VII. FINANCING AND SETTLEMENT Flashcards
Mortgage loans are the most common choice for financing real property. Mortgage loans
fall into two broad categories:
A conventional loan is one that is neither federally insured nor guaranteed. (It is not an
FHA or VA loan.)
Non-conventional mortgage loans through three agencies:
Federal Housing Administration
U.S. Department of Veterans Affairs
U.S. Department of Agriculture
A seller will offer financing to a buyer. It may be similar to a loan from any other lender, or it may be in the form of
Contract for Deed (Installment Contract or Land Contract or Real Estate Contract)
All money up to that point is considered
rent. Contract for Deed benefits the seller.
The parties are the vendOR & the vendEE, and
both must sign.
Contract for Deed is an executory contract.
Contract for Deed becomes fully executed when the final loan payment is made, and the seller (vendor) delivers the deed to the buyer (vendee).
If the vendor or vendee dies, Contract for Deed is binding on the heirs.
Reminder: An installment sale (Chapter 4) is not the same as an installment contract.
A mortgage is a pledge of real property as security for a
A note, or promissory note, is the instrument for the debt. It is your personal promise to
pay. It is not recorded.
The mortgagOR borrows the money
The lender is called the mortgagEE
The mortgage is recorded, creating the lien.
At closing, the LENDER receives the TITLE and will hold it until the lien
is satisfied or paid off.
Title Theory State
At closing, the BUYER receives the title, and the lender has a LIEN
Lien Theory State
Some states use this instead of a traditional mortgage. It contains
a “power of sale” clause that allows for non-judicial foreclosure. Power of sale results in a quick foreclosure. This non-judicial foreclosure is preferred by lenders.
The Deed of Trust
involves three parties - the borrower or trustor, the lender or beneficiary, and the trustee.
The trustee acts in a fiduciary relationship with the beneficiary. The trustee has two functions
in accordance with the Deed of Trust. He or she will release the lien when the note is paid or will foreclose in the event of default.
Two Sources of financing
The PRIMARY market is where consumers go to borrow money.
The SECONDARY market is where lenders go for money.
Fannie Mae and Freddie Mac are in the Secondary Market.
12 Types of loans and loan programs
- Fixed-rate amortized loan - equal, regular payments of principal and interest until the
loan is repaid. Interest is paid in arrears - at the end of each payment period. - Term loan - interest only until the end of the term, when the entire principal is repaid.
- Blanket loan - covers more than one piece of property (several lots on one note).
- Package loan - includes real property plus personal property (a furnished condominium).
- Budget loan - includes principal, interest, taxes, and insurance in the monthly payment,
known as PITI. - Balloon loan - This is a partially amortized loan with a final payment substantially
larger than the others. - Participation loan - Two or more lenders invest in one loan.
- Open-end mortgage - Permits additional borrowing on the same note. This is sometimes
called a credit card mortgage or a home equity line of credit - HELOC. - ARM - adjustable rate mortgage - An ARM is a loan with an interest rate subject to
change as conditions in the market change. - Construction loan - short-term loan with funds advanced periodically during the
stages of construction. This is a term loan – interest only. - Reverse annuity mortgage – allows homeowners 62 years of age or older, for all borrowers
involved, to borrow against their equity without making any payments on the
amount borrowed. - Sub-prime loans – loans with risk-based pricing - the rates are not published. This loan would be likely to have a prepayment penalty to protect the lender from loss of interest.
This INSURANCE protects the LENDER. It insures the whole loan amount, not just the lender’s
risk. It is paid for by the borrower.
FHA - the Federal Housing Administration (The FHA program is overseen by HUD)
Primary purpose is to aid in home financing by insuring the loan.
The loan requires an approved appraisal, is assumable, and may be prepaid without penalty.
The insurance on the FHA loan is referred to as MIP - mortgage insurance premium.
The mortgage insurance premium is paid monthly in addition to the PITI payment.
There are two advantages of FHA loans.
- Qualifying ratios are slightly more lenient, allowing borrowers to have more debt and still
qualify. - LTVs are very high, allowing buyers with little money for a down payment to purchase a
property. Points on FHA loans can be paid by either the buyer or the seller. - FHA has PMI. PMI is private mortgage insurance.
It may be required by lenders if a borrower has less than a 20% down payment.
PMI is found on high LTV conventional loans.
VA - The Department of Veterans Affairs
GUARANTEES repayment of the loan.
The guarantee is for the top 25% of the loan.
The guarantee is free to the veteran and protects the lender.
There is a required funding fee, and it may be paid by the buyer or seller at closing or included in the loan.
A loan needs $0 down payment, the loan is assumable and may be
prepaid without penalty.
The parents and siblings of a veteran are not eligible for a VA loan.
The veteran must obtain a Certificate of Eligibility from the VA.
The Certificate of Reasonable Value (CRV or VA appraisal) must meet or exceed the sale price.
The VA must be notified prior to a foreclosure by the loan servicer on a VA loan.
7 Types of Mortgage clauses
- Acceleration clause - a provision in a written mortgage, or note, stating that in the event
of default, the whole amount of the principal becomes due and payable. - Alienation clause - “Due on sale” clause states that the balance of the secured debt
becomes due if the property is sold by the mortgagor without the mortgagee’s approval. - Defeasance clause - states that the lien is defeated when the debt is repaid.
- Escalation clause - allows a lender to raise the existing rate. An escalation clause is usually
found in an ARM. - Prepayment clause - A lender may provide a borrower with a prepayment privilege. The
borrower can pay the entire amount or the stated amount prior to the due date in the note. - Subordination clause - allows a lender to move to or take a lower lien position. This clause
would be found in a second mortgage, a home improvement loan, or a home equity loan. - Assumption clause – allows a new borrower to take over the payments on an existing loan
under specified terms and conditions. - In a straight assumption, the new buyer is approved and takes over the payments and liability. This is often called a loan novation. This will not impact the seller’s credit rating.
- In an assumption “subject to,” the buyer takes over the payments, but is not liable for the
loan. The original borrower remains liable. This can have an impact on the seller’s credit
rating.
Lender Requirements
A loan processor working for the lender will coordinate the loan from application to closing. Lenders will typically require at least:
An appraisal of the property
A complete credit report and job history of the borrower
Evidence of down payment funds.
The percent of MONTHLY GROSS income that can be used to pay the PITI payment on a mortgage loan. (PITI means principal, interest, tax, and insurance).
The front ratio - 28%
The percent of MONTHLY GROSS income that can be used to cover all the consumer DEBT, including the PITI.
The back ratio - 36%,
