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To buy or to rent considerations (6)
- 1) How long the person wants to leave in a particular area
- 2) Person's financial situation
- 3) Housing affordability
- 4) Current mortgage interest rates
- 5) Tax consequences of owning versus renting property
- 6) What might happen to home prices and tax laws in the future
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Automatic (computerized) underwriting system
- used by ...
- to ...
- - used by Credit Reporting Companies
- - to determine what a prospective buyer can afford
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Federal Government requires each Credit Reporting Companies to...
- to make a free copy of the report available annually to every consumer from whom a report is available
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Consumer can request a free report every
- 4 months from a different Credit Reporting Companies each time
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Credit Score
- FICO
- - Fair Isaac & Company
- - developed software to create Credit Score
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Credit Score Range
- Risk: <400
- High: 400 - 620
- Marginal: 620 - 660
- Acceptable: 660 - 900
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PITI
- - Basic costs of owning a home
- Principal
- Interest
- Taxes
- Insurance
-
In at least 10% of the down payment borrower could expect total monthly housing expense allowed
- PITI
- - no more than 28% of the gross monthly income
-
In at least 10% of the down payment borrower could expect total monthly housing expense plus other (non-housing) debt expense
- PITI + other (non-housing) debt expense
- - not to exceed 36% of the gross monthly income
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In at least 10% of the down payment borrower could expect other (non-housing) debt expense
- - car payments, student loans, other mortgages
- - not to exceed 8% of the gross monthly income
-
in at least 10% of the down payment borrower could expect insurance premiums, utilities, routine medical care expense
- to be covered by 64% of the gross monthly income
-
Gross monthly Income: 5,000
Required down payment 10%: can be made
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PITI = ?
PITI + other (non-housing) expense = ?
- 5,000 x 28% = 1,400 - PITI
- 5,000 x 36% = 1,800 - PITI + other (non-housing) expense
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Investment considerations (4)
- 1) Property with increased value can be sold
- 2) Equity
- 3) Tax deductions (5)
- 4) Part of the profit made on the sale of a principal residence is not taxed at all
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Equity
- difference between the market value of the property and the amount still owned on it
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Tax deductions (5)
- - home owners can deduct from gross income:
- 1) Mortgage interest payments on first and second homes
if mortgage balance for - - single or married filing a joint below 1 million
- - married filing separately below 500,000
- 2) Property Tax (RE taxes)
- - but not interest paid on overdue taxes
- 3) Certain Loan Origination Fees
- 4) Loan discount points
- 5) Loan prepayment penalties
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Tax deduction on Mortgage interest payments
- - home owners on first and second homes can deduct from gross income mortgage interest payments if mortgage balance for
- - single or married filing a joint
- - bellow $1 million
- - married filing separately
- - bellow $500,000
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Other tax benefits (3)
- 1) Married couple can be excluded from Capital Gains Tax
- - file a joint: up to 500,000 in profit
- - files singly: up to 250,000 in profit
- 2) First time home buyer
- - penalty-free withdrawal from IRA (limit is 10,000)
- - must be spend within 120 days
- 3) Tax credit for part of the purchase price
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Tax deduction on RE taxes
- - home owners can deduct from gross income RE taxes
- - but not interest paid on overdue taxes
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Promissory Note
- or
- - or Note
- - or Financing Instrument
- - borrower's personal promise to repay a debt according to the agreed terms
- - contract between burrower (maker or payor) and lender (payee)
-
If terms of the note are satisfied
- debt is discharged
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If terms of the note are not met lender may
- - sue payee to collect on that note
- - foreclosed on any property that was used as security of the debt
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Loan Amount
- term
- formula
- - total amount borrowed (w/o interest)
- - (Sales Price or Appraised Value) x LTV
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Interest
- term
- formula
- - charge for the use of money
- - percentage of the remaining balance of the loan
- - Principal x Interest Rate
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Principal
- term
- formula
- - amount borrowed that has not yet been repaid
- - Loan Amount – Amount paid toward Principal
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Loan Balance
- term
- formula
- - amount still owed
- - Principal + Interest
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LTV
- - Loan-To-Value Ratio
- - loan approved %%
- - percentage of the Sales Price or Appraised Value (whichever is less)
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Parcel sold for 500,000.
Loan approved 90%
Interest rate 5%
Appraised Value 450,000
Amount paid toward principal 20,000
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LTV ?
Loan Amount ?
Interest ?
Principal ?
Loan Balance ?
- LTV: 90%
- Loan Amount: 450,000 x 90% = 405,000
- Interest: 405,000 x 5% = 20,250
- Principal: 405,000 - 20,000 = 385,000
- Loan Balance: 385,000 + 20,250 = 405,250
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Payment in Arrears
or
- - or End-Of-Period Payments
- - interest due to the end of each payment
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Payment in Advance
- interest due to the beginning of each payment
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Parcel sold for 335,200
Loan approved 90%
Interest 4.5%
Period 30 years
Appraised Value of parcel 335,500
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Interest of the 1st month ?
- Loan amount = 335,200 x 90% = 301,680
- Annual interest = 301,680 x 4.5% = 13,575.60
- Interest of the 1st month = 13,575.60 ÷ 12 = 1,131.30
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Usury
- charging interest in excess of the maximum rate allowed by law
-
Legal Maximum Rate can be
- - maximum rate allowed by law - Usury
- - fixed amount (in some states)
- - floating based on a Specific Economic Standard (in another states)
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Loan Origination Fee
or
- - or Transfer Fee
- - processing of a mortgage application
- to cover the expenses involved in generating that loan
- - 1% of the loan amount
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Tax deduction on Loan Origination Fee
- home owners can deduct from gross income Loan Origination Fee
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Discount points
- used to increase the lender’s yield (rate of return) on its investment
-
Tax deduction on Discount points
- home owners can deduct from gross income Discount points
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%% of Discount Points of the loan amount?
- 1 point = 1% of the loan amount
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%% of Discount points of the interest?
- 1 point = 0.125% of the interest
-
Discount points depends on 2 factors
- 1) Difference between interest rate and yield required by the lender
- 2) How long the lender expects it will take the borrower to pay off the loan
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Prepayment penalty
- for any payments make ahead of schedule
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Tax deduction on Prepayment penalty
- home owners can deduct from gross income Prepayment penalty
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Mortgage loan has 2 parts
- 1) Debt itself
- - financing instrument that creates the debt
- - promissory note which creates the amount of owned
- 2) Security for the debt
- - it is Mortgage or a Deed of Trust
- - specifies the property that the debtor will use as collateral (дополнительный) for the debt
-
Mortgage creates
- lien on the property
-
Deed of Trust transfers
- legal title from the borrower to a third party to hold on behalf of the lender while the borrower's debt is still outstanding
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Basic Principle of Property Law
- no one can convey more then he actually owns
-
Hypothecation
- - to pledge (заложить) property as security for loan w/o giving up possession of it
- - debtor (borrower) retains the right of possession and control of the secured property
- - creditor (bank) receives an Equitable right in the property
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Mortgagor
- - borrower
- - receives a loan
-
Mortgagee
- - lender
- - receives Promissory Note and Mortgage
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Lien Theory
- - Mortgagor (borrower)
- - retains both Legal and Equitable Title
- - Mortgagee (lender)
- - has a lien on the property
- - must go though foreclosure procedure to obtain Legal Title
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Title Theory
- - Trustor
- - person who creates the trust (Borrower - Mortgagor)
- - conveys Bare Legal Title to Trustee (third party)
- - conveys Promissory Note to Beneficiary (lender)
- - Trustee
- - third party
- - holds Bare Legal Title on behalf of lender (beneficiary)
- - Beneficiary
- - lender - Mortgagee
- - holds Promissory Note
- - has right to immediate possession
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Mortgage or Deed typically include 2 provisions for default
- 1) Acceleration Clause
- - to assist the lender in foreclosure
- - to accelerate the maturity of the debt
- - lender may declare the entire principal balance due and payable immediately (w/o of suing the borrower)
- 2) Lender can take care of the property
- - if the borrower
- - does not pay taxes or insurance premiums
- - fails to make necessary repair on the property
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Assignment of the mortgage
- - Promissory Note maybe soled to a 3rd party
- - assignor
- - original mortgagee
- - assignee
- - third party
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Defeasance Clause
- - дифи’сэнс - анулирование
- - provision that requires the lender to execute a Satisfaction of Mortgage when the loan is fully paid
- - NOT Deficiency Judgment
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Satisfaction of Mortgage
or
- - or release
- - or discharge
- - released by lender when all loan payments have been made
- - promissory note has been paid in full
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Impound
- Escrow Account required by lender to reserve fund of borrower for RE taxes and property insurance
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2 ways to purchase RE w outstanding Mortgage or Deed of Trust
- 1) “subject to” Mortgage or Deed of Trust
- - buyer is personally NOT obligated to pay the debt in full
- - takes Title to RE
- - must make payments on existing loan
- - in buyer’s default
- - lender forecloses and the property is sold by court
- - buyer is not liable for the difference
- - seller might continue to be liable
- 2) Assumption of Mortgage
- - buyer is personally obligated for payment of the entire debt
- - Novation Agreement
-
- b/w seller, buyer and lender - - make seller to be completely free of the original mortgage loan
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Novation Agreement
- - when RE purchased w outstanding Mortgage or Deed of Trust using Assumption of Mortgage
- - Novation Agreement makes
- - seller to be completely free of the original mortgage loan
- - buyer solely responsible for any default on the loan
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Alienation clause
or
- - or Resale Clause
- - or Due-On-Sale-Clause
- - paid immediately on the date of sale
- - or Call Clause
- - lender may prevent a future purchaser from being able to assume the loan (interest rate is low)
- - when property is sold debt loan paid immediately (Due-On-Sale-Clause)
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Recording of mortgage or deed of trust
Mortgage or Deed of Trust MUST be recorded
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Priority of A Mortgage or Deed of Trust
- determined by the order in which they wear recorded
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Subordination Agreement
- to change priority of loan (if a second lien is higher than the first)
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Basic costs of owning a home
- - PITI
- Principal
- Interest
- Taxes
- Insurance
-
Note
or
- - or Promissory Note
- - or Financing Instrument
- - borrower's personal promise to repay a debt according to the agreed terms
- - contract between burrower (maker or payor) and lender (payee)
-
-
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assignor
- - Promissory Note maybe soled to a 3rd party
- - original mortgagee
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assignee
- - Promissory Note maybe soled to a 3rd party
- - third party
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