Chapter 6: Real Estate Financing Flashcards
Definitions
Mortgage
a voluntary lien on real estate
Mortgagor
the borrower, maker or payor
Mortgagee
the lender
Title-theory States
the mortgagor gives legal title to the mortgagee and retains equitable title - lender has right to immediate possession if mortgagor defaults
Lien-theory States
the mortgagor holds legal title - mortgagee/lender has a lien on property - if mortgagor defaults then formal foreclosure proceedings
Illinois is what theory lien or title?
neither - it’s an Intermediate Mortgage Theory State
Mortgage approach
buyer gets title
Deed of Trust
lender has title
Intermediate Mortgage Theory
Mortgage approach & Deed of Trust
Defeasance Clause
the lien is released by the lender at the time debt is fully repaid
Two parts of mortgage loans
the debt & the security for the debt
Two documents when a property is mortgaged
promissory note (amount owed) & security document (mortgage pledging property as collateral)
Hypothecation
the promise of collateral in return for a loan, for when a lender wants to protect itself from when a borrower misses payments.
Promissory Note
note or financing instrument - the borrower’s personal promise to repay a debt according to agreed terms - legally enforceable and fully negotiable upon signed
What does a promissory note state?
Amount of debt, time & method of payment, rate of interest
Unsecured note
used by banks (and other lenders) for short-term personal loans
Interest
a charge for the use of money
Payment made at the beginning of each period
payment in advance
Payment made at the end of a period
payment in arrears
Usury
charging interest in excess of the maximum rate allowed by law
Loan origination fee
the processing of a mortgage application - it is NOT prepaid interest - however IRS lets a buyer deduct the loan origination fee as interest paid up front as part of Regulation Z
Regulation Z
part of the Truth in Lending Act of 1968 designed to protect consumers against misleading lending practices
Discount points
fees paid directly to the lender at closing in exchange for a reduced interest rate - “buying down the rate”
One discount point equals
1 percent of the loan amount - 1 point is 1% of mortgage
Prepayment penalty
payment if borrower pays loan ahead of schedule
Prepayment penalty in Illinois is prohibited
on fixed rate loans w/ interest rate >8%
Prepayment penalty in Illinois is allowed
on adjustable rate loans
Deed of Trust (mortgage document) establishes
the property is security for a debt, identifies lender & borrower, includes legal description of property
Three-party instrument
Deed of trust, or trust deed
A deed of trust conveys
naked title/bare title
Naked title or bare title
title without the right of possession
The deed is given by the
buyer-borrower (Trustor)
Trustor
the “grantor” of a trust is the creator of the trust
Trustee
the person who manages the trust - holds the title on behalf of the lender/beneficiary
Beneficiary
the mortgagee, the holder of the note
Acceleration clause
the lender may declare the entire debt due and payable immediately “accelerate the maturity of the debt”
Without an Acceleration clause
the lender would have to sue the borrower every time a payment was overdue
Each discount point increases the lender’s yield by
1/8 of 1% (.00125)
1/8 of 1%
.00125
Release of mortgage (mortgage lien) or mortgage discharge
“Satisfaction of Mortgage”
Deed of Reconveyance
the trustee executes a release deed to the trustor
Impound Account
Escrow Account
Escrow Account
a reserve fund to meet future real estate taxes and property insurance premiums
PITI
Principal, interest, taxes & insurance
In IL a lender may not require an escrow accumulation of more than
150% of the previous year’s real estate taxes
In IL an escrow account may be terminated by borrower when
the principal loan balance has been reduced to 65% of its original amount
When a property is sold “subject to mortgage”
the buyer is not personally obligated to pay the debt in full
When a buyer “assumes the seller’s dept”
the buyer becomes personally obligated for the payment of the entire debt
Alienation clause
“due-on-sale” clause - the lender may either declare the entire debt due immediately or allow the mortgage to be assumed
What is a second mortgage also called?
a junior lien
Subordination agreement
a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor
2 other names for an Installment contract
Contract for deed or land contract
Land contract buyer is called
vendee & is granted equitable title
Land contract seller is called
vendor & retains legal title
In an installment contract the seller delivers a “_____” title
a “clear” title
In a land contract the seller can usually evict the buyer in the event of default unless
the buyer has 20% equity and a contract in excess of 5 years (then would need judicial foreclosure)
Foreclosure
property pledged as security is sold to satisfy the debt
Three types of foreclosure
Non-judicial foreclosure, judicial foreclosure & strict foreclosure
Non-judicial foreclosure
when power-of-sale clause allows sale of property by way of a nonjudicial foreclosure
Judicial foreclosure (Illinois is classified as a judicial foreclosure state)
property is sold by court after presentation of facts to highest bidder
Strict foreclosure
if borrower doesn’t pay off the loan by a certain date, court awards full legal title to lender
Deed in lieu of foreclosure
“friendly foreclosure” transfers the home’s title from the homeowner to the bank that holds the mortgage
Short sale
lender accepts less than the amount owed on the property
Deficiency judgement
an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full
HAMP
reduces loan to no more than 31% of pretax income by reducing interest rate, increasing term up to 40 years, reducing principal on which interest is charged
HAFA
provides alternatives to foreclosures like deed-in-lieu of foreclosure or short sale
Redemption
when a state allows delinquent buyers to redeem property
Certificate of sale
a certificate issued to the winning bidder at a foreclosure sale - after confirmed by the court the holder recieves a sheriff’s deed
Deficiency Judgement
personal judgment agains the borrower for the unpaid balance of a loan
The Federal Reserve System requires tht each member bank keep a certain level of assests on hand as reserve funds
Reserve requirements
Discount Rate
the rate charged by the Federal Reserve when it lends money to its member banks
Prime rate
the short-tern interest rate charged to a bank’s largest, most creditworthy customers and it is a basis for determining a bank’s interest rate on other loans like home mortgages
MLO
Mortgage Broker Licensing - anyone who for compensation or expectation of compensation, takes a residential mortgage loan by phone or in person
Fannie Mae
does all loans
Freddie Mac
mostly conventional loans - a mortgage that is not guaranteed or insured by any government agency
Ginnie Mae
FHA / VA, special assistance loans - division of HUD - guarantees mortgage backed securities - guarantees “pass through certificate”
when various agencies purchase a number of mortgage loans and assemble them into packages
blocks or pools
Straight Loans
Interest-only loan, term loan, non-amortized loan - it divides the loan into two amounts to be paid off separately - borrower pays periodic payments of interest only followed by the payment of the principal in full at the end of the term.
Amortized Loans
EXACT payment every month
Adjustable-Rate Mortgage
a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan
Periodic Cap Rate
limits the amount the rate may increase at any one time
Aggregate Rate Cap
limits the amount the rate may increase over the entire life of the loan
Balloon Payment Loan
a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity
Growing Equity Mortgage
GEM - rapid-payoff mortgage - uses a fixed interest rate but payments of principal are increased according to an index or a schedule
Reverse Mortgage
62+ years to borrow money against equity for any purpose - no payments due until property is sold or borrower defaults, moves or dies
Nonrecourse Loan
Borrower is not held personally responsible for the loan
Conventional Loans
most secure loans - loan-to value ratios are often the lowest - borrower makes down payment of at least 20%
Fannie Mae and Freddie Mac require how many years to re-establish credit?
4 years
Fannie Mae requires borrow’s monthly housing expenses including PITI not exceed ?
28% of total monthly gross income
Fannie Mae requires borrow’s monthly financial obligations not exceed ?
36% of total monthly gross income (33% in the case of 95% LTV loans)
Conforming loans
meet criteria and are eligible to be sold in the secondary market
PMI
Private Mortgage Insurance - protects the top 20 to 30 percent of the loan against borrower default
PMI under Homeowners’ Proctection Act of 1998
PMI must terminate when borrower reaches 22% equity based on original value
FHA-Insured Loans
3.5% down, borrower charged MIP (Mortgage Insurance Premium), may get charged discount points in addition to loan origination fee - it more than 6% lender will treat payments as reduction in sales price and recalculate the mortgage
VA-Guarenteed Loans
Dept of Veterans Affairs is authorized to guarantee loans for eligible veterans and their spouses, little to no down payments, no dollar limit on the loan rather the VA limits the amount of the loan it will guarantee
Certificate of Eligibility (COE)
serves as that proof, and tells a lender that an applicant has officially met the minimum service requirement
Certificate of Reasonable Value (CRV)
Establishes a ceiling on the maximum VA mortgage loan principal
FSA
Farm Service Agency offers programs to help families purchase or operate family farms
Purchase-Money Mortgages
mortgage issued to the borrower by the seller of a home as part of the purchase transaction. Also known a seller or owner financing, this is usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels
Package Loans
RP+PP, usually developer offering on new property (i.e. appliances)
Blanket Loans
Covers more than one parcel or lot, used to finance subdivision developments, contains partial release clause
Wraparound Loans
instead of paying off their existing mortgage, the home seller keeps their home loan in place, while the buyer’s new mortgage “wraps around” the existing home loan
Open-End Loans
a line of credit that allows you to borrow money when you need it
Construction Loans
Interim Financing, short-term, borrower pays interest only on monies that have actually been disbursed - borrower to arrange take-out loan or end loan which will repay or take out the construction financing lending when work is complete
Sale-Leaseback
buyer becomes landlord (lessor) and original tenant (lessee)
Buy-downs
a way to temporarily (or permanently) lower the initial interest rate on a mortgage by 1 to 2 percent over the first on to two years of the loan term
Home Equity Loans
HELOC, Original loan remains in place, home equity loan is junior to the original lien
Truth in Lending Act and Regulation Z
requires credit institutions to inform borrowers of the true cost of obtaining credit, true cost of lending - applies to residential loans, APR must include: loan fees, finder’s fees, service charges, points, interest
Three-day right of rescission
a right of a borrower to cancel a home equity loan or line of credit with a new lender, or to cancel a refinance transaction done with another lender other than the current mortgagee, within three days of closing
ECOA
Equal Credit Opportunity Act prohibits lenders and others who grant or arrange credit to consumers from discriminating against credit on basis of: race, color, religion, national origin, sex, marital status, age or dependence on public assistance
CRA
Community Reinvestment Act is responsibility of financial institutions to help meet their communities’ needs for low-income and moderate-income housing
RESPA
Real Estate Settlement Procedures Act designed to ensure that buyer and seller are fully informed of all settlement costs in residential real estate (speaks to only closing itself)
