Unit 8: Mortgages, Deeds of Trust, and Lending Practices Flashcards
- A sales contract and a financing instrument. *Owner financing with installment payment. *Seller (vendor) retains title, buyer (vendee) secures possession and an equitable interest in the property.
- Contract is a cloud on sellers title.
- Buyers pays taxes, HOAdues, insurance premiums, repairs and upkeep.
- In NC must be used as primary residence of the buyer.
Installment land contract
17 provisions of Installment Land Contracts
- full name & addressees of all parties
- date signed
- legal property description
- sales price
- charges or fees separate from sale price
- down payment
- principal balance owed
- provisions
- amount, due date and total installments
- interest rate on unpaid balance
- statement on pending orders adverse to property
- provision of right to prepay early w/o penalty
- description of property
- statement on current taxes/HOA dues
- statement on current deed of trust/mortgage that constitutes a Lein
- statement above purchasers signature giving right of buyer to cancel contract until midnight of 3rd business day following contract execution
2 party mortgage instrument used for security for the debt. Borrower retains legal and equitable title to property. Lender is given right to have property sold should buyer default
Lein Theory
Uses 3 party deed of trust instrument. Borrower (trustor) conveys legal title to 3rd party (trustee) to hold for the lender (beneficiary). Borrower has the right to use and possess property. Beneficiary can request trustee to initiate foreclosure if debt is not paid per terms of promissory note
Title Theory
1) Promissory note: promise to repay debt in defined installments with interest
2) mortgage or deed of trust: security instrument that is the document that pledges the property to the lender as security or collateral
Mortgage Loan Instruments
Act if pledging real property as security for payment of a loan w/o giving up possession
Hypothecation
3 provisions of promissory notes
1) acceleration: if buyer defaults, lender has right to accelerate maturity of debt
2) prepayment penalty: paid for early payment on principal to cover unearned portion of the interest due to lender
3) Due-on-sale: (alienation clause) allows lender to decide if original mortgage is assumeable by new buyer.
Charge for the use of money borrowed (principle)
Interest
Principal & interest payments
Debt service payments
Regular payments are made and each payment is broken down and applied first to the interest owed, the rest goes to principal
Amortized loans
Require a fixed amount principal to be paid in each payment with he amount applied to interest varying as the balance is reduced
Direct reduction loans
Principal, interest, taxes and insurance
PITI
Mortgagee first credits each payment to the interest due and then applies the balance to the principal. Portion applied to the principal grows and interest due declines
Fully amortized fixed-rate mortgage
Monthly principal and interest payments are a constant amount. Balloon payment due at maturity
Partially amortized fixed-rate mortgage
Mortgagor pays a different amount for each installment. Fixed amount towards principal and additional, variable amount towards interest
Straight line amortized mortgage
Simple interest
Principal x interest rate x time
Charging interest in excess of rate set by state laws
Usury
Return or profit on a loan
Yield
Charge that makes up the interest between the interest rate and the required investor yield
Discount points
Lenders calculate it takes 6-8 points to increase yield 1%
One points will increase the yield about 1/8%
Administrative expense for generating the loan, usually 1% of the loan
Loan origination fee
Process of paying off a home loan by making periodic payments of P&I called debt service . Literally means ‘kill the debt’
Amortization
Periodic payments of interest only, with principal paid in full at end of loan term
Interest only mortgage (term loan)
Generally originate at one rate of interest, with the rate fluctuating up or down during the loan term based on the movement of a published index
Adjustable rate mortgage (ARM)
Common components of ARM
1) note rate - originally rate
2) index- rate on outstanding balance of the loan is increased or decreased based on movements of an index (us treasury bill rate)
3) margin- amount of interest a lender charges over and above the index rate
4) interest rate caps-limit the amount the interest may increase or decrease
5) payment caps- sets a maximum for payment changes
6) adjustment period- establishes how often the loan rate may change
7) conversion option - permits the mortgage to be converted from an adjustable rate to a fixed rate loan at certain intervals
Flexible payment mortgage that allows mortgagors to make lower monthly payments for first few years and larger payments towards end of term. Interest is fixed thru life. Early, decreased payments result in negative amortization so interest not paid during thus time is added to the principal
Graduated payment mortgage (GPM)
Loan requires periodic payments that will not fully amortize the amount of the loan. Final payment is amount larger then the previous payments . Is a partially amortized loan
Balloon payment loan
Rapid payoff mortgage. Fixed interest rate, payments of principal are increased
Growing Equity Mortgage (GEM)
Rights and duties of Borrower
- payment of debt in accordance of terms
- payment of all real estate taxes
- maintenance of insurance
- maintenance of property
- lender authorization b4 making major alterations
Right to assign the mortgage debt as well as the right to foreclose
Rights of Lender
Process of selling the mortgaged real estate to repay debt from the proceeds
Foreclosure
Methods of foreclosure
Judicial: foreclosed thru a court process
Non judicial :gives trustee power to sell, no court, proceeds used to pay the debt
Strict: court establishes a specific time period during which the balance of the defaulted debt must be paid in full. If not paid, court awards title to lender
Distribution of foreclosure proceeds
1) costs of sale
2) real estate and personal property taxes
3) mortgage or deed of trust debt
4) other liens in order priority
5) any surplus equity goes to the borrower
Borrower’s right to redeem their property
Redemption
If during the course of foreclosure but before the confirmation of the foreclosure sale, borrower pays lender total amount due, plus costs, then the borrower retains the property
Equity of redemption
During a 10 day period after the auction, borrower can try to raise necessary funds to redeem property. Borrower must pay total amount due, plus costs.
Statutory Redemption Period
Foreclosure sale secured by mortgage or deed does not produce sufficient proceeds to pay loan balance and accrued interest, lender entitled to a personal judgement against maker of the note, endorsers or guarantors
Deficiency judgements
‘Friendly foreclosure’…lender accepts deed in lieu of foreclosure. Takes real estate subject to all junior liens
Deed in lieu of foreclosure
Proceeds from the sale are not sufficient to fully satisfy balance on existing mortgage.
Short sale
NC is characterized as a ______ theory state
Title theory state
Clause in promissory note allowing lender the right to demand that all future installment payments become due on default
Acceleration clause
In a deed of trust that allows lender to call in the loan when the property is transferred
Alienation clause
Deed of trust is a ___party instrument
Three
Buyer assumes seller’s mortgage
Agreement made buyer personally obligated to continue making payments under seller’s existing mortgage. If buyer defaults, court sale does not satisfy the debt, buyer is liable for deficiency
Owner financed at time if purchase to facilitate sale. Borrower holds title. Seller not entitles to a deficiency judgement in NC.
‘Given by purchaser to a seller who takes back a note and mortgage for part or all of the purchase price’
Purchase-money mortgages
Includes not only real estate but all fixtures, and appliances installed on premises
Package loan
Covers more than one parcel of land and usually is used to finance subdivision developments and improved properties. Include partial release clause so borrower may obtain release of any one lot or parcel from the lien by repaying a definite amount of the loan at closing w/o triggering due-on-sale clause
Blanket mortgages
Used as a method of refinancing real property or financing the purchase of real property when an existing mortgage can not be prepaid. Buyer takes title subject to existing mortgage. Buyer executes wraparound doc to seller who collects payments on the new loan and makes payments on the old loan
Wrap around loan
Act as a line of credit or equity line allowing the mortgagee to make additional future advances of funds to the mortgagor
Open ended mortgages
Made to finance the construction of improvements on real estate. Lender commits the full amount of the loan but makes partial installment payments or draws as the building is being constructed
Construction loans
A way to lower the initial interest rate on a mortgage or deed of trust loan. Lump sum paid in cash at closing. Payment offsets interest rate and monthly payments during first few years. Typically reduces by 1-3% over first - third year
Buy downs
Source of funds for homeowners who wish to finance purchase of expensive items, consolidate debt, pay for home improvements etc. can be fixed or equity line of credit.
Home equity loans
Based on equity Homeowner has invested in the property given as security of the loan. Used by senior citizens in fixed income
Reverse annuity mortgages
First lender subordinates it’s lien to that of the second lender.
Subordination agreement
When debt is paid Lein must be removed
Defeasance clause
Loan-to-value-ratio (LTV)
- Maximum percentage of value lender will loan
- Mortgage amount/price or value
- higher the loan-to-value ratio, higher the leverage
Leverage
Using borrowed money to finance an investment
Using Loan Factor
Used to determine total amount of mortgage that applicant can afford.
Principal +Interest payment / rate factor
Computerized loan origination (CLO)
Electronic network for handling loan applications thru remote computer terminals linked to several lender’s computers.
Buyer can select lender and apply for loan from brokerage office
Proposed monthly housing expense
No more then 28% of monthly gross income
Includes: principal, interest, monthly property taxes, and monthly insurance payments
Maximum housing expense to income ratio for FHA loans
29%
Maximum debt to income ratio is 41% (vs 36% conventional loans)
VA loans
41% monthly debt to income ratio
Uses ‘residual income method’- buyers must have a certain amount of cash left over after paying monthly housing and recurring payments
Regulation Z
Requires credit institutions inform borrowers of he true cost of obtaining credit so borrowers cab compare costs of various lenders and avoid the uninformed use of credit.
Budget mortgage
PITI
Adjustable rate mortgage (ARM)
Interest rate is subject to change based on a published economic index or indicator
Rate
Index + margin
Contract for Deed (land contract if installment contract)
Purchase price paid in installments to seller.
Seller holds legal title. Deed delivered upon final payment
North Carolina Connor act
Requires installment land contracts to be recorded to protect against 3rd party claims
