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©2011 Cengage Learning
Chapter 7 Introduction to Real Estate Finance California Real Estate Principles ©2011 Cengage Learning
Chapter 7 1. Describe the types of promissory notes, then explain adjustable rate loans. 2. Explain a deed of trust (trust deed), a mortgage, installment sales contract, and foreclosure procedures. 3. Define clauses common to financing documents: acceleration, alienation, subordination, prepayment penalty. 4. Outline the principles of loan regulations: Truth-In-Lending, RESPA, Fair Credit, Real Fair Credit Reporting and Property Loan Law. ©2011 Cengage Learning
Financing Process 1. APPLICATION: Lender form used to acquire information on income, credit and assets. 2. ANALYSIS: Verification of income, credit and assets. Underwriter decides if borrower is qualified. If so, loan terms. The major issue the FICO score 3. PROCESSING: Papers drawn. Escrow instructions, appraisal, loan documents. 4. CLOSING: Papers signed, loan funds, loan and escrow closes, documents recorded, insurance issued (property and title), closing statements issued 5. SERVICING: Process of collecting loan payments. Check on loan until paid off. Pay impound bills. ©2011 Cengage Learning
Phases of the Financing Process 1. APPLICATION -income, debts, net worth 2. ANALYSIS -FICO score, ability to pay, appraise property 3. PROCESSING -draw papers and escrow instructions 4. CLOSING -loan is funded, documents recorded, escrow closing statements 5. SERVICING -collecting payments and monitoring loan ©2011 Cengage Learning
Overview of Finance Documents ©2011 Cengage Learning Hypothecate
Negative Amortized Note This is when the loan payment does not cover the monthly interest Shortage is added to principal loan amount Results in increased loan balance ©2011 Cengage Learning
SAFI Promissory Notes (SAFI ) Legal evidence for the debt S S traight Note – term note Payments of Interest Only Entire principle repaid on the final due date ©2011 Cengage Learning A A mortized Note Monthly payments which include both Principal and Interest I I nstallment Note Periodic payments of principal & interest F F ully amortized type--Liquidates the debt with final payment P artially amortized (balloon payment type requires larger final payment)
Real Estate Loans Fixed Rate - The interest rate remains the same Adjustable Rate Mortgage (ARM)-rate Lower initial rate than fixed-rate mortgage Rate cap and payment cap Variable Interest Rate (VIR) Graduated Payment Mortgage (GPM)-increasing Graduated Payment Adjustable Mortgage (GPAM) Growing Equity Mortgage (GEM)- principal All-Inclusive Trust Deed (AITD) Reverse Annuity Mortgage (RAM) ©2011 Cengage Learning
VARIABLE PAYMENT PLANS The interest rate may change and as a result the following may be affected: 1. Payments 2. Principal owed 3. Term (length of the loan) ©2011 Cengage Learning
Adjustable Rate Loan TERMS INDEX: Measures need for a change in rate. MARGIN: The distance between actual and index rate. ADJUSTMENT PERIODS: How often rate changes. Typically every 6 or 12 months. CAP: Maximum rate over initial rate. TEASER: Very low initial rate for short period before increase to normal ARM rate. CONVERTIBLE: During “window period” (2-5 years) allowed to switch to fixed rate upon payment of fee. ©2011 Cengage Learning
DEED OF TRUST (Trust Deed) Easier, cheaper, faster foreclosure Creates a lien to secure repayment of a note Trustor – Borrower Trustee – Stakeholder or “naked” Titleholder Beneficiary – BANK - Lender ©2011 Cengage Learning Trustor Deeds to Trustee Reconveys Who holds title until debt is paid When debt is paid TrustorTrustee The Trustee returns title to the Trustor by a Deed of Reconveyance
MORTGAGE (A Contract) Loan Payoff Satisfaction of Mortgage Foreclosure by default Law suit / Court order Decree of Foreclosure Notice of Sale Sheriff’s Sale Sheriff’s Deed Deficiency Judgment possible One-year Period of Redemption ©2011 Cengage Learning Mortgagor - Borrower Mortgagee - Lender
Common Provisions in Security Instruments ©2011 Cengage Learning Alienation (Due-On-Sale) Clause Lock-In Clause Assumption Provision Prepayment Provision or Acceleration Clause
TRUST DEED vs. MORTGAGE Deed of TrustComparisonMortgage If Foreclosure by Court Action: Same as for Mortgage Trustee’s Sale - No Deficiency Judgment Possible Lender’s Rights Possible Deficiency Judgment If Foreclosure by Court Action: Same as for Mortgage Trustee’s Sale Notice of Default – Owner may redeem by bringing payments current within three months Notice of Sale – Owner may redeem only by paying entire indebtedness in full Trustee’s Sale Sale final. No redemption Owner’s Rights of Redemption Before Decree of Foreclosure Owner may redeem anytime by bringing payments current After Decree of Foreclosure and Sale Owner has one year “Equity of Redemption” Must pay indebtedness in full to redeem Trust Note – Outlaws four years after due date Trust Deed – Never outlaws – Lender can always have trustee sell to recover unpaid balance Stature of Limitations Mortgage note and contract both outlaw four years from due date, or from date of last payment. No relief. Monies involved not collectable. ©2011 Cengage Learning
Mortgage versus Trust Deed ©2011 Cengage Learning MortgageDeed of Trust ForeclosureCourt action Only Equitable Redemption Notice of Default Lawsuit/Court Notice of Sale Statutory Redemption Sheriff’s Sale Deficiency Judgment Sheriff’s Deed 1 year to redeem Court Action or Trustee’s Deed Reinstatement Period Notice of Default/3 months Notice of Sale 21 day minimum publish Trustee’s Sale All sales final Trustee’s Deed No redemption Owner’s Rights of Redemption Before Decree of Foreclosure Owner may redeem anytime by bringing payments current After Decree of Foreclosure and Sale Owner has one year “Equity of Redemption” Must pay indebtedness in full to redeem If Foreclosure by Court Action: Same as for Mortgage Trustee’s Sale Notice of Default – Owner may redeem by bringing payments current within three months Notice of Sale – Owner may redeem only by paying entire indebtedness in full Trustee’s Sale Sale final. No redemption
Buyer Takes Over Seller’s Loan Buyer assumes existing loan Substitution of Liability Buyer takes title “Subject to” existing loan. ©2011 Cengage Learning
Prepayment Penalty Certain California lenders prohibited from charging prepayment penalty on owner- occupied home loans if the loan has been on the lender’s books for more than 3 years. Does not apply to federally supervised lenders No prepayment penalty on FHA, VA, or Cal- Vet loans ©2011 Cengage Learning
SECOND DEED OF TRUST Junior Lien – Purpose: Close the gap between the sales price and the first loan plus down payment Types: “Hard” money second – cash from lender “Soft” money second – credit from seller Default: Junior lienholder may foreclose ©2011 Cengage Learning Purpose: To inform holders of junior liens when the holder of a senior lien (deed of trust) is about to foreclose NOTICE OF DEFAULT REQUEST FOR COPY OF NOTICE OF DEFAULT AND SALE
SALES CONTRACT Land Contract or Installment Sales Contract Vendor - Vendee Low down payment usually required Allows marginal buyer to acquire real estate Buyer gets immediate possession Buyer receives full legal title after loan paid off Seller must follow statutory notice requirements if buyer defaults All parties should consult their attorney Vendee may receive poor title. Vendor may have problems during the term. ©2011 Cengage Learning
Sales Contract (cont.) Buyer usually receives equitable, insurable, recorded title The contract cannot prohibit recording Creates a cloud on vendor’s title Removed by court or vendee signing a quitclaim deed Vendee may assign all rights if no release from vendor ©2011 Cengage Learning
Basic Rule of Finance If you don’t pay … they will take it away ! ©2011 Cengage Learning
TRUSTEE’S SALE STEPS 1.Beneficiary requests trustee to foreclose 2.Trustee records Notice of Default 3.Three-month waiting period (Borrower has reinstatement period) 4.Advertise “Notice of Sale” with date, time and place of sale (Borrower has limited right to reinstate) 5. Sale to highest bidder for cash (loan amount + costs) 6. Trustee’s deed is issued (all sales final; borrower has no right of redemption) 7. Disbursement of funds ©2011 Cengage Learning
TRUTH IN LENDING LAW Regulation Z (TIL) Purpose – disclosure of credit A.P.R. – cost of credit in percentage terms Right of rescission Annual Percentage Rate (APR) must be stated when advertising financing ©2011 Cengage Learning
Equal Credit Opportunity Act Enforced by the Board of Governors of the Federal Reserve System, through the Federal Reserve Board. ©2011 Cengage Learning Prohibits lender or mortgage broker from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, or age, among other things. Lender cannot ask borrower if: divorced, separated, has childbearing plans, receives alimony or child support (unless using the income to qualify for the loan). Lender has 30 days to approve or disapprove. If not approved, lender must state why.
Fair Credit Reporting Act Requires that, if a loan is denied, lender or mortgage broker must: ©2011 Cengage Learning Give applicant a statement of denial reasons. Include the name of the federal agency that can be contacted if the applicant feels discriminated against. If denial is based on information contained in the applicant’s credit report, inform applicant of the right to receive a free copy of the report, and how to do so. Information can be obtained from the Board of Governors of the Federal Reserve System, through the Federal Reserve Board.
Real Estate Settlement Procedures Act (RESPA) Requires lender or mortgage broker to disclose any affiliated business arrangement with an individual or entity offering settlement services. ©2011 Cengage Learning Good Faith Estimate of settlement service charges must be provided within 3 business days of loan application. Special information booklet (Buying your Home: Settlement Costs and Helpful Information) within three days of loan application.
HUD–1 Settlement Statement May inspect one day before closing Includes disclosure of lender-paid broker fees Escrow Account Statement No more than two months of excess payments Accounting provided within 45 days Annual review of escrow account ©2011 Cengage Learning
Mortgage Broker Limits COSTS: Limits amount of costs and expenses Cannot be over 5% of the loan amount Actual costs, or $390 Cannot exceed $700 for costs and expenses. ©2011 Cengage Learning
Review Quiz Chapter 7 1.A real estate promissory note that reads “$100,000 principal payable interest only monthly at a rate of 10%” is what type of promissory note? a. straight b. installment c. principal and interest d. accommodation ©2011 Cengage Learning
Review Quiz Chapter 7 2.A real estate promissory note reads “$ per month for 239 payments, then a final monthly payment of $3, ” This is an example of a/an: a)Alienation payment b)Prepayment c)Balloon payment d)Amortized payment ©2011 Cengage Learning
Review Quiz Chapter 7 3. An enforceable due-on-sale clause is correctly called a/an: a. acceleration clause b. alienation clause c. wrap around clause d. prepay clause ©2011 Cengage Learning 4.In a normal sale using both a grant deed and a trust deed (deed of trust) the buyer is the: a. grantor and trustor b. grantor and trustee c. grantee and trustee d. grantee and trustor
Review Quiz Chapter 7 5. A type of financing instrument where the owner (vendor) retains the legal title until the buyer (vendee) fulfills the terms of the purchase contact: a. lease contract b. installment sales contract c. wraparound contract d. junior lien contract ©2011 Cengage Learning
Review Quiz Chapter 7 6.Under the Trustee’s Sale procedure, after a Notice of Default has been recorded, a borrower has how long to reinstate by making up past payments, penalties, late charges, and trustee expenses? a. 5 days prior to trustee’s sale date b. 90 days c. 3 months d. 1 year ©2011 Cengage Learning
Review Quiz Chapter 7 7. A mortgage broker negotiated a loan for $10,000 secured by a second trust deed to be paid in 30 monthly payments. The maximum commission the broker is permitted to charge is: a. $195 b. $390 c. $700 d. $1,000 ©2011 Cengage Learning
Review Quiz Chapter 7 8.An owner sells and the buyer takes over the existing loan. To relieve the seller of primary liability, the buyer must: a. sign a non-recourse agreement b. take title contingent upon the note and trust deed c. take title subject to the note and trust deed d. assume the note and trust deed ©2011 Cengage Learning
Review Quiz Chapter 7 9. In an ARM loan, the distance between the borrower’s rate and the index is called the: a. cap b. adjustment c. margin d. teaser ©2011 Cengage Learning
Review Quiz Chapter 7 10.Under the Real Property Loan Law the maximum amount a borrower can pay for closing cots, excluding commission, regardless of the size of the loan, is: a. 5% b. $390 c. $700 d. $900 ©2011 Cengage Learning
Answers to Review Quiz Chapter 7 1. A 6. A 2. C 7. D 3. B 8. D 4. D 9. C 5. B10. C ©2011 Cengage Learning
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