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Real Estate > Read Estate Financing > Flashcards

Read Estate Financing Flashcards

1
Q

The decision to buy or rent property involves considering

A

– How long a person wants to live in a particular area,

  • a persons financial situation
  • housing affordability
  • current mortgage interest rates
  • tax consequences of owning vs renting property
  • what might happen to home prices and tax laws in the future
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2
Q

Home ownership costs

A

Includes utility costs, electricity, natural gas, heating oil, water, trash removal, and sewer charges, routine maintenance and repairs. Also must pay Real estate taxes, by property insurance, and we pay with interest mortgage loan use to purchase a property.

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3
Q 
PITI
PRINCIPLE 
INTEREST
TAXES 
AND INSURANCE
A

Owners must pay real estate taxes, buy property insurance, an repay with interest the mortgage loan.

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4
Q

3 major credit reporting companies in US

A

Equifax
Experian
Transunion

Free report of credit every year - www.annualcreditreport.com

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5
Q

Credit score

A

Prepared by a credit reporting company and is based on a consumers past history of credit use, including income, outstanding loans, number of credit accounts open, outstanding credit lines, number of accounts opened and closed, payment history, and credit inquiries.

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6
Q

FICO score

A

Credit score

350-850

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7
Q

Debt to income

A

DTI lenders usually look at the loan applicants DTI.
Home owner who can provide at least 10% of purchase price as down payment can be expected to incur a monthly PITI payment of no more than 28% of borrowers gross income. Monthly payment on all debt not to exceed 36% of gross I come.

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8
Q

Equity

A

The difference between the market value of the property and the amount still owed on it.
Can be borrowed against or realized by sale of property.

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9
Q

Homeowners may deduct from gross income:

A
  • mortgage interest payments on first and second homes as well as home equity loans on those dwellings if no more than a combined 100,000
  • Real estate taxes
  • certain loan origination fees
  • loan discount points
  • loan prepayment penalties
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10
Q

Tax advantages first time home buyer

A

May withdrawal from IRA without penalty for down payment. Use within 120 days

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11
Q

Promissory note

A

Aka note or financing instrument
A borrowers personal promise to repay a debt according to the agreed terms. Executed by a borrower (maker /payor) and contracted with lender (payee).
States amount of the debt, the time and method of payment and the rate of interest. When signed by both parties it becomes a legally enforceable and fully negotiable instrument of debt. Can be transferred to a 3rd party.

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12
Q

Note is a negotiable instrument

A

Similar to a check or bank draft. The payee who holds the note may transfer the remaining three to receive payment to a third party in one of two ways. By signing the instrument over
Or by delivering the instrument to the third party

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13
Q

Secondary mortgage market

A

Home loans are bought and sold

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14
Q

Interest
Discount points
And payments made

A

A charge for the use of money, expressed as a percentage of the remaining balance of the loan. Lender charges interest in principal (amount borrowed not yet repaid) over term of loan. Usually monthly
Discount points are a % of a loan amount and are charged by a lender to increase the lenders yield on its investment.
Payments made at the end of a period are known as payments IN ARREARS (general practice)
Payments made at the beginning are knowns as payments IN ADVANCE.

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15
Q

Loan-to-value ration LTV

A

The percentage of the sales price or appraised value, whichever is less, that the lender is willing to lend.

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16
Q

Usury

A

Charging interest in excess of the maximum rate allowed by law.
Most loans are not subject to state usury protections because they are federally related and exempt from state usually laws.

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17
Q

As of march 31,1980

A

Federal law exempts federally related residential first mortgage loans made after that date from state usury laws. Not subject to private lenders

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18
Q

Prepayment clause

A

This clause requires that the borrower pay a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule, typically during the first years of the loan.

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19
Q

Mortgage loans

A

Secured loans. 2 parts: the debt itself and security for the debt. When property is mortgaged the owner must execute (sign) two separate instruments. Financing that creates debt and security that specifies the property that the debtor will use as collateral.
Mortgage creates a lien on the property. Deed of trust actually transfers legal title from borrower to 3rd party to hold on behalf of lender while debt owed.

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20
Q

Basic principle of property law

A

No one can convey more than he actually owns.

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21
Q

Hypothecation

A

A process in which the debtor retains the right of possession and control of the secured property, while the creditor receives an equitable right in the property. A home mortgage loan is secured by the borrowers real property in this process. The borrower retains the right of possession and control of the property. Can be either a mortgage or deed of trust.

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22
Q

Mortgage

A

Lien or transfer of title on the real property of a debtor. A voluntary, specific lien

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23
Q

Mortgagor

Mortgagee

A

The borrower. Received a loan and in return gives a promissory note and mortgage to the lender (mortgagee)

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24
Q

Satisfaction of mortgage

A

When loan is paid in full the mortgagee issues a document called satisfaction of mortgage. Can be filed in the public record as evidence of the removal of the security interest which would otherwise continue to be an encumbrance in the ownership interest.

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25
Q

Lien theory state
Mortgage state
Title state

A

Mortgagor retains both legal and equitable and equitable title to property that serves as security for a debt. Has a lien on the property but the mortgage is nothing more than collateral for the loan. Must go through a formal foreclosure proceeding in court.

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26
Q

Deed of trust

A

A three party security instrument. Conveys bare legal title (naked title) title without the right of possession from the borrower to a third party. Trustee holds legal title on behalf of the lender.
Establishes the actions that the trustee may take if the borrower, the trustor, defaults under any of the deed of trust terms.

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27
Q

Beneficiary

A

The holder of the promissory note

28
Q

Title theory state

Deed of trust

A

The mortgagor actually conveys legal title to the mortgagee and retains equitable title and the right of possession. Title is returned to mortgagor when debt is paid in full. Because lender holds legal title, the lender has the right to immediate possession if mortgagor defaults.

29
Q

Obligations created by mortgage or deed of trust for borrower to fulfill

A
  • payment of the debt in accordance with the terms of the promissory note
  • payment of all real estate taxes on the property used a security
  • maintenance of adequate insurance to protects the lender in the event that the property is destroyed or damaged by fire, windstorm, or other hazard
  • maintenance of the property in good repair at all times
  • receipt of lender authorization before making any major alterations in the property

Failure to meet any of these can result in default. Loan documentation provide a grace period (such as 30 days) during which borrower can meet obligations and cure default.

30
Q

Acceleration clause

A

Included in a mortgage or deed of trust to assist the lender in foreclosure. If borrower defaults, lender has the right to accelerate the maturity of debt. They may declare the entire principal balance due and payable immediately.

31
Q

Assignment of mortgage

A

The sale of a promissory note to a 3rd party, such as an investor or mortgage company.

32
Q

Defeasance clause

A

Written in the financing instrument, the lender is required to execute a satisfaction of mortgage (release or discharge) that is recorded to clear title when the note has been fully paid. This document returns to the borrower all interest in the real estate originally conveyed to the lender.

33
Q

Deed of reconveyance (release deed)

A

Beneficiary must make a written request that the trustee convey the title to the property back to the grantor. The trustee executes and delivers this to the trustor. Should be notarized and recorded

34
Q

Impound or escrow account

A

A reserve fund required by many lenders provided by borrowers to meet future real estate taxes and property insurance premiums. When a new policy has been purchased, the premiums reserve will be started with deposit of 1/20 of the insurance premium liability. Loan payments will include PITI. Principle, interest, taxes, and insurance. Also can include flood insurance. Federal regulations limit the total amount of reserves that a lender may require.

35
Q

Subject to mortgage

A

The buyer is not personally obligated to pay the debt in full. If sale upon foreclosure does not pay off the entire debt the purchaser is not liable for the difference. Original seller might continue to be liable

36
Q

Assumption of mortgage

A

Buyer assumes the mortgage or deed of trust and agrees to pay the debt. If seller wants to be free of obligation the seller, buyer, and lender must execute a novation agreement in writing. Makes the buyer solely responsible for any default on the loan.

37
Q

Allenation clause (resale clause, due on sale, call clause)

A

Provides that when property is sold, the lender may declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender.

38
Q

Straight loan

Aka term loan or interest-only loan

A

Essentially divides the loan into two amounts to be paid off separately. Borrower makes periodic payments of interest only, followed by payment of principle in full at the end of the terms. Once the only form of home loan but now used for home improvements and second mortgages.

39
Q

Amortized loan

A

Each payment partially pays off both principal and interest. Most mortgages and deeds of trust loans are These. Amortize = kill off.
Time usually ranges from 10-30 years. At the end of the loan term, the full amount of the principal and the interest due is reduced to zero. Known as direct reduction loans.

40
Q

Fully amortized loan

Level payment loan.

A

Most frequently used mortgage payment plan. Mortgagor pays a constant amount, usually monthly. The lender credits each payment first to the interest due them to the principal amount of loan: while each payment remains the same; the portion applied to principal grows and interest due declines.

41
Q

Adjustable-rate mortgage

A 
Begin be at one rate of interest, then fluctuates up or down during the loan term, based on a specified economic indicator.
Common components:
-the index 
-margin
-rate caps
42
Q

Index

A

An economic indicator that is used to adjust the interest rate in the loan. Tied to US Treasury securities. Adjustment period establishes how often the rate may be changed.

43
Q

Margin

A

Added to the interest rate as a premium. Lenders cost of doing business

44
Q

Rate caps

A

Limit the amount of interest rate change. Periodic and life of the loan (aggregate). Periodic rate cap limits the amount the rate may increase over a stated term, usually a year. A life if the loan rate caps limits the amount the rate may increase over the entire life of the loan.

45
Q

Payment cap

A

Protects the mortgagor from unaffordable individual payments.

46
Q

Negative amortization

A

The amount of the loan actually increases in the progress call negative amortization.

47
Q

Growing-equity mortgage

Aka rapid payoff mortgage

A

Uses a fixed rate of interest but payments of principal or increasing according to an index or schedule. Most commonly use when the borrowers income is expected to keep pace with the increasing loan payments.

48
Q

Balloon payment

A

A final payment that is at least twice the amount of any other payment. Will be considered a partially amortized loan

49
Q

Reverse mortgage

A

Allows A homeowner age 62 or older to borrow money against the equity buildup in the home. The homeowners equity diminishes as the loan amount increases. The owner remains in the home but provides more income. Owner must still pay property tax, insurance, maintenance, and utility costs.
Most popular are insured through FHA

50
Q

Foreclosure

A

A legal procedure in which property pledged as security for a debt is sold to satisfy the debt. Any lien holder, regardless of priority position, can intimate foreclosure proceedings. The foreclosure of a lien with highest priority brings the rights of the parties and all junior lienholders to conclusion. Sold at foreclosure sale and free of the foreclosure mortgage and all junior liens.
3 types: judicial, nonjudicial,and strict foreclosure.

51
Q

Judicial foreclosure

A

Judicial foreclosure allows the property to be sold by court order after the mortgagee has given sufficient public notice. When borrower defaults, lender may accelerate the due date of the remaining principal balance, along with overdue payments and interest, penalties, administrative costs. Can file suit to foreclose the lien. Going to court and grants request, sells house. Public sale.

52
Q

Nonjudicial foreclosure

A

Can be used when security instrument contains power of sale clause. No court action is required. In states that recognize deed of trust loans, beneficiary is generally given power of sale, which is conducted by trustee. Trustee or mortgagee will send a notice of default to the borrower indicating the amount that must be paid to make debt current and action taken if not met. If borrower fails to cure default next step will be sending notice of foreclosure to borrower and indicating when and where property will be sold at public auction. Notice will be recorded and public given.

53
Q

Strict foreclosure process

A

Appropriate notice given to delinquent borrower. Once proper papers have been prepared and recorded, the court establishes a deadline for balance of the defaulted debt to be paid in full. If borrower does not pay it by date, court simply awards full legal title to lender. No sale takes place. More commonly used when property is used to secure debt

54
Q

Deed in lieu of foreclosure

A

Alternative to foreclosure. Aka friendly foreclosure. Carried out by mutual agreement rather than by lawsuit. Does not eliminate junior liens. Also, lender usually loses any rights pertaining to FHA or private mortgage insurance or VA guarantees. Still considered an adverse element in borrowers credit history.

55
Q

Deficiency judgement

A

A personal judgement against a borrower for unpaid balance to the mortgagee.

56
Q

Short sale

A

Sales price is less than the remaining indebtedness.

57
Q

Homeowners insurance

A

Required by lenders. Basic form Insurance covers against fire, windstorm, left etc.
Broad form covers more damage to home and utilities inside.

58
Q

Coinsurance clause

A

Continued in homeowner policy. Requires the owner maintain insurance equal to a specific percentage (80%) of the replacement cost of the dwelling.

59
Q

Comprehensive loss underwriting exchange

CLUE

A

A database of consumer claims history that enable insurance companies to access prior claims information in the underwriting and rating process. Contains up to 5 ears of personal property claims history.

60
Q

National flood insurance act of 1968

A

Enacted by congress to help owners of property in flood-prone areas by subsidizing flood insurance and land-control measures to improve future management t for floodpain areas.

61
Q

Federal emergency management agency

A

Administers the national flood insurance program.

62
Q

FEMA defines a flood as

A

A general and temporary condition of partial or complete inundation of two or more acres of normally dry land or two or more properties from:

  • an overflow of inland or tidal waves
  • an unusual and rapid accumulation or runoff of surface waters
  • mudflows or mudslides on the surface of normally really dry land
  • the collapse of land along the shore of a body of water
63
Q

Special flood hazard area

A

Flood insurance required on all types of buildings. Must cover either the value of the property or the amount of the mortgage loan. Take 30 days to be effective.

64
Q

Two types of flood insurance

A

Replacement cost value RCV

actual cost value ACV

65
Q

Home affordability

A

The goal of both government and business.

66
Q

National flood Insurance reform act of 1994

A

Imposes obligations on lenders and loan services to set aside escrow funds for flood insurance on new loans for property in flood-prone areas

67
Q

Growing-equity mortgage

A

Payments of principal are increased each month to pay off the loan more quickly.

Real Estate (13 decks)

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