simply acknowledging that a debt exists. ABC Real Estate School 3 st ed National Workbook August 2010 Page 382

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1 Promissory Note A promissory note, or commonly as just a "note", is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that they contain a specific promise to pay, rather than 80 simply acknowledging that a debt exists ory_note Accessed June 22, ABC Real Estate School 3 st ed National Workbook August 2010 Page 382

2 Sources of Mortgage Funds: 1. Private Investors 2. Banks 3. Mortgage Bankers a) make loans 4. Mortgage Brokers a) locate lenders to buy loans b) processors c) may also be Real Estate Brokers Who buys the loans? Secondary Mortgage Markets: Secondary mortgage markets purchase loans and assemble them into packages. They also sell securities that represent shares in the pooled mortgages to investors. The major purchasers are: a) FNMA - Federal National Mortgage Association (Fannie Mae) 1938 i) organized as a privately owned corporation ii) issues its own common stock iii) buys conventional, FHA and VA loans iv) lender receives mortgage-backed securities that the lender may keep or sell b) GNMA - Government National Mortgage Association (Ginnie Mae) 1968 i) division of HUD ii) provides pass-through certificates iii) provides a guarantee on FNMA-packaged pools of FHA/VA mortgages c) FHLMC - Federal Home Loan Mortgage Corporation (Freddie Mac) 1970 i) buys mostly conventional loans ii) buys and pool mortgages for resale to investors Lender for rural areas is: Farmer s Home Administration (FmHA) * federal agency of the Department of Agriculture * offers programs to help purchase or operate family farms * provides loans to help purchase or improve single-family homes in rural areas * used in Pahrump, Sandy Valley and other rural areas in Nevada to finance at 100% * loans are made to low-and-moderate income families * two categories * guaranteed loans * made and serviced by a private lender * guaranteed for a specific percentage by the FmHA * loans made directly by the FmHA ABC Real Estate School 3 st ed National Workbook August 2010 Page 383

3 Payment Plans - Types of Amortization A. amortized 30-year mortgage 1. interest decreases and principle increases over the life of the loan B. term loan 1. Has interest only payments - or the interest may accrue until the final payoff - with a full payoff of principal at the end of the term in a single lump sum. C. balloon payment loan 1. Has partial amortization with lump-sum payoff of all remaining principal before the payments would have otherwise paid the loan off. D. Adjustable rate mortgage (ARM) 1. Index a) tied to an economic indicator called an index 2. Margin a) the amount over the index that the rate can differ 3. rate caps a) limit the amount the interest rate may change 4. payment cap a) sets a maximum amount for payments - could cause negative amortization if interest rate increases payment above the cap 5. adjustment period a) establishes how often the rate may be changed 6. conversion option a) permits the mortgagor to convert to a fixed-rate loan E. Growing-Equity mortgage (GEM) 1. also known as a rapid-payoff mortgage fixed interest rate - makes pay-off quicker principle is increased throughout the life of the loan Mortgage design types 1. Reverse annuity mortgage (RAM) a) the lender makes the borrowers payments b) lender pays loan c) paid off upon the sale of the property, death of the borrower, or expiration of the contract 2. Package mortgage a) includes real estate, personal property (furniture, drapes, etc.) and appliances b) used to buy furnished condominiums, tract housing models 3. Blanket mortgage a) mortgage which encumbers multiple parcels of land b) usually contains a partial release clause allowing for one or more of the parcels to be released from the loan without changing the entire loan 4. Construction mortgage a) secured by real estate which is being built with the advanced funds b) short-term financing ABC Real Estate School 3 st ed National Workbook August 2010 Page 384

4 c) replaced by permanent financing when the building is completed and sold 5. Sale-and-leaseback a) Used with models in tracts. b) investor purchases models and leases them back to developer who uses them to sell the homes 6. Wrap-arouna) mortgage (the meaning has changed over the years) lets a borrower to obtain additional financing from a second lender without paying off the first loan b) the borrower makes payments to the new lender on the larger loan 7. Open-end mortgage a) loan less costly than a home improvement b) interest rate fixed - future advances fluctuating interest rate c) the borrower can borrow any amount up to a fixed limit Regulation Z Financing Regulations * part of the Truth-in-Lending Act * requires credit institutions to inform borrowers of the true cost of obtaining credit * goal is to create informed borrowers * credit can be for personal, family or household uses * for loans of $25,0 00 or less and all mortgages * not for business, commercial, agricultural loans greater than $25,000 * requires disclosure of: * Total finance charges (both itemized and total) * finance ch arges need to include: * Loan fees * Finders fees * Servic e charges * points * interest * summarize these into Annual Percentage Rate (APR) * does not have to indicate the total interest payable during the term of the loan * does not have to include title fees, legal fees, appraisal fees, credit reports, survey fees, and closing expenses 3 day right of rescission * Borrowers has 3 days to rescind the transaction by notifying the lender for 2 nd mortgages * does not apply to residential purchase-money or first mortgage of deed of trust loans Housing and Urban Development (HUD) requires all Brokers to display Equal Housing poster ABC Real Estate School 3 st ed National Workbook August 2010 Page 385

5 Mortgage v Deed of Trust Mortgage v Deed of Trust Some states require the security for real property debt to be a mortgage, and some states including Nevada, require the security to be a deed of trust. Even though most people commonly refer to their home loan as a mortgage, due to the functional similarity of a mortgage and a deed of trust, this is not always accurate. Trust deeds are commonly called mortgages in the real estate loan business although a mortgage is technically an entirely different legal instrument. There are also significant differences between the two types in the foreclosure process. Mortgage A mortgage is a voluntary lien that borrowers sign and give to their lender to secure the debt on their home. It involves two parties the borrower (mortgagor) and the lender (mortgagee) and it creates a lien against the property that is recorded in public records. The lender, known as the mortgagee, places a lien on the borrowers house. It accepts the mortgage from the borrower, the mortgagor, in exchange for loaning money to purchase the home. Deed of Trust A deed of trust serves the same purpose as a mortgage; however, there are important differences with respect to the number and kind of parties involved, the holder of the title, and the foreclosure process. Unlike a mortgage, a deed of trust is a three-party instrument. The three parties are the beneficiary, the trustor, and the trustee. The lender is called the beneficiary because it benefits from the transaction by collecting interest. The borrower is the trustor because he/she is "trusted" with the money. The final party is the trustee, who holds title for the benefit of the beneficiary. The trust deed document is recorded (constructive notice) with the County Recorder where the property is located as evidence of and security for the debt. A trust deed or deed of trust, is a document wherein specific financial interest in the title to real property is transferred to a trustee, which holds it as security for a loan (debt) between two other parties. When the loan is fully paid, the monetary claim on the title is transferred to the borrower by reconveyance to release the debt obligation. If the borrower defaults on the loan, the trustee has the right to ABC Real Estate School 3 st ed National Workbook August 2010 Page 386

6 foreclose on and transfer title to the lender or sell the property to pay the lender from the proceeds. A trust deed is not a mortgage-backed vehicle, nor is it any sort of publicly traded item. Instead it is a way to participate in making a real estate loan available to a group or company in need of financing. Differences between mortgage and deed of trust Mortgage 2 party instrument mortgagor (borrower) mortgagee (lender) defeasance clause -releases mortgage when fully paid Deed of trust 3 party instrument trustor (borrower) trustee (usually title company) beneficiary (lender) deed of reconveyance - releases deed of trust when fully paid Legislation: ECOA - Equal Credit Opportunity Act Prohibits discrimination for granting credit based on: A. race B. color C. religion D. national origin E. sex F. marital status G. age H. source of income (provided it is legal income) * protects more classes of individuals than the Fair Housing Act * prevents lending institutions from discriminating in the loan process * requires that credit applications be considered only on the basis of income, net worth, job stability, and credit rating * must also provide: I. reasons for the denial J. the source of information; such as credit bureaus ABC Real Estate School 3 st ed National Workbook August 2010 Page 387

7 Oh No! The borrower isn t paying! Title: Legal v Equitable: Equitable Title: The interest held by someone who has agreed to purchase but has not yet closed the transaction. Legal Title : The interest held by someone after the transaction is closed and reco rded. Legal title is clear and enforceable title that represents legal ownership of real property. Lien Theory v Title Theory v Intermediate Theory If the mortgage loan terms are in default in any way (payments, insurance coverage lapses, delinquent, etc.), the mortgage may be foreclosed. Also if a homeowners association is involved, the association may take the property for delinquencies to the association. Procedures during foreclosures are designed based on the type of legal theory followed by the state controlling the property being foreclosed upon. Each typ e of theory has special considerations on who will hold title and how foreclosure proceedings would take place if they were to become necessary. Lien Theory Mortgages are used in a lien theory state. In a lien theory state, the deed stays with the borrower (mortgagor), and the lender (mortgagee) places a lien on the property using the mortgage instrument. The mortgagor retains both legal and ABC Real Estate School 3 st ed National Workbook August 2010 Page 388

8 equitable title. The lender's lien is removed once the payment of all loan payments have been completed. Foreclosure proceedings in a lien theory state may be more difficult for the lender than in a title theory state, due to the fact that the buyer is holding title to the land and not the lender. Generally, foreclosure in Lien Theory States occur through a judicial proceeding (within the court system). Title Theory A Deed of Trust is used in a title theory state such as Nevada. In title theory states, the borrower does not actually keep title to the property during the loan term. The seller gives the buyer/borrower a deed to the property (retaining legal title) but when the borrower signs the mortgage for the loan the borrower gives the title back to the mortgage holder. The lender (or the 3 rd party beneficiary such as the trustee) then holds title to the property, as security only (retaining equitable title), until all loan payments have been made. During that time the borrower has the right to possession of the property, and the lender delivers the deed back to the borrower only after the loan obligation has been satisfied. The third-party trustee holding the title to the property in trust has with the power to foreclose on the buyer if there is a default. Generally, foreclosure in Title Theory States occur through a non-judicial proceeding (outside of the court system). With a non-judicial foreclosure process, the security instrument (usually a deed of trust) contains a power-or-sale clause and no court action is required. The trustee's sole function is to initiate the foreclosure at the order of the lender. When a deed of trust is involved, foreclosure can be quicker, less expensive, and less complicated than when a mortgage is the security instrument. If the loan becomes delinquent, the trustee has the power to sell the home. Of course, the lender must provide the trustee with proof of delinquency and request that foreclosure proceedings be initiated. And the foreclosure must progress according to law and as dictated by the deed of trust. However, the foreclosure does not have to go through the court system. 81 The buyer owns the property and has all rights of ownership and possession, subject only to the conditions in the deed of trust. When the loan has been paid off, the lender will give clear the title by way of recording a Deed of Accessed June 22, ABC Real Estate School 3 st ed National Workbook August 2010 Page 389

9 Reconveyance. The Deed of Reconveyance removes the lender's interest in the property. Intermediary Theory Some states have modified the title and lien theories, and these states are referred to as "intermediary theory" states. In these states, the title remains with the borrower, but the lender may take back title to the property if the borrower defaults on the loan. Foreclosure processes There are big differences between the two types of security interests; mortgage and deed of trust. The major distinction is that foreclosure with a Deed of Trust is non-judicial while a foreclosure with a mortgage is judicial. There are three major foreclosure processes: judicial foreclosure, non-judicial foreclosure and strict foreclosure. A judicial foreclosure process allows property pledged as security to be sold by court order after the mortgagee has given sufficient public notice. With a non-judicial foreclosure process, the security instrument contains a power-or-sale clause and no court action is required. With a strict foreclosure process no sale takes place and the court usually awards full legal title to the lender. What happens if the borrower defaults? The traditional rule is: First in Time, First in Right or First Recorded, First Paid. Senior liens (first recorded) are paid first, and then junior liens (liens recorded after the first lien) are paid. The only way to change the order is with a subordination agreement. A subordination agreement changes payment priority of liens. It must be approved and signed by involved lenders because it would change the payment position of senior and junior lienholders. It may be required when refinancing a first mortgage when there are already junior lienholders that will be staying in place. If there are 2 (or more) trust deeds on a particular piece of real estate, either can foreclose. For example, say a piece of commercial real estate sells for $1,000,000. Assume that there is a first trust deed for $500,000, a second trust deed for $200,000, and the purchaser of the property pays a down payment of $300,000. The first trust deed holder will be paid first, no matter who requests ABC Real Estate School 3 st ed National Workbook August 2010 Page 390

10 the foreclosure. If a foreclosure sale yields $600,000, the bank owning the first trust deed will be paid in full, and the second gets $100,000. If a foreclosure sale yields $400,000, the bank owning the first trust deed will be paid the proceeds, and the second gets nothing. So having a First Trust Deed is preferable to having a second or third trust deed and the junior liens should not initiate a foreclosure unless they know that the property value will exceed the senior lien value and/or the property owner has assets that can be pursued for the value of the junior lien. How Does the Lender Establish Priority in a Foreclosure proceeding? first recorded - first paid Foreclosure Example Example: Property value - $113,000 $113,000 1ST mortgage - $84,000-84,000 of 1 st mortgage gets paid 2ND mortgage - $20,000 $29,000 3RD mortgage - $10,000-20,000 of 2 nd mortgag e gets paid $9,000 $9,000 of 3 rd mortgage gets paid 0 ABC Real Estate School 3 st ed National Workbook August 2010 Page 391

11 Why does a foreclosure happen? There are many reasons that foreclosures take place. Sometimes a foreclosure is initiated voluntarily by the property owner or owners and sometimes a foreclosure is initiated by the lender. The foreclosure may be an unemotional financial decision by the homeowner, basically buying and selling paper. The foreclosure may also be a very emotional situation where the property owner is emotionally devastated. Possible involuntary reasons include: The property owner lost his/her job. The property owner s pay decreased. The mortgage payment increased. The property owner s spouse died and the property could not be sold for the mortgage amount. The property owner divorced and the property could not be sold for the mortgage amount. The proper ty was never affordable for the property owner. The property owner wants to retire an d cannot sell the property for the mortgage amount. The property owner wants to move and cannot sell the property for the mortgage amount. Possible voluntary reasons include: The property owner is upside down on his mortgage (the mortgage amount of the property exceeds the value), and the property owner no longer wants to make the payment. The property owner purchased the property as an investment and his is upside down on his mortgage, and does not see the property value increasing in the near future. The property owner purchased commercial property with a group of other investors and the property is no longer profitable. ABC Real Estate School 3 st ed National Workbook August 2010 Page 392

12 Alternatives to foreclosure There are several alternatives to foreclosure. They include mortgage modification, bankruptcy, short sale and deed in lieu of foreclosure. Mortgage Modification A property owner can try and negotiate with the lender or lenders to reduce interest, reduce principal (rare), extend the term of the loan to lower payment amounts, or try and qualify for a government plan such as Home Affordable Modification Program (HAMP). This should usually be tried first, but it is rarely successful. Lenders prefer other options, because they are looking for a solution that benefits them the most. A real estate licensee may not assist in the mortgage modification, and may not accept a fee to perform any activity that assists in a mortgage modification. In Nevada, all individuals performing any duties of a mortgage modification specialist must be licensed by the Mortgage Lending Division. The lender may be receptive to some type of payment grace or deferment period while the owner gets back on his feet financially. If the owner is not behind on his payments by a large amount, maybe he can increase the amount of payments for a few months, catching up with the amount due. This equitable right of redemption (payment in full of all accrued charges and penalties) must take place before the state requirement deadline. Bankruptcy Filing for bankruptcy protection can prolong a foreclosure, help the homeowner remove the debt obligation of a junior lien and reduce the principal owed on the property. There are different types of bankruptcies and each type has limitations and restrictions. The property owner may be seeking total liquidation of assets, or may be attempting to reduce his financial obligations. An attorney who has knowledge of state bankruptcy law will probably be needed to follow this option. ABC Real Estate School 3 st ed National Workbook August 2010 Page 393

13 Deed in lieu of foreclosure A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings. The borrower is handing the house back to the lender. This is sometimes called a friendly foreclosure. The principal advantage to the borrower is that it immediately releases him/ her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts their credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy. Timing and property condition incentives are worked out with the individual lender. The homeowner needs to confirm that the property ownership changes in a timely manner so he is release from any further physical upkeep of the property. There may be fines if the property is not kept tidy and the homeowner does not want to be subjected to any additional expenses and liability with the property. Short Sales A short sale can be defined as the sale of an asset for less than the loan balance. As a potential buyer, the author assumed that when a licensee marked the short sale box on a listing agreement, it meant that they had initiated negotiations with the lenders for a short sale. I also thought that the seller has stopped making payments on the property. As experience has shown me, however, it only means that the value of the property is less than the mortgages securing the property. The property owner may or may not be up-to date with payments. ABC Real Estate School 3 st ed National Workbook August 2010 Page 394

14 Does a short sale mean there is a deal in the buyer s future? Does a successful short sale mean that the buyer paid less than value for a property? Not necessarily. It only means that the loans on the property exceeded the value of the property. The buyer paid fair market value for the property. The buyer is not only not usually getting a bargain on the purchase; he also needs to tolerate more problems than he would have had if he wasn t trying to purchase a short sale. First, he needs to wait until the listing agent or seller s attorney files all of the paperwork with the lender; so the lender will grant permission to attempt the short sale. The short sale package must include the seller s financial information, tax returns, appraisal, a HUD-1 settlement statement, and a hardship letter, at a minimum. If the offer is not high enough, the listing agent may recommend to his client that they reject the offer out-right; and not present the offer to the lienholder. If the offer is presented to the lien-holder, additional time will probably be needed for the listing agent to make sure that the offer finds the appropriate loss mitigagor ; one that can make a final decision on the property. During this interim period, since the seller may be facing a foreclosure; the property owner may not be giving the property the care that it needs; due to lack of disposable funds or because of emotional headache. The purchaser of a short sale may end up purchasing a property that is in better physical condition than a foreclosure. They will also property pay more for the property than they would have paid for a foreclosure. A short sale may take 6- months or more to close on. Lender s Decision Multiple lenders and multiple mortgages: The investor needs to feel that there is an advantage for him to take less than the mortgage amount for the property, rather than foreclosing on the property at a later date. If there is more than one mortgage on the property, and the value of the property is less than the 1 st mortgage amount; the remaining lien- holders (2 nd mortgage, 3 rd mortgage, etc.) would need to agree to walk away from ABC Real Estate School 3 st ed National Workbook August 2010 Page 395

15 their loans. If this is not the same lender that loaned the 1 st mortgage money, they have nothing to gain by allowing a short sale to take place. The advantage for the lender is that evidence shows that the value of the short sale is higher than that of its foreclosure counterpart. Same neighborhood, similar house, th e short sale sales price will be higher than the sales price of the foreclosure. Often times it is because often times the house selling with a short sale will be in better condition than the house selling in a foreclosure action. A foreclosure sits vacant longer and has more opportunity to be vandalized. One lender and multiple mortgages: If the 1 st mortgage holder and the 2 nd mortgage holder is the same company, they can decide whether to accept less than their loans; or potentially take back the property at a later date in a foreclosure. Multiple lenders, multiple mortgages and property value exceeds 1 st : If the value of the property is greater than the amount of the 1 st mortgage, and there are two mortgages securing the property, the 1 st mortgage will be paidin-full, and the 2 nd mortgage will need to decide whether he thinks that he will be paid less if the property is foreclosed upon. The 2 nd mortgage holder, if a different company than the 1 st mortgage holder, may not see any payment if the mortgage holder takes the property in a foreclosure. Under these circumstances, the short-sale may be a good choice for the lenders. 1 st Why would a buyer purchase a short sale? Why would a buyer try to purchase a short sale? There are three major reasons. 1) Because the buyer is not dealing with an emotional seller, there is a chance that they might pay less than market value. 2) The condition of the property is probably not going to improve and may deteriorate after the seller moves out. 3) Since the market prices of entire areas have probably decreased, it is difficult for a buyer to find an emotional seller willing to price his property at market value. ABC Real Estate School 3 st ed National Workbook August 2010 Page 396

16 What timing is necessary? To reiterate, the offer of a short sale does not always mean that the owner is, or will become, behind on his mortgage payments. If, however, the seller has stopped making payments, there is a limited time frame between the notice of delinquency and the notice of foreclosure. Depending on the number of short- the lender needs to work with and changes in weather that may affect the sales condition of the properties, this time period will vary. If there are pools, etc. that may become damaged; or winter is approaching without an operating furnace, the lender may vary the interim time period. What are a licensee s potential objectives? Sell the property. Secure the highest sales price for the seller. Secure the lowest sales price for the buyer. Protect the property. Earn a commission. Move the transaction as quickly as possible. Stay calm and focused. What is the process for the listing agent? The listing agent needs to verify that the house can be sold. The seller may have other financial and legal problems that prevent them from selling the home like a pending bankruptcy. In addition, the lender may have a financial interest in the property after it is sold a reverse mortgage or similar for example. The listing agent must stay actively involved in the transaction. The lender will supply the listing agent with a list of required documents to submit with the short sale package. In addition to an appraisal, the seller may be required to submit letters about, and proof of, his financial condition and circumstances. The listing agent should also try and learn the lenders bottom line. They should obtain this in writing, if possible, or at the very least document the name of ABC Real Estate School 3 st ed National Workbook August 2010 Page 397

17 the lender contact who supplied the number. It is also a good idea to request a property profile from a title company in an attempt to uncover potential additional lien holders. The listing agent also needs to find out the probable commission that will be paid to his firm and buyer s agents. Since the commission in a short sale is paid by the lender, the licensee may not be able to name his fee. The lender may have a non-negotiable commission percentage in mind to offer the two licensees. There is also a chance that the lender will not pay a commission to a licensee who is also the buyer of the property. Negotiation Some licensees believe that hiring a professional negotiator is important when attempting to close a short sale. The negotiator may be an attorney, or just someone consistently successful with lender negotiations. It takes some of the liability for the licensee out of the transaction and helps to move the transaction through the steps before the foreclosure takes place and the transaction is terminated. What is the process for the buyer s agent? The first question that the buyer s agent should ask the listing agent is how much will the lenders accept? Is that number in writing or was it gained verbally, from a conversation only? Often times the paperwork moves from loan consultant to loan consultant within the organization, or one collection agent to another collection agent, so if the listing agent did not receive written notice of the acceptable amount; it may not be provable later. The buyer s agent can do some research for themselves. The buyer s agent can check the listing history, check the tax records to see when the current seller purchased the property, and for how much. The buyer s agent can also check information on previous listings, by searching the address in the MLS. The buyer s agent can contact a title company and ask them to provide him with a title search and property profile. So let s say that the buyer s agent has been a successful detective. He discovered that the house at 1 Jones is listed at $645,000, was purchased by the sellers 2 years ago for $445,000 and there are two mortgages securing the ABC Real Estate School 3 st ed National Workbook August 2010 Page 398

18 property. The seller owes $425,000 to the first mortgage holder, and $150,000 to the second mortgage holder. Now what? How much will the seller take for property, or more specifically, how little will the lenders take for the property? What is the lowest price that the lender will accept? That is what the buyers want to know. Some of the questions the buyer s agent needs answered are: 1) How many mortgages secure the property? 2) How much are owed to the lenders? 3) What is the market value of the property? 4) What will the market value of the property be at closing? 5) Are there multiple lenders involved, or does one lender hold all of the liens? 6) Are there any other lien-holders of the property? 7) Does the seller intend on filing for bankruptcy? Yes? If that is the case, an attorney will probably need to be consulted. What is the process for the seller? The seller needs to take some responsibility for his financial condition. In addition to filling out paperwork for the listing agent, they should stay on top of the lender to make sure that the listing agent can obtain the information that they need. They need to cooperate with the listing agent to make sure that offers are presented and the transaction continues to proceed ahead. They can also request that the lender or lenders accept the short sale amount, and not continue to hold them financially accountable, after the sale; with a deficiency judgment and/or tax consequences. What is the process for the buyer? The buyer should not let emotions enter in the transaction. His offer may not ever get presented, and it may be 7-10 or more days before he hears any information. He also may be required to become pre-qualified by the lien-holder before he even signs an offer. Let s say that the buyer likes the property enough to sign an offer. The buyer s agent provides the offer to the listing agent. The listing agent provides ABC Real Estate School 3 st ed National Workbook August 2010 Page 399

19 the offer to the seller. It doesn t cover both mortgages, but the seller would like to accept the offer and sell the house. Now what? Who makes the decision on the offer? The lender would need to accept the offer if the mortgages and costs are not covered by the offer. One of the many problems for the buyer is the very real possibility that there are multiple offers. To make it worse, the time frame on the offer is greater than a typical offer, so the longer time frame creates more time for the listing agent and others to submit offers that will be presented to the lender at the same time. If the lien-holder does decide to accept the offer, will the property be conveyed without additional liens? Will the deed be conveyed free and clear? Maybe, or maybe not. It will be sold as is without guarantees as to the quality of its interior, exterior, or title. It depends on the individual property, and the type of liens that are outstanding. That is a good question for a title company or attorney. What is the process for the lien-holder? The lender or lenders require the seller (or seller s agent) to prepare paperwork proving that he has no money, cannot make the payments, and that his house is worth less than the amount of the mortgage pledged on the property. A typical list of items may include the following: Appraisal of subject property. Hardship letter signed by seller. Seller s bank account statements. Seller s job history. Much of the required paperwork is probably beyond the scope of the listing agent s expertise, and is probably more in line with the expertise of an accountant, or an attorney. Unfortunately though, given the financial condition and the distraught emotional condition of the seller, the listing agent is advised to continue to stay involved with expediting this paperwork. If the paperwork is not submitted, and/or the paperwork does not arrive at the appropriate parties desk in time for them to approve the short sale, all hopes of this transaction succeeding are futile. The lender(s) will review this paperwork and judge its merit and success. When presented with multiple offers; if the lien-holder chooses an offer, he will probably accept the offer that nets that highest amount. ABC Real Estate School 3 st ed National Workbook August 2010 Page 400

20 INSURANCE On a practical note.if a licensee decides to specialize in short sales or foreclosures, it is important to purchase insurance for the house involved in the transaction. Often times in-between walk-through and closing (last week of the transaction), many of the fixtures (air conditioner, stove, oven, water-heater, etc.) disappear. Following the foreclosure sale..is that it? Deficiency Judgment If the lender agrees to take less than the mortgage balance and the short sale was successful, the secured debt is no longer secured to an asset and the borrower is released from liability, correct? No, not necessarily. Per state law, the lender has a period of time after the sale to pursue the difference between what was owed and what was paid from the borrower. If there was a junior lien (2 nd, 3 rd mortgage) that didn t get paid at all, they also may pursue the borrower. This financial obligation is called a deficiency judgment. Short Sale v Foreclosure Decision Some states do not allow a lender to pursue a deficiency judgment against a borrower after the asset is closed. Nevada is one of the states that do allow for deficiency judgments. The deficiency judgment statute of limitations is the reason that many borrowers choose a foreclosure over a short sale. If a borrower decided to find a buyer for the lender and see the transaction through, they are still kept on the hook for the remaining balance of the lien for years to come. The statute of limitations of deficiency judgment liability is presently a couple of years less for a foreclosure over a short sale. When deciding between the two options, often times the statute of limitation in state law on deficiency judgments is a primary determiner. ABC Real Estate School 3 st ed National Workbook August 2010 Page 401

21 Mortgage Loan Instruments Review A. security for the debt B. gives legal notice of the mortgage or deed of trust C. Security instruments are as follows: 1. Deed of Trust (used in Nevada) a) 3 parties (1) trustor (a) borrower/buyer (2) trustee (a) usually title company (b) release deed or deed of reconveyance releases (c) trustee executes and delivers a release deed or deed of reconveyance (3) beneficiary (a) lender (b) legal owner and holder of the note 2. Mortgages a) security instrument b) creates the lien on the property c) gives the creditor the right to sue for foreclosure in the event the borrower defaults b) has 2 parties c) Mortgagor (1) borrower (buyer) (2) defeasance clause requires mortgagee to execute a satisfaction of mortgage when the note has been fully paid. d) Mortgagee (1) Lender Mortgage or Deed of Trust Clauses A. Acceleration clause 1. kicks it in default, for any reason (i.e. payment, insurance, tax deficiency) 2. gives the lender the right to declare the entire debt due and payable immediately 3. accelerates the maturity of the debt B. Alienation clause 1. A type of acceleration clause requiring full payment of the balance of a mortgage upon the transfer of title of the mortgaged property. ABC Real Estate School 3 st ed National Workbook August 2010 Page 402

22 C. Assignment clause 1. the lender is protecting his right to sell the loan D. Release clause 1. requires the lender or trustee to execute a satisfaction of mortgage when the note has been fully paid E. Assumption clause 1. explains the terms of the assumption and whether or not the borrower has the righ t to offer their loan to a new borrower to assume 2. Conventional loans a) up to the individual lender 3. FHA loans a) Start date before Dec 1986 (1) no restrictions (assumable without qualification) b) Start date between Dec 1, 1986 and Dec 15, 1989 (1) credit approval is necessary c) start date after Dec 15, 1989 (1) complete buyer qualification is required 4. VA loans a) Start date before March 1, 1988 (1) freely assumable with assumption processing fee b) Start date on or after March 1, 1988 (1) VA must approve with assumption agreement F. Due-on-sale clause does not allow the property to be sold without the mortgage being paid off lenders may decide not to call in the loan if interest rates have decreased since the mortgage was made - it s their choice G. Prepayment clause 1. clause that informs the buyer whether they can pay off the loan before the last required payment 2. still commo nly used in most home-improvement loans (2 nd s) 3. option s: a) allowing the customer to prepay without penalty b) allowing the customer to prepay with penalty (1) penalty could be % (2) penalty could be $ amount 4. FHA a) loans originated before Aug 2, 1985 (1) borrower must give the lender written notice of intention to exercise the prepayment privilege (pay off early) (2) without the written notice, the lender may charge up to 30- days interest b) loans originated after Aug 2, 1985 (1) no notice is required ABC Real Estate School 3 st ed National Workbook August 2010 Page 403

23 Major Financing Programs There are three major types of mortgage programs: 1) Federal Housing Administration (FHA), 2) Veterans Administration (VA), and 3) Conventional loan programs. FHA and VA are both controlled by government agencies. Conventional loan programs operate under federal oversight, but its funding comes primarily from private sources. This chapter will compare and contrast these programs. As prices in the real estate market adjust to current market conditions, and down payment requirements adjust to loan requirements, a licensee may find a use for all three programs. FHA loans are insured by the federal government and VA loans are guaranteed by the federal governmen t.. Conventional loans can be less expensive for borrowers than FHA and VA loans because conventional loans are not required to secure some of the expenses always required of government loans; such as FHA mortgage insurance and/or a VA funding fee. Private mortgage insurance (PMI) is however required for conventional mortgages if down payments are less than a certain down payment size, usually 20% of the property value. Major Financing Programs Summary 1. Insured loans a) Federal Housing Authority (FHA) 2. Guaranteed loans a) Veterans Administration (VA) 3. Conventional loans a) government won t insure insured privately ABC Real Estate School 3 st ed National Workbook August 2010 Page 404

24 FHA Loans In some geographic areas over 30% of new mortgages made are now FHA loans, or Federal Housing Administration insured loans. Unlike risky conventional loans, the FHA lender gets 100% insurance against losses resulting from any default paid for by borrower. Unlike the 20% usually required for conventional loans, the loan-to-value ratio can be as low as 97%, requiring a minimum 3% down payment. The property value is the selling price or appraisal - whichever is less. FHA sets the maximum loan amount depending on the region of the country. The property type is limited to a one to four family dwellings only; no land, commercial or industrial properties. The property must meet FHA living standards and FHA approves appraisers. The dwelling must be owner-occupied and the borrower may only carry a maximum of one FHA loan at a time. The loans are insured by an FHA mortgage insurance premium (MIP) and monthly mortgage insurance (MMI). The cost of MIP is 2.25% up front and the cost of MMI is.005 multiplied times the loan amount divided by 12 months. A 1 st time homebuyer may pay 1.75% for MIP, if he/she agrees to watch a FHA video. A 1 time homebuyer is defined as a borrower that has not purchased a home within at least the past 3 years. FHA loans prohibit a prepayment penalty. The loan is always assumable with qualification. The interest rate is negotiable and set by the lender. Either the buyer or seller can pay points. A borrower can carry higher bills than they may have if they are purchasing using a conventional loan. Fixed expenses count if their contract period exceeds 10-months in length. Qualifying rules applied according to two ratios: 1) 29% of the borrower s gross income can be used towards housing expenses, and 2) 41% of th e borrower s gross income can be used towards all fixed monthly expenses including housing. st ABC Real Estate School 3 st ed National Workbook August 2010 Page 405

25 FHA Loans Summary * FHA = Federal Housing Administration insures loans * lender gets 100% insurance against losses resulting from any default paid for by borrower * loan-to-value ratio is 97% (required at least 3% down) * value is the selling price or appraisal - whichever is less * maximum loan amount is set by FHA depending on the region of the country * 1 to 4 family dwellings only; no land, commercial or industrial properties * home must meet FHA standards - appraisers are approved by FHA * dwelling must be owner-occupied - can have a maximum of 1 FHA loan out at a time * loan is insured by an FHA mortgage insurance premium (MIP) and monthly mortgage insurance (MMI) * cost of MIP 2.25% up front and MMI.005 X loan amount(principal)/12 monthly * 1 st time homebuyers may pay 1.75% for MIP (if haven t purchased a home last 3 years and watch video) * no prepayment penalty * qualifying rules applied according to two ratios: * 29% of gross income is the maximum for housing expenses * 41% of gross income is the maximum for fixed monthly expenses including housing * other fixed expenses count if over 10-months in length * loan is always assumable * the buyer must always qualify before assuming loans originated after * the interest rate is: * negotiable - set by lender * points can be paid by either buyer or seller ABC Real Estate School 3 st ed National Workbook August 2010 Page 406

26 FHA loans for 1-4 family homes Housing and Urban Development's Homes and Communities ww.hud.gov/offices /hsg/sfh/ins/203b--df.cfm updated January 29, Summary: Through this program, Housing and Urban Development (HUD's) Federal Housing Administration (FHA) insures mortgages made by qualified lenders to people purchasing or refinancing a home of their own. Purpose: FHA's mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make mortgages to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements, by protecting the lender against default on mortgages for properties that meet certain minimum requirements--including manufactured homes, single-family and multifamily properties, and some health-related facilities. Section 203(b) is the centerpiece of FHA's single-family mortgage insurance programs the successor of the program that helped save homeowners from default in the 1930s, that helped open the suburbs for returning veterans in the 1940s and 1950s, and that helped shape the modern mortgage finance system. Today, FHA One- to Four-Family Mortgage Insurance is still an important tool through which the Federal Government expands homeownership opportunities for first-time hom ebuyers and other borrowers who would not otherwise qualify for conventional mortgages on affordable terms, as well as for those who live in underserved areas where mortgages may be harder to get. These obligations are protected by FHA's Mutual Mortgage Insurance Fund, which is sustained entirely by borrower premiums. Type of Assistance: This program provides mortgage insurance to protect lenders against the risk of default on mortgages to qualified buyers. Insured mortgages may be used to finance the purchase of new or existin g one- to four-family housing, as well as to refinance debt. Section 203(b) has several important features: -- Downpayment requirements can be low. In contrast to conventional mortgage products, which frequently require downpayments of 20 percent or more of the purchase price of the home, single-family mortgages insured by FHA under Section 203(b) make it possible to reduce downpayments to as little as 3 percent. This is because FHA insurance allows borrowers to finance approximately 97 percent of the value of their home purchase through their mortgage, in some cases. ABC Real Estate School 3 st ed National Workbook August 2010 Page 407

27 Sales Price (SP) Gross Loan Amount Under $50,000 SP X.9875 $50,000 - $125,000 SP X.9765 Over $125,000 SP X Many closing costs can be financed. With most conventional mortgages, the borrower must pay, at the time of purchase, closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program allows the borrower to finance many of these charges, thus reducing the up-front cost of buying a home. FHA mortgage insurance is not free: borrowers pay an up-front insurance premium (which may be financed) at the time of purchase, as well as monthly premiums that are not financed, but instead are added to the regular mortgage payment. -- Some fees are limited. FHA rules impose limits on some of the fees that lenders may charge in making a mortgage. For example, the mortgage origination fee charged by the lender for the administrative cost of processing the mortgage may not exceed one percent of the amount of the mortgage. -- HUD sets limits on the amount that may be insured. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage. These figures vary over time and by place, depending on the cost of living and other factors (higher limits also exist for two- to four-family properties). Eligible Participants: FHA-approved lending institutions, such as banks, mortgage companies, and savings and loan associations, can make insured Section 203(b) mortgages. Eligible Customers: Anyone intending to use the mortgaged property as their primary residence is eligible to apply for an FHA insured mortgage through FHA-approved lenders. This program is not open to investors. Application: Any person able to meet the cash investment, the mortgage payments, and credit requirements can apply. The program is limited to owner-occupants. Applications are made through an FHA- approved lending institution. Most lenders who use this mortgage insurance product, however, make their requests through a provision known as Direct Endorsement, which authorizes them to consider applications without submitting paperwork to HUD. Borrowers can locate FHAapproved lenders through the searchable listing provided on HUD's homepage. U.S. Department of Housing and Urban Development 451 7th Street, S.W., Washington, DC Telephone: (202) ABC Real Estate School 3 st ed National Workbook August 2010 Page 408

28 In Summary: FHA 1-4 family dwellings Basics: FHA (Federal Housing Administration insures loans. Borrowers who would not otherwise qualify for conventional loans Borrowers who live in underserved areas where mortgages may be harder to get. Value of the home is the selling price or the appraisal, whichever is less Maximum loan amount is set by FHA, changes on the region of the country. The home must meet FHA standards and the appraisers are approved by FHA Characteristics: owner occupants only 1-4 family dwellings CALLFHA Costs: Down payment requirements 3% down payment insurance insures 97% Insurance MIP (mortgage insurance premium) =.0225 X loan amount Also MMI (monthly mortgage insurance) =.005 X loan amount 12 months Additional closing costs: loan origination fee cannot exceed 1% Points can be paid by either buyer or seller. The interest rate is negotiable, set by the lender Never a pre-payment penalty. ABC Real Estate School 3 st ed National Workbook August 2010 Page 409