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Real Estate Licensing > Chapter 13 Real Estate Financing > Flashcards

Chapter 13 Real Estate Financing Flashcards

1
Q

Lien Theory

A
  • two party mortgage instrument used as security
    for the debt
  • borrower (mortgager) retains both legal and
    equitable title to the property
  • lender (mortgagee) given the right to have the
    property sold through judicial foreclosure and
    applied to the debt should they default.
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2
Q

Title Theory: North Carolina

A
  • three party instrument as security for the debt
  • borrower (grantor or trustor) conveys legal title to
    the trustee(third party) to hold for the lender
    (beneficiary) until the debt is satisfied.
  • borrower retains equitable title to the property.
    -right to use and possess the property as if
    he/she owned it and to demand the return of
    the legal title when the debt is repaid.
  • lender can request that trustee initiate power of
    sale foreclosure to sell the property if the debt is
    not paid per the terms of the promissory note.
  • lender’s legal ownership is subject to the
    termination on full payment of the debt or
    performance of the obligation
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3
Q

Promissory Note : Mortgage loan instrument

A
  • ONLY borrower signs the promissory note
  • financing instrument, written promise or
    agreement to repay a debt in definite installments
    with interest.
  • negotiable instrument -lenders often sell their
    mortgage loans in the secondary mortgage
    market.
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4
Q

Mortgage or Deed of Trust: Mortgage Loan instrument

A

security instrument, is the document that pledges the property to the lender as security or collateral for a debt

borrower conveys naked title or bare legal title without the right of possession to a trustee who is the beneficiary for the lender.

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5
Q

Hypothecation

A

The act of pledging real property as security for a payment of a loan without giving up possession of the property.

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6
Q

Elements of a Valid Note

A

1) Term
2) promise to pay
3) signature of the borrower

Simple document that states the amount of the debt, the time and method of payment, and the rate of interest.

  • signed by borrowers only.
  • Not recorded (only security instrument is)
  • one original signed at closing
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7
Q

Negotiable instrument

A
  • promissory note
  • Checks
  • bank drafts
  • must be in writing
  • made by one person to another and signed by
    the maker
  • unconditional promise to pay a sum of money on
    demand in the future
  • payable to the order of a specifically named
    person or to the bearer.
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8
Q

Acceleration Clause: Special Note Provision

A

If a borrower defaults, the lender has the right to accelerate the maturity of the debt

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9
Q

Prepayment Penalty Clause: Special Note Provision

A

When a loan is paid off before its full term, the lender collects less interest from the borrower in the form of a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule.

In NC
* Lenders are NOT allowed to charge a prepayment
penalty on any residential loan w/ an original
balance of $150,000 or less that is the first lien on
the borrowers primary residence.
* Federal law prohibits from charging prepayment
penalty on any FHA insured VA guaranteed loan.

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10
Q

Due on Sale Clause: Special Note Provision

A

AKA Alienation Clause : Transfer
* Provides that on sale of the property by the
borrower to a buyer who wants to assume the
loan, the lender has the choice of either declaring
the entire debt to be due and payable
immediately or permitting the buyer to assume
the loan at current market interest rates.

  • TRIGGERS the acceleration clause
  • Absence of due on sale clause would permit a
    loan assumption without the lender’s prior
    consent.
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11
Q

P & I or Debt Service Payments

A

loan payments

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12
Q

Payment in Arrears

A
  • interest due at the end of each payment
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13
Q

Payment in Advance

A
  • interest due at the beginning of each payment period
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14
Q

Amortized Loans

A

Installment plan

  • level payments made
    • applied first to interest then to principal
  • 15 years or 30 years
  • each month borrower required to pay 1/12th of annual real property taxes and 1/12th of various annual insurance premiums. (PITI)
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15
Q

Direct Reduction Loan

A
  • require a fixed amount of principal to be paid in each payment with the amount applied to interest varying as the balance is reduced.
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16
Q

Fully Amortized Fixed Rate Mortgage

A
  • mortgagor pay a constant amount, usually
    monthly that will completely pay off the loan
    amount with the last equal payment.
  • The mortgagee first credits each payment to the
    interest due and then applies the balance to
    reduce the principal of the loan.
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17
Q

Partially Amortized Fixed Rate Mortgage

A
  • monthly principal and interest payments are a
    constant amount
  • Payment amount not sufficient to completely pay
    off the loan within the loan term.
  • Larger Balloon payment due at the maturity of the
    loan.
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18
Q

Straight Line Amortized Mortgage

A
  • Direct reduction mortgage loan
  • mortgagor may pay a different amount with each
    installment
    • each payment consisting of a fixed amount
      credited toward the principal plus and additional
      amount for the interest due on the principal
      outstanding since the last payment was made.
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19
Q

Simple Interest

A 
I = P x R x T 
Interest = Principal x Rate x Time
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20
Q

Usury

A

Charging more than the max rate of interest legally charged on loans

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21
Q

Discount Points

A
  • Prepaid interest charged by a lender to make up
    the difference between the mortgage interest rate
    and the required investor yield.
  • 1 discount point equals 1 percent of the original
    loan amount and increases the yield of a loan by
    approx 1/8th percent.
  • CAN be charged on FHA insured, VA-guaranteed,
    and conventional loans.
    2 points 1/4 increase
    4 points 1/2 percent
    6 points 3/4
    8 points 1 percent

Example loan with 9 1/2 % & 6 discount points (3/4) = 10 1/4 % yield to investor

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22
Q

Amortization (debt liquidation)

A

process of paying off a home loan by making periodic (monthly) payments of Principal (P) and interest (I), called debt service.
* to kill a debt

23
Q

PITI

A

Principal, Interest, Taxes, Insurance
borrower places into escrow 1/12th of the annual property taxes and 1/12th of the homeowners annual insurance premium each month along with PI debt service payment.

24
Q

Mortgage Debt Reduction

A

Monthly PI payment will
- principal portion will reduce the debt by the
amount of monthly principal paid
- interest portion will supply the lender’s yield on
the loan.

25
Q

Loan origination fee

A

1% of loan amount and discount points charged by the lender to increase the yield.

26
Q

Fixed Rate Level Payment Mortgage

A
  • most popular repayment plan
  • Level payment simple interest loan.
  • preferred by mortgagors
  • Interest rate and debt service amount set for life
    of the loan.
27
Q

Interest Only Mortgage (term loan)

A
  • periodic payments of interest only, with the
    principal to be paid in full at the end of the loan
    term.
  • straight loan or term loan
  • thought to be contributor to mortgage crisis
28
Q

Adjustable Rate Mortgage (ARM)

A
  • orginate at one rate of interest
  • rate fluctuates up or down during the loan term
    based on the movement of a published index
  • loan payments may change.
  • Note rate/Contract Rate
  • Index
  • Margin
  • Interest Rate Caps
  • Payment Cap
  • Adjustment Period
  • Conversion Option
29
Q

Note Rate: ARM

A

The original rate charged, which is stated in the closing documents

30
Q

Index: ARM

A

Interest rate on the outstanding balance of the loan is increased or decreased according to the movements of a named publicly published index such as the short term US treasury bill rate

31
Q

Margin: ARM

A

The amount of interest a lender charges over and above the index rate
* amount of margin remains fixed on the life of the
loan

32
Q

Interest Rate Caps : ARM

A

Rate Caps limit the amount the interest rate may increase or decrease in any one adjustment period, called the anniversary or periodic interest rate cap.

limit the amount the interest rate can increase over life of the loan /lifetime loan cap.

33
Q

Payment Cap : ARM

A

sets a maximum amount for payment changes, protects the mortgagor against the possibility of individual payments that the mortgagor cannot afford.

Can lead to Negative Ammortization/increase in loan balance

34
Q

Adjustment Perioud

A

How often the loan rate may change.
every year 1-year ARM
every three years 3-year ARM
every five years 5-year ARM

35
Q

Conversion Option

A

permits the mortgage to be converted from an adjustable rate to a fixed rate loan at certain intervals during the life of the mortgage.

36
Q

Graduated Payment Mortgage (GPM)

A

Flexible payment plan
* allows a mortgagor to make lower monthly
payments for the first few years of the loan and
larger payments for the remainder of the term,
when the mortgagors income is expected to have
increased.
* fixed on the life of the loan
* early years monthly payments are lower than the
payments required to fully amortize the loan =
negative amortization

  • GPMs are utilized to enable first time buyers and
    buyers in times of high interest rates to purchase
    real estate.
37
Q

Balloon Payment Loan

A

Partially Amortized Loan and Term Loan
higher payment at end of the loan.

  • common in seller financed situations/ cashed out.
    3-5 years of the sale.
38
Q

Growing Equity Mortgage (GEM)

A

rapid payoff mortgage
* fixed interest rate
* payments of principal are increased according to
an index or a schedule.
* Total payment increases and loan paid off more
quickly.

39
Q

Rights & Duties of Borrower: Mortgage or Deed of Trust Instrument

A
  • Payment of the debt in accordance with the
    terms of the note.
  • Payment of all real estate taxes
  • Maintenance of adequate insurance
  • Maintenance of property
  • Lender Authorization before making any
    alterations or demolitions

Failure to meet any obligations can result in buyers default.

Borrower has right of Defeasance to have legal title to the property transferred back to him or her when the loan is paid in full.

40
Q

Satisfaction of Mortgage/ Deed of Release/ Reconveyance Deed

A

When note is fully paid, the trustee is required to execute a release of mortgage discharge.

41
Q

Rights of Lender: Mortgage or Deed of Trust Instrument

A

Right to assign the mortgage debt as well as the right to foreclose the mortgage or deed of trust if the borrower defaults.

Note is a negotiable instrument and may be sold to a third party without consent of borrower.

42
Q

Methods of Foreclosure

A

Judicial Foreclosure
Non Judicial Foreclosure
Strict Foreclosure

43
Q

Judicial Foreclosure:

A

Court process
Property sold
new owner receives title by way of Sheriff’s Deed.

44
Q

NON Judicial Foreclosure AKA Power of Sale Foreclosure

A

Deed of trust NOT foreclosed through court action

*Power of Sale Clause gives the trustee the power to sell the property and use the proceeds to repay the debt.

45
Q

Strict Foreclosure

A

Not used in NC

46
Q

Distribution of Proceeds after Sale: 5 steps

A

1) pay all costs of sale
- court costs
- trustee fees
- legal fees
- advertising fees
2) pay any outstanding & real property taxes or
assessments
3) pay mortgages or deeds of trust debt if 1st
priority over other liens
4) pay off any other liens in order of priority
5) pay any surplus(equity) to the borrower

47
Q

Redemption

A

Equity Right of redemption

Statutory right of redemption

48
Q

Statutory Right of Redemption

A

after upset bit period/auction a NC mortgagor can try to raise funds to redeem the property.

  • each upset bid 10 day period
  • if defaulted borrower can pay all that is owed to the lender anytime prior to confirmation of sale, borrower redeems the property, receives legal title and eliminates the previous winning bid.
  • Foreclosure sale becomes final at the end of any 10 day period when no new bid is filed and the borrowers right to redeem the property is terminated.
49
Q

Deficiency Judgement

A

Foreclosure sale does not produce enough funds to pay loan balance and accrued unpaid interest plus costs of sale, lender may be entitled to a personal judgement against
- the maker of the note
- any owners of mortgaged property who have
assumed the debt by written agreement
for the unpaid balance.
* FORBIDDEN when purchase- money /seller financing is used

50
Q

Deed in Lieu of Foreclosure

A

aka Friendly Foreclosure by agreement

Disadvantage is mortgagee takes the real estate subject to all junior liens; foreclosure eliminates such liens.

51
Q

Short Sale

A

When proceeds of sale are not sufficient to fully satisfy the outstanding balance on the sellers existing mortgage.

  • lender agrees to discount remaining loan balance and allow seller to sell the property for less than the outstanding balance on the loan and cedes all of the proceeds to the lender in full satisfaction of the mortgage debt.
  • can be prevented by junior lien holders such as second mortgages, tax liens, or mechanics liens
52
Q

Mortgage Debt Relief Act of 2007

A
  • Taxpayers are permitted to exclude from taxable income, the amount of debt reduced through mortgage restructuring, as well as mortgage debt forgiven through foreclosure or short sale.
  • applies to debt forgiven in years 2007- 2012
53
Q

Property Sold Subject to Mortgage

A

Buyer will not be personally obligated to pay the debt in full.

  • buyer takes title to real estate and makes payments on existing loan.
  • upon default, purchaser is not liable for the difference, seller is.
54
Q

Loan Factor

A

Monthly P & I amount in dollars needed to amortize a $1000 loan. determined by interest rate and term of loan.

Real Estate Licensing (42 decks)

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