UNIT 14: Real Estate Pre-license Course - Real Estate Financing
Amortize
"to kill off" i.e., pay off a debt in installments that include both interested and principal. Also known as direct reduction loans.
Buying vs. Renting
- How long in one area/place - buyer/renter financial status - housing affordabilty - current mortgage interest rates - tax consequences of owning vs. renting - what might happen to home prices and tax laws in future
Adjustable Rate Mortgage Common Elements
- The index is an economic indicator used to adjust interest rate. - Usually the interest rate is the index + a premium (called a margin). - Rate Caps limit the amount of interest rate may change.
Duties of the borrower in a mortgage or deed of trust:
1. Payment of the debt in accordance with the terms of the note. 2. Payment of all real estate taxes on the property given as security. 3. Maintenance of adequate insurance. 4. Maintenance of the property in good repair at all times. 5. Obtain lender authorization prior to making any major alterations to the property. Failure to meet any of these obligations can result in borrower's default.
Consumer Financial Protection Bureau (CFPB)
A U.S. government agency that helps protect consumers by regulating financial products and services, like mortgages, credit cards, and student loans. Released mortgage rules that the lender must: - provide billing information in writing - give borrower two months' warning if an ARM will have a rate change - promptly credit borrower's payments - respond quickly when the borrower asks about paying off the loan - not charge for insurance the borrower does not need or over charge - quickly resolve complaints w/i 30-45 biz days - have and follow good customer service policies - contact the borrower to help when the borrower is having trouble making payments - work with the borrower if the borrower is having trouble making payments before starting foreclosure. - allow a borrower to seek review of the decision about a loan workout request.
Prepayment Penalty
A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost.
Coinsurance Clause
A clause in an insurance policy under which the insured agrees to maintain insurance equal to some specified percentage of the property value or otherwise to assume a portion of any loss. Usually 80% of replacement cost
Interest
A cost of or charge for the use of money, expressed as a charge for the remaining balance of the loan.
Comprehensive Loss Underwriting Exchange (CLUE)
A database of consumer claims history that allows insurance companies to access prior claims information in the underwriting and rating process.
Deed in Lieu of Foreclosure
A deed to real property accepted by a lender from a defaulting borrower to avoid the necessity of foreclosure proceedings by the lender. (also known as friendly foreclosure). Drawback to this is that is does not eliminate junior loans, unlike foreclosure actions. It also still considered an adverse element to borrower's credit history.
Deed of Reconveyance
A document that a trustee uses to transfer the title back to the trustor (borrower) when the note is repaid.
Release Deed
A document, also known as a deed of reconveyance, that transfers all rights given a trustee under a deed of trust loan back to the grantor after the loan has been fully repaid.
Discount Points
A fee charged by the lender at settlement that results in increasing the lender's effective yield (rate of return) on the money borrowed. Charged as prepaid interest. 1 Point usually = 1% of the amount being borrowed (not the purchase price). The number of points charged depends on two things: 1) the difference between the loan's stated interest rate and the yield required by the lender 2)How long the lender expects it will take the borrower to pay off the loan.
Loan Origination Fee
A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount. a.k.a. transfer fee.
Balloon Payment
A final payment of a mortgage loan that is considerably larger than the required periodic payments because the loan amount was not fully amortized. Typically this payment is a final payment that is at least twice the amount of any other payment. The loan will be considered partially amortized.
Amortized Loan
A financial debt that is paid off over a period of time by a series of periodic payments. A loan can be fully amortized or partially amortized requiring a balloon payment to satisfy the debt at the end of the term. A loan in which the principal as well as the interest is payable in monthly or other periodic installments over the term of the loan.
Growing Equity Mortgage (GEM)
A fixed-rate (rapid payoff) mortgage that provides scheduled payment increases over an established period of time. The increased amount of the monthly payment is applied directly toward reducing the remaining balance of the mortgage.
Assignment of Mortgage
A legal instrument that states that the mortgagee (assignor) assigns/endorses (transfers) the mortgage and promissory note to the purchaser/third party (assignee).
Foreclosure
A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the note.
Reverse Mortgage
A loan based on the equity in a home, that provides elderly homeowners (aged 62 or older) with tax-free income and is paid back with interest when the home is sold or the homeowner dies. The borrower may decide on lump sum payout, fixed monthly payments, open line of credit, or another option. Normal home expenses would still be paid by borrower.
Adjustable Rate Mortgage (ARM)
A loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index.
Fully amortized loan (level payment loan)
A loan consisting of equal, regular payments satisfying the total payment of principal and interest by the due date.
Partially Amortized Loan
A loan requiring payments of both principal and interest, but when the final payment is made, a balloon payment is required to retire the loan. Some of the interest has been paid, with some still owed at the end of the term. Lenders are often known for extending the balloon payment (but not legally obligated to do so).
Credit Score (FICO)
A measure of an individual's credit risk; calculated from a credit report using a standardized formula, FICO is an acronym for the Fair Isaac Corporation, the company that developed the FICO score, which is the most commonly used credit score in the United States. There are others, but FICO is most commonly used. When someone says 'credit score,' it's almost always FICO they're talking about. FICO scores range from 300 to 850.
Defeasance Clause
A necessary mortgage clause in title theory states. When the debt is satisfied, this clause causes title to pass automatically back to the borrower. Satisfaction of mortgage; release from records. a clause or condition which, if fulfilled, renders a deed or contract null and void.
Deficiency Judgment
A personal judgment against a debtor for the amount of a debt remaining unpaid after the collateral has been repossessed and sold. In a short sale, the sale price is "short" of the amount you owe to the mortgage lender. The difference between the total debt owed and the sale price is the "deficiency". Example. Say you are approved by your lender to sell your property for $200,000, but you owe them $250,000. The deficiency is $50,000. In many cases, the lender can seek a personal judgment against you after the short sale to recover the deficiency amount. Generally, once a deficiency judgment has been obtained, the lender may collect this amount (in our example, $50,000) from the borrower by doing such things as garnishing the borrower's wages or levying the borrower's bank account.
Margin
A premium added to the index rate representing the lender's cost of doing business.
Nonjudicial Foreclosure
A process of bringing the property of defaulting borrowers to public sale by the lender or a trustee outside of the court system. It must follow statutory guidelines, particularly concerning public notices of the sale. A foreclosure under "power of sale" in which the deed of trust does not have to be foreclosed through a court action.
Short Sale
A sale in which the seller does not actually own the security that is sold. The seller does not actually own the security that is sold. Sales price is less than the remaining indebtedness.
Interest Only Loan
A straight, non-amortizing loan in which the lender receives only interest during the term of the loan and principal is repaid in a lump sum at maturity.
Deed of Trust
A three party security instrument that grants a trustee under a land trust full power to sell, mortgage, and subdivide a parcel of real estate. The beneficiary controls the trustee's use of these powers under the provisions of the trust agreement. A deed to real property, which serves the same purpose as a mortgage, involving three parties instead of two. The third party holds naked title for the benefit of the lender. Beneficiary (Lender), Trustor (Borrower), Trustee (Third Party)
Subordination Agreement
A written agreement between holders of liens on a property that changes the priority of mortgage, judgment, and other liens under certain circumstances. To be valid, both lender's must sign.
Security Instrument
A written document executed by a debtor by which the described property is made security for the underlying debt. Mortgage loans = secured loans.
Statutory Right of Redemption
AFTER THE SALE. If the state provides statutory redemption rights, then the homeowner has the right to redeem their mortgage for a certain period of time by paying the entire foreclosure sale, plus interest and other fees to the purchaser of the foreclosure sale. This occurs *after the property is actually sold in foreclosure* and the homeowner must pay the entire mortgage balance. Only available in about half the U.S. states.
Assumption of Mortgage
Acquiring title to property on which there is an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including payments.
Impound or Escrow Account (reserve fund)
An account that most mortgage lenders require borrowers to have for funds to pay future real estate taxes and insurance premiums; also called escrow account.
Satisfaction of Mortgage
An instrument issued by the mortgagee (Lender) when the mortgage has been paid in full.
Negotiable Instrument
An unconditional, written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee's right to payment.
"Subject To"
Assumption of mortgage in which the buyer assumes the mortgage or deed of trust and agrees to pay the debt. In the instance of foreclosure, (without novation) the buyer is not personally obligated to pay the debt in full.
Equitable Right of Redemption
BEFORE THE SALE. Under the right of redemption, a homeowner in a foreclosure process has the right to redeem the mortgage and keep the house by making mortgage payments or paying a certain amount of the money to save their homes from being foreclosed. Occurs prior to the home actually being foreclosed. The homeowner only needs to pay the amount that is due and not the entire mortgage balance. Every state allows for this *before foreclosure*.
Usury
Charging interest on a loan, esp. charging illegally high or excessive interest.
Strict Foreclosure
Court ordered legal transfer of title directly to lender without public sale. A legal procedure which enables the lender to take title from a defaulting borrower without a foreclosure sale. The court grants the borrower a specified amount of time to pay off the loan. If the debt is not paid, title is awarded to the lender. No sale takes place. This is common when personal property is used to secure a debt.
Judicial Foreclosure
Court-administered public auction. Allows the property to be sold by court order after the mortgagee has given sufficient public notice.
Calculating interest
Determining interest
Special Flood Hazard Areas (SFHAs)
Flood prone areas. A categorization of risk associated with floods determined by flood history and location used to determine the cost of flood insurance. The Federal Emergency Management Agency (FEMA) uses A to indicate inland areas and V for coastal areas.
Recording a Mortgage or Deed of Trust
Gives constructive notice and establishes the lien's priority.
Short Sale Tax Implications
If the Lender "Forgives" the Deficiency - "Cancellation of Debt" as Taxable Income: If a short sale results in a deficiency, but the lender decides not to come after you for payment and forgives the debt, this means you are no longer under an obligation to repay the lender. The lender is then usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C. If this occurs, you might have to include the forgiven amount as income for tax purposes. Example. As in the example above, let's say you complete a short sale by selling your property for $200,000, but you owe the lender $250,000. The deficiency is $50,000. If the lender decides not to try to obtain a deficiency judgment and issues a 1099-C instead, then you have received a cancellation of debt in the amount of $50,000. This is generally considered taxable income to you.
Flood Insurance
Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas. Policies are of two types: Replacement Cost Value (RCV) or Actual Cost Value (ACV)
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
Legislation passed in 2010 that was intended to reform regulation of the financial system. Passed in response to the 2008 global financial crisis, the Act brought the most significant changes to financial regulation in the nation since the regulatory reform that came following the Great Recession. It made changes in the American financial regulatory environment affecting all federal financial regulatory agencies and almost every part of the nation's financial services industry.
Mortgage Amortization Triangle
Monthly payment (- month's interest) = amount paid toward principal >>>> Principal Balance (- amount paid toward principal) = new pricipal balance >>>> Principal Balance x annual interest rate ÷ 12 = month's interest
Power of Sale Clause
Mortgage provision which enables the lender to foreclose without filing a lawsuit against the defaulting borrower. Common with deed of trust loans (title theory states).
Note
Negotiable instrument given by borrower (maker/payor)to lender as evidence of debt.
Negative Amortization
Occurs when the loan payment is not sufficient to cover the interest cost and results in the unpaid interest being added to the original balance, causing the loan amount to increase. When the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition.
debt-to-income (DTI) ratio
Percentage of monthly gross income that goes towards paying debt.
Financing Instrument
Promissory note or mortgage note
Homeowners Insurance
Provides payment to cover liability losses as well as damage and loss of the home structure and its contents.
Short Sale Taxation
Regardless of the time between the short sale and the replacement, the capital gain or loss realized is considered short term provided: 1) Identical or substantially identical property is acquired in the period between the short sale and its replacement. 2) Identical or substantially identical property to that used to close the short sale was owned by the investor for a short-term holding period and at the time of the short sale.
Lien Theory (or Mortgage Theory)
Some states interpret a mortgage as being purely a lien on real property. The mortgagee thus has no right of possession but must foreclose the lien and sell the property if the mortgagor defaults. Not GA.
Title Theory or (Deed of Trust)
Some states interpret a mortgage to mean that the lender is the owner of mortgaged land. Upon full payment of the mortgage debt, the borrower becomes the landowner. Usually the lend chooses the trustee and reserves the right to substitute trustees (upon death or at dismissal). Ga is.
Methods of Foreclosure
Specific provisions and procedures depend on state law: Judicial Foreclosure Non-Judicial Foreclosure Strict Foreclosure
National Flood Insurance Act of 1968
Subsidizes flood insurance, and is administered by the Federal Emergency Management Agency (FEMA). Required owners who finance property with federal or federal related mortgage loans, in flood prone areas known as special flood hazard areas (SFHAs) to obtain flood insurance.
Flood Insurance Reserves
The National Flood Insurance Reform Act of 1994 imposes certain mandatory obligations on lenders and loan servicers to set aside (escrow) funds for flood insurance on new loans for property in flood-prone areas. However, the act also applies to any loan still outstanding on September 23, 1994. This means that if a lender or servicer discovers that a secured property is in a flood hazard area, it must notify the borrower. The borrower then has 45 days to purchase flood insurance. If the borrower fails to procure flood insurance, the lender must purchase the insurance on the borrower's behalf. The cost of the insurance may be charged back to the borrower.
PITI Acronym
The basic costs of owning a home: Principal, Interest, Taxes, Insurance
Acceleration Clause
The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or other covenant.
Alienation Clause
The clause in a mortgage or deed of trust that states that the balance of the secured debt becomes immediately due and payable at the lender's option if the property is sold by the borrower. In effect, this clause prevents the borrower from assigning the debt without the lender's approval. Often called a due-on-sale clause.
Prepayment Clause
The clause in a mortgage or note stating the penalty, if any, for payment before it actually becomes due.
Naked Title (also called "bare legal title")
The minimum title vested in the holder of a trust deed, without any of the privileges of possession and use.
Mortgagor/Mortgagee
The mortgagor is the borrower. The mortgagee is the lender. The borrower gives a mortgage to the lender.
Loan to Value (LTV)
The percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower).
Trustor
The person who creates a trust and voices the instructions to the trustee. (The borrower.)
Interest Rate Factor
The rate of exchange between dollars today and dollars in the future. The number required eac month to amortize a $1000 loan. To calculate the principal and the interest (PI) multiply the interest rate factor x number of $1,000's in the total loan.
Novation
The substitution, by agreement, of a new contract for an old one, with the rights under the old one being terminated.
Mortgage Debt Relief Act of 2007
This act offers relief to homeowners who would have owed taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying to debts discharged in calendar year 2007 through 2009. With the Emergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through calendar year 2012. Act further extended until January 1, 2014 at section 202 of American Taxpayer Relief Act of 2012. This tax relief has been renewed each year since. The latest enactment on February 9, 2018 of the Bipartisan Budget Act renewed for all of tax year 2017 a wide range of individual and business tax benefits that had expired at the end of 2016 -- including the "exclusion from gross income of discharge of qualified principal residence indebtedness (often, foreclosure-related debt forgiveness), claimed on Form 982."
Hypothecation
To pledge property as security for an obligation or loan without giving up possession of it.
Rate Caps - ARMs
Two types: - Periodic - rate cap limits of the rate increase over a stated term (usually a year) - Life-of-the-loan (aggregate) - rate cap limits the amount the rate may increase over the entire life of the loan.
Forclosure
When borrower defaults on any required payment or fails to fulfill any of the other obligations set forth in the mortgage or deed of trust, the lender's rights can be enforced through this. A legal procedure in which property pledged as security of a debt is sold to satisfy a the debt.
Federal Flood Insurance Program
a federal program that affords flood insurance policies to persons living in areas potentially subject to flood losses
Beneficiary
a person who receives something good from someone else such as an inheritance.
Mortgage
a specific type of loan that is used to buy real estate. a voluntary and specific lien.
Capital Gains Tax
a tax levied on profit from the sale of property or of an investment. Exclusions for couples up to $500K or $250K single. Can be done repeatedly as long as homeowner has live in home 2 of last 5 years.
Promissory Note
a written (negotiable instrument) promise to pay a specified amount of money on demand or at a definite time
Straight Loan
aka Interest only loan or term loan. A loan with payments of interest only until the end of the term, when the entire principal is repaid in one lump sum- a zero amortization loan- a term loan. Current day, these types of loans are often used for second mortgages and home improvements.
Liability Coverage
insurance to protect against claims for bodily injury to another person or damage to another person's property
Tax Deductions
mortgage interest on 1 and 2nd homes, real estate taxes, loan discount points, certain loan origination fees, loan prepayment penalties
Payment Cap
on an ARM, the limit on the monthly payment increase that may result from a rate adjustment. which could add remaining balance to the mortgage leading to negative amortization (being underwater).
Homeowners Insurance Basic Form
pg 256
Homeowners Insurance Broad Form
pg 256-7
Replacement Cost
the cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation (not including the price of the land)
