Mortgages Flashcards
Mortgage
Security for some other obligation that typically places an encumbrance on real property.
–A mortgage provides that, if the borrower defaults, the mortgagee may sell the mortgaged property and use the proceeds of the sale to satisfy the debt
Mortgagor
*Person taking the mortgage (i.e., the borrower).
*Remember Mortgagor is the Borrower
Mortgagee
-Entity providing the mortgage (i.e., the lender).
-Remember the Mortgagee is the Lender
Obligation
The borrower’s duty to repay a loan evidenced by a written promissory note.
Promissory Note
A specialized type of contract between the borrower and lender by which the borrower agrees to repay the loan on certain terms and conditions
To borrow money from a lender, the mortgagor must…
give the lender both a promissory note and a mortgage
Down Payment
A down payment is the money a home buyer pays at closing toward the cost of the home. It’s the difference between the mortgage amount and the purchase price.
Equity
Mortgagor’s current interest in the property—home value minus amount owed on mortgage (mortgagor’s want this to get bigger over time)
Principal
The amount of debt, excluding interest, left on the loan (mortgagor’s want this to get smaller over time)
Adjustable-Rate Mortgage (ARM)
A home loan in which the interest rate changes periodically based on a standard financial index
Fixed-Rate Mortgage
A home loan in which the interest rate will remain the same throughout the life of the loan, most often 15 or 30 years
Purchase-Money Mortgage
-The buyer borrows money for the purchase price of a home from the seller and pays the entire purchase price in a lump sum.
–Title is typically transferred to buyer and the seller/lender holds a mortgage on the property.
–Also known a seller or owner financing, this is usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels
Purchase-Money Mortgage
–Note that purchase money mortgages usually have priority over subsequent recorded liens on the property.
–However, the priority of a purchase money mortgage can be lost if the mortgage is either recorded incorrectly or not recorded at all.
Loan-to-Value Ratio
Ratio of amount borrowed to the appraised value of the house
Prepayment Penalty
Fee charged to borrowers who pay a loan off faster than the prescribed payment schedule
Acceleration Clause
Allows the lender to demand payment of the entire loan if the borrowers miss even one monthly payment. This is valid in all states
Due-on-Sale Clause
This gives the lender the option to demand payment of the entire loan if the borrowers sell the property or any part of it
What is the equity of redemption?
-Courts of equity recognized and protected the Equity of Redemption: the borrower’s right to repay the debt, even after the payment due date.
-It is a fundamental principle that courts will not allow clogging of the equity of redemption by allowing lenders to obtain title without foreclosure
-The modern foreclosure sale ends the borrower’s equity of redemption
What is an equitable mortgage?
If the parties disguise a mortgage transaction as a sale, the court will construe it as an equitable mortgage and provide the “seller”with the rights of a borrower
What is the difference between assuming the mortgage and taking subject to the mortgage?
Assuming: If the agreement provides that Buyer will assume the loan, then he is personally liable to repay it, together with the borrowers
Taking subject to: If the agreement provides thatBuyer will take title subject to the loan, then he is not personally liable
What are the borrower’s rights before the foreclosure sale?
Reinstatement:
-As a general rule, a borrower can avoid foreclosure by paying the missed payments before the lender accelerates the loan. Some states also allow the borrower to reinstate for a limited period after acceleration occurs.
Equitable Redemption:
-All states allow the borrower to avoid foreclosure by paying the loan in full (plus any incurred costs) after default but before the sale occurs.
What is foreclosure?
The legal process by which a homeowner in default on a mortgage is deprived of interest in the property.
What are the two types of foreclosure?
Judicial Foreclosure:
-A specialized form of litigation in which the lender brings a complaint against the necessary parties including:
*the borrower,
*any junior lienors, and
*anyone else holding interest in the property that are junior in priority to the mortgage
Nonjudicial Foreclosure (also called power of sale foreclosure):
-Similar to a judicial foreclosure except it takes place with no court involvement.
*This is the dominant method for collecting on a secured loan after the borrower’s default.
*The mortgage has to expressly provide for this type of foreclosure and if it does, it is called a mortgage with power of sale
Regarding the results of the foreclosure sale, what is Principle 1?
Foreclosure eliminates or “wipes out”the mortgage being foreclosed and all junior interests, but does not affect senior interests
Regarding the results of the foreclosure sale, what is Principle 2?
Foreclosure sales proceeds are distributed first to the foreclosing lender, and then to junior interests in order of priority; any surplus proceeds go to the borrower
What is a deficiency judgment?
-If the foreclosure sale proceeds do not fully repay the loan, the lender can usually sue the borrower for breach of contract and obtain a deficiency judgment for the remaining balance.
–Note that legislation in some states prohibits deficiency judgments altogether in certain situations, most commonly after nonjudicial foreclosure or foreclosure on a purchase money mortgage.
–Note also that a number of courts have invalidated deficiency judgments based on inadequacy of the sales price or unfairness in the foreclosure process
What are the borrowers rights after the foreclosure sale?
-Statutory right of redemption: In about half the states, a borrower may regain title by redeeming the property from the successful bidder—i.e., paying the sales price plus interests and costs—within a set period of time (ranging from 3 months to 2 years).
–Setting aside the sale: The borrower may be able to set aside the foreclosure sale. In most jurisdictions, a foreclosure sale will be set aside if the sales price is so inadequate as to “shock the conscience” of the court or is “grossly inadequate.”
What are two mortgage alternatives?
-Deed of Trust
-Installment Land Contract (also known as land sale contract or contract for deed)
come back to this
What are subprime loans?
made to borrowers who generally would not qualify for traditional loans offered at the generally prevailing rate of interest for conventional mortgages
What are Alt-A loans?
made to borrowers who are close to being eligible for a prime loan but who do not quite qualify
Typically both subprime and Alt-A loans would begin with a low, fixed interest rate for the first few years (called a “teaser rate”) and then would reset to an adjustable rate for the duration of the loan
yup
subprime mortgage crisis
yes
