© 2009 by South-Western, Cengage Learning SAMIRLANDER Chapter 12

Florida Real Estate: Principles, Practices and License Law Chapter 12 Real Estate Finance © 2009 by South-Western, Cengage Learning

Key Terms Acceleration clause Amortized loan Assumption Balloon payment Certificate of estoppel Deed in lieu of foreclosure Deferred interest Deficiency judgment Due on sale clause Equity Home equity loans Hypothecation Index plus a margin Interest Lien theory Lines of credit Lis pendens

© 2009 by South-Western, Cengage Learning Key Terms Mortgage Mortgagee Mortgagor Negative amortization PITI Power-of-sale clause Prepayment clause Prepayment penalty Promissory note Reconveyance clause Statutory redemption Subject to the mortgage Subordination clause Takeout loan Term or straight loans Title theory Wraparound mortgage

© 2009 by South-Western, Cengage Learning Mortgages and Hypothecation Hypothecation: Borrower retains possession Property used as security 2 Legal theories: Title Theory Lien Theory

© 2009 by South-Western, Cengage Learning Title Theory 3 Parties Trustor: owner Trustee: third party Beneficiary: lender Trustee holds naked title Loan is paid: title reconveyed to trustor Upon default: title is transferred to the beneficiary

© 2009 by South-Western, Cengage Learning Title Theory Trust deed provides security for the note Reconveyance clause: Reconveyance clause: title returned to borrower upon payment in full Release deed Marginal release

© 2009 by South-Western, Cengage Learning Title Theory TRUSTORTRUSTEE TRUSTEETRUSTOR DEED OF TRUST deeds bare legal title to for security When debt is paid DEED OF RECONVEYANCE reconveys title back Figure 12.1

© 2009 by South-Western, Cengage Learning Title Theory Power-of sale clause Nonjudicial foreclosure: Property sold at public auction without going to court

© 2009 by South-Western, Cengage Learning Lien Theory Two Parties Two instruments Borrower has legal title Mortgage creates a lien Florida is a lien theory state

© 2009 by South-Western, Cengage Learning Lien Theory Borrower's promise to pay Prima facie: note acts as evidence of the debt Terms of repayment Annual interest Term Type of loan Negotiable instrument

© 2009 by South-Western, Cengage Learning Lien Theory Will always contain : Prepayment clause Acceleration clause

© 2009 by South-Western, Cengage Learning Lien Theory May not be prepaid May not be prepaid for a fixed period May be prepaid Prepaid with penalty Prepayment penalty Yield maintenance

© 2009 by South-Western, Cengage Learning Lien Theory Full and immediate payment in the event borrower defaults May be coupled with other clauses Call in the note

© 2009 by South-Western, Cengage Learning Lien Theory Provides security Note without a mortgage is unsecured Mortgage without a note is meaningless

© 2009 by South-Western, Cengage Learning Lien Theory Parties to the mortgage Mortgagor: Mortgagor: borrower Mortgagee: Mortgagee: lender Granting clause Title theory states: transfers title Lien theory states: creates the lien

© 2009 by South-Western, Cengage Learning Lien Theory Defeasance Clause Allows borrower to defeat the lien by fulfilling terms and conditions Makes mortgage null and void when paid

© 2009 by South-Western, Cengage Learning Lien Theory One or more covenants Alienation clause AKA: Due on sale clause

© 2009 by South-Western, Cengage Learning Lien Theory Covenants Covenant to pay taxes Covenant of insurance Covenant against removal Covenant of good repair Covenant of reentry

© 2009 by South-Western, Cengage Learning Lien Theory Alienation Clause “to transfer” Due on sale Prohibits:Assumption Wraparound mortgage

© 2009 by South-Western, Cengage Learning Lien Theory At time of contract: At time of contract: Sales price Remaining balance $100,000 - $80,000 Cash required $20,000 At time of closing Sales price $100,000 Remaining balance - $79,000 Cash required $21,000

© 2009 by South-Western, Cengage Learning Lien Theory Two ways to assume Price to control Price is set and controls the amount of cash required (See previous example) Cash to control Sales prices is not fixed Agreed amount of cash to seller controls

© 2009 by South-Western, Cengage Learning Lien Theory Date of Contract Date of Contract Remaining balance Cash to be paid Sales Price Date of Closing $80,000 $79,000 $20,000 $20,000 $100,000 $99,000

© 2009 by South-Western, Cengage Learning Lien Theory Buyer does not assume but makes payments Original borrower Gives up possession Transfers deed Remains liable

© 2009 by South-Western, Cengage Learning Lien Theory Certificate of estoppel Certificate of estoppel Buyer acknowledges amount owed When selling When placing debt on property

© 2009 by South-Western, Cengage Learning Priority of Loans First Mortgage is first to be recorded Senior Mortgage 2 nd Mortgage is recorded after the first Junior Mortgage Subordination clause: Subordination clause: allows a change in priority

© 2009 by South-Western, Cengage Learning Foreclosure Most common 2 purposes: Lender obtains possession Borrower’s equity is liquidated Legal procedure upon buyer default

© 2009 by South-Western, Cengage Learning Foreclosure Acceleration clause Title search Lis pendens Lawsuit filed Public notice / public auction Court approves the sale Lender is paid Buyer receives title Borrower receives excess Nine step foreclosure process:

© 2009 by South-Western, Cengage Learning Foreclosure Lender bids loan amount All others must pay cash Recourse loan: Deficiency judgment: Deficiency judgment: amount of outstanding debt Nonrecourse loan: Exculpatory clause Sheriff’s sale

© 2009 by South-Western, Cengage Learning Foreclosure Excess pays other recorded liens Period of time after foreclosure to pay the debt and reclaim the property

© 2009 by South-Western, Cengage Learning Foreclosure Borrower signs deed over to lender AKA: friendly foreclosure

© 2009 by South-Western, Cengage Learning Types of Loans Principal: Principal: amount borrowed Interest: Interest: money paid for using lender’s money Term: Term: time to repay Principal balance: Principal balance: amount owed at any point Equity Equity: difference between value and amount owed

© 2009 by South-Western, Cengage Learning Types of Loans Straight loan AKA: Straight loan Payments cover interest only Balloon payment: Balloon payment: principal paid in full at end of the term

© 2009 by South-Western, Cengage Learning Types of Loans Principal and interest are paid over the term of the loan Payment amount is the same throughout the term Each payment covers: Interest for previous installment Remaining toward principal

© 2009 by South-Western, Cengage Learning Types of Loans Over the term: Interest payment decreases Principal payment increases Entire principal paid by the final payment

© 2009 by South-Western, Cengage Learning Types of Loans A balance remains at the end of the term Balloon payment required Florida law requires amount of final principal be disclosed in loan documents

© 2009 by South-Western, Cengage Learning Types of Loans Amortized loan which includes taxes and insurance with every payment Principal Interest Taxes Insurance

© 2009 by South-Western, Cengage Learning Types of Loans Budget loan which includes real and personal property Example: condo in resort area which includes furniture Personal Property Package Loan

© 2009 by South-Western, Cengage Learning Types of Loans Seller financing Buyer gives seller a promissory note and a mortgage AKA: take back mortgage or carry back financing

© 2009 by South-Western, Cengage Learning Types of Loans Home equity loan: Home equity loan: loan to a prescribed limit Property is pledged as collateral Lines of credit: Lines of credit: draws on a line of credit are limited to a prescribed amount Property is not pledged as collateral

© 2009 by South-Western, Cengage Learning Types of Loans More than one property used to secure the loan Partial release clause: allows the release of properties as the principal balance is reduced

© 2009 by South-Western, Cengage Learning Types of Loans Low payments in the beginning which increase over time FHA section 245 negative amortization Early years result in negative amortization Loan balance increases Payment is not enough to cover amount due Unpaid interest is added to balance

© 2009 by South-Western, Cengage Learning Types of Loans Interest rate may change Rate is tied to an index Loan rate = index plus a margin Margin (spread) is a fixed number

© 2009 by South-Western, Cengage Learning Types of Loans Adjustment limitations: Made at the end of each adjustment period Limit (cap) on increases Periodic cap Lifetime cap Payment cap can result in negative amortization

© 2009 by South-Western, Cengage Learning Types of Loans No alienation clause 1 st loan assumed by buyer Seller makes loan to buyer as a 2 nd New loan is created but original loan is not paid off Buyer’s payment is greater than the original Seller keeps the difference Original rate is lower than market rate

© 2009 by South-Western, Cengage Learning Types of Loans A prepaid amount reduces interest in the first few years Lender-funded buydown Rate is slightly higher but allows a lower rate during the first years.

© 2009 by South-Western, Cengage Learning Types of Loans Short term (interim loan) Money advanced as construction occurs Take-out loan: Take-out loan: permanent financing Pays off construction loan

© 2009 by South-Western, Cengage Learning Types of Loans AKA: shared appreciation loan Favorable terms for the borrower Portion of the appreciation for lender Deferred interes Deferred interest: end payment to the lender

© 2009 by South-Western, Cengage Learning Types of Loans Used by retirees Borrow against the equity Income received in monthly payments Repaid on a specific date or upon specific event

© 2009 by South-Western, Cengage Learning Types of Loans Owner sells to an investor on condition of a lease back Frees up capital Tax benefits

© 2009 by South-Western, Cengage Learning Lending Practices and Underwriting Risk Employment verification Tax returns Credit check Appraisal Loan-to-value ratio (LTV)

© 2009 by South-Western, Cengage Learning Figure 12.3 Term or straight loan Amortized loan Partially amortized loan Package loans Purchase money loan Open-end loan Blanket loan Adjustable rate loan Sale and leaseback Shared equity Buydown Reverse annuity loan