Chapter 6 -- Finance ** Flashcards
What is a mortgage?
a voluntarily lien placed on real estate.
Who is the mortgagor?
The buyer
Who is the mortgagee?
The lender
Title-theory states
Borrower (mortgagor): Has equitable title
Lender (mortgagee): Has legal title. Once mortgage is paid, the borrower will get the legal title.
In theory, the lender (mortgagee) actually owns the property until the debt is paid. Because lender holds legal title they have the right to immediate possession if the borrower defaults.
Intermediate Mortgage Theory State (IL)
IL does not adhere strictly to either the title or lien theory. Meaning the lender does not own the home.
Lender (mortgagee): gets a qualified title as security of the loan.
Borrower (mortgagor) remains the owner subject to a lien that is placed on the property. the qualified title that is held by the lender is subject to the defeasance clause.
Lien-theory states….
Borrower (mortgagor): holds legal AND equitable title
Lender (mortgagee): places lien on the property to use as collateral. If borrower defaults, then lender must go through foreclosure to obtain the legal title.
What is the defeasance clause?
Requires the lender to execute a satisfaction of mortgage which states that the mortgage has been paid in full. It also requires that this is recorded in public record.
Which theory does IL subscribe to?
Intermediate theory
What is an acceleration clause?
This clause allows the lender to call the entire balance due, not just the months the borrower is behind. They are contained in notes, mortgages, and security instruments. The lender could enforce the accleration clause if the borrower defaults on payments, there is destructio to premises, or there is a sale of the proeprty to another party. If this clause were not in place the lender would have to sue the borrower for each monthly payment that was late.
what are the two parts of a mortgage loan?
- the loan itself
2. the security of debt
when a property is mortgaged, the owner must execute (sign) two separate instruments. What are they?
- the promissory note
2. a security document (mortgage), pledging the property as collateral for the amount owed.
what is hypothecation?
Means to pledge property to a lender as collateral, without giving up possession of it.
A promissory note is evidence of what?
It is evidence of debt
What is the instrument is used as evidence of a debt?
promissory note
what is a promissory note?
it is an instrument used where it is the borrower’s personal promise to repay a debt according to agreed terms. when the borrower signs the note, it becomes legally enforceable and fully negotiable instrument of debt.
what is included in a promissory note?
- amount of debt
- the time and method of payment
- rate of interest
what is usury?
charging interest in excess of the maximum rate allowed by law
does IL have usury laws?
IL does not have any usury laws.
what is a loan origination fee?
a fee that includes the various cost to create a loan
what is loan origination?
the processing of a mortgage application
Is the loan origination fee considered prepaid interest?
no
Can a person deduct the loan origination fee on their taxes?
yes. it can be deducted as paid interest upfront
what is discount points?
it is interest paid in advance. can be used to lower the interest rate. it is based on loan amount. (page 125 to 126)
can lenders charge prepayment penalties on mortgage loans insured or guaranteed by the federal government or on loans that have been sold to fannie mae or freddie mac?
NO. examples are FHA and VA loans
Does a promissory note have to be tied to a mortgage or deed of trust?
No. it is only evidence of a debt.
what is an acceleration clause and where is it typically located?
This clause allows a lender to declare the entire debt due if a borrower DEFAULTS. It is typically including in the mortgage or deed of trust.
** When you hear accerlation clause, think of foreclousure.
THIS IS DIFFERENT FROM DUE-ON-SALE CLAUSE AND ALIENATION CLAUSE
What is assignment of mortgage?
An assignment of mortgage is a document which indicates that a mortgage has been transferred from the original lender or borrower to a third party. Assignments of mortgage are more commonly seen when lenders sell mortgages to other lenders.
This is when the mortgagee transfers the rights and interests to a 3rd party such as investor or another mortgage company. The new assignee becomes the new owner of the debt and security instrument. Once the debt has been paid, it is the assignee’s responsibility to execute the satisfaction (or release) of the security instrument.
What is the satisfaction of mortgage document?
This document is used to show the mortgagor has paid the debt in full. This document returns all interest in real estate to the borrower. Entering this release in the public record shows that the mortgage lien has been removed from the property.
What is another name for the satisfaction of mortgage document?
release of mortgage or mortgage discharge
What is an assumption of mortgage?
aka loan assumption
This means taking over the seller’s mortgage and continuing to make the payments on it. Should the new buyer default, that buyer is primarily liable for the debt and the original borrower is secondarily liable.
Mortgage assumptions come about when the seller has to get rid of their home somehow and the traditional method of finding a buyer and selling the house isn’t working. It’s an avenue that some sellers can try if they don’t want to go through the pain of surrendering their home to the bank, i.e. foreclosure.
But the caveats are many: Banks aren’t fond of mortgage assumptions, and Fannie Mae and Freddie Mac won’t even allow them. Only VA, FHA and USDA loans allow someone to assume an existing mortgage.
What are the 2 types of mortgage assumptions?
- A subject to the mortgage assumption
2. Assuming a mortgage
What is a subject to the mortgage assumption?
If you buy a house subject to mortgage, you do “not assume personal liability for the obligation” of the loan. You make an agreement with the seller that you will make the payments. If you don’t make them, the lender may foreclose and sell the house, and may take legal action against the person who sold it to you to pay for any remaining mortgage. The lender can not take legal action action against you, but the person who sold you the house can.
What is an alienation clause?
Mortgages may contain an alienation clause, which provides that if a property is conveyed to any party WITHOUT the lenders consent, the lender can collect full payment.
This is different from the due-on-sale clause. For example, a borrower negotiated a loan for a principal place of residence. Several years later, the borrower converts the principal place of residence to rental property and does not disclose the change to the lender. When the lender discovers that it is being used for rental property, the lender can call the note due and payable.
what is a word for land contract?
contract for deed or installment contract
what are 3 reasons a borrower would use a land contract?
- financing is unavailable
- high interest rates make the borrowing too expensive
- insufficent down payment
what is a land contract?
the buyer (vendee) agrees to pay a down payment and monthly loan payments that include principle and interest directly to the seller. Payment can also include real estate taxes and insurance reserve.
the seller (vendor) retains the legal title and the buyer is granted equitable title and possession. at the end of the loan term, the seller delivers a clear title. if they fail to deliver a title, the buyer would file a vendee’s lien.
what is a trust deed or deed of trust?
A trust deed does not transfer title to real estate, but instead grants a lender a lien on the property, which is identified in the trust deed. Th lender gives you money to purchase or improve your property, and in exchange, you promise to pay the lender back. You also give the lender a lien on your property as security for the loan. The trust deed, then, gives the lender authority to foreclose on your home if you don’t repay the mortgage loan.
what is foreclosure?
It is a legal process whereby the lender forces the sale of the property.
what are the 3 types of foreclosure?
- non-judical
- judicial
- strict forclosure
what is a non-judaical foreclosure?
aka statutory foreclosure or foreclosure by advertisment
It is contained in the mortgage document, This clause allows the lender to sell property at a nonjudical public sale without being required to spend the time and money involved in a court foreclouse suit.
no court action is required.
Upon default, the loan is accerlerated and the defaulted borrower may redeem the property (equitable redemption) by paying off the principal and collection costs. If payment is not made during the equitable redemption period, the property is advertised and sold at auction. The defaulted borrower is then given a specified time period set by state law to redeem the property (statutory redemption) by repurchaing the property from the highest bidder. The defaulted borrower must pay the full auction sale price and all of the legal fees associated with the process. The defaulted borrower is allowed to remain in possession of the property until the expiration of the statutory redemptions periond.
what is a judicial foreclosure?
Occurs when the property is sold through court. This is expensive and time-consuming. First the lender must bring lawsuit. against the defaulted borrwer. Then the judge orders an appraisal of the property and sets a foreclosure date. Creditors are notified and the foreclosure is advertised. The property is sold and when the paperwork is in order, the sale is confirmed. At that point the owner’s rights to the property have been forecolsed.
