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Chapter 11
Real Estate Finance
| Question | Answer |
|---|---|
| Acceleration clause | Provides the lender with the option of calling the entire loan due and payable at once if the buyer defaults or breaks the contract in any way. |
| Adjustable rate mortgage (ARM) | A type or mortgage loan in which the lender has the right to alter, or adjust, the interest rate. |
| Alienation clause | Synonymous with due-on-sale clause. Prevents a future purchaser from assuming the loan without the lender's permission. |
| Amortization | The gradual reduction of a mortgage loan amount from the original amount of the loan to a zero balance through periodic payments |
| Arrears | Monthly payment due on first of the month includes interest for using the money during the previous month. |
| Balloon payment | A lump sum due at the end of the amortization period which is much larger than any previous payment in order to satisfy remaining principal and interest. |
| Beneficiary | In title theory, the lender. A trustee holds the rights conveyed by the buyer/borrower in trust for the lender. |
| Buydown loan | Allows for a temporary or permanent reduction of the interest rate. Temporary is in early years, permanent involves purchasing discount points. |
| Certificate of reasonable value (CRV) | provided by the VA to the lending institution as the basis for making the loan. |
| Conforming loans | Comply with FNMA/FHLMC guidelines. Prepared using standardized forms. |
| Consumer Financial Protection Bureau (CFPB) | An agency established by the Dodd-Frank Act. Established to prevent abuses by lenders, including predatory lending and inappropriate fees, as well as to incorporate federal regulations re: consumers into one agency. |
| Conventional loan | A loan that has no participation by an agency of the federal government. |
| Deed in lieu of foreclosure | Also known as "friendly foreclosure". A borrower in default simply conveys the title to the property to the lender in order to avoid record of foreclosure. |
| Deed of trust | Serves the same purpose as a mortgage in a lien theory state. The legal instrument through which the buyer/borrower conveys legal title to the property to a neutral third party called the trustee. A specific lien. |
| Defaults | If the borrower fails to make payments as scheduled or fails to fulfill other obligations set forth in the deed of trust, they are said to have "defaulted" on the loan. |
| Defeasance clause | In title theory: relates to the borrower's right to defeat, or pay off, the mortgage. |
| Deficiency judgment | Court order stating that the borrower still owes the lender money. |
| Disintermediation | The loss of funds available to lending institutions for making mortgage loans; caused by the withdrawal of funds by depositors for investment in higher yield securities in times of higher interest rates. |
| Due-on-sale clause | Synonymous with alienation clause. Prevents a future purchaser from assuming the loan without the lender's permission. |
| Equal Credit Opportunity Act | Enacted and amended in mid-1970s to prevent discrimination in the loan process on the part of lending institutions. |
| Equity | The difference between the market value of the property and what is owed on it. |
| Equity of redemption | Also called right of redemption. The borrower has the right to pay off the loan and received his title back any time prior to final foreclosure sale. |
| Escrow account | An account required by FHA and VA loans. Also called an impound account. The borrower must pay monthly into this account to accrue monies for annual property taxes and insurance policy premium. |
| Federal Home Loan Mortgage Corporation (FHLMC), aka Freddie Mac | Operates along with FNMA as a government conservatorship under the Federal Housing Finance Agency. |
| Federal Housing Administration (FHA) | Created during the depression of the 1930s to make home ownership available to more people., prove construction standards, and provide a more stable and effective way of financing homes. |
| Federal National Mortgage Association (FNMA), aka Fannie Mae | The oldest secondary mortgage institution and the largest holder of home mortgages. |
| FHA-insured loan | Protects FHA approved lenders against financial loss. |
| Foreclosure | The liquidation of title to the real property pledged to recover funds to pay off the debt. |
| Foreclosure under power of sale | Used synonymously with nonjudicial foreclosure. Common in title theory. Trustee files summary proceeding and locally advertises sale according to guidelines (15 days minimum). |
| Government National Mortgage Association (GNMA), aka Ginnie Mae | Purchases mortgages to make capital available to lending institutions. |
| Graduated payment mortgage (GPM) | Monthly payments lower in early years. Gradually increase at specified intervals until amount is sufficient to amortize loan over remaining term. |
| Home equity mortgages | Considered open end mortgages. Essentially an open-end line of credit secured by a second mortgage on the home. |
| Hypothecation | When a borrower pledges property as security for a loan without surrendering possession |
| Insured | A conventional loan in which the borrower has a down payment of less than 20% and thus borrows at least 80 percent of the value. Insurance is thus necessary in case of default. |
| Interest | Money paid for using someone else's money |
| Judicial foreclosure | Requires the lender to bring suit against the borrower and obtain a judgment for the amount of debt owed by the borrower. |
| Lien theory | One of the two main lending practices (theories of financing). The loan constitutes a lien against the real property. |
| Liquidity | A mortgage is a liquid asset because it can be readily converted to cash by the lending institution selling the mortgage in the secondary market. |
| Loan assumption | Purchase assumes liability for the loan and personal liability for payment of the note. The seller whose loan was assumed remains liable unless specifically released from liability by the lender. |
| Loan cap | The maximum amount by which loan interest may increase. |
| Loan-to-value ratio | Abbreviated LTV and calculated using purchase price. If the loan amount is 85,000 and the purchase price is 100,000, the LTV is 85%. |
| Loan underwriting | The process by which an underwriter reviews loan documentation and evaluates a buyer's creditworthiness and the value of the property to be pledged as security as well as to determine the ability of the loan to be sold on the secondary market. |
| Mortgage Guarantee Insurance Corporation (MGIC), or Maggie Mae | A purchaser of conventional loans. Provides PMI on loans with an LTV above 80%. |
| Mortgage | A two-party instrument between lender and borrower. Consists of a mortgage note (promissory note) and a mortgage (or deed of trust). |
| Mortgage banker | One who makes and services mortgage loans. |
| Mortgage broker | One who brings together a lender and a borrower for a fee paid by the lending institution. |
| Mortgage insurance premium (MIP) | FHA annual premium, prorated monthly and paid with monthly payment. The second of the two phases. |
| Mortgage note | An IOU (promissory note) that is backed by a mortgage or a deed of trust pledging the property as collateral for the loan. |
| Mortgagee | The lender who receives the mortgage in exchange for the borrowed funds. |
| Mortgagor | The borrower who gives the mortgage to the lender in exchange for the borrowed funds. |
| Negative amortization | Payment does not cover amount due for interest. The vast majority of ARM lenders do not allow negative amortization to exist in their loans. |
| Negotiable note | A written promise to pay a specified sum of money according to specified terms to the bearer or holder of the note. |
| Non-conforming loans | Loans which do not meet the requirements for Sallie Mae or Freddie Mac. |
| Nonjudicial foreclosure | Does not require lender to bring a lawsuit against the defaulting borrow to obtain a judgment to foreclose. |
| Nonnegotiable note | A written promise to pay a specified sum of money according to specified terms to a particular individual or corporation. |
| Nonrecourse note | Buyer assumes no personal liability for paying the note; therefore, the lender can look only to the property pledge in the mortgage to obtain money owed in case of default. |
| Open-end mortgage | one that can be refinanced without rewriting the mortgage and incurring closing costs. |
| Package mortgage | Personal property, in addition to real property, is pledged to secure payment of the mortgage loan. |
| Periodic cap | An interest cap which is utilized every adjustment period. |
| Power of sale clause | In title theory: gives the trustee the right to sell the property, without prior court approval being required, if the buyer defaults. |
| Prepaid items | Insurance and tax monies deposited at the time of closing on an FHA or VA loan into the borrower's escrow account. Considered in excess of closing costs. |
| Prepayment penalty | A penalty in the event the mortgage is paid off faster than at the amortization rate stipulated. |
| Prepayment penalty clause | Rarely included on mortgage loans for personal residence. Govt. related loans (FHA, VA, and RD) and conforming loans do not allow them. |
| Principal | Amount of money on which interest is either paid or received |
| Private mortgage insurance (PMI) | Insurance obtained by a lender to serve as security for an loan in case of default. The premium is paid by the borrower at closing, financed into loan amount, or paid monthly. |
| Promissory note | An IOU, or promise to pay. Given to the lender by the buyer/borrower in exchange for the borrowed funds. |
| Purchase money mortgage | Any mortgage obtained in order to purchase a property. The term is most often used, however, to describe traditionally seller financing. |
| Real estate investment trusts (REITs) | Owned by stockholders. Make loans secured by real property. Provide |
| Regulation Z | Provides specific consumer protections in mortgage loans for residential real estate. |
| Release of liability | A procedure by which a mortgage holder agrees not to hold a borrower responsible for a mortgage on a property when another has assumed the loan and the responsibility for payment of the note. |
| Reverse mortgage | Homeowner receives income from the lender. May be useful when a homeowner has large equity in a property but low income. |
| Right of assignment | Lender call sell the loan at any time and obtain the money invested rather than wait for payment of the loan over an extended period. |
| Savings and loan associations (S&Ls) | Lend money to construct housing, to purchase existing housing, and to effect improvements in existing housing. |
| Secondary mortgage market | Buys and sometimes sells and services mortgages created in the primary mortgage market. Provides liquidity to mortgages. |
| Statutory redemption period | Strictly after final foreclosure sale. Often referred to as the "upset bid" period. In NC, this period is ten days long. |
| Strict foreclosure | Lender files a foreclosure petition with he court after the mortgage is in default. |
| Subject to a loan | If a buyer purchases property "subject to a loan", s/he does not become liable for payment of the note. |
| Substitution of entitlement | The process by which one veteran pledges entitlement for a VA loan he or she is assuming in order to free up the entitlement of the original veteran/borrower. |
| Takeout loan | Any type of loan that will pay off, or "take out", the construction lender. |
| Term loan | Also called a "straight loan." Requires borrower to make interest-only payments for a specified term. At the end of that term, the borrower is required to pay the entire principal balance. |
| Title theory | One of the two main lending practices. A disinterested third party holds legal title to the property in security for the loan through a deed of trust. |
| Trustee | Usually an attorney. Holds the rights conveyed by the buyer/borrower in trust for the lender (the beneficiary). |
| Trustor | Also called a grantor with regard to title theory. The term refers to the buyer/borrower, who signs a promissory note payable to the lender. |
| Truth in Lending Simplification and Reform Act (TILSRA) | Empowers the Federal Reserve Board to adopt regulations known as "Regulation Z". |
| Uninsured | In an uninsured conventional loan, the borrower's equity in the property provides sufficient security for the lender. |
| Up-front mortgage insurance premium (UFMIP) | FHA loan insurance. Paid by buyer at closing. The first of the two phases. |
| Usury | Interest charged in excess of the legal limit that is set by law. |
| VA-guaranteed loan | Can be a 100 percent loan. VA guarantees repayment of top portion of loan to lender in the event of default. |
| PITI | Principal, interest, taxes, and insurance. A combined mortgage payment which covers a portion of the taxes and insurance to be escrowed each year. |
| Why must tax and insurance funds be escrowed? | A property tax lien takes precedence over all others, so the monthly collection and escrow of tax and insurance funds using PITI payments ensure that taxes are paid in the event of foreclosure. It protects the collateral and the priority of their lien. |
| Debt service | The part of a PITI payment which covers principal and interest (P&I), is constant in a fixed-rate loan. |
| Disclosures required by TILA and Regulation Z | APR, finance charge, amount financed, and total of payments. |
| Trigger terms | Require that the disclosure of APR occur when a specific number is mentioned in regard to financing in a real estate ad. |
| When a borrower's equity in a property reaches ______ percent of the current value, the borrower may request the lender to discontinue the insurance requirement. The | 20 |
| Each discount point purchased by the buyer will cost 1% of the loan amount and will reduce their interest rate by | 1/8, or .125. |
| Par interest rate | The interest rate at zero (discount) points. Keyword: yield. |
| PITI | Principal, Interest, Taxes, Insurance. The total monthly payment made by the borrower to the lender. |
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