CHAPTER 12 SNAPSHOT REVIEW
Residential Mortgages Snapshot Review
MORTGAGE CONCEPTS
Mortgage law
● hypothecation: mortgage financing: using borrowed money secured by a mortgage to finance the purchase of real estate
●lien-theory—mortgagee holds a lien against the title; title theory—mortgage conveys title to mortgagee; Florida is a lien-theory state
Loan instruments
● promissory note: legal instrument executed by borrower stating debt amount, loan term, method and timing of repayment, interest rate, promise to pay; may repeat other provisions from mortgage document or deed of trust; negotiable instrument assignable to a third party
● mortgage instrument: pledges the property as collateral for the loan
●mortgage mechanics: borrower gives lender note and mortgage; lender gives borrower funds and records a lien
Mortgage priority
● first mortgages are paid off before second or junior mortgages
●lienor can change priority by means of subordination agreement
ESSENTIAL LEGAL PROVISONS OF MORTGAGES
Primary provisions
● promise to repay principal and interest, taxes and insurance, escrow, covenant of good repair
Other provisions
● may include, prepayment, acceleration, right to reinstate, due on sale, release, application of payments, charges and liens, insurance, lender’s rights, private mortgage insurance, inspection, and other conditions of performance
COMMON MORTGAGE FEATURES
Principal
● original principal: capital amount borrowed on which interest payments are calculated
Down payment
● difference between purchase price and loan amount
Loan-to-value ratio
● loan amount divided by property value; percent of value a lender will finance
Interest
● charge for the use of money; rate fixed or variable
●Annual Percentage Rate (APR) includes interest and all other finance charges; lender must disclose on residential properties
Servicing
● collecting of payments; record-keeping; documentation; may be performed by original lender or passed to another entity
Escrow account
● reserve fund held in special account by lender for periodic payments of principal, interest, taxes and insurance
Discount points
● point = one percent of the loan amount, charged by lender at origination to obtain required return
Origination fee
● fee charged by lender to cover costs of processing loan application
Take-out commitment
● lender’s offer to make a loan that retires another loan and replaces it
Term
● period of time for repayment of interest and principal
Payments
● scheduled periodic payments covering interest, principal, taxes and insurance
Assignment of mortgages
● original mortgagee transfers mortgage instrument and promissory note to another by means of assignment of mortgage; original mortgagor now makes payments to new mortgagee
● estoppel: use of certificate of estoppel containing details of mortgage agreement to forestall contrary claims
PURCHASING MORTGAGED PROPERTY
Subject to the mortgage
● buyer takes title and makes loan payments to original mortgagee; original mortgagor (seller) remains responsible for loan
Purchase money
mortgages
● seller acts as lender, takes mortgage and note from buyer, who makes payments to seller
Wraparounds
● seller receives junior mortgage from buyer, uses buyer’s payments to continue payments to original lender
Assumptions
● buyer acquires title, makes new promissory note to lender, takes primary responsibility for loan; original mortgagor (seller) retains secondary responsibility unless novation note relieves seller
Contracts for deed
● seller holds legal title while buyer holds equitable title, takes possession, and makes payments to seller; legal title transferred when full sale price paid
DEFAULT
Enforcement
● enforcement of mortgage lien by tax foreclosure sale, deed in lieu of foreclosure, or short sale
Foreclosure
● enforcement of liens through liquidation or transfer of encumbered property by judicial, non-judicial, or strict foreclosure
● judicial: lawsuit and court-ordered public sale; deficiency judgments, redemption rights; used in Florida
● non-judicial: “power of sale” granted to lender; no suit; no deficiency judgment; no redemption period after sale
● strict: court orders legal transfer of title directly to lender without public sale
Deed in lieu of
foreclosure
● defaulted borrower deeds property to lender to avoid foreclosure
Short sale
● borrower and lender agree to sell property for less than loan balance; lender may require seller to make up deficiency
