©2011 Cengage Learning. Chapter 7 Introduction to Real Estate Finance California Real Estate Principles ©2011 Cengage Learning

©2011 Cengage Learning

Chapter 7Introduction to Real Estate

Finance

California Real Estate Principles


Chapter 71. 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.


Financing Process1. 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.


Phases of the Financing Process1. 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


Overview of Finance Documents

S tra ig h t N o te

P artia lly A m ortized

F u lly A m ortized

A m ortized N ote

In s ta llm en t N o te

N oteP rom ise to R eP ay

M ortg ag e

D eed o f Tru s t

L an d C on trac t

S ecu rityC o lla te ra l L ien

F in an c in g In s tru m en ts


Hypothecate

Negative Amortized NoteThis is when the loan payment does not cover the

monthly interest Shortage is added to principal loan amountResults in increased loan balance


Promissory Notes (SAFI SAFI )Legal evidence for the debt

SS traight Note – term notePayments of Interest Only Entire principle repaid on the final due date


A A mortized NoteMonthly payments which include both Principal and Interest

I I nstallment NotePeriodic payments of principal & interest

FF ully amortized type--Liquidates the debt with final payment

Partially 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)


VARIABLE PAYMENT PLANS

The interest rate may change and as a result the following may be affected:1. Payments2. Principal owed3. Term (length of the loan)


0

1

2

3

4

5

6

7

Year1

Year2

Year3

Year4

Year5

Year6

Loan InterestRateTreasurySecurities Rate

Adjustable Rate Loan TERMSINDEX: 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.


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


TrustorDeeds to

Trustee

Reconveys

Who holds title until debt is paid

When debt is paid Trustor Trustee

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


Mortgagor - Borrower

Mortgagee - Lender

Common Provisions in Security Instruments


Alienation (Due-On-Sale)

Clause

Lock-In Clause

Assumption Provision

Prepayment Provision

or

or

Acceleration Clause

TRUST DEED vs. MORTGAGEDeed of Trust Comparison Mortgage

If Foreclosure by Court Action: Same as for Mortgage

Trustee’s Sale - No Deficiency Judgment Possible

Lender’s Rights

Possible Deficiency Judgment


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.


Mortgage versus Trust Deed


Mortgage Deed of Trust

Foreclosure Court 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


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.


Prepayment PenaltyCertain 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


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


Purpose: To inform holders of junior liens when the holder of a senior lien (deed of trust) is about to foreclose

REQUEST FOR COPY OF NOTICE NOTICE OF DEFAULTOF DEFAULT AND SALE

SALES CONTRACTLand 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


Basic Rule of FinanceIf you don’t pay … they will take it away !


TRUSTEE’S SALE STEPS1. Beneficiary requests trustee to foreclose2. Trustee records Notice of Default3. 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


TRUTH IN LENDING LAWRegulation Z (TIL)

Purpose – disclosure of creditA.P.R. – cost of credit in percentage

termsRight of rescissionAnnual Percentage Rate (APR)

must be stated when

advertising financing


Equal Credit Opportunity

Act

Enforced by the Board of Governors of the Federal Reserve System, through the Federal Reserve Board.


• 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:


• 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.


• 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 closingIncludes disclosure of lender-paid broker feesEscrow Account Statement

No more than two months of excess paymentsAccounting provided within 45 daysAnnual review of escrow account


www.hud.gov

Mortgage Broker Limits

COSTS:Limits amount of costs and expensesCannot be over 5% of the loan amount

Actual costs, or$390

Cannot exceed $700 for costs and expenses.


Review Quiz Chapter 71. 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


Review Quiz Chapter 72. A real estate promissory note reads “$887.50 per

month for 239 payments, then a final monthly payment of $3,011.19.” This is an example of a/an:a) Alienation paymentb) Prepaymentc) Balloon paymentd) Amortized payment


Review Quiz Chapter 73. An enforceable due-on-sale clause is correctly called

a/an:

a. acceleration clause

b. alienation clause

c. wrap around clause

d. prepay clause


4. In a normal sale using both a grant deed and a trust deed (deed of trust) the buyer is the:a. grantor and trustorb. grantor and trusteec. grantee and trusteed. 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


Review Quiz Chapter 76. 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 dateb. 90 daysc. 3 monthsd. 1 year


Review Quiz Chapter 77. 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


Review Quiz Chapter 78. 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


Review Quiz Chapter 79. 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


Review Quiz Chapter 710.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


Answers to Review Quiz Chapter 71. A 6. A

2. C 7. D

3. B 8. D

4. D 9. C

5. B 10. C
