There are two parts to a mortgage loan:

 Promissory note or financing instrument - Promise to repay the debt.

 The mortgage, or security instrument - Creates a lien on the property.

Hypothecation: To pledge specific real or personal property as security for

an obligation without surrendering possession of it. (You can live in your
house while you are paying off the loan.)
In some states, a Deed of Trust is used rather than a mortgage. There are
still two parts to the loan, a promise to repay, and the security or lien on the
property. But, in this case there are three parties involved. Note that in a
deed of trust, the lender is referred to as the "beneficiary" and holds the
note, or the promise to repay, and a third party known as the "trustee" holds
"naked legal title" as the security part of the loan.
Provisions of The Financing Instrument:

 A note is negotiable; the lender can sell the note to a third party.
 Interest is the charge for using money and is always expressed as an
annual percentage rate.
 Discount Points are prepaid interest charged up front at closing:
 One discount point = One Percent (1%) or (.01) of the loan amount.
 Sometimes, the lender will include a provision in the promissory note
stating that if the loan is paid off early, there will be a prepayment
penalty, which is a percentage of the loan balance. For example, if the
prepayment penalty is stated as 3% and a borrower pays off her loan
ahead of schedule, then the borrower must pay a fee of 3% of the loan
balance prior to paying off the loan.

Duties of the Borrower:

1. Payment of the debt in accordance with the terms of the note.

2. Payment of all real estate taxes on the property given as security.
3. Maintenance of adequate insurance.
4. Maintenance of the property in good repair at all times.
5. Lender authorization prior to making any major alterations to the
property.

Clauses in a Promissory Note:

Acceleration Clause: If a borrower defaults on the loan, (misses a
payment, etc.) the entire balance is due and payable immediately.
Defeasance Clause: When the borrower has paid the entire balance, the
lender is required to execute a satisfaction of mortgage, which puts on the
public record that the loan was paid and that the lender no longer has a lien
on your property. MEMORY TOOL: Remember, that when this happens you
have defeated the lender-you won by paying off the loan!
Alienation Clause: "Due on sale Clause" The entire balance of the loan
becomes due and payable when the property is transferred. This prevents
assumption.
Do you understand the difference between an assignment and subject to?
Assignment - The transfer of the right, title and interest in the property of
one person (the assignor) to another (the assignee). There are assignments
of, among other things, mortgages, sale contracts, contracts for deed,
leases, and options.
In any assignment, the assignee becomes primarily liable, and the assignor
remains secondarily liable as surety, unless there is a novation agreement
relieving the assignor from liability.
If a Mortgage or Deed of Trust is taken over:

 "Subject to" an existing Mortgage or Deed of Trust - if the clause in the

deed states that the buyers are purchasing the property "subject to the
existing loan" the buyers acknowledge the existing loan, and promises
to pay the obligation. If the buyer does not pay the original
borrower will be held responsible. If the original borrower (grantor)
does not pay the buyer (grantee) will lose the property, and thus his or
her equity, in a foreclosure sale.
 Assumption of a mortgage - the acts of acquiring title to property that
has an existing mortgage and agreeing to be personally liable for the
terms and conditions of the mortgage, including payments. In effect, the
buyer (grantee) becomes the principal guarantor on the mortgage note
and is primarily liable for the amount of any deficiency judgment
resulting from a default and foreclosure on the property. The original
mortgagor (grantor) is still liable as surety on the note if the grantee
defaults unless there is a novation given by the lender, which is usually
unlikely.

Land Contracts (Contract for Deed): This is one type of owner financing,
whereby the title to the property does not transfer until the purchaser has
paid the seller the entire balance of the debt. The seller in this case is
referred to as the VENDOR and the buyer is the VENDEE.
Foreclosure: The legal process whereby the property pledged as security
in the mortgage documents or the deed of trust is sold to satisfy the debt.

 Judicial Foreclosure: Required by a mortgage. Must go through the

courts to foreclose.
 Nonjudicial Foreclosure: Required by a Deed of Trust - Do not have to
go through the courts to foreclose; and is therefore, a quicker process.

Foreclosure (continued):

 Deed in Lieu of Foreclosure: Referred to as a "friendly foreclosure,"

lender and borrower agree that the lender will become the owner of the
property, instead of going through the formal foreclosure process. This
process does not however, clear any junior liens.
 Equitable Redemption: The borrower is allowed to clear up the debt
prior to the foreclosure sale.
 Statutory Redemption: The borrower has a certain amount of time
after the sale to clear the debt.
 Deficiency Judgment: If the proceeds of the foreclosure sale are not
sufficient to cover the debt, the lender can go to court and seek a
deficiency judgment against the borrower. This is a general lien and
would apply to all of the borrower's assets.

Straight Loan: A non-amortizing loan where the entire principal is due at

the end of the loan term. Interest may be paid in periodic installments or in
a lump sum at the end of the loan term.
Amortized Loan: Regular payments of principal and interest are made and
the entire loan is paid off by the end of the term.
Adjustable Rate Mortgages (ARMS)

 Interest rate fluctuates and is usually tied to an index.

 Increases are capped for each period and for the term of the loan.

List the distinguishing aspects of the following loans:

 Graduated Payment Plan

 Balloon Loan
 Shared Appreciation Mortgage
 Purchase Money Mortgage
 Package Loan
 Blanket Loan
 Wraparound Loan
 Open-end loan
 Construction loan
 FHA/VA Loans - FHA loans are loans which are insured by the Federal
Housing Authority VA loans are loans that are guaranteed by the
Veteran's Administration

The Primary Mortgage Market consists of lenders who originate mortgage

loans directly to borrowers. Primary mortgage market lenders include:

1. Savings and loans

2. Commercial banks
3. Mutual savings banks
4. Life insurance companies
5. Mortgage bankers
6. Credit unions
7. Mortgage brokers are also part of the primary mortgage market, even
though they do not lend to customers directly. Rather, they are
instrumental in procuring borrowers for primary mortgage lenders. The
primary lender assumes the initial risk of the long-term investment in the
mortgage loan. Primary lenders sometimes also service the loan until it
is paid off. Servicing loans entails collecting the borrower's periodic
payments, maintaining and disbursing funds in escrow accounts for
taxes and insurance, supervising the borrower's performance, and
releasing the mortgage on repayment. In many cases, primary lenders
employ mortgage servicing companies, which service loans for a fee.
8. Portfolio lenders - A primary mortgage market lender may or may not
sell its loans into the secondary market. Many lenders originate loans
for the purpose of retaining the investments in their own loan portfolio.
These loans are referred to as portfolio loans, and lenders originating
loans for their own portfolio are called portfolio lenders. Portfolio lenders
are less restricted by the standards and forms imposed on other lenders
by secondary market organizations. In retaining their portfolio loans,
portfolio lenders may vary underwriting criteria and hold independent
standards for down payment requirements and the condition of the
collateral.

The Secondary Mortgage Market

Remember that we said that the promissory note is negotiable, that is it can
be bought and sold. The Secondary Mortgage Market is the market in which
these notes are exchanged.
There are three major players in the Secondary Mortgage Market:
 Fannie Mae (FNMA) - Buys FHA loans, VA loans, and conventional
loans
 Ginnie Mae (GNMA) - Buys FHA loans or VA loans
 Freddie Mac (FHLMC) - Buys conventional loans

How does the Federal Reserve control the flow of money in the market?
Reserve Requirements: The amount banks are required to keep on
reserve.
Interest Rate (discount rate) the Fed charges banks for money.
The Secondary Mortgage Market
Remember that we said that the promissory note is negotiable, that is it can
be bought and sold. The Secondary Mortgage Market is the market in which
these notes are exchanged.
There are three major players in the Secondary Mortgage Market:

 Fannie Mae (FNMA) - Buys FHA loans, VA loans, and conventional

loans
 Ginnie Mae (GNMA) - Buys FHA loans or VA loans
 Freddie Mac (FHLMC) - Buys conventional loans

How does the Federal Reserve control the flow of money in the market?
Reserve Requirements: The amount banks are required to keep on
reserve.
Interest Rate (discount rate) the Fed charges banks for money.
Real Estate Investment
Advantages of Real Estate Investment:

 Has shown an above average rate of return

 Tax benefits

Disadvantages of Real Estate Investment:

 Real estate is not highly liquid.

 Difficult to invest in real estate without expert advice.
 Management decisions must be made.
 High degree of risk.
Property appreciates in value due to inflation and due to an increase in the
intrinsic value of the property.
Cash flow is the total amount of money remaining after all expenditures
have been paid, including taxes, operating costs and mortgage payments.
Leverage is the use of borrowed funds.
FINANCE HELPFUL HINTS
INTEREST IS RENTED MONEY
First deal with the sellers' loan that is going to be paid off at closing. The
seller has a loan balance of $50,000 on November 1st and the seller has
just made his payment for the month of October. (MORTGAGE PAYMENTS
ARE PAID IN ARREARS ** AT THE END OF THE MONTH)
REMEMBER: The seller owes $50,000 for the whole month of November no
matter when he sells the property. Interest on the loan is 10 3/4 % annually
and closing is set for November the 16th.
HOW MUCH INTEREST DOES HE OWE? IS IT A CREDIT OR A DEBIT TO
THE SELLER?
ANSWER:
Time Line 11/1 - 11/30.
Seller closes 11/16, therefore; he is renting the money for 16 days.

 Step1:
$5375.00 interest per year
$50,000 loan / 10.75% annual
balance / interest rate
 Step2:
$447.93 interest per month
12 months / $5,375.00
/ annual interest
 Step 3:
$14.93 interest per day
30 days / $447.93 monthly
in month/ interest
 Step 4:

$14.93 interest per day

x 16 days the money is rented
$238.89 DEBIT SELLER
What if the buyer is going to assume this loan?
The seller is debited and the buyer is credited interest on a loan
assumption, therefore;

 DEBIT THE SELLER $238.89 and CREDIT THE BUYER $238.89

If the seller's loan ($50,000) is assumed by the buyer, the seller needs to be
debited $50,000 and the buyer receives a credit for $50,000. Now the seller
has transferred the obligation of the loan to the buyer to pay.
The reason the buyer receives credit is he/she is taking over the obligation
of the seller's loan! The seller is obligated to make the next payment on
DECEMBER 1ST. Therefore, the buyer receives credit for the time the seller
lived in the property because the buyer now is obligated to make the
December 1st payment. The buyer will add his/her own monies to the
December 1st payment in order to meet the full financial obligation due.

Unit 1 Summary - Appraisal Process

A CMA can be performed by a real estate licensees, whereas an appraisal
must be performed by a licensed appraiser.
An Appraisal is an estimate or opinion of value. The goal of the appraiser
is to determine:

 The market value, insurance value, salvage value or the tax value of a
property.
 Compensation is based on time and effort never on the established
price of the property.

Appraiser's Ground Rules

 Payment must be in cash or its equivalent

 Buyer and seller must be unrelated and acting without undue influence,
menace or duress.
 The property must be marketed for a reasonable time in an open and
free-flowing market.
 Both buyer and seller must be well-informed consumers.

Appraisal Process

 State the problem.

 Gather, record and verify the necessary data.
 Analyze and Interpret using:
  Neighborhood Analysis
 Neighborhood Cycle
 Site Analysis
 Estimate Land Value.
 Estimate the value of the property by:
 Market Data (sales comparison)
 Cost (or Summation)
 Income
 Reconcile estimated values for the final value estimates.

Types of Appraisal Reports:

 Letter: A short business letter stating all essential data but not including
supporting data.
 Short or Form: Contains all basics of a regular appraisal and is used
primarily for homes.
 Narrative: The most comprehensive of all appraisal reports. Used for
commercial and investors.

Unit 2 Summary - Value Principles

Highest and Best Use - the possible use of a property that would produce
the greatest net income and thereby develop the highest value.
Substitution - the maximum value of a property tends to be set by the cost
of purchasing an equally desirable and valuable substitute property.
(Comparison shopping- basis for market data approach.)
The Law of Supply and Demand - the value of a property increases when
the supply is short and decreases when there is too much. Similarly, the
value increases when the supply is short, and decreases when there is little
demand.
Conformity - the more a property or its components are in harmony with
the surrounding properties or components, the greater the contributory
value. (The more the properties are alike, the more they retain value.)
Regression and Progression - occur between dissimilar properties. The
value of the better quality property is affected adversely by the presence of
the lesser quality property and a lesser house will benefit from a larger
house.
Anticipation - property can increase or decrease in value in expectation of
something in the future such as appreciation or rezoning.
Contribution - means the value of any component of a property is what it
gives to the value of the whole or what its absence detracts from the whole.
Assemblage - is the combining of two or more adjoining lots into one larger
tract to increase their total value.
Competition - is when one business attracts another business of similar
type; together they may make more money than they would have singularly.
Too much competition is ruinous.
Change - real property is constantly changing- expanded, stabilizing,
declining or rebirth. We are all familiar with areas that have or may be going
through these changes.
Sales Comparison Approach (Market Data Approach):

 Used for appraising residential property and vacant land.

 The principle of substitution holds that if a buyer will pay a certain
price for a property, he will pay a similar price for a ‘substitute’ property
of similar characteristics.

Three steps in the Sales Comparison Approach:

1. Identify comparable sales.

2. Compare comparables to the subject and make adjustments to
comparables. One always adjusts the values of the comparables –
never the subject.
3. Reconcile values indicated by adjusted comparables for the final value
estimate of the subject - a judgmental evaluation based on all value
indicators.

Cost Approach
Used for properties with limited comparable data or income data or for
properties where the original cost is particularly applicable.
Cost can be determined by:

 Square foot cost: using outside measurement, how many square feet
times a cost for either replacement or reproduction of the improvement.
 Unit in place: based on the construction cost per unit of measure of
individual building components.
 Quantity survey method: The quantity and quality of all materials and
the labor are estimated on a unit cost basis. These factors are added to
indirect costs to arrive at the total cost of the structure.

Four steps involved in the Cost Approach:

1. Estimate the value of the land alone as if vacant.

2. Determine the replacement or reproduction cost of the improvements.
3. Deduct all accrued depreciation from the replacement cost.
4. Add the estimated land value to the depreciated replacement or
reproduction cost.

The land never depreciates.

Depreciation is divided into three classes according to its cause:

1. Physical depreciation is a form of depreciation caused by the action of

the physical elements.
2. Functional obsolescence is a loss of value of an improvement due to
functional inadequacies, often caused by age or poor design.
3. Economic obsolescence is a loss of value resulting from extraneous
factors that exist outside of the property itself. It is caused by
environmental, social, or economic forces over which an owner has little
or no control.

Chronological Age: actual age in years of the building, based on building

date. It cannot be changed. EffectiveAge: differs from the actual age by
such variable factors as depreciation, quality of maintenance, and the like.
Physical life is the actual age or life of a structure that is considered
habitable - defined by the durability of its structural components. Economic
Life is the estimated period where an improved property will yield a return
over and above economic rent.
The deterioration of an improvement that it is not economically feasible to
repair is considered incurable.
Income Approach to Value
Based on the present value of the rights to future income. For income
generating properties.

 Estimate the annual Potential Gross Income.

 Deduct an allowance for vacancies to arrive at Effective Gross
Income.
 Deduct the annual operating expenses from Effective Gross Income to
derive Net Operating Income (NOI).
 Estimate the rate of return that an investor would demand for this
investment - Capitalization Rate.
 Divide the Cap Rate into the net operating income to identify the
property’s value.

Formulas:

 To solve for Value: I / R = V

 To solve for Cap Rate: I / V = R
 To solve for Income: V x R = I

There are no federal taxes on real property.

County and local governments establish tax districts to collect funds for
providing specific services.
Ad Valorem Taxation

 General property taxes are levied on an ad valorembasis, meaning that

they are based on the assessedvalue of the property.
 Some tax jurisdictions may employ an assessment ratiowhere the
assessed value used for taxation is a percentage of the property’s
market value.
 The tax baseof an area is the total of the appraised or assessed values
of all real property within the area's boundaries, excluding partially or
totally exempt properties:
 Tax base = assessed values - exemptions

Homestead Exemption

 A homestead is a parcel of real property that is owned and occupied as

a family home.
 A property owner qualifies for a homestead exemption by meeting two
criteria:
1. Is head of a family.
2. Resides on the property for a required length of time.

Taxable value is the assessed value subject to taxation after all exemptions
have been taken into account.
The part of the budgeted expenditures that cannot be funded from other
income sources must come from real property taxes. This budgetary
shortfall becomes the ad valorem tax levy.

 Tax rate = tax requirement ÷ tax base

A mill is one one-thousandth of a dollar ($.001).

Special Assessments

 A tax levied against specific properties that will benefit from a public
improvement.
 If a taxing entity initiates an assessment, the assessment creates
an involuntary tax lien.
 Usually paid in installments over a number of years.

Unit 5 Summary - Gross Rent Multiplier

The GRM and GIM are abbreviated forms of valuation using the income
approach, but without the complications of property expenses, reserves,
depreciation, and debt service.
If one is using the GRM method, one uses the property’s monthly rent. If
using the GIM, one uses the property’s annual income.
The gross rent multiplier itself is a ratio number reflecting the relationship
between a property’s price or value and its income.
Gross Rent Multiplier (GRM) Formulas

 Value ÷ Monthly rent = Gross Rent Multiplier

 GRM x Monthly rent = Value
 Value ÷ GRM = Monthly rent

Gross Income Multiplier (GIM) Formulas

 Value ÷ Annual rent = Gross Income Multiplier

 GIM x Annual rent = Value
 Value ÷ GIM = Annual rent

Private Land-use Controls

The grantor (seller) decides how the grantee (buyer) can use the property.
The grantor creates deed restrictions – encumbrances - which limit the use
of the property.
 Limiting restrictions: State things you can never do. Affirmative
restrictions:State things you must abide by.
 The neighbor seeking help must go to the courts for relief, rather than
the police or taking action individually.
 Deed restrictions are recorded with the deed or on the deed itself.

Public Land-control use

The United States is empowered to control land for the benefit of all
citizens. The rights to make laws to control local property are
called Enabling Acts.
Police Power:
Planning/Zoning

 Master Plan: both a statement of policies, and a presentation of how it

will be implemented once a local government has adopted it.
 Bulk Zoning: Controls density and avoids overcrowding.
 Aesthetic Zoning: Requires that new buildings conform to specific types
of architecture.
 Directive Zoning: Encourages zoning as a planning tool to use land for
its highest and best use.
 Spot Zoning is the reclassification of one piece of property in an area for
a specific purpose.
 Zero Lot Line: to describe the positioning of a structure on a lot so that
one side rests directly on the lot’s boundary line.
 Planned Unit Development (PUD) produces a high density of housing
units, while maximizing the use of open space.

Zoning ordinances must not violate the rights of individuals and property
owners.
Exceptions to Zoning:

 Buffer Zones such as landscaped parks and playgrounds to separate

and screen residential areas from nonresidential areas.
 Nonconforming Use: constructed prior to the adoption of the zoning
laws, and its use is one that clearly differs from current zoning.

A Variance may be sought to provide deviation from an ordinance so long

as it is before the construction or reconstruction takes place.
Conditional Use Permit: for a property deemed to be in the public interest
contrary to the zoning that exists.
Building Codes

 Set the standards for the types of materials to be used for construction.
Most cities use the BOCA requirements for building.
 The purpose of a building permit is to control compliance with building
codes and zoning ordinances by examining the plans and inspecting the
work.

Subdivision Regulations

 Cities control subdivision construction as part of the master plan.

Environmental Protection Legislation

 Disclosure of knowledge of Lead Paint on any sale or lease of a

residential property is mandatory.
 To insure the safety of an area, a percolation test is required to test
ground water for runoff.

A developer attempts to put land to its most profitable use through the
construction of improvements. Asubdivider is an owner whose land is
divided into two or more lots and offered for disposition.
Public - Owned property
Through PETE and the use of eminent domain, property may be acquired
for the public good.
Unit 7 Summary - Legal Descriptions
A legal description of real property accurately locates and identifies the
boundaries of the subject parcel to a degree acceptable by courts of law in
the state where the property is located.
A legal description is required for:

 Public recording.
 Creating a valid deed of conveyance or lease.
 Completing mortgage documents.
 Executing and recording other legal documents.

Lot and Block System

 Used to describe properties in residential, commercial, and

industrial subdivisions.
  In a large subdivision, lots may be grouped together into blocks for
ease of reference.
 The surveyor incorporates the survey data into a plat of survey.

Example: "Lot 7, Block 8 of the Grand Oaks Subdivision of the SE 1/4 of

Section 35, Township T22S, R14E of the Tallahassee Principal Meridian
in Pinellas County, Florida."
Metes and Bounds System

 A property description using the metes and bounds system must begin
and end at the point of beginning.
 Monumentsare fixed objects that serve as markers for the property, and
are used to establish the parcel’s boundaries.

Rectangular Survey System

This system is based on sets of intersecting lines.

 Principal Meridians run north and south.

 Base Lines run east and west.
 Township lines are lines running east and west, parallel with the base
line and six miles apart.

Range Lines are lines on either side of a principal meridian and are divided
into six mile wide strips by lines that run north and south parallel to the
meridian.

 A Township is a 36 square mile area formed by the intersection of a

township and range lines.
 Each township square is divided into 36 Sections each one mile square.
 One section is also equal to 640 acres.

Area is always expressed in square feet or square yards:

Area of a rectangle:

 Area = base x height

Area of a trapezoid:

 Area = Average base length x height

 Average base length = (base 1 + base 2) / 2

Area of a triangle:
  Area = ½ base x height

Volume is always expressed in cubic feet or cubic yards:

A solid rectangle, or prism:

 Volume = length x width x depth

A solid triangle, or pyramid:

 Volume = ½ base x height x depth

Measurement Formulas
1 mile = 5,280 linear feet
1 square yard = 9 square feet
1 cubic yard = 27 cubic feet
1 square mile = 640 acres = 1 section
1 acre = 43,560 square feet.
Following are the necessary steps to determine how much interest the
buyer pays over the life of a loan:
The loan amount is $50,000, and the monthly principal and interest payment
will be $439.00 a month for 30 years. How much interest will be paid over
the term of the loan?
Step 1 - Take the monthly Principal & Interest payment that will be given to
you, and multiply it by 12 to obtain the amount paid a year, and then
multiple by the number of years the loan will be in existence.

 $439 x 12 months x 30 years = $158,040 = total amount paid in P & I.

Step 2 - Then subtract the loan amount ($50,000 principal) from the
$158,040 ($158,040 - $50,000 = $108,040.00 which is the amount of
interest paid over the life of the loan.
If you are given the monthly interest and interest rate of a loan, you must
first get the annual interest payment (multiply by 12), and then divide by the
interest rate.
Example:
If the loan is for $150,000 at 7% interest for 30 years and the payment is
$998 per month (including principal and interest), what is the principal
balance after one payment?
Step 1: Determine the annual amount of interest paid based on the loan
balance.

 $150,000 X 7% = $10,500 year interest

Step 2: Divide the annual amount of interest by twelve to determine the

monthly interest amount.

 $10,500/12 = $875 month interest

Step 3: If the payment of $998 includes both interest and principal, then we
can subtract the interest amount from $998 to determine the amount that
was applied to principal.

 $998 - $875 = $123 (principal paid)

Step 4: Now, we can apply the principal to the loan balance to get the loan
balance after one payment.

 $150,000 - $123 = $149,877 (new balance).

Step 5: Principal Balance X Annual Percentage Rate

 $149,877 X 7% = $10,491.39 annual interest amount.

Step 6: Annual interest amount divided by 12 to get monthly interest

amount.

 $10,491.39/12= $874.28 interest a month

Step 7: Subtract monthly interest amount from the payment of $998 to get
principal portion of payment.

 $998 - $874.28= $123.72 principal paid

Step 8: Apply this principal payment to the loan balance.

 $149,877 - $123.72 =$149,753.28 loan balance after the second

payment.

Straight Term Loan: The borrower must be prepared to pay the entire
principal at the end of the time period.
Balloon Loan: Interest and principal are paid on an equal basis until the
final payment, which is larger. A balloon is the remaining balance that is
due at the maturity of a note or obligation.

Fully Amortized Loan: Regular payments of principal and interest. The

entire loan is paid off by the end of the term. The liquidation of a debt by
periodic installments.
Budget Mortgage: Has a payment composed of principal, interest, taxes
and insurance.
Adjustable-rate Loan: Interest rate fluctuates and is usually tied to an
index; increases are capped for each period and for the term of the loan.

 An Adjustable Rate Mortgage(ARM) contains an escalator clause that

allows the interest to adjust over the loan term. An ARM is tied to an
index, and the rate of the loan goes up or down, depending on
the caps,margin and adjustment period.

Graduated Payment Plan: Lower payments first year, then payments

increase.
Reverse Annuity Mortgage: Homeowner receives monthly payments
based on accumulated equity rather than a lump sum. Loan must be repaid
upon the death of the owner or sale of the property.
Part Purchase Money: A mortgage given as part of the buyer's
consideration (cash) for the purchase of real property, and delivered at the
same time that the real property is transferred as a simultaneous part of the
transaction.
Package Mortgage: Loan on real estate, plus fixtures, and appliances;
always includes personal property as well as real property.
Blanket Mortgage: Loan on several pieces of land. Partial Release Clause
- mortgagee/beneficiary agrees to release certain parcels from the lien of
the blanket mortgage/deed of trust upon payment by the mortgagor/trustor
of a certain sum of money.
Open-end Mortgage/deed of trust: The mortgagor/trustor is allowed to re-
borrow against principal that has already been paid so far. A lender is
allowed to increase the outstanding balance of a loan up to the original
amount of the loan.
Wraparound: Additional financing from a second lender. One payment- two
loans. The new lender pays the first loan, but charges higher interest for a
second. Original loan must be assumable with no alienation clause.
Buydown: The payment is subsidized at the beginning by a builder or other
party for a 3 to 5 year period, and thereafter, the purchaser takes over and
pays the regular payment amount.
Construction Loan:

 The lender commits the full amount of the loan to the borrower, but
makes partial progress payments as the building is being completed
after lien waivers have been obtained
 High interest rate to builders, usually one percent over prime rate to be
loaned for “spec homes.”

Takeout Loan: Long term permanent financing for large construction

projects, usually commercial. Replaces construction loan on large
commercial projects.
Sale-Leaseback: Owner sells his or her improved property and at the same
time, signs a long-term lease.
Participation Mortgage: A mortgage in which the lender participates in the
income of the mortgaged property beyond a fixed return, or receives a yield
on the loan in addition to the straight interest rate.
Bridge Loan: Short term interim loan for buyer, usually six months to one
year in duration.
Grant Program (Down Payment Assistance): A program that provides
buyers with a "gift" of money to use toward their down payment or closing
costs which never has to be paid back.
Contract for Deed: The buyer does not receive legal title until the final
payment is made. Seller keeps legal title until the debt is paid in full. Buyer
receives equitable title until debt is paid in full.
Vendor: The seller of realty - the seller under contract for
deed. Vendee: The purchaser of realty - the buyer under a contract for
deed.
Loan Assumption: The act of acquiring title to property that has an existing
mortgage and agreeing to be personally liable for the terms and conditions
of the mortgage, including the payments.
"Subject to mortgage": A grantee [buyer] taking title to a real property
"subject to" a mortgage is not personally liable to the lender [mortgagee] for
the payment of the mortgage note.
The Federal Housing Administration (FHA) does not build homes nor
does it lend money itself.

 The FHA insures loans on real property made by qualified or approved

lending institutions.
 FHA is overseen by The Department of Housing and Urban
Development (HUD).
 If a buyer wants to obtain an FHA loan, a licensee should send him/her
to a qualified lender.

Requirements to receive an FHA loan:

 The borrower is charged a one-time insurance premium (paid at

closing by the borrower or the other party), which provides security to
the lender in addition to the real estate in case of borrower default.
 The lender can charge points, and either the borrower or the seller can
pay them.

The Veterans Administration (VA) will guarantee that a loan made by an

approved lending institution will be paid.

 The veteran (with Certificate of Eligibility) must have served 181 days
active service. A veteran's basic entitlement is $104,250 in counties
where the loan limit is $417,000.
 If a veteran does not pay the mortgage as agreed there will be a
 Certificate of Reasonable Value: the house must qualify with an
appraisal and the amount of the loan is limited.
 Points can be paid by either the seller or the buyer. VA does not allow
prepayment penalties to be charged if a veteran pays off a loan early.

VA will make a direct loan if there are no lenders in the area where a
veteran wants to buy property.
The Rural Economic and Community Development (RECD) makes loans
for home purchases or construction in rural areas and small communities
outside metropolitan areas.
Conventional Loans - No government guarantees or insurance.

 Minimum down payment of 20%.

  There are conventional loans available with lower down payments if the
buyer is willing to pay a Private Mortgage Insurance (PMI).
 Conventional Loans normally require a larger down payment (20% down
or more) than FHA or VA, but do not require insurance with 20% or
more down payments.
 Most loans are packaged by the lenders and sold in the secondary
market to Fannie Mae or Freddie Mac.

Conventional Insured Loans - No government guarantees of insurance but

insurance from private insurance companies.

 The amount a lender will loan is generally based on the appraised value
for loan purposes or the sale price whichever is lower.
 A lender or investor is really not interested or concerned with the loan
applicant's need of financial assistance.

Qualifying the Buyer:

 Ability to repay the loan; Mortgage to income ratio; Assets; Liabilities;

Debt Coverage ratio and Attitude.

Qualifying the property:

 Type of property; Location; Area zoning; Value range; Neighborhood;

Actual/Effective age/Remaining economic life; Condition; Special
clearances and Overall marketability.

Qualifying the title:

 Abstract and opinion; Chain of Title; Title insurance and Other Terms.

Loan definitions:

 Non-recourse loan- the borrower is not held personally liable on the

note.
 Non-recourse clause - Real estate loans are often sold in the financial
market.
 Default- The non-performance of a duty or obligation that is part of a
contract.
 Conditional approval- A written pledge by a lender to lend a certain
amount of money to a qualified borrower on a particular piece of real
estate for a specified time under specific terms.
 Underwriting- The analysis of the extent of risk assumed in connection
with a loan.
 Appraisal fees- An appraiser's fees are typically based on time and
expenses; fees are never based on a percentage of the appraised
value.
 Certificate- a person is prevented from asserting rights or facts that are
inconsistent with a previous position or representation made by act,
conduct, or silence.
 Exculpatory clause- which the lender waives the right to a deficiency
judgment.
 Impounds- A fund of the buyer's money that the lender sets aside for
future needs relating to the parcel of property.
 Disintermediation- investing funds directly instead of placing money
savings institutions.
 Foreclosure- when the lender takes back a house because the
homeowner has not made mortgage payments. The property becomes a
lender-owned property (REO).
 Short sale- Occurs in lieu of a foreclosure. In the end, the lender
agrees to accept a loan payoff amount that is less than what is actually
owed.

Closing the loan

 Buyer and seller face to face – All parties to the transaction are present
and the closing is conducted by a settlement agent.
 Closing in escrow – A third party acts as the escrow agent for the buyer
and seller and conducts all the closing activities.

Settlement Agent Duties

 Does the closing, calculates the costs involved and fills out the closing
statements.
 A settlement agent could be an attorney, a real estate broker, a closer
from the title company or a lender.

Transfer Tax

 To collect reliable data on the fair market value of the property to help
establish more accurate property tax assessments.
 Paid by the seller or lessor. The tax may be paid by the purchase of tax
stampsor by payment of a transfer fee.

Loan Sources:
 Savings and Loans- Specialize in long term residential loans.
Deposits must be insured up to $250,000.
 Banks- Make short-term loans.
 Insurance companies- Prefer large commercial projects, but will make
residential loans.
 Participation financing- A mortgage in which the lender
participates in the income of the mortgaged property beyond a fixed
return, or receives a yield on the loan in addition to the straight
interest rate.
 Mortgage Broker- provides its own funds for loans or negotiates loans
for compensation.
 Mutual savings banksare also lenders in the primary market (primarily
in the Eastern states).

The Federal Reserve System is a central banking system designed to

manage the nation's economy.

 Reserves: amounts of money banks are required to keep on hand.

 Discount rates: rate at which the Federal Reserve System charges
banks for money.
 Buying bonds - more money in the market, interest rates lower,
economy is stimulated. Selling bonds - the opposite of buying bonds.
 The promissory note is considered to be personal property that can
be bought and sold.

Secondary Mortgage Market - provides funds for the primary market

(lenders):

 Federal National Mortgage Association or Fannie Mae - (FNMA

or "Fannie Mae")
 Government National Mortgage Association - (GNMA or Ginnie
Mae)
 Federal Home Loan Mortgage Corporation - (FHLMC or Freddie
Mac)

HUD is the regulator for Fannie Mae, Ginnie Mae and Freddie Mac.
Property appreciates in value due to inflation and due to an increase in
the intrinsic value of the property.
Selling shares (securities) of FNMA, GNMA and FHLMC requires
a securities license.
Advantages of Real Estate Investment:
 Above average rate of return.
 Tax benefits
 Land can never be depreciated.

Disadvantages of Real Estate Investment:

 Not highly liquid.

 The purchaser of investment property must be prepared to "invest" for
the long haul.
 Market conditions are changing all the time.

Cash Flow is the total amount of money remaining after all expenditures
have been paid including taxes, operating costs, and mortgage payments.
Leverage is the use of borrowed funds.
Selling shares (securities) of FNMA, GNMA, and FHLMC requires a
securities license.
Securities Law

 Real property securities must be registeredwith the Securities and

Exchange Commission (SEC).
 If an agent suspects a property may be a real property security, he
should refer the seller to a securities professional for advice .

Financing regulation:
Truth In Lending Law (Regulation Z)

 Requires lenders to disclose to buyers the true cost of obtaining credit.

 Requires that the consumer be fully informed of all finance charges.
 Applies to residential loans, federally related 1-4 family properties, non-
commercial properties, and family farms.

Two major sections of Truth In Lending:

 Advertising - Truth in lending is violated when the phrase "no down

payment required" is advertised without any other information.
 Annual Percentage Rate - An expression of the relationship of the total
finance charge to the total amount to be financed. Use of APR permits
the consumer to compare rates.

The REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) - To

ensure that the buyer and seller in a residential real estate transaction
involving a new first mortgage loan have knowledge of all settlement costs.
Administered by the CFPB.
According to the TRID rule:

 Lenders must give a copy of the booklet, “Your home loan toolkit” to
every person at the time of application for a loan.
 Lenders must provide a Loan Estimate of settlement costs at the time of
loan application or within three business days of application.
 A Closing Disclosure must be delivered to the borrower at least three
days before closing.

RESPA prohibits kickbacks to real estate licensees.

Equal Credit Opportunity Act - Prohibits lenders from discriminating
against race, color, religion, national origin, sex, marital status, age or
dependency on public assistance in the granting of credit to consumers.
Under ECOA, a lender can base lending decisions on:

1. Income
2. Net worth
3. Job stability
4. Credit rating

TRDI Rule
The Loan Estimate and Closing Disclosure forms provide a means for
borrowers to comparison shop more effectively for competing loan offers.
Closings that must comply with TRID include any closed end-loan secured
by real property.
The Loan Estimate must be delivered within three business days of
loan application. Signature of the applicant is not required.
A loan application exists once consumer has submitted to the lender:

 Name
 Borrower’s Income
 Borrower’s Social Security number
 Property address
 Estimated value of property
 Amount of mortgage loan sought by the consumer.
A business day is a day on which the creditor’s offices are open to the
public for carrying out substantially all of its business functions.

Required delivery time frame for the Closing Disclosure is based on the
method of delivery. It must be delivered at least three days prior to
closing.
Consummation is defined under Regulation Z as the time that a consumer
becomes contractually obligated on a credit transaction
The settlement agent must provide the seller with the Closing Disclosure,
and that may be done at consummation.
An Agent is a person who is empowered by contract to represent the
interest of someone called a Principal.
When one person is empowered by another to represent him/her in any
type of transaction, it is called anagency relationship.
This type of relationship is called a "Fiduciary Relationship," one
of utmost trust.
An agency relationship can be created any one of four ways:

 Written or expressed: An oral or written contract in which the parties

state the contract’s terms and express their intentions in words.
 Implied - A contract under which the agreement of the parties is
demonstrated by their acts and conduct.
 Ostensible Agency - An actual agency relationship that arises by the
actions of the parties rather than by express agreement. For example,
the owner of a property knows a broker is showing the owner's vacant
lot to prospective buyers without authority to do so. Unless the owner
takes steps to stop such unauthorized showings, the law considers that
third parties have a just cause to believe the broker to be the "owner's
broker" This situation is called an ostensible agency because on the
surface an agency appears to exist. Once this type of agency is created,
the owner is prevented by estoppel* from denying its existence.
(*Estoppel - A legal doctrine by which a person is prevented from
asserting rights or facts that are inconsistent with a previous position or
representation made by act, conduct or silence.)
 Ratification - A method of creating an agency relationship in which the
principal (seller or buyer) accepts the conduct of someone who acted
without prior authorization as the principal’s agent.
When an agent works FOR a principal that person is a client.
When an agent works WITH a person that individual is a customer.
There are multiple types of agents:
Universal Agent: Handles all delegated business of principal. The
Universal Agent has Power of Attorney which is sometimes called
an Attorney-in-Fact.
General Agent: Handles multiple transactions of a client. The best example
in real estate would be property management.
Special Agent: Handles one transaction for one seller of one property. The
best example would be a licensee who is hired to sell one property for a
client.
Agency Coupled with an Interest: When the real estate licensee is a
partner in the ownership of the property.
What does an agent owe his/her principal? (C O A L N):

 Care: Taking due care of that which is entrusted to the agent, including
writing a contract in such a manner so that the interests of the Principal
are protected.
 Obedience: Lawful instructions of the Principal are followed.
 Accounting: Handling money (including escrows) with care and closing
statement figures.
 Loyalty: Putting the principal first, confidentiality, and avoidance of dual
agency unless agreed to by all parties.
 Notice (sometimes called Disclosure): Material facts disclosed as well
as relationships, important business facts for the principal to make
decisions upon.

Customers are owed the following duties from an agent (HAD):

 Honesty – While a licensee does not owe a “customer” a fiduciary duty

we do have an obligation to be honest.
 Accuracy – A licensee should be sure of the statements made to a
customer.
 Disclosure of latent defects – A licensee must disclose any known
structural or “hidden” defects, regardless of representation.

Agents must beware of the difference between puffing—a legal, subjective

opinion, and fraud—an illegal, intentional misrepresentation.
A broker may represent both parties in a transaction as long as all parties
understand and agree to the dual representation. This is called " Dual
Agency." In most states dual agency agreements and/or disclosure forms
must be signed by all parties, and finally acknowledged in the final
agreement between the parties.
If the parties are not aware that the agency (or licensee) is representing
both parties, then an "Undisclosed Dual Agency" is created which violates
agent's duty of loyalty, is illegal, and could be cause for revocation of
license, a lawsuit by the parties involved, and possibly a recession of the
transaction.
What is required to collect a commission?

 Must be a licensed real estate broker or salesperson under a broker.

 Must have been employed by the principal under a valid contract.
 Must have been the procuring cause of the sale—meaning, the agent
must have set into motion a series of events which resulted in the sale.

The seller is liable to pay a commission once he/she accepts an offer

from a ready, willing and able buyer.
A broker can only pay another broker or a salesperson licensed to him or
her. A salesperson can only accept a commission from his or her own
broker.
The Sherman Anti-Trust Act prohibits:

 Price Fixing - Collusion between brokers and sales people with

competing companies to set commission rates is illegal.
 Group Boycotts - Licensees should never "get together" and boycott a
company because of their business practices.
 Division of markets by location or price

All independent contractors should have an "Independent Contractor's

Employment Contract" that clearly defines their responsibilities and
obligations.
The listing agreement is the employment contract between the Seller and
the Broker.
There are five types of listing agreements:

 Exclusive Right to Sell— The Listing broker is always entitled to a fee,

regardless of who procures the buyer, thus offering the most protection
 to the broker. Brokers cooperate through the MLS (Multiple Listing
Service) and agree to split commission upon bringing a ready, willing,
and able buyer to the seller.
 Exclusive Agency— Only one broker is allowed to act on behalf of the
principal. If the owner sells the property him/herself, no commission is
paid to the broker.
 Open Listing— The seller retains the right to hire any number of
brokersto sell his/her property. Whoever provides seller with a ready,
willing and able purchaser is entitled to a commission, or the seller may
sell the property without aid.
 Net Listing— States that seller is to receive a certain amount of money
from the sale and any amount over that will be paid to the broker as a
commission. Illegal in many states.
 Agency Coupled with an Interest:An agency relationship in which the
agent is given an estate or interest in the property. The principal cannot
revoke this type of agency, nor is it terminated upon the death of the
principal.

*Check the State section of this course to determine the rules in your
area.
Termination of Listings occurs through:

 Performance— Fulfillment of the purpose of the listing.

 Expiration of time as stated in the agreement.
 Breach or cancellation by one party— (renunciation by the broker or
revocation by the principal).
 Transfer of title as operation of law, such as bankruptcy or foreclosure.
 Mutual consent.
 Death or incapacitation of either party.
 Destruction of the property or a change in property use by outside
forces (such as a change in zoning or condemnation).

Once a listing agreement has been signed, a listing agent has

specific responsibilities with regard to that listing:

 Show the property.

 Locate a buyer or tenant.
 Communicate terms.
 Promote the features and terms to customers.
 Assist in negotiations.
The listing agent must verify the accuracy of items in the listing
agreement.
It's also a good practice for the listing agent to inspect the listed
property to be sure that his or her representations to potential buyers will
be accurate.
It is important for agents to keep up to date on The Federal
Communications Commission’s National Do Not Call Registry, as well as
guidelines of the CAN-SPAM Act regarding the sending of commercial
emails.