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Mortgages and Foreclosures Basics Chapter 7 1 Financing AlaskaRealEstateSchool.com Chapter 7 Financing Correspondence Course Information Please read and become familiar with this information prior to the class date. This part of the class will be taken correspondence. You will be required to take a test on this information and the test must be returned prior to taking the classroom portion of the course. The remainder of the class may be taken in the classroom or by correspondence. If you have registered for the correspondence course, the test as well as the evaluation sheet must returned for grading and issuance of you graduation certificate. You may take the tests all at once or one chapter at a time. The test may be taken open book and the answer sheet must be sent back to: Email to [email protected] Or Fax to 866-659-8458 Or Mail to: AlaskaRealEstateSchool.com Attn: Denny Wood PO Box 241727 Anchorage, Alaska 99524-1727 copyright 2013 dwood Chapter 7 2 Financing AlaskaRealEstateSchool.com Mortgages and Foreclosures Basics A mortgage is a transfer of an interest in real estate as security for the repayment of a loan. A typical mortgage transaction involves a home purchaser borrowing money from a lender and entering into a written agreement with the lender, so that the real estate is collateral for the loan. If the homeowner defaults on the loan, the lender is entitled to foreclose on the real estate and have it sold to reduce the debt. Depending on the terms of the agreement, the lender may then be entitled to pursue the homeowner for payment of any deficiency between the real estate sale proceeds and the debt owed. The Mortgage Loan Process A borrower (or mortgagor) obtains a mortgage loan through a process of application and commitment. The borrower initiates the process by submitting an application to the lender (or mortgagee) and in some cases paying a nonrefundable fee. The lender conducts a risk evaluation to determine whether a mortgage loan will be granted. In the risk analysis, the lender evaluates both the borrower's financial position and the value of the real estate. If the lender determines the risk to be acceptable, the lender will issue a loan commitment detailing the loan amount, repayment terms, interest rate, and other pertinent conditions. Because the commitment will normally contain terms and conditions not found in the loan application, it typically constitutes a counteroffer to make a loan. When the borrower accepts the commitment, a binding contract for a mortgage loan is created. Residential mortgage loans usually bear interest at a fixed annual percentage rate over a period of fifteen or thirty years. The interest rate is determined by the prevailing market conditions at the time the loan is made. A lender may increase its yield beyond the stated interest rate by requiring the borrower to pay "points" at the time the loan is made. One point equals one percent of the loan amount. It may also be beneficial for the borrower to pay points in order to reduce the interest rate over the term of the loan. Mortgages: Key Phrases Adjustable rate mortgages (ARMs) are also common. Under an ARM, the interest rate rises and falls over the term of the loan in accordance with prevailing market conditions. The parties may agree to hedge against extreme interest rate fluctuations by establishing ceiling and floor limits. A balloon mortgage, less common but not unheard of in the residential mortgage market, exists when a substantial payment is required at the end of the term of the loan to cover the unamortized loan principal. Default occurs when the mortgagor fails to perform an obligation secured by the mortgage. The most common event of default is the mortgagor's failure to timely pay monthly principal and interest installments. A mortgagor's failure to insure the property or to pay property taxes can also constitute copyright 2013 dwood Chapter 7 3 Financing AlaskaRealEstateSchool.com an event of default. However, the use of escrow accounts has reduced the frequency with which this type of default occurs. Finally, construction difficulties or physical damage or destruction to the property by the mortgagor, constituting "waste," can also be considered an event of default. Most mortgages and underlying promissory notes contain an acceleration clause providing that the occurrence of an event of default accelerates the debt, making the entire debt immediately due and payable. Most residential mortgage lenders are required to provide that the mortgagee must give the mortgagor notice of impending acceleration and the opportunity to avoid it by curing the default. In most states, the commencement of a foreclosure proceeding constitutes notice of impending acceleration. Mortgages also often provide for acceleration in the event the mortgagor transfers any interest in the mortgaged property without the mortgagee's consent. These clauses, referred to as due-on-sale clauses, protect the mortgagee from being forced to do business with persons other than the mortgagor with whom the mortgagee initially contracted. When a mortgagor desires to transfer the mortgaged property, the mortgagee has the option to either accelerate the debt or consent to the transaction conditioned on the grantee's assumption of the mortgage and payment obligation, possibly also with a transfer fee requirement and/or an increased interest rate. Foreclosure Proceedings In general, the mortgagor can foreclose on the mortgaged property any time after an event of default. There are two types of foreclosure proceedings: foreclosure by judicial sale and foreclosure by power of sale. Foreclosure by judicial sale is available in all states, and is the required foreclosure method in a number of jurisdictions. A foreclosure by judicial sale is subject to court supervision and is not final until the court confirms the sale. Foreclosure by power of sale serves the same purpose as foreclosure by judicial sale. However, statutes delineating detailed notice and sale procedures replace court supervision. If the foreclosure sale proceeds are insufficient to satisfy the underlying debt, the mortgagee can usually obtain a deficiency judgment against the mortgagor for the deficiency. Likewise, if the foreclosure sale results in a surplus, the mortgagor is usually entitled to seek payment from the mortgagee for the amount of the surplus. In either type of foreclosure sale, it is important to conduct the foreclosure in accordance with the applicable law so that the mortgagor's redemption rights are curtailed and whoever purchases the property at the foreclosure sale receives clear and unhindered title thereto. copyright 2013 dwood Chapter 7 4 Financing AlaskaRealEstateSchool.com Mortgage Basics FAQ Find the best loan option for you, plus tips on how to afford a mortgage and down payment. Where should I shop for home loans or mortgages? Many entities, including banks, credit unions, savings and loans, insurance companies, and mortgage bankers make home loans. Lenders and terms change frequently as new companies appear, old ones merge, and market conditions fluctuate. To get the best deal, it's a good idea to compare loans and fees with at least a half a dozen lenders -- or to get the help of an experienced mortgage broker, who can help you sift through the latest offerings. Because many types of home loans are standardized to comply with rules established by the Federal National Mortgage Association (Fannie Mae) and other quasi-governmental corporations that purchase loans from lenders, comparison shopping is not difficult. However, you'll need to decide what type of mortgage you're interested in first, whether it's a fixed rate, adjustable rate, or one of the many hybrids available now. Once you've narrowed your sights to a particular size, type, and length of mortgage -- such as a 30-year fixed term mortgage for $300,000 -- you'll be ready to compare apples to apples. Mortgage rates and fees are usually published in the real estate sections of metropolitan newspapers, and on online mortgage websites. It's wise to do some advance research even if you decide to work with a loan broker, so that you'll have a sense of the market. Some loan brokers charge the consumer directly, others collect a fee from the lender (though this ultimately adds a little to what you pay for your mortgage). Be sure to check out government-subsidized mortgages, which offer both no-down-payment and low- down-payment plans. Also, ask banks and other private lenders about any "first-time buyer" programs that offer low-down-payment plans and flexible qualifying guidelines to low- and moderate-income buyers with good credit. Finally, don't forget private sources of mortgage money -- parents, other relatives, friends, or even the seller of the house you want to buy. Borrowing money privately is usually the most cost-efficient mortgage of all. And its popularity is increasing as investors turn to real estate as a high-appreciation place to put their money. What are low down payment options, for buyers who can't afford a 20% down payment? Assuming you can afford (and qualify for) high monthly mortgage payments and have a high credit score, you should be able to find a low (5% to 15%) down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment. copyright 2013 dwood Chapter 7 5 Financing AlaskaRealEstateSchool.com Also, if you put down less than 20%, you may have to either pay for private mortgage insurance (PMI) or, to avoid PMI, take out two separate loans (a first mortgage and a second mortgage). What is private mortgage insurance? Private mortgage insurance (PMI) policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale.
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