance and taxes. Sometimes this is referred to as the buyers' escrow (not the brokers').

Participation Mortgage

A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate. Example - An insurance company teams with a bank and a purchaser to buy a property.

Open-end Mortgage/deed of trust

A mortgage or Deed of Trust in which the mortgagor/trustor is allowed to re-borrow against principal that has already been paid so far. The full loan is secured by the same original mortgage/deed of trust. A lender is allowed to increase the outstanding balance of a loan up to the original amount of the loan, in order to advance additional funds to the borrower as the funds are needed. Example - A farmer needs to borrow money to plant his/her crop.

Straight Term Loan

A type of a loan where only interest is paid is called a Straight Term Loan. The borrower must be prepared to pay the entire principal at the end of the time period!

Contract for Deed

Also called an installment land contract where the buyer does not receive legal title until the final payment is made. Seller is vendor, buyer is the vendee. Seller keeps legal title until the debt is paid in full. Buyer receives equitable title until debt is paid in full.

APPRAISAL FEES:

An appraiser's fees are typically based on time and expenses; fees are never based on a percentage of the appraised value.

Federal Home Loan Mortgage Corporation or Freddie Mac (FHLMC)

Buys conventional loans. Referred to as "Freddie Mac." HUD (Department of Housing and Urban Development) is the regulator for Ginnie Mae and Freddie Mac. You must be able to recognize these three major players in the secondary market by their Full Names, Nicknames and Initials. Note: In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship under the federal government's Federal Housing Finance Agency.

A mortgage or deed of trust, if recorded, must be recorded in the:

City, county or municipality where the property is located; Junior mortgages are second mortgages or deeds of trust. The priority of junior liens is determined by the date and time of recording.

FHA has other programs

FHA 234 - for loans on condominiums FHA 245 - Graduated Payment Plan Mortgage FHA 203K - Allows the purchaser to borrow enough money to rehabilitate a property FHA also has an Adjustable Rate Mortgage Program (ARM)

Major warehousing agencies in the Secondary Mortgage Market are:

Federal National Mortgage Association or Fannie Mae (FNMA) Government National Mortgage Association or Ginnie Mae (GNMA) Federal Home Loan Mortgage Corporation or Freddie Mac (FHLMC)

Reverse Annuity Mortgage (RAM)

Homeowner receives monthly payments based on accumulated equity rather than a lump sum. Loan must be repaid upon the death of the owner or sale of the property. Most advantageous for senior citizens who own their own home - house rich/cash poor.

Adjustable-rate Loan

Interest rate fluctuates and is usually tied to an index; increases are capped for each period and for the term of the loan. INDEX is often tied to U.S. Treasury securities. The interest rate is usually the index plus a premium called the Margin.

Takeout Loan

Long term permanent financing for large construction projects, usually commercial. Replaces construction loan on large commercial projects.

Graduated Payment Plan

Lower payments first year, then payments increase. Example: FHA 245 program is a graduated payment plan loan. You will have to remember this FHA program plan number and its purpose. Monthly payments will go up!!! This is an excellent loan for a young executive (doctor, lawyer) whose income will increase over the years.

Sale-Leaseback

Owner sells his or her improved property and at the same time, signs a long-term lease. Example, A commercial property is sold on the condition that the new owner lease it back to the seller at the time title passes. Grantor (original seller) becomes the lessee and the grantee (new owner of the property) becomes the lessor. In a sale-leaseback the grantor (original seller) had a "Freehold estate". After the sale, the new tenant (the original grantor) ends up with a "Less than freehold estate" (a leasehold estate).

Duties of the borrower in a mortgage or deed of trust:

Payment of the debt in accordance with the terms of the note. Payment of all real estate taxes on the property given as security. Maintenance of adequate insurance. Maintenance of the property in good repair at all times. Obtain lender authorization prior to making any major alterations to the property.

A monthly loan payment consists of:

Principal - The amount borrowed from the lender. Interest - The amount paid to the lender for allowing the money to be borrowed. Taxes - The amount due to the government for the privilege of private ownership of real property. Insurance - The amount paid to the insurance company in case of damage to the property. There could also be mortgage insurance due.

NON-RECOURSE CLAUSE:

Real estate loans are often sold in the financial market. When a non-recourse clause is included in the sale's agreement, the seller of the security is not liable if the borrower defaults.

The Primary Mortgage Market financing sources are:

Savings and loans Banks Insurance companies Mortgage brokers Mutual savings banks

Chain of Title

The chain of title shows the successive changes of ownership, each one linked to the next so that a "chain" is formed.

DISINTERMEDIATION:

The process of individuals investing their funds directly instead of placing money with banks, savings and loans and other savings institutions. Disintermediation has a direct influence on the scarcity of money or surplus of money available for mortgages.

Vendee

The purchaser of realty - the buyer under a contract for deed.

Truth In Lending Law (Regulation Z):

The purpose of this law is DISCLOSURE. The law requires lenders to disclose to buyers the true cost of obtaining credit so that the borrower can compare the costs of various lenders. The regulation requires that the consumer be fully informed of all finance charges, as well as the true annual interest rate, before a transaction is consummated. The truth in lending law does not control interest rates.....does not control costs to close a transaction. Truth In Lending applies to residential loans, federally related 1-4 family properties, non-commercial properties, and family farms. Commercial transactions are not covered under the Truth in Lending law.

Vendor

The seller of realty - the seller under contract for deed.

Hypothecation:

To pledge property as security for an obligation or loan without giving up possession of it.

Satisfaction Piece

When the borrower has paid the entire balance, the lender is required to execute a satisfaction of mortgage or a release deed of trust.

Subordination clause

a clause in a Mortgage or Deed of Trust wherein a subsequent mortgage or deed of trust takes priority. Example, the first deed or mortgage holder becomes the second deed or mortgage holder in the order they were recorded in priority - the second becomes the first. This clause is further defined as a "change in priority positions between holders of liens on a Mortgage or Deed of Trust in case of foreclosure."

Novation

a contract in which a buyer assumes the liability for the seller's existing mortgage debt. In other words the buyer assumes the seller's mortgage along with the property.

Adjustable Rate Mortgage

contains an escalator clause that allows the interest to adjust over the loan term. An ARM is tied to an index, and the rate of the loan goes up or down, depending on the caps, margin and adjustment period. Yearly caps limit the amount of the interest rate that may be charged during any one adjustment period. Lifetime caps set the maximum amount for payments. How often the loan rate may be changed is determined by the Adjustment Period. Most have both yearly rate caps, which limit the amount the rate may change at one time, and lifetime caps, which limit the amount the rate may increase over the life of the loan.

SHORT SALE:

the sale of a secured real property where the sale price is less than what is owed to the lender. To consummate the conveyance, the lender releases the mortgage or trust deed so that the property can be sold free and clear to a new purchaser. Lenders will agree to a short sale to avoid the delay and expense of a foreclosure action. Lenders wish to avoid foreclosure because it can result in the bank owning the asset and thus carrying a Real Estate Owned (REO) property on its books. A short sale can also be a sale where the title has been transferred, but the selling price was insufficient to cover all the liens and costs of sale. The seller is unable to bring enough cash to the transaction to pay off the shortage.

If a Mortgage or Deed of Trust is taken over: subject to

"Subject to" an existing Mortgage or Deed of Trust. If the clause in the deed states that the buyers are purchasing the property "subject to the existing loan" the buyers acknowledge the existing loan, and promises to pay the obligation. If the buyer does not pay the original borrower will be held responsible. If the original borrower (grantor) does not pay the buyer (grantee) will lose the property, and thus his or her equity, in a foreclosure sale.

assumption

An assumption is when the buyer takes over the original payment, the original loan and the original interest rate of the seller's existing loan.

Government National Mortgage Association or Ginnie Mae (GNMA)

Buys FHA loans or VA loans. Referred to as "Ginnie Mae." "Ginnie Mae is controlled by an agency of the Department of Housing and Urban Development. When "Ginnie" and "Fannie" work together it is called the Tandem Plan. It is a mortgage subsidy program offered by Congress from time to time through the Government National Mortgage Association. When assistance is needed, GNMA is authorized to purchase certain mortgages at below market interest rates so that borrowers can be granted low-interest loans. GNMA then sells these loans in the secondary market at deep discounts, the discount loss being the amount of the subsidy. When these programs are available, they are offered through, or "in tandem" with, local mortgage lenders, generally administered under a contract with the Federal National Mortgage Association (FNMA).

ORDER OF PAYMENT IN FORECLOSURE

Cost of Sale - advertising, attorney fees, trustee fees, etc. Special assessment taxes, and general taxes which are called "ad valorem", according to value taxes, are paid after the costs of the sale. The first mortgage, which is determined by the order of recording. Whatever is recorded next would then be paid because of a foreclosure.

Acceleration Clause

If a borrower defaults on the loan (misses payments, etc.) the lender can call the entire balance due and payable immediately. The mortgagee or beneficiary (lender) benefits because of the presence of an acceleration clause. Without this clause in the mortgage or deed of trust the lender would not have the power or right to foreclose.

Blanket Mortgage

Loan on several pieces of land. Blanket mortgages usually contain a Partial Release Clause. This is a clause in a mortgage/deed of trust under which the mortagee/beneficiary agrees to release certain parcels from the lien of the blanket mortgage/deed of trust upon payment by the mortgagor/trustor of a certain sum of money. Example - A builder purchases 100 acres of land, and develops it into 100, 1 acre lots. As the lots are sold, in order to give the purchaser clear title, that lot needs to be released from under the blanket mortgage. So the builder pays the lender for the lot, and can now issue a deed to the purchaser.

MORTGAGOR = Borrower MORTGAGEE = Lender

Trustor = Borrower Beneficiary = Lender Trustee = Bank Vice President or anyone else designated by the lender. The trustee holds naked legal title and has the right to foreclose, with directions from the beneficiary. This is often referred to as non-judicial foreclosure.

Construction Loan

Two types 1) The lender commits the full amount of the loan to the borrower, but makes partial progress payments as the building is being completed after lien waivers have been obtained 2) High interest rate to builders, usually one percent over prime rate to be loaned for "spec homes." It is converted to Take-out on a long term basis. A builder's construction loan is considered by lenders to be a much higher risk loan than a residential home loan.

Fully Amortized Loan

A Fully Amortized loan has regular payments of principal and interest. The entire loan is paid off by the end of the term. The liquidation of a debt by periodic installments.

EXCULPATORY CLAUSE:

A clause sometimes inserted in a mortgage note in which the lender waives the right to a deficiency judgment. As used in a lease, a clause that intends to clear or relieve the landlord from liability for tenants' personal injury and property damage. It may not, however, protect the landlord from injuries to third parties.

ESTOPPEL CERTIFICATE:

A document in which a borrower certifies the amount owed on a mortgage loan and the rate of interest. A legal doctrine by which a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct or silence. For example, a mortgagor/trustor who certifies that he or she has no defense against the mortgagee/beneficiary would be estopped to later assert any defenses against a person who purchases the mortgage in reliance on the mortgagor's certificate of no defense. Another example: Depending upon the area of the country you live in, the title company or escrow company want to know how much you owe the lender on the day of closing so they can withhold that amount from the proceeds of closing. The title company or escrow company ask the lender to sign an estoppel certificate with this information. If the lender makes a mistake they are estopped from making a claim against the title company or escrow company for the mistake. (The lender may come after the borrower claiming the borrower knew how much they owed.)

Abstract and opinion

A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The abstract of title does not guarantee or ensure the validity of the title of the property. It is a condensed history that merely discloses those items about the property that are of public record. It does not reveal such things as encroachments and forgeries. Therefore, the abstracter is usually liable only for damages caused by his or her negligence in searching the public records.

"Subject to mortgage"

A grantee [buyer] taking title to a real property "subject to" a mortgage [that a seller is letting the buyer take over] is NOT personally liable to the lender [mortgagee] for the payment of the mortgage note. In the event of a foreclosure the buyer would lose his/her equity. If the buyer doesn't pay, the seller would have to pay, and if the seller doesn't pay, the property gets foreclosed on, and the buyer loses the property.

NON-RECOURSE LOAN:

A loan in which the borrower is not held personally liable on the note. The lender of a non-recourse loan generally feels confident that the property used as collateral will be adequate security for the loan.

Grant Program (Down Payment Assistance)

A program that provides buyers with a "gift" of money to use toward their down payment or closing costs which never has to be paid back. Some popular programs include AmeriDream, Nehemiah, Housing Action Resource Trust (HART) and Partners in Charity. Some lenders also accept "gift letters" which acknowledge that the down payment money was a gift from a relative and does not need to be repaid.

Balloon Loan

A type of loan where interest and principal are paid on an equal basis until the final payment, which is larger, is called a Balloon or a Partially Amortized Loan. A balloon is the remaining balance that is due at the maturity of a note or obligation. This type of loan is also referred to as partially amortized.

CONDITIONAL APPROVAL (conditional or qualified commitment):

A written pledge by a lender to lend a certain amount of money to a qualified borrower on a particular piece of real estate for a specified time under specific terms. It is more formal than a preliminary loan approval. After reviewing the borrower's loan application, the lender usually decides whether to make a commitment to lend the requested funds. This application contains such information as the name and address of the borrower, place of employment, salary, bank accounts, credit references, and the like.

Wraparound

Additional financing from a second lender. One payment - two loans. The new lender pays the first loan, but charges higher interest for a second. Original loan must be assumable with no alienation clause. Type of loan where the original 1st mortgage is not disturbed. Example - You are interested in purchasing a property, but interest rates are high, and your lender will not make you a loan. You and your lender discover that the seller has an FHA or a VA loan. Remember, that this type of loan cannot have an alienation (due on sale) clause. Your lender agrees to assume the seller's mortgage, and make you a loan for the entire amount you need to purchase the property.

The following can usually be deducted on income tax returns:

Interest payments made on first and second homes that meet the necessary qualifications; Certain loan origination fees and discount points; Loan prepayment penalties and real estate property taxes.

Package Mortgage

Loan on real estate, plus fixtures, and appliances; always includes personal property as well as real property. Used extensively in the sale of condominiums (the property comes with the refrigerator, stove, drapes, washer and dryer).

Transfer Tax

Many states charge what is called a transfer tax when the property is conveyed by one of the following means: Deed Contract for deed Lease Sublease Assignment One purpose of the tax is to collect reliable data on the fair market value of the property to help establish more accurate property tax assessments. Transfer taxes are paid by the seller or lessor. The tax may be paid by the purchase of tax stamps or by payment of a transfer fee.

oan application exists once consumer has submitted 6 items (3 pertaining to customer and 3 pertaining to property) to the lender

Name Borrower's Income Borrower's Social Security number Property address Estimated value of property Amount of mortgage loan sought by the consumer.

Conventional Insured Loans

No government guarantees of insurance but insurance from private insurance companies. Private Mortgage Insurance (PMI) is insurance provided by a private insurer that protects the lender against loss in the event of a foreclosure and deficiency. Insurance is required for all loans with less than 20% down payment.

Conventional Loans

No government guarantees or insurance. Loans obtained at local savings and loans, mortgage brokers and mortgage bankers. Minimum down payment of 20%. However, there are conventional loans available with lower down payments if the buyer is willing to pay a Private Mortgage Insurance premium (PMI). Conventional Loans normally require a larger down payment (20% down or more) than FHA or VA, but do not require insurance with 20% or more down payments. Most loans are packaged by the lenders and sold in the secondary market to Fannie Mae or Freddie Mac.

Federal National Mortgage Association or Fannie Mae (FNMA)

Sells seasoned mortgages and deeds of trust to individual investors and financial institutions. A seasoned mortgage is one that has been in existence for some time and has a good record of repayment by the mortgagor. Fannie Mae was established in 1938 for the purpose of purchasing FHA loans from loan originators to provide some liquidity for government insured loans. Please note the following about the Federal National Mortgage Association: Buys FHA loans, VA loans, and conventional loans. FNMA is referred to "Fannie Mae." Largest purchaser in secondary market.

Bridge Loan

Short term interim loan for buyer, usually six months to one year in duration. May be placed on former house to buy new house until first house sells.

Loan Assumption

The act of acquiring title to property that has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments. (The buyer is "Taking over" the seller's responsibilities)

UNDERWRITING:

The analysis of the extent of risk assumed in connection with a loan. Underwriting a loan includes the entire process of preparing the conditions of the loan, determining the borrower's ability to repay and subsequently deciding whether to give loan approval.

Alienation Clause

The mortgagee or beneficiary declares the entire balance of the loan due and payable when the property is transferred. When this clause is contained in the Mortgage or Deed of Trust, it prevents the assumption of the loan by a new purchaser.

DEFAULT:

The non-performance of a duty or obligation that is part of a contract. The most common occurrence of default on the part of a buyer or lessee is nonpayment of money when due. A default is normally a breach of contract, and the non-defaulting party can seek legal remedies to recover any loss. A buyer's good faith inability to obtain financing under a contingency provision of a purchase agreement is not considered a default (the performance of the contract depends on the buyer getting the property financed), and in this case the seller must return the buyer's deposit.

Buydown

The payment is subsidized at the beginning by a builder or other party for a 3 to 5 year period, and thereafter, the purchaser takes over and pays the regular payment amount. This is a financing technique used to reduce the monthly payment for the home buying borrower during the initial years. As interest rates climbed in the late '70's and early '80's many families could not qualify for sufficient loans needed to purchase a home. This type of help from a builder or from the borrower him/herself allowed a family to qualify for a lower interest rate loan.

settlement agent duties

The settlement agent does the closing, calculates the costs involved and fills out the closing statements. The agent must also fill out all the papers that are necessary for the particular transaction, which may include filing IRS forms. A settlement agent could be an attorney, a real estate broker, a closer from the title company or a lender.

Escalation Clause

This clause is found in an adjustable rate mortgage and in some leases. In a mortgage, it allows the interest rate to adjust over the life of the loan. In a lease, it allows the lease payment to adjust over the life of the lease.

Rural Economic and Community Development (RECD)

formerly known as Farmers Home Administration (FmHA) is a federal lender with the U.S. Department of Agriculture that makes loans for home purchases or construction in rural areas and small communities outside metropolitan areas.

Subrogation

he substitution of a third person in place of a creditor to whose rights the third person succeeds in relation to the debt. Example, a title company that pays a loss within the scope of its policy is subrogated to any claim that the buyer has against the seller for a loss. Or if you have an automobile accident, your insurance company will pay any claims against you.

Part Purchase Money

or Purchase Money Mortgage (PMM) - A mortgage given as part of the buyer's consideration (cash) for the purchase of real property, and delivered at the same time that the real property is transferred as a simultaneous part of the transaction. It is commonly a mortgage taken back by a seller from a purchaser in lieu of purchase money.