promissory note promissory note issuer note “a promissory note ... secured by real estate which is...

Promissory Note “A promissory note, or commonly as just a "note", is a contract where one party (the

aker or issuer) makes an unconditional promise in writing to pay a sum of money to the other

owledging that a debt exists.”

m(the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that they contain a specific promise to pay, rather than simply ackn 80

ory_note80 http://en.wikipedia.org/wiki/Promiss Accessed June 22, 2010.

ABC Real Estate School 3st ed National Workbook August 2010 Page 382

Sources of Mortgage Funds: 1. Private Investors 2. Banks 3. Mortgage Bankers

a) make loans 4. Mortgage Brokers

a) locate lenders to buy loans b) processors c) may also be Real Estate Brokers

Who buys the loans? Secondary Mortgage Markets: Secondary mortgage markets purchase loans and assemble them into packages. They also sell securities that represent shares in the pooled mortgages to investors. The major purchasers are:

a) FNMA - Federal National Mortgage Association (Fannie Mae) 1938 i) organized as a privately owned corporation ii) issues its own common stock iii) buys conventional, FHA and VA loans iv) lender receives mortgage-backed securities that the lender may keep or sell

b) GNMA - Government National Mortgage Association (Ginnie Mae) 1968 i) division of HUD ii) provides pass-through certificates iii) provides a guarantee on FNMA-packaged pools of FHA/VA mortgages

c) FHLMC - Federal Home Loan Mortgage Corporation (Freddie Mac) 1970 i) buys mostly conventional loans ii) buys and pool mortgages for resale to investors

Lender for rural areas is: Farmer’s Home Administration (FmHA)

* federal agency of the Department of Agriculture * offers programs to help purchase or operate family farms * provides loans to help purchase or improve single-family homes in rural areas

* used in Pahrump, Sandy Valley and other rural areas in Nevada to finance at 100% * loans are made to low-and-moderate income families * two categories

* guaranteed loans * made and serviced by a private lender * guaranteed for a specific percentage by the FmHA

* loans made directly by the FmHA


Payment Plans - Types of Amortization A. amortized 30-year mortgage

1. interest decreases and principle increases over the life of the loan B. term loan

1. Has interest only payments - or the interest may accrue until the final in a single

lump sum. yment loan

1. Has partial amortization with lump-sum payoff of all remaining principal re the payments would have otherwise paid the loan off. ate mortgage (ARM)

nomic indicator called an index gin

e index that the rate can differ 3. rate caps

a) limit the amount the interest rate may change

vert to a fixed-rate loan

e - makes pay-off quicker t the life of the loan

Mort. Reverse annuity mortgage (RAM)

borrower, or expiration of the

furnished condominiums, tract housing models 3.

a) land b) r more of the parcels to

anging the entire loan 4. Construction mortgage

a) secured by real estate which is be g built with the advanced funds b) short-term financing

payoff - with a full payoff of principal at the end of the term

C. balloon pa

befoD. Adjustable r

1. Indexa) tied to an eco

2. Mara) the amount over th

4. payment cap a) sets a maximum amount for payments - could cause negative

amortization if interest rate increases payment above the cap 5. adjustment period

y be changed a) establishes how often the rate ma6. conversion option

a) permits the mortgagor to conE. Growing-Equity mortgage (GEM)

1. also known as a rapid-payoff mortgage 2. fixed interest rat3. principle is increased throughou

gage design types

1a) the lender makes the borrowers payments b) lender pays loan c) paid off upon the sale of the property, death of the

contract 2. Package mortgage

re, drapes, etc.) and appliances a) includes real estate, personal property (furnitub) used to buyBlanket mortgage

mortgage which encumbers multiple parcels ofusually contains a partial release clause allowing for one obe released from the loan without ch

in

ABC Real Estate School 3st ed National Workbook August 2010 84

c) replaced by permanent financing when the building is completed and sold

urchases models and leases them back to developer who uses them to

6. Wrap-a) ncing from a second lender without paying

7. Open-nt loan

ed - future advances fluctuating interest rate c)

5. Sale-and-leaseback a) Used with models in tracts. b) investor p

sell the homes around mortgage (the meaning has changed over the years) lets a borrower to obtain additional finaoff the first loan

b) the borrower makes payments to the new lender on the larger loan end mortgage

a) less costly than a home improvemeb) interest rate fix

the borrower can borrow any amount up to a fixed limit

Financing Regulations Regulation Z

* * * goal is to cr* * * *

* * * * i t* interest

nnual Percentage Rate (APR) terest payable during the term of the loan

rts, survey fees,

part of the Truth-in-Lendingrequires cr tituti

Act edit ins ons to inform borrowers of the true cost of obtaining credit eate informed borrowers

or household uses credit can be for personal, family for loans o 00 orf $25,0 less and all mortgages

cultural loans greater than $25,000 not for business, commercial, agrirequires di e of: sclosur

tal) * Total finance charges (both itemized and to* fina argesnce ch need to include:

Loan fees Finders fees S r i e harges e v c cpo n s

* summarize these into A* does not have to indicate the total in* does not have to include title fees, legal fees, appraisal fees, credit repo

and closing expenses 3 day right of rescission

Borrowers has 3 days to rescind the tr* ansaction by notifying the lender for 2nd mortgages sidential purchase-money or first mortgage of deed of trust loans * does not apply to re

Housing and Urban Dep

velopment (HUD) requires all Brokers to display Equal Housing oster


Mortgage v Deed of Trust

mortgage, and

ue to the

real estate loan business rument. There are

closure process.

Mortgage

orrowers sign and give to their lender to agor)

ainst the property that is e mortgagee, places a lien on

the mortgagor, ney to purchase the home.

rves the same purpose as a mortgage; however, there are s with respect to the number and kind of parties involved, the d the foreclosure process.

nstrument. The three parties

cause he/she is "trusted" with the money. The final

e the property is located as evidence of and security for the debt.

A trust deed or deed of trust, is a document wherein specific financial interest in he title to real property is transferred to a trustee, which holds it as security for

a loan (debt) between two other parties. When the loan is fully paid, the monetary claim on the title is transferred to the borrower by reconveyance to release the debt obligation. If the borrower defaults n the loan, the trustee has the right to

Mortgage v Deed of Trust

Some states require the security for real property debt to be asome states including Nevada, require the security to be a deed of trust. Even though most people commonly refer to their home loan as a mortgage, d

mortgage and a deed of trust, this is not always accurate. functional similarity of aTrust deeds are commonly called mortgages in thealthough a mortgage is technically an entirely different legal instalso significant differences between the two types in the fore

A mortgage is a voluntary lien that bsecure the debt on their home. It involves two parties – the borrower (mortgand the lender (mortgagee) – and it creates a lien ag

as threcorded in public records. The lender, known the borrowers house. It accepts the mortgage from the borrower,in exchange for loaning mo

Deed of Trust A deed of trust seimportant differenceholder of the title, an

Unlike a mortgage, a deed of trust is a three-party iare the beneficiary, the trustor, and the trustee. The lender is called the beneficiary because it benefits from the transaction by collecting interest. The borrower is the trustor beparty is the trustee, who holds title for the benefit of the beneficiary. The trust deed document is recorded (constructive notice) with the County Recorder wher

t

o


foreclose on and transfer perty to pay the lender from the proceeds.

nor is it any sort of publicly traded

title to the lender or sell the pro

A trust deed is not a mortgage-backed vehicle,item. Instead it is a way to participate in making a real estate loan available to a group or company in need of financing.

DM

ifferences between mortgage and deed of trust ortgage

• 2 party instrument • mortgagor (borrower) • mortgagee (lender)

• defeasance clause -releases mortgage when fully paid Deed of trust

• 3 party instrument • trustor (borrower) • trustee (usually title company) • beneficiary (lender)

• deed of reconveyance - releases deed of trust when fully paid

Legislation: ECOA - Equal Credit Opportunity Act Prohibits discrimination for granting credit based on:

A. race B. color

e, net worth, job

C. religion D. national origin E. sex F. marital status G. age H. source of income (provided it is legal income)

* protects more classes of individuals than the Fair Housing Act * prevents lending institutions from discriminating in the loan process * requires that credit applications be considered only on the basis of incom

stability, and credit rating * must also provide:

I. reasons for the denial J. the source of information; such as credit bureaus



Oh No! The borrower isn’t g! payin

Title: Legal v Equitable:

Equit lhas not yet closed the transaction.

ab e Title: The interest held by someone who has agreed to purchase but

Legal Title after the transaction is closed and reco enforce ble title that represents legal ownership

: The interest held by someonerded. Legal title is clear and a

of real property.

Lien Theory v Title Theory v Intermediate Theory If the mortgage loan terms are in default in any way (payments, insurance coverage

c.), the mortgage may be foreclosed. Also if a homeowners association may take the property for delinquencies to

Procedures during foreclosures are designed based on the type of ing the property being foreclosed upon.

ill hold title and how become necessary.

ry state, the deed stays with the borrower (mortgagor), and the le der (mortgagee) places a lien on the property using the mortgage instrument. The mortgagor retains both legal and

lapses, delinquent, etassociation is involved, thethe association. legal theory followed by the state controllEach typ of theory has special considerations on who weforeclosure proceedings would take place if they were to

Lien Theory

Mortgages are used in a lien theory state. In a lien theon

equitable title. The lender's lien is removed once the payment of all loan payments have been completed. Foreclosure proceedings in a lien theory state may be more difficult for the lender than in a title theory state, due to the fact that the buyer is holding title to the land and not the lender. Generally, foreclosure in Lien Theory States occur through a judicial proceeding (within the court system).

Title Theory

A Deed of Trust is used in astates, the borrower does not actu o the property during the loan erm. The seller gives the buyer/boitle) but when the borrower signs the mortgage for the loan the borrower gives

the tit older. The lender (or the 3rd party beneficiary

n of the property, and the lender delivers the

on the buyer if there is a default. Generally, foreclosure in itle Theory States occur through a non-judicial proceeding (outside of the court stem). With a non-judicial foreclosure ocess, the security instrument (usually

t action is required.

oes not have to go through the court system.81

ns the property and has all rights of ownership and possession, subject only to the conditions in the deed of trust. When the loan has been paid

title theory state such as Nevada. In title theory ally keep title trrower a deed to the property (retaining legal t

tle back to the mortgage h

such as the trustee) then holds title to the property, as security only (retaining equitable title), until all loan payments have been made. During that time the borrower has the right to possessiodeed back to the borrower only after the loan obligation has been satisfied.

The third-party trustee holding the title to the property in trust has with the power to forecloseTsy pra deed of trust) contains a power-or-sale clause and no cour

he trustee's sole function is to initiate the foreclosure at the order of the Tlender.

When a deed of trust is involved, foreclosure can be quicker, less expensive, and less complicated than when a mortgage is the security instrument. If the loan becomes delinquent, the trustee has the power to sell the home. Of course, the lender must provide the trustee with proof of delinquency and request that foreclosure proceedings be initiated. And the foreclosure must progress according to law and as dictated by the deed of trust. However, the foreclosure d

The buyer ow

off, the lender will give clear the title by way of recording a Deed of 81 http://www.moneyinstructor.com/doc/mortgagedeed.asp http://www.forecloseddreams.com/deed-of-trust-vs-mortgage Accessed June 22, 2010.


Reconveyance. The Deed of Reconveyance removes the lender's interest in the property.

Intermediary Theory

Some states have modified the title and lien theories, and these states are "intermediary theory" states. In these states, the title remains

with the borrower, but the lender may take back title to the property if the

e

rty

referred to as

borrower defaults on the loan.

Foreclosure processes

There are big differences between the two types of security interests; mortgagand deed of trust. The major distinction is that foreclosure with a Deed of Trustis non-judicial while a foreclosure with a mortgage is judicial.

There are three major foreclosure processes: judicial foreclosure, non-judicial foreclosure and strict foreclosure. A judicial foreclosure process allows propepledged as security to be sold by court order after the mortgagee has given sufficient public notice. With a non-judicial foreclosure process, the security instrument contains a power-or-sale clause and no court action is required. With a strict foreclosure process no sale takes place and the court usually awards full legal title to the lender.

What happens if the borrower defaults?

The traditional rule is: First in Time, First in Right or First Recorded, First Paid.

f ange

hen

er

econd trust deed for $200,000, and the purchaser of the property pays a down payment of

Senior liens (first recorded) are paid first, and then junior liens (liens recorded after the first lien) are paid. The only way to change the order is with a subordination agreement. A subordination agreement changes payment priority oliens. It must be approved and signed by involved lenders because it would chthe payment position of senior and junior lienholders. It may be required wrefinancing a first mortgage when there are already junior lienholders that will bestaying in place.

If there are 2 (or more) trust deeds on a particular piece of real estate, eithcan foreclose. For example, say a piece of commercial real estate sells for $1,000,000. Assume that there is a first trust deed for $500,000, a s

$300,000. The first trust deed holder will be paid first, no matter who requests


the foreclosure. If a foreclosure sale yields $600,000, the bank owning the firstrust deed

t will be paid in full, and the second gets $100,000. If a foreclosure sale

yields $400,000, the bank owning the first trust deed will be paid the proceeds, thing. So having a First Trust Deed is preferable to having

a second or third trust deed and the junior liens should not initiate a foreclosure n.

and the second gets no

unless they know that the property value will exceed the senior lien value and/orthe property owner has assets that can be pursued for the value of the junior lie

How Does the Lender Establish Priority in a Foreclosure proceeding?

“first recorded - first paid “

Foreclosure Example Example: Property value - $113,000 $113,000

1ST mortgage - $84,000 -84,000 of 1st mortgage gets paid

e gets paid2ND mortgage - $20,000 $29,000 3RD mortgage - $10,000 -20,000 of 2nd mortgag

$9,000 $9,000 of 3rd mortgage gets paid

0


Why does a foreclosure happen? here are many reasons that foreclosures take place. Sometimes a foreclosure is

initiated voluntarily by the property owner or owners and sometimes a foreclosure is initiated by the lender. The foreclosure may be an unemotional financial decision by the homeowner, basically buying and selling paper. The foreclosure may also be

d.

T

a very emotional situation where the property owner is emotionally devastate Possible involuntary reasons include:

The property owner lost his/her job. The property owner’s pay decreased. The mortgage payment increased. The property owner’s spouse died and the property could not be sold for the

mortgage amount. The property owner divorced and the property could not be sold for the

mortgage amount. The proper the property owner. ty was never affordable for The proper d cannot sell the

mortgaty owner wants to retire an property for the

ge amount. The property owner wants to move and canno

mortg Possible voluntary reasons include:

t sell the p pro erty for the age amount.

The property owner is ‘upside down’ on his mortgage (the mortgage amount of the property exceeds the value), and the property owner no longer wants to make the payment.

The property owner purchased the property as an investment and his is ‘upside down’ on his mortgage, and does not see the property value increasing in the near future.

The property owner purchased commercial property with a group of other investors and the property is no longer profitable.


Alternatives to foreclosure There are several alternatives to foreclosure. They include mortgage modification, bankruptcy, short sale and deed in lieu of foreclosure. Mortgage Modification

hat benefits them the most.

e mortgage modification, and may hat assists in a mortgage

d on his feet financially. If the owner is not behind on his

ayments for a n’

d penalties) must take place before the

ankruptcy prolong a foreclosure, help the homeowner

ty owner may be seeking ‘total liquidation of assets’,

A property owner can try and negotiate with the lender or lenders to reduce interest, reduce principal (rare), extend the term of the loan to lower payment amounts, or try and qualify for a government plan such as Home Affordable Modification Program (HAMP). This should usually be tried first, but it is rarely successful. Lenders prefer other options, because they are looking for a solutiont A real estate licensee may not assist in thnot accept a fee to perform any activity tmodification. In Nevada, all individuals performing any duties of a mortgage modification specialist must be licensed by the Mortgage Lending Division. The lender may be receptive to some type of payment grace or deferment periowhile the owner gets backpayments by a large amount, maybe he can increase the amount of pfew months, catching up with the amount due. This ‘equitable right of redemptio(payment in full of all accrued charges anstate requirement deadline. BFiling for bankruptcy protection canremove the debt obligation of a junior lien and reduce the principal owed on the property. There are different types of bankruptcies and each type has limitations and restrictions. The properor may be attempting to reduce his financial obligations. An attorney who has knowledge of state bankruptcy law will probably be needed to follow this option.


Deed in lieu of foreclosure A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) o satisfy a loan that is in default and avoid foreclosure proceedings. The

ouse back to the lender. This is sometimes called a

her

an he/she would in a formal foreclosure. Another enefit to the borrower is that it hurts their credit less than a foreclosure does.

ty before

dividual lender.

tborrower is handing the hfriendly foreclosure.

The principal advantage to the borrower is that it immediately releases him/from most or all of the personal indebtedness associated with the defaulted loan.The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms thbAdvantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the propersheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy. Timing and property condition incentives are worked out with the in

The homeowner needs to confirm that the property ownership changes in a timely manner so he is release from any further physical upkeep of the property. There may be fines if the property is not kept tidy and the homeowner does not want to be subjected to any additional expenses and liability with the property.

Short Sales A short sale can be defined as the sale of an asset for less than the loan

balance. As a potential buyer, the author assumed that when a licensee markedshort sale box on a listing agreement, it meant that they had initiated negotiation

the s

ith the lenders for a short sale. I also thought that the seller has stopped making payments on the property. As experience has shown me, however, it only means that the value of the property is less than the mortgages securing the property. The property owner may or may not be up-to date with payments.

w


Does a short sale mean there is a ‘deal’ in the buyer’s future?

ty.

lso problems than he would have had if he wasn’t trying to

e the seller may be facing a foreclosure; the property owner

ore for he property than they would have paid for a foreclosure. A short sale may take 6-

months or more to close on.

Does a successful short sale mean that the buyer paid less than value for a property? Not necessarily. It only means that the loans on the property exceededthe value of the property. The buyer paid fair market value for the proper The buyer is not only not usually getting a bargain on the purchase; he aneeds to tolerate morepurchase a short sale. First, he needs to wait until the listing agent or seller’s attorney files all of the paperwork with the lender; so the lender will grant permission to attempt the short sale. The short sale package must include the seller’s financial information, tax returns, appraisal, a HUD-1 settlement statement, and a hardship letter, at a minimum.

If the offer is not high enough, the listing agent may recommend to his client that they reject the offer out-right; and not present the offer to the lien-holder. If the offer is presented to the lien-holder, additional time will probably be needed for the listing agent to make sure that the offer finds the appropriate ‘loss mitigagor’; one that can make a final decision on the property. During thisinterim period, sincmay not be giving the property the care that it needs; due to lack of disposable funds or because of emotional headache.

The purchaser of a short sale may end up purchasing a property that is in better physical condition than a foreclosure. They will also property pay mt

LendeMultip

, and -

m

r’s Decision le lenders and multiple mortgages: The investor needs to feel that there is an advantage for him to take less

than the mortgage amount for the property, rather than foreclosing on the property at a later date. If there is more than one mortgage on the propertythe value of the property is less than the 1st mortgage amount; the remaining lienholders (2nd mortgage, 3rd mortgage, etc.) would need to agree to walk away fro


their loans. If this is not the same lender that loaned the 1st mortgage money, they have nothing to gain by allowing a short sale to take place.

The advantage for the lender is that evidence shows that the value of the short sale is higher than that of its foreclosure counterpart. Same neighborhood, similar house, th

any, ack

value exceeds 1st: ge,

1st ,

e short sale sales price will be higher than the sales price of theforeclosure. Often times it is because often times the house selling with a short sale will be in better condition than the house selling in a foreclosure action. A foreclosure sits vacant longer and has more opportunity to be vandalized. One lender and multiple mortgages:

If the 1st mortgage holder and the 2nd mortgage holder is the same compthey can decide whether to accept less than their loans; or potentially take bthe property at a later date in a foreclosure. Multiple lenders, multiple mortgages and property

If the value of the property is greater than the amount of the 1st mortgaand there are two mortgages securing the property, the 1st mortgage will be paid-in-full, and the 2nd mortgage will need to decide whether he thinks that he will be paid less if the property is foreclosed upon. The 2nd mortgage holder, if a different company than the 1st mortgage holder, may not see any payment if themortgage holder takes the property in a foreclosure. Under these circumstancesthe short-sale may be a good choice for the lenders.

Why would a buyer purchase a short sale? Why would a buyer try to purchase a short sale? There are three major reasons.

1) Because the buyer is not dealing with an emotional seller, there is a chance t value.

2) that they might pay less than marke

The condition of the property is probably not going to improve and may deteriorate after the seller moves out.

3) Since the market prices of entire areas have probably decreased, it is difficult for a buyer to find an emotional seller willing to price his property at market value.


What timing is necessary? To reiterate, the offer of a short sale does not always mean that the owneris, or will become, behind on his mortgage payments. If, however, the seller has stopped making payments, there is a limited time frame between the notice of delinquency and the notice of foreclosure. Depending on the number of sh

ort-ales the lender needs to work with and changes in weather that may affect the

period will vary. If there are pools, etc. that may be

scondition of the properties, this time

come damaged; or winter is approaching without an operating furnace, the lender may vary the interim time period.

What are a licensee’s potential objectives? Sell the property. Secure the highest sales price for the seller. Secure the lowest sales price for the buyer. Protect the property. Earn a commission. ove the transaction as quickly as possible. Stay calm and focused.

M

What is theay

financial and legal problems that prevent them from selling the home –

similar for example. er

ed documents to submit with the

or at the very least document the name of

process for the listing agent? The listing agent needs to verify that the house can be sold. The seller m

have o hertlike a pending bankruptcy. In addition, the lender may have a financial interest in the property after it is sold –a reverse mortgage or

The listing agent must stay actively involved in the transaction. The lendwill supply the listing agent with a list of requirshort sale package. In addition to an appraisal, the seller may be required to submit letters about, and proof of, his financial condition and circumstances.

The listing agent should also try and learn the lenders ‘bottom line’. They should obtain this in writing, if possible,


the lender contact who supplied the number. It is also a good idea to request a ‘property profile’ from a title company in an attempt to uncover potential additional lien holders.

The lis d out the probable commission that will be

e is he

professional negotiator is important when attempting to close a short sale. The negotiator may be an attorney, or just someone consistently successful with lender negotiations. It takes some of the liability for the licensee out of the transaction and helps to move the transaction through the steps before the foreclosure takes place and the transaction is terminated.

ting agent also needs to finpaid to his firm and buyer’s agents. Since the commission in a short sale is paid by the lender, the licensee may not be able to name his fee. The lender may have a non-negotiable commission percentage in mind to offer the two licensees. Theralso a chance that the lender will not pay a commission to a licensee who is also tbuyer of the property. Negotiation

Some licensees believe that hiring a

What is the process for the buyer’s agent? he buyer’s agent should ask the listing agent is “how

much will the lenders accept”? Is that number in writing or was it gained verbally, from a conversation only? Often times the paperwork moves from loan consultant to loan consultant within the organization, or one collection agent to another collection agent ten notice of the accept

The first question that t

, so if the listing agent did not receive writable amount; it may not be provable later. The buyer’s agent can do some research for themselves. The buyer’s agent

can check the listing history, check the tax records to see when the current sellerpurchased the property, and for how much. The buyer’s agent can also check information on previous listings, by searching the address in the MLS. The buyer’sagent can contact a title company and ask them to provide him with a title search and property profile.

So…let’s say that the buyer’s agent has been a successful detective. He discovered that the house at 1 Jones is listed at $645,000, was purchased by thesellers 2 years ago for $445,000 and there are two mortgages securing the


property. The seller owes $425,000 to the first mortgage holder, and $150,000to the second mortgage holder. Now what? How much will the seller take for property, or m

ore specifically, how little will the lenders take for the property? What

value of the property? ) What will the market value of the property be at closing?

multiple lenders involved, or does one lender hold all of the liens? 6) Are

is the lowest price that the lender will accept? That is what the buyers wantto know.

Some of the questions the buyer’s agent needs answered are: 1) How many mortgages secure the property? 2) How much are owed to the lenders? 3) What is the market 45) Are there

there any other lien-holders of the property? 7) Does the seller intend on filing for bankruptcy? Yes? If that is the case, an attorney will probably need to be consulted.

What is the process for the seller? The seller needs to take some responsibility for his financial condition. In

addition to filling out paperwork for the listing agent, they should stay on top of the lender to e information that they need.

r tax

make sure that the listing agent can obtain th They need to cooperate with the listing agent to make sure that offers are

presented and the transaction continues to proceed ahead. They can also request that the lender or lenders accept the short sale amount, and not continue to hold them financially accountable, after the sale; with a deficiency judgment and/oconsequences.

What is the process for the buyer? The buyer should not let emotions enter in the transaction. His offer may

not ever get presented, and it may be 7-10 or more days before he hears any information. He also may be required to become pre-qualified by the lien-holder before he even signs an offer.

Let’s say that the buyer likes the property enough to sign an offer. The buyer’s agent provides the offer to the listing agent. The listing agent provides


the offer to the seller. It doesn’t cover both mortgages, but the seller would liketo accept the offer and sell the house. Now what? Who makes the decision onoffer? The lender would need to accept the offer if the mortgages and costs are

the

of the many problems for the buyer is the very real possibility that there ffer is

frame creates more time for the s that will be presented to the lender at

the property be

rantees as to the quality of

question for a title company or attorney.

not covered by the offer. Oneare multiple offers. To make it worse, the time frame on the o

greater than a typical offer, so the longer timelisting agent and others to submit offerthe same time.

If the lien-holder does decide to accept the offer, will conveyed without additional liens? Will the deed be conveyed free and clear? Maybe, or maybe not. It will be sold ‘as is’ without guaits interior, exterior, or title. It depends on the individual property, and the typeof liens that are outstanding. That is a good

What is the process for the lien-holder? The lender or lenders gent) to prepare paperwork

provingt

, and is probably more in line with the expertise of an accountant, or an attorney. Unfortunately though, given the financial condition and the distraught emotional condition of the seller, the listing agent is advised to continue to stay involved with expediting this paperwork. If the paperwork is not submitted ve at the appropriate parties’ desk in time g

n f the lien-holder chooses an offer, he will

probab

require the seller (or seller’s a has no money, cannot make the paym that he ents, and that his house is

worth less than the amount of the mortgage pledged on the property. A typical lisof items may include the following:

• Appraisal of subject property. • Hardship letter signed by seller. • Seller’s bank account statements. • Seller’s job history. Much of the required paperwork is probably beyond the scope of the listing

agent’s expertise

, and/or the paperwork does not arri for them to approve the short sale, all hopes of this transaction succeedin

are futile. The lender(s) will review this paperwork and judge its merit and success. Whe

presented with multiple offers; ily accept the offer that nets that highest amount.


INSURANCE On a p

he

.)

ractical note….if a licensee decides to specialize in short sales or foreclosures, it is important to purchase insurance for the house involved in ttransaction. Often times in-between walk-through and closing (last week of the transaction), many of the fixtures (air conditioner, stove, oven, water-heater, etcdisappear.

Following the foreclosure sale..Is that it? Deficiency Judgment If the lender agrees to take less than the mortgage balance and the short sale was successful, the secured debt is no longer secured to an asset and the borrower is released from liability, correct? No, not necessarily. Per state law, the lender has a period of ce between what was owed and

sue a deficiency judgment against a da is one of the states that do allow for

r for

s of

in state law on deficiency judgments is a primary determiner.

time after the sale to pursue the differen what was paid from the borrower. If there was a junior lien (2nd, 3rd mortgage)

that didn’t get paid at all, they also may pursue the borrower. This financial obligation is called a deficiency judgment. Short Sale v Foreclosure Decision Some states do not allow a lender to purborrower after the asset is closed. Nevadeficiency judgments.

The deficiency judgment statute of limitations is the reason that many borrowers choose a foreclosure over a short sale. If a borrower decided to find a buyethe lender and see the transaction through, they are still kept on the hook for the remaining balance of the lien for years to come. The statute of limitationdeficiency judgment liability is presently a couple of years less for a foreclosure over a short sale. When deciding between the two options, often times the statute of limitation



Mortgage Loan Instruments Review A. security for the debt B. gives legal notice of the mortgage or deed of trust C. Security instruments are as follows:

1. Deed of Trust (used in Nevada) a) 3 parties

(1) trustor (a) borrower/buyer

(2) trustee (a) usually title company (b) release deed or deed of reconveyance releases

elivers a release deed or deed of reconveyance

(c) trustee executes and d

(3) beneficiary (a) lender (b) legal owner and holder of the note

2. Mortgages a) security instrument b) creates the lien on the property c) gives the creditor the right to sue for foreclosure in the event the

borrower defaults b) has 2 parties

c) Mortgagor rower (buyer)

(1) bor(2) defeasance clause requires mortgagee to execute a

satisfaction of mortgage when the note has been fully paid.d) Mortgagee

(1) Lender

Mortgage or Deed of Trust Clauses A. Acceleration clause

1. kicks it in default, for any reason (i.e. payment, insurance, tax deficiency) 2. gives the lender the right to declare the entire debt due and payable

immediately

3. accelerates the maturity of the debt B. Alienation clause

1. A type of acceleration clause requiring full payment of the balance of a mortgage upon the transfer of title of the mortgaged property.

C. Assignment clause 1. the lender is protecting his right to sell the loan

D. Release clause satisfaction of mortgage when

tion and whether or not the borrower has ew borrower to assume

3.

b)

r qualification is required 4. VA loans

able with assumption processing fee h 1, 1988

F. erty to be sold without the mortgage being paid off

ot to call in the loan if interest rates have decreased s their choice

G. Prepayment clause 1.

most home-improvement loans (2nd’s) 3.

llowing the customer to prepay without penalty b) allowing the customer to prepay with penalty

(1) penalty could be % (2) penalty could be $ amount

1985

1. requires the lender or trustee to execute a een fully paid the note has b

E. Assumption clause

1. explains the terms of the assump righ their loan to a nthe t to offer

2. Co al lnvention oans a) up to divi the in dual lender FHA loans a) Start date before Dec 1986

(1) no restrictions (assumable without qualification) bStart date etween Dec 1, 1986 and Dec 15, 1989

(1) credit approval is necessary 15, 1989 c) start date after Dec

(1) plecom te buye

a) Start date before March 1, 1988 (1) freely assum

b) Start date on or after Marc(1) VA must approve with assumption agreement

Due-on-sale clause s no op1. doe t allow the pr

n2. lenders may decidesin ortgce the m age was made - it’

clause that informs the buyer whether they can pay off the loan before the last required payment

2. still nly commo used in o t sp ion : a) a

4. FHA riginated before Aug 2, 1985 a) loans o

(1) borrower must give the lender written notice of intention to exercise the prepayment privilege (pay off early)

(2) without the written notice, the lender may charge up to 30-days interest

originated after Aug 2,b) loans(1) no notice is required



Major Financing Programs

(FHA), 2) Veterans Administration (VA), and 3) tional loan programs. FHA and VA are

both c cies. Conventional loan programs operate under federal

oversight, but its funding com rces.

This chapter will com rices in the real estate

market adjust to current m t to loan

requirem

FHA lo the

federal governm n .. and VA

required of governm

l mortgages if down

payme

There are three major types of mortgage programs: 1) Federal Housing Administration

Conven

ontrolled by government agen

es primarily from private sou

pare and contrast these programs. As p

arket conditions, and down payment requirements adjus

a use for all three programs. ents, a licensee may find

ans are ins he

e t n

ured by t federal government and VA loans are guaranteed by

Co ventional loans can be less expensive for borrowers than FHA

loans because conventional loans are not required to secure some of the expenses always

ent loans; such as FHA mortgage insurance and/or a VA funding fee.

rance (PMI) is however required for conventionaPrivate mortgage insu

t an s re less than a certain down payment size, usually 20% of the property value.

Major Financing Programs Summary 1.

nteed loans

3. a)

Insured loans a) Federal Housing Authority (FHA)

2. Guaraa) Veterans Administration (VA) Conventional loans

government won’t insure – insured privately

FHA Loans

In some geographic areas over 30% of new mortgages made are now FHA loans, or

Federal Housing Administration insured loans. Unlike risky conventional loans, the FHA lender

gets 100% insurance against losses resulting from any default paid for by borrower. Unlike th

20% usually required for conventional loans, the loan-to-value ra

e

tio can be as low as 97%,

requiring a m

industrial properties.

for MIP, if he/she agrees to watch a FHA video. A 1 time homebuyer is defined as a borrower

at has not purchased a home within at least the past 3 years.

FHA lo ble with

qualification. The interest rate is negotiable and . Either the buyer or seller can

pay po bills than they may have if they are purchasing using a

convention od exceeds 10-months in length.

Qualifying rules app ross income can be

used towards housing expenses, and 2) 41% of th borrower’s gross income can be used towards

all fixed monthly expenses including housing.

inimum 3% down payment. The property value is the selling price or appraisal -

whichever is less. FHA sets the maximum loan amount depending on the region of the country.

The property type is limited to a one to four family dwellings only; no land, commercial or

The property must meet FHA living standards and FHA approves appraisers. The

dwelling must be owner-occupied and the borrower may only carry a maximum of one FHA loan

at a time. The loans are insured by an FHA mortgage insurance premium (MIP) and monthly

mortgage insurance (MMI). The cost of MIP is 2.25% up front and the cost of MMI is .005

multiplied times the loan amount divided by 12 months. A 1st time homebuyer may pay 1.75% st

th

ans prohibit a prepayment penalty. The loan is always assuma

set by the lender

ints. A borrower can carry higher

al loan. Fixed expenses count if their contract peri

lied according to two ratios: 1) 29% of the borrower’s g

e


FHA Loans Summary * FHA = Federal Housing Administration insures loans * lender gets 100% insurance against losses resulting from any default paid

for by borrower * loan-to-value ratio is 97% (required at least 3% down) * value is t ppraisal - whichever is less * maximum by FHA depending on the region of the

ties

r MIP (if haven’t purchased a t 3 years and watch video)

* no prepayment penalty

he selling price or a loan amount is set

country * 1 to 4 family dwellings only; no land, commercial or industrial proper* home must meet FHA standards - appraisers are approved by FHA * dwelling must be owner-occupied - can have a maximum of 1 FHA loan

out at a time * loan is insured by an FHA mortgage insurance premium (MIP) and

monthly mortgage insurance (MMI) * cost of MIP 2.25% up front and MMI .005 X loan amount(principal)/12

monthly * 1st time homebuyers may pay 1.75% fo

home las

* qualifying rules applied according to two ratios: * 29% of gross income is the maximum for housing expenses * 41% of gross income is the maximum for fixed monthly expenses

including housing * other fixed expenses count if over 10-months in length

* loan is always assumable * the buyer must always qualify before assuming loans originated

after 12-1-86. * the interest rate is:

* negotiable - set by lender * points can be paid by either buyer or seller


FHA loans for 1-4 family homes

http://w /hsg/sfh/ins/203b--df.cfmHousing and Urban Development's Homes and Communities

ww.hud.gov/offices updated January 29, 2009.

hom e of the costs of their mortgage loans. FHA mortgage insurance ts nder

facilities.

Se ily mortgage insurance programs—the default in the 1930s, that helped

that helped shape the s still

an imp nities for first-time hom mortgages for those who live in underserved areas where mortgages ma e

Type rotect lenders against the risk of default on

ortgages may be used to finance the purchase of new or existin refinance debt. Section 203(b) has several

Downpayment requirements can be low. In contrast to conventional mortgage products, hich frequently require downpayments of 20 percent or more of the purchase price of the ome, single-family mortgages insured by FHA under Section 203(b) make it possible to reduce ownpayments to as little as 3 percent. This is because FHA insurance allows borrowers to nance approximately 97 percent of the value of their home purchase through their mortgage, in me cases.

Summary: Through this program, Housing and Urban Development (HUD's) Federal Housing Administration (FHA) insures mortgages made by qualified lenders to people purchasing or refinancing a home of their own.

Purpose: FHA's mortgage insurance programs help low- and moderate-income families become

eowners by lowering somalso encourages lenders to make mortgages to otherwise creditworthy borrowers and projecthat might not be able to meet conventional underwriting requirements, by protecting the leagainst default on mortgages for properties that meet certain minimum requirements--including manufactured homes, single-family and multifamily properties, and some health-related

ction 203(b) is the centerpiece of FHA's single-fame homeowners fromsuccessor of the program that helped sav

open the suburbs for returning veterans in the 1940s and 1950s, and modern mortgage finance system. Today, FHA One- to Four-Family Mortgage Insurance i

ortant tool through which the Federal Government expands homeownership opportuebuyers and other borrowers who would not otherwise qualify for conventional

on affordable terms, as well asy be harder to get. These obligations are protected by FHA's Mutual Mortgag

y by borrower premiums. Insurance Fund, which is sustained entirel

of Assistance: ides mortgage insurance to pThis program prov

mortgages to qualified buyers. Insured mg one- to four-family housing, as well as to

important features:

--whdfiso


-- Many closing costs can be financed. With most conventional mortgages, the borrower must pay, at the time of purchase, closing costs (the many fees and charges associated with buying a home) equivalent to 2-3 percent of the price of the home. This program allows the borrower to

the up-front cost of buying a home. FHA mortgage nced) at

to

-es

ply

ts A-

51 7th Street, S.W., Washington, DC 20410 elephone: (202) 708-1112

Sales Price

finance many of these charges, thus reducing insurance is not free: borrowers pay an up-front insurance premium (which may be finathe time of purchase, as well as monthly premiums that are not financed, but instead are added the regular mortgage payment.

-- Some fees are limited. FHA rules impose limits on some of the fees that lenders may charge inmaking a mortgage. For example, the mortgage origination fee charged by the lender for the administrative cost of processing the mortgage may not exceed one percent of the amount of the mortgage.

-- HUD sets limits on the amount that may be insured. To make sure that its programs serve lowand moderate-income people, FHA sets limits on the dollar value of the mortgage. These figurvary over time and by place, depending on the cost of living and other factors (higher limits also exist for two- to four-family properties).

Eligible Participants: FHA-approved lending institutions, such as banks, mortgage companies, and savings and loanassociations, can make insured Section 203(b) mortgages.

Eligible Customers: Anyone intending to use the mortgaged property as their primary residence is eligible to apfor an FHA insured mortgage through FHA-approved lenders. This program is not open to investors.

Application: Any person able to meet the cash investment, the mortgage payments, and credit requiremencan apply. The program is limited to owner-occupants. Applications are made through an FHapproved lending institution. Most lenders who use this mortgage insurance product, however, make their requests through a provision known as Direct Endorsement, which authorizes them to consider applications without submitting paperwork to HUD. Borrowers can locate FHA-approved lenders through the searchable listing provided on HUD's homepage.

U.S. Department of Housing and Urban Development4T

(SP) Gross Loan Amount Under $50,000 SP X .9875

$50,000 - $125,000 SP X .9765 Over $125,000 SP X .9715


In Summary: FHA 1-4 family dwellings Basics: • FHA (Federal Housing Administration insures loans. • Borrowers who would not otherwise qualify for conventional loans • Borrowers who live in underserved areas where mortgages may be harder to get. • Value of the home is the selling price or the appraisal, whichever is less • Maximum loan amount is set by FHA, changes on the region of the country. • The home must meet FHA standards and the appraisers are approved by FHA

Characteristics:

• owner occupants only • 1-4 family dwellings

• 1-800-CALLFHA

Costs: Down payment requ• 3% down payment • insurance insures 97%

irements

Insurance emium) = .0225 X loan amount • MIP (mortgage insurance pr

Also • MMI (monthly mortgage insurance) = .005 X loan amount ÷ 12 months

Additional closing costs: • loan origination fee cannot exceed 1% • Points can be paid by either buyer or seller. • The interest rate is negotiable, set by the lender

• Never a pre-payment penalty.


Veteran’s Administration (VA) HOME

s Administration LoansLOANS

Veteran

. an can be used to purchase dwellings designed to be used by one to four families. The

A Department of Veterans Affairs Guaranteed Loan (VA) provides additional security for the lender, a guarantee of payment. Form DD2-14 is required by the borrower to prove eligibilityThe loproperty must be owner-occupied. The loans require very strict government regulation. The

an origination fee is required.

y be restored under certain circumstances. Unused partial entitlements d VA loan even with first one still outstanding. The veteran buyer must

loans are assumable by anyone after qualification, even non-veterans. VA dictates which party in the transaction is allowed to pay certain fees. If points are required

y the loan, either the buyer or seller may pay them. A prepayment penalty is not allowed, but abloVA loan entitlement mamay be used for a seconpay a 2% VA funding fee for first time use and 3% if he/she has previously used an entitlement.

erest rate with a higher down payment, but no down payment is ovide a single $1 down and not pay any funds towards closing

pay all or some of the closing costs required of the loan.

value comes in lower than the agreed to pay for the house. Can a Veteran still purchase it?

options.

ase with a lower selling price. and the e plus the funding

ffice to ally identify where you believe the appraisal is in error and

The loan may offer a lower intrrequired. The Veteran may p

andcosts or provide $0 down

What if the appraisal/reasonable amount

There are basically three

1. Renegotiate the purch2. Have the Veteran pay the difference between the selling price

nable value, since the loan cannot exceed the reasonable valureasofee. 3. If you believe there is an error in the appraisal, you can ask the local VA oreview it. Be sure to specific

ywh .


Veterans Administration (VA) Loan Summary * VA = Department of Veterans Affairs Guaranteed Loan * provides only a guarantee of payment to the lender * DD2-14 required to prove eligibility * 1-4 family dwellings. * must be owner-occupi* entitlement may be restored u ircumstances

used for a second VA loan even with

* guarantee provides additional security to lender

sing costs, but only 0 down payment

ed nder certain c

* Unused partial entitlements may befirst one still outstanding.

* very strict government regulation * no down payment required * 2 Types * $1 down * Veteran buyer only pays $1 * $0 down * Veteran buyer pays clo* buyer must pay a 2% VA funding fee if 1st time use and 3% if used before * lower rate available with greater down payment, higher if entitlement has been used * assumable by anyone, even non-vets * No Prepayment penalty * loan origination fee required * either buyer or seller can pay points


Conventional Loans

nal LoanSecuring a Conventio

rket will not buy, so the rimary mortgage lenders. In

s less regulation and more discretion than we have all witnessed, stronger secondary mortgage

ake conventional loans more difficult for consumers to obtain than

Licensees are aware that rules governing conventional loans change as the guidelines enforcedby the secondary market changes, especially as loan bundling choices decrease. Financial

titutiins ons will not make a loan that the secondary mortgage maollowed by the psecondary mortgage market sets the guidelines f

years past, conventional loans offered consumergovernment loans. Presently though, asmarket standards can mgovernment loans.

Loan Costs Conventional loans can be cheaper tofor the borrower with a substantial do

obtain than FHA insured and VA guaranteed mortgages ayment and qualifying debt. Assuming a borrower e using down-payment funds of less than 20% of the

ower to purchase private mortgage insurance (PMI). FHA on the other hand, would require the borrower to pre-purchase 2 mortgage insurances consistent of a mortgage insurance premium (MIP) and monthly mortgage insurance (MMI) and VA would require only a VA funding fee. The conventional loan Private Mortgage Insuran the riskiness of the conventional loan for the lender. It makes the insurance company liable for a percentage of the borrowed amount if borrower defaults. The prem onthly, but typically, it is paid monthly. The amount of the premium depends on the term, length, risk, loan type, state rules, lender, and cancellation policy. Typically the PMI charge is .0078 of the loan amount, paid monthly. If the borrower instead secured the same conventional loan with the preferred down payment of 20% or greater of the property value, the borrowinsurance policy, making the FHA insured loan and the VA guaranteed loan more expensive. As a footnote, if the value of the property secured with a down-payment less than 20% appreciates in value and its equity exceeds 20%, proven with ny appraisal, the lender should discontinue PMI monthly charges. In today’s lending environment however, conventional loans are more difficult to secure, so FHA and VA has made a big comeback. Most transactions today are completed with a cash buyer or a FHA or VA loan. Conventional loans are rare.

wn pwas able to secure a conventional mortgagvalue, the conventional loan would require the borr

ce (PMI) policy reduces

ium can be paid up front or m

er would not be required to pay for a mortgage

a


promissory note promissory note issuer note “a promissory note ... secured by real estate which is...

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