Intro To Real Estate Financing

Question 1

What is financing

Answer 1

Receiving or providing money for the purposes of buying real estate

Question 2

Mortgagor

Answer 2

The buyer

who applies to a lender for a loan

Question 3

Mortgagee

Answer 3

The lender or the bank

Question 4

Financial Steps

Answer 4

1. Buyer applies to lender for a loan
2. Lender uses gross salary, FICO score, credit history, and debt to income ratio to assess a buyers liability
3. Buyer receives a pre-approval or pre-qualified letter, pre-qualification is a preliminary idea of how much a borrower can afford
   Pree approval =a conditioner
4. Buyer finds a property to purchase
5. Lender’s attorney checks public records at county of registry of deeds for title defects. If it does, the seller must fix them before closing
6. Letter of commitment to buyer, requiring them to make loan
7. At closing lender makes the loan for borrower, borrower gives a note
8. Buyer pay back loan upon repayment lender returns nota and mortgage to buyer

Question 5

Collatoral

Answer 5

The property

Question 6

Amortization

Answer 6

The payment of the debt in equal installments

Question 7

Balloon Mortgages

Answer 7

a loan with an amortization period that is longer than its payment period. Meaning the loan is lower than necessary to pay off by the end of the period making them more affordable
ex. a 10 yr loan whose payments are calculated on a 30-year schedule

Question 8

Forclosure

Answer 8

Legal process a lender attempts to recover the balance of a loan from a borrower by forcing the sale of the asset used as collateral for the loan.

• Judicial (under court supervision) but some states allow non - judicial foreclosures
• Foreclosures are processed through public auction

Question 9

Short Sale

Answer 9

When the seller is underwater or owes more than what they can sell their home for

Question 10

The Note

Answer 10

The evidence of the debt

I OWE U

Question 11

Mortgage

Answer 11

The security of the note (or debt) provides a piece of property as collateral for the loan.

Question 12

Title Theory

Answer 12

Technically the banks owns the property until loan is paid off.

Question 13

Power of Sale Clause

Answer 13

Permits the lender to take the property and sell it in the event of a default on the terms of the loan (most often non-payment of the loan)

Question 14

Mortgage covenants

Answer 14

Everything the borrower promises to do.

Making monthly payments, pay their property taxes as impounds to the bank, maintain insurance, etc.

Question 15

Defeasance Clause - Alienation clause

Answer 15

Permits maturity of the loan in the event of a Due on Sale Clause

When the loan is paid back, collateral is automatically released

-Prevents from wrap-around mortgages or transferring to a third party.

Question 16

Subordination Clause

Answer 16

Makes the mortgage junior to any future mortgage.

Junior mortgages get paid second

Question 17

Points

Answer 17

One percent of the loans
Often used to increase the value of a loan.
Ex. if the interest rate is so low on a loan bank might charge borrower points to increase profit.

Question 18

Discount Points

Answer 18

Borrow’s capability of buying down the loan interest rates.

Borrower owes less interest every month

Question 19

Mortgage Brokers

Answer 19

Do not originate the loan, but instead broker the loan between the borrower and lender

Question 20

Partial Release Clause

Answer 20

Used in blanket mortgages

Releases a portion of the collateral in exchange for partial payment of loans

Question 21

Gran St. Germain Act

Answer 21

The due on sale clause cannot be triggered upon death, devising of the property, leasing, marriage, divorce, or transfer to a family trust

Question 22

Mortgage

Answer 22

-Security or the note, providing a piece of property as collateral for the loan.

Question 23

Title Theory

Answer 23

• The bank legally owns the property until the borrower pays off loan
• The mortgagor (borrower) has equitable title (future right to gain legal title)

Question 24

Lien theory

Answer 24

Borrow will holds legal title during the life of the loan

Question 25

Equity Right of Redemption

Answer 25

Right to pay off debt and prevent foreclosure

Question 26

Letter of Commitment

Answer 26

When the lender is satisfied with the collateral; requires them to make the loans as long as the buyer satisfies lenders conditions in the letter

Question 27

Pre-approval letter

Answer 27

Lender receives a preapproval letter from lender Allows buyer to search for homes within loan amount. Also called the commitment letter or letter of commitment

Question 28

Collateral

Answer 28

the property

Question 29

A default

Answer 29

failure to make payments

Question 30

A note

Answer 30

evidence of the debt, and mortgage securing the debt also known as a promissory note or mortgage note Beware of two clauses: 1. Acceleration clause 2. Prepayment Penalty Clause

Question 31

Equity of Redemption

Answer 31

Being able to payback lender what is owed along with foreclosure costs before public auction

Question 32

Short Sale

Answer 32

Homeowner decides to sell house short of what's owed, bank settles with whatever open market price homeowner finds

Question 33

Equity

Answer 33

Money in excess of debt, borrower receives proceeds from auction

Question 34

Deficiency Judgement

Answer 34

Property is sold under the debt debt owed

Question 35

REO (Real estate owned)

Answer 35

If lender owns the property after foreclosure they sell it in the open market

Question 36

Acceleration Clause

Answer 36

Permits the lender to accelerate the maturity date (due date of loan.

Question 37

Prepayment Penalty Clause

Answer 37

Requires borrower to pay a penalty for prepayment of the loan; guarantee's the lender gets paid the interest on the loan Uncommon in residential; common in commercial

Question 38

Power of Sale Clause

Answer 38

Permits lender to sell property if there is a default

Question 39

Defeasible Clause

Answer 39

Collateral is automatically relieved when loan is paid back, | bank no longer has rights to property

Question 40

Subordinate Clause

Answer 40

Mortgage becomes junior to any future mortgage, Get paid second in a forclosure after any senior mortgages

Question 41

Junior Mortgage

Answer 41

mortgage gets paid second (3rd, 4th, etc), in a foreclosure auction after any senior mortgages

Question 42

Due -On -Sale Clause (Assumption Clause)

Answer 42

Acceleration of maturity of loan due to (mostly) title transfer, which prevents the bank from transferring the mortgage to a third party.

Question 43

Defeasance clause

Answer 43

When loan is paid back, the bank's claim to the collateral is automatically relieved

Question 44

St. Germain Act

Answer 44

The due on the sale clause cannot be triggered by death, divorce, transfer of property via family, lease, marriage, devising of property or family trust.

Question 45

MA Title Theory

Answer 45

In MA bank legally owns your property until it is paid in full Equitable title as the borrower

Question 46

Partial release clause

Answer 46

Used in blanket mortgages, releases a portion of the collateral in exchange for partial payment of the loan Example: subdivision development or cross-collateralized loans

Question 47

Blanket mortgages

Answer 47

Mortgages that cover several parcels of land

Question 48

Points (percentage)

Answer 48

1% of the loan Used to increase value of a loan; used basically when the interest rate on a loan is so low that it isn't worth making a lender can charge borrowr points as in an origination fee to increase profit.

Question 49

Math example of points/origination fee: A property was sold for $100,000 with a loan for $80,000. The lender charged the borrower two points. How much did the points cost the borrower?

Answer 49

80,000x.02 = $1,600

Question 50

Mortgage Brokers

Answer 50

3rd parties between the borrower and lender; offer more flexibility in terms of payments offer loan comparisons, through a higher cost (because broker charges a fee)

Question 51

Mortgage brokers

Answer 51

Directly work with lenders | do not orginate loan

Question 52

Assumption Clause

Question 53

Acceleration Clause (aka calling in the note)

Answer 53

Permits lender to accelerate the maturity date (due date) of the loan in the event of a default; lenders first step to in foreclosure

Question 54

Prepayment Penalty Clause

Answer 54

Penalty for prepayment of the loan | Gaurentees lenders gets paid interest on the loan (common in commercial)

Question 55

Junior Mortgage

Answer 55

gets paid second, something that happens when primary mortgage gets sold to another bank