Real Estate: Mortgages and Loans

Negative Amortization

A type of loan in which payments do not cover the interest due, which increases the amount owed over time.

Balloon Mortgage

A non-traditional mortgage product that has lower initial payments that do not amortize and require a “catch up” lump sum payment to be paid at a specific time, usually at the end of the loan period

VA Loans

Veterans can pay as little as nothing down, and the VA doesn’t allow lenders to require mortgage insurance

Farm Service Agency

Provides government loans specifically for family farms and help finance housing

USDA Farm Service Agency can…

offer direct loans to farmers and ranchers. Loans are funded by congressional appropriation

Private Mortgage Insurance (PMI)

Insures the payment of that top portion of the loan and protects the lender in a buyer default. Lenders generally require this if the borrower does not provide 20-25% down payment

Non-Conforming Loans

Loans that are outside of the Freddie Mac and Fannie Mae Guidelines, such as jumbo loans.

Primary Mortgage Market

Where banks that originate loans operate. Includes commercial banks, credit unions, and savings and loans.

Secondary Mortgage Market

Primary lenders don’t want to hold onto loans because they’d run out of money if they have to wait 30 years for payments. They loan the money at one price, and then package and sell the loans to investors on a secondary market.

Qualified Mortgage

A mortgage loan that meets specific ability-to-repay rules, including a prohibition on interest-only loans, negative amortization, balloon payments, or excessive loan terms (longer than 30 years”.

Fannie Mae (Federal National Mortgage Association)

Can purchase any type of loan, but primarily deals with conventional loans from commercial banks.

Freddie Mac (Federal Home Loan Mortgage Corporation)

Can purchase any type of loan, but primarily deals with conventional loans from smaller lending institutions.

Farmer Mac (Federal Agricultural Mortgage Corporation)

A government-sponsored enterprise that provides a secondary market for agricultural real estate and rural housing loans, helping to ensure a stable supply of credit for farmers and rural communities.

Ginnie Mae (Government National Mortgage Association)

Guarantees mortgage-backed securities (MBSs) that contain loans insured or guaranteed by a US government agency. Does not purchase loans.

Adjustable Rate Loans

Loan where interest rate is based on an economic index and is adjusted on a periodic basis, such as annually.

Amortization

Paying off a loan by making periodic payments of principal and interest.

Balloon Payment

Lump sum payment, usually at the end of the loan period.

Fixed-Rate Loan

Loan where the principal and interest payment remains the same over the life of the loan.

Graduated Mortgage

Fixed-rate mortgage with payments that gradually adjust (usually upward) based on a predetermined schedule and amount. Initial payments are less than what would be a fully amortization payment, which creates negative amortization.

Growing Equity Mortgage

Fixed-rate mortgage where monthly payments increase over time according to a set schedule. Interest rate remains the same, and there’s no negative amortization.

Pledged Account Mortgage

Type of graduated payment mortgage; the buyer deposits funds into a savings account held by the lender.

Straight-Line Mortgage (constant amortization)

For this type, the amount applied to principal remains constant over the life of the loan.

Straight Mortgage/Term Mortgage (Interest only)

The periodic payments go to interest only and the entire principal amount is due at the end of the term.

Home Equity Loan

The borrower’s home equity is used as collateral.

Reverse Mortgage/Reverse Annuity Mortgage

Made using the equity in the property, but the homeowner continues living in the home while the lender makes payments to homeowner, and gains corresponding ownership of the property over time. When the homeowner leaves the home, the lender sells the property to pay back the amount of the loan and interest.

Bridge Loan (swing loan)

Temporary loan that provides funds for a homebuyer to use as a down payment for a new home, prior to selling the current home.

Purchase Money Mortgages

A form of seller financing in which the seller gives the buyer a loan toward the purchase price. Buys use it as down payment financing; the seller is mortgagee and buyer is mortgagor.

Wrap-Around Mortgage

Form of seller financing in which the seller’s mortgage remains in place, but the seller is receiving payments from a new buyer and therefore financing the purchase. Usually a short-term arrangement, made until buyer is able to qualify for conventional mortgage, and will then pay off the remaining principal to the seller.

Land Contract

Known as a contract for deed/land installment contract, or an installment sale agreement; this is a contract between a seller and buyer in which the seller finances the buyer’s purchase by retaining the deed to the property while the buyer makes payments toward the purchase price. Buyer has right of possession.

Construction Mortgage

Temporary financing for construction purposes.

Blanket Mortgage

For commercial applications where two or more properties are pledged as security for repayment of the loan.

Shared Equity Mortgage

Used most often in commercial lending. Borrower agrees to lender’s participation in the net income from the commercial property or enterprise in order to obtain the loan.

Package Mortgage

Mortgage in which personal property is included with real property in the sale. Might be used in the case of a furnished condo, but is more commonly used in commercial real estate where business assets are included as collateral.

Sale Leaseback

Provides 100% financing and allows the investor to realize the tax benefits of real property ownership as well as the security of owning a building with a solid tenant.

Open-Ended Loans

Works similar to a credit card. Borrower is approved up to a specific amount; they can spend all or part of the amount they’re approved for; they owe interest on amounts borrowed until they are paid back; and as money is paid back, the borrower can borrow against the approved amount again and again.

Closed-Ended Loan

Borrow is approved for and received a specific amount, borrower repays the loan principal and interest, and once repaid, loan is closed. Types: Fixed-rate mortgage, adjustable rate loans, and auto loans.

Subprime Loan

Type that is offered at a rate above prime to individuals who don’t qualify for prime rate loans.

Periodic Cap

Limits the amount the rate can adjust at subsequent adjustment dates.

Lifetime Cap

Usually expressed as a percentage increase from an initial interest rate.

Margin

When a number of percentage points is added to the index to determine the rate for an adjustable rate mortgage.

Loan Estimates

Provides info about the loan’s features, costs, and risks so the borrower can understand the affordability of the loan. Must be provided at the time of the loan application or within 3 business days after application.

Closing Disclosure

Provides final loan terms and a breakdown of the closing costs for both buyers and the seller. Must be provided to the borrower by the lender at least 3 business days before closing. It’s not the same as a closing statement provided by the closiLng or settlement agent, though the figures should still be the same.

Loan Transfer Disclosure

Often, Lender that originates the buyer’s loan in the primary market may then sell that loan in the secondary market. When this happens, the original lender must provide this disclosure to the borrower with details about to which lender the loan was sold, and any info the borrower needs to make payments to the new lender.

Loan application collects what info about the borrower…

Assets and liabilities, credit references, employment history, income sources.

What three items about property are needed in the loan application?

Address, loan purpose, type of occupancy.

What type of borrower info does the loan application request?

Name, SSN, current address, number and ages of dependents, marital status.

When completing the assets section of the loan application, what info should the borrower be prepared to provide?

Account number, cash or market value, name of the bank or company.

What does the declarations section in the loan application seek to uncover?

Outstanding judgments, bankruptcies or foreclosure within the last seven years, current delinquency or default on debt obligations, additional loan to acquire property, intention to occupy the property as a primary resident.

Review of Request for Verification of Deposit

Form that allows lender to verify the cash deposits listed on the applicant’s loan application. Parties involved: applicant, lender, depository institution. It provides the average balance for the applicant’s accounts and it covers two months.

Review of Request for Verification of Employment

Purpose is to allow the lender to verify the employment listed on applicant’s loan application. Parties involved: Lender, applicant, applicant’s employer.

Title Theory

Borrower receives deed, but the lender keeps the title and owns the house until borrower pays off the loan. Trustee already holds the legal title to the property and can legally sell it if buyer defaults. No court order needed (non-judicial) to seize and sell home.

Ussery

Unscrupulous lenders that take advantage of a consumer’s naivety or circumstances to get them to sign loans with terms nearly impossible to fulfill.

5 Prepayment Plans

Biweekly, 1/12, lump sum, set dollar over, and snowball.

Snowball

After paying off another debt, put that amount toward the principal each month.

Set Dollar Over

Paying a little extra each month.

Lump Sum Plan

When bonus money arrives, allocate a portion of it toward the principal. The sooner the principal is paid down, the less interest is paid over time.

1/12 Plan

Divide monthly payment by 12; add this amount to your mortgage payment each month.

Biweekly Plan

Divide your mortgage payment in half; pay half of it every two weeks.

Final Termination

If borrowers are current on payments, the lender must terminate the PMI one month after the loan reaches the midpoint of its amortization schedule, even if the LTV isn’t yet 78%

Borrower Requested Termination

Must request that lenders terminate PMI when principal balance on loan is scheduled to reach 80% of the home’s original value. Must be current on payments and have a good payment history, must request termination in writing, may have to provide evidence like an appraisal.

Automatic Termination: PMI Act of 1998/Homeowner’s Protection Act

Requires lenders of loans after ‘98 to auto cancel PMI when the borrower’s equity is scheduled to reach 22% based on the original value (the lower of the purchase price or appraised value). Borrowers must be current on payments for this to occur.

Private Mortgage Insurance (PMI)

Protects portion of mortgage loan not covered by down payment; shields lender. May terminate automatically or at the borrower’s request under certain circumstances.

Govt loans are insured by…

Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA)

Hypothecation

The process of pledging something as collateral

Non-Institutional Lenders

Non-depository sources of financing. Ex: Mortgage bankers, mortgage brokers, investors.

Institutional Lender

Bank deposits or insurance premiums provide funds used for loans and mortgages. Ex: savings and loan associations, commercial banks, credit unions, insurance companies.

Mortgage Lender List

Savings and loan associations, commercial banks, credit unions, mortgage bankers and mortgage brokers, insurance companies, and investment groups.

Assumptions

If buyer does assume seller’s mortgage, the buyer assumes liability for mortgage and personal liability for the note. BUT, the seller also remains responsible if lender didn’t release them from the note.

Sale subject to a mortgage

Lien is still there, but note that accompanied the original mortgage was in seller’s name and not the buyer’s. Seller is still subject to the terms of the mortgage if the buyer doesn’t sign for the note. If the buyer is foreclosed on, only the previous owner is subject to the debt, not the buyer.

3 types of mortgage sales

Sale subject to a mortgage, assumptions, and free and clear.

Buydown

Lump sum prepayment of interest to the lender at closing that buys down the interest rate to below the market rate, either temporarily or permanently.

Arrear

Part of a debt that is overdue after missing one or more required payments. Interest rate payments are paid in this.

Savings and Loan Lender

Taking in savings deposits and then lending out to consumers through mortgages and other loans.

Annual Percentage Rate (APR)

Usually higher than other interest rates, but it’s because it accounts for interest rate, plus other costs of the loan (discount points, origination fees, and other fees associated with the loan).

Discount Points

A fee charged by lender at closing in exchange for a lower interest rate.

Adjustable Rate loans

Generally tied to an index such as the consumer price index (CPI), so when the CPI changes, so will the interest rate of the loan.

Straight-Line Loan

“Constant amortization”; Portion of the payment applied to the principal remains the same with each payment, and the interest amount varies according to the outstanding loan balance.

Fully Amortized Loans

“Constant Payment Method”

Mortgage Payment Components (PITI)

Principal, interest, taxes, and insurance.

Defeasance

The lender is prevents from trying to pursue additional payment because the loan has been paid in full.

Acceleration Clause

Gives the lender the right to make all money owed immediately due and payable in the event of borrower default.

Due-on-sale Clause/Alienation Clause

Requires the borrower to repay the loan on the property when selling or transferring ownership of the property.

Junior Mortgage

Mortgage taken out after the first mortgage.

Purpose of Subordination Agreement

Senior lien holder agrees to subordinate or lower its lien position in favor of junior lien. Must be signed by both lien holders and recorded.

Deed of Trust

Agreement between a lender and borrower to give the property to a neutral 3rd party who will serve as Trustee. The Trustee holds the title to the property until borrower pays off the debt. Title theory.

Mortgagee/Lender Duties

Deposits and keeps escrow funds (for prepaid taxes and insurance) safe in a lending institution, use escrow funds to pay the escrow items.

Mortgagee/Lender Rights

Foreclose on the property if mortgagor defaults, possess property (after foreclosure) if mortgagee is purchaser at sale, assign or transfer the mortgage.

Mortgagor/Borrower Duties

Pay the debt, pay real estate taxes, replenish escrow funds if they run low, pay charges and assessments against property (so no liens can be placed), keep property in good condition, maintain property and hazard insurance.

Mortgagor/Borrower Rights

Possess property during mortgage terms, equity of redemption, receipt of the title upon paying the mortgage in full, release of the lien upon paying mortgage in full.

Parts of a Mortgage

Identifies parties and dates the agreement, legal description of property (and assurance that there are no encumbrances), covenants between borrower and lender, lender agrees to discharge the mortgage once the borrower’s paid off the loan in full (also called a defeasance clause).

Negotiable instruments must…

Be in writing; have a time limit on the payment or must be payable upon demand; contains a promise or order to pay (it may not contain any conditions for payment; must be unconditional); specify the amount to be paid; be signed by the person/entity who is making the promise of agreement to pay.

Negotiable Instrument

The holder may transfer the right to receive payments to a 3rd party, and that 3rd party may enforce the promissory note and other loan documents. Regulations are in place to prevent lenders from committing usury.

Promissory Note

A promise on part of the borrower to repay certain sums of money to another party under certain set of terms.

Promissory Notes should include…

Terms of repayment (including principal and interest), length of loan, late fees, any prepayment penalties, a description of the circumstances under which the borrower may default, a description of what happens if borrower defaults, an accurate date, signatures, discount points (if applicable).

Title Theory

Borrower received deed but the lender keeps the title and owns the house until the borrower pays off the loan.

Lien Theory

Borrower holds title and owns the house, but a promissory note signed by the borrower gives the lender the right to seize and sell the house should the borrower default.

Judicial Foreclosure

If borrower defaults, lender usually has to get a court order that allows it to seize and sell the home.

Notable Instrument

The holder may transfer the right to receive payments to a 3rd party and that party may enforce the promissory note and other loan documents.

Administrative Procedure Act of 1946

Provides oversight and regulation to agencies and their roles, an effort to balance the potential for a too powerful federal govt.

Truth in Lending Act of 1968 (TILA)

Part of the consumer credit protection act, requires full disclosure of the terms and conditions of credit.