Loans – Security Instruments Flashcards
What word or clause pledges property as security for a loan without giving up possession of it?
A. Hypothecate
B. Habendum Clause
C. Defeasance Clause
D. Collateral
A. Hypothecate
• Defeasance (“Defeated”) – Lender cancels mortgage when note is paid in full • Habendum versus Hypothecate – To have and to hold – Shows types of ownership
At a mortgage foreclosure sale, the successful bidder gets a deed from
A. the sheriff.
B. the mortgagor.
C. the mortgagee.
D. no one.
D. no one - This is a JUDICIAL process. Highest bidder gets a certificate of sale from the Sherriff.
Mortgage as the Security instrument
• Creates a lien against real property as security for payment.
• Mortgagor (Borrower) gives note to the Mortgagee (Bank)
• Mortgagee (Lender) cancels the mortgage and note when Mortgagor (Borrower) fails to pay. Default - Borrower fails to repay debt according to terms.
The mortgagor pledges (gives) property as security (collateral)
When in Foreclosure, the remedy for default, is the property used as security for debt is sold to satisfy debt.
Mortgage Foreclosure Procedure is Judicial (Court)
- DEFAULT - Borrower in default
- ACCELERATION - Due immediately; notice of default
- LAWSUIT - Foreclosure action - Lawsuit
- WRIT of EXECUTION - Judge approves foreclosure sale
- EQUITABLE Redemption period - Borrow can pay missed loan payments up to sale
- SHERIFF’s SALE - Property goes to highest bidder - receives CERTIFICATE of SALE - NOT a deed
- STATUTORY Redemption - Borrower can pay missed loan payments, late fees, and outstanding loan balance to new lien holder. Up to one Year after sale. Borrow can continue to live on property.
- Sheriff’s Deed (Ownership) - Now owns the property, 1 year after sale
• Mortgage Foreclosure Sale (Sheriff’s Sale)
– Public notification of sale for 4 weeks
– Public auction at courthouse
– Proceeds pay costs of sale, mortgage, junior liens, excess goes to mortgagor
– Certificate of sale to bidder to become lienholder, not owner
– Statutory period of redemption
• 1 year to redeem property with lump-sum payment
– Sheriff’s Deed to make bidder legal owner
Who authorizes the use of the power of sale in a deed of trust?
A. trustor
B. court
C. beneficiary
D. trustee
C. beneficiary
• Trust deed creates lien against property in favor of beneficiary (lender)
• Trustor (borrower) has legal ownership (deed)
• Trustee holds bare legal title and power of sale - Neutral 3rd party
– Deed of reconveyance upon debt repayment clears title
– Trustee’s Sale in event Trustor goes into default
Deed of Trust Foreclosure Procedure (Non-Judicial)
Faster, less expensive than using court system
1. Beneficiary (lender) notifies the trustor (borrower) of default
2. Requests the trustee to record a Notice of Default.
3. Anyone who has recorded a Request for Notice must be notified of the default.
4. The trustee must wait at least three months (90 Days) after recording the Notice of Default before advertising the trustee sale.
5. Trustee advertises a Notice of Sale once a week for three weeks (21 days) and posts a Notice of Sale on the property.
Deed of Trust Foreclosure Procedure (Non-Judicial)
– So the minimum time between recording the Notice of Default and the trustee sale is three months and 21 days.
– During this time the trustor may reinstate (bring current) the loan up to 5 business days prior to the trustee’s sale.
Which of the following is true about a purchase money mortgage?
A. It is signed by the purchaser and given to the seller
B. It includes the sale of personal property
C. The seller retains legal title
D. It must include a walenda line
A. It is signed by the purchaser and given to the seller
• In a purchase money mortgage, the seller is acting as the mortgagee (for example: the bank)
NOTE: Do not confuse purchase money mortgage with land contract. In a land contract, the buyer only gets equitable title, while in a purchase money mortgage the buyer gets legal title and the seller gets a mortgage
A note calls for level monthly payments for five years with a lump sum payment due at the end of five years. What type of loan is it?
A. Straight line
B. Amortized
C. Balloon
D. Adjustable rate
C. Balloon
• Amortized loans
– Repayment of debt in “equal” payments of principal and interest, rather than interest only payments
• Straight line loan
– Same amount paid each month toward the principal
• Balloon
– A loan with a final payment due that is considerably larger than the required periodic payment because the loan amount was not fully amortized.
• Adjustable rate
– A loan that has a fluctuating interest rate
What is another name for a VA appraisal?
A. CRV
B. Certificate of Eligibility
C. DD-214
D. MIP
A. CRV
• VA appraisals are known as CRVs
– Certificate of Reasonable Value
A mortgagor is behind on the monthly mortgage payments and the mortgagee is threatening to foreclose on the mortgage. The mortgagor agrees to give the property back to the mortgagee instead.
This is called:
- Acceleration
- Defeasance
- Alienation
- Deed in lieu
- Deed in lieu
• Defeasance (think “defeated”)
– Clause in a mortgage that says once the promissory note is paid, the mortgage is void
• Alienation (transfer of interest clause)
– Clause in a mortgage that says if you sell the property the total amount of the loan is due now
• Deed in lieu
– Agreement between you and the bank that if you give the bank your real estate, they will not foreclose
• Acceleration
– First step in foreclosure
– Call clause for breach of any mortgage provision
Financial institutions that buy and sell mortgage loans are in the Secondary Mortgage Market. These include:
- Fannie Mae
- Ginnie Mae
- Freddie Mac
- All of the above
- All of the above
- Secondary market participants
- Fannie Mae: Federal National Mortgage Association (FNMA)
- Purchases FHA, VA, and conventional
- Ginnie Mae: Government National Mortgage Association (GNMA)
- Guarantees FHA, VA
- Freddie Mac: Federal Home Loan Mortgage Corporation (FHLMC)
- Purchases FHA, VA, and conventional
When qualifying for a loan, underwriters use ratios to determine the confidence level the borrower will be able to pay back the loan.
The back end ratio of debt will normally not exceed:
- 20%
- 30%
- 40%
- 50%
- 50%
- Back-end Ratio
- All Debt including Housing / Gross Monthly Income
- Normally not to exceed 50%
- Front-end Ratio
- Normally not to exceed 30%
- Housing Expense / Gross Monthly Income
- Housing Expense – Front End Ratio (PITI)
- Principal
- Interest
- Taxes (Property taxes and special assessments)
- Insurance (homeowners hazard insurance; mortgage insurance)
- And HOA fees, when applicable
- Housing Expense – Front End Ratio (PITI)
Debt
• is any recurring monetary obligation that cannot be cancelled.
• Installment loans with more than 10 payments remaining
• Credit card and retail account balances
• Child support or alimony payments
• Other mortgage loans
• Utilities, cable service, and life insurance premiums are not considered debt because they can be cancelled.
Insures loans for 1-4 family homes made by approved lenders?
- FHA
- VA
- Conforming loans
- Subprime Loans
- FHA
- Federal Housing Administration (FHA) insures loans for one- to four-family homes made by approved lenders.
- insures private lenders against losses from borrower defaults.
- MIP) included in all FHA-insured loans. PITI payment - Budget Loan
FHA Loans - Mutual Mortgage Insurance Fund
• Is a federal fund that insures mortgages by the Federal Housing Administration (FHA).
• Borrowers of either loan type pay into the fund with a one-time up-front premium then 1/12 per month included in their monthly payment.
FHA Loans - 1-4 family dwellings, if multi family, borrow must live in one of the units as primary
- 3.5% down payment of purchase price or appraised value (higher)
- Source of down payment may NOT be non-repayable gift and can not be financed
- must live in dwelling as principle residence within 60 days and live in house for 1 year
- max loan ceilings will apply - differ in counties
• FHA property appraisal (conditional commitment) comes in equal to or greater than sales price.
• Escape clause permits buyer to cancel contract if property does not appraise for sale price.
• Or More Clause - Allows additional principal payment with regular monthly loan payment.
• Mortgage Insurance Premium - First Year Paid Upfront (UFMIP) 1/12 of new year’s policy included with monthly payment
• Origination Fee - May not exceed 1% of loan amount; normally paid by borrower
• Seller Contribution - Limited to 6 points total, which include discount points, closing costs, prepaid expenses, temporary buydowns
• Prepayment Penalties - Prohibited.
Loan Assumption - Allowed with FHA credit review of buyer
Investors may NOT assume FHA-insured loans
Loans for veterans and members of reserves?
- FHA
- VA
- Conforming loans
- Subprime Loans
- VA Guaranteed Loans
- is for veterans and certain members of the Reserves and National Guard.
- Guaranteed by the government
- Used to buy single-family homes or multi-family residences with up to four units
- Interest rate and points set by financial markets, negotiated by borrower and lender
- Discount points paid by seller or buyer; cannot be financed
- Investor loans not part of VA program
- Eligibility
- Certificate of Eligibility (COE) shows eligibility amount and status
- Certificate of Reasonable Value
- states value of the subject property based on approved appraisal.
- Establishes maximum guaranteed loan amount with $0 down
- If price exceeds CRV, veteran must pay difference in cash
- Entitlement
- No upper loan limit on VA mortgages as of 1 January 2020.
- An increase in the VA Loan Funding Fee for all non-exempt borrowers.
- Purple Heart recipients are now exempt from paying the VA loan funding fee the same as those who receive or are entitled to receive VA compensation*
- When loan is repaid in full, full entitlement reinstated
Must establish bona fide occupancy as principal residence within 60 days
• Down Payment - Not required unless purchase price exceeds value
• Loan Payments - Level payments that include PITI
• Qualifying Standards - Maximum income ratio (PITI) N/A, Maximum debt ratio (PITI + debt) = 41%, Must show sufficient residual income for normal living expenses
• Property Eligibility - One- to four-family dwellings; if multi-unit dwelling, borrower must live in unit as the principal residence (no investor loans)
• Occupancy - Must establish bona fide occupancy as principal residence within 60 days
• Maximum Guaranty - No limit, as approved by the lender
• Maximum Mortgage - Amount No limit, as approved by the lender
• Secondary Financing - Permitted
• Mortgage Insurance - Not required, although borrowers must pay a one-time funding fee
• Origination Fee - May not exceed 1% of the loan amount
• Payment of Fees - Negotiable, though escrow fees cannot be charged to veteran
• Payment of Discount Points - Paid by the seller or by the buyer; cannot be financed
• Prepayment Penalties - Prohibited
• Loan Assumption - Allowed with VA approval; can be a veteran or non-veteran; if
assumed by another veteran, eligibility may be restored
Loans that do not meet Freddie Mae and Freddie Mac standards are?
- FHA Loans
- VA Loans
- Non-Conforming loans
- Subprime Loans
- Non-Conforming loans do not meet Fannie Mae or Freddie Mac standards.
- Size of the loan exceeds guidelines.
- Credit quality of the borrower is too low.
• Conforming loans meet criteria to be sold in the secondary market.
- Subprime loans refer to the quality of a borrower’s credit.
- Rates may be higher.
- Lenders can be more flexible.
When can PMI be removed from a loan?
- After 3 years of paying on the loan
- After 5 years of paying on the loan
- When the loan amount drops below 78% of the value of the property
- Never once started until the loan is paid off
- When the loan amount drops below 78% of the value of the property
Private mortgage insurance (PMI)
• Enables lenders to make conventional loans up to 95%
• Covers funding above 80% if borrower defaults on loan
• 1972 Mortgage Guarantee Insurance Corporation (MGIC) was first PMI company
• Homeowners Protection Act of 1998 (HPA) requires lender to automatically cancel PMI at 78% or upon borrower request at 80% or less
A real estate financing device that does NOT transfer legal title but does place equitable title with the buyer is called a(n)
A. conditional sales contract.
B. agreement for sale.
C. Seller Financing.
D. all of the above
D. all of the above
Seller Financing
• Called installment sales contract, a contract of sale, an agreement of sale, a conditional sales contract, a contract for deed, or a land sales contract
• Seller called Vendor
• Buyer is the Vendee
seller financing, also known as an installment sale, credit sale or carryback
financing, occurs when a seller carries back a note and trust deed executed by the buyer to evidence a debt owed for purchase of the seller’s property
Agreement for Sale –
• Carryback document between buyer and seller.
• Seller does not give a deed to the buyer until paid in full
• Seller retains legal title and the buyer has equitable title.
• Also called: Land Contract, Contract for Deed, or Installment Sale.
Borrower or purchaser of a home shares a percentage of the appreciation in the home’s value with the lender:
- CalVet Loan
- Shared appreciation mortgage (SAM)
- Nonconforming loans
- VA Guaranteed loans
- Shared appreciation mortgage (SAM)
- Borrower or purchaser of a home shares a percentage of the appreciation in the home’s value with the lender.
- In return for this additional compensation, the lender agrees to charge an interest rate which is below the prevailing market interest rate.
