Unit 11

Financing

2 Party Loan Instrument

  • Definition: When a property is to be mortgaged, the owner must sign two separate instruments:

    1. Mortgage: This is a security instrument that creates a lien on the property. It is essential for securing the loan against the property.

    2. Promissory Note: A document representing the promise to repay the entire loan amount.

Deed of Trust

  • Definition: A 3-party instrument, which involves:

    1. Lender: The entity providing the loan.

    2. Borrower: The individual or entity receiving the loan.

    3. Trustee: A third-party who holds the deed on behalf of the lender until the loan is repaid.

  • Hypothecation: This term refers to pledging property as security for a loan without transferring the ownership of the property.

Foreclosures

Types of Foreclosure

  1. Judicial Foreclosure: Allows the property to be sold by court order.

  2. Non-Judicial Foreclosure: Does not require court intervention to proceed with the foreclosure process.

  3. Deed in Lieu of Foreclosure: Known as a friendly foreclosure, as it involves a mutual agreement between the borrower and lender rather than a lawsuit.

Act 91 Notice

  • Definition: A required notice regarding foreclosure must be provided to the property owner.

  • Short Sale: A process where the property owner requests the lender to accept less than the total amount owed on the mortgage.

Deficiency Judgement

  • Definition: The right of the lender to obtain a personal judgment against the borrower for any unpaid amounts after foreclosure, often referred to as deficiency.

Redemption

  • Equitable Right of Redemption: Borrowers can redeem their property before foreclosure, allowing them to recover their property if they pay the outstanding debt.

  • Statutory Right of Redemption: Allows borrowers to redeem their property even after the foreclosure has taken place, within a certain statutory period.

Title Information and Commitments

  • Title Information: Essential to get a signed contract to the title company immediately to ensure clarity regarding ownership.

  • Title Commitment: Document issued after the title search, outlining liens, judgments, and taxes against the property.

FINCEN and Money Laundering Prevention

  • FINCEN: The Financial Crimes Enforcement Network, specifically working to combat money laundering in financial transactions.

  • Title Searches: The process of investigating the title for errors, illegal deeds, encroachments, and easements on the property.

Title Commitment

  • Description: Issued after a title search, it serves as a promise to issue title insurance provided certain conditions are fulfilled.

Provisions of the Note

  • Promissory Note: Functions similarly to a check and is a financing instrument that outlines the terms of the loan.

Primary Mortgage Market

  1. Definition: The market where loans originate directly from lenders.

  2. Mortgage Banking Companies: Entities that offer funds like banks to facilitate loans.

  3. Mortgage Brokers: Individuals or firms that assist in finding lenders for borrowing needs.

Secondary Mortgage Market

  • Function: This market helps entities raise capital to continue issuing mortgage loans. Loans are bought and sold after they originate in the primary mortgage market.

  • Examples:

    • Fannie Mae: Government-sponsored enterprise that deals with VA and FHA loans.

    • Freddie Mac: Focuses on traditional (conventional) loans.

Interest and Usury

  • Interest: The cost charged for the use of money, generally stated as a percentage of the loan.

  • Usury: The practice of charging interest that exceeds the maximum rate permissible by law; many states have laws regulating interest rates on loans.

Loan Origination Fee

  • Definition: A fee charged for processing a mortgage application; typically 1% of the amount borrowed.

Types of Loans

  1. Straight Loan: A term loan or interest-only loan where the principal is paid separately at the end of the loan period.

  2. Amortized Loan: This type of loan includes payments that partially pay off both the principal and interest throughout the term of the loan.

Duties of the Mortgagor

  1. Timely payment of the debt according to the terms outlined in the promissory note.

  2. Payment of all real estate taxes related to the property.

  3. Maintenance of adequate insurance to protect the lender if the property is damaged.

  4. Keeping the property in good repair and condition.

  5. Obtaining lender authorization before making any significant alterations to the property.

Acceleration Clause

  • Definition: A provision that allows the lender to accelerate the maturity of the debt if the borrower defaults, meaning the entire outstanding balance becomes due immediately.

Release of Mortgage Lien

  • Procedure: Once all loan payments have been made and the note is fully paid, the borrower should ensure that the public record reflects that the debt has been satisfied. The lender must record this release within 30 days.

Tax and Insurance Reserves

  • Definition: A fund set aside to cover future real estate taxes and insurance premiums on the property.

Alienation Clause

  • Definition: Provides that when the property is sold, the lender may either demand immediate payment of the remaining debt or permit the buyer to assume the loan under conditions acceptable to the lender.