Unit 8: Mortgages, Deeds of Trust, and Lending Practices

Question 0

• 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.

Answer 0

Installment land contract

Question 1

17 provisions of Installment Land Contracts

Answer 1

• 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

Question 2

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

Answer 2

Lein Theory

Question 3

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

Answer 3

Title Theory

Question 4

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

Answer 4

Mortgage Loan Instruments

Question 5

Act if pledging real property as security for payment of a loan w/o giving up possession

Answer 5

Hypothecation

Question 6

3 provisions of promissory notes

Answer 6

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.

Question 7

Charge for the use of money borrowed (principle)

Answer 7

Interest

Question 8

Principal & interest payments

Answer 8

Debt service payments

Question 9

Regular payments are made and each payment is broken down and applied first to the interest owed, the rest goes to principal

Answer 9

Amortized loans

Question 10

Require a fixed amount principal to be paid in each payment with he amount applied to interest varying as the balance is reduced

Answer 10

Direct reduction loans

Question 11

Principal, interest, taxes and insurance

Answer 11

PITI

Question 12

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

Answer 12

Fully amortized fixed-rate mortgage

Question 13

Monthly principal and interest payments are a constant amount. Balloon payment due at maturity

Answer 13

Partially amortized fixed-rate mortgage

Question 14

Mortgagor pays a different amount for each installment. Fixed amount towards principal and additional, variable amount towards interest

Answer 14

Straight line amortized mortgage

Question 15

Simple interest

Answer 15

Principal x interest rate x time

Question 16

Charging interest in excess of rate set by state laws

Answer 16

Usury

Question 17

Return or profit on a loan

Answer 17

Yield

Question 18

Charge that makes up the interest between the interest rate and the required investor yield

Answer 18

Discount points

Question 19

Lenders calculate it takes 6-8 points to increase yield 1%

Answer 19

One points will increase the yield about 1/8%

Question 20

Administrative expense for generating the loan, usually 1% of the loan

Answer 20

Loan origination fee

Question 21

Process of paying off a home loan by making periodic payments of P&I called debt service . Literally means ‘kill the debt’

Answer 21

Amortization

Question 22

Periodic payments of interest only, with principal paid in full at end of loan term

Answer 22

Interest only mortgage (term loan)

Question 23

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

Answer 23

Adjustable rate mortgage (ARM)

Question 24

Common components of ARM

Answer 24

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

Question 25

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

Answer 25

Graduated payment mortgage (GPM)

Question 26

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

Answer 26

Balloon payment loan

Question 27

Rapid payoff mortgage. Fixed interest rate, payments of principal are increased

Answer 27

Growing Equity Mortgage (GEM)

Question 28

Rights and duties of Borrower

Answer 28

* 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

Question 29

Right to assign the mortgage debt as well as the right to foreclose

Answer 29

Rights of Lender

Question 30

Process of selling the mortgaged real estate to repay debt from the proceeds

Answer 30

Foreclosure

Question 31

Methods of foreclosure

Answer 31

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

Question 32

Distribution of foreclosure proceeds

Answer 32

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

Question 33

Borrower's right to redeem their property

Answer 33

Redemption

Question 34

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

Answer 34

Equity of redemption

Question 35

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.

Answer 35

Statutory Redemption Period

Question 36

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

Answer 36

Deficiency judgements

Question 37

'Friendly foreclosure'...lender accepts deed in lieu of foreclosure. Takes real estate subject to all junior liens

Answer 37

Deed in lieu of foreclosure

Question 38

Proceeds from the sale are not sufficient to fully satisfy balance on existing mortgage.

Answer 38

Short sale

Question 39

NC is characterized as a ______ theory state

Answer 39

Title theory state

Question 40

Clause in promissory note allowing lender the right to demand that all future installment payments become due on default

Answer 40

Acceleration clause

Question 41

In a deed of trust that allows lender to call in the loan when the property is transferred

Answer 41

Alienation clause

Question 42

Deed of trust is a ___party instrument

Answer 42

Three

Question 43

Buyer assumes seller's mortgage

Answer 43

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

Question 44

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'

Answer 44

Purchase-money mortgages

Question 45

Includes not only real estate but all fixtures, and appliances installed on premises

Answer 45

Package loan

Question 46

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

Answer 46

Blanket mortgages

Question 47

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

Answer 47

Wrap around loan

Question 48

Act as a line of credit or equity line allowing the mortgagee to make additional future advances of funds to the mortgagor

Answer 48

Open ended mortgages

Question 49

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

Answer 49

Construction loans

Question 50

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

Answer 50

Buy downs

Question 51

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.

Answer 51

Home equity loans

Question 52

Based on equity Homeowner has invested in the property given as security of the loan. Used by senior citizens in fixed income

Answer 52

Reverse annuity mortgages

Question 53

First lender subordinates it's lien to that of the second lender.

Answer 53

Subordination agreement

Question 54

When debt is paid Lein must be removed

Answer 54

Defeasance clause

Question 55

Loan-to-value-ratio (LTV)

Answer 55

* Maximum percentage of value lender will loan * Mortgage amount/price or value * higher the loan-to-value ratio, higher the leverage

Question 56

Leverage

Answer 56

Using borrowed money to finance an investment

Question 57

Using Loan Factor

Answer 57

Used to determine total amount of mortgage that applicant can afford. Principal +Interest payment / rate factor

Question 58

Computerized loan origination (CLO)

Answer 58

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

Question 59

Proposed monthly housing expense

Answer 59

No more then 28% of monthly gross income Includes: principal, interest, monthly property taxes, and monthly insurance payments

Question 60

Maximum housing expense to income ratio for FHA loans

Answer 60

29% Maximum debt to income ratio is 41% (vs 36% conventional loans)

Question 61

VA loans

Answer 61

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

Question 62

Regulation Z

Answer 62

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.

Question 63

Budget mortgage

Answer 63

PITI

Question 64

Adjustable rate mortgage (ARM)

Answer 64

Interest rate is subject to change based on a published economic index or indicator

Question 65

Rate

Answer 65

Index + margin

Question 66

Contract for Deed (land contract if installment contract)

Answer 66

Purchase price paid in installments to seller. Seller holds legal title. Deed delivered upon final payment

Question 67

North Carolina Connor act

Answer 67

Requires installment land contracts to be recorded to protect against 3rd party claims