Finance Laws Flashcards
Hypothecate
Pledge
Depending on the state laws the document to hypothecate real property is
Called a mortgage or deed of trust.
In a mortgage transactions there are 2 instruments given to the lender in return for the loan:
A promissory note or bond
A mortgage or a deed of trust aka trust deed
Government and private corporations use
A bond to borrow money.
In residential transactions
A promissory note signed by the borrower and given to the lender provides legally acceptable evidence of the borrowers debt and his promise to repay the debt.
A promissory note establishes:
Who the lender Who the borrower The amount of debt The interest rate The terms of repayment.
A note is a negotiable instrument.
If a note is negotiable, it is transferable.
A note may be sold for amount owed , less than the amount or more
A note contains a number of PROVISIONS. Relating to repayment of the debt.
A prepayment privilege. Or prepayment penalty
Lock in clause
Late payment penalty
An acceleration clause
An alienation clause ( due on sale). If title is alienated w/out lender approval it becomes
Due at once
TITLE SUBJECT TO. Vs. ASSUMPTION
When a borrower sells his property , the purchaser may take title to the property with the lien remaining against the property. In so doing he may either assume responsibility for payment or not assume responsibility.
If the buyer were not to be responsible for making payments to the lender , he would take TITLE SUBJECT TO.
If he is to be responsible for making payments to the lender, he would ASSUME AND AGREE TO PAY them.
With a note, the lender has the borrower’s promise to pay the debt but nothing to secure that promise!
A mortgage is written contract pledging real property the borrower owns or will own
Depending on the state, mortgage can convey title to the lender or simply create a lien for the lender.
Most states operate under the lien theory of mortgages.
In title theory states, mortgage conveys title to the lender and title is returned to borrower after paid in full.
In intermediate theory states, the mortgage gives the lender a lien but allows him to take title without foreclosure if the borrower defaults.
Mortgage provisions
These clauses are not however required in order to be legally enforceable.
Insurance clause
A defeasance clause
An assignment of rents clause
A request for notice of default
Deed of Trust. Is a form of mortgage that has same type of provisions with the major difference being in provisions to foreclosure.
With a deed of trust, the borrower is called a trustor or grantor.
In a lien theory state , deed of trust gives lender a lien, not title.
Lender is called a beneficiary
The trustor makes his loan payment to the beneficiary.
In deed of trust, the trustor gives a third party (called the trustee) a power of sale, allowing the trustee to sell the property w/out court approval.
If grantor defaults, the beneficiary can sue on the note, file for judicial foreclosure or instruct trustee to conduct a trustee’s sale. After the sale, the trustee will convey title to highest bidder through a trustee’s deed.
If grantor pays off, the trustee to issue a deed of reconveyance. This is recorded to show lien has been satisfied.
Seller Financing
PURCHASE MONEY MORTGAGE: The buyer gives seller a note for balance of purchase price plus a mortgage securing note. Simultaneously at closing the seller gives the buyer the deed to the property. The buyer holds title and the seller has a lien
Vs. the buyers property as a mortgagee.
CONTRACT FOR DEED (land sale contract or contract for deed, agreement for sale)
The purchaser pays for the property in installments while the seller retains title until the property is paid in full.
This makes it the least secure method of financing for the buyer as buyer does not have title and does not have absolute assurance of receiving title upon performance of contract.
To protect himself, the buyer should see that the contract is recorded.
A collection escrow is set up with the parties sharing the cost of maintaining. A deed would be placed in escrow at time of agreement, an escrow agent would collect payments and when satisfied, escrow agent would deliver deed in satisfaction to buyer.
Under this contract the seller is the vendor the buyer is the vendee.
Types of Mortgages
Fixed rate mortgage.
Adjustable rate mortgage
Term or interest only mortgage
Reverse Annuity or reverse mortgage
Amortized
A partially amortized mortgage
A fully amortized (self liquidating) mortgage
The level payment mortgage
A graduated payment mortgage. Payments start low and rise at set rate over set period of time.
A budget mortgage or PITI mortgage( principle, interest, taxes and insurance)
1/12 of estimated insurance, taxes, association fees and/or special assessments.
A direct principal reduction loan periodic payments include a fixed amount of principle plus interest on unpaid balance.
