L12: Residential Mortgages Flashcards
Interest
Additional money paid to a lender for the use of their money
It’s a percentage of the loan amount
2 Documents to a mortgage
1) promissory note = the control and document
2) security instrument = mortgage or trust deed
Addresses acknowledgement of debt, collateral, terms of repayment, consequences of failure to pay and obligations of borrower
Promissory note
It’s a negotiable financial instrument, ie. Mortgage
Functions as a legal evidence of a debt and promise to pay debt
It’s a Contract in itself
Unsecured note VS. Secured loan
Unsecured note = one note exists on its own without collateral tied to it, i.e. Personal loan
Secured loan = has a security instrument along with the note the ties the loan to a property, i.e. Mortgage. Can be transferred/reassigned
Estoppel certificate
Letter given to owner of the note when it’s assigned
Verifies: current balance on note, interest rate and how much interest was paid before assignment
Security instrument & hypothecation
Contract that identifies and pledge is the priority or asset that will serve as collateral to secure the loan
Loans with security instruments are less risky and have lower interest rates
Hypothecation = pledging of an asset as collateral to secure a loan for the purchase of that same asset
Junior mortgage
Liens recorded after the senior mortgage and get paid after senior mortgage has been satisfied (in cases of default)
Constructive Notice VS. Actual notice
Constructive Notice = idea that information that is public knowledge has been accessed by interested parties
Actual Notice = literal notice given directly to an individual
Mortgage satisfaction
When loan that is secured to a note is paid in full
Lien on the title is cleared and a deed of release (reconveyance) is executed and recorded
Lien Theory State
States in which the lender places a lien on the property to secure the loan
Borrower retains the title through a security instrument
Judicial foreclosure is needed
Satisfaction of mortgage clause (when met in full)
Title theory state
States in which the title of the property is conveyed to the lender (trustee) for the life of the loan
Parties: borrower, lender and trustee (holds the title on behalf of the lender)
Foreclosure process is simple
Defeasance of mortgage clause (when met in full)
Acceleration clause VS. Right to reinstate clause
Acceleration clause = entire loan amount is due upon default
Right to reinstate clause = provides for a way to get back on track by bringing current any delinquent payments
Percentage formulas
Part/Percentage = Total
Part/total = percentage
Total X percentage = part
Non-amortized VS. Amortized loans
Non-amortized loans = borrower only pays interest and principal remains the same and is due as a balloon payment at the end of the term
Amortized loan = payment of interest and principal with each payment
Down payment
Money buyers put down to pay for property
Ideal/normal payment is 20%
- if payment is less than 20%, borrower needs a PML (private mortgage loan)
Federal housing administration loan allows for 3.5% down
What are the “items” inside a mortgage payment?
PITI
Principal + Interest + Taxes + Insurance (+ HOA)
Equity
Amount of the property that owner owns out right
It’s increased by paying mortgage down or when value of the property goes up
Loan to value ratio (LTV)
LTV (%) = loan amount/purchase price
It shows how much of the purchase price is being financed in percentage form
Discount points
Interest that the board prepares to lower interest rate
One point = 1% of loan principal (interest)
Origination fees
Fees charged by lender for originated (processing) loan
It’s often shown as points (like discount points)
Buydown
The payment of money upfront to reduce a loan’s interest rate and monthly payments
Buying a property with “subject to” existing loan
Seller transfers title to the buyer but retains responsibility for the loan
It’s done WITHOUT lender’s OK, as most loans have a due on sale clause
Contract for deed
Payment is made in installments to seller
Seller finances the purchase and keeps the title until all payments are made
- buyer gets equitable title and is responsible for paying for insurance and taxes
Assumption
Selling mortgaged properties
Buyer takes over the loan from the seller with lender’s permission (not common) Both parties (seller and buyer) are responsible for the debt, but sometimes can be just the buyer (new contract with lender)
Construction loans
- Short term loans for finance in the build out
- Cash is taken in portions, not lump sum
- Total sum is normally = up to 75% of post-construction value and it’s paid through a long term mortgage (lower interest rate)
Take out commitment
Written pledge from a financial institution claiming it will be the permanent lender for the construction loan
Blanket mortgage
Common type of mortgage for developments in which several properties are mortgaged as collateral
Once properties get sold, they receive a Partial Release Clause
Default
Failure of a borrower to perform according to one or more terms and conditions of their mortgage agreement
—> can lead to foreclosure
Deficiency judgment
When the funds from the sale of the property don’t cover the loan amount, the lender has the RIGHT to pursue personal judgment against the borrower for the remaining amount
Right to reinstate
Right some borrowers have to bring current their delinquent loans
Usually comes with additional fees
Statutory redemption
Right of borrower to redeem their foreclosed property with a certain timeframe after foreclosure
Florida: 10 days
Receivership
Right that lender of the property under default has to collect rental income of such property to satisfy the debt (in cases in which property is being rented)
Types of Foreclosure (4)
1) judicial foreclosure
2) strict foreclosure = courts determine time to pay dead, if not done, title automatically goes to lender
3) non-judicial foreclosure = security instrument has a pre-authorized power of sale clause
4) for closure by entity and possession = uncommon, requires willingness and acceptance by borrower
Alternatives to avoid foreclosure (8)
Keeps Possession:
- Special Forbearance (temporary suspension of payment)
- Repayment plan
- Loan modification
- Refinance
- Partial claim
- Payment forgiveness
Relinquishes Possession:
- Deed in lieu of foreclosure (requires cooperation from both sides)
- Short sale (mutually agreed-upon, one property is worth less than the outstanding balance)
Equity of redemption
A borrower in default’s right to pay an entire mortgage (plus fees) and regain the property before foreclosure
GFE (Good Faith Estimate)
Good Faith Estimate
A form that explains the cost of a mortgage in an easy to understand format. This assists borrowers by comparing “apples to apples“ when deciding on the type of loan they should obtain and which lender to use
