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Financing Residential Real Estate Lesson 5: Finance Instruments.

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1 Financing Residential Real Estate Lesson 5: Finance Instruments

2 Introduction In this lesson, we will cover:  types of finance instruments  how they work  common provisions

3 Promissory Notes Promissory note A written promise to pay money.

4 Promissory Notes Promissory note A written promise to pay money. Maker – one who makes the promise.

5 Promissory Notes Promissory note A written promise to pay money. Maker – one who makes the promise. Payee – one to whom the promise is made.

6 Promissory Notes Promissory note A written promise to pay money. Maker – one who makes the promise. Payee – one to whom the promise is made. Note – evidence of debt and promise to pay.

7 Promissory Notes A promissory note can be a brief and simple document. It usually contains:  names of the parties, Basic provisions

8 Promissory Notes A promissory note can be a brief and simple document. It usually contains:  names of the parties,  amount of the debt, Basic provisions

9 Promissory Notes A promissory note can be a brief and simple document. It usually contains:  names of the parties,  amount of the debt,  interest rate, Basic provisions

10 Promissory Notes A promissory note can be a brief and simple document. It usually contains:  names of the parties,  amount of the debt,  interest rate, and  how/when money is to be repaid. Basic provisions

11 Promissory Notes Promissory note must be signed by the maker. A legal description isn’t required. Basic provisions

12 Promissory Notes Negotiable instrument  A written, unconditional promise,  to pay a certain sum of money,  on demand or on a certain date,  payable to order or bearer,  signed by the maker. Negotiability

13 Promissory Notes “Without recourse” endorsement Means future payment is only between the maker and the third party the instrument is endorsed to. Without recourse

14 Promissory Notes “Without recourse” endorsement Means future payment is only between the maker and the third party the instrument is endorsed to.  Original payee not liable if maker fails to pay. Without recourse

15 Promissory Notes Holder in due course Someone who buys a negotiable instrument for value, in good faith, and without notice of defenses. Holder in due course

16 Promissory Notes Promissory notes are classified according to how principal and interest are paid off. Types of notes

17 Promissory Notes Promissory notes are classified according to how principal and interest are paid off. Straight note – periodic payments are interest only, with principal due on maturity date. Types of notes

18 Promissory Notes Promissory notes are classified according to how principal and interest are paid off. Straight note – periodic payments are interest only, with principal due on maturity date. Installment note – periodic payments include both principal and interest. Types of notes

19 Summary Promissory Notes  Maker  Payee  Negotiable instrument  Without recourse  Holder in due course  Straight note  Installment note

20 Security Instruments In real estate transactions, a promissory note is accompanied by a security instrument:  Mortgage  Deed of trust Purpose

21 Security Instruments Security instrument gives the lender the right to foreclose on the property if borrower defaults. Purpose

22 Security Instruments Security instrument gives the lender the right to foreclose on the property if borrower defaults. Foreclosure = lender forces sale of property and collects debt out of sale proceeds. Purpose

23 Security Instruments Lenders can enforce unsecured promissory notes by filing a lawsuit to obtain a judgment.  May not be able to collect without collateral. Purpose

24 Security Instruments Lenders can enforce unsecured promissory notes by filing a lawsuit to obtain a judgment.  May not be able to collect without collateral. Secured lender in much better position.  Real estate lenders always require borrowers to sign a security instrument. Purpose

25 Security Instruments Personal property used as collateral for early forms of secured lending. Historical background

26 Security Instruments Personal property used as collateral for early forms of secured lending.  Borrower gave lender property until loan was repaid. Historical background

27 Security Instruments Personal property used as collateral for early forms of secured lending.  Borrower gave lender property until loan was repaid.  Lender kept property if loan remained unpaid. Historical background

28 Security Instruments Hypothecation Pledging property as collateral without giving up possession of it. Historical background

29 Security Instruments Hypothecation Pledging property as collateral without giving up possession of it.  Became standard arrangement for borrower to retain possession of land.  Lender received title. Historical background

30 Security Instruments Legal title = when title is transferred only as collateral, without possessory rights. Historical background

31 Security Instruments Legal title = title transferred only as collateral, without possessory rights. Equitable title = property rights retained by the borrower, without legal title. Historical background

32 Security Instruments Eventually, transfer of legal title wasn’t necessary. Mortgage or deed of trust creates lien against borrower’s property. Liens

33 Security Instruments Eventually, transfer of legal title wasn’t necessary. Mortgage or deed of trust creates lien against borrower’s property. Lien Financial encumbrance on property owner’s title, allowing lienholder to foreclose on property to collect debt. Liens

34 Security Instruments Depending on the state, a security instrument may or may not transfer legal title. Liens

35 Security Instruments Depending on the state, a security instrument may or may not transfer legal title. Title theory states – security instrument transfers legal title until loan is paid off. Lien theory states – instrument creates lien and doesn’t transfer legal title. Liens

36 Security Instruments Mortgage Two-party security instrument in which borrower mortgages his property to lender. Mortgages

37 Security Instruments Mortgage Two-party security instrument in which borrower mortgages his property to lender. Mortgagor = borrower Mortgagee = lender Mortgages

38 Security Instruments Mortgage must include:  names of parties,  accurate legal description of property, and  identify promissory note it secures. Mortgages

39 Mortgagor promises to:  pay property taxes, Covenants

40 Mortgages Mortgagor promises to:  pay property taxes,  keep property insured against fire and other hazards, and Covenants

41 Mortgages Mortgagor promises to:  pay property taxes,  keep property insured against fire and other hazards, and  maintain structures in good repair. Covenants

42 Mortgages Mortgagor promises to:  pay property taxes,  keep property insured against fire and other hazards, and  maintain structures in good repair. Mortgagee has right to inspect property. Covenants

43 Mortgages If mortgagee fails to fulfill covenants imposed by mortgage, he is in default.  Mortgagee can foreclose. Covenants

44 Security Instruments After execution, mortgagee records document to establish priority of mortgagee’s security interest. Mortgage recording

45 Mortgages Satisfaction of mortgage Document given to mortgagor by mortgagee, after mortgage is paid off, releasing property from mortgage lien. Satisfaction

46 Mortgages Satisfaction of mortgage Document given to mortgagor by mortgagee, after mortgage is paid off, releasing property from mortgage lien.  Mortgagor records document. Satisfaction

47 Security Instruments Deed of trust Similar to mortgage, but involves three parties, rather than two. Deeds of trust

48 Security Instruments Deed of trust Similar to mortgage, but involves three parties, rather than two. Grantor (or trustor) = borrower Deeds of trust

49 Security Instruments Deed of trust Similar to mortgage, but involves three parties, rather than two. Grantor (or trustor) = borrower Beneficiary = lender Deeds of trust

50 Security Instruments Deed of trust Similar to mortgage, but involves three parties, rather than two. Grantor (or trustor) = borrower Beneficiary = lender Trustee = independent third party, who arranges for release of property or foreclosure, as necessary. Deeds of trust

51 Deeds of Trust Usually include same basic provisions found in a mortgage, including:  names of parties,  property description,  identification of promissory note,

52 Deeds of Trust Usually include same basic provisions found in a mortgage, including:  names of parties,  property description,  identification of promissory note,  grantor’s promises to pay taxes and insure property, and  beneficiary’s right to inspect property.

53 Security Instruments Deed of reconveyance Document releasing property from lien.  Executed by trustee when deed of trust loan is paid off. Deeds of trust

54 Deeds of Trust Deed of reconveyance Document releasing property from lien.  Executed by trustee when deed of trust loan is paid off.  Recorded by the grantor. Reconveyance

55 Summary Security Instruments  Hypothecation  Legal title  Equitable title  Lien  Mortgage  Deed of trust  Deed of reconveyance

56 Security Instruments Key difference between deeds of trust and mortgages: procedures used for foreclosure. Foreclosure

57 Traditionally, judicial foreclosure was only option.  Lender filed lawsuit against borrower.  Sheriff’s sale ordered by court if borrower found in default. Judicial foreclosure

58 Foreclosure Traditionally, judicial foreclosure was only option.  Lender filed lawsuit against borrower.  Sheriff’s sale ordered by court if borrower found in default. Alternative to judicial foreclosure was eventually developed. Judicial foreclosure

59 Foreclosure Nonjudicial foreclosure is generally associated with deeds of trust.  Lender doesn’t have to file lawsuit.  Trustee arranges for property to be sold at trustee’s sale.  Property sold to highest bidder. Nonjudicial foreclosure

60 Typical clause may read: “Upon default by Grantor in the payment of any indebtedness secured hereby or in the performance of any agreement contained herein, and upon written request of Beneficiary, Trustee shall sell the trust property, in accordance with the Deed of Trust Act of this state, at public auction to the highest bidder.”

61 Foreclosure Some states don’t allow nonjudicial foreclosure. In some circumstances, it might be preferable for lender to foreclose deed of trust or mortgage judicially. Nonjudicial foreclosure

62 Foreclosure Steps in judicial foreclosure: 1. Acceleration of debt 2. Foreclosure lawsuit 3. Equitable right of redemption 4. Order of execution 5. Public notice of sale 6. Sheriff’s sale 7. Statutory right of redemption Judicial foreclosure procedures

63 Foreclosure 1. Acceleration of debt If mortgagor defaults, mortgagee notifies mortgagor that entire outstanding loan balance is due. Judicial foreclosure procedures

64 Foreclosure 2. Foreclosure lawsuit If mortgagor can’t pay off entire debt, mortgagee files foreclosure action in county where property is located. Judicial foreclosure procedures

65 Foreclosure 2. Foreclosure lawsuit If mortgagor can’t pay off entire debt, mortgagee files foreclosure action in county where property is located. Defendants = mortgagor and junior lienholders Judicial foreclosure procedures

66 Foreclosure 2. Foreclosure lawsuit If mortgagor can’t pay off entire debt, mortgagee files foreclosure action in county where property is located. Defendants = mortgagor and junior lienholders Lis pendens = document recorded to give notice to prospective buyers of property Judicial foreclosure procedures

67 Foreclosure 3. Reinstatement v. equitable redemption In some states, mortgagor has right to cure default while foreclosure lawsuit is pending. Judicial foreclosure procedures

68 Foreclosure 3. Reinstatement v. equitable redemption In some states, mortgagor has right to cure default while foreclosure lawsuit is pending.  Mortgagor must pay delinquent payments, interest and costs incurred due to foreclosure. Judicial foreclosure procedures

69 Foreclosure 3. Reinstatement v. equitable redemption In some states, mortgagor has right to cure default while foreclosure lawsuit is pending.  Mortgagor must pay delinquent payments, interest and costs incurred due to foreclosure.  Loan is reinstated and foreclosure is terminated. Judicial foreclosure procedures

70 Foreclosure 3. Reinstatement v. equitable redemption In other states, there is no right to cure. Instead, mortgagor has equitable right of redemption. Judicial foreclosure procedures

71 Foreclosure 3. Reinstatement v. equitable redemption In other states, there is no right to cure. Instead, mortgagor has equitable right of redemption.  Mortgagor must pay off entire outstanding balance, plus costs. Judicial foreclosure procedures

72 Foreclosure 3. Reinstatement v. equitable redemption In other states, there is no right to cure. Instead, mortgagor has equitable right of redemption.  Mortgagor must pay off entire outstanding balance, plus costs.  Redemption satisfies debt, stops foreclosure, and terminates mortgagee’s interest in property. Judicial foreclosure procedures

73 Foreclosure 4. Notice of sale If loan not cured or redeemed, court schedules hearing to determine if default has occurred. If so, court issues writ of execution. Judicial foreclosure procedures

74 Foreclosure 4. Notice of sale If loan not cured or redeemed, court schedules hearing to determine if default has occurred. If so, court issues writ of execution.  Sheriff authorized to conduct sheriff’s sale. Judicial foreclosure procedures

75 Foreclosure 4. Notice of sale If loan not cured or redeemed, court schedules hearing to determine if default has occurred. If so, court issues writ of execution.  Sheriff authorized to conduct sheriff’s sale.  Notice posted on property, at courthouse, and in running advertisement. Judicial foreclosure procedures

76 Foreclosure 5. Sheriff’s sale Public auction, usually held at county courthouse, where property is sold to highest bidder.  Purchaser given a certificate of sale. Judicial foreclosure procedures

77 Foreclosure 5. Sheriff’s sale Public auction, usually held at county courthouse, where property is sold to highest bidder.  Purchaser given a certificate of sale.  Proceeds of sale pay costs and debt. Judicial foreclosure procedures

78 Foreclosure 5. Sheriff’s sale Public auction, usually held at county courthouse, where property is sold to highest bidder.  Purchaser given a certificate of sale.  Proceeds of sale pay costs and debt.  Junior liens paid in priority order. Judicial foreclosure procedures

79 Foreclosure 5. Sheriff’s sale Public auction, usually held at county courthouse, where property is sold to highest bidder.  Purchaser given a certificate of sale.  Proceeds of sale pay costs and debt.  Junior liens paid in priority order.  Any surplus after all liens paid goes to debtor. Judicial foreclosure procedures

80 Foreclosure 5. Sheriff’s sale If proceeds aren’t enough to pay off foreclosed mortgage, court may award deficiency judgment. Judicial foreclosure procedures

81 Foreclosure 5. Sheriff’s sale If proceeds aren’t enough to pay off foreclosed mortgage, court may award deficiency judgment.  Gives lender a personal judgment against the debtor for amount of deficiency. Judicial foreclosure procedures

82 Foreclosure 6. Post-sale redemption Debtor has additional period after sheriff’s sale to redeem the property. Judicial foreclosure procedures

83 Foreclosure 6. Post-sale redemption Debtor has additional period after sheriff’s sale to redeem the property.  Debtor must pay purchaser the amount paid for the property plus accrued interest. Judicial foreclosure procedures

84 Foreclosure 6. Post-sale redemption Debtor has additional period after sheriff’s sale to redeem the property.  Debtor must pay purchaser the amount paid for the property plus accrued interest.  Statutory right of redemption. Judicial foreclosure procedures

85 Foreclosure 6. Post-sale redemption Debtor has additional period after sheriff’s sale to redeem the property.  Debtor must pay purchaser the amount paid for the property plus accrued interest.  Statutory right of redemption.  Redemption period is at least 6 months; sometimes 2 years. Judicial foreclosure procedures

86 Foreclosure 7. Rights of purchaser Purchaser at sale may be entitled to either take possession or collect rent from debtor during redemption period. Judicial foreclosure procedures

87 Foreclosure 7. Rights of purchaser Purchaser at sale may be entitled to either take possession or collect rent from debtor during redemption period. Sheriff’s deed = deed given to purchaser at end of redemption period Judicial foreclosure procedures

88 Foreclosure Nonjudicial foreclosure is very similar to judicial foreclosure: 1. Notice of default 2. Public notice of sale 3. Cure and reinstatement 4. Trustee’s sale 5. No post-sale redemption Nonjudicial foreclosure procedures

89 Foreclosure 1. Notice of default Trustee must follow similar steps to those taken by sheriff in a judicial foreclosure.  Trustee must give notice of default to trustor. Nonjudicial foreclosure procedures

90 Foreclosure 2. Notice of sale Trustee must wait certain length of time after notice of default before issuing notice of sale. Nonjudicial foreclosure procedures

91 Foreclosure 2. Notice of sale Trustee must wait certain length of time after notice of default before issuing notice of sale.  Usually between 3 to 6 months. Nonjudicial foreclosure procedures

92 Foreclosure 2. Notice of sale Trustee must wait certain length of time after notice of default before issuing notice of sale.  Usually between 3 to 6 months.  Minimum time period also required between notice of sale and date of sale. Nonjudicial foreclosure procedures

93 Foreclosure 3. Cure and reinstatement Grantor is allowed to cure default and reinstate loan by paying delinquent amounts plus costs. Nonjudicial foreclosure procedures

94 Foreclosure 3. Cure and reinstatement Grantor is allowed to cure default and reinstate loan by paying delinquent amounts plus costs.  Right ends shortly before trustee’s sale is held. Nonjudicial foreclosure procedures

95 Foreclosure 3. Cure and reinstatement Grantor is allowed to cure default and reinstate loan by paying delinquent amounts plus costs.  Right ends shortly before trustee’s sale is held.  No statutory right of redemption after trustee’s sale. Nonjudicial foreclosure procedures

96 Foreclosure 4. Trustee’s sale When property is sold, buyer is given trustee’s deed, which immediately divests debtor of title. Nonjudicial foreclosure procedures

97 Foreclosure 4. Trustee’s sale When property is sold, buyer is given trustee’s deed, which immediately divests debtor of title.  Debtor has short time to vacate property ( days). Nonjudicial foreclosure procedures

98 Foreclosure 4. Trustee’s sale When property is sold, buyer is given trustee’s deed, which immediately divests debtor of title.  Debtor has short time to vacate property ( days).  Proceeds first applied to costs, then to debt, and then to junior liens. Nonjudicial foreclosure procedures

99 Foreclosure 4. Trustee’s sale When property is sold, buyer is given trustee’s deed, which immediately divests debtor of title.  Debtor has short time to vacate property ( days).  Proceeds first applied to costs, then to debt, and then to junior liens.  Any surplus goes to debtor. Nonjudicial foreclosure procedures

100 Foreclosure Entire nonjudicial foreclosure process may be completed in under a year, without many expenses. Nonjudicial foreclosure procedures

101 Foreclosure State may place variety of restrictions on nonjudicial foreclosures, including: Requiring a post-sale redemption period for agricultural property. Nonjudicial foreclosure procedures

102 Foreclosure State may place variety of restrictions on nonjudicial foreclosures, including: Requiring a post-sale redemption period for agricultural property. Prohibiting beneficiary from obtaining deficiency judgment after sale. Nonjudicial foreclosure procedures

103 Foreclosure Advantages of judicial foreclosure:  Borrower can’t reinstate loan.  Right to deficiency judgment. Lender’s point of view

104 Foreclosure Advantages of judicial foreclosure  Borrower can’t reinstate loan.  Right to deficiency judgment. Advantages of nonjudicial foreclosure:  Quick and inexpensive. Lender’s point of view

105 Foreclosure Advantages of judicial foreclosure:  Slow process.  Post-sale redemption. Borrower’s point of view

106 Foreclosure Advantages of judicial foreclosure:  Slow process.  Post-sale redemption. Advantages of nonjudicial foreclosure:  Right to cure and reinstate. Borrower’s point of view

107 Security Instruments A land contract serves purpose similar to that of a deed of trust or mortgage. Land contract

108 Security Instruments A land contract serves purpose similar to that of a deed of trust or mortgage.  Used in seller-financed transactions. Land contract

109 Security Instruments A land contract serves purpose similar to that of a deed of trust or mortgage.  Used in seller-financed transactions. Buyer takes possession of property, but seller retains title until contract has been paid off. Vendor = seller Vendee = buyer Land contract

110 Summary Foreclosure and Land Contracts  Judicial foreclosure  Nonjudicial foreclosure  Power of sale  Acceleration  Redemption  Deed of reconveyance  Deficiency judgment  Redemption  Sheriff’s deed

111 Finance Instrument Provisions Rights and responsibilities of borrower and lender may be affected by:  subordination clause,  late charge provision,  prepayment provision,  partial release clause,  acceleration clause, and/or  alienation clause.

112 Finance Instrument Provisions Subordination clause gives mortgage recorded earlier lower priority than another mortgage that will be recorded later on. Subordination clauses

113 Finance Instrument Provisions Subordination clause gives mortgage recorded earlier lower priority than another mortgage that will be recorded later on.  Common in construction financing. Subordination clauses

114 Typical subordination clause: “Lender agrees that this instrument shall be subordinate to a lien to be given by Borrower to secure funds for the construction of improvements on the Property, provided said lien is duly recorded and the amount secured by said lien does not exceed $125,000.”

115 Finance Instrument Provisions Inclusion of these clauses must be negotiated during the earlier transaction.  Should be reviewed or drafted by real estate lawyer. Subordination clauses

116 Finance Instrument Provisions Promissory notes usually provide for late charges if borrower doesn’t make payments on time. Late charge provisions

117 Finance Instrument Provisions Promissory notes usually provide for late charges if borrower doesn’t make payments on time. State laws may override late charge provision, to protect borrowers from excessive late charges. Late charge provisions

118 Finance Instrument Provisions Prepayment provision imposes penalty on borrower if she repays some or all of principal before it is due. Prepayment provisions

119 Finance Instrument Provisions Prepayment provision imposes penalty on borrower if she repays some or all of principal before it is due. Prepayment deprives lender of some of the interest it expected to receive over loan term. Prepayment provisions

120 Typical prepayment provision: “If, within five years from the date of this note, Borrower makes any prepayments of principal in excess of twenty percent of the original principal amount in any twelve-month period beginning with the date of this note or anniversary dates thereof (“loan year”), Borrower shall pay the Note Holder three percent of the original principal amount.”

121 Finance Instrument Provisions No longer standard in residential loan agreements.  Fannie Mae/Freddie Mac promissory note gives borrower right to prepay.  Prepayment penalties prohibited with FHA and VA loans. Prepayment provisions

122 Finance Instrument Provisions Penalties are usually charged only if loan is prepaid during first few years of loan term. Prepayment provisions

123 Finance Instrument Provisions Penalties are usually charged only if loan is prepaid during first few years of loan term. Unreasonable prepayment penalties are considered a predatory lending practice.  Some states limit the amount of such penalties. Prepayment provisions

124 Finance Instrument Provisions Partial release clause obligates lender to release part of property from lien when part of debt is paid. Partial release clauses

125 Finance Instrument Provisions Partial release clause obligates lender to release part of property from lien when part of debt is paid. Typically found in deed of trust or mortgage covering subdivision in the process of being sold. Partial release clauses

126 Typical partial release clause: “Upon payment of all sums due with respect to any lot subject to this lien, Lender shall release said lot from the lien at no cost to Borrower.”

127 Finance Instrument Provisions Acceleration clause allows lender to declare outstanding loan balance due immediately in event of default. Acceleration clauses

128 Finance Instrument Provisions Acceleration clause allows lender to declare outstanding loan balance due immediately in event of default.  Most lenders wait 90 days before accelerating. Acceleration clauses

129 Typical acceleration clause: “In case the Mortgagor [or Trustor] fails to pay any installment of principal or interest secured hereby when due or to keep or perform any covenant or agreement aforesaid, then the whole indebtedness hereby secured shall become due and payable, at the election of the Mortgagee [or Beneficiary].”

130 Finance Instrument Provisions Alienation clause (due-on-sale clause) is designed to limit borrower’s right to transfer title to property without lender’s permission. Alienation clauses

131 Finance Instrument Provisions When borrower transfers security property without paying off loan, either: 1.new owner takes title subject to loan; Alienation clauses

132 Finance Instrument Provisions When borrower transfers security property without paying off loan, either: 1.new owner takes title subject to loan; 2.new owner assumes loan without release of original borrower; or Alienation clauses

133 Finance Instrument Provisions When borrower transfers security property without paying off loan, either: 1.new owner takes title subject to loan; 2.new owner assumes loan without release of original borrower; or 3.assumption and release. Alienation clauses

134 Finance Instrument Provisions If new owner takes title subject to any existing liens:  Lender still has power to foreclose on property. Alienation clauses

135 Finance Instrument Provisions Assumption New owner takes on primary liability for repaying loan. Alienation clauses

136 Finance Instrument Provisions Assumption New owner takes on primary liability for repaying loan.  Unless lender agrees to release, original borrower is secondarily liable. Alienation clauses

137 Finance Instrument Provisions Assumption New owner takes on primary liability for repaying loan.  Unless lender agrees to release, original borrower is secondarily liable.  Original borrower can be forced to pay deficiency if new owner doesn’t. Alienation clauses

138 Finance Instrument Provisions Most alienation clauses are triggered by transfer of any significant interest in property.  Includes long-term leases, or leases with options to purchase. Alienation clauses

139 Finance Instrument Provisions Most alienation clauses are triggered by transfer of any significant interest in property.  Includes long-term leases, or leases with options to purchase.  Lender can’t forbid a sale, but can demand payment of loan. Alienation clauses

140 Typical alienation clause: “If all or any part of the Property or an interest therein is sold or transferred by Borrower without Lender’s prior written consent, Lender may, at Lender’s option, declare all the sums secured by this instrument to be immediately due and payable.”

141 Finance Instrument Provisions Lender may charge assumption fee, which may be as substantial as loan origination fee. Alienation clauses

142 Finance Instrument Provisions Estoppel letter Acknowledges transfer of ownership and waives lender’s right to accelerate loan.  Lender estopped from trying to enforce alienation clause later on. Alienation clauses

143 Finance Instrument Provisions Real estate agent should always ask seller about existing financing. If assumption is arranged, both parties should seek legal advice and agreement should be drawn up by lawyer. Alienation clauses

144 Summary Finance Instrument Provisions  Subordination clause  Late charges  Prepayment  Partial release clause  Acceleration clause  Alienation  Assumption  Estoppel letter

145 Types of Real Estate Loans Junior mortgage Mortgage with lower lien priority than another mortgage or deed of trust against same property. Junior or senior mortgage

146 Types of Real Estate Loans Junior mortgage Mortgage with lower lien priority than another mortgage or deed of trust against same property. Senior mortgage Mortgage with first lien position.  Also called a first mortgage. Junior or senior mortgage

147 Types of Real Estate Loans Property may be encumbered with two mortgages in several situations: 1.Junior mortgage provides secondary financing to supplement primary loan. Junior or senior mortgage

148 Types of Real Estate Loans Property may be encumbered with two mortgages in several situations: 1.Junior mortgage provides secondary financing to supplement primary loan. 2.Purchase mortgage is subordinated to a construction mortgage. Junior or senior mortgage

149 Types of Real Estate Loans Property may be encumbered with two mortgages in several situations: 1.Junior mortgage provides secondary financing to supplement primary loan. 2.Purchase mortgage is subordinated to a construction mortgage. 3.Home equity loan. Junior or senior mortgage

150 Types of Real Estate Loans After foreclosure, junior mortgage paid only after senior lender has been paid in full. Junior or senior mortgage

151 Types of Real Estate Loans After foreclosure, junior mortgage paid only after senior lender has been paid in full.  If proceeds insufficient, junior lender receives nothing. Junior or senior mortgage

152 Types of Real Estate Loans After foreclosure, junior mortgage paid only after senior lender has been paid in full.  If proceeds insufficient, junior lender receives nothing.  Junior lender can still sue borrower, but debt is now unsecured. Junior or senior mortgage

153 Types of Real Estate Loans Purchase money mortgage: 1.Any mortgage loan used to finance purchase of property that is collateral for loan. Purchase money mortgage

154 Types of Real Estate Loans Purchase money mortgage: 1.Any mortgage loan used to finance purchase of property that is collateral for loan. 2.A mortgage buyer gives to seller in seller- financed transaction. Purchase money mortgage

155 Types of Real Estate Loans Home equity loan is loan secured by mortgage against borrower’s equity in home she already owns. Home equity loan

156 Types of Real Estate Loans Home equity loan is loan secured by mortgage against borrower’s equity in home she already owns. Equity = difference between property’s current market value and liens against it Home equity loan

157 Types of Real Estate Loans Often used to finance remodeling or property improvements.  Interest rates higher than purchase loans.  Also used to pay off credit cards. Home equity loan

158 Types of Real Estate Loans Home equity line of credit (HELOC) Line of credit with a limit and minimum monthly payments that homeowners can draw upon as needed.  Automatically secured by borrower’s home. Home equity loan

159 Types of Real Estate Loans Refinancing refers to a new loan used to pay off existing mortgage against same property. Refinance mortgage

160 Types of Real Estate Loans Refinancing refers to a new loan used to pay off existing mortgage against same property. Often used:  to take advantage of market interest rate drop; Refinance mortgage

161 Types of Real Estate Loans Refinancing refers to a new loan used to pay off existing mortgage against same property. Often used:  to take advantage of market interest rate drop; or  when large balloon payment is required on existing mortgage. Refinance mortgage

162 Types of Real Estate Loans Cash-out refinancing New loan amount is more than amount of existing mortgage balance, so borrowers receive cash from refinance lender.  A way to tap into equity of home. Refinance mortgage

163 Types of Real Estate Loans Bridge loan provides cash for purchase of new home pending sale of old home.  Secured by equity in old home.  Usually has interest-only payments.  Also called swing loan or gap loan. Bridge loan

164 Types of Real Estate Loans Budget mortgage is mortgage in which monthly payments include property taxes and hazard insurance. Budget mortgage

165 Types of Real Estate Loans Budget mortgage is mortgage in which monthly payments include property taxes and hazard insurance. Impound account = lender places tax and insurance payments in account and pays premiums out of it Budget mortgage

166 Types of Real Estate Loans Budget mortgage is mortgage in which monthly payments include property taxes and hazard insurance. Impound account = lender places tax and insurance payments in account and pays premiums out of it PITI payments = payments on a budget mortgage (principal, interest, taxes, and insurance) Budget mortgage

167 Types of Real Estate Loans Package mortgage is secured by personal property as well as real property. Package mortgage

168 Types of Real Estate Loans Package mortgage is secured by personal property as well as real property. Alternatively, personal property may be financed separately, using a separate security agreement.  Lender must file financing statement with Secretary of State. Package mortgage

169 Types of Real Estate Loans Key advantage of package mortgage:  Mortgage term is generally much longer than with ordinary loan for personal property. Package mortgage

170 Types of Real Estate Loans Key advantage of package mortgage:  Mortgage term is generally much longer than with ordinary loan for personal property.  Interest rate may also be lower. Package mortgage

171 Types of Real Estate Loans Blanket mortgage is secured by more than one parcel of land and contains a partial release clause. Blanket mortgage

172 Types of Real Estate Loans Blanket mortgage is secured by more than one parcel of land and contains a partial release clause. Partial release clause = requires lender to release some of security property from lien when portion of debt is paid off Blanket mortgage

173 Types of Real Estate Loans Construction loan is a short-term loan used to finance construction of improvements on land already owned by borrower. Construction loan

174 Types of Real Estate Loans Construction loan is a short-term loan used to finance construction of improvements on land already owned by borrower.  Considered high risk loans.  High loan fees and interest rates. Construction loan

175 Types of Real Estate Loans Fixed disbursement plan Common disbursement schedule for construction loans that calls for a series of predetermined disbursements (obligatory advances) at certain stages of construction. Construction loan

176 Types of Real Estate Loans Fixed disbursement plan Common disbursement schedule for construction loans that calls for a series of predetermined disbursements (obligatory advances) at certain stages of construction.  Interest starts to accrue at first disbursement. Construction loan

177 Types of Real Estate Loans Once construction is complete, the construction loan is replaced by take-out loan.  Borrower repays amount borrowed over specified term. Construction loan

178 Types of Real Estate Loans Nonrecourse mortgage gives lender no recourse against borrower.  Lender’s only remedy in event of default is foreclosure on collateral property.  Borrower is not personally liable for loan repayment. Nonrecourse mortgage

179 Types of Real Estate Loans Participation mortgage allows lender to participate in earnings generated by mortgage property, in addition to collecting interest payments. Participation mortgage

180 Types of Real Estate Loans Shared appreciation mortgage entitles lender to a share of increases in property’s value. Shared appreciation mortgage

181 Types of Real Estate Loans Wraparound mortgage is new mortgage that includes existing first mortgage on property.  Used almost exclusively in seller-financed transactions. Wraparound mortgage

182 Types of Real Estate Loans Reverse equity mortgage provides elderly homeowners with a source of income, without having to sell their home. Reverse equity mortgage

183 Types of Real Estate Loans Reverse equity mortgage provides elderly homeowners with a source of income, without having to sell their home. Homeowner borrows against equity. Reverse equity mortgage

184 Types of Real Estate Loans Reverse equity mortgage provides elderly homeowners with a source of income, without having to sell their home. Homeowner borrows against equity. Receives monthly check from lender, rather than making monthly payments. Reverse equity mortgage

185 Types of Real Estate Loans Reverse equity mortgage provides elderly homeowners with a source of income, without having to sell their home. Homeowner borrows against equity. Receives monthly check from lender, rather than making monthly payments. Borrower typically required to be over certain age. Reverse equity mortgage

186 Types of Real Estate Loans Reverse equity mortgage provides elderly homeowners with a source of income, without having to sell their home. Homeowner borrows against equity. Receives monthly check from lender, rather than making monthly payments. Borrower typically required to be over certain age. Home sold after death to pay loan. Reverse equity mortgage

187 Summary Types of Loans  Purchase money mortgage  Home equity loan  HELOC  Refinancing  Bridge loan  Budget mortgage  Package mortgage  Blanket mortgage  Construction loan  Nonrecourse mortgage  Participation/share appreciation mortgage  Wraparound mortgage


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