Real Estate Principles and Practices Chapter 11 Financing © 2010 by South-Western, Cengage Learning

Key Terms Adjustable rate mortgage Amortization Balloon payment Blanket mortgage Deed of trust Discount points Equity Escrow agreement Estoppel certificate Foreclosure General liens Hypothecation Interest Involuntary lien Lien Lien theory Moratorium

© 2010 by South-Western, Cengage Learning Key Terms Mortgage Mortgagee Mortgagor Open-end mortgage PITI Short-sale Specific liens Straight loan Tax lien Title theory Voluntary lien

© 2010 by South-Western, Cengage Learning Overview Interest rates Clauses found in notes & mortgages Foreclosure procedures General & specific liens

© 2010 by South-Western, Cengage Learning Interest Rates Interest: rent for the use of money Factors: Risk Business outlook Alternative investments Future inflation

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods Straight loan AKA: Straight loan Interest only Amount borrowed paid on final due date

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods Equal payments include principal and interest Reduce unpaid balance Amortization: Amortization: liquidation of financial obligation

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods Interest only: principal is not reduced “Option Arm” OR Interest only OR 15, 20, or 30 year amortized payment

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods Periodic payments with a remaining balance due at end of term Balloon payment: Balloon payment: used to shorten term of loan

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods 1/12 th taxes and insurance added to PITI Equity Difference between value and loan amount Usury Interest in excess of the amount Interest in excess of the amount allowed – illegal allowed – illegal Moratorium Moratorium

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods Increase the lenders yield 1 point equals 1% of loan amount General Rule: 1 point lowers the rate 1/8 th of 1% Origination fee: charged by lender for originating and processing the loan 1% of loan amount

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods Ratio of loan amount to sales price The greater the LTV the greater the risk Value is sales price or appraised value whichever is lower

© 2010 by South-Western, Cengage Learning Mortgage Payment Methods Backed by a mortgage Note details the terms Prepayment penalty

© 2010 by South-Western, Cengage Learning The Mortgage Mortgage: Mortgage: pledges the property as collateral for the debt Hypothecation: Hypothecation: pledge property without giving up possession Mortgagee: Mortgagee: lender Mortgagor: Mortgagor: borrower Negotiable instrument: Negotiable instrument: can be bought or sold

© 2010 by South-Western, Cengage Learning Deed of Trust Conditional deed to secure money for debt Easier to foreclose 3 Parties: Trustor: borrower Trustee: 3 rd party Beneficiary: lender

© 2010 by South-Western, Cengage Learning Other Mortgage Clauses and Conditions second in priority Mortgage lien is second in priority Interest rate is usually higher due to higher risk

© 2010 by South-Western, Cengage Learning Other Mortgage Clauses and Conditions Penalty if loan is paid off early Not allowed on FHA and VA loans

© 2010 by South-Western, Cengage Learning Other Mortgage Clauses and Conditions Buyer is obligated to pay the loan Original owner secondarily liable Release of liability “Subject to existing loan” FHA and VA loans

© 2010 by South-Western, Cengage Learning Types of Mortgages Mortgagor may extend the amount of the loan Terms may change Common use: construction loans

© 2010 by South-Western, Cengage Learning Types of Mortgages Includes both real and personal property Common uses: New homes Farm and tractor

© 2010 by South-Western, Cengage Learning Types of Mortgages Seller financing: seller takes back a note 1 st or 2 nd lien Investment for seller who does not need the equity

© 2010 by South-Western, Cengage Learning Types of Mortgages Pledges owner’s equity as collateral Second priority Greater risk – higher rate Specified period Demand full payment at end of period

© 2010 by South-Western, Cengage Learning Types of Mortgages 2 or more mortgages consolidated into 1 payment Lender wraps new loan around an existing assumable loan Existing loan may not have a due-on-sale clause

© 2010 by South-Western, Cengage Learning Types of Mortgages $80,000 50,000 $30,000 Sales price FHA 1 st mortgage equity $50,000 14,000 $64,000 6% 1 st mortgage 8.5% current rate wrap mortgage

© 2010 by South-Western, Cengage Learning Alternate Mortgage Plans Allows a change in the rate up or down Index: cost of funds (one-year T-bill) Margin: 2 – 3%, allows for reasonable profit Adjustment period: time rates can change Adjustable Rate Mortgages (ARMs) Cap rates Periodic Aggregate

© 2010 by South-Western, Cengage Learning Alternate Mortgage Plans Borrow shares appreciation in return for lower rate Payable when: Property is sold Loan is paid off Ten years have passed Sold prior to 10 years - % appreciation is due Available for commercial properties

© 2010 by South-Western, Cengage Learning Alternate Mortgage Plans Reduces the rate for the first years Seller prepays the interest Placed in a saving account for the buyer Rate reduced: 1 st year – 3% 2 nd year – 2% 3 rd year – 1% Qualifies at 1 st year rate with 90% LTV

© 2010 by South-Western, Cengage Learning Alternate Mortgage Plans Line of credit or fixed amount Not to exceed 80% LTV Interest paid on amount borrowed Home Equity Line of Credit Similar to credit card Access funds as needed

© 2010 by South-Western, Cengage Learning Instruments Relative to Financing Estoppel certificate: Estoppel certificate: acknowledges the debt owed to new mortgagee Certificates of no defense Declaration of no set off Satisfaction Piece: Satisfaction Piece: acknowledges full payment

© 2010 by South-Western, Cengage Learning Instruments Relative to Financing Pledge: Pledge: money kept on deposit as security for the debt Frozen asset Escrow agreement: used to carry out terms of an agreement Escrow agent: third party

© 2010 by South-Western, Cengage Learning Real Estate Mortgage Theories Defeasance clause: upon payment property reverts to mortgagor Gives right of redemption Deed of Trust as security instrument

© 2010 by South-Western, Cengage Learning Real Estate Mortgage Theories Borrower retains legal rights Beneficiary has equitable rights Mortgage as security instrument

© 2010 by South-Western, Cengage Learning Real Estate Mortgage Theories Lender does not wait for foreclosure for possession Title is not turned over until redemption period expires Deficiency judgment

© 2010 by South-Western, Cengage Learning Liens The mortgage The mortgage: pledges property as collateral Property Taxes: h Property Taxes: have priority over all other liens Property sold to successful bidder who receives a tax certificate Tax deed or treasurer’s deed is issued after redemption period Special assessments: Special assessments: pay for improvements Assessed per front foot for sidewalks, paved roads Assessed equally for sewer Mechanics Liens: Mechanics Liens: suppliers of labor or materials may lien for nonpayment Filed within a specified time after completion Action must be taken within a specified time Attachment writ of attachment Attachment against personal property is a writ of attachment Prevents owner form leaving state with merchandise Sheriff can seize property to satisfy the debt

© 2010 by South-Western, Cengage Learning Liens Federal liens Federal liens for failure to pay income tax Statutory period is 10 years Property may be sold to satisfy the debt Judgment liens Judgment liens awarded to the prevailing party in a dispute Covers all real and personal property within the jurisdiction Federal estate tax: Federal estate tax: levied on estate of deceased upon transfer Tax return must be filed 9 months from date of death State inheritance tax: State inheritance tax: tax on heirs not the estate Clear title cannot pass until tax is paid in full Decedents’ debts: Decedents’ debts: lien against all of the deceased assets All debts must be paid from proceeds from the sale Child support liens: Child support liens: attach to any parcel of real estate If paid – ex-spouse signs a voluntary release If not paid – lien is not released preventing sale of the property