L12: Residential Mortgages

Question 1

Interest

Answer 1

Additional money paid to a lender for the use of their money

It’s a percentage of the loan amount

Question 2

2 Documents to a mortgage

Answer 2

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

Question 3

Promissory note

Answer 3

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

Question 4

Unsecured note VS. Secured loan

Answer 4

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

Question 5

Estoppel certificate

Answer 5

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

Question 6

Security instrument & hypothecation

Answer 6

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

Question 7

Junior mortgage

Answer 7

Liens recorded after the senior mortgage and get paid after senior mortgage has been satisfied (in cases of default)

Question 8

Constructive Notice VS. Actual notice

Answer 8

Constructive Notice = idea that information that is public knowledge has been accessed by interested parties

Actual Notice = literal notice given directly to an individual

Question 9

Mortgage satisfaction

Answer 9

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

Question 10

Lien Theory State

Answer 10

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)

Question 11

Title theory state

Answer 11

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)

Question 12

Acceleration clause VS. Right to reinstate clause

Answer 12

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

Question 13

Percentage formulas

Answer 13

Part/Percentage = Total

Part/total = percentage

Total X percentage = part

Question 14

Non-amortized VS. Amortized loans

Answer 14

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

Question 15

Down payment

Answer 15

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

Question 16

What are the “items” inside a mortgage payment?

PITI

Answer 16

Principal + Interest + Taxes + Insurance (+ HOA)

Question 17

Equity

Answer 17

Amount of the property that owner owns out right

It’s increased by paying mortgage down or when value of the property goes up

Question 18

Loan to value ratio (LTV)

Answer 18

LTV (%) = loan amount/purchase price

It shows how much of the purchase price is being financed in percentage form

Question 19

Discount points

Answer 19

Interest that the board prepares to lower interest rate

One point = 1% of loan principal (interest)

Question 20

Origination fees

Answer 20

Fees charged by lender for originated (processing) loan

It’s often shown as points (like discount points)

Question 21

Buydown

Answer 21

The payment of money upfront to reduce a loan’s interest rate and monthly payments

Question 22

Buying a property with “subject to” existing loan

Answer 22

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

Question 23

Contract for deed

Answer 23

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

Question 24

Assumption

Selling mortgaged properties

Answer 24

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)

Question 25

Construction loans

Answer 25

• 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)

Question 26

Take out commitment

Answer 26

Written pledge from a financial institution claiming it will be the permanent lender for the construction loan

Question 27

Blanket mortgage

Answer 27

Common type of mortgage for developments in which several properties are mortgaged as collateral

Once properties get sold, they receive a Partial Release Clause

Question 28

Default

Answer 28

Failure of a borrower to perform according to one or more terms and conditions of their mortgage agreement
—> can lead to foreclosure

Question 29

Deficiency judgment

Answer 29

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

Question 30

Right to reinstate

Answer 30

Right some borrowers have to bring current their delinquent loans
Usually comes with additional fees

Question 31

Statutory redemption

Answer 31

Right of borrower to redeem their foreclosed property with a certain timeframe after foreclosure

Florida: 10 days

Question 32

Receivership

Answer 32

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)

Question 33

Types of Foreclosure (4)

Answer 33

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

Question 34

Alternatives to avoid foreclosure (8)

Answer 34

Keeps Possession:

1. Special Forbearance (temporary suspension of payment)
2. Repayment plan
3. Loan modification
4. Refinance
5. Partial claim
6. Payment forgiveness

Relinquishes Possession:

7. Deed in lieu of foreclosure (requires cooperation from both sides)
8. Short sale (mutually agreed-upon, one property is worth less than the outstanding balance)

Question 35

Equity of redemption

Answer 35

A borrower in default’s right to pay an entire mortgage (plus fees) and regain the property before foreclosure

Question 36

GFE (Good Faith Estimate)

Answer 36

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