Chapter 14 - Mortgages and Financing

Question 1

What is a mortgage?

Answer 1

is the grant of an interest in real or personal property with a provision for the release of that property upon repayment of the debt in full.

Question 2

What is a mortgagor?

Answer 2

borrower that gives the mortgage.

Question 3

What is a mortgagee?

Answer 3

the lender who receives the mortgage.

Question 4

What is a promissory note?

Answer 4

the promissory note or bond is the primary financing obligation and makes the mortgagor personally liable for the debt.

Question 5

What is an acceleration clause?

Answer 5

allows the lender to demand immediate payment of the entire loan if the borrower defaults. A due on sale clause (alienation clause) is a type of acceleration cause that makes all future payments due when a property is sold.

Question 6

What is a defeasance clause?

Answer 6

provides that the rights of the mortgagee will come to an end, if and when the debt if repaid in full. NJ law requires the mortgagee to record the satisfaction of the mortgage–otherwise things will continue to show as a lien on the home.

Question 7

What is a subordination clause?

Answer 7

may be included in a mortgage agreement in which the lender agrees to allow a subsequently acquired mortgage to have legal priority. Example of land with $10M loan ‘A’ for plot of land that releases plots of land ‘B’ for $1M each – prioritize ‘B’ owner loan to encourage return on investment.

Question 8

What is private mortgage insurance (PMI)?

Answer 8

is insurance that mortgage lenders require from most homebuyers who take out a mortgage loan in an amount in excess of 80% of a home’s appraised value. In other words, buyers with less than a 20% down payment are normally required to have private mortgage insurance.

Question 9

What is the Homeowners Protection Act of 1998?

Answer 9

mortgages signed on or after July 29, 1999, PMI companies must notify borrowers of their right to cancel the insurance when the loan is 80% of the value of the home, and it requires them to automatically cancel the insurance when the loan is no more than 78% of the value of the home.

Question 10

What is a payment cap?

Question 11

What is mortgage insurance premium?

Answer 11

FHA mortgage insurance protects lenders against losses that result from defaults on home mortgages. Mortgage insurance is charged to the homeowner each month at the rate of 0.5% per year of the total loan amount. FHA also charges an upfront mortgage insurance premium (MIP) of 1.5%.

Question 12

What is a blanket mortgage?

Answer 12

creates a lien on two or more parcels of property that are pledged as security for a debt. The blanket mortgage is most commonly used in financing the development of residential subdivisions and condominiums. A release clause or partial release clause allows the developer to sell an individual parcel or unit over time and deliver free and clear title to a purchaser without satisfying the entire mortgage.

Question 13

What is the secondary market?

Answer 13

the secondary market achieves two objectives. First, it provides liquidity to originators of mortgage loans and enables institutions to invest in the mortgage market without having to be involved with marketing direct mortgage loans.

Question 14

What are mortgage brokers and bankers?

Answer 14

when a mortgage company serves only to bring the lender and borrower together for a fee and does not advance its own funds to close the loan, but facilitates it through an institutional lender, it serves as a mortgage broker. When a mortgage company serves as a mortgage banker, it uses its own borrowed funds, using a credit line established at a “warehouse bank” to borrow the loan amount on a short-term loan basis for settlement.

Question 15

What is a deficiency judgment?

Answer 15

If a mortgagor abandons a mortgaged property is still personally liable for the debt, and the mortgagee can obtain a personal judgment against the mortgagor for any deficiency between the foreclosure sale price and the amount of the mortgage debt.

Question 16

What is an assignment?

Answer 16

is the transfer of a mortgage to a third party called an assignee. This enables the lender to sell the mortgage and free up the money invested.

Question 17

What is hypothecate mean?

Answer 17

means to pledge property as security for a loan without giving possession of the property to the lender

Question 18

What does it mean to take “subject to” the mortgage?

Answer 18

When buying subject to the mortgage, the buyer agrees to take over the seller’s remaining mortgage payments, after having paid him the equity in the property.

Question 19

What does it mean to take “assumption of” the mortgage?

Answer 19

under a mortgage assumption the same basic circumstances of a “subject to” applies, except that the buyer personally obligates himself to payment of the entire outstanding debt and becomes a co-signer on the seller’s note.

Question 20

What is novation?

Answer 20

is a three party agreement under which one party is released from an obligation and another party is substituted.

Question 21

What is the Uniform Residential Loan Application?

Answer 21

approval process for all loans from most lenders (including VA and FHA lenders) secured by one- to four-family residences. Looking for (1) ability to pay based on income and (2) willingness to pay based on credit history.

Question 22

What is a qualifying ratio?

Answer 22

to determine whether borrowers will qualify for the amount they have applied for. Generally one’s monthly payment for housing expenses should not exceed approximately 28% of monthly gross income. This is called the payment-to-income ratio or housing ration. When combined with long term debt housing expenses should not exceed 36% (total debt ratio).

Question 23

What is a mortgage commitment?

Answer 23

If all is satisfactory, a mortgage commitment will be issued, which is a contractual promise by the lender to the buyer promising to provide the funds necessary to complete settlement, if the conditions named in the commitment are met.

Question 24

What is Regulation Z?

Answer 24

Accompanies a mortgage commitment and is required by the Truth in Lending Act to advice borrowers of the true cost of borrowing by listing loan costs and disclosing the annual percentage rate of the loan. Both must be signed by the borrower (mortgagor) and returned to the lender (mortgagee)

Question 25

What is Loan to Value Ratio?

Answer 25

The ratio between the amount borrowed and the sale price or appraised value of the property, whichever is lower, is the LTV ratio. LTVs are generally higher for residential properties vs. commercial properties.

Question 26

What is a discount point?

Answer 26

If the current true cost of money is higher than the going rate for mortgage loans, lenders will not make the loan unless they are compensated for the difference in the form of a one-time, upfront loan fee called points or discount points. One point is 1% of the loan amount. The lender’s yield is increased 1/8% (0.125) for each point charged, thus 8 points will increase the yield 1%. Cost of points are deductible from federal taxes.

Question 27

What is usury?

Answer 27

is an interest rate in excess of the legally permitted rate. A seller may not charge more than 17% on a first mortgage loan by law unless the transaction involved the purchase of the seller’s primary residence then it can be as high as 30%. Second mortgages are 16% and 30% respectively.

Question 28

What is an adjustable rate mortgage?

Answer 28

the interest rate change periodically based on an index. Lender adds a margin rate on top of the index. Adjustment period in an ARM establishes how often the loan rate may be changed – longer adjustment periods favor the buyer if market rates are increasing. ARMs contain rate caps that limit both the adjustment at the adjustment period and the total adjustment over the lifetime of the loan. A payment cap sets maximum amounts for payments and protects mortgagor.

Question 29

What is negative amortization?

Answer 29

With a payment cap, a rate increase could result in neg. amortization. This occurs when the index rises while the payment is fixed. This could cause the payments to fall below the amount necessary to pay the interest required by the index. The unpaid interest is added to the principal resulting in a debt that increases.

Question 30

What is the FHA?

Answer 30

Federal Housing Administration – the primary function of the FHA is to provide insurance protection to private lenders who provide mortgage financing to homebuyers.