Intro To Real Estate Financing Flashcards
What is financing
Receiving or providing money for the purposes of buying real estate
Mortgagor
The buyer
who applies to a lender for a loan
Mortgagee
The lender or the bank
Financial Steps
- Buyer applies to lender for a loan
- Lender uses gross salary, FICO score, credit history, and debt to income ratio to assess a buyers liability
- Buyer receives a pre-approval or pre-qualified letter, pre-qualification is a preliminary idea of how much a borrower can afford
Pree approval =a conditioner - Buyer finds a property to purchase
- Lender’s attorney checks public records at county of registry of deeds for title defects. If it does, the seller must fix them before closing
- Letter of commitment to buyer, requiring them to make loan
- At closing lender makes the loan for borrower, borrower gives a note
- Buyer pay back loan upon repayment lender returns nota and mortgage to buyer
Collatoral
The property
Amortization
The payment of the debt in equal installments
Balloon Mortgages
a loan with an amortization period that is longer than its payment period. Meaning the loan is lower than necessary to pay off by the end of the period making them more affordable
ex. a 10 yr loan whose payments are calculated on a 30-year schedule
Forclosure
Legal process a lender attempts to recover the balance of a loan from a borrower by forcing the sale of the asset used as collateral for the loan.
- Judicial (under court supervision) but some states allow non - judicial foreclosures
- Foreclosures are processed through public auction
Short Sale
When the seller is underwater or owes more than what they can sell their home for
The Note
The evidence of the debt
I OWE U
Mortgage
The security of the note (or debt) provides a piece of property as collateral for the loan.
Title Theory
Technically the banks owns the property until loan is paid off.
Power of Sale Clause
Permits the lender to take the property and sell it in the event of a default on the terms of the loan (most often non-payment of the loan)
Mortgage covenants
Everything the borrower promises to do.
Making monthly payments, pay their property taxes as impounds to the bank, maintain insurance, etc.
Defeasance Clause - Alienation clause
Permits maturity of the loan in the event of a Due on Sale Clause
When the loan is paid back, collateral is automatically released
-Prevents from wrap-around mortgages or transferring to a third party.
Subordination Clause
Makes the mortgage junior to any future mortgage.
Junior mortgages get paid second
Points
One percent of the loans
Often used to increase the value of a loan.
Ex. if the interest rate is so low on a loan bank might charge borrower points to increase profit.
Discount Points
Borrow’s capability of buying down the loan interest rates.
Borrower owes less interest every month
Mortgage Brokers
Do not originate the loan, but instead broker the loan between the borrower and lender
Partial Release Clause
Used in blanket mortgages
Releases a portion of the collateral in exchange for partial payment of loans
Gran St. Germain Act
The due on sale clause cannot be triggered upon death, devising of the property, leasing, marriage, divorce, or transfer to a family trust
Mortgage
-Security or the note, providing a piece of property as collateral for the loan.
Title Theory
- The bank legally owns the property until the borrower pays off loan
- The mortgagor (borrower) has equitable title (future right to gain legal title)
Lien theory
Borrow will holds legal title during the life of the loan
Equity Right of Redemption
Right to pay off debt and prevent foreclosure
Letter of Commitment
When the lender is satisfied with the collateral; requires them to make the loans as long as the buyer satisfies lenders conditions in the letter
Pre-approval letter
Lender receives a preapproval letter from lender
Allows buyer to search for homes within loan amount.
Also called the commitment letter or letter of commitment
Collateral
the property
A default
failure to make payments
A note
evidence of the debt, and mortgage securing the debt
also known as a promissory note or mortgage note
Beware of two clauses:
- Acceleration clause
- Prepayment Penalty Clause
Equity of Redemption
Being able to payback lender what is owed along with foreclosure costs before public auction
Short Sale
Homeowner decides to sell house short of what’s owed, bank settles with whatever open market price homeowner finds
Equity
Money in excess of debt, borrower receives proceeds from auction
Deficiency Judgement
Property is sold under the debt debt owed
REO (Real estate owned)
If lender owns the property after foreclosure they sell it in the open market
Acceleration Clause
Permits the lender to accelerate the maturity date (due date of loan.
Prepayment Penalty Clause
Requires borrower to pay a penalty for prepayment of the loan; guarantee’s the lender gets paid the interest on the loan
Uncommon in residential; common in commercial
Power of Sale Clause
Permits lender to sell property if there is a default
Defeasible Clause
Collateral is automatically relieved when loan is paid back,
bank no longer has rights to property
Subordinate Clause
Mortgage becomes junior to any future mortgage,
Get paid second
in a forclosure after any senior mortgages
Junior Mortgage
mortgage gets paid second (3rd, 4th, etc), in a foreclosure auction after any senior mortgages
Due -On -Sale Clause (Assumption Clause)
Acceleration of maturity of loan due to (mostly) title transfer, which prevents the bank from transferring the mortgage to a third party.
Defeasance clause
When loan is paid back, the bank’s claim to the collateral is automatically relieved
St. Germain Act
The due on the sale clause cannot be triggered by death, divorce, transfer of property via family, lease, marriage, devising of property or family trust.
MA Title Theory
In MA bank legally owns your property until it is paid in full
Equitable title as the borrower
Partial release clause
Used in blanket mortgages, releases a portion of the collateral in exchange for partial payment of the loan
Example: subdivision development or cross-collateralized loans
Blanket mortgages
Mortgages that cover several parcels of land
Points (percentage)
1% of the loan
Used to increase value of a loan; used basically when the interest rate on a loan is so low that it isn’t worth making a lender can charge borrowr points as in an origination fee to increase profit.
Math example of points/origination fee:
A property was sold for $100,000 with a loan for $80,000. The lender charged the borrower two points. How much did the points cost the borrower?
80,000x.02 = $1,600
Mortgage Brokers
3rd parties between the borrower and lender; offer more flexibility in terms of payments
offer loan comparisons, through a higher cost (because broker charges a fee)
Mortgage brokers
Directly work with lenders
do not orginate loan
Assumption Clause
Acceleration Clause (aka calling in the note)
Permits lender to accelerate the maturity date (due date) of the loan in the event of a default;
lenders first step to in foreclosure
Prepayment Penalty Clause
Penalty for prepayment of the loan
Gaurentees lenders gets paid interest on the loan (common in commercial)
Junior Mortgage
gets paid second, something that happens when primary mortgage gets sold to another bank
