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California Real Estate Principles

California Real Estate Principles. Chapter 7 Introduction to Real Estate Finance. Chapter 7. Describe the types of promissory notes, then explain adjustable rate loans. Explain a deed of trust (trust deed), a mortgage, installment sales contract, and foreclosure procedures.

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California Real Estate Principles

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  1. ©2011 Cengage Learning

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

  3. Chapter 7 • Describe the types of promissory notes, then explain adjustable rate loans. • Explain a deed of trust (trust deed), a mortgage, installment sales contract, and foreclosure procedures. • Define clauses common to financing documents: acceleration, alienation, subordination, prepayment penalty. • Outline the principles of loan regulations: Truth-In-Lending, RESPA, Fair Credit, Real Fair Credit Reporting and Property Loan Law. ©2011 Cengage Learning

  4. Financing Process • APPLICATION: Lender form used to acquire information on income, credit and assets. • ANALYSIS: Verification of income, credit and assets. Underwriter decides if borrower is qualified. If so, loan terms. The major issue the FICO score • PROCESSING: Papers drawn. Escrow instructions, appraisal, loan documents. • CLOSING: Papers signed, loan funds, loan and escrow closes, documents recorded, insurance issued (property and title), closing statements issued • SERVICING: Process of collecting loan payments. Check on loan until paid off. Pay impound bills. ©2011 Cengage Learning

  5. 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

  6. Overview of Finance Documents Hypothecate ©2011 Cengage Learning

  7. 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

  8. Promissory Notes (SAFI )Legal evidence for the debt Straight Note – term note Payments of Interest Only • Entire principle repaid on the final due date • A mortized Note • Monthly payments which include both Principal and Interest • Fully amortized type--Liquidates the debt with final payment • Partially amortized (balloon payment type requires larger final payment) • I nstallment Note • Periodic payments of principal & interest ©2011 Cengage Learning

  9. 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

  10. VARIABLE PAYMENT PLANS • The interest rate may change and as a result the following may be affected: • Payments • Principal owed • Term (length of the loan) ©2011 Cengage Learning

  11. 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

  12. 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 Who holds title until debt is paid Deeds to Trustor Trustee Reconveys When debt is paid Trustor Trustee The Trustee returns title to the Trustor by a Deed of Reconveyance ©2011 Cengage Learning

  13. MORTGAGE(A Contract) Mortgagor - Borrower • 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 Mortgagee - Lender ©2011 Cengage Learning

  14. Acceleration Clause Assumption Provision Alienation (Due-On-Sale) Clause Lock-In Clause Prepayment Provision Common Provisions in Security Instruments or or ©2011 Cengage Learning

  15. TRUST DEED vs. MORTGAGE ©2011 Cengage Learning

  16. Mortgage versus Trust Deed ©2011 Cengage Learning

  17. Buyer Takes Over Seller’s Loan • Buyer assumes existing loan • Substitution of Liability • Buyer takes title “Subject to” existing loan. ©2011 Cengage Learning

  18. 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

  19. 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 Notice REQUEST FOR COPY OF NOTICE OF DEFAULTAND SALE Purpose: To inform holders of junior liens when the holder of a senior lien (deed of trust) is about to foreclose ©2011 Cengage Learning

  20. 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

  21. 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

  22. Basic Rule of Finance • If you don’t pay … they will take it away ! Foreclosure ©2011 Cengage Learning

  23. TRUSTEE’S SALE STEPS • Beneficiary requests trustee to foreclose • Trustee records Notice of Default • Three-month waiting period (Borrower has reinstatement period) • Advertise “Noticeof Sale” with date, time and place of sale (Borrower has limited right to reinstate) • 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

  24. TRUTH IN LENDING LAWRegulation 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

  25. 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. ©2011 Cengage Learning

  26. 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. ©2011 Cengage Learning

  27. 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. • Special information booklet (Buying your Home: Settlement Costs and Helpful Information) within threedays of loan application. • Good Faith Estimate of settlement service charges must be provided within 3 business days of loan application. ©2011 Cengage Learning

  28. 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 www.hud.gov ©2011 Cengage Learning

  29. 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

  30. Review Quiz Chapter 7 • 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

  31. Review Quiz Chapter 7 • 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: • Alienation payment • Prepayment • Balloon payment • Amortized payment ©2011 Cengage Learning

  32. 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 • 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 ©2011 Cengage Learning

  33. 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

  34. Review Quiz Chapter 7 • 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

  35. 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

  36. Review Quiz Chapter 7 • 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

  37. 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

  38. Review Quiz Chapter 7 • 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

  39. Answers to Review Quiz Chapter 7 1. A 6. A 2. C 7. D 3. B 8. D 4. D 9. C 5. B 10. C ©2011 Cengage Learning

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