Unit 12: Real Estate Financing Flashcards
What are the basic costs of owning a home
PITI- Principal, Interest, Taxes, and Insurance
What determines the mortgage payment and ability to get a loan
- Ability to pay it
- Credit scores- determine interest rates
Lenders generally look at a loan applicant’s percentage of
Debt to income ratio (DTI)- PITI should not exceed 28% of gross income.
A borrower’s long term debts should not exceed this percentage of their gross income
36% (does not include monthly utility bills) includes long term debts like student loans, car payments, other mortgages.
This is the borrower’s personal promise to repay a debt according to the agreed terms
Promissory note- it can be transferred to other banks
This is a charge for the use of money, expressed as a percentage of the remaining balance of the loan
Interest
Charging interest in excess of the maximum rate allowed by law
Usury
Charged by the lender to cover the expenses involved in generating a loan
Loan origination fee
Penalty the borrower could be charged for paying their loan in advance
Prepayment penalty- In MA for residential property you cannot be charged
What are the two contracts signed on the day of the closing
Promissory note and mortgage contract
In this process, the debtor retains the right of possession and control of the secured property, while the creditor receives an equitable right in the property
Hypothecation
A lien on the real property of a debtor
Mortgage
The borrower, who gets a loan
Mortgagor
The lender (bank)
Mortgagee
Lenders prefer to use a three party security instrument known as a:
Deed of trust- conveys bare legal title without the actual deed until repaid
What are the duties of the borrower
- Payment of the debt in accordance with the terms in the promissory note
- Payment of all real estate taxes on the property
- Maintenance of adequate insurance to protect the lender in the event the property is destroyed 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 on the property
If a borrower defaults on loan (mortgage), the lender has the right to accelerate the maturity of the debt through this process
Acceleration clause- without one, a lender would have to sue the borrower every time a payment was overdue. With this, they can declare the entire principal balance due and payable immediately.
What are the type of defaults
Acceleration clause, power of sale clause, foreclosure, public sale
Many lenders require this type of account to reserve funds to meet future real estate taxes and property insurance premiums
Escrow account
A clause to prevent a future purchaser of the property from being able to assume the loan particularly if the original interest rate is low
Alienation clause (Mortgage takeover)
This is an interest only loan- no money goes toward the principal in first five years
Straight loan- not used today
This loan goes from 10-30 years and partially pays interest and a portion of the principal owed over years
Amortized loan
This loan begins at one rate of interest then fluctuates up or down during the loan term, based on a specified economic indicator
Adjustable rate mortgage (ARM)
This type of mortgage allows someone 62 or older to borrow money against the equity built up in their home
Reverse mortgage- must live in the home
Legal procedure when person defaults on payments, can sell your property at a public sale (auction)
Foreclosure
Lender must get court approval to do the foreclosure
Judicial foreclosure
The bank does not require a court order
Nonjudicial foreclosure- In MA this is used usually because we have the power of sale clause
This is used as an alternative to foreclosure- bank may accept this
Deed in lieu of foreclosure
The borrower as this right to get the property back
Redemption
If the sale at auction does not produce enough money to repay the loan, this is the act by the bank to recoup the loss
Deficiency judgment
When the property is sold for less than the amount of the mortgage. It can only be done if approved by the bank.
Short sale
This Act of 2010 made it a requirement to provide information to buyers about their rights
Consumer Protection Act of 2010 by the (CFPB) Consumer Financial Protection Bureau (Dodd-Frank)
