Real Estate Finance Laws

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Mortgage or Trust Deed

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The document used to pledge the real property.

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A promissory note establishes...

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...1) who is the borrower, 2) who is the lender, 3) the amount of the debt, 4) the interest rate, 5) the terms of repayment.

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Negotiable Instrument

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A note may be this. It is a written, unconditional promise to pay, on demand or at a specified future time, a sum of money “to oder” or “to bearer,” signed by its maker or payor (the borrower). other types of ______ ______ are checks, money orders, and drafts.

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Endorsement

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When the payee transfers a note to another party by writing her name across the back of the note (if the note is negotiable)

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Prepayment Privilege

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a provision in a note that gives the right to prepay.

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Prepayment Penelty

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This is a provision in a note that provides for a fee to be paid for the privilge of paying off the loan ahead of schedule.

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Lock in Clause

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This is a provision/clause in a note prohibbiting any loan prepayment, at least for a certain period.

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Late Payment Penalty

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A provision to create motivation for timely payment. Could be a specific dollar figure or a percentage of the overdue payment.

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Acceleration Clause

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A provision that allows the lender to declare the entire unpaid loan balance due upon a fault of any of the terms or conditions of the document, including failure to pay insurance premiums, property taxes, or the principal and interest on the debt.

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Alienation Clause (Due on Sale Clause or Call Provision)

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Most nongovernmental notes have this provision. It provides that, if title is alienated (transferred to another) without the lenders prior written consent, the lender may, at its option, call the loan due at once and require immediate payment in full of all sums owed. . . . it prohibits the assumption of the loan without the lenders approval.

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Title Subject To

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If the buyer were to be responsible for making the payments to the lender, he would take ______ ________ __ the existing loan

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Assume (Assumption)

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If the buyer is to be responsible for making payments to the lender, he would _________ and agree to pay the loan.

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Mortgage

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A written contract pledging real property the borrower owns or will own to secure the debt.

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Lien theory of Mortgages

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This means that a mortgage creates specific voluntary lien. Most states operate under this

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Title Theory

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This means the mortgage conveys title to the lender, and the title is returned to the borrower when the loan is repaid.

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Intermediate Theory

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This means the mortgage gives the lender lien but allows him to take title without foreclosure if the borrower defaults.

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Defeasance Clause

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A clause that states that if the loan is paid according to the terms of the note and the other covenants are fulfilled, the lender will release the lien, so the borrower can regain clear title.

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Assignment of Rents Clause

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A clause that provides that the rents from the property are assigned to the lender as security for payment of the debt.

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Request for Notice of Default

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This clause provides for notification to the lender if another lien against the property is in default so the the lender may take action to prevent loss due to foreclosure of the other lien.

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Mortgager

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Because the borrower gives the mortgage, the borrower is called the ______________

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Mortgagee

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Because the lender is receiving the mortgage, the lender is called the ______________

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Satisfaction of Mortgage

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When a mortgage is paid off, a mortgagor can request a ____________ __ _________ to be recorded to clear the mortgage lien from he records.

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Judicial Foreclosure and Sale

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If the mortgager defaults, the mortgagee could file this which would result in the property being foreclosed and sold through court action

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Strict Foreclosure

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If the mortgager defaults, the mortgagee could file this which would result in judicial foreclosure and the property given to the lender instead of being sold. In most states this is not allowed.

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Power of Sale Clause

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If the mortgager defaults, the mortgagee could have the property foreclosed through nonjudicial foreclosure as long as it has this clause. This clause give the lender the power to sell the property without a judicial foreclosure, upon default.

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Equitable Right of Redemption (Equity of Redemption)

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This is the right to pay of the mortgage debt plus interest and costs prior to the foreclosure. A foreclosure wipes out this right

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Foreclosure Sale

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This is an auction sale of a foreclosed house to the highest bidder

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Deed of Trust

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a form of mortgage that is available in may staes, particularly those that do not have laws allowing for a power of sale provision in a mortgage. The major difference between this and a mortgage are the provisions relating to foreclosure. . . .

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Trustor (Grantor)

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This is what the borrower is called in a deed of trust.

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Beneficiary

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This is the what the lender is called in a trust deed. the Trustor makes payments to this.

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Deed of Reconveyance

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serves the same purpose of a satisfaction of mortgage in a Trust Deed.

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How a Deed of Trust Works

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In the deed of trust, the trustor gives a third party (called the trustee) a power of sale, allowing the trustee to sell the property without court approval. If the grantor defaults, the beneficiary can sue on the note, file for judicial foreclosure, or instruct the trustee to conduct a trustee’s sale. After a trustee’s sale (or after a statutory redemption period, if the state law provides for one), the trustee will convey title to the high bidder, through a trustee’s deed.
If the grantor pays off the loan, the beneficiary will instruct the trustee to issue a deed of reconveyance. This is recorded to show the lien has been satisfied. It serves the same purpose as a satisfaction of mortgage does for a mortgage.

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Trustee

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a third party in a deed of trust whom the trustor gives the power of sale, allowing this third party to sell the property without court approval.

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Purchase Money Mortgage

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This is a financing agreement between buyer and seller with no third party lender involved. The buyer becomes the owner of the property and the seller places a lien on the property. The seller takes back a mortgage as a full or partial payment for the property.

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Land Sales Contract (has lots of other names)

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Financing agreement between buyer (vendee) and seller (vendor) with no third party lender. The seller retains title to the land until paid for in full. It is the least secure purchasing method of a buyer. The buyer (vendee) has legal interest in the property called equitable title that entitles him to legal title when all contract payments have been made.

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Vendor

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This is what a seller is called in a land sales contract. Heremais primarily liable for the payment of insurance premiums, taxes, and any underlying mortgage payments.

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Vendee

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What the buyer is called in a land sales contract

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Equitable Title

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This is the legal interest a buyer has in a land sales contract that entitles him to a conveyance of the legal title when all contact payments have been made.

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Term/Straight/Interest-Only Mortgage

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Provides for payments of interest only, with no amortization (reduction of loan balance) during the term of the loan. The loan must be paid off by the end of the term

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Balloon Payment

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A payment made at the end of a loan term that is considerably higher than previous payments

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Reverse Mortgage (Reverse Annuity Mortgage)

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A loan secured that is due on default or when the property is sold or no longer used as a principal resisdece. It is designed to enable a person who already owns real estate to convert some of his equity into cash. It is available to people 62 and up who own their home and need cash to meet expenses.

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Graduated Payment

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A payment that starts low and rises at a set rate over set period.

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Budget Mortgage (PITI)

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This mortgage provides that an amount equal to 1/12 of the estimated annual property insurance premiums, taxes dues, etc will be paid to the mortgagee, together with the monthly installment.

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Direct Principal Reduction Loan

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With this loan, periodic payments are made (like $1000) in addition to monthly payments to reduce the size of the amount owed quicker

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Subordination Clause

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Whichever Mortgage was recorded first has precedent. But this priority can be changed with a _____ _____ , which is an agreement to waive some rights in favor of another.

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First Mortgage

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A mortgage is called this if there are no other mortgages on the property with prior lien rights.

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Junior Mortgage

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A lien that is subordinate to another mortgage that was previously recorded.

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Deed in Lieu of Foreclosure (Estoppel Deed)

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This is a voluntary act of a borrower who is in default to transfer title to the lender by deed

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Wraparound Mortgage

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When you have an second mortgage that is all inclusive to pay off all the the mortgages.

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Chattel Mortgage

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A mortgage lien encumbering only personal property. Has been replaced by a security agreement regulated by the Uniform Commercial Code.

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Security Agreement

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In personal property, this is a pledge for a loan. If the debtor fails to pay the debt, the lender will become owner of the property pledged

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Package Mortgage

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A Mortgage using both real and personal property for security to a loan.

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Blanket Mortgage

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This is a mortgage that covers more than one parcel of real estate as security. parcels of property can be released from the lien through a Release Clause If the borrower wants to sell released land, he needs a record of partial satisfaction, or partial reconveyance deed

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Release Clause

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A borrower of a blanket mortgage would need to obtain this to release individual pieces of property from the mortgage.

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Partial Satisfaction / Partial Reconveyance Deed

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In order for th borrower of a blanket mortgage to sell land that has been returned through a release clause, and to obtain clear title, the borrower needs to obtain this from the bank.

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Participation Mortgage

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A mortgage used most often in loans for development of large commercial real estate projects. The lender conditions the loan commitment upon receiving part ownership interest in the development. The lender also earns interest as well as a percentage of the projects net income. (e.g. When a lender agrees to reduce the interest rate on a loan by 1⁄2% in return for a 2% interest in a large commercial complex.

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Shared Appreciation Mortgage

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In return for a relatively low interest rate, the borrower agrees to share with the lender a sizable percent (e.g. 30-50%) of the appreciation in the value of the property, either after a specified number of years or when title is transferred.

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Open-End Mortgage (Mortgage for Future Advances)

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Most mortgages are this - allows borrower to borrow additional funds up to a specified maximum amount without negotiating a new mortgage. (simlar to using a credit card with the mortgage making the real property security for repayment.

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Closed-End Mortgage

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Mortgages with a fixed amount borrowed and in which no additional funds can be borrowed without a new note or Mortgage.

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Construction Mortgage

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A type of open end mortgage that is usually designed as high interest, short term loan to finance the cost of labor and materials used during the construction of a new building.

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Obligatory Advances

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In a construction mortgage, money is released in installments only after each inspection or progress on the job. (i.e. not in one lump sum)

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Take-Out Loan

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A long term loan taken out after construction is completed and used to pay of the construction loan.

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Home Equity Loan

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most often a Junior Loan in which the homeowner uses the equity in his home as a basis for a loan. The loan can be used for anything. The interest paid on the loan is tax deductible. (up to $100,000)

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Home Equity Line of Credit (HELOC)

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A form of revolving credit in which a persons home serves as collateral. By using the equity of the home, the borrower may qualify for a sizable amount of credit at an interest rate that is relatively low.

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Purchase Money Mortgage

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A mortgage given to the seller by the purchaser as part of the purchase price . . . When the buyer gives the seller a note and mortgage as payment for the property, the mortgage is called a ________ ________ _______." A mortgage is called a _________ ________ _______ when the seller is the mortgagee.

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Consumer Credit Protection Act (Truth in Lending Act) TILA (Regulation Z)

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issued by the FED, but enforced by various federal agencies (Federal Trade Commission) . This law ensures that applicants for consumer credit are given sufficient information about the cost and conditions of the credit or an installment purchase so they can easily compare credit terms offered by various creditors. It deals with disclosure about the cost of credit. . It does not limit how much creditors charge. Applies to consumer loans (personal, household, and family purposes) The three principal areas covered by the law are 1) Disclosure, 2) Rescission (right to rescind the transaction within 3 business days of signing the loan documents 3) Advertising.

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Real Estate Settlement Procedures Act (RESPA)

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This act is administered by HUD. It has to do with providing borrowers with information about the closing process. It requires lenders to provide borrowers with information about the process of settlement (or closing) of the transaction, so they may make infomed decisions regarding the selection of settlement services. The law applies to transactions involving federally related loans to finance a purchase, refinance, or obtain a home equity loan or line of credit using residential real property as security. They also have to give borrower a booklet prepared by HUD within 3 days.

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Equal Credit Opportunity Act (ECOA)

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This act prohibits creditors from discriminating against a loan recipient on the basis of 1) race, religion, origin, sex, marital status, or age 2) receipt of income from public assistance programs, 3) good faith exercise of rights under the Consumer Credit Protection Act.

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Flood Disaster Protection Act

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This act requires the purchase of flood insurance as a condition of receipt of federal or federally related financial assistance for acquisition and or constriction of a building in a special flood hazard area of the community.

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Service Members Civil Relief Act

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this act was enacted in 2003 to update the soldiers and sailors civil relief act. Its purpose to to ease economic and legal burdens on active duty military members and reservists, or members of the national guard called to active duty, and , in limited situations, dependents of military members. Does not apply to Veterans.