Intro to Real Estate Financing

Question 1

What is financing?

Answer 1

Receiving money or providing money for the purpose of real estate.

Question 2

What is the Note?

Answer 2

The promissory note. “I owe you.” Evidence of the debt.

Question 3

What is the Mortgage?

Answer 3

Security for the note. Pledging of property as collateral for the debt. Hypothecation of property. “Buyer gives the mortgage”.
“Lien, not the loan.”

Question 4

Collateral

Answer 4

Borrower hypothecates (pledges) the property as collateral for the loan.

Question 5

What are the parties involved in a financing arrangement?

Answer 5

Mortgagor: The buyer/borrower
Mortgagee: The bank/lender

Question 6

How many days until late fees kick in/foreclosure process can start on a delinquent mortgage payment?

Answer 6

15 days late = late fee

30 days late = foreclosure process may begin

Question 7

Financing Steps

Answer 7

1. Buyer applies to a lender for a loan.
2. Lender uses gross salary, credit history (FICO score), debt to income ratio to assess a buyer’s ability to pay for the loan.
3. Buyer receives a pre-approval or pre-qualification letter.
4. Buyer finds a property to purchase.
5. After P&S is signed, the lender hires an appraiser to determine if the collateral for the loan is sufficient to cover the loan in the event of a default.
   - P&S outlines the terms of the sale of the home.
6. Lender’s attorney conducts a title search to determine if the property suffers from any title defects.
   - If there are any title defects, it is on the seller to correct them before closing.
7. Letter of commitment is issued to the buyer.
8. At closing, the lender creates the loan & in return, the borrower gives a note as evidence of the debt along w/ the mortgage, securing the debt.
9. Over the term of the loan, the borrower pays back the loan. Upon repayment, the mortgage discharges & the borrower/homeowner now owns the home free & clear.

Question 8

Pre-qualification

Answer 8

A preliminary idea of how much a borrower can afford.

Question 9

Pre-approval

Answer 9

A conditional approval of the loan.

Question 10

Letter of Commitment

Answer 10

Final approval from the lender to lend the money as long as the borrower has not changed anything in their financial profile prior to close.

Question 11

What happens if the borrower defaults on the terms of the loan?

Answer 11

The lender can foreclose on the property to secure payment.

Question 12

What is foreclosure?

Answer 12

Legal process where the lender attempts to recover the balance of the loan from the borrower in default by forcing the sale of the asset.

Question 13

Judicial foreclosure

Answer 13

Court ordered process for foreclosure by a lawsuit.

Question 14

Non-judicial foreclosure

Answer 14

Not a court process. Deed of trust is issued at closing. (This is when the lender forecloses).

Question 15

How are foreclosures “usually” done?

Answer 15

Public auction.

-Bank grants title to the highest bidder by signing & delivering a new deed to the new owner (could be the bank itself).

Question 16

What happens with the “extra” (paid or owed) money after the public auction?

Answer 16

After the foreclosure, depending on the sale price the borrower will either receive money from the bank or owe money to the bank.

• If the proceeds from the sale are in excess of the borrowers debt plus the lender’s expenses, the borrower will receive their leftover equity.
• If the proceeds from the sale are short & don’t cover the debt plus lender’s expenses, the borrower is personally liable & can be sued for the outstanding debt.

Question 17

What is REO or “Real Estate Owned” property?

Answer 17

This is when the highest bidder at an auction was the bank itself. The bank owns the property & will sell it in the open market.

Question 18

What are the two ways to prevent foreclosure?

Answer 18

Equitable right of redemption

Short sale

Question 19

Equitable right of redemption

Answer 19

Homeowner can by back their home if before the auction they can repay the lender what is owed plus the costs of foreclosure.

Question 20

Short sale

Answer 20

Homeowner sells their home “short” of what they owe to the bank.

• Bank settles for less money & (usually) writes off the loss.
• Typically occurs when the homeowner owes more than what the home is worth.
• Bank agrees to take whatever price they can get in the open market.
  
  • bank must approve the sale
  • can take up to 6+ months

Question 21

What can happen is an appraisal comes back lower than the sale price?

Answer 21

The buyer can either back out of the deal or they can come up with the extra money to make up0 the difference up front.

Question 22

Deed in lieu of foreclosure

Answer 22

Borrower hands over the deed to the lender w/out the foreclosure process.

Question 23

Strict foreclosure

Answer 23

Some states provide for strict foreclosure.

• Auction isn’t required.
• Lender can simply sue the borrower for the money owed.
• Can be seen w/ “underwater properties” (meaning borrower owes more than what the house can be sold for).
• If the borrower doesn’t pay within a certain time frame ordered by the court, the lender receives title to the property automatically.

Question 24

In MA, which foreclosure process is used.

Answer 24

MA uses the auction process, not the strict process.

Question 25

What are the clauses in the note?

Answer 25

Acceleration clause: Permits the lender to accelerate the maturity date of the loan if there is a default on the terms of the mortgage. Also known as “calling in the note”.
Prepayment Penalty Clause: Requires the borrower to pay a penalty for prepaying the loan. Used to ensure the lender gets all interest.
-In MA, on regular loans (FHA/insured/conventional) there is no prepayment penalty. Usually in non-conforming loans.

Question 26

Lein theory state

Answer 26

FL, NY, ME, RI

• Title to property is held in the name of the borrower, with a security interest lien to the property being granted to the lender.
  
  • Title remains w/ buyer.
  • Lender would have to sue to get their money back in the event of default on payments.

Question 27

Title theory state

Answer 27

MA, CA, NH

• Mortgage states that title is held in the lender’s name until final payment is made, At which time, the title is then conveyed to the borrower.
  
  • Lender would go through the foreclosure process in the event of default on payments.

Question 28

Mortgage covenants

Answer 28

“Borrower’s promises”

Buyer promises to maintain the property properly.

Question 29

Power of sale clause

Answer 29

Allows lender to take the property and sell it if the borrower defaults on the terms of the loan.

Question 30

Defeasible clause

Answer 30

Automatically relieves the collateral of the bank’s claim when the loan is paid back.

Question 31

Due on sale clause

Answer 31

Also known as the “Alienation” or “Assumption clause”.
Allows the bank to accelerate the maturity date of the loan in the event of most title transfers.
-prevents transfer of the mortgage to a third party.

Question 32

Garn-St. Germain clause

Answer 32

Due on sale clause can’t be triggered upon death, devising property, leasing, marriage, divorce, or transfer to a family trust.

Question 33

Subordination clause

Answer 33

Makes the mortgage junior (2nd) to any future loans.

-Think first in line first in right.

Question 34

Partial release clause

Answer 34

Used in blanket mortgages to allow portions of the debt to be paid off as the developer sells each parcel.

Question 35

How are points used?

Answer 35

Used to increase the value of the loan.
If the interest rate is so low that the lender won’t make much money, they can charge points to the borrower as an origination fee in order to increase profits.

Question 36

How much is 1 point worth?

Answer 36

1 point = 1% of the loan amount.

Question 37

What are discount points?

Answer 37

Can be paid up front by the borrower to buy down loan interest rate, lowering their monthly payment.

Question 38

Point math example:
A property was sold for $100k, with a loan amount of $80k. The lender charged the borrower 2 points. How much did the points cost the borrower?

Answer 38

80,000 x .02 = 1600

Answer: $1600

Question 39

Mortgage brokers

Answer 39

• 3rd parties.
• Don’t originate loans.
• Offer a variety of loan products from different investors/banks.
• brokers charge a fee.
• Can be great for tricky loan situations.
• *Mortgage brokers arrange loans & do not make them.

Question 40

Mortgage bankers

Answer 40

• Work directly for the bank.
• Originate the loan for the bank.
• Offer products only from their bank.
• No broker fee.
• *Mortgage bankers make loans.