MortgageBasics.pptVIP

Mortgage Basics Types of Mortgages Types of Collateral: Residential 1 to 4 family homes (up to 4 units) Commercial Larger apartments non-residential Permanent vs. Construction Perm on completed existing buildings Construction loans finance development projects Government Involvement Government-Insured (FHA, VA) Include “mortgage insurance”, allows higher L/V ratio More “red tape”, longer approval process No “due-on-sale” clause, may be assumable Conventional Normally max L/V=80%, unless private mortgage insurance (PMI) Majority of all loans Terminology Owner begins with O, so: ...or === Owner Lessor is Owner (Landlord), Lessee is Renter. Mortgagor is Owner (Borrower), Mortgagee is Lender. Legal Structure of Mortgages Mortgages have 2 parts (documents): Promissory Note: Contract establishing debt. Mortgage Deed: Secures debt with real property collateral (potentially conveys title). Two legal bases of mortgages: Lien Theory (most states): borrower holds title, lender gets lien. Title Theory (a few states): Lender holds title. TYPICAL COVENANTS CLAUSES Promise to Pay Specifies principal, interest, penalties, etc., along with date, names, etc. 2) Covenant to Avoid Liens w Priority over the Mortgage For example, if borrower fails to pay property tax, she is in default of mortgage too, because property tax lien has priority over mortgage lien. 3) Hazard Insurance Borrower must insure value of the property (at least up to mortgage amount) against fire, storm, etc. *4) Mortgage Insurance Borrower must hold mortgage insurance (usually only if loan is not Govt insured and Loan/Value ratio 80%). In essence, mortgage insurance will pay lender the difference between foreclosure sale proceeds and the debt owed to lender, if any. In effect, Govt (FHA, VA) loans automatically have mortgage insurance from the Govt. 5) Escrow Borrower required to pay insurance and property tax installments to lender in advance, who holds funds in escrow until due to insurer and prope