National Practice Chapter 6 Textbook Summary
Unit 1 Summary
National Finance: Real Estate Financing
A promissory note (pledge) is the promise to repay the debt and a negotiable instrument. A
debenture is a long- term note that is not secured by a specific property.
The buyer of the property retains the right to use the property exclusively while it is subject to a Mortgage or Deed of Trust. Both create the collateral for a loan by promising the property in case of default by the borrower.
In a Mortgage:
· Mortgagor – Borrower
· Mortgagee – Lender In a Deed of Trust:
· Trustor – Borrower
· Beneficiary – Lender
· Trustee – anyone designated by the lender.
National Practice Chapter 6 Textbook Summary
Under a Deed of Trust, the beneficiary (lender) holds the promise to repay (Promissory Note) from the borrower.
The trustee holds the security (Deed of Trust) for the debt.
Duties of the borrower in a mortgage or deed of trust:
· Payment of the debt in accordance with the terms of the note.
· Payment of all real estate taxes on the property given as security.
· Maintenance of adequate insurance and the property in good repair at all times.
· Obtain lender authorization prior to making any major alterations to the property. Clauses in a Mortgage or Deed of Instrument of Trust:
· Acceleration Clause: If a borrower defaults on the loan, the lender can call the entire balance due and payable immediately.
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· Escalation Clause: Allows the interest rate to adjust over the life of the loan.
· Alienation Clause: The beneficiary declares the entire balance of the loan due and payable when the property is transferred.
· Satisfaction Piece: Puts on public record that the loan was paid, and that the lender no longer has a lien on your property.
· Prepayment Penalty Clause: Allows a lender to charge extra interest if the loan is paid off before the normal completion date.
· Subordination Clause: A clause in a Mortgage or Deed of Trust wherein a subsequent mortgage or deed of trust takes priority. Subrogation is the substitution of a third person in place of a creditor to whose rights the third person succeeds in relation to the debt.
An assumption is when the buyer takes over the original payment, the original loan and the original interest rate of the seller’s existing loan:
If a Mortgage or Deed of Trust is taken over:
· “Subject to” an existing Mortgage or Deed of Trust. If the buyer does not pay the original borrower will be held responsible. If the original borrower (grantor) does not pay the buyer (grantee) will lose the property.
If a Mortgage or Deed of Trust is:
· “Assumed” the purchaser is accepting the debt and is personally liable for the entire debt. The bank could require the original seller to remain secondarily liable if the new borrower does not pay. The seller would no longer be liable if the lender will consider a novation.
As a result of a lender requiring tax or insurance escrows, a “Budget Mortgage or Deed of Trust” occurs. By placing money in the account, the lender is assured that the bills will be paid.
A monthly loan payment consists of:
· Principal
· Interest
· Taxes
· Insurance
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A mortgage or deed of trust, if recorded, must be recorded in the city, county or municipality where the property is located.
Junior mortgages are second mortgages or deeds of trust. The priority of junior liens is determined by the date and time of recording.
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Unit 2 Summary National Finance: Foreclosure
Order of Payment in Foreclosure
· Cost of Sale – advertising, attorney fees, etc.
· Special assessment and general taxes are paid after the costs of the sale.
· The first mortgage, which is determined by the order of recording.
· Whatever is recorded next would then be paid because of a foreclosure.
Judicial foreclosure is required to foreclose a Mortgage. Non-Judicial foreclosure is required to foreclose on a Deed of Trust.
The trustee, in a Deed of Trust, holds “Naked Legal Title” (one without possessory rights), and can claim the property without going through the courts.
The Equitable Right of Redemption gives the borrower the right to clear up the debt prior to the foreclosure sale. The Statutory Right of Redemption gives the borrower a certain amount of time after the sale to clear the debt.
Equitable Redemption -> Foreclosure -> Statutory Redemption
If the proceeds from the foreclosure sale are not sufficient to cover the debt, the lender can go to court and seek:
· Deficiency judgment – a general lien and would apply to all of the borrower’s assets.
· Deed in lieu of foreclosure – Lender and borrower agree that the lender will become the owner of the property instead of going through the formal foreclosure process.
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Unit 3 Summary
National Finance: Money, Interest and Types of Loans
The amount of money that a lender charges for the use of money is interest – always expressed as a percentage per year.
· Simple Interest – charged on a mortgage loan.
· Principal – loan balance
Charging interest in excess of this rate is usury or illegal interest.
Prepaid interest – the total dollar amount of interest and points paid by a borrower at closing.
Points are a one-time fee paid at closing to increase the yield to the investor.
· They give the lender more money up-front so he will be encouraged to make a loan at a lower interest rate.
· The lender is able to make lower interest rate loans, but the buyer must come up with the point money in cash at the time of closing.
Leverage is the principal of using other people’s money to make investments. The lower the down payment, the higher the risk to lender. The lower the down payment the higher the “leverage” obtained by the borrower.
The ratio of loan amount compared to the value of the property is called the Loan to Value Ratio. The value in a property held by the owner in excess of any liens against it is called equity.
A factor is the cost per thousand that is required to create the principal and interest payment necessary to pay off the loan.
The longer the loan, the lower the interest rate = lowest factor = lowest payment for the buyer.
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Unit 4 Summary
National Finance: Reduction of Loan Principal
If you are given the monthly interest and interest rate of a loan, you must first get the annual interest payment (multiply by 12), and then divide by the interest rate.
Example:
If the loan is for $150,000 at 7% interest for 30 years and the payment is $998 per month (including principal and interest), what is the principal balance after one payment?
Step 1: Determine the annual amount of interest paid based on the loan balance.
· $150,000 X 7% = $10,500 year interest
Step 2: Divide the annual amount of interest by twelve to determine the monthly interest amount.
· $10,500/12 = $875 month interest
Step 3: If the payment of $998 includes both interest and principal, then we can subtract the interest amount from $998 to determine the amount that was applied to principal.
· $998 – $875 = $123 (principal paid)
Step 4: Now, we can apply the principal to the loan balance to get the loan balance after one payment.
· $150,000 – $123 = $149,877 (new balance)
Step 5: Principal Balance X Annual Percentage Rate
· $149,877 X 7% = $10,491.39 annual interest amount
Step 6: Annual interest amount divided by 12 to get monthly interest amount.
· $10,491.39/12= $874.28 interest a month
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Step 7: Subtract monthly interest amount from the payment of $998 to get a principal portion of the payment.
· $998 – $874.28= $123.72 principal paid
Step 8: Apply this principal payment to the loan balance.
· $149,877 – $123.72 =$149,753.28 loan balance after the second payment
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Unit 5 Summary
National Finance: Financing Methods
Straight-Term Loan: The borrower must be prepared to pay the entire principal at the end of the time period.
Balloon Loan: Interest and principal are paid on an equal basis until the final payment, which is larger. A balloon is the remaining balance that is due at the maturity of a note or obligation.
Fully Amortized Loan: Regular payments of principal and interest. The entire loan is paid off by the end of the term. The liquidation of a debt by periodic installments.
Budget Mortgage: Has a payment composed of principal, interest, taxes and insurance.
Adjustable-rate Loan: Interest rate fluctuates and is usually tied to an index; increases are capped for each period and for the term of the loan.
· An Adjustable Rate Mortgage (ARM) contains an escalator clause that allows the interest to adjust over the loan term. An ARM is tied to an index, and the rate of the loan goes up or down, depending on the caps, margin and adjustment period.
Graduated Payment Plan: Lower payments first year, then payments increase.
Reverse Annuity Mortgage: Homeowner receives monthly payments based on accumulated equity rather than a lump sum. Loan must be repaid upon the death of the owner or sale of the property.
Part Purchase Money: A mortgage given as part of the buyer’s consideration (cash) for the purchase of real property, and delivered at the same time that the real property is transferred as a simultaneous part of the transaction.
Package Mortgage: Loan on real estate, plus fixtures, and appliances; always includes personal property as well as real property.
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Blanket Mortgage: Loan on several pieces of land. Partial Release Clause – mortgagee/beneficiary agrees to release certain parcels from the lien of the blanket mortgage/deed of trust upon payment by the mortgagor/trustor of a certain sum of money.
Open-end Mortgage/deed of trust: The mortgagor/trustor is allowed to re-borrow against principal that has already been paid so far. A lender is allowed to increase the outstanding balance of a loan up to the original amount of the loan.
Wraparound: Additional financing from a second lender. One payment- two loans. The new lender pays the first loan but charges higher interest for a second. Original loan must be assumable with no alienation clause.
Buydown: The payment is subsidized at the beginning by a builder or other party for a 3 to 5 year period, and thereafter, the purchaser takes over and pays the regular payment amount.
Construction Loan:
· The lender commits the full amount of the loan to the borrower but makes partial progress payments as the building is being completed after lien waivers have been obtained
· High-interest rate to builders, usually one percent over prime rate to be loaned for
“spec homes.”
Takeout Loan: Long-term permanent financing for large construction projects, usually commercial. Replaces construction loan on large commercial projects.
Sale-Leaseback: Owner sells his or her improved property and at the same time, signs a long- term lease.
Participation Mortgage: A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate.
Bridge Loan: Short term interim loan for the buyer, usually six months to one year in duration.
Grant Program (Down Payment Assistance): A program that provides buyers with a “gift” of money to use toward their down payment or closing costs which never has to be paid back.
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Contract for Deed: The buyer does not receive legal title until the final payment is made. Seller keeps legal title until the debt is paid in full. Buyer receives equitable title until debt is paid in full.
Vendor: The seller of realty – the seller under contract for deed.
Vendee: The purchaser of realty – the buyer under a contract for deed.
Loan Assumption: The act of acquiring title to property that has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments.
“Subject to mortgage”: A grantee [buyer] taking title to a real property “subject to” a mortgage is not personally liable to the lender [mortgagee] for the payment of the mortgage note.
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Unit 6 Summary
National Finance: Government and Conventional Loans
The Federal Housing Administration (FHA) does not build homes nor does it lend money itself.
· The FHA insures loans on real property made by qualified or approved lending institutions.
· FHA is overseen by The Department of Housing and Urban Development (HUD).
· If a buyer wants to obtain an FHA loan, a licensee should send him/her to a qualified lender.
Requirements to receive an FHA loan:
· The borrower is charged a one-time insurance premium (paid at closing by the borrower or the other party), which provides security to the lender in addition to the real estate in case of borrower default.
· The lender can charge points, and either the borrower or the seller can pay them.
The Department of Veterans Affairs (VA) will guarantee that a loan made by an approved lending institution will be paid.
· The veteran (with Certificate of Eligibility) must have served 181 days active service. A veteran’s basicventitlement is $104,250 in counties where the loan limit is $417,000.
· If a veteran does not pay the mortgage as agreed there will be a foreclosure.
· Certificate of Reasonable Value: the house must qualify with an appraisal and the amount of the loan is limited.
· Points can be paid by either the seller or the buyer. VA does not allow prepayment penalties to be charged if a veteran pays off a loan early.
VA will make a direct loan if there are no lenders in the area where a veteran wants to buy property.
The Rural Economic and Community Development (RECD) makes loans for home purchases or construction in rural areas and small communities outside metropolitan areas.
Conventional Loans – No government guarantees or insurance.
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· Minimum down payment of 20%.
· There are conventional loans available with lower down payments if the buyer is willing to pay a Private Mortgage Insurance (PMI).
· Conventional Loans normally require a larger down payment (20% down or more) than FHA or VA, but do not require insurance with 20% or more down payments.
· Most loans are packaged by the lenders and sold in the secondary market to Fannie Mae or Freddie Mac.
Conventional Insured Loans – No government guarantees of insurance but insurance from private insurance companies.
· The amount a lender will loan is generally based on the appraised value for loan purposes or the sale price whichever is lower.
· A lender or investor is really not interested or concerned with the loan applicant’s need of financial assistance.
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Unit 7 Summary
National Finance: Qualifying and Closing the Loan
Qualifying the Buyer:
· Ability to repay the loan; Mortgage to income ratio; Assets; Liabilities; Debt Coverage ratio and Attitude.
Qualifying the property:
· Type of property; Location; Area zoning; Value range; Neighborhood; Actual/Effective age/Remaining economic life; Condition; Special clearances and Overall marketability.
Qualifying the title:
· Abstract and opinion; Chain of Title; Title insurance and Other Terms. Loan definitions:
· Non-recourse loan – the borrower is not held personally liable on the note.
· Non-recourse clause – Real estate loans are often sold in the financial market.
· Default – The non-performance of a duty or obligation that is part of a contract.
· Conditional approval – A written pledge by a lender to lend a certain amount of money to a qualified borrower on a particular piece of real estate for a specified time under specific terms.
· Underwriting – The analysis of the extent of risk assumed in connection with a loan.
· Appraisal fees – An appraiser’s fees are typically based on time and expenses; fees are never based on a percentage of the appraised value.
· Certificate – a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct, or silence.
· Exculpatory clause – which the lender waives the right to a deficiency judgment.
· Impounds – A fund of the buyer’s money that the lender sets aside for future needs relating to the parcel of property.
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· Disintermediation- investing funds directly instead of placing money savings institutions.
· Foreclosure: when the lender takes back a house because the homeowner has not made mortgage payments. The property becomes a lender-owned property (REO).
· Short sale: Occurs in lieu of a foreclosure. In the end, the lender agrees to accept a loan payoff amount that is less than what is actually owed.
Closing the loan
· Buyer and seller face to face – All parties to the transaction are present and the closing is conducted by a settlement agent.
· Closing in escrow – A third party acts as the escrow agent for the buyer and seller and conducts all the closing activities.
Settlement Agent Duties
· Does the closing, calculates the costs involved and fills out the closing statements.
· A settlement agent could be an attorney, a real estate broker, a closer from the title company or a lender.
Transfer Tax
· To collect reliable data on the fair market value of the property to help establish more accurate property tax assessments.
· Paid by the seller or lessor. The tax may be paid by the purchase of tax stamps or by payment of a transfer fee.
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Unit 8 Summary
National Finance: Primary and Secondary Mortgage Markets
Loan Sources:
· Savings and Loans – Specialize in long term residential loans. Deposits must be insured up to $250,000.
· Banks – Make short-term loans.
· Insurance companies – Prefer large commercial projects, but will make residential loans.
o Participation financing – A mortgage in which the lender participates in the income of the mortgaged property beyond a fixed return, or receives a yield on the loan in addition to the straight interest rate.
· Mortgage Broker – provides its own funds for loans or negotiates loans for compensation.
· Mutual savings banks are also lenders in the primary market (primarily in the Eastern states).
The Federal Reserve System is a central banking system designed to manage the nation’s economy.
· Reserves: amounts of money banks are required to keep on hand.
· Discount rates: rate at which the Federal Reserve System charges banks for money.
· Buying bonds – more money in the market, interest rates lower, economy is stimulated.
Selling bonds – the opposite of buying bonds.
· The promissory note is considered to be personal property that can be bought and sold.
Secondary Mortgage Market – provides funds for the primary market (lenders):
· Federal National Mortgage Association or Fannie Mae – (FNMA or Fannie Mae)
· Government National Mortgage Association – (GNMA or Ginnie Mae)
· Federal Home Loan Mortgage Corporation – (FHLMC or Freddie Mac)
HUD is the regulator for Fannie Mae, Ginnie Mae, and Freddie Mac.
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Property appreciates in value due to inflation and due to an increase in the intrinsic value of the property.
Selling shares (securities) of FNMA, GNMA and FHLMC requires a securities license.
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Unit 9 Summary
National Finance: Investments and Financing Laws
Advantages of Real Estate Investment:
· Above average rate of return.
· Tax benefits
· Land can never be depreciated.
Disadvantages of Real Estate Investment:
· Not highly liquid.
· The purchaser of investment property must be prepared to “invest” for the long haul.
· Market conditions are changing all the time.
Cash Flow is the total amount of money remaining after all expenditures have been paid including taxes, operating costs, and mortgage payments.
Leverage is the use of borrowed funds.
Selling shares (securities) of FNMA, GNMA, and FHLMC requires a securities license.
Securities Law
· Real property securities must be registered with the Securities and Exchange Commission (SEC).
· If an agent suspects a property may be a real property security, he should refer the seller to a securities professional for advice.
Financing regulation:
Truth In Lending Law (Regulation Z)
· Requires lenders to disclose to buyers the true cost of obtaining credit.
· Requires that the consumer be fully informed of all finance charges.
· Applies to residential loans, federally related 1-4 family properties, non-commercial properties, and family farms.
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Two major sections of Truth In Lending:
· Advertising – Truth in lending is violated when the phrase “no down payment required” is advertised without any other information.
· Annual Percentage Rate – An expression of the relationship of the total finance charge to the total amount to be financed. Use of APR permits the consumer to compare rates.
The Real Estate Settlement Procedures Act (RESPA) – To ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs. Administered by the CFPB.
According to the TRID rule:
· Lenders must give a copy of the booklet, “Your home loan toolkit” to every person at
the time of application for a loan.
· Lenders must provide a Loan Estimate of settlement costs at the time of loan application or within three business days of application.
· A Closing Disclosure must be delivered to the borrower at least three days before closing.
RESPA prohibits kickbacks to real estate licensees.
Equal Credit Opportunity Act – Prohibits lenders from discriminating against race, color, religion, national origin, sex, marital status, age or dependency on public assistance in the granting of credit to consumers.
Under ECOA, a lender can base lending decisions on:
1. Income
2. Net worth
3. Job stability
4. Credit rating
TRID Rule
The Loan Estimate and Closing Disclosure forms provide a means for borrowers to comparison shop more effectively for competing loan offers.
Closings that must comply with TRID include any closed end loan secured by real property.
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The Loan Estimate must be delivered within three business days of loan application. Signature of the applicant is not required.
A loan application exists once consumer has submitted to the lender:
· Name
· Borrower’s Income
· Borrower’s Social Security number
· Property address
· Estimated value of property
· Amount of mortgage loan sought by the consumer.
A business day is a day on which the creditor’s offices are open to the public for carrying out
substantially all of its business functions.
Required delivery time frame for the Closing Disclosure is based on the method of delivery. It must be delivered at least three days prior to closing.
Consummation is defined under Regulation Z as the time that a consumer becomes contractually obligated on a credit transaction.
The settlement agent must provide the seller with the Closing Disclosure, and that may be done at consummation.
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