Mortgages and Real Estate : Types of Property Pledged


Package Mortgages

Quite often the sale of real property includes certain items and equipment as part of the sales price. Rather than acquiring separate mortgages on each of these items, the buyer can, through the use of a package mortgage, finance both the real property and the personal property. In residential real estate, a builder might include a stove, refrigerator, dishwasher or air conditioning in the sales price. For commercial real estate, certain equipment or furniture is often included in the sales price. The advantage to the purchaser is that these items can be financed over a much longer period and at a much lower interest rate than if a separate financial instrument was used. For the builder or seller, these items often serve as inducements used in financing the sale.


Blanket Mortgages

A blanket mortgage is often used by a developer to cover more than one parcel of land under the same mortgage. For example, a developer buys a large tract of land and plans to subdivide the land into 100 lots and then build homes on the lots. Rather than going to the expense and time of obtaining 100 separate mortgages, one blanket mortgage covering all the lots is obtained. Since the developer will probably be developing a few lots at a time, the mortgage will include a partial release clause which means that as the debt is paid, individual lots will be released from the mortgage. Thus, the developer can pay off part of the mortgage, have a certain number of lots released, build on the lots and then sell them free and clear from the lien that still exists on the unreleased lots.

Mobile Home Loans

Certain lenders, although not all, make loans on mobile homes. Typically, the amount financed is far much less than the average residential loan, and the amortization period is much shorter, perhaps seven to 10 years, even though longer terms are available under both FHA and VA financing. The amortization period is usually shorter since, unlike a permanent home, a mobile home normally depreciates in value, and thus, the lender wants to be repaid over a shorter period of time. A fear of some lenders is that since mobile homes are not permanently affixed to the land, the security for the loan, the mobile home, can be moved by a dishonest borrower, thus, not all lenders make mobile home loans.


Land Contracts

Also referred to as an installment sales contract, a land contract involves the seller`s accepting a down payment on a parcel of land and a series of periodic payments of principal and interest. However, unlike other types of financing, title to the property does not pass until the last payment has been received. Although called a land contract, this means of financing can also be used to purchase improved land. Rules relating to land contracts differ from state to state. For instance, some states require that title be passed when a certain percentage of the loan has been paid by the borrower.

Lease hold Mortgages

Sale leaseback are used by owners of commercial property as a means of raising capital. The process involves the simultaneous selling and leasing back of the property usually through a net lease. The advantages to the seller include the freeing of capital previously tied up in the project and the inclusion of the rental payment as a legitimate operating expense for income tax purposes. For the investor, the rental payment represents a return on investment and any depreciation for tax purposes or increases in value due to market conditions accrue to the investor.


Land Leases (Ground Leases)

A ground lease is ordinarily a long term lease for a parcel of unimproved land. The tenant pays what is known as a ground rental and pays all taxes and other charges associated with ownership. The landlord receives a net amount which may have an escalation clause to periodically adjust the ground rental so that the property reflects the changing values of the land.

Normally, a ground lease contains a subordination clause. A subordination clause is an agreement that the first lien holder will agree to take a junior position to another lien holder. Without a subordination clause, it may be more difficult to construct improvements on the land. A lender, without a subordination agreement by the leasor of the land, will only consider the value of the leasehold in making a loan, while with a subordination will consider the full value of the property.

In certain parts of the country, most notably Baltimore, Maryland, the land under residential real estate is leased through a long term lease agreement whereby the owner of the land receives periodic rent for the use of the land. Such an agreement covers an extended period of time, possibly 99 years, renewal at the lessee`s option and results in a lower purchase price of the home, since the land is not owned in fee simple. Thus , less money has to be borrowed. The owner of the ground rent has a superior lien position to that of the lender, and therefore the lender normally requires the borrower to include the ground rent as part of the monthly debt service. State status regulate land leases.

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