Unit 12 Flashcards
Considering Factors of Buying or Renting
- how long a person wants to live in a particular area
- a person’s financial situation
- housing affordability
- current mortgage interest rates
- tax consequences
- what might happen to home prices and law laws in the future
Basic Costs of Owning a Home
- Principal
- Interest
- Taxes
- Insurance
FHA
Federal Housing Administration
3 major credit reporting companies
- Equifax
- Experian
- TransUnion
VA
US Department of Veterans Affairs
What are the 2 biggest factors when deciding whether to rent or own?
- mortgage terms
2. payment plans
What must purchasing decisions be weighed carefully again?
individual’s financial circumstances
FICO Score range
300-850
Loan-to-Value Ratio (LTV)
amount of the loan as a percentage of the purchase price of the property
How to calculate total housing expense allowed
monthly income * .28
How to calculat etotal housing and other debt expense allowed
montly income * .36
What is the minimum credit score for a loan determined by>
- whether the lended will sell the mortgage after initiating it
- borrowing is making use of government-sponsored program
promisory note
borrower’s personal promise to repay a debt according to the agreed terms
Who is a promisory note in a contract with?
lender/payee
Who is a promisory note executed by?
borrower/maker or payor
Other terms for promisory note
note, financing instrument
What does a promisory note state?
amount of debt, time and method of payment, rate of interest
Interest
charge for the use of money, expressed as a percentage of the remaining blanace of the loan
in arrears
payments made at the end of each period
in advance
payments made at the beginning of each period
What type of payment method is more common?
in arrears
Who charges interest on the principal
lender
Usury
charging interest in excess of the maximum rate allowed by law
Federally related transaction
one that involves a federally chartered or insured lending institution or an agency of the federal government
loan origination fee typical percentage
1% of the loan amount
Discount Point
used to increase the lender’s yield on its investment
Point
1% of the amount being borrowed; not 1% of purchase price
What do the number of points charged depend on?
- Differences between loan’s stated interest and lender yield
- how long the lender expects it will take the borrower to pay off the loan
How to determine the number of points on a loan
total point dollar amount / amount of loan
When are points paid
in cash at closing by buyer
How ar emost mortgage loans paid
in installments over a long period of time
Prepayment Penalty
penalty against uneared portion of the interest of mortgage interests paid ahead of schedule
Prepayment Clause
clause that requires the borrower pay a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule, typically during the first year
When might lenders not charge prepayment penalties
- on mortgage loans insured or guaranteed by the federal government
- loans that have been sold on the secondary mortgage market to one of the government-sponsored enterprises
What type of loans are mortgages?
secured loans
What are the 2 parts of mortgage loans?
- debt itself
2. security for the debt
Execute
sign
What must the owner execute when they have a mortgage?
- financing instrument
2. security instrument
What is the Mortgage financing instrument
promisory note
What is the mortgage Security Instrument
either a mortgage or deed of trust
Financing Instrument
creates the debt
Security Instrument
specifies the property that the debtor will use as collateral for the debt
bare legal title (naked title)
title without the right of possession
deed of trust
three party security instrument
Who holds legal title on behalf of the lender on a deed of trust?
trustee
who is the holder of the promisory note
beneficiary
What are the borrower’s duties?
- pay the money back
- payment of all real estate taxes
- maintenance of insurance
- Maintenance of the property and repair at all times
- receipt of lender authorization before any major alterations
What happens if the borrower does not uphold their duties to lender?
can result in default
Acceleration Clause
assists the lender in foreclosure; lender has right to accelerate the maturity of the debt; can may entire principal due and payable immediately
Assignor
original mortgagee
assignee
third party who receives a note
Assignment of mortgage
asignee becomes new owner of the debt and security instrument
Can you change terms of the loan when there is an assignment of mortgage?
no
How does an assignment of mortgage work?
the assignor endorses the note to the assignee
Defeasance Clause
lender is required to execute a satisfaction of mortgage when teh note has been fully paid
Satisfaction of mortgage
returns to the borrower all interest in teh real estate originaly conveyed to the lender
Deed of reconveyance
release deed
Release Deed
trustee conveys the title of the property back to the trustor, conveying the same rights and powers that the trustee was given under the deed of trust
What is the insurance premium reserve for a new insurance policy?
1/12 of insurance premium liability
Flood insurance
must set aside escrow funds for flood insurance on new loans for property in flood-prone areas
How much time do you have to purchase flood insurance
45 days
What happens if a borrowers doesn’t purchase flood insurance?
lender purchases it for them
Assumption of mortgage
buyer assumes the mortgage or deed of trust adn agrees to pay the debt
How to take property when real esatte has outstanding mortgage or deed of trust
- “subject to”
- Assumption of mortgage
- Novation
Alienation Clause
provides that when the property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender
Other names for alienation clause
resale clause; due-on-sale clause, call clause
Novation
makes the buyer solely responsible for any default on a loan adn original borrower is freed of any liability for the loan
Other names for alienation clause
resale clause; due-on-sale clause, call clause
Recording
gives constructive notice to the world of the borrower’s obligations
What does recording establish?
lien’s priority
Types of Loans
- straight loan
- amortized loan
- adjustable rate mortgage (ARM)
- Growing-equity mortgage
- balloon payment loan
- reverse mortgage
Amortization
each payment including part of the loan principal so the entire principal is paid off by the end of the loan term
Straight loan
term loan, interest only loan; borrower makes periodic payments of interested only, followed by teh payment of the principal in full at the end of the term
What are straight loans used for?
home improvements and seond mortgages
Amortized Loan
pays interest as well as a portion of the principal owned
What type of loan are most mortgage and deed of trust loans?
amortized loan
Margin
index + premium
Rate Caps
limit the amount of the interest rate may change
What does the margin represent?
lender’s cost of doing business
Payment cap
sets a maximum amount for payment, but the difference between the payment made and the full payment amount will be added to the reamining mortgage balance
Growign Equity Mortage
rapid-payoff mortgage; uses a fixed interest rate with payments of principal are increased according to an index or schedule; pays loan off more quickly but payments increase
Balloon Payment
final payment that is at least twice the amount of the any other payment
Partially amortized loan
some of the principal has been paid with some still owned at the end of the term
Balloon Payment Loan
when the periodic payments on a loan are not enough to fully pay off the principal of the loan by the time the final payment is due, the final payment is larger than the others
Balloon Payment Loan
when the periodic payments on a loan are not enough to fully pay off the principal of the loan by the time the final payment is due, the final payment is larger than the others
Reverse Mortgage
allows a homeowner 62 or older to borrow money against the equity built up in the home
What can borrowed money on a reverse mortgage be used for?
any purpose
Ways reverse mortgage funds can be paid out
- lump sum
- fixed monthly payments
- open line of credit
- other
When does the lender need to be paid back?
- when property is sold
- borrower defaults
- borrower moves
- borrower dies
Foreclosure
a legal procedure in which property pledged as security for a debt is sold to satisfy the debt when a borrower defaults on any required payments or fails to fulfill any other obligations set forth in teh mortgage or deed of trust
Who can initiate foreclosure proceedings
any unpaid leinholder
How are foreclusure properties sold?
free of the foreclosing mortgage and all junior liens
REO
real estate owned
Methods of Foreclosure
- Judicial
- Nonjudicial foreclosure
- Strict foreclosure
Judicial Foreclosure
allows the proeprty to be sold by court order after the mrotgagee has given sufficient public notice
Nonjudicial foreclosure
when teh security instrument contains a power-of-sale clause; no court action is required
Who is given power of sale in deed of trust loans
beneficiary
Deed in lieu of foreclosure
eliminates any equity that the homeowner may have had in the property
Nickname for Deed in lieu of foreclosure
friendly foreclosure
Why is Deed in lieu of foreclosure called a friednly foreclosure?
carried out by mutual agreement rather than lawsuit
Short sale
sales price is less than the reamining indebtedness
Mortgage Forgiveness Debt Relief Act of 2007
allows a taxpayer to exclude from income the forgiveness of part of the mortgage debt on teh taxpayer’s principal residence on a sale of the property, restructuring of an existing mortgage loan, or foreclosure of a mortgage loan
What does the leder have to do to protect the consumer?
- provide billing info in writing
- give the borrower 2 months warning if rate will change
- promptly credit the payments
- respond quickly
- not charge for insurance you don’t need or overcharge insurance
- quickly resolve complaints
- good customer service policies and procedures
- work with the borrowers if they’re having trouble making payments
- Contact borrower when they’re having trouble making payments
- allow the borrower to seek review of a decision about a loan workout request
Basic Form
most common homeowner’s policy
What does basic form over against
- fire and lightening
-
Broad Form insurance coverage
- falling objects
- damage due to ice/snow/sleet
- collapse of building
- damage to electrical applicances from short circuits and other accidentally generated currents
- bursting, cracking, burning or bulging of a steam or water heading system or applicances used to heat water
- accidental discharge, leakage, overflow of water or steam from plumbing heating or AC system
- freezing of plumbing, heating and AC systems and domestic appliances
Comprehensive Loss Underwriting Exchange (CLUE)
database of consumer claims history that enables insurance companies to access prior claims information in the underwriting and rating process; up to 5 years of history
National Flood INsurance Act of 1968
help owners of property in flood-prone areas by subsidizing flood insurances and by takign land-use and land-control measures to improve future management for floodplain areas
In SFHA’s, who types of buildings must have flood insurance?
residential, commercial, industrial agricultural (all buildings)
SFHA
special flood hazard areas
Who can get CLUE reports?
insurance agents
What does flood insurance cover?
the value of the property or amount of the mortgage loan?
Who can be exempt from flood insurance
a borrower who has a survey showing the lowest part of the building is located about the 100 year flood mark
Flood
a general and temporary condition of partial or coplete 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 fo runoff or surface water; mudflowers or mudslides; or the collapse of land along teh shower of a body of water
What does flood insurance cost?
increases property owner’s expenses, but they take this into consideration, but will qualify for a lower loan amount
What do flood policies excluse coverage for
swimming pools, cars, money, animals, groundcover, underground systems
2 types of flood insurance policies
- replacement cost value
2. actual cost value
If a buyer signs a note and a mortgage, they buyer is a
mortgagor
Who is the borrower under a deed of trustt
trustor
mortgage fraud
exaggerating income or assets, minimizing or concealing debt obligations, or providing a false employment
Predatory Lending
practices that result in too-high loan fees and abusive interest rates
Credit score
prepared by a credit reporting company and is based on a consumer’s 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
What would be the highest monthly debt payments
36% of gross monthly income
If you can provide at least 10% of the purchase price as a downpayment, what would be your monthly PITI payment
no more than 28% of borrower’s gross monthly income
What happens when terms of the note are satisfied?
debt is discharged
What happens when terms of the note are not met?
lender may foreclose on property
What happens when a note is not secured?
lender can sue to collect on the note
How can the payee who holds the note transfer the right to receive payment to a third party
- by signing the instrument over to a third party
2. by delivering the instrument to the third party
Loan origination
the processing of a mortgage application
Loan Origination Fee
charged by most lenders to cover the expenses involved in generating the loan
Hypothecation
debtor retains the right of possession and control of the secured property while the creditor receives an equitable right in the property
Mortgage
a lien on the real property of a debtor
mortgagor
receives a loan and in return gives a promissory note and mortgage to the lender, called the mortgagee
Satisfaction of mortgage
document for when loan is paid in full whihc is filed in the public record as evidence of the removal o the securiyt interest
lien theory
mortgageor retains both legal and equitable title to property that serves as security for a debt
title thoery
borrower is the trustor who conveys legal title to the trustee but retain equitable title and right of possession
What must a mortgage or deed of trust clearly establish
that the property is security for a debt, identify the leder and borrower, accurate legal description of the property
“subject to”
buyer is not personally obligated to pay the debt in full
first morgage
mortgage or deed of trust on land that has no prior mortgage lien
secod mortgage
owner executes another loan for additional funds
subordination agreement
first lender subordinates or lowers its lien position to that of the second lender
direct reduction loans
full amount of the principal and all interest due is reduced to zero
fully amortized loan/level-payment loan
lender credits each payment first to the interest due, then to the principal amount of the loan
adjustable rate mortgage
begins at one rate of interest then fluctuates up or down during the loan term, based on specific economic indicator
Index
economic indicator that is used to adjust the interest rate in the loan
Periodic rate caps
limit the amount the reate may increase over a stated term, usually a years
Life-of-the-loan rate cap
limits the amount the rate may increase over the entire life of the loan
Payment cap
sets a maximum amount for payments
negative amortization
amount of hte loan increases
under water
borrower owing more than the property is worth
option ARM
allowed negative amortization
who can initate foreclosure proceedings?
any lienholder unpaid
strict foreclosure
notice is given to delinquent borrower; if balance of defauled debt is not paid within the designated period of time, a court awards full legal title to the lender; no sale takes place
Problem with deed in leiu foreclosure
does not eliminate junior liens
equitable right of redemption
gives defaulting borrowers a change to redeem their property before foreclosure sale
Statutory right of redemption
allow defaulted borrowers a period in which to redeem their real estate after the sale
deficiency judgement
personal judgement against the borrower for the unpaid balance after the foreclosure sale
homeowners insurance
covers various risks associated with real and personal property
Basic Form Homeowner’s Insurance Coverage
fire and lightening, glass breakage, windstorm and hail, explosion, riot and civil commotion, damage by aircraft, damage from vehicles, damage from smoke, vandalism and malicious mischief, theft, loss of proeprty removed from premises when it is endangered by fire or other perils
