Chapter 15 Real Estate Financing Principles

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Chapter Fifteen Real Estate Financing PriNciples:

Chapter Fifteen Real Estate Financing PriNciples ON LINE Program 75 Hr. Real Estate Broker Principles Course Copyright Sarrett 2018

Mortgage Law:

Note Mortgage Mortgagor Mortgagee Mortgage Law Page 282 Mortgage =Dead Pledge Chapter 15 Real Estate Financing Principles

Deed of Trust:

Deed of Trust Note Deed of Trust Trustor Beneficiaries Deed o f trust is n o deed Page 306

TERMS:

TERMS Borrower Mortgagor – giver of the mortgage Payor – Payor of the Note Lender Mortgagee – receiver of the mortgage Payee- receiver of the note Payment PI Principle and Interest – the sum of money due the lender and Interest – a charge for using lender’s money Page 282 Chapter 15 Real Estate Financing Principles

Mortgage Theories:

Mortgage Theories Title Theory Lien Theory Lender - legal title Borrower - equitable title Lender - Lien Borrower – legal & equitable title Intermediate theory Illinois Page 282 Pay Off = defeasance clause= Satisfaction of Mortgage Chapter 15 Real Estate Financing Principles

Promissory Note:

Promissory Note A promissory Note is an IOU which evidences a debt and the borrower promises to repay the debt to the holder of the note. A negotiable Instrument like a check The note allows the lender to sell it ( transfer) the obligation to pay a third party . Page 283 Leverage = OPM = Other Peoples Money Chapter 15 Real Estate Financing Principles

Terms of Note:

Terms of Note Term – # of years and/or payments to repay the loan Interest Rate - the percentage of annual interest charged by the lender Impound or Escrow Account – Lender holds funds for taxes & insurance Usury – maximum interest rate a lender can charge legally Page 284 Chapter 15 Real Estate Financing Principles

Terms of Note:

Terms of Note Usury – maximum interest rate a lender can charge legally. Page 284 Loan Origination Fees – Fee paid by Borrower for loan application ( Reg Z). Page 284 Discount Points – Additional fees to borrower to raise yield of their ROI. ( 1 point – 1 %of loan). Page 285 Pre-Payment Penalty a penalty fee for prepaying before the tem has expired ( illegal in Illinois over 8% on a rater term). Page 285 Impound or Escrow Account – Lender holds funds for taxes & insurance ( limits on how much and for how long. Page 457 Page 284-285 Chapter 15 Real Estate Financing Principles

Loan Origination Points:

Loan Origination Points Service fees charge d by lender to borrowers for loan processing services Example: Joe borrower $150,000 form ABC Lender. He was charged loan origination fees of 2 points. How much did the loan cost? Answer : Joe paid the lender $3,000 service fee. ( $150,000 x .o2) Page 284 Chapter 15 Real Estate Financing Principles

WHY DOES THE LENDER “SELL” YOUR PROMISSORY NOTE:

WHY DOES THE LENDER “SELL” YOUR PROMISSORY NOTE 5% Discount on a $200,000 Note @ 4% for 30 Years Lender receives 95% $190,000 now In 7 years the Investor collects Loan Balance of $197,962.59 plus $7,980 of interest Makes a Yield of 10.3% Extra Chapter 15 Real Estate Financing Principles

DISCOUNT POINTS CHARGED TO A BORROWER:

DISCOUNT POINTS CHARGED TO A BORROWER Purpose – lender will retain the same yield earned on a mortgage loan when lowering the interest rate to benefit the borrower Reason: Since Borrowers can afford more property with a lower interest rate this will increase the number of loans a lender can make. Page 285 Chapter 15 Real Estate Financing Principles

Loan Discount Points to a Borrower:

Loan Discount Points to a Borrower Additional fees charged by lenders to increase their yield on a loan . Example: Joe borrower wants to borrow $150,000 from ABC Lender. He can afford a loan with an interest rate of only 7.5%. However, the Lender wants an 8% yield. How many points will lender need to charge? Yield desired 8% 4 points or 4% X 150,000= $6000 Loss to lender .5% Contract rate 7.5% .5 =1/2 1/2=4/8 4/8= 4 points These points can be paid by seller, buyer, broker or builder or refinanced as part of the loan. Page 285 Chapter 15 Real Estate Financing Principles

Mortgage Document or Deed of Trust :

Mortgage Document or Deed of Trust This instrument Pledges the property to another as collateral to hold until repayment of the debt. Page 286 Chapter 15 Real Estate Financing Principles

Duties of the Mortgagor :

Duties of the Mortgagor Pay the terms in the Note Pay real estate taxes Keep the Property insured Maintain the property Lenders Permission before any major alterations are made Page 287 Chapter 15 Real Estate Financing Principles

Mortgage or Deed of Trust Clauses:

Mortgage or Deed of Trust Clauses Acceleration Clause (Page 287) Makes entire amount due on default of borrowed ( not just one monthly payment) Assignment of the Mortgage ( Page 288) Mortgagee can assign the security ( they sell the note) to a third party. Defeasance ( Release Deed or “Satisfaction of Mortgage”) ( Page 288) Borrower (mortgagor) defeats right to foreclose of mortgagee by abiding by all terms and at conclusion of loan or pay off mortgage must release mortgagor .. ( Release Deed) or Deed of re-conveyance) Hypothecation ( Page 283 ) Pledge of real property as collateral for a loan, while keeping ownership Page 287-288 Chapter 15 Real Estate Financing Principles

Mortgage Clauses:

Mortgage Clauses Alienation Clause Page 290 ( triggers “Acceleration Clause” Page 287 ) Entire Mortgage Balance Due in its entirety Prevents an assumption without permission Prevents selling “Subject To” without permission Impound Accounts ( Tax and Insurance) Page 288 Can terminate when loan balance is 65% of value Anytime borrower can create pledge account instead Tax reserve can not be greater than 150% of last tax bill Assignment of rents during foreclosure of a investment property that was a rental , lenders gets the rents . Page 289 Page 288-290

Land Contract ( Installment Contract):

Land Contract ( Installment Contract) A type of seller financing whereby the buyer (called the vendee) makes a down payment and monthly payments to the seller ( called the vendor) at the end of the time period “seller” will then convey an actual deed and legal title it is then the buyer becomes the legal title holder. Page 291 Buyer gets “ Equitable Tile” Until he pays the seller the amount due at the end of the installment period. Chapter 15 Real Estate Financing Principles

Foreclosure:

Foreclosure Non- Judicial foreclosure No court involvement Power of Sale Clause No Court Approval Needed Judicial foreclosure Court authorization Property sold at public auction Strict foreclosure Court authorization Property awarded to lender Page 291 Used In Illinois Chapter 15 Real Estate Financing Principles

Foreclosure Vocabulary:

Foreclosure Vocabulary Right of Redemption ( Not In Illinois) Equitable Right (Before sale) Statutory right (After the sale) Statutory Right of Reinstatement ( In Illinois) Certificate of Sale is Given at the “Sale” A Sheriffs Deed conveying legal title is given after the redemption period which is typically 30 days) Page 293 Chapter 15 Real Estate Financing Principles

ILLINOIS FORECLOSURE TIMELINE:

ILLINOIS FORECLOSURE TIMELINE Notice Publication Deed Sherriff’s Deed Court Auction Court Statutory Right of Redemption Equitable Right of Redemption Statutory Right of Reinstatement 1. Court order of Foreclosure 2. Deficiency Judgment Certificate of Sale REO – Real Estate Owned – foreclosed property acquired by the lender upon receipt of the sheriff’s deed. Lis Pendens 293 Before Sale After Sale Do Not Need to Know Chapter 15 Real Estate Financing Principles

Foreclosure Vocabulary:

Foreclosure Vocabulary Lis Pendens ( Page 182) Means “Lien Pending” that might effect the property. So Buyers beware Deficiency Judgment ( Page 294) General Lien against borrower for the balance owed after the sale and could include. Cost of foreclosure sale Outstanding Taxes and assessments Amount of mortgage balance Other liens Page 294 It all starts with a Lis Pendens and ends at the Foreclosure Sale . Remember a borrower may still owe on the balance if the lender decides to enforce a deficiency judgment against the borrower for any amount still due and owing) Chapter 15 Real Estate Financing Principles

Chapter Fifteen Quiz Questions:

Chapter Fifteen Quiz Questions ON LINE Program 75 Hr. Real Estate Broker Principles Course Copyright Sarrett 2018

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