Unit 5 - Mortgages and Financial Calculations Flashcards
What are the three types of mortgages?
- Legal
This is when the mortgagee (lender) has legal title, but the mortgagor has the right to deal with the land and premises. This is a common first mortgage - Equitable
Because the first mortgage has the title already resting with mortgagee, subsequent mortgages rely on their equity in the property and this is what these are based on - Chattel
Chattel mortages are for what would be seen as personal property. So for manufactured homes, cars, furniture, etc.
Who is mortgagor and mortgagee?
Mortgagor: Borrower
Mortgagee: Lender
What is a covenant in a mortgage?
A covenant are promises from the mortgagor such as that they will pay to principal, interest, keep property in good repair, insure it, etc.
What are the two common legal remedies to default?
What is a non-legal remedy to default?
Foreclosure and judicial sale are two common legal remedies to defaulting.
Non-legal remedies are used by lenders who want to resolve the default through direct negotiations and therefore avoid costly legal disputes.
What are three common rights that the mortgagor has?
What are two that the mortgagee has?
Mortgagor rights:
- Right to quiet possession
- Right to redeem the property
- Right to discharge the mortgage
Mortgagee rights
- Right to assign
- Right to be paid
What is a mortgage Deed?
A Mortgage Deed is a legal document entered by the mortgagee and mortgagor and follow a similar format to the following:
- Parties (legal names)
- Consideration and terms of repayment
- Arrears (calculating any arrears interest)
- Special Privileges (prepayment, renewal, etc)
- Covenant
- Monthly tax payments
- Acceleration
- Judgment
- Signatures
What is the secondary mortgage market?
The Secondary market invovles buying and selling mortgages and has grown significantly.
What is “Equity of Redemption?”
Equity of redemption is the right of the mortgagor to reclaim clear title to the property after it has been fully repayed
What is a foreclosure and judicial sale?
Should default occur, this is a case of the court selling your house to and the proceeds being applied against the mortgage debt
What are three common mortgage privileges?
- Prepayment
Can pay off chunks of principal at a time - Renewal
- Portability
Can transfer mortgage to new property upon selling the old
What are three common mortgage privileges?
- Prepayment
Can pay off chunks of principal at a time - Renewal
- Portability
Can transfer mortgage to new property upon selling the old
What is the difference between a closed and open mortgage?
An open mortgage can be prepaid without penalty, whereas closed can not be prepaid.
When will clients need a high ratio mortgage?
They will need a high ratio mortgage when they do not have a 20% down payment, and therefore will need mortgage insurance
There are so many ways a prepayment penalty could work for breaking a closed mortgage. Usually it’s just 3 month’s interest on the outstanding balance of the mortgage. Could also be an interest rate differential. At the end of the day, what’s the best advice for clients?
The best advice for clients looking to break mortgage is to contact their lender for an exact penalty quote.
What are the 7 processing steps leading to a mortgage approval?
- Pre-approval attained (optional)
- Mortgage application prepared
- Lender review application
- Commitment letter is prepared and forwarded to applicant
- Applicant reviews and signs commitment letter
- Upon receipt of commitment letter, the lender’s purchaser’s lawyer prepares the mortgage documents for signature
- Mortgage transaction is completed with issuing of closing funds
What is the simple interest equation?
Simple
total interest = principal x interest rate x term in years
What’s the difference between nominal and effective rates of interest?
Nominal interest rates are the advertised annual rate.
The effective rate, however, is what it actually is after compounding.
What is a GDS ratio and how do you calculate it?
A GDS assesses borrower’s income in relation to:
Principal
Interest
Tax
aka: (PIT) payments
So say a lender’s GDS ratio is 30% and they make $50,000 a year. That means the maximum PIT payment is (50,000 x .3) = $15,000
Let’s takeaway annual property tax of 1,500 and we’re down to $13,500, as the remaining PI payment available for the year. So the monthly PI payment available is $1,125.
If the lender needs a mortgage of $140,000 at 6.5%, the payment is 6.698238 x 140(000) = 937.75
This is below the PI payment available and so it fits the lender’s requirements!
What is the date that the mortgage official begins known as?
Interest Adjustment Date (IAD)
What is a flat payment plan for a mortgage?
A flat payment plan is when you don’t have to repay any of the principal until the maturity date. Rather rare for real estate I’d say.
Seller Frankman has sold her home containing an oil-fired heating system. The closing date is scheduled for January
15th . On the day prior to closing, Frankman has the 200-gallon tank filled. The amount required to fill the tank was
127.5 gallons @ $2.37 per gallon. How much will be credited to the seller on the statement of adjustments?
So the total amount of oil in the tank (not just was added) must be credited to seller. So at a rate of $2.37 / gallon, it’d be 2.37 * 200 = $474.00
The closing date of a transaction is November 1st. Taxes in the amount of $2,380 were paid by the seller for the
year.
The tax year runs from April 1st until March 31st.
The statement of adjustments would show?
A credit to the seller in the amount of $984.52
Because the buyer is responsible for taxes from closing date (Nov 1) until March 31st, which would be 151 days.
So it’d be 151/365 * 2,380 = 984.52
This would be a credit to the seller in the amount of $984.52. In other words, the buyer owes the seller this.
What is a seller take back (STB) mortgage?
The buyer obtains a loan from the seller!
So it’s an interesting negotiating tool for sellers, and can hasten the sale of a property. However, a seller should do their due diligence and ensure the buyer provides reasonable downpayment to minimize risk as well as ensure any tax implications are looked at.
Can a trust company be authorized to offer mortgage services in Canada?
Yup, a trust company can be authorized the offer mortgage services in Canada
Say a lease is registered prior to a mortgage. Whidh would take priority?
The lease registered first would have priority.
Can a mortgage be sold, transfered, or assigned without the consent of the mortgagor (borrower)?
Yup!
What is Genworth Financial Canada?
An insurer of high ration mortgages
