Florida Real Estate Principles, Practices & Law 38th Edition Linda L. Crawford Copyright © 2015 Kaplan, Inc. All rights reserved.

Residential Mortgages Chapter 12 Residential Mortgages

Mortgage Law Lien Theory (Florida) Title Theory Borrower retains legal title Lender is protected with a lien Title Theory Title conveyed to Lender through a mortgage deed, or Trustee through a deed of trust Borrower retains equitable title ©2015 Kaplan, Inc.

Loan Instruments Promissory Note Mortgage Promise to repay; evidence of a debt Terms of the loan Mortgage Pledges property as collateral Hypothecation—pledging property as security without surrendering possession Written instrument ©2015 Kaplan, Inc.

Parties to a Mortgage Mortgagor Mortgagee Borrower Gives mortgage as security to repay Mortgagee Lender Owns the mortgage ©2015 Kaplan, Inc.

Satisfaction of Mortgage Release of mortgage is recorded by lender Mortgagee must cancel the mortgage and send the recorded satisfaction to the mortgagor within 60 days ©2015 Kaplan, Inc.

Mortgage Lien Priority Priority is normally determined by the order liens are recorded First mortgage is the first mortgage loan to be recorded Junior mortgage is a second mortgage or later mortgage Subordination agreement used to voluntarily take lower priority ©2015 Kaplan, Inc.

Borrower’s Covenants and Agreements Promise to repay Taxes and liens Property insurance Occupancy Maintenance and covenant of good repair Covenant against removal ©2015 Kaplan, Inc.

Other Mortgage Provisions Prepayment clause Included in FHA and VA mortgages Prepayment penalty clause Acceleration clause Upon default, accelerate entire debt due Right to reinstate Due-on-sale clause Defeasance clause ©2015 Kaplan, Inc.

Loan-to-Value (LTV) Ratio Relationship between amount borrowed and value (or sale price) Loan Amount ÷ Price (or value) = LTV ratio Example: Buyer will get a loan of $234,000 with a $260,000 purchase price. $234,000 ÷ $260,000 = .9 (90%) LTV ratio = 90% ©2015 Kaplan, Inc.

Another Example of LTV What is the loan amount for a property appraised for $150,000 if the lender will make a 80% LTV ratio loan? Appraised value x LTV ratio = Loan amount $150,000 x 80% = $120,000 Loan amount = $120,000 ©2015 Kaplan, Inc.

Common Mortgage Features Down payment Loan-to-Value ratio Equity Current market value – mortgage debt = equity Interest Cost for use of borrowed funds Escrow (impound) account Monthly installment of property taxes and hazard insurance Discount points ©2015 Kaplan, Inc.

Sources of Income to Lenders Loan origination fee Takeout commitment Loan servicing ©2014 Kaplan, Inc.

Mortgage Discounting Discount points Up-front fee to increase the real yield, or annual percentage rate (APR) to lender Allows lender to increase return without increasing the contract interest rate ©2015 Kaplan, Inc.

Discount Point Cost to the Borrower Each point is equal to 1% of the loan amount Example: On a $120,000 loan for which the lender is charging 2 points, find the cost of the points $120,000 x 2% = $2,400 ©2014 Kaplan, Inc.

Discount Point Yield to the Lender Known as the lender’s yield, return, or APR Each discount point paid will increase the yield (return) to lender by 1/8% For each point charged, add 1/8% to the stated interest rate Example: A lender charges 2 points on a loan of $120,000 at 6% interest. 2/8% + 6% = 6¼% ©2015 Kaplan, Inc.

Assignment of Mortgage Assignment is when ownership of a mortgage is transferred from one company or individual to another Estoppel certificate (letter) verifies the amount of the unpaid balance, interest rate, and date to which interest has been paid prior to the assignment ©2015 Kaplan, Inc.

Two Methods of Purchasing Property Encumbered by an Existing Mortgage Subject to mortgage Assumption of an existing mortgage Novation agreement makes the buyer solely responsible for a default ©2015 Kaplan, Inc.

Contract for Deed Land contract, agreement for deed, installment sale contract Seller financing Usually small down payment Buyer makes payments to seller Seller retains legal title until loan is repaid If recorded, buyer gets equitable title and can file for homestead tax exemption ©2015 Kaplan, Inc.

Foreclosure If the borrower defaults Initiate a suit on the promissory note Sue on the note, obtain a judgment, and then execute the judgment against any real or personal property Initiate a foreclosure proceeding Foreclose on the property Caveat emptor applies to purchase at foreclosure sale Deed in lieu of foreclosure Non-judicial procedure ©2015 Kaplan, Inc.

Equity of Redemption Mortgagor can prevent foreclosure by paying the principal and interest due plus collection expenses Right ends once property has been sold at foreclosure sale ©2015 Kaplan, Inc.

Short Sale Net proceeds at closing will not satisfy the payoff amount of mortgages and other liens on the property Seller is selling the home for an amount less than the amount owed to the lender ©2015 Kaplan, Inc.

Lis Pendens Notice recorded in public records of pending legal action involving real estate Constructive notice ©2015 Kaplan, Inc.