Class Flashcards
NYS Department of State
Article 12-A of the NYS Real Property Law outlines the roles/duties of the Department of State.
The Department of State is primarily responsible for issuing real estate licenses, pocket cards, and handing down disciplinary action.
Attorney General
According to Article 12-A of the NYS Real Property Law,
the Attorney General shall prosecute criminal actions for violations of the Real Property Law.
New York Court of Appeals
The New York Court of Appeals is the highest court in New York State.
Misdemeanor
Section 442-e of the NYS Real Property Law:
“Any person who violates any provision of this article shall be guilty of a misdemeanor. The commission of a single act prohibited by this article shall constitute a violation hereof.”
Violations of the Real Property Law
The Department of State may suspend or revoke a real estate salesperson or broker’s license for violations of the Real Property Law and impose a > $1,000 fine
Real Estate License Requirements
- at least 18 years old.
- A real estate salesperson’s license is valid for 2 years.
Every 2 years, the salesperson must renew their license online through eAccessNY.
Before renewing a license, the salesperson must complete 22.5-hours of Continuing Education.
If a real estate salesperson fails to renew their license within 2 years, their license is considered expired.
The salesperson must retake the State exam and reapply for their license.
Real estate salespersons may perform acts that a broker is authorized to perform, but they do so on behalf of a broker with whom they are associated.
Real estate brokers license
- at least two years of experience as a real estate salesperson.
- at least 20 years of age.
- Complete the 45-hour NYS real estate broker’s course (120 hours of total coursework including the 77-hour real estate salespersons course).
- Pass the State real estate broker’s exam.
A broker’s license must be renewed every 2 years.
Associate broker
Associate real estate brokers must fulfill the same requirements as a broker (they must obtain their brokers license), but their status in the firm is the same as that of a salesperson.
Pocket Card
DOS issues a real estate license and a pocket card.
- The salesperson’s license is held with their sponsoring broker.
- The salesperson carry their pocket card at all times when doing business and show it on demand.
Suspension or Revocation of Sponsor’s License
If a broker’s license is suspended or revoked, each real estate salesperson working under that broker shall also have their licenses suspended. In this case, the State deems the salesperson’s license as a ‘discontinuance of association with the broker being suspended’.
License Exemptions
- Attorneys admitted to the NY State Bar if they represent a client. If an attorney wants to employ salespersons, they then must obtain a broker’s license.
- Public officers when performing official duties.
- Persons under the judgment or order of a court.
It is important to note that if a licensed attorney wants to have salespersons working under them (the attorney acts as their sponsoring broker), the attorney must obtain a broker’s license.
Advertising
According to section 175.25 of Article 12-A (NY Real Property Law):
“All advertisements placed by a broker must indicate that the advertiser is a broker or give the name of the broker and his telephone number.All advertisements placed by a broker which state that property is in the vicinity of a geographical area or territorial subdivision must indicate as part of such advertisement the name of the geographical area or territorial subdivision in which such property is actually located.”
Blind Advertising
All ads by a licensee must indicate that the advertiser is a broker and give the name and telephone number of the broker.
Ads that do not contain this information are called blind ads.Blind ads are illegal in New York State.
Stigmatized Property Disclosure
According to Article 443-a of the NY Real Property Law, sellers and seller agents do not have to disclose the following facts when selling or leasing residential property:
1) Occupants who have AIDS or other illnesses not transmitted through occupancy.
2) Properties that were a site of death due to natural causes, accidents, suicide, homicide, crime, and other reasons.
Record Keeping
Brokers must maintain records of all transactions for at least 3 years.
Types of Agency
General Agent:
Someone authorized to transact every kind of business for the principal.
Example: Property Manager
Special Agent:
An agent with limited authority to act on behalf of the principal, such as created by a listing.
Example: Real Estate Agent / Real Estate Broker
Universal Agent:
A universal agent has complete authority over any activity of the principal.
Example: Power of Attorney
Agent / Client Relationships
The buyer and/or seller is known as the Principal or Client.
The broker is known as the Agent.
The salesperson is a Sub-agent of their broker.
Buyer Agency / Buyer Brokerage
Buyer agency occurs when a purchaser/renter hires a broker to represent them.
The purchaser/renter employs a broker to locate a property. In this relationship, the buyer is the principal and the broker is the agent.
A Buyer Representation Form should be signed between the buyer and broker.
Fiduciary Duties
The real estate agent serves as a fiduciary to the client.
A fiduciary relationship implies great confidence and trust. As a fiduciary, the agent is in a position of great trust by the client.
Use the acronym OLD CAR to remember the agent’s fiduciary duties to their client.
Agency Disclosure Form
The Agency Disclosure Form is a written explanation, to be signed by a prospective buyer or seller of real estate, explaining to the client the role that the broker plays in the transaction.
This Agency Disclosure Form is known as the ‘New York State Disclosure Form for Buyer and Seller’.
The Agency Disclosure Form outlines the following:
- The agent’s duties to the client.
- Explains that an agent owes a fiduciary duty to the client.
- Allows for advance consent to dual agency.
The Agency Disclosure Form is not required for the sale of vacant land.
According to Section 443 of the NYS Real Property Law, licensees must present a written Agency Disclosure Form that details consumer choices about representation at the first substantive contact.
If a seller or buyer refuses to sign the Agency Disclosure Form, the agent should do the following:
- Document the names and time, date, and reasons for refusal to sign the disclosure form.
- Complete the declaration form stating the facts, have it acknowledged, and retain a copy for their records for at least 3 years.
- The declaration form should say the following: “Although I indicated to the buyer/seller that New York State Law required that I request that he/she sign to acknowledge receipt of the disclosure notice, he/she refused to sign the acknowledgement to the disclosure form when presented. The reason given for this refusal was as follows…”
Dual Agency
Dual agency occurs when a broker represents both the buyer and seller in a transaction.
Dual agency is permitted in New York State; however, advanced informed consent by BOTH parties is required.
Dual agency inherently puts the agents fiduciary duty of loyalty at risk.
Undisclosed Dual Agency is illegal in New York State.
Instead, the agent should notify both parties and have them sign the Agency Disclosure form, which states that the agent is acting as a dual agent. This is known as Advance Consent to Dual Agency.
Dual Agency with Designated Agents:
A broker may elect to have designated agents within his/her office to represent both sides in the transaction.In this case, one designated agent will represent the seller and another designated agent will represent the buyer.This helps reduce the broker’s risk of violating their fiduciary duties to the client.
Estoppel
An agency by estoppel exists when a principal does not stop an individual from representing his or her interests, thus creating an agency relationship between the two.
Listing Contracts
A listing contract is created between a seller and a broker (NOT a salesperson).
The listing agreement creates an express agency relationship.
The following listing contracts are the most used by brokers:
- Exclusive Right to Sell Agreement: This listing contract offers the most security to the broker. The seller must work exclusively with the broker to sell their property. The broker is entitled to a commission even if the seller finds a buyer themselves.
- Exclusive Agency Agreement:The seller must work exclusively with the broker to sell their property, BUT the seller does not have to pay the broker a commission if they find a buyer themselves.
- Open Listing Contract: The seller is allowed to work with any broker who brings them a buyer. Only the broker who brings a buyer is entitled to a commission. This is the riskiest type of listing contract for a broker. An open listing contract is an example of a unilateral contract.
- Net Listing: A net listing is not technically a listing agreement, but a method of establishing the listing broker’s commission as all money above a specified net amount to the seller.
Net listings are illegal in New York.
Commissions
Real Estate Salespersons/Agents DO NOT collect money or commissions.
Any commissions earned are paid to the salesperson’s broker, who in turn, pays the salesperson his/her portion of the commission.
Commissions are determined between the client and broker and are always negotiable (there is no ‘standard’ commission rate).
Commissions are typically calculated as a percentage of the sales price (not the listing price).
Commission between the broker and salesperson are always negotiable.
A commission is technically earned when the agent finds a “ready, willing and able buyer” for the seller.
OLD CAR
Use the acronym OLD CAR to remember the agent’s fiduciary duties to their client.
Obedience - Agent shall follow the legal instructions of their client.
Loyalty - Agent shall work in the best interests of their client.
Disclosure of Information (Full Disclosure) - Agent shall promptly communicate all information about the transaction to their client. This includes presenting all offers to the client.
Confidentiality - Agent shall not reveal confidential information about the client to prospective buyers, without the express consent from the client. Such confidential information may harm the client.
Accountability - (refers to financial accountability) the agent must account for and promptly remit all money or property entrusted to the agent.
Reasonable Care and Duty to Account - Agent shall possess the necessary skills and training to perform their requested services.
Independent Contractor Relationship
A salesperson must work under a sponsoring broker. Their relationship must be that of an independent contractor.
It is important that salespersons maintain their independent contractor status in the eyes of the Internal Revenue Service (IRS). Otherwise, if the salesperson is considered an employee, the sponsoring broker will be required to withhold income taxes and pay for health insurance.
To maintain an independent contractor relationship, the following rules must be met:
- The broker shall not withhold income taxes. The salesperson must pay their own taxes on commissions.
- The salesperson is responsible for paying social security taxes and self-employment taxes.- Compensation is not based on hours worked (a salesperson can make their own hours).
- A salesperson is not required to work in a specific location (a salesperson can work from home if they choose).
- A salesperson can have outside employment.
- Brokers can provide office facilities and supplies, but salespersons are responsible for their own expenses (transportation, cell phone, clothing).
- The broker supervises the salesperson, but does not direct or control their activity.
- Either party can terminate the relationship at any time.
If a salesperson is not deemed an independent contractor under their sponsoring broker (the actions of the broker or salesperson instead suggest an employer/employee relationship), the broker is responsible for withholding income taxes.
If this occurs, the salesperson cannot file a Schedule C of the federal income tax Form 1040 and deduct expenses incurred during the year.
Salespersons should track their expenses and file yearly federal and State tax returns. The sponsoring broker must prepare and file IRS Form 1099-MISC for any salespersons who earn $600 or more in a year.
Vicarious Liability
Vicarious liability is a situation in which one party is held partly responsible for the unlawful actions of a third party.
According to Section 442-c of the New York Real Property Law, a broker is vicariously liable for a salesperson’s actions only when “the broker had actual knowledge of such violations or if the broker retains the benefits from the transaction after he knows that the salesperson has engaged in some wrongdoing”.
Sherman Anti-Trust Act
The Sherman Anti-Trust Act made the following actions illegal:
1) Price fixing
2) Group boycotts
3) Market allocation
4) Tie-in arrangements
Misrepresentation
Misrepresentation means making an intentionally false statement to induce someone to contract.
Misrepresentation consists of:
1) A false representation of a material fact.
2) A person making the false representation knew or should have known it to be false.
3) A person acts or does not act based on the misrepresentation.
4) A person who relies on the misrepresentation in acting or not acting.
Positive misrepresentation means the broker concealed a material defect from the buyer. Self-dealing is another example of positive misrepresentation.
Unintentional misrepresentation occurs when the broker makes a false statement to the buyer about the property and the broker does not know whether the statement is true or false.
Property Condition Disclosure Statement
The Property Condition Disclosure Act requires the seller to submit to the buyer, a Property Condition Disclosure Statement, prior to signing the contract of sale. If the statement is not signed, the buyer shall receive a $500 credit against the purchase price of the property.
Most seller attorneys advise their clients NOT to sign the statement, as it opens them up to a vast amount of liability.
Real Property vs Personal Property
Real property is the land and improvements, and all legal rights, powers, and privileges of real estate ownership. Real property includes the bundle of rights.
Everything that is not real property is personal property.
Personal property is also known as chattel.
Fixtures
A fixture is personal property that attaches permanently to the land or improvements and becomes part of the real property.A few typical examples of a fixture include:
- chandelier
- custom book shelves
- wall-to-wall carpeting
- plumbing fixtures
Trade Fixtures
Trade fixtures are items of personal property that a business operator installs in rented building space.
Unlike a typical fixture, a trade fixture is considered personal property of the business owner. It is assumed the business owner will take the trade fixtures with them when moving out of the rented space.
A display case is a common example of a trade fixture.
Fee Simple
Fee simple absolute provides the most complete form of ownership.
Absolute ownership of real property; a person has this type of estate where the person is entitled to the entire property with unconditional power of disposition during the person’s life and descending to the person’s heirs or distributees.
Most properties in New York have a Fee Simple Absolute deed, unless specified otherwise!
Ownership in Severalty
When title to real estate is in the name of only one person or entity, it is an estate (ownership) in severalty.
Think of it as a single individual owns real estate, therefore, the ownership is ‘severed’ from all others.
Co-ownership
Joint tenancy: Joint tenancy is a form of co-ownership by two or more persons, each of whom has an undivided interest WITH the “right of survivorship”.
Tenancy in common: Tenancy is common is a form of co-ownership by two or more persons, each of whom has an undivided interest, WITHOUT the “right of survivorship”.
Remember: the difference between joint tenancy and tenancy in common is the “right of survivorship”. A tenancy in common does NOT include the “right of survivorship”.
Tenancy by the entirety: This form of co-ownership is limited to married couples.
4 Unities of Co-ownership
The 4 possible unities include:
1) Time
2) Title
3) Interest
4) Possession
Life Estates
A life estate is ownership, possession, and control of a property for someone’s lifetime.
For example: Joe will grant ownership of his property to Sarah until the death of Nancy. Once Nancy passes away, the ownership of the property will revert back to Joe (or Joe’s heirs).
A life estate is a form of fee simple estate.
A life estate may be formed when a couple owns property as a tenancy by the entirety. If one spouse dies, the other spouse gains full ownership of the property. When the remaining spouse dies, the property is transferred to the children.
Leasehold Estates
A leasehold estate is a non-freehold of limited duration, providing the right of possession and control but not title.
There are a few types of leasehold estates you should be familiar with:
Estate for years: An estate for years exists for a fixed period of time. It can be as short as a day and as long as many years. Once the term of the lease ends, the rental agreement is automatically terminated. Most residential leases are an estate for years.
Periodic Estate: A periodic lease automatically renews itself for another period at the end of each period unless one party gives notice to the other party at a time specified in the lease before the lease ends.
Estate at Will: The duration of an estate at will is for an unknown period of time. This is an open-ended estate.
Water Rights
Littoral Rights = Lake
Littoral rights apply to property bordering a stationary body of water.
Riparian Rights = River (stream)
Riparian rights belong to the owner of a property bordering a flowing body of water.
Supply and Demand
Real estate values are driven by the concept of supply and demand.
When demand (the number of buyers in the market) is greater than supply (the amount of available homes to purchase), prices will increase.
When supply is greater than demand, prices will decrease.
Easement
An easement is the right to cross or otherwise use someone else’s property for a specified purpose.
An easement is a non possessory interest in land owned by another.
The common term for an easement is “right-of-way”. Easements “run with the land”.
Encroachments
An encroachment is a building, part of a building, or obstruction which intrudes upon the property of another.
In other words, a part of one’s property crosses over the property line of an adjoining property.
Common encroachments include:
- a fence that was partially built onto the neighbor’s property.
- a tree that has grown to cantilever over the property line.
- a deck that was built slightly over the property line.
- a garage or shed, part of which was built over the neighbor’s property line.
Liens
A lien is a claim or charge against the property of another.
Mechanic’s Lien:
This type of lien applies to individuals or companies who have “supplied labor or materials that improve a property”.
For example, if a roofing contractor does not get paid for work performed on a person’s property, they may file a mechanic’s lien against the property.
A mechanic’s lien is a type of involuntary, specific lien.
Mortgage Lien:
This is the most common type of lien.
When a homeowner obtains a mortgage, they are granting the lender a mortgage lien on their property. If the mortgage is not paid, the lender may exercise the mortgage lien and demand full payment of the loan through the sale of the property (also known as foreclosure).
A mortgage lien is another example of a voluntary, specific lien.
Tax Lien:
When a taxpayer is delinquent in paying property taxes, a tax lien attaches against the property.
A tax lien takes the highest priority among other liens (even higher than a mortgage lien).
Deeds
A deed is also called an instrument of conveyance.
- The Grantor is the Seller (conveys the deed).
- The Grantee is the Buyer (receives the deed).
- The grantor of a deed must be at least 18 years old and mentally competent.
Essential Elements of a Deed:
- Must be in-writing (according to the Statute of Frauds).
- Include a grantor (the person conveying title to the property).
- Include a grantee (the person receiving title).
- Contain a granting clause, which includes words of conveyance.
- Provide evidence of consideration (something of value).
- Include a legal description of the property.
- Include an habendum clause (this clause begins with the words “to have and to hold”).
- Include limitations and subject-to clause (any deed restrictions or easements must be noted).
- The signature of the grantor (the grantee is not required to sign the deed).
- Acknowledgement/recording (the deed must be notarized and recorded).
- Delivery and acceptance (a valid deed must be delivered to the grantee).
Conveyance
The transfer of the title of land from one to another. The means or medium by which title of real estate is transferred.
A deed is a document used to convey title legally to real property.
A deed is also called an instrument of conveyance.
Conveyance after death: Intestate succession
When a person dies and leaves no valid will, the laws of intestacy determine the order in which the property is distributed to the heirs.
The heirs take title by descent, or the way they are related to the decedent (deceased person).
The typical order of descent is spouse, children, parents, and siblings, followed by relatives who are more distant.
According to law, the person appointed by a court to distribute the intestate decedent’s property is an administrator or administratrix.
Legal description
The deed must contain an adequate formal legal description.
The legal description describes where the property is located and the size of the lot.
There are 3 acceptable types of property descriptions:
1) Metes and bounds
2) Description by reference, lot and block
3) Monuments
Survey
A survey is a drawing prepared by a licensed surveyor, which shows the exact dimensions of a property and any improvements located on the property (including a garage, deck, fend, driveway).
A survey is drawn using the metes and bounds method.
Full Covenant and Warranty Deed
The Full Covenant and Warranty deed contains the broadest form of guarantee of title of any type of deed and provides the greatest protection to the grantee.
The Full Covenant and Warranty deed includes the following covenants:
1) Covenant of seisin – assures the grantee that the grantor holds the title specified in the deed.
2) Covenant of right to convey – assures the grantee that the grantor has the legal capacity to convey the title and has the title to convey.
3) Covenant against encumbrances – assures the grantee that no encumbrances against the title except those set forth in the deed itself exist.
4) Covenant of quiet enjoyment – assures the grantee that they will have quiet enjoyment and possession of the property.
5) Covenant for further assurances
6) Covenant of warranty
Deed Restrictions
Deed restrictions are a form of encumbrance on real property.
A deed restriction is an imposed restriction in a deed for the purpose of limiting the use of real property, such as:
1) A restriction against the sale of liquor on a property.
2) A restriction as to the size, type, value or placement of improvements that may be erected on the property.
Deed restrictions are in the form of restrictive covenants and/or conditions (CC&R’s).
Title
Title is a legal right to ownership of a property.
Chain of title
Chain of title refers to the sequence of historical transfers of title to a property.
It runs from the present owner all the way back to the original owner of the property.
Abstract of title
An abstract of title is a condensed history of title.
It is a summary of all links in the chain of title.
Deed
A deed is an official legal document that’s used to transfer ownership of a property.
A deed is used as evidence that someone owns a property.
The seller’s attorney uses the old deed to prepare a new deed for the closing.
Contract Requirements
– In New York State, an individual must be at least 18 years of age to enter into a contract.
– Minors (less than 18 years old) CANNOT enter into a contract. The contract is voidable if signed by a minor.
– In New York State, an individual must be mentally and emotionally capable to enter into a contract.
Signing the Sales Contract
Generally, the purchaser signs the contract of sale first because the purchaser is the party making the offer.
The purchaser is stating the purchase price he/she wants to offer and the terms.
Bi-lateral vs Uni-lateral Contracts
A bi-lateral contract includes two parties.
Most contracts in real estate are bi-lateral.
A few common examples include listing contracts, sales contracts, buyer representation agreements and independent contractor agreements.
A uni-lateral contract is an “open contract” where one party promises to pay another party if the other party performs a specific action.
An open listing contract is an example of a uni-lateral contract.
Down payment
The down payment is the portion of a property’s purchase price that is paid in cash and is not part of the mortgage loan.
The down payment must be placed in a separate escrow account.
The following people generally hold the deposit/down payment:
- Listing agent (seller’s broker)
- Seller’s attorney
Earnest money deposit
A deposit that a buyer makes at the time of submitting an offer to demonstrate the true intent of the purchase; also referred to as a binder, good faith deposit, and escrow deposit.
An earnest money deposit is usually binding.
Proration
The division of certain settlement costs between buyer and seller.
These items can include real estate taxes, fuel, a survey, water and sewer charges, rent, and security deposits.
Proration ensures fair apportionment of expenses between buyer and seller.
Discharge of Contracts
A contract may be discharged or terminated in the following ways:
1) Agreement of the parties
If both parties agree to terminate the contract, a release of contract can be performed.
Novation:
This is the act of either:
1) replacing an obligation to perform with a new obligation; or
2) adding an obligation to perform; or
3) replacing a party to an agreement with a new party.
2) Full performance
When the duties of the contract are performed by both parties, full performance is achieved. This is the most common and desirable way to discharge a contract.
3) Impossibility of performance
If there is a change in the law which makes full performance of the contract illegal, the contract may be discharged due to impossibility of performance.
In another example, if a property is destroyed by fire, the listing contract between the owner and broker may be discharged due to ‘impossibility of performance’.
4) Operation of law
This includes the statue of limitations.
Contract Remedies
The following contract remedies may be pursued by the non-breaching party.
1) Specific performance:
This is an order from the court requiring specific performance means that the contract is to be completed as the parties originally agreed.
2) Compensatory damages:
Compensatory damages equal the amount of money actually lost due to the breach of contract.
3) Liquidated damages:
Liquidated damages are damages agreed to be paid in the contract.
4) Reformation:
A doctrine that permits the court to rewrite a contract.
Right of first refusal
The right of first refusal may be added to a sales contract or a lease.
It allows the holder to purchase (or lease) a property if the seller decides to sell or another purchaser (or lessee) comes along.
The holder of the right of first refusal can match the offer from the third party or forfeit their claim to purchase or lease the property.
Leases: Use Provisions in a Lease
The ‘use provisions’ is a clause in a lease that requires a tenant reasonably use the space for its intended use.
For example, a tenant cannot continuously throw loud, late-night parties, which disturb the other tenants in the building.
Assignment vs. Sub-Lease
In an assignment, the assignee is responsible for paying the rent directly to the landlord. The assignee takes responsibility of the lease.
In a sublease, the original tenant is still responsible to the landlord for the lease payments under the lease contract.
In a sublease arrangement, the sub-lessee pays the rent to the tenant (lessee) and the tenant pays the landlord.
Eviction
Eviction is a legal proceeding by a landlord to recover possession of real property.
There are 2 types of eviction:
Actual eviction:
Actual eviction occurs when the landlord removes the tenant from the property without aid or control of the court system.
Actual eviction is wrongful use of self-help.
Constructive Eviction
This occurs when the tenant is prevented from the quiet enjoyment of the property.
In other words, the landlord deliberately renders the property unfit or unsuitable to live in.
An example may be refusing to repair a broken toilet or bathtub.
Mortgagor / Mortgagee
Mortgagor is the borrower (typically the person buying the house)
Mortgagee is the lender or bank who provides a loan to the borrower or homeowner.
This may seem counter-intuitive. Many students think of the bank as the ‘mortgagor’ since people always say “I’m taking out a mortgage”. But in fact, the homeowner gives the bank a mortgage. A mortgage is really a legal document that allows the lender to foreclose on the property if the borrower defaults on the loan. The borrower gives the mortgage to the lender, and in return for this security, the lender gives the borrower a loan.
Types of Loans: Fixed-Rate Mortgage / Fully Amortized Loan
This is the most common type of loan. The borrower makes installment payments (usually once a month). Over time the balance on the loan decreases. At the end of the term of the loan (30 years for examples), the loan balance reaches $0 and the loan is paid in full.
In a fixed-rate mortgage, the borrower pays both principal and interest with each mortgage payment.
Types of Loans: Straight Loan (also known as a Term Loan)
This is an interest-only loan. The balance of the loan always remains the same. At the end of the term of the loan, the borrower must pay the full balance back.
Types of Loans: Adjustable Rate Mortgage (ARM)
In this type of loan, the monthly payment fluctuates based on a standard index. These are considered high-risk loans for borrowers because the monthly payment may increase to an amount the borrower cannot afford.
Types of Loans: Blanket Mortgage
A blanket mortgage is a type of commercial mortgage in which two or more parcels of real estate are pledged as security for payment of the mortgage debt.
A blanket mortgage usually contains a release clause, which allows certain parcels of property to be removed from the mortgage lien when the loan balance is reduced by a certain amount.
Types of Loans: Purchase Money Mortgage
A purchase money mortgage is a type of seller financing in which a mortgage is given by the buyer to the seller to cover part of the purchase price.
In this type of loan, the seller becomes the mortgagee and the buyer becomes the mortgagor.
Types of Loans: Wraparound Mortgage
A wraparound mortgage is another type of seller financing. The seller extends to the buyer a junior mortgage, which wraps around the existing in addition to any superior mortgages already secured by the property.
Types of Loans: Swing/Bridge Loan
A type of short-term loan, typically taken out for a period of 2 weeks to 3 years.
A bridge loan is a type of gap mortgage in which funds are provided over and above an already existing loan until more permanent financing is in place.
A bridge loan allows a buyer to obtain a new property without having to sell his/her current property.
Types of Loans: Graduated Payment Mortgage (GPM)
In a graduated payment mortgage, the monthly payments are lower in the early years of the mortgage term, but increase at specific intervals until the payment amount is sufficient to amortize the loan over the remaining term.
The monthly payments are low in the early years because the borrower does not pay all of the interest that is then added to the principal balance.
Types of Loans: Construction Mortgage
A construction mortgage is a form of interim, or temporary, short-term financing for creating improvements or buildings on a property.
Negative Amortization
Occurs when the monthly payment is less than full interest and does not pay any principal. The interest that is unpaid accrues and the principal balance owed increases.
Conventional vs. Government Loans
Conventional
Conventional loans are loans issued by commercial lenders without any participation by an agency of the federal government.
Conventional loans with an loan-to-value ratio greater than 80% need to obtain private mortgage insurance (PMI).
Government Loans
Government loans involve some kind of participation by a government agency.
The most common type of government loan is an FHA-insured loan.
Mortgage insurance premium (MIP) is paid upfront when obtaining an FHA-insured loan.
VA-guaranteed loans are another example of government loans. These loans are offered to Veterans.
Prepayment Penalty Clause
A pre-payment penalty clause states that the borrower cannot pay off the loan at any time before expiration of the full mortgage term without a financial penalty for early payoff.
Primary vs. Secondary Mortgage Markets
The primary mortgage market is where lending institutions originate mortgages.
Example: Bank of America gives a loan to the home buyer.
The secondary mortgage market is where the loans originated in the primary mortgage market are bought and sold.
Real Estate Settlement Procedures Act (RESPA)
A consumer protection statute, first passed in 1974. Also known as Regulation X.
The purpose of RESPA is:
1) To help consumers become better shoppers for settlement services and
2) To eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
Truth in Lending Act (TILA) / Regulation Z
The Truth in Lending Act of 1968 is United States federal law designated to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed.
TILA requires four main disclosures:
1) Annual percentage rate
2) Finance charge
3) Amount financed
4) Total amount of money to be paid toward the mortgage in principal and interest payments
With regards to advertisements, the only specific item that may be stated in an advertisement, without making a full disclosure is the annual percentage rate.
Loan to Value Ratio (LTV)
LTV is a financial term used by lenders to express the ratio of a loan to value of an asset (property) purchased.
LTV compares the amount financed to the purchase price.
For example:
If a property is being purchased for $500,000 and the buyer obtains a $400,000 mortgage, the LTV will be 80%.
$400,000 is 80% of $500,000 (400,000/500,000 = 0.80).
Points and Buydowns
1 point equals 1% of the loan amount.
For example:
If a lender charges 1-1/2 points as a loan origination fee, the fee will equal 1.5% of the loan amount.
A buydown allows the borrower to obtain a lower interest rate by paying additional points upfront to the lender.
A buydown may also be referred to as discount points.
Usury Laws
Usury laws govern the amount of interest that can be charged on a loan.
The Economy - Inflation
Inflation occurs when there is an increase in money and credit relative to available goods, resulting in higher prices.
