Mortgages And Financing Flashcards
Basic Theories of Financing
1). Lien Theory State. (hawaii uses + 26 other states
)
- Title Theory state
3) . Intermediary State
What is a Lien Theory State?
Mortgagee holds a secured interest; therefore mortgagors is legal owner of the land.
If property is foreclosed upon, mortgagee cannot take possession BEFORE foreclosure.
What is a Title Theory State?
Legal title is held by trustee until loan is satisfied or foreclosed.
The instrument is a deed of trust or trust deed.
Under title theory, there are 3 parties
. The trustee: neutral 3rd party holds LEGAL title but very often the lender.
The trustor: (borrower or buyer). Holds EQUITABLE title.
The beneficiary: (lender). Benefits since they can forclose its interests if the trustor defaults.
What is the Intermediate Theory?
This is based on the principles of title theory but requires the mortgagee(lender) to forclose to obtain legal title.
What is the Rule of Thumb regarding Discount Point. (1% of loan amount)
If Borrower intends to refinance or sell within 10 years.
Consider to pay less in points and higher interest rate
If Borrower intends to keep property for more than 10 years, pay more points upfront
To bring down the interest rate.
What is an estoppel certificate and when is it used?
It is a signed statement certifying facts for the benefit of another party as the date of the statement. This prevents a party later challenging the facts.
Used in certain situations:
- In a secondary mortgage market, mortgagee , the assignee may require it from mortgagors. The certificate certifies amount owed on mortgage loan and rate of interest as of date of signing certificate.
- In purchasing an income producing property, the buyer’s lender may want the estoppel certificate from the tenants to ensure it is financing a sound investment.
What is an impound account?
(Reserves)
An account by mortgagee to pay borrowers property tax and insurance costs.
Mortgage and loan Clauses
- Acceleration Clause
- Defeasance Clause used in title theory states
- Due-on-Sale (Alienation) Clause
Designed to protect lender from sale to credit risk person
Allows lender to raise interest rate or charge an assumption fee when property is
Sold to buyer who assumes existing mortgage - Escalation Clause I.e. Adjustable Rate Mortgage
- Lock-in Clause borrower cannot repay loan prior to agreed upon date w/o incurring
A penalty. Different from lock-in rate made by lender on committing an interest rate
For a specified time pending approval of a mortgage. - Subordination Clause: lender voluntary permit a prior or subsequent mortgage to
Take priority(in case of foreclosure)
A). Refinancing JR mortgagee may sub subordinate its lien enabling first
Mortgagee to retain property
B). Leasehold property, a lessee wants to develop on property. Fee owner may be
Willing to subordinate his interest because the lessor will charge higher
Rents thus increasing the property value.
C). A SR. Mortgage may subordinate its lien to a construction loan— again
Increasing property. If the land value is substantially lower than construction
Value.
What types of Mortgage Loans?
1) . ARM: Adjustable Rate Mortgage Loan, an escalation clause links interest rate to economic index
2) . Amortized Mortgage Loan: An amortized rate must be given.
3) . Blanket Mortgage Loan: frequently used by developers . Secured by 2 or more parcels so developer acquires a tract of land and then sub divides allowing developer to contain a partial release clause where he can sell individual lots over time without retiring entire mortgage
4) . Bridge Loan aka Swing Loan aka Interim Loan aka Gap Loan: Short term financing until more permanent loan can be obtained. Allows one to buy a home until another home is sold.
5) . closed End Mortgage Loan is a fixed loan
6) . Conforming Loan meets Freddie Mac or Fannie Mae. Usually carries lower interest rates or more favorable terms.
7) . Consolidated Mortgage Loan
8) . Construction Loan aka Construction Draw Mortgage Loan: usually short term financing disbursed on percentage-completed basis according to borrower’s agreement w/ builder taking a draw. Usually followed by a “Take Out” loan upon completion of improvements
9) . Conventional Loan: fixed term, fixed rate loan
10) . Debenture unsecured instrument an unsecured promissory note
11) . Fixed rate Mortgage Loan
12) . Graduated Payment Loan (GPM): low payments in early years and higher payments later on. Negative amortization
13) . Growing Equity Mortgage Loan : Fully amortized over a much shorter term than the traditional30 year. These payments increase each year.
14) . Hard Money Loan. Made by a private investor. “ known as a “last resort” loan
15) . Jumbo Loan: exceeds Fannie Mae and Freddie Mac loan limits
16) Non-conventional Loan. ( unconventional loan) government backed loan like FHA & VA loan
17). Nonconforming Loan: only private lenders can purchase loans that exceed allowable amount. Interest rate is higher than conforming loan
18). Non-recourse Loan is secured by real property which borrower has no personal liability. This loan usually involves a Low LTV (50-60%) . Used usually for commercial real estate loans.
19) Open-End Mortgage Loan: Home equity loan
20) Package Mortgage Loan secured by both real property and personal property
21). Prime Mortgage Loan: high quality loans. Low default risk . Made to borrowers w/ good credit and high monthly income
22). Purchase Money Mortgage (PMM) Loan: purchase real property mortgage loan, secured by mortgaging that property.
A). First mortgage loans
B). Seller Financing ( mortgage given to seller of property in exchange for providing financing for part or all f the purchase price)
Refinancing is not a PMM
HAR ‘s form only applies to seller financing
23). Reverse Annuity Mortgage Loan:
This loan is repaid when: mortgagors dies; mortgagors no longer occupies the
Property or if a property is sold.
24). Shared Appreciation Mortgage Loan (SAM)
25). Shared Equity Mortgage Loan when an investor is granted a share of the equity in the property
26). Term Loan:
A). Interest only loan w/ a balloon payment die after 1 or more years
B). Defined as a loan for a specific time-frame having a maturity for more than1 year. The loan comes due often before the periodic payments pay the loan in full.
27). Variable Rate Mortgage Loan permits lender to adjust rates up or down in response to money market rates of on conditions of mortgage loan demands
28). Wraparound Mortgage Loans:
To calculate amortized payments ( principle & interest mortgage loan payments)
An amortization rate must be given if a question asks what is the principal and interest monthly payment for a $500,000 loan with an interest rate of 5%. The rate is $5.37/$1000 for 30 years. $2,685.00
What are the different types of Seller Financing ?
1) . Purchase Money Mortgage (PMM)
2) . Agreement of Sale ( on mainland this instrument is a land contract, install sales agreement, installment sales contract or contract for deed). It is both a financing device& an executor contract to sell real property. In an agreement of sale, the buyer(the vender) purchases real property and the seller (vendor) finances the transaction while retaining legal title until the agreement of sale is paid in full.
Vender has all rights and interests in the property, therefore he has EQUITABLE TITLE.
Hawaii views the vendee as having a real property interest even tho, the property is legally in vendor’s name.
There are 2 closings. First is typical cost of conveyance are paid including conveyance tax. Equitable title passes to vendee. Then at second closing, the agreement of sale is paid off and legal title passes to vendee.
The length of agreement is typically 3-5 years.
Hawaii uses the term agreement of sale .
Therefore general uniform portion of real estate exam, terms land contract, install sales contract, installment sales agreement or contract for deed are used.
On the state portion, agreement of sale is used.
3). Assumption of Mortgage: a buyer takes over the mortgage loan from the seller (mortgagor) . The buyer pays mortgagee directly. Should buyer default, the buyer has 100% personal liability (primary) and the mortgagor also has100% liability (secondary).
With an assumption of mortgage loan, the buyer requests a document from the mortgagee acknowledging the sum due on the loan which is called a REDUCTION certificate.
The due on sale clause is usually incorporated in conventional loans. Any transfer of property triggers this clause so entire loan is due and payable. Therefore usually only non-conventional (FHA and VA) loans allow an assumption with a NOVATION (trade out).
4). Subject to Mortgage Loan : when a buyer purchases a property “subject to” mortgage loan, the buyer is not taking on any personal liability. Buyer pays mortgagor who pays the mortgagee. If default occurs, the mortgagee’s only recourse is against the mortgagor, not the buyer.
Like the assumption of mortgage loan, any transfer of interest triggers the mortgage due-on-sale clause.
