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Modern Real Estate Practice in NC, 8th ed. - Chap. 13 - Real Estate Financing: Principles
Property Management, Real Estate Financing: Principles
Terms in this set (92)
An older, traditional approach in mortgaging property where a two-party mortgage instrument is used as security for the debt; the borrower retains both legal and equitable title to the property.
Uses the three-party deed of trust instrument as security for the mortgage debt; the borrower conveys legal title to a trustee to hold for the lender until the debt is paid off. NC uses this theory.
The right to use and possess the property as if one owns it and to demand the return of the legal title when the debt is repaid.
A lender in a deed of trust loan transaction; the recipient of personal property in a will.
power of sale foreclosure
The form of foreclsure used in a title theory state; also called a nonjudicial foreclosure.
Written promise to repay a debt in definite installments with interest.
deed of trust
The document that pledges the property to the lender as security or collateral for a debt; also called mortgage.
The act of pledging real property as security for payment of a loan without giving up possession of the property.
2) promise to pay
3) signature of the borrower(s) (lender does NOT sign)
essential elements of a note
1) acceleration clause
2) prepayment penalty clause
3) due-on-sale clause
special promissory note provisions
A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee's right to payment.
The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or another covenant.
prepayment penalty clause
Included in a promissory note requiring the borrower to pay a penalty against the unearned portion of the interest for any payments made ahead of schedule. NC prohibits on res. loans of $150k or less
Loan must be paid in full if the property is sold. aka alienation clause
The amount of money borrowed.
A charge for the use of borrowed money.
The principal and interest payment on a loan.
direct reduction loan
A loan that requires a fixed amount of principal to be paid in each payment with the amount applied to interest varying as the balance is reduced.
Principal, Interest, Taxes, and Insurance acronym.
fully amortized fixed-rate mortgage
A mortgage that requires the mortgagor to pay a constant amount, usually monthly, that will completely pay off the loan amount with the last equal payment. Payment is broken down and applied first to interest owed, then the rest to principal.
partially amortized fixed-rate mortgage
A loan in which the monthly principal and interest payments are a constant amount, but that payment amount is not sufficient to completely pay off the loan within the loan term; balloon payment due at maturity.
straight-line amortized mortgage
A loan in which the mortgagor may pay a different amount for each installment, with each payment consisting of a fixed amount credited toward the principal plus an additional amount for the interest due on the principal outstanding since the last payment was made.
Charging interest in excess than the maximum rate established by state law.
The return or profit on a loan.
reduce interest rate
-raise yield to the lender
-lower rate to the borrower
-1pt raises yield 1/8% or 1pt lowers rate 1/8%
loan origination fee
An administrative fee charged to the borrower by the lender for making a mortgage loan; usually computed as a % of the loan amount.
fixed rate-level payment mortgage
The most popular repayment plan; both the interest rate and the debt service amount are set for the duration of the loan. Loan is amortized
Also called a "term loan," it only calls for periodic payments of interest.
adjustable-rate mortgage (ARM)
A type of mortgage that generally originates at one rate of interest, with the rate fluctuating up or down during the loan term based on the movement of a published index. Lower rate than fixed.
1) Note rate
4) Interest rate caps
5) Payment Cap
6) Adjustment Period
7) Conversion option
components of an ARM loan
An increase in the loan balance.
graduated payment mortgage (GPM)
A flexible payment plan that allows a mortgagor to make lower monthly payments for the first few years of the loan and larger payments for the remainder of the term. Results in negative amortization. Enables first time buyers.
Partially amortized. Fixed interest rate. A final balloon payment of a mortgage loan that is larger than the required periodic payments because the loan amount was not fully amortized.
growing-equity mortgage (GEM)
A loan in which the monthly payments increase annually, with the increased amount being used to reduce directly the principal balance outstanding and thus shorten the overall term of the loan.
Loan that requires the borrower to make loan payments every two weeks instead of once a month.
shared-appreciation mortgage (SAM)
A mortgage loan in which the lender, in exchange for a loan with a lower interst rate, participates in the profits (if any) the borrower receives whent he property is eventually sold.
satisfaction of mortgage
A document acknowledging the full repayment of a mortgage debt.
A legal procedure in which property used as security for debt is sold to satisfy the debt in the event of default in payment or terms.
The form of foreclosure used in lien theory states; court process.
A foreclosure under power of sale in which the deed of trust does not have to be foreclosed through a court action.
Not used in NC; after appropriate notice has been given to the delinquent borrower and proper papers prepared, the court establishes a specific time period during which the balance of the defaulted debt must be paid in full.
deed in lieu of foreclosure
A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage; "friendly foreclosure."
statutory right of redemption
The right of a defaulted property owner to recover the property after its sale by paying the appropriate fees and charges.
equity of redemption
The right of a borrower in default on a mortgage loan to reclaim the forfeited property prior to the foreclosure sale through payment in full of all debt and associated costs.
A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full; a general lien.
statutory redemption period
Ten day period after the auction in which the borrower can try to raise the necessary funds to redeem the property.
A loan in which the principal as well as interest is payable in periodic installments over the term of the loan.
The nonperformance of a duty, whether arising under a contract or otherwise; failure to meet an obligation when due.
The interest or value that an owner has in property over and above indebtedness.
(1) The property owner that is transferring title to or an interest in real property to a grantee. (2) A borrower in a deed of trust loan transaction.
A conditional transfer or pledge of real estate as security for the payment of a debt. Also, the document creating a mortgage lien in a lien theory state.
The lender in a mortgage loan transaction.
When a lender allows a borrower in default on mortgage loan payments to sell the mortgaged property for less money than necessary to satisfy the loan to avoid the delay and expense of a foreclosure sale; lender usually "forgives" the balance owed after the sale, although the IRS will frequently consider the forgiven amount to be taxable income for the borrower.
Usually short term. A loan in which only interest is paid during the term of the loan, with the entire principal due with the final interest payment; also called a straight loan.
The borrower in a mortgage loan transaction.
1) only the borrowers (both spouses)
2) it is not recorded (only the security instrument is)
3) only one original signed at closing
Who signs the note?
1) Must be in writing, made by one person to another & signed by the maker
2) Must contain unconditional promise to pay a sum of money on demand or at set date in future
3) Instrument must be payable to the order of specifically named person or bearer (whoever possesses the note)
What requirements of the law must be met to make a note negotiable or freely transferable?
Instruments payable to order must be transferred by _____.
Instruments payable to the bearer must be transferred by _____.
to order or to bearer
Nonnegotiable note does not contain _____ or _____ but is payable to a named person. It is neither transferable nor assignable.
$150,000 or less
NC lenders cannot charge prepayment penalty on any residential loan with original balance of ____.
FHA-insured VA-guaranteed loan
Federal law prohibits charging prepayment penalty on any ___ loan.
How much will 1 discount point increase yield?
1) Refer to the terms of promissory note and state that the property is intended to be security for a valid debt
2) Identify the lender and the borrower
3) Include accurate legal description of the property
4) Be in writing and signed by all parties
5) Married couples as tenants by entirety or joint tenants must sign mortgage/deed of trust even if only one signed mortgage note
6) Be recorded and delivered to and accepted by lender/trustee
Mortgage (Deed of Trust) Instrument Must...
1) payment of the debt
2) payment of all real estate taxes
3) adequate insurance
4) maintenance of property in good repair
5) lender authorization before major alterations or demolishing
What are the duties of the borrower?
1) possess & enjoy the property during loan term
2) right of defeasance (to have legal title transferred back to him when load paid in full)
3) satisfaction of mortgage (executed by trustee)
What are the rights of the borrower?
To assign the mortgage debt and right to foreclosure if the borrower defaults. May be sold to 3rd party without consent of borrower. Must be recorded
What are the rights of the lender?
1) Judicial foreclosure
2) Non-judicial foreclosure (NC)
3) Strict foreclosure
Methods of Foreclosure
Which type of foreclosure is used in NC?
Which type of foreclosure is not used in NC?
1) Costs of sale
2) Outstanding real & personal property taxes or assessments
3) Mortgage or Deed of Trust debt (assuming this debt has priority over other liens according to recordation)
4) Other liens in order of priority
5) Surplus (equity) to the borrower
What is the distribution of proceeds after foreclosure?
10 days after the auction
In NC, how long is the statutory redemption period?
In NC, what is prohibited when a purchase money deed of trust is used?
1) loan status - in default
2) hardship - beyond seller's control
3) seller's financial status - insufficient resources to make up shortage
4) brokerage fee - owed by the seller
5) possibility of loan fraud - (within first 12 months of loan)
6) property value - lender gets appraisal
Factors of a workout arrangement
Which type of legal theory does NC use?
-borrower is mortgagor pledges property as collateral
-lender is mortgagee and holds loan until paid
Deed of Trust
-borrower = trustor/grantor pledge property as collateral
-trustee holds legal title for lender
-lender is beneficiary
-used in NC
-evidences the debt
-lender holds until repaid
-personal promise to pay
What is difference between
2) Deed of Trust
3) Promissory Note
The ___ is the personal promise to pay
$150k or less
NC prohibits prepayment penalty clause on res. loans of ___ or less
8 discount points
How many discount points equals a yield of 1 percentage point?
debt liquidation, gradually eliminates debt
Principle, Interest, Taxes, Insurance
PITI = ___
-borrower has equitable title
-right to possess if they pay PITI
-right to clear title if pay in full
Rights of borrower in Deed of Trust
-lender has legal title
-right of possession if borrower defaults
-right to foreclosure if borrower defaults
Rights of Lender in Deed of Trust
-trustee starts proceeding & handles sale
-advertise for 30 days
-hold high bid open for 10 days
-repeats process if necessary
-anyone can bid
cost of sale gets paid first, typically taxes do
After foreclosure sale, what gets paid off first?
surplus - borrower receives
deficiency - lender sues borrower and obtains deficiency judgement
NC - no deficiency judgments granted in cases of seller financing
What happens if foreclosure doesn't bring enough money?
-Not enough money to go around, cover mortgage
-Lender enters transaction circle
-every lien holder has to agree to take less
-RE agent cant negotiate this with the lender, need to get attorney
-seller needs to qualify for short sale, lost job/something out of their control
Short sale key points
1) Purchase subject to mortgage
Buyer will not be personally obligated to pay debt in full.
Buyer takes title & must make payments on existing loan. Seller liable
2) Assume seller's mortgage
Buyer becomes personally liable for payment of entire debt. Seller secondary liable
Explain the 2 ways to purchase property that is subject to an outstanding mortgage or deed of trust
c) escrow cap
All of the following components are common in adjustable rate mortgage EXCEPT
a) payment cap
b) life of the loan cap
c) escrow cap
d) anniversary cap
b) amount borrowed
Discount points on a mortgage are computed as a percentage of the
a) selling price
b) amount borrowed
c) closing costs
d) down payment
c) alienation clause
The clause in a deed of trust that allows the lender to call in the loan when the property is transferred is called
a) acceleration clause
b) prepayment penalty clause
c) alienation clause
d) defeasance clause
b) growing equity
Which of the following mortgages features increasing payments with the increases applied directly to principal?
a) shared appreciation
b) growing equity
c) adjustable rate
d) graduated payment
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