Chapter 6 -- Finance ** Flashcards
(103 cards)
1
Q
What is a mortgage?
A
a voluntarily lien placed on real estate.
2
Q
Who is the mortgagor?
A
The buyer
3
Q
Who is the mortgagee?
A
The lender
4
Q
Title-theory states
A
Borrower (mortgagor): Has equitable title
Lender (mortgagee): Has legal title. Once mortgage is paid, the borrower will get the legal title.
In theory, the lender (mortgagee) actually owns the property until the debt is paid. Because lender holds legal title they have the right to immediate possession if the borrower defaults.
5
Q
Intermediate Mortgage Theory State (IL)
A
IL does not adhere strictly to either the title or lien theory. Meaning the lender does not own the home.
Lender (mortgagee): gets a qualified title as security of the loan.
Borrower (mortgagor) remains the owner subject to a lien that is placed on the property. the qualified title that is held by the lender is subject to the defeasance clause.
6
Q
Lien-theory states….
A
Borrower (mortgagor): holds legal AND equitable title
Lender (mortgagee): places lien on the property to use as collateral. If borrower defaults, then lender must go through foreclosure to obtain the legal title.
7
Q
What is the defeasance clause?
A
Requires the lender to execute a satisfaction of mortgage which states that the mortgage has been paid in full. It also requires that this is recorded in public record.
8
Q
Which theory does IL subscribe to?
A
Intermediate theory
9
Q
What is an acceleration clause?
A
This clause allows the lender to call the entire balance due, not just the months the borrower is behind. They are contained in notes, mortgages, and security instruments. The lender could enforce the accleration clause if the borrower defaults on payments, there is destructio to premises, or there is a sale of the proeprty to another party. If this clause were not in place the lender would have to sue the borrower for each monthly payment that was late.
10
Q
what are the two parts of a mortgage loan?
A
- the loan itself
2. the security of debt
11
Q
when a property is mortgaged, the owner must execute (sign) two separate instruments. What are they?
A
- the promissory note
2. a security document (mortgage), pledging the property as collateral for the amount owed.
12
Q
what is hypothecation?
A
Means to pledge property to a lender as collateral, without giving up possession of it.
13
Q
A promissory note is evidence of what?
A
It is evidence of debt
14
Q
What is the instrument is used as evidence of a debt?
A
promissory note
15
Q
what is a promissory note?
A
it is an instrument used where it is the borrower’s personal promise to repay a debt according to agreed terms. when the borrower signs the note, it becomes legally enforceable and fully negotiable instrument of debt.
16
Q
what is included in a promissory note?
A
- amount of debt
- the time and method of payment
- rate of interest
17
Q
what is usury?
A
charging interest in excess of the maximum rate allowed by law
18
Q
does IL have usury laws?
A
IL does not have any usury laws.
19
Q
what is a loan origination fee?
A
a fee that includes the various cost to create a loan
20
Q
what is loan origination?
A
the processing of a mortgage application
21
Q
Is the loan origination fee considered prepaid interest?
A
no
22
Q
Can a person deduct the loan origination fee on their taxes?
A
yes. it can be deducted as paid interest upfront
23
Q
what is discount points?
A
it is interest paid in advance. can be used to lower the interest rate. it is based on loan amount. (page 125 to 126)
24
Q
can lenders charge prepayment penalties on mortgage loans insured or guaranteed by the federal government or on loans that have been sold to fannie mae or freddie mac?
A
NO. examples are FHA and VA loans
25
Does a promissory note have to be tied to a mortgage or deed of trust?
No. it is only evidence of a debt.
26
what is an acceleration clause and where is it typically located?
This clause allows a lender to declare the entire debt due if a borrower DEFAULTS. It is typically including in the mortgage or deed of trust.
** When you hear accerlation clause, think of foreclousure.
THIS IS DIFFERENT FROM DUE-ON-SALE CLAUSE AND ALIENATION CLAUSE
27
What is assignment of mortgage?
An assignment of mortgage is a document which indicates that a mortgage has been transferred from the original lender or borrower to a third party. Assignments of mortgage are more commonly seen when lenders sell mortgages to other lenders.
This is when the mortgagee transfers the rights and interests to a 3rd party such as investor or another mortgage company. The new assignee becomes the new owner of the debt and security instrument. Once the debt has been paid, it is the assignee's responsibility to execute the satisfaction (or release) of the security instrument.
28
What is the satisfaction of mortgage document?
This document is used to show the mortgagor has paid the debt in full. This document returns all interest in real estate to the borrower. Entering this release in the public record shows that the mortgage lien has been removed from the property.
29
What is another name for the satisfaction of mortgage document?
release of mortgage or mortgage discharge
30
What is an assumption of mortgage?
| aka loan assumption
This means taking over the seller's mortgage and continuing to make the payments on it. Should the new buyer default, that buyer is primarily liable for the debt and the original borrower is secondarily liable.
Mortgage assumptions come about when the seller has to get rid of their home somehow and the traditional method of finding a buyer and selling the house isn’t working. It’s an avenue that some sellers can try if they don’t want to go through the pain of surrendering their home to the bank, i.e. foreclosure.
But the caveats are many: Banks aren’t fond of mortgage assumptions, and Fannie Mae and Freddie Mac won’t even allow them. Only VA, FHA and USDA loans allow someone to assume an existing mortgage.
31
What are the 2 types of mortgage assumptions?
1. A subject to the mortgage assumption
| 2. Assuming a mortgage
32
What is a subject to the mortgage assumption?
If you buy a house subject to mortgage, you do "not assume personal liability for the obligation" of the loan. You make an agreement with the seller that you will make the payments. If you don't make them, the lender may foreclose and sell the house, and may take legal action against the person who sold it to you to pay for any remaining mortgage. The lender can not take legal action action against you, but the person who sold you the house can.
33
What is an alienation clause?
Mortgages may contain an alienation clause, which provides that if a property is conveyed to any party WITHOUT the lenders consent, the lender can collect full payment.
This is different from the due-on-sale clause. For example, a borrower negotiated a loan for a principal place of residence. Several years later, the borrower converts the principal place of residence to rental property and does not disclose the change to the lender. When the lender discovers that it is being used for rental property, the lender can call the note due and payable.
34
what is a word for land contract?
contract for deed or installment contract
35
what are 3 reasons a borrower would use a land contract?
1. financing is unavailable
2. high interest rates make the borrowing too expensive
3. insufficent down payment
36
what is a land contract?
the buyer (vendee) agrees to pay a down payment and monthly loan payments that include principle and interest directly to the seller. Payment can also include real estate taxes and insurance reserve.
the seller (vendor) retains the legal title and the buyer is granted equitable title and possession. at the end of the loan term, the seller delivers a clear title. if they fail to deliver a title, the buyer would file a vendee's lien.
37
what is a trust deed or deed of trust?
A trust deed does not transfer title to real estate, but instead grants a lender a lien on the property, which is identified in the trust deed. Th lender gives you money to purchase or improve your property, and in exchange, you promise to pay the lender back. You also give the lender a lien on your property as security for the loan. The trust deed, then, gives the lender authority to foreclose on your home if you don't repay the mortgage loan.
38
what is foreclosure?
It is a legal process whereby the lender forces the sale of the property.
39
what are the 3 types of foreclosure?
1. non-judical
2. judicial
3. strict forclosure
40
what is a non-judaical foreclosure?
| aka statutory foreclosure or foreclosure by advertisment
It is contained in the mortgage document, This clause allows the lender to sell property at a nonjudical public sale without being required to spend the time and money involved in a court foreclouse suit.
no court action is required.
Upon default, the loan is accerlerated and the defaulted borrower may redeem the property (equitable redemption) by paying off the principal and collection costs. If payment is not made during the equitable redemption period, the property is advertised and sold at auction. The defaulted borrower is then given a specified time period set by state law to redeem the property (statutory redemption) by repurchaing the property from the highest bidder. The defaulted borrower must pay the full auction sale price and all of the legal fees associated with the process. The defaulted borrower is allowed to remain in possession of the property until the expiration of the statutory redemptions periond.
41
what is a judicial foreclosure?
Occurs when the property is sold through court. This is expensive and time-consuming. First the lender must bring lawsuit. against the defaulted borrwer. Then the judge orders an appraisal of the property and sets a foreclosure date. Creditors are notified and the foreclosure is advertised. The property is sold and when the paperwork is in order, the sale is confirmed. At that point the owner's rights to the property have been forecolsed.
42
what is strict foreclosure?
first appropriate notice must be given to the delinquent borrower. second, the court establishes a deadline of when the remaining balance must be paid in full. if balance is not paid by due date, the lender acquires full legal title. no sale takes place.
43
In IL, foreclosures must take place through...
court proceedings
44
what type of foreclosure state is IL?
judicial
45
under the Illinois 1987 mortgage foreclosure law, the term mortgage includes what 4 factors. What are they?
1. deeds of trust
2. installment contracts payable over a period in excess of 5 years (when the unpaid balance is less than 80 percent of the purchase price)
3. certain collateral assignments of the beneficial interest in land trusts used as security for lenders
4. traditional mortgage documents.
46
what is a short sale?
the process by which the lender accepts less than the amount owed on the property. lenders accept short sales if they will lose more money when trying to acquire property by foreclosure
47
does IL have a statutory right of redemption?
no. In Illinios a person has the right to exercise EQUITABLE REDEMPTION for 7 months after the date of the service on the mortgagor or after the publication date, whichever is later.
while Illinois does not have statutory right of redemption, we do have STATUTORY RIGHT OF REINSTATEMENT. This option is applicable when the defaulting mortgagor wishes to cure the default and reinstate the loan as if no acceleration has occured. The mortgagor has the right to exercise this right 90 days after the service of summons or publication date.
Reinstatement can only be exercies once every 5 years.
48
Explain how foreclosure and redemption takes place in IL
First remember that Illinois is a judicial foreclosure state. Once the mortgagor is 120 days late, the lender will go to court to have a judgment filed. A sheriff will serve the mortgagor of the suit. The reinstatement period expires 90 days after the mortgagor is served. Meaning, the mortgagor has 90 days to pay the missed payments in order to reinstatement the loan as if it never accelerated. The mortgagor has 7 months after personal service or 3 months after judgment for redemption or to pay off the entire loan. After redemption period expires, the house is sold. The new owner receives certificate of sale. Once sale is confirmed then they will receive a sheriffs deed.
49
what is a statue?
an enactment made by a legislature and expressed in a formal document.
50
explain the statutory right of reinstatement
while IL does not have the statutory right of redemption, it does offer a statutory right of reinstatement. This allows the mortgagor to pay the past due balance along with any late fees or attorney fees.
51
In Illinois, how long does a defaulted mortgagor have to exercise the statutory right of reinstatement?
they have 90 days after the service of summons or publication date. 90 day period can be extended
52
how many times can the statutory right of reinstatement be exercised?
usually once every 5 years
53
What is a sheriff's sale?
a judicial sale, thats usually called a sheriff's sale, takes place. each defendant to the suit must be given written personal notice of sale, and public notice of the sale must be published in a newspaper of general circulation. the successful bidder at the sale receives a certificate of sale, NOT A DEED. only after the sale is confirmed by the court will the certificate holder receive a sheriff's deed.
54
What is a primary mortgage and give examples?
They are direct lenders.
Ex. banks, insurance companies, commercial banks, thrifts, investment group financing, endowment funds
55
What is a secondary mortgage and give examples?
They are loans that are bought and sold only after they have been funded by primary lenders.
examples: conventional, va, FHA loans, special assistance loans
56
a straight-loan is also known as...
interest only loan or term loan
57
what is a straight loan
| aka interest only loan or term loan,
A loan in which only interest is paid during the term of the loan with the entire principal amount due with the final interest payment. Also called a term loan.
A construction loan is a example.
This is a non-amortized loan.
58
what is an amortized loan?
| aka fixed rate loan
this loan partially pays off both the principle and interest.
59
an amortized loan is also known as...
a fixed rate loan
60
what is an adjustable rate mortgage (ARMs)
loans where the interest rate fluctuates. because the interest changes, so does the loan repayment amounts.
61
ballon payment loan?
A balloon payment is a large payment due at the end of a balloon loan, such as a mortgage, commercial loan or other amortized loan. A balloon loan typically features a relatively short term, and only a portion of the loan's principal balance is amortized over the term. At the end of the term, the remaining balance is due as a final repayment.
this is a partially amortized loan because principle is still owed at the end of the term.
62
what is a reverse mortgage?
allows people 62 or older to borrow money against the equity they have built in their home. the borrower is charged a fixed rate of interest, and no payments are due until the property is sold or the borrower defaults, moves, or dies.
63
explain conventional loan (3 points)
1. usually most secure because loan to value ratio are often lowest
2. ratio is usually 80 percent of the property value, down payment of 20 percent
3. security of loan is solely by mortgage
64
What is the Federal Housing Administration (FHA)
they are an agency that INSURES loans. They provide security to the lender in addition to the real estate.
65
The Department of Veteran Affairs is authorized to...
GUARANTEE loans for vets.
66
What is equity?
The difference between current market value and any liens on the property.
67
What is the loan-to-value ratio?
This is the realtionship between the amount of a loan and the appraised value (sale price) of a property. For example, if a borrower has 10% down payment then the loan-to-value is 90%.
68
What are points?
Points are a unit of measurment used for various loan charges. One point equals 1% of the loan amount.
Ex. With a $100,000 loan amount, the lender is charging 2 points which is equal to $2,000.
69
What are discounts?
Discount points are an added loan fee charged by the lender to increase the yield on a lower-than-market-value loan competitive with higher-interest loans.
70
Can lenders charge prepayment penalties on FHA or VA loans?
No.
71
What is novation?
Is a substitution of one contract for another. If the lender grants novation in the assumption of an existing mortgage, the original borrower is released from liabilty.
72
What is a satisfaction of mortgage?
This is the DOCUMENT that releases the lien once a mortgage is paid off. It is also known as release of mortgage.
73
What is the National Flood Insurance Reform Act of 1994?
It requires lenders to set aside escrow funds for flood insurance on new loans. This act applies to any loan still outstanding on September 23, 1994. This means that is a lender discovers that a secured property is in a flood hazard area they must notify the borrower. The borrower then has 45 days to purchase flood insurance. If the borrower fails to purchase flood insurance then the lender must purchase the insurance on behalf of the borrwer.
74
What is a due-on-sale clause?
A due-on-sale clause in a mortgage allows the lender to collect full payment from the mortgagor when the property is sold. This clause prevents owners from selling the property to a buyer on a loan assumption, subject to mortgage, or land contract.
75
What is a power of sale clause?
It is contained in the mortgage document, This clause allows the lender to sell property at a nonjudical public sale without being required to spend the time and money involved in a court foreclouse suit.
76
What is a deficiency Judgement?
If a foreclosure sale price does not pay off the loan (prinicipal plus the costs of the collection and foreclosure) the lender can bring additonal action to enforce the terms of the payment. This is a deficiency judgment aks personal judgement.
77
What is the Real Estate Settlement Procedure Act (RESPA)?
Requires lenders to disclose to the buyer and seller all settlement costs on federally related mortgage loans, and first and second liens for the purchase or refinancing of 1 to 4 family dwellings.
The booklet, Your Home Loan Toolkit: A step-by-step guide must be given to prospective borrower within 3 business days of loan appplicaton.
RESPA limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc and requires the lender to initial and annual escrow statements to the borrower.
RESPA does not apply to a land contract or a transaction where the buyer is assuming the sellers existing loan.
78
what is equitable right of redemption?
Occurs prior to foreclosure sale. Gives the owner a chance to purchase the property back.
79
What is statutory redemption?
occurs after foreclosure. It is when someone wins the home in a foreclosure sale and after the sale, the previous owners has a chance to purchase the home from the highest bidder.
80
The highest bidder in a foreclosure will receive what document?
certificate of sale. after the sale is confirmed by the court the highest bidder will receive the sheriff's deed
81
what is a sheriff's deed?
A document giving ownership rights in property to a buyer at a sheriff's sale (a sale held by a sheriff to pay a court judgment against the owner of the property). A deed given at a sheriff's sale in fore-closure of a mortgage. The giving of said deed begins a Statutory Redemption period.
82
What type of loans does Fannie Mae deal with?
conventional and FHA and VA loans. Fannie Mae buys from a lender a block or pool of mortgages that may be used as collateral for mortgage-backed securities that are sold on the global market.
83
Ginnie Mae guarantees what?
mortgage backed securities using FHA and VA loans as collateral.
84
Low LTV means what?
high down payment, small loan
85
High LTV means what?
low down payment, large loan
86
What is private mortgage insurance (PMI)?
Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.
PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.
87
What is a note?
the promise to pay a debt and evidence of a debt; states terms of repayment.
88
what is a package loan?
INCLUDES PERSONAL AND REAL PROPERTY. Popular with developers of furnished condos. Includes drapes, kitchen range, fridge, washer, dryer, etc.
89
What is a blanket loan?
A blanket mortgage is a mortgage that covers two or more pieces of real estate. While each property covered by the mortgage serves as collateral for the loan, blanket mortgages have a unique feature, known as a release clause. A RELEASE CLAUSE enables properties included in the financing to be sold without having to repay the entire blanket mortgage. This is in contrast to traditional mortgages which have a “due on sale” clause, which forces the borrower to repay the entire mortgage when the property is sold.
Instead, the proceeds from the sale of the property can be used to purchase another property, which will then be added as collateral for the blanket mortgage. This creates what is essentially a revolving credit facility for real estate investors, property flippers, or developers who invest in multiple properties on an ongoing basis.
A single blanket mortgage can cover dozens or hundreds of properties at the same time, which eliminates the need to get a new mortgage each time a property is purchased.
There are four primary groups that can benefit from blanket mortgages. They include:
Builders & Developers
Property Flippers
Multi-Property Investors
Businesses with Multiple Locations
90
What is Regulation Z?
Regulation Z requires credit institutions inform borrwoers of the true cost of obtaining credit. The regulation does not apply to a business or commerical loan or argricultural loan.
Regulation Z covers all 1 to 4 family real estate financing for residential.
91
What is a sale-leaseback?
A leaseback is an arrangement where the seller of an asset leases back the same asset from the purchaser. In a leaseback arrangement, the specifics of the arrangement are made immediately after the sale of the asset, with the amount of the payments and the time period specified. Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor in this arrangement.
A leaseback, also referred to as a sale leaseback, is neither debt or equity. In fact, a sale leaseback is more like a hybrid debt product. The company does not increase its debt load but gains access to capital through the sale of assets. This is much like the corporate version of a pawn shop transaction. The company goes to the pawn shop and in exchange for a valuable asset, receives a certain amount of cash. The only difference is that there is no expectation for the company to buy back the asset.
For example, assume company A has a need for additional capital to pay employees and contractors but can't access the debt markets due to poor credit. The company sells equipment to an insurance company with the understanding that the equipment is to be immediately leased backed to the seller. As long as the amount charged for this service by the insurance company does not exceed the rate of interest on high interest loans, the sale leaseback is the better option.
The most common users of sale leaseback arrangements are builders or companies with high fixed assets. A leaseback arrangement is useful when a company needs to use the cash invested in an asset for other investments, but the asset is still needed in order to operate.
92
What is the Equal Credit Opportunity Act (ECOA)?
prohibits discrimination based on race, color, religion, national origin, sex, martial status, age, or source of income in granting credit.
credit applications can only be based on income, net worth, job statbilty, and credit rating.
93
What is redlining?
refuse (a loan or insurance) to someone because they live in an area deemed to be a poor financial risk, even those who are qualified buyers.
94
What is the community reinvestment act?
was passed to prevent redlining
95
What are the trigger terms in Regulation Z?
down payment, monthly payment, dollar amount of finance charge, loan
If one of those are mentioned then all of below must be disclosed:
cash price
required down payment
number, amounts, and due date of all payments
annual percentage rate
total of all payments to be made over the term of the mortgage
96
Under Regulation Z, how long does a consumer have to rescind a transaction?
They have 3 days to rescind a transction merely by notifying the lender. This right of recession does not apply to owner-occuiped residential purchase money, first mortgage, or deed trust loans. It does apply to refinancing or home equity loan.
97
What is a wraparound loan?
| aka all-inclusive or overriding loan
a wraparound loan enables a borrower with an existing mortgage or deed trust loan to obtain additional financing from a second lender without paying off the first loan.
The second lender gives the borrower a new loan with higher interest rates. The new lender takes over the old loan and makes payments to the old lender. The borrower makes payments to the new lender.
98
What is a open-end loan?
An open-end mortgage is a type of mortgage that allows the borrower to increase the amount of the mortgage at a later time. Open-end mortgages permit the borrower to go back to the lender and borrow more money if certain conditions have been met.
99
What is a purchase-money mortgage (PMM)?
This is when a SELLER will finance all or a portion of the purchase price. The seller will give the buyer title to the property. This is used sometimes when a person may not qualify for a mortgage.
The buyer executes a note and mortgage at the time of purchase; the seller records the note. If the buyer stops making payments, the seller has recourse to foreclose the property.
100
What is equitable redemption?
Ability to redeem property prior to foreclosure sale by paying off princpal and collection costs.
101
What is statutory right of redemption?
Ability to deem property after foreclosure sale by paying the highest bidder
102
What is a conventional or a conforming loan?
A conventional loan is a mortgage that is not guaranteed or insured by any government agency, including the Federal Housing Administration (FHA), the Farmers Home Administration (FmHA) and the Department of Veterans Affairs (VA). It is typically fixed in its terms and rate.
103
What are non-conventional or a non-conforming loans?
Examples of non-conventional loans include all government-backed loans and loans that do not meet Fannie Mae or Freddie Mac’s requirements. Government backed loans include the FHA, VA, or the USDA. Jumbo loans are also non-conventional because they are not required to follow the guidelines and exceed the loan amounts set by Fannie Mae, Freddie Mac, FHA, VA, and USDA. In general:
