General Mortgage Concepts Flashcards
Mortgage
- a pledge to replay a debt as agreed until the “death” or termination of the repayment contract or forfeit something of value if the debt is not repaid
- a legal document or contract, by which real property is pledged for the repayment of a loan (security instrument)
2 ways a contract is terminated
- ) failure to pay as agreed/default (collaterazation)
2. )full repayment as agreed
Security and Debt
any interest in a real property may be pledged as a security or debt
2 parts of a mortgage loan
- ) debt itself (promissory note)
2. ) security for that debt (security instrument)
promissory note
contract between the lender and the borrower. The note states the amount of the debt, the method and time of payment, and the rate of interest
essential elements of the note
- parties of the contract (borrower/lender)
- terms of the loan (rate, loan amount, length of term)
- promise to pay/repay
- signatures of borrower
- identity of collateral (used to secure the debt)
principal
amount of money borrowed/total amount loaned (face value)
Interest
fee paid for borrowing money (accrues daily or monthly)
interest rate
a percentage that will need to be pad to the lender (profit)
principal and interest (P&I)
both principal and interest added together (components of payment)
PITI
Total Housing Expense (Principal, Interest, Taxes, Insurance)
Escrow Account
- account managed by the loan servicer (covers property tax and insurance)
- pay 1/12 of the annual property tax and insurance into account
simple interest
interest computed based only on outstanding principal (fixed-rate closed-end loan)
ammortization
repayment/reduction of loan principal over time
negative ammortization
when scheduled monthly payment does not cover the full amount of interest due (unpaid interest is added to principal balance)
2 parties to every loan transaction
O’s- borrower = mortgagor
E’s- lender = mortgagee
lien theory
2 party theory where the lender lends the money and the title is conveyed to the borrower
(if the lender needs to foreclose on the borrower, it would go to the judicial system)
title theory
3 party theory where lender lends money and the “naked title” is conveyed to the trustee on behalf of the lender (beneficiary) who is the holder/owner of the note
trustee
licensed attorney; party who is given legal responsibility to hold a property in trust for another party to secure the performance of the obligation/debt
deed of trust
(security instrument in a title theory) transfers certain rights and conveys title to a 3rd party (trustee) until the loan is repaid (contains automatic power of sale clause which gives the trustee power to sell)
foreclosure
the legal process used by a lender to secure possession of a mortgaged property in which the borrower is in default (begins after 4 consecutive missed payments)
judicial foreclosure
a litigation process with a specific remedy. loan servicer on the note holder’s behalf, commences the foreclosure by filing a suit against the homeowner
non-judicial foreclosure
no court filing or proof required. the foreclosing party must notify the homeowner of the default and the scheduled sale
title
(shows ownership rights) transferred at closing from one owner to another when the deed is both “delivered and accepted”
deed
(transfer property interest) written document, when executed and delivered, conveys title to real property, and thereby transfers ownership of property from one person to another
requirements for valid deed
- in writing
- from a competent grantor
- signed by the grantor
identify an existing grantee - contain a sufficient property description
- include words of conveyance
- be delivered and accepted (recorded in county court house)
Quitclaim Deed (QCD)
release claim/the transferring of interest or rights(with no warranties), that the grantor may have (used in divorce commonly)
conveyance
(to transfer title; conveys ownership) transfer of ownership or real property from one person to another by a document (deed/deed of trustee)
reconveyance
(deed of trustee clause) when a loan is secured by “deed of trustee” and loan is paid in full the trustee “reconvey” title back to borrower
lien
a monetary claim against a property until the debt is paid in full
mortgage lien
(voluntary lien) borrower willingly pledges real property as security; lien become monetary claim when property s locative (constructive notice)
involuntary lien
claim placed against a real property without consent of property owner (can be placed by government/court) (if you dont pay income tax) (government lien always takes precedent)
subordinate lien
(junior lien) subordinate to primary lien (in case of foreclosure, primary lien is paid in full first)
subordinate agreement
senior lien holder agrees to take subordinate position to a more recently recorded lien
piggy-back/combo
used to avoid PMI/supplement amount of down payment needed to purchase a home
real estate (real property)
land, structure, improvements, above and below the earths surface
real property rights
- possess the property
- use the property
- dispose of the property
- experience quiet enjoyment
- exclude/control rights of entry
manufactured housing
manufactured homes not attached to real property are considered “personal property” and these loans are called “chattel loans” (like cattle because they mooooove) *constructed to HUD code
modular home
constructed to the same state, local, or regional building codes as site-built homes (not real property until put on foundation)
site-built home
ownership, measured by natural life of an individual. the land is owned completely with no limitation and allows for the property to descend to heirs with the same comprehensive ownership
leasehold
ground rent; when owner conveys a possessory interest in the property to another, known as the lessee/tenent
primary residence
the legal residence occupied by the owner as the primary place of residence the majority of the year
second home
a secondary residence, such as a vacation home. not the same as a rental or investment property
investment property
a property from which the owner receives at least 2 weeks of rental income annually
mortgage loan
lender provides funds to a borrower either to finance the purchase of a property, or to refinance a currently owned property
sales contract
agreement to purchase a property on agreed terms for a limited time and sealed by an earnest money deposit
earnest money
(held by realtor/escrow agent) money is paid by buyer to seller at the time of contract execution that indicates the buyers “earnest intent”
seller concession
contributions a seller pays toward all, or portion, of the buyers closing costs. Generally restricted to a certain percentage based on downpayment to ensure borrowers “skin in the game”
seller carry-back
seller of property is willing to “privately carry” some or all of the financing
refinancing
modifies terms of existing loan or pays off loan and replaces it with a new loan, to lower interest rate, change terms, consolidate debt, receive cash out for various reasons (home improvement)
short term financing
- construction loan
- construction to permanent loan
- bridge loan
construction loan
(temporary/interim financing) 12 months, financing cost of construction lender allows advances/draws at periodic intervals (require 2 settlements)
Construction to permanent loan
(construction conversion loan) 1 loan approval with 2 stages. When construction is done the inspector “use and occupancy certified”
bridge loan
used to purchase new home before selling existing one
Equity
ownership interest/net value of assets
LTV
the relationship between the value of the property and actual loan amount
Combined LTV ratio (CLTV
if applicant has 2 mortgages on 1 property, the originator must combine both loans to calculate the combined LTV (CLTV)
Primary Market
“retail market place” mortgage brokers/bankers/depository institutions originate and process loans (have direct contact with applicants)
wholesale lenders
acquire loans from the primary market through brokers/lenders/savings and loans/commercial banks/own retail options (dont have direct communication with applicant)
depository institution (bank)
first party accept deposits and make mortgage loans and other type of loans
mortgage lender
second party originates and closes mortgage loans in their own name using correspondent lines of credit; may also act as mortgage brokers
mortgage broker
independent financing expert. links borrower to lender to originate loans for a fee (used to find the best deal without wasting borrowers time)
state licensed non depositories
1 mortgage brokers
- MLO’s are state licensed
- don’t lend their own money
- dont service own loans
- act as broker/middle man
2 mortgage lenders/bankers
- MLO’s are state licensed
- may lend their own money
- may service own loans
- originate mortgage loans directly
regulators
write rules and supervise industry
- CFPB
- Legacy regulators
- Prudential Banking regulators
- state regulators
Consumer Financial Protection Bureau (CFPB)
newest regulator and took over the industry after housing market crash
legacy regulators (housing)
before housing crisis
- Department of Housing and Urban Development (HUD)
- Federal Trade Commission (FTC)
- Federal Reserve
Prudential Banking Regulators
Regulated Separately
- FDIC
- OCC (office of controller of currency
State regulators
(State by state basis) home own regulations
Truth in Lending Act (TILA)
fully disclose cost/credit terms over time
- require early disclose
- provide customers with right to cancel
- ensure truthful transparent advertising
- prevent fraud/predatory lending
- restrict loan originators being paid based on loan transaction terms
- prevent outside influence when appraisers are evaluating property
Real Estate Settlement Procedures Act (RESPA)
-consumers were overcharged because there was no competition
-settlements inflated by the system of kickbacks/referral fees/markups
congress enacted RESPA to encourage homeownership
Congress encourage homeownership in 3 ways
- Early disclosure of closing costs
- Protect consumers from excessive settlement costs
- prohibit overcharging of escrows
Mortgage loan process
- Origination (Application and Pre-qualification)
- Processing (Organization and Verification)
- Underwriting (Risk Assessment and Loan Decision)
- Closing (Preparation and Coordination)
- Post-Closing (Quality Control and Funding)
- Servicing (Payment Processing and Management)
- Secondary (Securitization and Investor Relations)
