Florida Real Estate Principles Practices Law 43 rd

Florida Real Estate Principles, Practices & Law 43 rd Edition Unit 12: Residential Mortgages

Mortgage Law • Lien Theory (Florida) – Borrower retains legal title – Lender is protected with a lien • Title Theory – Title conveyed to • Lender through a mortgage deed, or • Trustee through a deed of trust – Borrower retains equitable title © 2017 Kaplan, Inc.

Loan Instruments • Promissory Note – Promise to repay; evidence of a debt – Terms of the loan • Mortgage – Pledges property as collateral – Hypothecation—pledging property as security without surrendering possession – Written instrument © 2017 Kaplan, Inc.

Parties to a Mortgage • Mortgagor – Borrower – Gives mortgage as security to repay • Mortgagee – Lender – Owns the mortgage © 2017 Kaplan, Inc.

Satisfaction of Mortgage • Release of mortgage is recorded by lender • Mortgagee must cancel the mortgage and send the recorded satisfaction to the mortgagor within 60 days © 2017 Kaplan, Inc.

Mortgage Lien Priority • Priority is normally determined by the order liens are recorded • First mortgage is the first mortgage loan to be recorded • Junior mortgage is a second mortgage or later mortgage • Subordination agreement used to voluntarily take lower priority © 2017 Kaplan, Inc.

Borrower’s Covenants and Agreements • • • Promise to repay Taxes and liens Property insurance Occupancy Maintenance and covenant of good repair Covenant against removal © 2017 Kaplan, Inc.

Important Mortgage Provisions • Prepayment clause • • • – Included in FHA and VA mortgages Prepayment penalty clause Acceleration clause – Upon default, accelerate entire debt due Right to reinstate Due-on-sale clause Defeasance clause © 2017 Kaplan, Inc.

Mortgage Features • Down payment • Loan-to-Value ratio • Equity – Current market value – mortgage debt = equity • Interest – Cost for use of borrowed funds • Loan servicing • Escrow (impound) account – Monthly installment of property taxes and hazard insurance © 2017 Kaplan, Inc.

Mortgage Features • PITI (monthly payment) – Principal, interest, taxes, and insurance • Discount points • Loan origination fee © 2017 Kaplan, Inc.

Loan to Value (LTV) Calculation • Loan amount ÷ sale price (value) = LTV ratio • Example: Purchase price is $200, 000. Loan is $180, 000. – $180, 000 ÷ $200, 000 =. 90 or 90% LTV ratio © 2017 Kaplan, Inc.

Discount Points • Up-front fee to increase the real yield, or annual percentage rate (APR) to lender • Allows lender to increase return without increasing the contract interest rate • Payment of additional points may allow the borrower to reduce the interest rate • Payment of discount points is in effect prepaid interest to the lender © 2017 Kaplan, Inc.

Discount Points Calculations: Cost to the Borrower • Each point is equal to 1% of the loan amount • Example: – On a $120, 000 loan for which the lender is charging 2 points, find the cost of the points – $120, 000 x 2% = $2, 400 © 2017 Kaplan, Inc.

Discount Points Calculations Effective Yield to the Lender • Known as the lender’s yield, return, or APR • Each discount point paid will increase the yield (return) to lender by 1/8% • 1/8 is same as taking 1 ÷ 8 = 0. 125% • Example A lender charges 2 points on a loan of $120, 000 at 4% interest. . 125% × 2 points =. 25% + 4% = 4. 25% © 2017 Kaplan, Inc.

Assignment of Mortgage • Assignment is when ownership of a mortgage is transferred from one company or individual to another • Estoppel certificate (letter) verifies the amount of the unpaid balance, interest rate, and date to which interest has been paid prior to the assignment © 2017 Kaplan, Inc.

Purchasing Property Encumbered by an Existing Mortgage Loan • Subject to mortgage – Buyer is not personally liable for the debt • Assumption of an existing mortgage – Seller still liable on original promissory note – Novation agreement makes the buyer solely responsible in the event of a default • Due-on-sale clause – Prevents sale subject to the mortgage or an assumption of the mortgage • Purpose of estoppel certificate © 2017 Kaplan, Inc.

Contract for Deed (Land Contract) • Type of seller financing – Usually small down payment – Buyer makes payments to seller – Seller retains legal title until loan is repaid – Buyer gets possession and equitable title until debt is repaid, then legal title is conveyed © 2017 Kaplan, Inc.

Land Development Loans Construction Loans • Land development loans used to fund streets and infrastructure • Construction loans – Draws – Short-term financing • Blanket mortgage loans – Partial release clause • Takeout commitment • Buydowns © 2017 Kaplan, Inc.

Foreclosure • If the borrower defaults – Initiate a suit on the promissory note • Sue on the note, obtain a judgment, and then execute the judgment against any real or personal property – Initiate a foreclosure proceeding • Foreclose on the property • Caveat emptor applies to purchase at foreclosure sale © 2017 Kaplan, Inc.

Equity of Redemption • Mortgagor can prevent foreclosure by paying the principal and interest due plus collection expenses • Right ends once property has been sold at foreclosure sale © 2017 Kaplan, Inc.

Short Sale • Net proceeds at closing will not satisfy the payoff amount of mortgages and other liens on the property • Seller is selling the home for an amount less than the amount owed to the lender • Sale is subject to all lienholders’ approval © 2017 Kaplan, Inc.

Deed In Lieu of Foreclosure • Mortgagor transfers title to mortgagee • Friendly foreclosure • Non-judicial foreclosure © 2017 Kaplan, Inc.

Foreclosure on Income Property • Receivership clause – Allows a receiver to be appointed to collect income from the property and use the income to make mortgage payments in the event of default © 2017 Kaplan, Inc.

Lis Pendens • Notice recorded in public records of pending legal action involving real estate • Constructive notice © 2017 Kaplan, Inc.