Key Terms Mortgage a document that makes

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Key Terms: • Mortgage: a document that makes property security for the repayment of debt • Mortgagee: the party receiving the mortgage, the lender • Mortgagor: the party making the mortgage, the borrower • Foreclosure: the procedure by which a person’s property can be taken and sold to satisfy a debt • Power of Sale: allows a lender to conduct a foreclosure sale without going to court

Key Terms: • Deed of Trust: a document that conveys legal title to a neutral third party as security for a debt • Trustor: one who creates a trust, the borrower in a deed of trust • Beneficiary: one for whose benefit a trust is created, the lender in a deed of trust • Trustee: one who holds property in trust for another • Release: a document used to extinguish the right of a mortgagee • Reconveyance: a document used to reconvey title from the trustee back to the trustor

Key Terms: • First Mortgage: the mortgage loan with highest priority for repayment in the event of foreclosure • Subordination: voluntary acceptance of a lower mortgage priority than one would otherwise be entitled to • Junior Mortgage: any mortgage that is subordinate to the first mortgage in priority eg. Second Mortgage • Promissory Note: a written promise to repay a debt • Obligor/Maker: someone who has given (made) a promissory note to repay a debt, the borrower • Obligee/Holder/Payee: someone to whom a debt is owed, holding a promissory note, the lender

Key Terms: • Acceleration clause: requires immediate repayment of the loan if ownership transfers; a/k/a due-on-sale clause • Deficiency judgment: a judgment against a borrower if foreclosure sale does not bring enough to pay debt • Alienation clause: gives lender right to call entire loan due if property is sold, a/k/a due-on-sale clause • Assignment of Rents: establishes the lender’s right to take possession and collect the rents in the event of loan default

Key Terms: • Amortized loan: a loan requiring periodic payments that include both interest and partial repayment of principal • Balloon loan: any loan in which the final payment is larger than the preceding payments • Equity: the market value of a property less the debt against it • Principal: the balance owing on a loan • PITI: loan payment that includes principal, interest, taxes and insurance • Maturity: the end of the life of the loan

Key Terms: • FHA: Federal Housing Administration, insures certain real estate loans • VA: Department of Veterans Affairs, guarantees certain real estate loans • Conventional Loan: real estate loans that are not insured by FHA or guaranteed by VA • Impound or Reserve account: an account into which the lender places monthly tax and insurance payments, a/k/a escrow

Key Terms: • Loan origination fee: the expenses a lender incurs in processing a mortgage loan • Point: one percent of the loan amount • Loan-to-value ratio: a percentage reflecting what a lender will lend divided by the sale price or market value of the property, whichever is less • PMI: Private mortgage insurance-a private mortgage insurance source to insure lenders against foreclosure loss

Key Terms: • Truth-in-Lending Act: a federal law that requires certain disclosures when extending or advertising credit abbreviated as TIL • Regulation Z: federal regulations that implement the enforcement of the Truth-in-Lending Act • APR: the annual percentage rate as calculated under the federal Truth-in-Lending Act by combining the interest rate with other costs of the loan • Finance Charge: the total amount the credit will cost over the life of the loan

Key Terms: • Fair Credit Reporting Act: a federal law giving an individual the right to inspect his or her file with the credit bureau and correct any errors • Credit Report: a report reflecting the credit worthiness of a borrower by showing past credit history • Liquid asset: asset that is in cash or is readily convertible to cash • Redlining: a lender’s refusal to make loans in certain neighborhoods

“Loans” to Finance the Purchase of Real Estate • Contract for Deed: aka Land Contract – Single Document, title remains with seller until final installment, buyer only has “equitable title” • Lease with Option to Purchase • Most Bank loans involve at least two documents – Promissory Note – Document pledging the real estate as collateral: • Mortgage • Deed of Trust

Promissory Note • Contract between a borrower and lender • Obligor sometimes referred to as Maker or Promisor • Obligee sometimes referred to as Holder or Promisee • Principal • Interest – Arrears vs. Advance • Signature of borrower • Note is not usually recorded

Note and Mortgage Sequence • Step 1 Buyer gives note to lender and receives $$ • Step 2 Buyer pays $$ to seller and receives deed • Step 3 Buyer has clear title and gives mortgage to lender South-Western Publishing© 2002

Security for Debt • Mortgage pledges collateral – Hypothecation (debtor retains right to possess) – Pledging (debtor gives up possession) • Conveyance Type – Lien theory – Title theory – Intermediate theory

Mortgage Basics • Borrower signs mortgage • Parties – Borrower = Mortgagor – Lender = Mortgagee • Lender should provide constructive notice of lien to prevent other loans from gaining priority – Recorded at Register of Deeds – Requirements for recording: • Legal Description • Acknowledgment

Acceleration Clause

Alienation Clause

Particular Provisions Reviewed • Defeasance clause: “mortgage and estate created hereby shall cease and be null and void”. . . when paid • Assignment of rents • Covenant to pay taxes • Covenant against waste and removal • Covenant of preservation and repair • Covenant of insurance

Mortgage Satisfaction • Return Note marked “PAID” • Mortgagee issues either a “satisfaction of mortgage” or a “release” • Partial payment may be partially released • Release should be recorded with register of deeds

Recordation • Promissory note not usually recorded • Mortgage should be recorded by bank/lender – Recorded at Register of Deeds – Requirements for recording: • Legal Description • Acknowledgment

Deed of Trust Parties • Borrower = Trustor • Lender = Beneficiary • Neutral Third Party = Trustee – – – Bank or Savings Attorney Real Estate Broker Title Company Trust Company

Conveyance Type • Naked or bare title: note conveyance language, “grants and conveys. . . in trust” • Trustee holds “title” until paid • Satisfaction through “Reconveyance” • COMPARE TO: Mortgage Title Theory

Clauses • Unique to Mortgage: Defeasance • Unique to DOT: “In Trust” & Reconveyance • All other clauses and covenants (pay taxes, etc) are similar

Payment in Full of Note Secured by Deed of Trust • Return Note marked “PAID” • Beneficiary requests that Trustee “Reconvey” property to Trustor • Trustee executes and delivers “Deed of Reconveyance” • Partial payment may be partially released • Only the Deed of Reconveyance need be recorded

Shifting of Obligation Applies to Mortgages and Trust Deeds • Property may be sold “subject to” (original mortgagor remains liable, buyer not liable) • Assumption (original mortgagor remains liable, buyer liable) • Substitution or Novation • Assignment by Lender • Transfer with or without recourse (Deed in lieu of foreclosure would be without recourse)

Comparison of a Mortgage, Deed of Trust and Land Contract

Foreclosure Methods Reviewed • Lease with Option - Eviction & Quiet title or perhaps a judicial foreclosure • Land Contract - judicial foreclosure • Mortgage - judicial foreclosure • Deed of Trust - judicial foreclosure or exercise of power of sale (advertisement and sale)

Deed of Trust Advantages • Upon default, Lender can take possession of property & collect rents • Time between default & foreclosure is short • Power of sale provision • Trustee already has title • Usually no statutory redemption • Borrower’s Right to Cure South-Western Publishing© 2002

Proceeds of Sale • If excess proceeds, balance is returned to mortgagor/trustor • If proceeds do not cover loan: – Collection and – Action for Deficiency Judgment

Loans • Term loan – interest payments only until due. • Amortized loan – regular equal payments for life of loan including both principal & interest. • Balloon loan – any loan that has a final payment larger than any of the previous. • Partially amortized loan – series of amortized payments with a balloon payment at maturity. South-Western Publishing© 2002

Loan-to-Value • The relationship between the amount the lender is willing to loan and the market value of the property • Market value = $100, 000 Loan = $80, 000 What is the loan-to-value ratio? 80% • Note: LV ratio is based on lesser of purchase price or FMV

Equity – the difference between the value of the property and outstanding debt. Points – one percent of the loan amount. Origination fee – fee lender charges for making loan usually stated in terms of a percentage of loan amount. Discount points – lender’s charge to raise the return on the loan usually stated as a percentage of the loan amount. South-Western Publishing© 2002

Government Sponsored Loan Programs vs. Conventional Loans • Government Sponsored: – – – • FHA: Federal Housing Administration VA: Veterans Administration RHSA: Rural Housing Services Administration Non-Governmental Loans: – – Conventional Private

VA and FHA in Comparison FHA VA Insures loans UFMIP Guarantees loans Funding fee Veterans only Rate negotiable Points No down payment 100% L-T-V (up front mortgage Insurance premium) Anyone qualified Rate negotiable Points 3 -5% down 97 -95% L-T-V South-Western Publishing© 2002

VA and FHA Similarities • • • Owner-occupied 1 -4 family dwellings Refinancing allowed Assumption allowed (with approval) VA borrowers must obtain – “Certificate of Eligibility” – “Certificate of Reasonable Value” South-Western Publishing© 2002

Regulation Z • Requires lender to show the borrower the cost of the credit. • Requirements include: – – Amount financed Finance charge Annual percentage rate Total payments • Exempt: 1) business, commercial and agricultural; 2) loans over $25, 000 secured by personal property South-Western Publishing© 2002

Regulation Z Right to Rescission • • Borrower’s right to cancel a credit transaction. Three business days after signing to back out. Includes Saturdays Does not apply to credit used for the acquisition or initial construction of your principal dwelling. South-Western Publishing© 2002

Regulation Z Triggering Items and Disclosures Mention these Triggers disclosure • Down payment • Cash price or the amount of the loan • Any payment • Down payment (or none) • Number of payments • Number, amount, • Period of payments frequency of payments • Amount of any finance charge, • or statement: no charge for. Annual percentage rate (AP credit • Deferred payment price or total payments

Getting a Loan Can be Challenging The dream of the older generation was to pay off a mortgage. The dream of today's young families is to get one.

Loan Application/Approval • Universal Loan Application – Monthly housing expense (PITI) 25%-30% – Fixed Monthly Expenses less than 33%-38% • Positive net worth • Appraisal: loan to value ratio South-Western Publishing© 2002

Other Factors • • Income stability Employment history Monthly debts in relation to your income Savings amount and methods Mortgage type Property type and value Down payment amount Timeliness of rent and utilities payments

Debt to Income Ratios (Conventional Loans) • 28/36 qualifying ratio 28% = Maximum percentage of your monthly gross income that the lender allows for housing expenses (note typical ranges between 25% and 30%) 36% = Maximum percentage of your monthly gross income that the lender allows for housing expenses plus recurring debt. (note typical ranges between 33% and 38%)

Debt to Income Ratios (Conventional Loans) • Example: 28/36 qualifying ratio – $3, 750 Monthly Income x. 28 = $1, 050 allowed for housing expense (PITI) – $3, 750 Monthly Income x. 36 = $1, 350 allowed for housing expense plus recurring debt

Debt to Income Ratios (FHA Loans) • 29/41 qualifying ratio 29% = Maximum percentage of your monthly gross income that the lender allows for housing expenses (note typical ranges between 27% and 32%) 41% = Maximum percentage of your monthly gross income that the lender allows for housing expenses plus recurring debt. (note typical ranges between 36% and 44%)

Debt to Income Ratios (FHA Loans) • Example: 28/36 qualifying ratio – $3, 750 Monthly Income x. 29 = $1, 087 allowed for housing expense (PITI) – $3, 750 Monthly Income x. 41 = $1, 538 allowed for housing expense plus recurring debt

Credit Report • Provides lender with independent means of checking borrower’s credit history. • Fair Credit Reporting Act – consumer right to their file at credit bureau. • Credit Scoring – method used today to evaluate credit risk. South-Western Publishing© 2002

FICO Scores • It is an acronym for the creators of the FICO score, Fair Isaac Credit Organization • Using mathematical models, the FICO score takes into account various factors in each of these five areas: payment history, current level of indebtedness, types of credit used and length of credit history and new credit in determining credit risk.

General Guide to A Credit Source: www. mortgage 101. com • • • Quality level/Credit score: Debt ratio: LTV Ratio Delinquency: A+ 670+ A- 660 28 - 38% to 95% – Mortgage None within last 24 months – Installment: 1 of no more than 30 days in 24 mo. – Revolving: 1 of no more than 60 days in 24 mo. • Good to excellent credit within last 2 to 5 years. No bankruptcy within last 2 to 10 years.

General Guide to B Credit • • • Quality level/Credit score: Debt ratio: LTV Ratio: Delinquency: B+ 640 B- 620 50% 75 -85% – Mortgage 2 -3 over 30 within last 12 months – Installment: 2 -4 over 30 within last 12 moths – Revolving: 2 of no more than 30 days in 12 mo. • 24 -48 months since bankruptcy. No 60 day mortgage lates.

General Guide to C Credit • • • Quality level/Credit score: Debt ratio: LTV Ratio: Delinquency: C+ 600 C- 580 55% 75% – Mortgage 3 -4 over 30 within 12 months – Installment: 4 -6 over 30 within 12 moths – Revolving: 4 of no more than 60 days in 12 mo. • 12 - 24 months since bankruptcy. No 60 day mortgage lates.

General Guide to D Credit • • • Quality level/Credit score: Debt ratio: LTV Ratio: Delinquency: D+ 560 D- 540 60% 65 -70% – Mortgage 4 -6 over 60 last 12 months – Installment: 4 -6 over 60 days in 12 moths – Revolving: Poor payment record • Bankruptcy discharge within last 12 months. Judgments to be paid w/ loan proceeds. Not in foreclosure