Real Estate Unit 14

Front 1

The decision to buy or to rent property involves considering

Back 1

how long a person wants to live in a particular area,

a person's financial situation,

housing affordability,

current mortgage interest rates,

tax consequences of owning versus renting property, and

what might happen to home prices and tax laws in the future.

Hint 1

6

Front 2

Two of the biggest factors when deciding whether to own or rent a home.

Back 2

Mortgage terms and

payment plans

Front 3

PITI

Back 3

The basic costs of owning a home—mortgage principal and interest, real estate taxes, and hazard Insurance

Insurance

Front 4

What expenses are involved in home ownership

Back 4

1. including utility costs, such as

2. electricity,

3. natural gas,

4. heating oil,

5. water,

6. trash removal,

7. sewer charges,

Hint 4

7

Front 5

DTI

Back 5

Information about an applicant's gross income and total debt that lenders generally look at as a percentage to determine qualification for a loan.

Front 6

homeowner's equity

Back 6

The difference between the market value of the property and the amount still owed on it.

Front 7

Purchasing a home can offer financial advantages to a buyer, provided the marketplace cooperates.

Back 7

First, if the property's value increases, an eventual sale of the property might bring in more money than the owner's purchase price

Second, as the total mortgage debt is reduced through monthly payments that include part of the principal owed, the owner's actual ownership interest in the property increases

The third financial advantage of home ownership may be the tax deductions available to the homeowner for mortgage interest and property tax,

Finally, part of the profit made on the sale of a principal residence is not taxed at all.

Front 8

Notes on Tax deductions on Real estate

Back 8

mortgage interest payments on first and second homes (for mortgage balances below $1 million, or $500,000 if married filing separately, as well as home equity loans on those dwellings of no more than a combined $100,000),real estate taxes (but not interest paid on overdue taxes),certain loan origination fees,loan discount points (whether paid by the buyer or the seller), andloan prepayment penalties.

Front 9

Notes

Back 9

When a married couple who file a joint tax return sell a principal residence, up to $500,000 in profit (sales price minus purchase price) can be excluded from capital gains tax. A taxpayer who files singly is entitled to a $250,000 exclusion

Front 10

Notes

Back 10

A first-time homebuyer may make a penalty-free withdrawal from a tax-deferred individual retirement account (IRA) for the down payment on a home, although the withdrawal is still subject to income tax in that year. The limit on the withdrawal is $10,000 and the amount withdrawn must be spent entirely within 120 days on a down payment to avoid any penalty.

Front 11

Promissory note

Back 11

A financing instrument that states the terms of the underlying obligation, is signed by its maker, and is negotiable (transferable to a third party).

Front 12

What does a promissory note state

Back 12

1. the amount of the debt

2. the time and method of payment

3. the rate of interest

Front 13

When does a note become a legally enforceable and fully negotiable instrument

Back 13

When signed by borrowers and other necessary parties

Front 14

The payee who holds the note may transfer the right to receive payment to a third party in one of two ways:

Back 14

1. By signing the instrument over (that is, by assigning it) to the third party

2. By delivering the instrument to the third party

Front 15

Interest

Back 15

is a charge for the use of money, expressed as a percentage of the remaining balance of the loan

Front 16

in arrears

Back 16

Interest Payments made at the end of a period

Hint 16

Rear

Front 17

in advance

Back 17

Interest Payments may also be made at the beginning of each period

Front 18

Loan to value LTV

Back 18

The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral.

Front 19

usury

Back 19

Charging interest in excess of the maximum rate allowed by law

Front 20

loan origination

Back 20

The processing of a mortgage application

Front 21

Loan Origination fee

Back 21

A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount.

Front 22

Discount points

Back 22

A unit of measurement used for various loan charges; one point equals 1% of the amount of the loan.

Front 23

The number of points charged depends on two factors:

Back 23

1. The difference between the loan's stated interest rate and the yield required by the lender

2. How long the lender expects it will take the borrower to pay off the loan.

Front 24

determine how many points are charged on a loan,

Back 24

divide the total dollar amount of the points by the amount of the loan. For example, if the loan amount is $350,000 and the charge for points is $9,275, how many points are being charged?

$9,275 ÷ $350,000 = 0.0265 or 2.65% or 2.65 points

Front 25

Prepayment penalty

Back 25

A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost.

Front 26

Mortgage loans are secured loans. Mortgage loans have two parts:

Back 26

1. the debt itself

2. the security for the debt.

Front 27

When a property is mortgaged, the owner must execute (sign) two separate instruments

Back 27

the financing instrument that creates the debt and

the security instrument that specifies the property that the debtor will use as collateral for the debt.

Front 28

Hypothecation

Back 28

To pledge property as security for an obligation or loan without giving up possession of it.

Front 29

mortgage

Back 29

is a lien on the real property of a debtor.

Front 30

mortgagor

Back 30

Receives a loan and in return gives a promissory note (Homeowner)

Front 31

Mortgagee

Back 31

A lender in a mortgage loan transaction.

Front 32

Satisfaction of mortgage

Back 32

evidence of the removal of the security interest

Front 33

The judicial process for foreclosure of a mortgage depends on what 2 things

Back 33

1. state law

2. and on whether the state treats the mortgage as a lien or as a conveyance of some part of the title to the property.

Front 34

lien theory state (mortgage)

Back 34

, the mortgagor retains both legal and equitable title to property that serves as security for a debt.

Front 35

Deed of trust

Back 35

An instrument used to create a mortgage lien by which the borrower conveys title to a trustee, who holds it as security for the benefit of the note holder (the lender)

Front 36

Title theory (Deed of trust)

Back 36

the mortgagor actually conveys legal title to the mortgagee (or some other designated individual) and retains equitable title and the right of possession.

Front 37

Duties of the borrower

Back 37

1. Payment of the debt in accordance with the terms of the promissory note

2. Payment of all real estate taxes on the property used as security

3. Maintenance of adequate insurance to protect the lender in the event that the property is destroyed or damaged by fire, windstorm, or other hazard

4. Maintenance of the property in good repair at all times

5. Receipt of lender authorization before making any major alterations on the property

Hint 37

5 (P,P,M,M,R)

Front 38

Acceleration clause

Back 38

The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or other obligation.

Front 39

Assignment of Mortgage

Back 39

The mortgagee can assign the mortgage to a third party and they will become the new owner of the debt and security instrument

Front 40

defeasance clause

Back 40

In the financing instrument, the lender is required to execute a satisfaction of mortgage (also known as a release or discharge) when the note has been fully paid.

This document returns to the borrower all interest in the real estate originally conveyed to the lender.

Front 41

deed of reconveyance

Back 41

When a real estate loan secured by a deed of trust has been completely repaid, the beneficiary must make a written request that the trustee convey the title to the property back to the grantor.

Front 42

Impound or escrow account.

Back 42

Is a reserve fund to meet future real estate taxes and property insurance premiums.

Front 43

Subject to

Back 43

Buyer takes title of property and makes payments on the existing loan but is not personally obligated to pay the debt in full. Original seller might continue to be liable for debt.

Front 44

Assumption of Mortgage

Back 44

Acquiring title to property on which there is an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including payments.

Front 45

alienation clause

Back 45

provides that when the property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender

Front 46

The mortgage document or deed of trust must be recorded where

Back 46

in the recorder's office of the county in which the real estate is located.

Front 47

Notes on Mortgage

Back 47

If the mortgagor defaults, the mortgagee must go through a formal foreclosure proceeding in court to obtain legal title.

Front 48

Notes on deed of trust

Back 48

In effect, because the lender holds legal title, the lender has the right to immediate possession of the real estate and rents from the mortgaged property if the mortgagor defaults.

Front 49

Straight loans

Back 49

The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term.

Front 50

What are straight loans generally used for

Back 50

home improvements and

second mortgages rather than for residential first mortgage loans.

Front 51

amortized loan

Back 51

partially pays off both principal and interest.

Front 52

adjustable-rate mortgage (ARM)

Back 52

begins at one rate of interest, then fluctuates up or down during the loan term, based on a specified economic indicator

Front 53

index

Back 53

is an economic indicator that is used to adjust the interest rate in the loan

Front 54

margin

Back 54

represents the lender's cost of doing business.

Front 55

Rate caps

Back 55

limit the amount the interest rate may change

Front 56

payment cap

Back 56

Protects the mortgagor from unaffordable individual payments

The payment cap sets a maximum amount for payments

Front 57

negative amortization

Back 57

can result in the borrower owing more than the property is worth—the unhappy situation of being under water.

Front 58

How To calculate the principal and interest (PI) payment

Back 58

multiply the interest rate factor by the number of 1,000s in the total loan

Front 59

growing-equity mortgage is also called a rapid-payoff mortgage.

Back 59

Uses a fixed interest rate, but payments of principal are increased according to an index or schedule.

Front 60

When is a growing equity mortgage used

Back 60

when the borrower's income is expected to keep pace with the increasing loan payments.

Front 61

The Mortgage Amortization Triangle

Back 61

Front 62

balloon payment

Back 62

is a final payment that is at least twice the amount of any other payment.

Front 63

reverse mortgage

Back 63

allows a homeowner aged 62 or older to borrow money against the equity built up in the home.

Front 64

Foreclosure

Back 64

is a legal procedure in which property pledged as security for a debt is sold to satisfy the debt.

Front 65

Notes

Back 65

foreclosure of a junior lien means that the liens with higher priority remain in place and the buyer takes title subject to those liens. The foreclosure of a lien with highest priority brings the rights of the parties and all junior lienholders to a conclusion

Front 66

There are three general types of foreclosure proceeding

Back 66

judicial, nonjudicial, and strict foreclosure.

Front 67

Judicial foreclosure

Back 67

allows the property to be sold by court order after the mortgagee has given sufficient public notice.

Front 68

nonjudicial foreclosure,

Back 68

no court action is required. In those states that recognize deed of trust loans, the beneficiary is generally given the power of sale, which is conducted by the trustee.

Front 69

strict foreclosure process

Back 69

1. First, appropriate notice must be given to the delinquent borrower.

2. the court establishes a deadline for the balance of the defaulted debt to be paid in full.

3. the court simply awards full legal title to the lender. No sale takes place.

Strict foreclosure is more common when personal property is used to secure a debt.

Front 70

deed in lieu of foreclosure

Back 70

sometimes known as a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit

Front 71

disadvantage of the deed in lieu

Back 71

It does not eliminate junior liens. In a foreclosure action

Front 72

What are the two redemption periods called

Back 72

1. equitable right of redemption. (Before)

2. statutory right of redemption

(After)

Front 73

Deed to Purchaser at Sale

Back 73

the successful bidder at the sale receives a deed to the real estate.

Front 74

Deficiency Judgment

Back 74

Court-ordered ruling that allows the lender to seek a portion of a borrower’s debt, not satisfied in the foreclosure sale, from the defaulted party’s general assets.

Front 75

Short sale

Back 75

Sale of property in which the sales price is less than the remaining indebtedness.

Front 76

Congress of the Mortgage Debt Relief Act of 2007.

Back 76

Allows a taxpayer to exclude the forgiveness part of the mortgage debt from income on the taxpayer's principal residence on a sale of the property

Front 77

Consumer protections

What must the lender due to stay compliant

Back 77

1. provide billing information in writing;

2. give the borrower two months' warning if an adjustable-rate mortgage will have a rate change;

3. promptly credit the borrower's payments;respond quickly when the borrower asks about paying off the loan;

4. not charge for insurance the borrower doesn't need, or over-charge for insurance the lender provides if the borrower fails to do so ("force-placed insurance");

5. quickly resolve complaints, generally within 30 to 45 business days, and share information;

6. have and follow good customer service policies and procedures;

7. contact the borrower to help when the borrower is having trouble making payments;

8. work with the borrower, if the borrower is having trouble paying the mortgage, before starting or continuing foreclosure; and

9. allow the borrower to seek review of the decision about a loan workout request.

Front 78

The most common homeowners policy is called a basic form. The basic form provides property coverage against

Back 78

fire and lightning,

glass breakage,windstorm and hail,

explosion,riot and civil commotion,damage by aircraft,damage from vehicles,damage from smoke,vandalism and malicious mischief,theft, and

loss of property removed from the premises when it is endangered by fire or other perils.

Front 79

Broad-form homeowners insurance covers

Back 79

falling objects;

damage due to the weight of ice, snow, or sleet;

collapse of all or part of the building;

bursting, cracking, burning, or bulging of a steam or water heating system or of appliances used to heat water;

accidental discharge, leakage, or overflow of water or steam from within a plumbing, heating, or air-conditioning system;

freezing of plumbing, heating, and air-conditioning systems and domestic appliances; and

damage to electrical appliances, devices, fixtures, and wiring from short circuits or other accidentally generated currents.

Front 80

coinsurance clause

Back 80

. This provision usually requires that the owner maintain insurance equal to a specified percentage (usually 80%) of the replacement cost of the dwelling

Front 81

Comprehensive Loss Underwriting Exchange (CLUE)

Back 81

is a database of consumer claims history that enables insurance companies to access prior claims information in the underwriting and rating process.

Front 82

How long does the Comprehensive Loss Underwriting Exchange database contain personal property claims history

Back 82

5 years

Front 83

What do the reports from the Comprehensive Loss Underwriting Exchange include

Back 83

include policy information such as:

name,

date of birth,

policy number, and

claim information date

Front 84

exterior insulating finishing system (EIFS)

Back 84

is a highly effective moisture barrier that also tends to seal in moisture—

Front 85

The National Flood Insurance Act of 1968

Back 85

was enacted by Congress to help owners of property in flood-prone areas

Front 86

Who administers The National Flood Insurance Act of 1968

Back 86

The Federal Emergency Management Agency (FEMA)

Front 87

FEMA defines a flood as "a general and temporary condition of partial or complete inundation of two or more acres of normally dry land or two or more properties from

Back 87

an overflow of inland or tidal waves,an unusual and rapid accumulation or runoff of surface waters,mudflows or mudslides on the surface of normally dry land, orthe collapse of land along the shore of a body of water (under certain conditions)."

Front 88

Flood policies exclude coverage for losses such as

Back 88

swimming pools, cars, money, animals, groundcover, or underground systems.Policies are of two types: replacement cost value

Front 89

Policies are of two types:

Back 89

replacement cost value (RCV) or actual cost value (ACV).

Front 90

How does FEMA define a flood

Back 90

as "a general and temporary condition of partial or complete inundation of two or more acres of normally dry land or two or more properties