Section 4: Financing Real Estate in Texas
Identify the loan limits on a one-unit property.
$484,350
Determine whether these statements about CLOs are true
-A computerized loan origination system is an automated computer system that allows borrowers to compare loan products electronically. -CLOs may be open or closed. -Open CLOs can be accessed by consumers in the comfort of their own home. -Closed CLOs can only be accessed through real estate offices, builders, or mortgage professionals. -Borrowers should be sure CLOs are providing the best results and are neutral.
Both mortgage and deed of trust
-A deficiency judgment is allowed -Uses a promissory note as the debt instrument
Which three of these describe the loan-to-value ratio?
-A way that loans are classified. -A calculation used by lenders to determine the loanable amount of a given property. -The ratio of debt to the value of the property.
What happens to a loan when there is a novation?
-All previous loan obligations are ended. -The seller is no longer responsible if the buyer defaults.
Is It Negotiable?
-An authorized agent of the maker/drawer may sign the negotiable instrument for the maker/drawer. -Some negotiable instruments aren't payable on demand (for example, drafts, promissory notes, and CDs) while others, such as checks, are. The negotiable instrument is payable on demand if no definite time is stated. -If interest is charged for the money owed, the rate of interest, which may be fixed or variable, must appear either on the instrument itself, or it must be be referenced in an associated document. -The negotiable instrument may not contain any conditions for payment; it must be unconditional.
Government loan
-Are insured or guaranteed by the government -Mortgage insurance premium (MIP) is required -Regularly originates loans where borrowers put down less than 4%
Conventional loan
-Aren't insured or guaranteed by the government -The lender may require additional protection if the down payment is less than 20-25% -The lender's LTV threshold is typically 75-80%
Reasons for a short sale
-Balloon payment on an adjustable rate mortgage loan -Mortgage that is too costly -Job loss
Mortgagor or trustor
-Borrower -Title holder in a lien theory state -Deed holder in a title theory state -Entity that retains rights of ownership
Which three of the following are triggering details?
-Buy a new home for $1,500 per month -Own a home for 3.5% down -Assume an FHA loan with 5% interest
Open CLO
-Can be accessed by consumers in the comfort of their own home. -The consumer uses free software to access the system.
Closed CLO
-Can only be accessed through real estate offices, builders, or mortgage professionals. -The consumer must go through the respective professional to access the system.
ECOA Laws
-Car loans -Credit cards -Home loans -Student loans
There are two key parts to every real estate loan.
-Debt -Security
When borrowers don't meet one or more of their responsibilities, what could happen?
-Default -Foreclosure
There are several criteria that Fannie Mae and Freddie Mac use as guidelines when determining if a loan is conforming. What are four of these criteria?
-Down payment -Housing/total debt to income -Loan amount -Loan-to-value ratio
Secondary Market Key Players
-Farmer Mac -Fannie Mae -Freddie Mac -Ginnie Mae
What two things should consumers do if they feel they have been discriminated against?
-File a complaint with HUD -Initiate a civil suit
Lenders that violate Regulation Z could face certain penalties. Can you identify these?
-For intentional violations, they could face fines up to $5,000 and/or imprisonment up to 12 months. -For unintentional violations, they could face fines of two times the finance charge, up to a maximum of $1,000.
Texas doesn't allow for a statutory right of redemption, except under very specific circumstances. Can you identify these two circumstances?
-Foreclosure due to unpaid ad valorem taxes -HOA foreclosure of an assessment lien
Facts about Foreclosures in Texas
-If a borrower doesn't make their mortgage payment, they're in default on their loan. -Public notices are filed with the county clerk and posted on a bulletin board in the courthouse. -The minimum amount of time from the first notice to the day of foreclosure sale is 41 days. -The borrower has at least 20 days to cure the default and stop the foreclosure.
Mortgage
-Includes two parties to the agreement -Borrower has equitable and legal title
Fixed Rate Mortgage (FRM)
-Interest rate remains the same over the life of the loan. -Principle and interest payments remain the same over the life of the loan.
Adjustable Rate Mortgage (ARM)
-Interest rates fluctuate at regular intervals. -Has a lifetime cap.
Primary Mortgage Market Players
-Investment groups -Commercial banks -Insurance companies -Credit unions
Which of these are foreclosure types in Texas?
-Judicial -Non-judicial
Mortgagee or beneficiary
-Lender -Title holder in a title theory state
Primary mortgage market lenders make money several ways. One of these ways is by originating loans. Identify two ways in which money is made when a loan is originated.
-Loan origination fees -Discount points
In order to qualify for a jumbo mortgage, lenders may require the borrower to meet certain requirements. Can you identify these requirements?
-Minimum down payment of 20% -More than 30% down payment on vacation homes -Maintain excellent credit scores -Sizable assets
Which part is the security?
-Mortgage -Deed of trust
When a borrower in Texas has defaulted, the lender sends the borrower two documents. What are these documents?
-Notice of default -Notice of acceleration
Types of CLOs (Computerized Loan Origination)
-Open system -Closed system
Borrower Responsibilities
-Pay the debt on the note -Pay the real estate taxes -Maintain property insurance -Keep the property in good condition
Promissory Note Items
-Principal -Interest rate -Discount points -Loan length -Prepayment penalties
Statutory right of redemption
-Remedying the default after the foreclosure sale. -Allows a defaulting homeowner to cure the default as long as one year after the foreclosure sale.
Equitable right of redemption
-Remedying the default before the foreclosure sale. -Doesn't allow a defaulting homeowner to cure the default after the foreclosure sale.
Common Issues with a Short Sale
-Sellers often leave the property in less-than-pristine condition. -Lenders often take a long time to approve a short sale. -Buyers could be responsible for any liens against the title. -Unrecorded liens may exist. -Junior lenders may not approve the short sale. -Lenders may require extra money after months of receiving and considering an offer.
Lenders can also make money by servicing their own loans or loans for other lenders by billing them for services. What three services can the primary mortgage market lenders make money from?
-Servicing loans -Processing payments -Preparing tax records
Facts about Texas
-Texas is a title theory state -In Texas, the deed of trust is the most commonly used instrument of conveyance
Identify the Facts
-The Truth in Lending Act requires disclosure of loan terms and costs. -Equal Credit Opportunity Act prohibits lenders from discriminating based on protected class. -Regulation Z requires that borrowers of residential loans be given specific information related to the loan. It also regulates advertising of credit terms. -Community Reinvestment Act requires lenders to demonstrate that they serve the community's low- to moderate-income housing needs.
Lien theory
-The borrower holds legal title to the property and owns the house. -A promissory note gives the lender the right to seize and sell the house should the borrower default.
Title theory
-The borrower receives the deed, but the lender has legal title. -The lender has legal title and owns the house until the borrower pays off the loan. -It's much easier for a lender to foreclose.
Purchase money mortgage
-The buyer retains title. -The buyer places security interest in the property on behalf of the seller.
Who or what are the big players in real estate financing?
-The fed -Primary mortgage market -Secondary mortgage market
Prepayment Penalty Facts
-The fee is charged to the borrower. -Paying off a loan early saves the borrower interest. -Lenders lose out on anticipated interest payments when borrowers pay off their loans early. -Lenders must disclose up front if they reserve the right to charge a prepayment penalty.
Land contract
-The seller retains title. -The seller retains ownership while the buyer has possession.
Judicial and Non-judicial Foreclosures
-Title theory states allow for a somewhat simpler foreclosure process. -In title theory states, the lender holds legal title to the property. -In lien theory states, the borrower retains both equitable and legal title. -A deed of trust gives the lender the right to foreclose on the property without taking the borrower to court first.
Identify the warning signs of credit discrimination.
-You're treated differently in person than you are on the phone. -You feel pressured into applying for a certain type of loan. -The lender makes negative comments about race, national origin, sex, or other protected groups.
HUD requires that a certain number of lenders be included in a CLO system. What is that magic number?
20
Sondra, a buyer, signs all the required mortgage documentation, promising to make all payments to her lender. Unfortunately, Sondra falls on hard times and misses multiple payments, and the bank indicates that it's going to foreclose on her. The foreclosure proceedings are more difficult for the lender because Sondra holds the title to the land. What kind of state does Sondra live in?
A lien theory state
What's a non-conforming loan?
A loan that fails to meet the criteria set forth by Fannie Mae and Freddie Mac
Straight loan
A mortgage in which only interest payments are made, and the entire principal is paid at the end of the term.
Amortized loan
A mortgage where the principal is paid down over the life of the loan, typically through equal payments.
ARM loan
A mortgage with a rate that is adjusted, usually annually, based on the behavior of the economic index with which it's associated
Novation
A new contract that replaces the old one and ends all previous obligations
What is a mortgage-backed security, or MBS?
A pool of mortgages sold to investors
Which Type of Loan?
A straight loan is a loan in which only interest is paid during the term of the loan. At the end of the term, a single payment is made and the entire principal is paid off. This type of loan is also called a term loan.
What is a triggering term?
A word or phrase that, when used in advertising, requires the disclosure of all of the terms of a loan
Farmer Mac
Agricultural and rural loans
Mortgage modification
Allows a refinancing of the debt and an extension of the mortgage term.
Refinance
Allows the borrower to use the equity in the home to pay the delinquent amount.
According to the ECOA, ______.
An applicant can only be judged by income, net worth, job stability, and credit rating
Which option best describes a CLO system?
An automated system that allows borrowers to compare loan products electronically, and even apply for a loan
_______ is a standardized measure for interest rates and other costs of the loan.
Annual percentage rate
Ed is a homebuyer reviewing the Loan Estimate he received from a lender. He notices the loan terms include a prepayment penalty. Because he's a savvy consumer, he ______.
Asks the lender if there are other options available that would not involve a prepayment penalty
What type of alternative allows the borrower to sign over the property to another person? This person would then take ownership of the home and take over the payments.
Assumption
With a deed of trust, who or what has equitable title to the property?
Borrower
With a mortgage, who or what holds equitable title to the property?
Borrower
Who are the parties involved in a mortgage loan?
Borrower and lender
Promissory note
Borrower's promise to repay another party under specified terms
Who are the parties involved in a loan secured by a deed of trust?
Borrower, lender, and trustee
Renting
Borrowers can lease their homes temporarily, moving into a less expensive home until their situation improves.
Let's say Jimmy decides to sell, and he agrees to pay the borrower's lender one discount point so that the borrower can qualify for the loan using a temporary lower interest rate. What financing technique is this?
Buydown loan
When a buyer assumes a seller's loan, who is directly responsible for repayment of the entire debt?
Buyer
When a loan is assumed, who or what takes on the responsibility of the debt?
Buyer
When a buyer assumes a seller's loan, who may be held responsible for repayment of the debt?
Buyer and seller
Buydown
Cash paid to a lender to reduce the amount of interest paid on a loan.
Package mortgage
Commonly used in commercial real estate where business assets are included as collateral. Could also be used for a furnished condominium.
Insurance companies
Companies that primarily finance large, long-term loans
What type of loan meets certain criteria that are accepted by Fannie Mae and Freddie Mac?
Conforming loan
Jimmy owns a vacant piece of land. He plans to build a home on the land, then sell it. What type of loan can he acquire to finance this project?
Construction loan
Fannie Mae
Conventional loans, FHA, VA, and rural development loans
As construction nears an end, Jimmy realizes that he's just built his dream house. Instead of trying to sell the property, he'd like to keep it and live in it forever. Which of these is Jimmy's best option?
Convert the short-term construction loan to long-term financing (take-out or end loan).
Which statement best describes an amortized loan?
Debt that is paid off by making periodic payments consisting of interest and principal
Robin has obtained a loan to purchase a home. Which of the following serves as security for that loan?
Deed of trust
Which type of security instrument involves three parties: the trustor, the beneficiary, and a trustee?
Deed of trust
Gerard has been offered a 4% interest rate on a $300,000 mortgage. His monthly mortgage payment would run about $950 per month. He plans to pay $2,000 up front to drop his interest rate to 3.75% and his payment to $920 per month. What is this upfront charge called?
Discount point
The purpose of the ECOA is to prevent ______ in lending.
Discrimination
1/12 plan
Divide the mortgage amount by 12 and add this additional amount to the monthly payment.
What is the term used to describe the payments made to a developer during the construction phase?
Draw
Regulation B is the set of regulations used to ______ the Equal Credit Opportunity Act.
Enforce
One way to avoid foreclosure is for the borrower to pay the amount owed. What's this called?
Equity of redemption
Ginnie Mae
FHA, VA, and rural development loans
Prepayment penalty
Fee that's charged when a borrower pays a loan off early
Which type of mortgage has an interest rate that remains constant over the life of the loan?
Fixed-rate
HUD partial claim
For an FHA-insured loan, the lender may be able to obtain a one-time payment from the FHA Insurance Fund to bring the loan balance current.
The ____________ process is used when borrowers don't meet their responsibilities to the lender.
Foreclosure
What process is initiated when the borrower doesn't meet their responsibilities to the lender?
Foreclosure
Deed of trust
Foreclosure is usually non-judicial
Which type of loan is insured by the Federal Housing Administration?
Government
Ralph is a borrower obtaining an FHA loan from Happy Bank. The loan is secured by a mortgage. Who or what entity is the mortgagee in this scenario?
Happy Bank
Pledging a property for a mortgage is known as _________.
Hypothecation
Which of the following criteria may be used by lenders when evaluating a loan application?
Income, net worth, job stability, and credit rating
Which of the following describes the amount a lender charges a borrower for using money?
Interest
You know how the secondary mortgage market makes money, but which entity buys its loans?
Investors
Construction mortgage
Involves risk for the lender because it is basically loaning on land, air, and a promise to build.
Which of the following is a mortgagor's responsibility?
Keep the property in good repair
Which of the following is a trustor responsibility?
Keep the property in good repair
A mortgage is a legally binding document that creates a lien on a piece of property and gives the lender the right to foreclose on the property if the borrower defaults. Who or what entity is considered the mortgagee?
Lender
Truth in Lending Act
Lenders much disclose the terms and conditions of loans
Equal Credit Opportunity Act
Lenders must not discriminate based on protected class
Regulation Z
Lenders must provide residential loan borrowers with all the important information related to the loan such as the annual percentage rate
RESPA
Lenders must provide written disclosure of estimated settlement costs to borrowers
Community Reinvestment Act
Lenders must show that they serve the community's low- to moderate income housing needs
Freddie Mac
Loans from any financial institution where the deposits are insured by the federal government
The trustor in a deed of trust is responsible for ______.
Making timely payments to pay off the loan
Credit unions
Member-based cooperatives
This type of security requires that the lender get a court order that allows it to seize and sell the home.
Mortgage
The borrower is charged ______ for all FHA loans.
Mortgage insurance premium
Another name for the borrower of a loan is ______.
Mortgagor
Commercial banks
National banks that offer consumer and business loans
Does Texas allow for a statutory right of redemption on a mortgage foreclosure?
No
What type of loan fails to meet the criteria set forth by Fannie Mae and Freddie Mac?
Non-conforming loan
A deed of trust is the most commonly used mortgage instrument in Texas. Which type of foreclosure is most commonly used in Texas?
Non-judicial
Blane is assuming Carla's loan. Which of the following may be used to ensure Carla is no longer responsible for the loan?
Novation
How can a seller be relieved of all responsibility when a buyer assumes the debt remaining on the seller's loan?
Novation
The mortgagor is responsible for ______.
Novation Making timely mortgage payments
Deed of Trust 101
Number of Parties Three: Trustor/borrower, beneficiary/lender, and trustee How Title is Held The trustee holds legal title on behalf of the beneficiary until there is a default on the debt or the loan is paid off in full. Maintenance of Collateral Beneficiary rights are protected with language that requires the trustor to maintain the property by: Paying property taxes and insurance Maintaining the physical condition of the property Allowing the beneficiary the right to inspect the property Release When Loan is Paid in Full The release clause directs the trustee to execute a deed of reconveyance, which conveys title to the trustor. In Case of Default Non-judicial foreclosure is typical. The power of sale clause is standard in a deed of trust, so that the trustor allows the beneficiary the right to nonjudicial foreclosure. The trustee arranges for auction of property; a court order is not required. Time and costs required to foreclose tend to be less than judicial foreclosure. The trustor is given notice of the sale and can cure the default and reinstate the loan prior to the sale. The trustor does not have any statutory right of redemption. The auction sale is final.
Mortgage 101
Number of Parties Two: Mortgagor/borrower, and mortgagee/lender How Title is Held Creates a lien against the property. The mortgagor holds legal title. Maintenance of Collateral Mortgagee rights are protected with language that requires the mortgagor to maintain the property by: Paying property taxes and insurance Maintaining the physical condition of the property Allowing the mortgagee the right to inspect the property Release When Loan Is Paid in Full The lender executes a satisfaction of mortgage form, which is recorded to give notice that the mortgage terms have been met. In Case of Default Judicial foreclosure is typical. The mortgagee files suit against the mortgagor to initiate judicial foreclosure. If the mortgagee proves the mortgagor is in default, a court-ordered sale of the property takes place. The property is sold at auction to highest bidder. Time and costs required to foreclose tend to be greater than a non-judicial foreclosure. The mortgagor has a right to cure the default before the judge's ruling; to use an equitable right of redemption up to the foreclosure sale; or to use a statutory right of redemption after the foreclosure sale. Specific rights depend on state law.Equitable right of redemption allows mortgagor to pay off loan in full prior to auction and maintain property ownership.Statutory right of redemption allows mortgagor a period of time after the property is sold at auction to pay off loan and associated costs and get the property title back. If the state law allows and a power of sale clause is included with the mortgage, non-judicial foreclosure can be used with this instrument.
Everyone knows that a short sale is just a sale of a one-story house, right? No? Well, what is a short sale? Use your resource and choose what you think is the best description for a short sale.
Occurs when the market value of the property is less than the amount the borrower owes, plus closing costs
Ronny is purchasing a home for $150,000. He puts 10% down on a conventional loan. Will he be required to obtain PMI or MIP?
PMI
Which one of these is the method by which the secondary mortgage market makes money?
Package and sell loans
Let's say that not only does Jimmy decide to sell his dream home, he also decides to sell it furnished. What type of loan would the buyer need to obtain?
Package loan
Several actions take place on the secondary mortgage market. Which of these is a common activity?
Packaging loans into mortgage-backed securities
Set dollar over
Pay a specific additional amount with each mortgage payment.
How can a foreclosure be stopped or prevented?
Pay all outstanding liens against the property.
Bi-weekly
Pay half the mortgage payment every two weeks instead of once per month.
Alienation clause
Prevents future buyers from assuming the loan
Where are real estate loans originated?
Primary market
What may the lender require if the borrower is unable to put at least 20% down on a conventional loan?
Private mortgage insurance
Which of the following is a promise from the borrower to repay a certain sum of money to another party (the lender or holder of the note) under specified terms?
Promissory note
Which part of a loan is the agreement to repay the debt?
Promissory note
Forbearance plan
Provides for a temporary reduction or suspension of payments.
The Hendersons don't have enough money to make the full 20% down payment their lender requires. To close the sale, the seller is willing to finance a loan for the gap between the home's list price and the amount the institutional lender is willing to loan. What's this type of financing called?
Purchase money mortgage
Investment groups
Purchasers of mortgage-backed securities
Which of the actions does the secondary mortgage market commonly take?
Purchases loans from lending institutions
Lump sum plan
Put a portion of any bonuses, tax returns, or other extra money toward the mortgage.
Robbie, a real estate agent, has a closed CLO. Who or what entity selects the lenders allowed on his CLO?
Robbie
Which of the following provides funds for lenders to keep making mortgage loans to the public?
Secondary market
In which market do lenders purchase packaged loans?
Secondary mortgage market
In the case of a "subject to" loan, who or what is the responsible party if the property is foreclosed on?
Seller
When a buyer takes on a seller's loan subject to an existing mortgage, who or what is directly responsible for repayment of the entire debt?
Seller
When a buyer takes on a seller's loan, subject to an existing mortgage, who's responsible for repayment of the seller's loan?
Seller
Mortgage-backed securities (MBSs) are created when several loans, which usually have similar characteristics, are grouped, or pooled, together and then sold. How does the loan originator make money from an MBS?
Sells the flow of principal and interest
The secondary mortgage market operates in part to _____.
Service loans
What's it called when a property is sold for less than the amount owed?
Short sale
If a negotiable instrument is transferrable, it must be ___________.
Signed
With all of this money lending and money making going on, which player has the most influence on real estate financing?
The Federal Reserve system
Forgiven debt from a short sale must generally be reported as income to the IRS. This means the buyer may be out a house, out any proceeds from the sale, and later face a whopping tax bill. What was put into place to relieve this burden?
The Mortgage Forgiveness Debt Relief Act
Interest
The amount charged for use of the money
The mortgagor in a mortgage or trustor in a deed of trust has certain obligations to fill. But before we can talk about these duties, it's important to know who this person is. Who is the mortgagor (with a mortgage) and the trustor (with a deed of trust)?
The borrower
Redemption
The borrower brings all amounts owed up to date.
Putting it Together
The borrower or mortgagor holds the title in a lien theory state. But in a title theory state, the mortgagee, or lender, holds the title.
Deed in lieu of foreclosure
The borrower turns over all rights to the property to the lien holder, without the need of a foreclosure.
Due-on-sale clause
The entire debt must be repaid at the time of sale
Which entity sits at the top of the real estate financing market?
The federal reserve
Home equity loan
The funds are often used for home renovations or to fund a college education.
Which best describes a home equity loan?
The funds are often used for home renovations or to fund a college education.
If Texas doesn't allow the statutory right of redemption, what does this mean for the homeowner?
The homeowner can't buy back the home after a foreclosure sale.
Judicial foreclosure
The lender must sue for the right to foreclose.
What value would the lender use to calculate loan-to-value ratio?
The lower of the sales price or appraised value
What's used to calculate the loan-to-value ratio?
The lower of the sales price or appraised value
Which of these is the best definition of a straight loan?
The periodic payments go to interest only and the entire principal amount is due at the end of the term.
Understanding the Players
The primary mortgage market is where the banks that originate loans operate. The secondary mortgage market is where the loans are sold and serviced.
If the secondary mortgage market didn't exist, what could happen to the primary mortgage market?
The primary mortgage market would have fewer funds available for lending.
Short sale
The property is sold for less than the loan balance, plus closing costs.
What's loan-to-value ratio?
The ratio of the amount of a loan to the value of the property
Now that you know what the fee is, let's calculate the expense for a borrower. The Moores are purchasing a home for $300,000. They are financing $250,000. Their lender charges a loan origination fee of 1%. How much will they pay in loan origination fees at closing?
They'll pay 1% of $250,000, or $2,500.
Non-judicial foreclosure
This method is most often used when a power of sale clause is included in the mortgage or deed of trust.
Which best describes a package mortgage?
This might be used in the case of a furnished condominium.
What is the purpose of the Truth in Lending Act?
To better educate consumers about the cost of credit or obtaining a loan
What's the purpose of the Federal Reserve System?
To maintain favorable and balance economic conditions
When the seller's loan will remain in place, why is it important to spell out the arrangements regarding that loan in the sale contract?
To prevent any misunderstandings in the case of a foreclosure
There are several criteria that Fannie Mae and Freddie Mac use as guidelines when determining if a loan is conforming. What are these criteria?
Total debt to income, loan amount, LTVR
In a deed of trust situation, person or entity that holds "legal" title is a ______.
Trustee
Discount point
Type of prepaid interest that borrowers pay to lower a loan's interest rate
In Texas, how long does a homeowner have to pay off outstanding liens against their property to prevent a foreclosure sale?
Until the foreclosure sale is held
Promissory and Usury Facts
Usury laws vary by state.
Usury
When an interest rate above the legally allowed maximum is charged
Snowball
When another bill is paid off, add that amount to the mortgage payment.
