Chapter 13 Summary. Real Estate Finance. California Real Estate Principles

Transcription

1 Parts to a mortgage loan: Pledge or promise to pay (promissory notes); Collateral, which allows a lender the right to foreclose if the borrower does not pay (mortgage or deed of trust). Promissory notes: Straight note (interest only note): the borrower agrees to pay the interest the entire principal in a lump sum on the due date. Installment note (most commonly used): requires payments that include BOTH principal and interest. Fully amortized loan: an installment note that includes principal and interest of equal installment payments that liquidate the debt. Balloon payment: any payment greater than a double monthly payment. Mortgage: MORTGAGOR = Borrower; MORTGAGEE = Lender Deed of Trust: TRUSTOR = Borrower; BENEFICIARY = Bank; TRUSTEE = Bank Vice-President or anyone designated by the lender 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. Maintenance of the property in good repair at all times. Lender authorization prior to making any major alterations to the property.

2 Clauses in a Mortgage or Deed of Trust Instrument Acceleration Clause: If a borrower defaults on the loan (misses payments, etc.) the lender can call the entire balance due and payable immediately. Alienation Clause: The mortgagee or beneficiary declares the entire balance of the loan becomes due and payable when the property is transferred. Satisfaction Piece: When the borrower has paid the entire balance, the lender is required to execute a satisfaction of mortgage or a release deed of trust. o o Satisfaction of Mortgage - A certificate issued by the mortgagee when a mortgage is paid in full. Deed of Reconveyance (deed of release) - A document used to transfer legal title from the trustee back to the borrower (trustor) after a debt secured by a deed of trust has been paid to the lender (beneficiary). A Prepayment penalty clause allows a lender to charge extra interest if the loan is paid off before the normal completion date. Subordination clause: 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 a Mortgage or Deed of Trust is assumed, the purchaser is accepting the debt and personally liable for the entire debt. Novation is a second contract to assume liability for the debt for the purchaser and relieve the liability to the seller. A monthly loan payment consists of: Principal - The amount borrowed from the lender. Interest - The amount paid to the lender for allowing the money to be borrowed. Taxes - The amount due to the government for the privilege of private ownership of real property. Insurance - The amount paid to the insurance company in case of damage to the property.

3 A mortgage or deed of trust must be recorded where the property is located. Junior mortgages are second mortgages or deeds of trust. Foreclosure is the legal process whereby the property pledged as security in the mortgage documents or the deed of trust is sold to satisfy the debt (promissory note). Order of payment in foreclosure: Cost of Sale - advertising, attorney, trustee fees, etc. Special assessment 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 through the courts. Non-Judicial foreclosure is required to foreclose on a Deed of Trust( does not have to go 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. If the proceeds from the foreclosure sale are not sufficient to cover the debt, the lender can go to court and seek: A Deficiency judgment against the borrower (general lien that applies to all of the borrower's assets). Deed in lieu of foreclosure: the lender will become the owner of the property instead of going through the formal foreclosure process. Interest is the amount of money that a lender charges for the use of money. SIMPLE INTEREST: charged on a mortgage loan; PRINCIPAL: loan balance. Usury or illegal interest: charging interest in excess of the rate set by law.

4 Prepaid interest: the total dollar amount of interest and points paid by a borrower at closing. Leverage is the principal of using other people's money to make investments, such as buying homes. Equity is the value in a property held by the owner in excess of any liens against it. A factor is the cost per thousand that is required to create the principal and interest payment necessary to pay off the loan. LOANS: Straight Term Loan (Interest Only Loan): only interest is paid. Balloon (Partially Amortized Loan): interest and principal are paid on an equal basis until the final payment. Fully Amortized - Regular payments of principal and interest are made and the entire loan is paid off by the end of the term. A Budget Mortgage is a loan which has a payment composed of principal, interest, taxes and insurance. Adjustable-rate Loan (ARM): Interest rate fluctuates (often tied to an index). The interest rate is usually the index plus a premium called the Margin. How often the loan rate may be changed is determined by the Adjustment Period. Graduated Payment Plan: Lower payments first year, then payments increase. Reverse Annuity Mortgage (RAM): Homeowner receives monthly payments based on accumulated equity rather than a lump sum. Part Purchase Money: mortgage given as part of the buyer's cash for the purchase of real property, and delivered at the same time that the real property is transferred. Package Mortgage: Loan on real estate, plus fixtures, and appliances.

5 Blanket Mortgage: Loan on several pieces of land. Open-end Mortgage/deed of trust: Loan that is expandable by increments up to a maximum dollar amount. Wraparound: Additional financing from a second lender. Buydown: The payment is subsidized at the beginning. Construction Loan: 1) - The lender commits the full amount of the loan to the borrower, but makes partial progress payments; 2) - high interest rate to builders. Takeout Loan: Long term permanent financing for large construction projects. Sale-Leaseback: Owner sells his or her improved property and at the same time signs a long-term lease. Participation Mortgage: the lender participates in the income of the mortgaged property beyond a fixed return. Bridge Loan: Short-term interim loan for buyer, usually six months to one year in duration. Contract for Deed: the buyer does not receive legal title until the final payment is made. 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.