A. Severalty – Title vested in one natural or legal person
B. Co-Ownership
C. Trust

A. Tenancy in common (See Figure 8.1)

1.   Two or more natural or legal owners
2.   Each owner with an undivided interest fractional interest
3.   Unity of possession
4.   Each owner may encumber or convey his or her interest.
5.   Each interest is inheritable.

B.   Joint tenancy (with rights of survivorship) (See Figures 8.2  and 8.3)

1.   Two or more natural owners only
2. Unity of Ownership
3.   Inherent right of survivorship among the owners
4.   Creation of joint tenancy requires four unities (PITT)

a. Possession*all joint tenants holding an undivided right to   possession
b. Interest*all joint tenants holding equal ownership interests
c. Time*all joint tenants acquiring their interest at thesame time
d. Title*all joint tenants acquiring their interests by the same document

5. Termination of joint tenancy occurs when any one unity is terminated.

C.   Termination of co-ownership by suit for partition

1. The court may physically divide the property
2. The court may order it sold  and divide the proceeds among the disputing owners.

D. Ownership by married couples

1.   Tenancy by the entiret

a.   Special form of ownership for married couples in separate property states.
b. Husband and wife are considered one legal entity;
c.   Each has undivided interest with inherent right of survivorship
d. Both husband and wife must sign any documents to encumber or convey the property.
e. Termination of tenancy by entirities:

(1) death of either spouse; survivor becomes owner in
     severalty
(2) agreement between both parties (new deed)
(3) divorce (parties become tenants in common)
(4) court ordered sale

2.   Community property

a.   Special form of ownership for married couples only
b. Husband and wife are considered equal partners, with both signatures required for conveying or mortgaging
c.   Property acquired during the marriage is community property.
d.   Property brought to the marriage or acquired during the marriage by gift or inheritance is separate property.
e.   Does not have a right of survivorship as joint tenancy does

A.   Parties to a trust

1.   Trustor*the person who creates the trust
2.   Trustee*the owner and manager of the property for the beneficiary; has a fiduciary responsibility
3.   Beneficiary*the person who receives the benefits of the trust

B.   Living trust*created while the trustor is alive, usually by a detailed trust     agreement
C.   Testamentary trust*created at the grantor's death through the grantor's will
D.   Land trust*permitted in a few states; land only asset

1. Public records do not name beneficiary.
2. Property can be pledged as security without having mortgage recorded; beneficial interest is personal property.
3. Continues for a definite term; if not extended, expires.

A.   Partnerships*two or more people in a business relationship

1.   General partnership*all partners are general partners who participate in the partnership
2.   Limited partnership*the general partner provides the management for the limited (non-participating) partners
3. Most states have adopted a Uniform Partnership Act (UPA)

B.   Corporations

1. A legal entity (“artificial person”); chartered under state law
2.   Exist in perpetuity until formally dissolved
3. Managed and operated by board of directors
4.   Provide its shareholders with limited liability
5.   Corporate profits are usually subject to double taxation unless a Chapter S corporation.

C.   Syndicates and Joint Ventures *a joining together of two or more people or firms to make and operate a real estate investment (See Appendix A - Investments)

1.   Can take one of the several forms of ownership previously mentioned
2.   Can be a joint venture for a single project

D. Limited Liability Companies (LLC)

1. Combines features of limited partnerships and corporations.
2. Members have limited liability plus the advantages of a partnership

A.   Condominiums (See Figure 8.4)

1.   Created under horizontal property laws or uniform condominium act laws*declaration of condominium
2.   The purchaser is a fee simple owner who receives a deed to

a.   Individual ownership of an individual unit
b.   Tenant-in-common interest for the common elements

3.   Can be for any type of real estate, not just residential
4.   There is no right to partition condominium ownership.
5. Most states have adopted Uniform Condominium Act, which requires a Declaration of Condominium be recorded.
6.   Require periodic fees for common area expenses and assessments for special expenses
7. Individual ownership unit is assessed for real property tax.
8. Title can be liened like any other real estate ownership.
9. Administered by association of unit owners.

B.   Cooperative ownership

1.   Title is held by a corporation or land trust.
2.   The purchaser is a shareholder who receives

a.   A stock certificate
b.   A proprietary lease

3. Operated and managed by board of shareholders.
4.   Shareholders pay fees to support the corporation's expenses.
a. Liability for non-payment of fees by other shareholders to support the cooperative
5. Method of transfer of ownership important issue. May require approval by board of directors and selling of stock back to corporation.

C.   Time-share ownership

1.   Can be either a fee simple interest, time-share estate or a right to use,     time-share use, (developer owns the real estate)
2.   The purchaser usually receives the right to occupy a certain unit for a     specified time-frame each year (one week being the most common).
3.   State laws that govern time-shares are extremely complex and varied,     requiring specialized competent legal counsel.
4. In some states, camp grounds are regulated by state laws
5.   In Practice: Time-shares are frequently regulated as subdivisions and     require special real estate licenses as do camp ground sales.

I.   Describing land*

A. The legal description of a parcel of property is the exact location of the  parcel according to an established system
B. The description is legally sufficient if a  competent surveyor can locate the parcel using that description.

A.   Metes-and-bounds legal descriptions (see Figure 9.1)

1.   Must have a specific point of beginning (POB)
2.   Must have measurements (metes = distances)
3.   Must have linear boundaries (bounds = directions)
4.   Must completely enclose the area (return to the POB)
5.   Monuments are used to mark the ends of the measurements/corners of the survey.

B.   Rectangular (government) survey system (see Figures 9.2 through 9.7)

1.   Established by Congress in 1785
2.   Based on two intersecting lines

a.   Principal meridians that run North and South
b.   Base lines that run East and West

(1)  Both principal meridians and base lines are located in reference to degrees of longitude and latitude.
(2)  Each principal meridian is named and is crossed by its own base line.
(3)  The rectangular survey system affects specific land areas within the boundaries.

3.   Township tiers (see Figure 9.2)

a. Township lines are six miles apart and run East and West parallel to the base line.
b. Township strips (tiers) are six-mile wide strips of townships that are numbered North and South of the base line.

4.   Range  (see Figure 9.3)

a. Range lines are six miles apart and run North and South parallel to the principal meridian.
b. Range strips (ranges) are six-mile wide strips of  townships that are numbered East and West of the principal meridian.

5.   Township squares (see Figure 9.4)

a. Townships are formed by intersecting pairs of township lines and range lines (the intersection of a township strip and a range strip).
b. Each township is six miles square and contains 36 square miles (36 sections) or 23,040 acres.

6.   Sections (see Figures 9.5 and 9.6)

a. There are 36 sections in a township.
b. They are numbered 1 through 36, starting in the top right corner and moving East to West and then West to East (similar to the way a field is plowed).
c. Each section is one mile square and contains one square mile or 640 acres.
d. Section 16 is dedicated as the school section.
e. They are divided into quarters for reference purposes.
f.   Correction lines (see Figure 9.7)

(1)  Correction lines are required to overcome the effect of the earth's curvature on range lines.
(2)  Every fourth township line is a correction line.
(3)  Guide meridians run North and South at 24-mile intervals from the principal meridian.
(4)  Adjustments are made on the North and West boundaries of  a township (sections 1 through 7, 18, 19, 30, 31).

g.   Fractional sections and government lots

(1)  Undersized or oversized sections are classified as fractional lots.
(2)  Areas smaller than full quarter-sections are designated as   Government lots.
(3)  They are used to correct survey errors and physical disparities (such as a partially-submerged property).

h.   Reading a government survey legal description and calculating the size of a tract of land

(1)  Start at the end of description and work backward to the beginning.
(2)  Begin size calculations from right hand side with section containing 640 acres, then divide by each fraction given as you
move to the left (the beginning of description.)of the principal meridian
(3) Multiply the denominators and divide into 640. N 1 / 2  of NW 1 / 4 = 640 divided by 8 = 80

i. Metes-and-bounds descriptions within the rectangular survey system. (See Figure 9.8) Occurs when:

(1)  tract is too small to be described by quarter sections.
(2)  when tract does not follow the lot or block lines of recorded subdivision.
(3)  when tract does not follow the section , quarter-section or fractional section lines.

C.   Lot-and-block (recorded plat) system (see Figure 9.9)

1.   This system uses a recorded subdivision plat map.
2.   It requires a survey plat by a licensed surveyor or land engineer.
3.   Identified properties may later be re-subdivided.
4.   The system is used in all states, sometimes in conjunction with other     legal descriptions.

A.   Used to locate a given parcel of land; can also amend a legal description

1. A survey shows the location and dimensions of the parcel
2. Spot survey includes the location of buildings on the land.

B.   Requires the use of a licensed surveyor or land engineer
C.   In Practice: Competent surveyor should prepare a legal description.

A.   Condominium laws require a legal definition of the horizontal property rightsincluded with each unit  (air lots). (See Chapter 8)
B.   Subsurface rights are also defined using datum.
C.   Datum*a point of reference for measuring elevations

1.   The United States Geological Survey (USGS) uses mean (average) sea level in New York Harbor.
2.   Many large cities use official local datum rather than USGS datum.
3.   Benchmarks*permanent reference points used primarily to mark elevations (See Figure 9.11)
4.   Monuments*traditionally used to mark only surface measurements

A. Math Concept: Land Acquisition Costs

1. Area times cost per square foot
2.Area times cost per acr

B. Use the same unit in which cost is given.

I.   Lien*a charge against property that provides security for a debt of the property owner (See Figure 10.1)

A.   Encumbrance

1.    Any charge or claim that burdens the title to real property
2.    It includes liens and non-monetary claims

B.   Liens may be:

1.    voluntary or involuntary
2.    statutory (statutes)or equitable (common law fairness)
3.    general or specific.

C.   General liens*affect all property owned by a debtor, both real and personal

1.   Judgment liens
2.   Estate and inheritance tax liens
3.   Debts of a deceased person (decedent)
4.   Corporation franchise tax liens
5.   Internal Revenue Service (income) tax liens
6. A lien attaches to real property the moment it is filed.
7. A lien does not attach to personal property until that property is seized.

D.   Specific liens*affect only one identified parcel of real property

1.   Real Estate tax (ad valorem tax) liens
2.   Special assessment liens
3.   Mortgage liens
4.   Trust deed liens
5.   Mechanic's liens
6.   Utility liens (refer to local laws)
7.   Bail bond liens

E.   The effect of liens on title

1.   Liens run with the land.
2.   Liens attach to the property, not the property owner.

F.   Priority of liens

1. The order in which claims against the property will be satisfied.
2.  Generally, real estate taxes and special assessments take priority over     all other liens.
3.   Other liens follow in the order that they were recorded.
4.   Some exceptions exist, particularly for mechanic's liens.
5. Subordination agreements between lien holders can change priority.

A.   General ad valorem tax

1.   They are levied by taxing bodies as a government power.

a. State
b. Cities, towns and villages
c. School Districts
d. Drainage districts
e. Water districts
f. Sanitary districts
g. Parks, forest preserve and recreation districts

2.   They are levied according to the value of the property being taxed (ad valorem = to value).
3. Ad valorem are specific, involuntary, statutory liens.
4. Exemptions: properties used for tax-exempt purposes:

a. municipal buildings
b. various municipal organizations
c  state and local governments
d  hospitals
e  educational institutions

5.   The method of assessment varies among jurisdiction (for example, a property's market value, a percentage of market value or replacement cost).
6.   Equalization process used to achieve uniformity
7.   Arriving at the tax rates

a.   A budget must be adopted by the taxing body.
b.   The amount of tax money needed specifically from real estate is derived from the budget figures.
c.   An appropriation is made, authorizing the expenditure of such funds and providing for their sources.
d.   The tax levy is imposed on each parcel of real property.
e.   The tax rate is computed for each property.
f.   The tax bill is sent to each property owner.

8. Tax bills

a. Usually one tax bill incorporates all taxes levied by various taxing bodies.
b. For tax bodies operating on different budget years, separate tax bill sent.
c. Due date, called penalty date, set by statute.
d. Discounts offered to encourage prompt payment.

9.   Enforcement of tax liens

a.   The taxes must be valid to be enforceable
b.   The provisions for delinquent taxes include

(1)  Tax foreclosure
(2)  Tax sale
(3)  Penalties imposed when the delinquent taxes are paid
(4)  The rights of redemption
(a)  Equitable redemption – before sale (fair)
(b)  Statutory redemption – after sale

B.   Special Assessments (Improvement taxes)

1. Always specific and statutory liens.

a.   Voluntary*the property owners in the area to be affected can petition  for the improvement.
b.   Involuntary*the appropriate governmental authority can initiate the procedure.

2.   Costs are spread over the assessment roll properties.

a.   On a fractional basis (equal costs)
b.   On a front-footage basis (prorated costs)

3.   The annual bills are typically spread out for a number of years, with the     property owner having the right to prepay at any time without penalty.

A.   Mortgage liens and Deed of Trusts - voluntary, specific liens used in real estate financing (see Chapters 14 and 15)
B.   Mechanic's liens*involuntary, statutory, specific liens

1.   Mechanic's liens give security to those who perform labor or furnish material in the improvement of real property.
2.   There must be a contract (expressed or implied, but usually written)between the owner and the contractor.
3.   Depending on the jurisdiction, lien priority can be established by

a.   The date the construction began or materials were first furnished
b.   The date the work was completed
c.   The date the individual subcontractor's work was either commenced or completed
d.   The date the contract was signed or work was ordered
 e.   The date a notice of the lien was recorded, filed, posted, or served

 4. In some states may be given priority over previously recorded liens.

 C.   Judgment liens*involuntary, equitable, general liens

1.   A judgment is a decree issued by a court at the end of a lawsuit.
2.   A judgment lien takes its lien priority according to the laws of the state in which the property (real or personal) is located.
3.   It is enforced through the issuance of a writ of execution and the ultimate sale of the property.
4. When property sold satisfaction of judgment should be filed.
5.   Lis pendens ("litigation pending")*an encumbrance that is a notice of apossible future lien on real estate.
6.   Attachments*the court retains custody of property until a lawsuit is concluded.

D.   Estate and inheritance tax liens*involuntary, statutory, general liens (see    Chapter 12); they are usually paid during the probate court proceedings.
E.   Utility liens*involuntary, equitable, specific liens granted to municipalities to assure collection of the funds due them for utility services they have provided
F.   Bail bond liens*voluntary, statutory, specific liens to assure the appearance of    the defendant in a criminal action
G.   Corporate franchise tax liens*involuntary, statutory, general liens corporation    as a condition of their conducting business in some states
H.   Internal Revenue Service (income) tax liens*involuntary, statutory, general liens as the result of a person's failure to pay any portion of his or her federal tax liability, such as income and withholding taxes

I.   Contract Law

A.   Contract: a voluntary agreement or promise between legally competent parties,  supported by legal consideration, to perform (or refrain from performing) some  legal act.

1.   Contracts may be express(ed) in writing or orally.
2.   Contracts may be implied by action or conduct.
3.   In bilateral contracts, all parties promise to do something for one another; they bind all parties and are enforceable against all parties.
4.   In unilateral contracts, one party promises to do something to induce the second party to do something; they are binding on and enforceable against only one party.
5.   Executed contracts are those that have been fully performed.
6.   Executory contracts require some performance by one or more parties before they are completed.

B.   Essential elements of a valid contract

1. Offer and acceptance*mutual assent or meeting of the minds (See Figures 11.2 and 11.2)

a. Offer*promise made by one party (offeror) with the request for something in exchange for that promise*may be terminated by

(1)  Rejection, including a counteroffer
(2)  Failure to accept within prescribed time period
(3)  Revocation

b. Acceptance*promise by the offeree to be bound by the exact terms proposed by the offeror
c.  Counteroffer*a new offer which rejects the original offer

2. Consideration*something of legal value; that which is "good and valuable" between the parties. Courts do not inquire into the adequacy of consideration.
 3.   Legally competent parties

a.   Of legal age
b.   Sufficient mental capacity to understand the actions or       consequences

4.   Validity of contracts (see Table 11.1)

a.   Valid*complies with the essentials of a valid contract
b.   Void*has no legal effect (in theory, never was a contract)
c. Voidable*may be disaffirmed or voided by one party
d. Unenforceable*no party may sue for performance; type of contract being used.

5.   Reality of consent*parties must be able to make a prudent and knowledgeable decision without undue influence. May be deprived by

(a)  Mistake
(b)  Misrepresentation
(c)  Fraud
(d)  Undue influence, including chemical substances
(e)  Duress

C.   Discharge of Contracts; Discharged when terminated, completely performed, a party’s breach or default.

1. Performance of contract

a.   "Time is of the essence"*the contract must be performed within the stipulated time.
b.   If no time is stipulated, it should be performed within a reasonable time.

2.   Assignment*the transfer of rights and obligations under a contract to a     third party (assignee)
3.   Novation*the substitution of a new contract for an existing contract (VA)
4. Breach of contract

a.   Default by the seller*the buyer may

(1)   Rescind the contract and recover the earnest money
(2)   Sue the seller for specific performance
(3)   Sue the seller for compensatory damages

b.   Default by the buyer*the seller may

(1)   Declare the contract forfeited and retain the earnest money
(2)   Rescind the contract but return the earnest money
(3)   Sue the buyer for the purchase price
(4)   Sue the buyer for compensatory damages

5.   Statute of limitations*the time limit in which to enforce rights

a. Time varies for different legal actions, rights not enforced within time period are lost.
b. Contracts may be discharged or terminated when any of the following occur:

(1) partial performance *with written acceptance
(2) substantial performance *may be sufficient to force payment with certain adjustments
(3) impossibility of performance *legally impossible to perform the required act
(4) mutual agreement *by the parties to cancel the contract
(5)   Operation of law*as in the voiding of a contract by a minor, result of fraud, improper alteration of the contract

     or expiration of statute of limitations

A.   Written agreements most commonly used:

1. Listing agreements and buyer agency agreements
2. Real estate sales contracts
3. Option agreements
4. Contracts for deed (Land contracts)
5. Leases and escrow agreements

B. Contract Forms

1.   Each state has different requirements regarding this matter. (NAR)
2. A real estate licensee who is not a licensed attorney may not practice law, i.e., draw up a contract. Can write contracts in AZ
3.   Preprinted forms are commonly used.

a.   What information is to be used in filling in the blanks
b.   What preprinted information needs to be deleted
c.   What additional information is to be added using addenda

4.   In Practice: Students should become familiar with various types of contracts used in the area; parties should have their attorneys review contracts to ensure understanding.

C.   Listing Agreements and Buyer Agency(see Chapter 6)

1.   Listing agreements is an employment contract; establish the relationship between the broker and principal.
2.   Some states require or suggest the use of specific forms.
3.   Some jurisdictions require listings to be in writing to be enforceable;     others recognize the validity of oral listings.
4.   In Practice: If there is an ambiguity in the listing, it will usually be interpreted against the broker who prepared the contract.

D.   Sales contracts (refer to the name used in your area) (Agreement of Sale, Offer to Purchase, Contract of Purchase and Sale, Purchase Agreement, Earnest Money Agreement)

1.   An offer can become or "ripen into" a sales contract.
2.   The sales contract is the most important document in a transaction because it establishes the legal rights and obligations of the buyer and seller; it dictates the contents of a deed.
3.   Offer
4.   Counteroffer

a.   Original offer ceases to exist.
b. Buyer may accept or reject counteroffer
c. May be revoked at any time before it has been accepted.

5.   Acceptance*there must be an acceptance to create a contract.

a.   If accepted as written, the contract is created and a signed copy  must be given to all parties.
b.   Notification of acceptance must be given to the party who made the offer before the contract is considered created.

6.   Binder*used in some areas as a "short form" sales contract NOT AZ
7.   Earnest money deposits*evidence of the buyer's intention to carry out the terms of the contract

a. Should be held by the broker, escrow agent or attorney in a trust or escrow account
b.   Amount to be agreed upon by buyer and seller
c. Should show how interest earned will be distributed
d. Should be of a sufficient amount to discourage the buyer from defaulting and compensate the seller for taking the property off the market

8.   Equitable title*after the contract is created but before the deed is delivered, the buyer may have an insurable interest in the property being purchased.
9.   Destruction of premises*depending on the jurisdiction, either the seller     or the buyer can be responsible for the property after the contract is     created but before the deed is delivered.
10. Liquidated damages*an amount agreed to by the parties to  compensate one if the other breaches the contract; commonly, the contract specifies that the earnest money will be used as liquidated  damages.
11.   Parts of a sales contract

a.   The identification of the buyer and the statement of the buyer's  obligations
b. The legal description of the property (adequate description such as street address)
c.   The identification of the seller and the statement of the type of  deed the seller will give, including any covenants, conditions and restrictions that bind the property
d.   The statement of the purchase price and the complete financial arrangements for its payment
e. Amount and form of down payment
f.   The provisions for closing and the transfer and possession to the buyer
g.   The provisions for title evidence
h.   The provisions for prorations
i.   The provisions regarding the damage to or destruction of the premises
j.   The provisions for remedies in the event of a breach of the contract
k.   The provisions for any contingencies in the contract
l. Date and signatures of parties (refer to state's procedures for signatures of non-owning spouses)
m.  Agency disclosure statement
n.   Additional provisions
(1)  The identification of any personal property to be left with the premises for the buyer
( 2)  The identification of any real property to be removed by the seller prior to the closing
( 3)  The transfer of any applicable warranties
( 4)  The identification of any leased equipment to be transferred  to the buyer or returned to the lessor
( 5)  The appointment of a closing or settlement agent
( 6)  The closing or settlement instructions
( 7)  The transfer of any impound or escrow account funds
( 8)  The transfer or payment of any outstanding special assessments
(9)  The provisions for the walk-through inspection
(10) The agreement regarding the documents to be provided by each party.

o. Contingencies*additional conditions that must be satisfied before a sales contract is fully enforceable (include examples of those commonly used in your area)

(1)  Elements are:

(a)  Actions necessary to satisfy
(b)  Time frame within which to perform
(c)  Any costs involved, who is responsible for payment

(2)   Taxes, mortgage, inspections, property sale, escape clauses

p. Amendments and Addenda

(1)  Amendment is a change to existing content of a contract.
(2)  Addendum is an additional, new provision to a contract.

q. Disclosures*property conditions or agency representation, either by custom or required by state law  (See Chapter 4)

E.   Option agreements

1.   Grant the right to buy or lease property at a fixed price within a stated period of time
2.   The optionee gives valuable consideration and has the right to

a.   Buy or lease the property
b.   Let the option expire

3.   The optionor must

a.   Reserve the property for only the optionee
b.   Sell or lease the property if the optionee exercises the option

F.   Land contracts (refer to the name used in your area)  (Contract for Deed, Bond for Title, Installment Contract)

1.   The seller/vendor retains fee simple ownership of the property.
2.   The buyer/vendee receives possession and equitable title; becomes     responsible for paying principal, interest, real estate taxes, hazard  insurance premiums and maintenance and repairs on the property depending on terms of the contract.
3.   The seller delivers the deed when the terms of the contract have been met, usually full payment of the contract amount.
4.   In Practice: An attorney should be consulted if a land contract is to be used.

I.   Title*the right to and evidence of the ownership
II.   Voluntary Alienation*the owner intentionally conveys the ownership during his or her  lifetime using some form of deed; may be a gift or a sale.

A. Requirements for a valid deed (See Figure 12.1)

1.   A grantor who has legal capacity to sign the deed

a. A deed signed by minors could be either void or voidable.
b.    A deed signed by individuals declared legally incompetent could be either void or voidable.

2.   A grantee named so that he or she can be readily identified

a.   Stage names and fictitious names are permitted
b.    No conveyances are allowed using "or"

3.   A recital of consideration (consult state's laws for any specific requirements)
4.   A granting clause*the words of conveyance
5.   An habendum clause*the "to have and to hold" clause that defines the     ownership taken by the grantee
6.   A accurate legal description of the property being conveyed
7.   Any exceptions or reservations to the title (for example, easements,     deed restrictions or restrictive covenants)
8.   The signature of the grantor, sometimes with a seal or before a notary     public or other officer of the court
9. Acknowledgment*that the signature is genuine and a free and      voluntary act (consult state's laws for requirements); usually required for     recordation
10.   The delivery of the deed to and its acceptance by the grantee

 B.   Execution of corporate deeds; varies from sate to state

1.   The conveyance of corporate-owned real estate requires a proper resolution by its board of directors or some other authority from its bylaws.
2.   The deed must be signed by an authorized corporate officer.

C.   Types of deeds

1.   General warranty deed

a.   May contain express written warranties; may state "convey and      warrant" or "warrant generally" depending on state law
b.   May contain implied warranties according to state statutes
c.   The basic warranties are

(1)  The covenant of seisin*the owner has full ownership and the legal right to convey the title.
(2)  The covenant against encumbrances*the title is free from all liens and encumbrances except those specifically stated.
(3)  The covenant of quiet enjoyment*the grantor assumes responsibility for protecting the title against the                                  claims of third parties.
(4)  The covenant of further assurance*the grantor will  furnish whatever is needed to make the title good.
(5)  The covenant of warranty forever*the grantor is liable for reimbursing the grantee for any title interest lost in the future.

d. Grantor defends title against both himself and against all those who previously held title.

2.   Special warranty deed

a.   Contains clause "remise, release, alienate and convey"
b.   Warrants only that the title was not encumbered while the grantor held it except as noted in the deed
c.   Any additional warranties must be specifically stated in the      deed
d.   May be used by a fiduciary

3.   Bargain and sale deed

a.   May state "grant and release" or "grant, bargain, and sell" in the document, depending on state law
b.   Contains no warranties against encumbrances unless stated
c.   Only implies that the grantor holds title and possession

4.   Quitclaim deed

a.   Provides the least protection to the grantee
b.   Carries no covenants or warranties whatsoever
c.   Transfers only what interest the grantor may have, if any.
d.   May state "remises, releases, and quitclaims"
e.   May be used to transfer a right or interest in real estate, such as an easement
f.   Often used to cure a defect in title

5.   Deed in trust (See Figure 12.1)

a.   Used by a trustor to convey property to a trustee for the benefit of a beneficiary
b.   Usually accompanied by a trust agreement regulating the  trustee's actions

6.   Trustee's deed

a.   Used to convey property out of a trust to anyone other than the trustor
b.   Executed by the authority granted to the trustee

7.   Reconveyance deed—executed by the trustee to return (reconvey) title property held in trust to the trustor
8.   A deed executed pursuant to a court order

a.   Usually a statutory deed form used to convey title
b.   Includes executor's deeds, administrator's deeds, sheriff's  deeds and others
c.   Used to convey title to property transferred by court order or by will
d.   The full consideration paid is usually stated on the deed.

D.   Transfer Tax Stamps – NOT IN ARIZONA

1.   Usually payable when the deed is recorded; also called documentary   stamps.
2.   Paid by the seller, buyer or split, depending on local custom or law
3.   Collected by some states and counties
4.   Rates vary from one jurisdiction to another.
5.   Some jurisdictions use a transfer declaration form, transfer statement or affidavit of real property value as basis for calculating tax.
6.   Some deeds are exempted from the tax, such as:

a. gifts
b. deeds not made in connection with a sale
c. conveyances to or between governmental bodies
d. deeds by charitable, religious or educational organizations
e. deeds securing debts or releasing property as security for a
debt
f. partitions
g. tax deeds
h. deeds pursuant to mergers of corporations
i. deeds from subsidiary to parent corporations for cancellation of stock

7. Math Concept: Calculation of Transfer Taxes

A.   Transfer by operation of law

1.   Eminent domain (through condemnation)
2.   Escheat
3.   Any type of foreclosure

a.    delinquent real estate taxes
b.    special assessments
c.    mortgage or deed of trust laws
d.    mechanic's liens
e.    judgment liens

B.   Transfer by natural forces (see Chapter 7)

1.   Accretion*the slow accumulation of soil, rock or other matter deposited on one's property by the movement of water
2.   Erosion*the gradual wearing away of the land
3.   Avulsion*the sudden and violent tearing away of the land
4. Other acts of nature such as earthquakes, hurricanes, etc.

C.   Transfer by adverse possession

1.   Possession by the trespasser must be open, notorious, continuous for a statutory number of years (10 yrs. In AZ), hostile and adverse to the true owner.
2.   Tacking permits combining successive periods of adverse possession by     different persons.
3.   Each jurisdiction has its own minimum requirements before an adverse     possession claim can be filed.(10 years in AZ)

A.   Transfer of title by will*a devise; the person dies testate.

1. A will is a testamentary instrument that becomes effective only after the death of its maker.
2.   It must strictly adhere to the laws of the state.
3.   It cannot supersede dower and curtesy laws (where they apply)
4.   The requirements for a valid will are

a.   The maker (the testator) must be of legal age.
b.   The testator must be of sound mind.
c.   The will must contain proper wording according to state law.
d.   It must be a free and voluntary act; the maker must be under no undue influence.
e.   The will must be witnessed by two or more persons in most states

5.   A codicil is a modification of or an amendment to a will.
6.   A holographic will is in its maker's own handwriting.
7.   A nuncupative will is given verbally by its maker.
8. Some states do not permit property to be conveyed by oral or handwritten wills.

 B.   Transfer of title by descent*the laws of the state determine to whom ownership passes; the person dies intestate. (See Figure 12.3)

1.   The laws of intestate succession vary from state to state.
2.   Generally, there are primary heirs (spouse, children).
3.   The closeness of one's relationship to the deceased determines the     amount of the estate that will be received.

C.   Probate proceedings*the purpose is to see that assets are distributed properly; affects only those assets that do not otherwise distribute themselves by their title.

1.   It is a legal process that

a.   proves or confirms the validity of the will.
b.   determines the precise assets of the deceased person.
c.   identifies the persons to whom the assets are to pass.
d. takes place in the county where the decedent resided.

2. An administrator/administratrix is appointed if there is no will designating an executor or executrix, sometimes referred to as "personal representatives".
3.   Legal procedures vary considerably from state to state.
4.   The decedent's debts must be satisfied before any property can be     disbursed to the devisees or heirs.
5.   In Practice: Commissions on properties listed through probate are fixed     by the court and paid only after the sale has been approved by the court.

I.   Public records*give the public legal and constructive notice of written documents that   affect the real estate

A. Records maintained by:

1. recorder of deeds
2. county clerks
3. county treasurers
4. city clerks
5. collectors
6. clerks of courts

B. Recording

1. Placing documents in public record.
2. Recording acts

a. Documents must be recorded in the county where the real estate is located.
b.   Documents must be drawn and recorded according to the  provisions of the recording statutes of that jurisdiction.

3.  Recording usually reveals the condition of title.
4.   Purchasers can rely on public records.

C.   Notice

1.   Constructive notice

a.   The legal presumption that information is available and by diligent inquiry an individual can obtain it
b. Includes property recording documents and the physical  possession of the property

2.   Actual notice

a.   Direct or actual knowledge
b.   Includes knowing what has been recorded and personal inspection of the property

D.   Priority

1.   Generally established by the date and time of recording
2.   Can be very complex and require legal advice

E.   Unrecorded documents

1.   Direct liens, such as real estate tax liens and special assessment liens
2.   Statutory liens, such as estate tax liens, inheritance tax liens, bail bond liens and corporate franchise tax liens

F.   Chain of title

1.   Recorded history of all of the matters that affect the title
2.   Include ownership, encumbrances and liens
3. Beginning with the original source of ownership and linking the passage of ownership to subsequent owners to form a chain
4.   A gap in the chain requires a suit to quiet title or quitclaim deeds to establish ownership.

G. Title search and abstract of title

1. An examination of public records to determine what defects, if any, exist in the chain of title
2. Search begins with present owner and traces back to the origin of title.
3. Length of search depends on local custom or laws.
a. 40-60 years (In Arizona, it is searched to the previous owner)
b. Marketable Title Act*extinguishes certain interests and cures certain defects arising prior to the "root of the title;" necessitates a search only to the root.
4. Abstract of title
a. Summary report of the items about a property that can be found in public record
b. Prepared by an abstractor
c. Does not reveal items that cannot be found in the public records

H. Marketable title

1. Discloses no serious defects and does not depend on doubtful questions of law or fact to prove its validity
2. Does not expose a purchaser to the hazard of litigation or threaten thequiet enjoyment of the property
3. Convinces a reasonably well-informed and prudent person that he or she could, in turn, sell or mortgage the property
4. Unmarketable title can still be transferred but its defects may limit or restrict its ownership.
5. Typical sales contract requires the seller to deliver marketable title to the buyer.
6. Customary for a preliminary title search to be conducted after sales contract is signed to give the buyer opportunity to review and seller time to cure defects before settlement.

A.   Certificate of title

1.   Statement of opinion of the title's status as of the date of the certificate
2. Based on the title search
3. Prepared by a title company, licensed abstracter or an attorney
4. Imperfect because unrecorded liens, rights of parties in possession and hidden defects such as forged deeds, marital interests or fraud cannot be detected.

B. Abstract and attorney's opinion

1. May be used in some areas as sufficient evidence
2. Attorney's opinion issued on basis of abstract
3. Imperfect because of the same conditions that affect a certificate of title.

C.   Title insurance (see Table 13.1)

1.   Insures the policyholder against loss due to defects in the title other than those exceptions identified in the policy
2.   Based on the title search
3. Preliminary report of title (commitment to issue policy) issued describing policy to be issue and includes

a. name of insured party
b. legal description of property
c. estate or interest covered
d. conditions and stipulations
e. schedule of exemptions

4.   Premium paid once, at closing.
5.   The insurer's liability cannot exceed the face amount of the policy unless     an inflation rider is included.
6. Maximum loss company liable for cannot exceed face amount of policy.
7. When title company makes payment to settle claim acquires rights to any remedy or damages available to insured (called subrogation).
8.   Extent of coverage

a.   Standard coverage policy*insures against

(1)  Defects found in public records
(2)  Forged documents
3)  Incompetent grantors
(4)  Incorrect marital statements
(5)  Improperly delivered deeds

b.   Extended coverage policy*insures against

(1)  All perils insured against by the standard coverage policy
(2)  Property inspection, including unrecorded rights of persons in possession
(3)  Examination of survey
(4)  Unrecorded liens not known of by the policyholder

c.   Typical exclusions

(1)  Defects and liens listed in the policy
(2)  Defects known to the buyer
(3)  Changes in land use brought about by changes in zoning ordinances

9. Different types of policies depending on who is insured

a. Owner's policy (issued for the benefit of the owner)
b. Lender's policy (issued for the benefit of the mortgagee; coverage commensurate with amount of loan; does not protect      owner's interest)
c. Leasehold and certificate of sale policies

D.   The Torrens System

1.   Written application to register the title is made with the clerk of the     county court where the property is located
2.   A court hearing is held, and the court enters an order to register the real estate with the registrar of titles.
3.   Such registration reveals the owner and some, but not necessarily all outstanding liens.
4. Torrens registration is the title.

A.   Adopted at least in part in all states
B.   Relates to when personal property is the collateral for a loan
C.   Requires and prescribes the use of the following types of forms:

1.   Security agreement (contains a complete description of the items against which the lien applies)
2.   Financing statement (UCC-1) (the short form of the security agreement which must be recorded)

I. Mortgage Law

A.   A mortgage is a voluntary lien on real estate, given by the mortgagor to secure the payment of a debt or the performance of an obligation to the mortgagee.

1.    Mortgagor = borrower
2.    Mortgagee = lender

B. Types of "Theory" states

2.   Title theory states (the mortgagor gives the mortgagee legal title and retains equitable title. Legal title is returned to the mortgagor upon full payment of the debt.)
3.   Lien theory states (the mortgagor retains legal and equitable title. The mortgagee has only a lien on the property as security for the debt. The lender must initiate foreclosure proceedings to obtain legal title.)
4.   Intermediate theory states (based on title theory but requires the lender to foreclose to obtain legal title. Distinctions must be made under the specific state's laws.

A.   Any interest in real estate that may be sold may also be used as security    (collateral) for a debt.
 B.   Mortgage loan instruments (See Figure 14.1)

1.   Two documents must be signed.

a.   The promissory note (financing document), the written promise to repay the debt
b.   The mortgage (security document), the document that creates the lien or transfers an interest to the creditor

2.   Hypothecation (pledging property as collateral without giving up its possession)
3.   Deed of trust (See Figure 14.2)

a.   Similar to, but not identical to, a mortgage
b.   Creates a three-party agreement
c.   Conveys "naked title" or "bare legal title" to the third party (the trustee) who has certain obligations to the lender (the       beneficiary); the borrower is the trustor.
d.   Generally provides simpler and faster foreclosure than a mortgage
e.   Can be used to secure multiple promissory notes

A.   The promissory note (see Figure 14.3)

1.   Will contain the amount of the debt, the time and method of payment and the rate of interest
2.   If used with a mortgage, will be payable to the lender
3.   If used with a deed of trust, can be payable "to bearer"
4.   Can refer to or repeat several of the clauses contained in the mortgage or the deed of trust
5.   Is a negotiable instrument; holder of note - payee; may transfer right the future payments
   a. by signing the instrument over to third party.
   b. by delivering the instrument to the third party.

B.   Interest

1.   A charge for the use of money
2.   May be due at the end of each payment period*interest in arrears (the normal method of interest payment)
3.   May be due at the beginning of each payment period*interest in advance

C.   Usury

1.   Charging interest in excess of maximum rate that may be legally   charged
2.   Maximum rate generally set by state law, except when federally-preempted
3. Some states set fixed amount, others have floating interest rate.

D. Loan origination fees (expense that is paid to the lender for generating the loan)
E   Discount  points

1.   Used to increase the yield (true rate of interest) required by an investor     who would purchase a loan
2.   Can fluctuate with the supply and demand for mortgage funds
3. Number of point determined by
 a. difference between the interest rate and required yield
 b. length of time lender expects borrower to pay off loan.
 4. One discount point equals 1 percent of the loan amount.
 5. Math Concept: Discount Points and Investor Yields

 F.   Prepayment

1. Borrower may pay off loan in full at any time before the end of the term  of the loan or make additional payments to principal during the term.
2. Penalties may be assessed by the lender to compensate for unearned  interest when a loan is paid in full prior to the scheduled end of the loan term.

a. Prepayment penalties may be regulated by state law.
b. Prepayment penalties prohibited on mortgage Loans insured or guaranteed by federal government.

A.   Refers to the terms of the note and clearly established that the property is    security for the debt
B.   Duties of the mortgagor or trustor

1.   Payment of the debt in accordance with the terms of the note
2.   Payment of real estate taxes
3.   Maintenance of adequate insurance to protect the lender's interest in the     property
4.   Maintenance of the property to keep it in good repair
5.   Lender authorization before making major alterations

C.   Provisions for default

1.   The lender may accelerate the maturity of the debt*acceleration clause
2.   The lender can step in to pay the real estate taxes or insurance, or physically repair or maintain the property.

D.   Assignment of the mortgage

1.   The note can be sold to a third-party investor.
2.   The securing mortgage or deed of trust will be assigned with the note to its purchaser.
3. When debt paid in full (satisfied) assignee required to execute the satisfaction (release) of the security instrument.

E.   Release of the mortgage lien

1.   The defeasance clause requires the execution of a satisfaction of     mortgage (release of mortgage or mortgage discharge).
2.   The deed of trust requires the execution of a release deed or deed of Reconveyance.

F.   Tax and insurance reserves

1.   Required for some mortgages by the lender; called reserve fund, impound or trust or escrow account.
2. Accounts set up for real estate taxes and insurance premium.
3.   RESPA limits the amount than can be held as reserves.
4. Flood insurance reserves

a. National Flood Insurance Reform Act of 1994 set requirements for lenders for flood insurance on new loans
b. Lender must notify borrower if property in flood hazard area.
c. If borrower fails to purchase flood insurance, lender must buy on borrower’s behalf; may charge back to borrower.

G.   Assignment of rents

1.   May be in the mortgage or deed of trust or in a separate document
2.   Entitles the lender to collect rents directly from the tenants in lieu of the borrower's payment if the borrower defaults on the loan.

 H.   Buying subject to or assuming a seller's mortgage or deed of trust

1.   Subject to

a.   The purchaser is not personally liable for the debt.
b.   In the event of a foreclosure, the purchaser is not personally  liable for a deficiency.

2.   Assumption

a.   The purchaser is personally liable for the debt.
b.   In the event of a foreclosure, the purchaser may be held liable for any deficiency.
c.   Unless specifically released by the lender, the original borrowermay also be liable for the debt or any deficiency.
d. Loan may not be assumed in many cases without lender approval, requiring assumer to qualify.

I.   Alienation clause

1. Also called a resale clause, due-on-sale clause or call clause
2.   The lender can declare the entire debt due immediately.
3.   The lender can raise the interest rate to the market rate.

 J.   Recording mortgages and deeds of trust

1.   Recorded in the county where the property is located
2.   Gives constructive notice of the debt
3. Establishes lien’s priority

K.   Priority of mortgages and deeds of trust

1.   Priority established by the date and time of recordation
2.   Generally, the loan for the purchase is the first lien.
3.   Subsequently recorded liens are second mortgages (junior liens).
4.   Lien priorities can be changed with subordination agreements.

A.   The buyer (the vendee) agrees to make a down payment and periodic payments of principal and interest and receives equitable title at the signing of the contract.
 B.   The seller (the vendor) retains legal title during the contract term and agrees to convey legal title to the buyer when the terms of the contract have been fulfilled.
C. Contract permits eviction in case of default with seller keeping any money  already paid.

A.   Methods of foreclosure*provisions vary from state to state

1.   Judicial foreclosure*the property may be sold by court order
2.   Non-judicial foreclosure*used when a power-of-sale clause is contained  in the security document
3.   Strict foreclosure*after proper notice is given and the defaulted debt remains unpaid, the court awards legal title to the lender
4. All junior liens are eliminated.

B.   Deed in lieu of foreclosure

1.   Sometimes called a "friendly foreclosure"
2.   The borrower forfeits any equity in the property and deeds it to the     lender.
3.   Any junior liens remain and become the lender's liability.
4.  Lender loses any rights pertaining to FHA or PMI  insurance or and VA  guarantees.

C.   Redemption (See Figure 14.3)

1.   Provides the opportunity for a defaulting borrower to redeem the property
2.   Equitable right of redemption*any time before the foreclosure sale, the defaulted borrower can bring the debt current and have it reinstated
3.   Statutory right of redemption*the specific period allowed for redemption after the foreclosure sale; state laws vary widely.

D.   Deed to purchaser at sale

1.   Given after any redemption period has expired
2.   Executed by a sheriff or a master-in-chancery
3.   Contains no warranties

E.   Deficiency judgment

1.   Issued to cover the difference between the amount received at the foreclosure sale and the principal balance owed
2.   Becomes a judgment against the debtor

I. Introduction to the Real Estate Financing Market

A.   Federal Reserve System is the basis forsound credit conditions

1.   Helps counteract inflationary and deflationary trends
2.   Attempts to create a favorable economic climate
3.   Country is divided into twelve federal reserve districts.

B.    Federal Reserve System regulates the flow of money and interest rates

1.   Controls bank reserve requirements

(a)  Funds unavailable for loans or any other use
(b)  Designed primarily to protect customer deposits
(c)  Also provides a means of manipulating the flow of cash into the money market

2.   Controls bank discount rates

(a)  When banks borrow from their district reserve banks, their loan interest rate determines what interest rate they must charge their borrowers.
(b)  A high discount rate reduces consumer borrowing; a low discount rate stimulates consumer borrowing.

A.   Lenders provide funds to borrowers as investments

1. Income generated for lender from

a. Finance charges-loan origination fees and discount points
b. Recurring income- interest

2. Selling loans in secondary mortgage market

a. Generate funds to make new loans
b. Servicing loans by Collecting payments, accounting, bookkeeping, processing payments of taxes and insurance and following up on delinquencies

B. Thrifts, savings association and commercial banks

1. Fiduciary lenders
2. Subject to regulations set by government agencies such as

a. Federal Deposit Insurance Corporation (FDIC)
b. Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created Office of Thrift Supervision (OTS)

C.   Insurance companies

1.   Invest much of their premium income in profitable enterprises, such as     long-term real estate loans
2.   Prefer income-producing commercial and industrial properties
3.   Invest in residential loans by purchasing large blocks of government backed loans from the Federal National Mortgage Association (FNMA)     and other mortgage warehousing agencies
4.   Often invest by demanding an equity position in the property

D.   Credits unions

1.   Cooperative organizations that require membership to borrow
2.   Only recently started making long-term first and second loans

E.   Pension funds

1.   Only recently started making long-term first and second mortgage loans
2.   Funds channeled through mortgage bankers and mortgage brokers

F. Endowment funds

1. Commercial banks and mortgage bankers handle
2. Source for financing low-risk commercial and industrial property

G.   Investment group financing

1.   Very popular for large real estate projects
2.   Funds come from such sources as partnerships and investment trusts.

H.   Mortgage banking companies

1.   Originate real estate loans using funds borrowed from others as well as their own funds
2.   Often serve as intermediaries between investors and borrowers, but not as mortgage brokers
3.   Generally service the loan once it has been made
4.   Usually organized as stock corporations
5.   Usually subject to fewer restrictions than other lenders

I.   Mortgage brokers

1.   Act as intermediaries between borrowers and lenders
2.   Locate borrowers, process their loan applications and submit them to lenders
3.   Do not service the loan once it has been made
4. Consult state's laws regarding licensure or registration of mortgage brokers.

A.   Secondary mortgage market*where loans are bought and sold after they have been funded
B.   The originating lender usually services the loan for a fee.
C.   Warehousing agencies*purchase real estate loans and then assemble them into securities for sale to investors
D.   Federal National Mortgage Association (FNMA, "Fannie Mae")

1.   A quasi-governmental agency*a privately-owned stock-issuing corporation backed by the federal government
2.   Deals in all real estate loans*FHA, VA, and conventional
3.   Guarantees payment of principal and interest to holders of its mortgage-backed securities
4.   Buys block or pool of mortgages from a lender in exchange for mortgagee-backed securities

E.   Government National Mortgage Association (GNMA, "Ginnie Mae")

1.   Exists as a division of HUD
2.   Administers special assistance programs for real estate loans
3.   Works with FNMA in the secondary mortgage market
4.   Joins with FNMA to provide "tandem plan" funds in times of high interest rates and tight money
5.   Issues the GNMA pass-through certificates

a.   A security interest in a pool of mortgages
b.   It "passes through" the principal and interest payments directly to the holder of the certificate.
c.   The payments are guaranteed by GNMA.

F.   Federal Home Loan Mortgage Corporation (FHLMC, "Freddie Mac")

1.   Provides a secondary market primarily for conventional loans
2.   Sells mortgage-backed securities like FNMA
3.   Unlike GNMA, FHLMC does not guarantee any payments

G. In Practice: Lenders use FNMA/FHLMC standardized forms and follow guidelines for underwriting procedures for loans they wish to sell in secondary mortgage market.

A.   Straight loans

1.   Also called "term loans" or "non-amortizing loans"
2.   Periodic payments of interest only with the entire principal balance due at the end of the loan term
3. Generally used for home improvement and second mortgages
4. Math Concept: Calculating simple interest

B.   Amortized loans (See Table 15.1)

1.   Also called "direct reduction" loans
2   Level-payment mortgages (See Figure 15.1)

a. Each payment is the same dollar amount.
b.   The amount applied to the interest decreases with each payment.
c.   The amount applied to the principal increases with each payment.

3.   Regular periodic payments are made, with each payment being applied first to the interest owed and the balance to the principal amount.
4. End of term all principal paid off
5. Most amortized loans paid in monthly installments; some paid quarterly or semi-annually
6. Math Concept: Interest and Principal credited from Amortized Payments

C.   Adjustable-rate mortgages (ARMs) (See Figure 15.2)

1.   Interest rates fluctuate, and therefore, so do the payments.
2.   Components include

a.   Interest rate tied to the movement of an index
b.   Interest rate equals the index rate plus a premium, the margin (the lender's profit and cost of doing business.)
c.   Rate caps that limit the amount the rate can increase both      periodically and over the life of the loan
d.   Payment cap that sets the maximum payment amount (might      cause negative amortization)
e.   Adjustment period that sets how often the rate can be changed

D.   Balloon payment loans

1.   The periodic payments are not sufficient to fully repay the principal loan     balance by the end of the term of the loan
2.   Characteristic of a partially-amortized loan
3. Math Concept: Balloon Payment Loan

E.   Growing-equity mortgages (GEMs)

1.   Known as a rapid-payoff mortgage
2. Increase in payments during the term of the loan reduce the principal     amount more rapidly.
3.   Borrower's equity grows faster than normal.

F.   Reverse-annuity mortgages (RAMs) (See Figure 15.3)

1.   Regular monthly payments made to the borrower
2.   The accrued debt (principal and interest) becomes payable at some specified future event, such as the sale of the property or by the estate upon the death of the owner.

A. Loans are classified based on the loan-to-value ratio

1. Value based on the sale price or appraisal, whichever is lower
2. Lower the ratio to debt to value, the higher the down payment; a more secure loan, minimizes lender’s risk
3. Math Concept: Determining LTV

B. Conventional loans

1. Loan-to-value ratio lowest; borrower makes significant down payment
2. Security for the loan is provided solely by the mortgage.
3. Payment of debt rests solely on the ability of the borrower to pay based     on the borrower's

a. creditworthiness as indicated by credit reports
b. amount of income
c. amount of existing outstanding debt
d. Consult lenders for current ratios.

C. Private mortgage insurance

1. Loan-to-value ratio higher than for other conventional loans.
2. Additional security for the loan for the lender provided by private mortgage insurance.
3. 20 to 25 percent of the loan is insured.
4. Borrower pays insurance premium to the lender.
5. Consult lenders for current rates
6. PMI to drop automatically when loan-to-value is 22%.

D. FHA-insured loans

1.   FHA —part of the Department of Housing and Urban Development (HUD)
2   FHA insures real estate loans made by approved lending institutions.
3.   Most common program: Title II, Section 203(b)

a.   For one- to-four-family residences
b.   Borrower or someone else pays mortgage insurance premium (MIP) in cash or it may be financed.
c.   FHA sets standards for the type and construction of buildings and neighborhood and qualifications for borrowers.
d. The property must be appraised by an FHA-approved appraiser.
e.   The loan amount that can be insured generally is

(1)  97% of the first $25,000 of appraised value or contract price whichever is less,  95% up to $125,000, and 90% of the
    remainder up to the prescribed limit in your area including allowable closing costs.
(2)  or 97.75% of sales price or assessed value, whichever is less
f. Consult local lenders for current loan requirements.

4.   Other FHA loan programs (for home improvement purposes, for condominium units, and adjustable rate mortgage loans)
5.   Prepayment privileges (no penalty to prepay as long as the lender receives minimum thirty days' advance notice.)
6.   Assumption rules (depends on when loan was originated)

a.   Loans before December 1986 (generally no restrictions)
b.   Loans between December 1, 1986 and December 14, 1989 (the buyer must submit to a creditworthiness review.)
c.   Loans after December 15, 1989 (no assumptions without complete buyer qualification)

7.   Discount points (who pays them and in what amount is negotiable between the parties; concessions exceeding six percent of the sales price will trigger a reduction in the property's appraised value.)

E. VA-guaranteed loans (See Table 15.2)

1.   The Department of  Veterans Affairs (VA)

a.   Authorizes the guarantee of home loans for eligible veterans
b.   Sets the minimum service times of  90 days, 181 days or two years, depending on the calendar dates of service
c. Reservists who do not otherwise qualify are also eligible.

2.   VA guarantees real estate loans made by approved lending institutions.
3.   Financing provisions

a.   Generally, no down payment is required
b.   There is no limit on the amount of the loan., determined by lender
c.   Limit on the maximum amount of VA guarantee (See Table 15.2)

(1)  Loans up to $45,000*50%
(2)  $45,001 to $56,250 —$22,500
(3)  $56,251 to $203000*the lessor of $36,000 or 40% of loan
(4)  More than $203,000*the lessor of $50,750 or 25% of loan

d.    The veteran must apply for a certificate of eligibility that indicates the maximum guarantee to which the veteran is      entitled.
e.   The VA will issue a certificate of reasonable value (the VA-approved appraisal)

(1)  to indicate the property's maximum value for guarantee purposes.
(2)  If property does not appraise, veteran can make a down payment to make up the difference between the appraisal and sale price.

4. Fees:

a. Loan Origination fee paid to lender
b. Funding fee paid to VA
c.   Discount points*can be paid by the veteran, seller or other person but cannot be financed

5. Prepayment privileges*can prepay without any penalty
6.   Assumption rules

a. VA loans made after March 1,1988 require the approval of the      buyer.
b. Processing fee is 1/2 percent of loan balance.
c. Original borrower remains liable for the loan unless VA approves     a release of liability; lender must release separately.
d. Non-veterans may assume the loan.

F.   Farm Service Agency (FSA) FmHA in Arizona

1.   Formerly the Federal Agricultural Mortgage Corporation FAMC or Farmer Mac, a division of the Department of
   Agriculture.
2.   Provides loans to help purchase or improve properties in rural areas, primarily farms and single-family residences
3.   Has guaranteed loan programs as well as a direct loan program
4. Loans to low/moderate income families at low interest rates

A.   Purchase-money mortgages

1.   Can refer to any type of real estate financing for the purchase
2.   Usually refers to an extension of credit by the seller to the buyer that     enables the buyer to purchase the property
3.   The seller "takes back" a note for some or all of the purchase price.

 B.   Package loans

1.   One loan covering both real and personal property – MH & land
2.   Usually used in new home sales to include the financing for floor and window coverings, major appliances and other similar items of personal  property

C.   Blanket loans

1.   One loan secured by multiple parcels of property as collateral
2.   Usually used in the financing of subdivision developments
3.   Partial release clause enables borrower to get a release of one of the parcels while the lien remains in place on the other parcels.

D.   Wraparound loans

1.   Also known as an over-riding or all-inclusive mortgage or deed of trust
2.   The new lender assumes responsibility for the payment of the existing loan (the underlying obligation) and gives the borrower a new increased     loan at a higher interest rate.
3.   Frequently used for refinancing or selling in a slow market
4.   May be prevented by an acceleration and alienation or due-on-sale     clause in the original mortgage

E.   Open-end loans

1.   Secures a note for a current loan and for any future advances
2.   Sometimes called an "equity line of credit"
3. Borrower can "open" the loan to increase the debt to its original amount.

F.   Construction loans

1.   Periodic payments often called "progress payments" or "draws"
2.  Made to the general contractor at predetermined progress points
3.   Paid off and replaced by a permanent or "take out" loan

G.   Sales and leasebacks

1.   The seller sells the property and leases it back, receiving cash and the     use of the property; becomes the lessee.
2.   The buyer receives the income from the rent and an ideal tenant;     becomes the lessor.
3.   Transactions usually require expert legal and tax advice.

H.   Buydowns

1.   The seller or some other individual pays some of the buyer's future     interest to the lender in advance.
2.   Used frequently by home builders as an incentive to buyers

I.   Home equity loans

1.  Usually beneath the loan obtained to purchase the property
2.   Can be an equity line of credit or a fixed amount

A.   Truth-in-Lending Act and Regulation Z

1.   Requires lenders to disclose to borrowers the true cost of obtaining     credit so that interest rates among lenders can be compared
2.   Applies to all loans of $25,000 or less for private consumers
3.   Always applies when a residence collateralizes the loan
4.   Does not apply to agricultural loans, business or commercial loans over $25,000
5.   The consumer must be fully informed of all financing charges, including loan origination fees, finders' fees, service charges, discount points and interest charges.
6.   The lender must compute and disclose the annual percentage rate (APR)*the true cost of the financing to be obtained.
7.   For purposes of Regulation Z, a creditor is defined as one who

a.   Extends consumer credit more than 25 times a year or more  than five times a year if the transaction involves a dwelling as  security
b.   Subjects the credit to a finance charge or contracts for payments in more than four installments
8.   Three-day right of rescission
a.   Applies to most Regulation Z consumer credit transactions
b.   Does not apply to residential purchase money or first mortgage  or deed of trust  loans

9.   Advertising for real estate financing

a.   Must give the annual percentage rate
b.   Must specify the total finance charges
c.   If any specific loan terms are to be mention, all terms must be      included such as the cash price; required down payment;  number, amounts and due dates of all payments; and the annual percentage rate

10.   Penalties for noncompliance include

a.   Liability to the consumer for twice the amount of the finance charge with a $100 minimum and a $1,000 maximum
b.   Court costs, attorneys' fees and actual damages
c.   Fines of up to $10,000 for each day a violation continues after an administrative order enforcing Regulation Z is given or for  engaging in unfair or deceptive credit practices
d.   For willful violations, up to a $5,000 fine or one year in prison or both

B.   Federal Equal Credit Opportunity Act (ECOA)

1.   Prohibits lenders and those who grant or arrange credit to consumers     from discriminating on the basis of

a.   Race
b.   Color
c.   Religion
d.   National origin
e.   Sex
f.   Marital status
g.   Age (provided the applicant is of legal age)
 h.   Dependence on public assistance (welfare)

2.   Lenders and creditors must inform rejected credit applicants, in writing within 30 days, why credit was denied or terminated.

C. Community Reinvestment Act of 1977 (CRA) – Rosa Bruce in Casa Grande

1. Financial institutions are expected to meet deposit and credit needs of community, participate in development and rehabilitation projects and loan programs.
2. Law requires statement by lender

a. defining geographic boundaries of community
b. identifying type of community reinvestment credit offered
c. comments from public about lender’s performance in meeting community needs

D.   Real Estate Settlement Procedures Act (RESPA)*created to provide the parties to a residential real estate transaction involving new financing with disclosure of all settlement charges (See Chapter 22)
E. Computerized Loan Origination (CLO) and Automated Underwriting

1. An electronic network for handling loan applications provides lists of mortgage lenders, rates and terms.
2. Real estate agent may assist buyer in selection of lender and applying for loan on-screen.
3. Broker may earn fees up to 1/2 point of loan amount.; borrower must pay fee.
4. Automated underwriting procedures shorten loan approval times,

a. lowers cost of application
b. reduces lenders’ time on approval process
c. strengthens buyer’s offer to purchase by including proof of loan approval

5. FNMA system called “Desktop Underwriter”; FHLMC system called  “Loan Prospector”

Future Class Notice