Real Estate Exam 2

Purchase Contracts contain 4 Key Parts:

(AKA Deposit Receipt, Offer and Acceptance, Purchase Offer, Purchase and Sales Agreement)
1. Provision for the buyer's earnest money deposit
2. the buyer's offer to purchase
3. the acceptance of the offer by the seller
4. provisions for the payment of a brokerage commission

Earnest Money Deposit

money that accompanies an offer to purchase as evidence of good faith

Deed and Condition of Title

the buyer should have a title search performed to ensure title and deed are verified

Prorating

the process of dividing ongoing expenses and income items (property taxes, insurance premiums, rent income, etc.)

Time Limits

when a buyer makes an offer, he should clearly state how long the offer will stand so that the seller cannot sit on the offer for an extended period of time

"Time is of the Essence"

the time limits of a contract must be faithfully observed or the contract is voidable

Binder

a short purchase contract used to secure a real estate transaction until a more formal contract can be signed; doesn't meet all the legal requirements of a binding contract; probably makes no mention of a termite inspection, the type of deed the seller is expected to use, or the closing date

Installment Contract

a method of selling and financing property whereby the seller retains title but the buyer takes possession while making the payments; vendor\=seller, vendee\=buyer

Equitable Title

the right to demand that title be conveyed upon payment of the purchase price

Option Agreement

buyer has a right to purchase the property but no obligation to do so in a designated time period

Lease Option

allows the tenant to buy the property at a preset price and terms for a given period of time

Right of First Refusal

the right to match or better an offer before the property is sold to someone else; usually not beneficial to the owner except in a very strong seller's market

Tax-Deferred Exchange

a sale on real property in exchange for another parcel of real estate to effect a non-taxable gain

Majority of tax-deferred exchanges today consist of three transactions:

the two conveyances and an escrow agreement with a qualified intermediary

Promissory Note

a written promise to repay a debt; signed by the borrower and not recorded

Requirements of a Promissory Note

must be in writing, be between a borrower and lender (both of whom have contractual capacity), state the borrower's promise to pay a certain sum of money, show the terms of payment, be singed by the borrower, be voluntarily delivered by the borrower and accepted by the lender

Acceleration Clause

allows the lender to demand immediate payment of the entire loan if the borrower defaults

Mortgage

a document that makes property security for the repayment of a debt; signed by both borrower and lender and is recorded; mortgagor\=borrower, mortgagee\=lender

First Mortgage

the mortgage loan with the highest priority for repayment in the even of foreclosure

Junior Mortgage

any mortgage on a property that is subordinate to the first mortgage in priority

Subordination

voluntary acceptance of a lower mortgage priority than one would otherwise be entitled to

Principal Vs. Interest

Principal is the amount you borrow and interest is the cost of borrowing (interest\=loan amount x interest rate x (1/12))

Prepayment Privilege/Penalty

paying more than is owed each payment which in turn helps lower interest total amounts; good for borrower, bad for lender

Assumptions

when one party takes over/assumes another party's loan

Formal Assumption

seller is released of liability

Simple Assumption

taking over payments, but loan stays in the same name

Foreclosure

the procedure by which a person's property can be taken and sold to satisfy an unpaid debt

Delinquent Loan

when a borrower runs behind on his payments

Judicial Foreclosure

taking the matter to court of law in the form of a lawsuit that asks the judge to foreclose the borrower; takes a long time and is costly

Steps in Judicial Foreclosure

begins with title search, then the lender files a lawsuit naming the borrower and anyone else with a right/interest in the property identifying the debt and the mortgage securing it and states it's in default

The Lender asks the Court for a Judgement of...

the defendant's interest in the property be cut off in order to return the condition of title to what is was when the loan was made, the property be sold at a public auction, the lender's claim be paid from the sale proceeds

Notice of Lis Pendens

informs the public that a legal action is pending against the property; recorded at the county recorder's office

Equity Right of Redemption

the privilege to redeem property anytime between the first sign of delinquency and the moment of foreclosure sale

Deficiency Judgement

a judgement against a borrower if the foreclosure sale does not bring enough to pay the balance owed

Entry and Possession

the lender giving notice to the borrower that the lender wants possession of the property

Non-Judicial Foreclosure

not taken to court or in front of a judge; conducted by the lender in accordance with provisions in the mortgage and bystate laws

Deed in lieu of Foreclosure

(AKA "friendly foreclosure")
voluntary act by both borrower and lender to erase debt in return or property

Deed in Trust/Trust Deed

real property is used as security for a debt; if the debt is not repaid the property is sold and the proceeds are applied to the balance owed; recorded in the county where the property is located

3 Parties involved in a trust deed:

trustor is the borrower, beneficiary is the lender, trustee is the neutral third party

Steps in a Trust Deed

the lender makes a loan to the borrower and the borrower gives the lender a promissory note and a deed of trust. In the trust deed, the borrower conveys title to the trustee, to be held in trust until the note is paid in full

Naked Title

the title that the borrower grants to the trustee; the borrower still retains the usual right of an owner (right to occupy, use the property, and sell)

Once the note is repaid in full...

the lender send the note, deed of trust, and a request for reconveyance to the trustee. Then, the trustee cancels the note and issues a reconveyance (release deed) to the borrower, the borrower records this document.

Term (Interest Only) Loan

only requires interest payment until the last day/maturity, in which the whole amount borrowed is due

Amortized loan

a loan requiring the periodic payments that include both interest and partial repayment of principal

Budget Mortgage

(AKA PITI: principal, interest, taxes, insurace)
in addition to collecting the normal monthly principal and interest, the lender collects 1/12 of the estimated cost of the annual property taxes and hazard insurance.

Impound/Reserve Account

an account into which the lender places monthly tax and insurance payments

Balloon Loan

any loan in which the final payment is larger than the preceding payments

Partially Amortized Loan

a loan in which the payments include a series of amortized payments followed by a balloon payment

Equity

your worth in the property; the market value of the property less the debt owed against it

Loan-to-value Ratio

a percentage reflecting what a lender will lend divided by the sale price or market value of the property, whichever is less; generally for 80%

1 Point

1 Point\= 1% of the loan amount

Loan Origination Fee

the expenses a lender incurs in processing a mortgage loan

Discount Points

points charged to raise the lenders monetary return on a loan

Conventional Loans

real estate loans that are not insured by the FHA or guaranteed by the VA

Federal Housing Administration (FHA)

division of housing and urban development (HUD), created in the 1930's to help get out of the depression, goal is to promote home ownership in the US/raise quality of homes and home ownership

Up Front Mortgage Insurance Premium (UFMIP)

a one-time charge by the FHA for insuring a loan

Department of Veterans Affairs (VA)

under the GI Bill of Rights, veterans can buy houses with 100% loan/no money down; qualifications do apply

Rural Development Program

government spending to develop rural areas with water lines and even housing developments; if qualified, 100% loan acceptance guaranteed; MUST live in a rural area (city with population less than 50,000)

Private Mortgage Insurance (PMI)

a private mortgage insurance source to insure lenders against foreclosure loss; don't have to keep PMI once loan-to-value ratio is less than 90%, may save money in each payment

Truth in Lending Act (1969)

(AKA Federal Consumer Credit Protection Act)
a federal law that requires certain disclosures when extending or advertising credit

Regulation Z

federal regulations that implement the enforcement of the Truth-in-Lending Acts

Five Specific Disclosures in Advertising (Trigger Terms)

1. the amount of down payment
2. the amount of any payment
3. the number of payments
4. the period of repayment
5. the dollar amount of any finance charge

Annual Percentage Rate (APR)

the APR is calculated under the Truth-in-Lending Act by combining the interest rate with other costs of the loan

Finance Charge

the total amount the credit will cost over the life of the loan

Red Lining

a lender's refusal to make loans in certain neighborhoods; ILLEGAL

Racial Steering

only showing property to someone based on race and community stereotype; ILLEGAL

Panic Peddling

scaring people out of neighborhoods; telling them that "certain people" are moving in to ruin property value; ILLEGAL

Credit Report

a report reflecting the creditworthiness of a borrower by showing past credit history

Fair Credit Reporting Act

federal law giving an individual the right to inspect his file with the credit bureau and to correct any errors

3 C's of Credit

Capacity: ability to pay the loan back
Character: willingness to pay bills
Collateral: what are you pledging and is it significant enough? (usually the house you're buying)

House Payment Ratio
(< 25-29%)

Monthly house payment/gross monthly income

House Payment Ratio
(< 35-41%)

(Monthly house payment + other monthly obligations)/gross monthly income

Primary Market

the market in which lender's originate loans and make funds available to borrower's

Largest Source of Loans

Saving and Loans Associations (S&L)

Commercial Banks Don't....

Make 30 year, fixed loans; arvest mortgage company does, arvest bank does not

Life Insurance Companies specialize in...

large-scale investments such as shopping centers, office and apartment building, and million dollar blocks of home loans purchased in the secondary market

Secondary Market

a market in which mortgage loans can be sold to investors

Computerized Loan Origination (CLO)

originating loans through the use of a networked computer system

Mortgage Companies

a firm that makes mortgage loans and then sells them to investors

Mortgage Banker Vs. Mortgage Broker

Mortgage Banker: works for the mortgage companies, makes loans, fund loans from their own sources
Mortgages Broker: bring borrowers and lenders together but do not lend their own money, charge a fee for their service

Municipal Bonds/Bonds Loan Program

provide a source of mortgage money for home buyers in some cities; the special advantage is that municipal bonds pay interest that is tax-free from federal income taxes

Credit Unions

normally specialize in consumer loans but real estate loans are becoming more frequent; usually set up by companies for its employees, pretty small, non-profit, have to be a member to borrow

Federal National Mortgage Association (FNMA/"Fannie Mae")

buys FHA mortgage loans from lenders so lenders can grant more loans to consumers, now buys VA loans too

Federal Home Loan Mortgage Corporation (FHLMC/"Freddie Mac")

goal was to increase availability of financing for residential mortgages

Fannie Mae and Freddie Mac

hold over 50% of residential real estate loans

Government National Mortgage Associations (GNMA/"Ginnie Mae")

agency within HUD, its purpose is to guarantee pools of mortgages/mortgage backed securities (all have to be FHA, VA or RUD) then ginnie mae will guarantee the whole pool

Federal Agriculture Mortgage Corporation (FAMC/"Farmers Mac")

established for ag. loans

Automated Underwriting System

computerized system for loan approval communication between a loan originator and the investor

Usury Law

set maximum on the interest rates that can be charged in that state, AR\=17%

Adjustable Rate Mortgages (ARM)

a mortgage on which the interest rate rises and falls with the changes in prevailing interest rates (tied to an index rate)

Margin

the risk of loss/profit on the loan for the lender's cost of doing business

Interest Rate Cap

ceiling and floor on how much the interest rate can change for any one adjustment period

Negative Amortization

accrual of interest on a loan balance so that as loan payments are made, the loan balance increase

Graduated Payment Mortgage

a mortgage with an interest rate and maturity that are fixed, but the monthly payment gradually rises because the initial monthly payment are insufficient to fully amortize the loan

Equity Sharing

an arrangement whereby a party providing financing gets a portion of the ownership

Package Mortgage

a mortgage that secures personal property in addition to real property

Blanket Mortgage

a mortgage secured by two or more properties

Reverse Annuity Mortgage (RAM)

the lender has 2 options:
1. payment to the homeowner in a lump sum
2. monthly payments to the homeowner as an annuity for the reverse term of the loan

Construction Loan

short term loan for new construction of remodeling of an existing structure; based on the estimated time of construction

"Upside-Downed"

took a loan out for more than the house is valued