Chapter 12 - Real Estate Finance Flashcards
What is title theory?
Title to the mortgaged property is conveyed to the lender through a mortgage deed; if the borrower defaults, the lender may take possession of the property; the borrower retains equitable title to the property; once the debt is paid in full, the lender conveys legal title to the borrower
What is the lien theory?
The borrower retains title to the property; the lender is protected with a lien on the real property to secure the payment of the mortgage debt; if the borrower defaults on the mortgage debt, the lender will foreclose to recover the money owed
What are the two loan instruments?
Promissory note
Mortgage
What is the promissory note?
The actual promise to repay; has basic info, only borrowers sign
Legal instrument that represents the evidence of a debt
What is a mortgage?
An instrument that pledges the property as security (collateral) for a debt
Legal document that represents the lien on the real estate that secures the debt
What is hypothecation?
Pledging of property as security for payment of a loan without surrendering possession of the property (using property as collateral)
What are the two parties to a mortgage?
The mortgagor (borrower or debtor) The mortgagee (lender or creditor)
What is an assignment of mortgage?
When ownership of a mortgage is transferred from one company or individual to another
What is an estoppel certificate?
Shows payment of information
When an individual or company purchases a mortgage, they will receive an estoppel certificate verifying the amount of the unpaid balance, the rate of interest, and the date to which interest has been paid prior to the assignment
What is the satisfaction of mortgage?
Release of mortgage
When the mortgagor pays the debt in full
What is equity of redemption?
Gives homebuyer the chance or opportunity to redeem
Allows the mortgagor to prevent foreclosure from occurring by paying the mortgagee the principal and interest due plus any expenses the mortgagee has incurred in attempting to collect the debt and initiating foreclosure proceedings
What is the promise to repay?
The mortgagor promises to pay principal and interest according to the terms of the note
The borrower agrees to pay all ____, _______, and _______ that could create a lien with superior priority over the mortgage (security) instrument.
Taxes, assessments, and fines
What is property insurance?
The mortgagor promises to keep the property insured against loss by fire and hazards included in an extended coverage policy
What is occupancy?
The borrowers agree to use the property as their principal residence for at least one year, unless the lender otherwise agrees in writing
What is maintenance and covenant of good repair?
The mortgagor promises to keep the property in good condition, maintain the property, and prevent waste
What is the due-on-sale clause?
If all or any part of the property or any interest in the property is sold or transferred without the lender’s prior written consent, the lender may require immediate payment in full
Allows the mortgagee to call due the outstanding loan balance plus accrued interest
What is the acceleration clause?
Authorizes the mortgagee to accelerate or advance the due date of the entire unpaid balance if the mortgagor fails to fulfill any promises stated in the mortgage instrument
Gives the lender the power to declare the entire unpaid mortgage loan due and payable and to foreclose on the property if the mortgagor does not remedy the default
What is the right to reinstate?
Based on the equity of redemption
Deals with the mortgagor’s right to reinstate the original repayment terms in the note after the mortgagee has initiated the acceleration clause
Gives the mortgagor the right to have foreclosure proceedings stopped before the foreclosure sale, provided that the mortgagor pays all sums that would be due if no acceleration had occurred plus all expenses incurred by the mortgagee in enforcing the mortgage
What is the defeasance clause?
It defeats the prior action when the borrower-mortgagor has made the final payment on the loan
What is the prepayment clause?
Allows the borrower to pay off part or all of the debt, without penalty or other fees, prior to maturity
What is the prepayment penalty clause?
The lender may choose to charge a prepayment penalty for early payment, if provided for in the mortgage instrument
What is the escalator clause?
Permits the lender to increase the interest rate
What is the exculpatory clause?
Requires that the lender waive the right to a deficiency judgment against the borrower; relieves the borrower of personal liability to repay the loan
What is the open-end clause?
Allows the borrower to increase the loan amount as long as the total debt does not exceed the original amount of the loan
What are blanket mortgages?
Cover a number of parcels, usually building lots
Builder/developer
The developer uses proceeds from the sale of individual lots to pay off the blanket mortgage
What is a partial release clause?
Commonly used in blanket mortgages
Provides for the release of individual parcels from the blanket mortgage upon payment of a specified amount
What is a receivership clause?
Allows a receiver (third party that is not the borrower) to be appointed to collect income from the property and use the income to make mortgage payments in the event of default
What is the FHA?
The Federal Housing Administration
A government agency within the Department of Housing and Urban Development (HUD)
What does the FHA do?
Regulates participating lenders, borrowers, and the real property offered as security for their mortgages
Functions as an insurance company, insuring mortgage loans made by approved lenders
Does not make loans to borrowers, nor does the agency process loans or build houses
What is a mortgage insurance premium?
Upfront payment required of borrowers; percentage is based on the term of the mortgage
What is the mortgage insurance premium on a typical 30-year mortgage?
2.25
What is the veterans affairs mortgage?
In 1944, the Servicemen’s Readjustment Act (GI Bill of Rights) was passed to aid returning WW2 veterans; this act and subsequent acts gave the Department of Veterans Affairs (VA) the authority to partially guarantee mortgage loans made to veterans by private lenders
The partial guarantee covers the top portion of the loan
What is the VA loan guarantee?
Loan guarantee limits
2008 maximum entitlement (guarantee) is $104,250
What is a veteran’s entitlement?
Maximum amount the government guarantees the lender will be paid in the event the borrower defaults
Does the VA set loan limits?
No
Because the maximum VA guarantee is $_________ or ____% of the loan amount, most lenders observe a maximum loan amount of $417,000.
$104,250 ; 25%
What is private mortgage insurance?
Insures that portion of the mortgage loan that exceeds the 80% of value
What is an amortized mortgage?
Gradually and systematically killed or extinguished by equal regular periodic payments
What is a partially amortized mortgage?
The buyer makes regular payments smaller than are required to completely pay off the loan by its date of termination; the payments do not fully amortize the loan
What is a balloon payment?
A single large final payment, including accrued interest and all unpaid principal, then becomes due on the loan maturity date
What is a package mortgage?
Includes both real and personal property as security for the debt
What is a purchase-money mortgage?
Mortgage given as part of the buyer’s consideration for the purchase of real property
What is a contract for deed?
AKA: Land contract, agreement for deed, installment sale contract
Another way to buy real property, usually with very little cash investment
What is negative amortization?
Occurs when the monthly mortgage payment amounts are less than needed to pay the monthly interest costs, causing the unpaid amount to be added to the loan balance
What is the most widely accepted alternative to the traditional 30-year fixed-rate level-payment mortgage?
The adjustable rate mortgage
What are buydowns?
Occurs when a party (such as the seller or developer) pays an upfront fee to the lender
In exchange for the fee, the mortgagor’s loan interest rate is reduced, generally for the first one year to three years
What two things does the FHA use to determine borrower qualification and to approach conventional loan qualifying?
A housing expense ratio (HER)
A total obligations ration (TOR)
FHA requirements currently allow up to ____% for the HER (monthly housing expenses/monthly gross income) and up to _____% for the TOR (total monthly obligations/monthly gross income.
31%
43%
To qualify loan applicants, the VA currently uses a __________________________ ratio (currently ____%) and a ______________________ calculated for different regions in the US
Total monthly obligations
41%
Table of Residual Incomes
What is the loan-to-value ratio?
The relationship between the amount borrowed and the appraised value (or purchase price) of a property
What is the formula for the loan-to-value ratio?
Loan amount / price (or value)
In a fully amortized, level-payment plan mortgage, the portion of the monthly payment that goes to reducing the principal:
Gradually increases with each payment throughout the duration of the loan term
A term mortgage differs from a level-payment, fully amortized mortgage because of the :
Method of repayment
In a mortgage transaction in Florida, the legal evidence of the personal debt is the:
Note
A financing vehicle in which the vendor holds title to the property until the buyer has met the stated obligations is a:
Contract for deed
In title theory states, the mortgage clause that provides that the conveyance of title to the lender is defeated when all of the terms of the agreement have been fulfilled is the:
Defeasance clause
If a foreclosed property fails to bring sufficient proceeds at the foreclosure sale to pay the debt, the lender:
May obtain a deficiency judgment for the amount of deficit
A home was purchased with a down payment of $50,000 and a loan of $200,000 at 6% interest for 20 years. Monthly payments are $1,432.86. What is the loan-to-value ratio?
80%
The current maximum FHA loan available for a single-family dwelling is:
Dependent on the location
Rebecca and Tony purchased their first home in January. The interest rate was based on the property being owner-occupied. In May of the same year, Rebecca and Tony decided to live on their sailboat and make a two-year long trip around the world. Tony and Rebecca rented their home to Tony’s best friend, Brad. The lender soon notified the couple in writing of the mortgagee’s intent to increase the interest rate on their loan to the investor rate of interest. The lender was proceeding under which of the following clauses?
Escalator clause
The maximum amount of a VA loan is:
Not a legislated limit for qualified borrowers
Tony wants to buy a small restaurant and is considering financing the restaurant equipment in addition to the real estate. If Tony pledges the personal property in addition to the real estate as collateral for the mortgage, Tony’s mortgage is a:
Package mortgage
A borrower who is in default on his mortgage is allowed to prevent the lender from foreclosing on the property by paying the mortgagee the delinquent principal and interest, plus any expenses the mortgagee has incurred in attempting to collect the payments. This right is referred to as:
The equity of redemption
A lender declares all the unpaid balance due and payable as a result of default. The lender is exercising the:
Acceleration clause
The person who borrows money to help pay for the purchase or real property is called at various times the:
Mortgagor
The mortgage provision that relieves the mortgagor from any personal liability for the debt so that the mortgagee can look only to the mortgaged property for reimbursement in the event of default is the:
Exculpatory clause
A mortgage:
Creates a lien
Is a contract
Must be in writing
When a vendee buys “subject to the mortgage”, the :
Vendor remains responsible for the note
Blanket mortgages:
Typically include a partial release clause
Bob and Stella have just made the final mortgage payment on their home. What document must the mortgagee file on their behalf?
Satisfaction of mortgage
A new mortgage accepted by the seller as part of the purchase price is a:
Purchase-money mortgage
If a mortgagee does not want the mortgage to be paid ahead of schedule, the mortgage will normally contain a:
Prepayment penalty clause
A mortgagor defaulted on a mortgage encumbering an apartment complex. Once the foreclosure proceedings were filed, the lender appealed to the courts to appoint a:
Receiver
What statement is true regarding the mortgagor’s minimum cash investment on an FHA loan?
Closing costs paid by the buyer may be applied toward satisfying the cash requirement
An FHA loan is a :
Government-insured loan
Which applies to FHA 203 (b) loans?
The loan program applies to loans for one-family to four-family residences
The maximum insurable loan limit varies from area to area
Borrowers are required to pay a one-time upfront mortgage insurance premium
A potential borrower’s monthly housing expense is $504, the total monthly gross income is $1,800, and the total monthly obligations are $648. With a conventional loan, what is the monthly housing expense ratio for the buyer?
28%
What is the formula to find the housing expense ratio?
Monthly housing expenses (PITI) / monthly gross income
The loan-to-value ratio is 80%. A buyer wants to acquire a property with a purchase price of $116,000. Calculate the required downpayment.
$23,200
The primary purpose of an estoppel certificate is to:
Verify the loan balance
Who may pay the discount points on a VA loan?
The buyer
The seller
A third party, such as a relative
If the amount realized at the foreclosure sale is more than the indebtedness, the excess belongs to:
The mortgagor
Ronald defaulted on his home mortgage payments. The lender obtained a court order to foreclose on the property. At the foreclosure sale, Ronald’s house sold for $29,000 and the unpaid balance of his loan is $40,000. What must the lender do to recover the $11,000 Ronald still owes?
Seek a deficiency judgment
Foreclosure would terminate:
Equitable right of redemption
Which best describes an owner’s equity in the property?
The value over and above the outstanding mortgage balance
A promissory note would not usually contain:
Physical description of the collatoeral
An instrument that evidences one person owing another money is a:
Note
A clause in a mortgage releasing the indebtedness once the loan is paid off is:
Defeasance
A mortgage which is subordinate to another mortgage is called :
A junior mortgage
In an installment land contract, what type of title did the seller retain until the loan was paid?
Legal
Which form of financing would be the greatest risk to the buyer?
Installment land contract mortgage
When the buyer’s mortgage is more than the market value of a home and the buyer must sell the home, a __________ might be negotiated with the bank.
Short sale
