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Ch. 11

Vocab: Real Estate Finance

Acceleration Clause A provision in a mortgage or deed of trust that permits the lender to declare the entire principal balance of the debt immediately due and payable if the borrower is in default.
Adjustable Rate Mortgage (ARM) A mortgage in which the interest rate changes according to changes in a predetermined index.
Alienation Clause (due-on-sale clause) Clause in a mortgage or deed of trust that entitles lender to declare the entire principal balance of debt due and payable immediately if borrower sells the property during the mortgage term. This clause prohibits ability of borrower to assume the loan.
Amortization The gradual reduction of a mortgage loan through periodic payments of principal and interest over a specific term to satisfy a mortgage loan.
Arrears Delinquent in meeting an obligation. The payment of interest for a prior period as scheduled.
Balloon Payment A payment in which the scheduled payment will not fully amortize the loan over the term. Therefore, it requires a final payment called a _______ payment, larger than the uniform payments, to satisfy the debt fully.
Beneficiary The lender in a deed of trust.
Buydown Loan A loan with a reduced interest rate that a seller, developer, or buyer has obtained by paying money up front.
Certificate of Reasonable Value (CRV) A document establishing the value of a property as the basis for the loan guarantee by the Department of Veterans Affairs to the lender.
Conforming Loans Loans processed on uniform loan forms & meets certain guidelines of Fannie Mae and Freddie Mac (ex. size of loan). Also meets guidelines regarding borrower's debt-to-income ratio (DTI), and the loan must be properly documented. Lower interest rates.
Consumer Financial Protection Bureau (CFPB) Created to prevent abuses by lenders, like predatory lending and inappropriate fees, as well as incorporate fed. regulations related to consumers into 1 overall agency. Has broad authority to implement rules for consumer protection in financial products.
Conventional Loan Loan in which the federal government does not insure or guarantee the payment to the lender.
Deed in Lieu (of foreclosure) A conveyance of title to the lender by a borrower in default to avoid a record of foreclosure. Also called a "friendly" foreclosure.
Deed of Trust/ Trust Deed A form of security instrument pledging real property as security for the loan by conveying legal title to a third party, who is called a trustee until the loan is paid in full.
Defaults Failure to perform a mortgage obligation.
Defeasance Clause (to defeat the mortgage) The clause in a mortgage or a deed of trust giving the borrower the right to redeem the title and have the mortgage lien released at any time prior to default by paying the debt in full.
Deficiency Judgement A judgement obtained by a lender for the difference between the amount of foreclosure sale proceeds and the amount needed to satisfy the mortgage debt. *Judgement=court rules 1 party is indebted to another, filing creates a lien on the debtor's property
Due-on-Sale Clause (Alienation clause) Clause in a mortgage or deed of trust that entitles lender to declare the entire principal balance of debt due and payable immediately if borrower sells the property during the mortgage term. This clause prohibits ability of borrower to assume the loan.
Equal Credit Opportunity Act (ECOA) A federal law prohibiting discrimination in consumer loans.
Equity The difference between the market value of the property and what is owed on it, As market value of the property goes up and amt. owed decreases, equity increases. When loan is completely paid, owner then has 100% equity in the property.
Equity of Redemption The right of the borrower to pay off what is owed and redeem the title to the property prior to final foreclosure sale. Also known as right of redemption.
Escrow Account (impound account or reserve account) An account maintained by the borrower with the lender in certain mortgage loans, aka an impound account or reserve account, to accumulate the funds to pay an annual insurance premium, a real property tax, and/or a homeowner's association assessment.
Federal Home Loan Corporation (FHLMC, or Freddie Mac) A secondary mortgage market institution (corporation) that only purchases conventional loans. (loan where fed. gov't does not insure payment to lender).
Federal Housing Administration (FHA) The federal agency that insures mortgage loans to protect lending institutions.
Federal National Mortgage Association (FNMA, or Fannie Mae) A privately owned corporation that purchases FHA,VA, and conventional mortgages.
FHA-Insured Loan A mortgage loan in which the payments are insured by the Federal Housing Administration.
Foreclosure The legal procedure in which the lender sells the collateral in order to pay off the existing loan in the event of default by the borrower. The process used to terminate the borrower's equity, or right, of redemption.
Government National Mortgage Association (GNMA, or Ginnie Mae) A government agency that purchases FHA and VA mortgages.
Graduated Payment Mortgage (GPM) Mortgage in which the payments are lower in the early years but increase on a scheduled basis until they reach an amortizing level.
Grantor One who conveys title to real property by deed.
Home Equity Mortgage Considered an open-end mortgage since this type of mortgage is basically a open-end line of credit secured by a second mortgage on the home. More popular for typical residential mortgages than open-end mortgages.
Hypothecation Pledging property as security for the payment of a debt without giving up possession.
Judicial Foreclosure A court proceeding to require that property be sold to satisfy a mortgage lien.
Lien Theory The legal theory that a mortgage creates a lien against the real property pledged in the mortgage to secure the payment of a debt.
Liquidity The ability to convert an asset into cash.
Loan Assumption The transfer of loan obligations to a purchaser of the mortgaged property.
Loan-to-Value Ratio The relationship between the amount of a mortgage loan or the sales price (whichever is lower) and the lender's opinion of the value of the property is pledged to secure the payment of the loan.
Loan Underwriting Process by which an underwriter reviews loan documentation and evaluates a buyer's creditworthiness and value of the property to be pledged as security for payment of the note as well as to determine ability of loan to be sold within the secondary market.
Mortgage Guarantee Insurance Corporation (MGIC or Maggie Mae) A secondary mortgage market corporation of the Mortgage Guaranty Insurance Corporation.
Mortgage A written instrument used to pledge a title to real property to secure the payment of a promissory note.
Mortgage Broker A broker who arranges a mortgage loan between a lender and borrower for a fee.
Mortgage Insurance Premium (MIP) A fee charged by the FHA to insure FHA loans. There is both an upfront fee (which can be added to the loan amount or paid in cash at closing) and an annual fee (which can be paid with monthly payments).
Mortgagor The borrower in a mortgage loan who executes and delivers a mortgage to the lender.
Mortgagee The lender in a mortgage loan receiving a mortgage from the borrower/mortgager.
Negative Amortization When the loan payment amount is not sufficient to cover interest due, the shortfall is added back into principal, causing principal to grow larger after payment is made.
Negotiable Note Written promise to pay specified sum of $ according to specified terms to the bearer/holder of the note. Won't name an individual/entity as payee, but rather ables payee to transfer its rights to receive payment to a 3rd party. Most R.E. notes=negotiable.
Nonnegotiable Note A written promise to pay a specified sum of money according to specified terms to a particular individual or corporation, thus limiting its ability to be sold int he secondary mortgage market.
Nonrecourse Note A note in which the borrower has no personal liability for payment.
Open-end Mortgage A mortgage that may be refinanced w/o rewriting the mortgage (or incurring closing costs). Credit ceiling created. When original mortgage is paid down, owner can draw extra funds up to the ceiling for home improvements, etc. Not typical res. mortgage.
Periodic Cap In order to regulate how much the interest rate can adjust, the lender will utilize a cap. Caps are usually both a periodic cap(per adjustment period) as well as a life of the loan cap.
Power of Sale Clause Gives the trustee the right to sell the property if the buyer defaults.
Prepaid Items (Prepaids) Funds paid at closing to start an escrow account required in certain mortgage loans.
Prepayment Penalty (clause) States that a financial penalty is imposed on a borrower for paying a mortgage loan prior to the expiration of the full mortgage term or before a time specified in the loan.
Principal The amount of money on which interest is either owed or received.
Private Mortgage Insurance (PMI) A form of insurance required in high loan-to-value ratio conventional loans to protect the lender in case of borrower default in loan payment.
Promissory Note A written promise to pay a debt as set forth in the writing.
Purchase Money Mortgage A mortgage given by a buyer to a seller to secure the payment of all or part of the purchase price.
Real Estate Investment Trusts (REITs) A form of business trust owned by shareholders who make mortgage loans.
Regulation Z Requirements issued by the Federal Reserve Board in implementing the Truth-in-Lending Law, which is a part of the Federal Consumer Credit Protection Act. Provides specific consumer protections in mortgage loans for residential real estate.
Release of Liability The procedure by which a mortgage holder agrees not to hold a borrower responsible for a mortgage on a property when the property has been bought by someone else who has assumed the seller's loan and responsibility for it.
Reverse Mortgage Mortgage allowing elderly home-owners to borrow against the equity in their homes to help meet living expenses while continuing to occupy their home.
Right of Assignment Lender has right to transfer mortgage note and mortgage or deed of trust. Lets lender sell the loan and free up the $invested. Provides liquidity to the loan b/c lender can sell loan any time and get $ invested rather than wait for loan payment over time.
Secondary Mortgage Market The market in which mortgages are sold by lenders.
Statutory Redemption Period A statutory time period after a foreclosure sale during which the borrower may still redeem the title.
Strict Foreclosure A proceeding in which a court gives a borrower in default a specified time period to satisfy the debt to prevent transfer of the title to the mortgaged property to the lender. Illegal in NC.
"Subject to" a Loan A method of taking title to a property with a mortgage on it without becoming liable for the note payments.
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 loan that pays off, or "take out," the construction lender. Due to risk in const. loans (home may not sell + interest payments eliminate builder's equity) most const. lenders require builder have commitment from another source for a takeout loan.
Term Loan Loan that requires the borrower to pay interest only during the mortgage term with the principal due at the end of the term.
Title Theory The legal theory followed in some states that a mortgage conveys a title to real property to secure the payment of a debt.
Trustee One who holds title to property for the benefit of another called a beneficiary.
Trustor One who conveys title to a trustee.
Truth in Lending Act (TILA) Regulation Z Part of the Federal Consumer Credit Protection Act (1969). Aka TILSRA. This act allowed Federal Reserve Board adopt regulations known as "Regulation Z." Law & Regulations require 4 chief disclosures, & FRB implemented these regulations by making Reg. Z.
Usury Charging a rate of interest higher than the rate allowed by law.
VA-Guaranteed Loans A mortgage loan in which the loan payment is guaranteed to the lender by the Department of Veteran Affairs.
Truth-in-Lending Simplification and Reform Act (TILSRA) Part of the Fed. Consumer Credit Protection Act. It requires 4 chief disclosures (in connection w/ residential mortgage loans + personal consumer loans under $53K): 1. Annual percentage rate 2. Finance charge 3. Amount financed 4. Total of payments
Non-Conforming Loans Loan that fails to meet bank criteria for funding. Reasons include the loan amount is higher than the conforming loan limit (for mortgage loans), lack of sufficient credit, the unorthodox nature of the use of funds, or the collateral backing it.
Construction loan A short-term loan, secured by a mortgage, to obtain the funds to construct an improvement on land. Riskiest of all mortgage loans. Most prevalent ex. of a term loan.
Disintermediation The loss of funds available to lending institutions for making mortgage loans caused by the withdrawal of funds by depositors for making investments that provide greater yields.
Interest Money paid for the use of money.
Mortgage Banker A form of organization that makes and services mortgage loans from it's own monies.
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. To be valid must contain a promise to pay a specified amt. of money, must specify terms of repayment, and be signed by borrower.
Foreclosure under Power of Sale / Nonjudicial Foreclosure A form of foreclosure that does not require court action to conduct a foreclosure sale.
Package Mortgage Mortgage in which personal property as well as real property is pledged to secure payment of the note.
Prepayment Penalty A charge for paying off the loan before the end of the mortgage term.
Prepayment Penalty Clause States that a financial penalty is imposed on a borrower for paying a mortgage loan prior to the expiration of the full mortgage term or before a time specified in the loan.
Savings & Loan Associations (S&Ls) A major source of funds for financing residential real estate.
Up-Front Mortgage Insurance Premium (UFMIP) An insurance premium charged at the time an FHA loan is closed to insure the mortgage lender against default by the borrowers on an FHA loan.
Uninsured Conventional Loan Loan in which the loan payment is not insured to protect the lender. Typically less than 80% LTV.
Insured Conventional Loan Loan in which the loan payment is insured by private mortgage insurance to protect the lender.
Amortization Schedule A printed list of periodic payments of principal & interest over a specific term to satisfy a mortgage loan. Usually shows total payment; amt. going to principal and interest; loan balance after ea. payment; and total principal & interest paid to date.
Acquisition Cost The basis used by the FHA in calculating the loan amount.
Annual Percentage Rate (APR) The actual effective rate of interest charged on a loan expressed on an annual basis; not same as the simple interest rate. Takes into account certain closing costs + discount points charged by the lender; therefore, it may be higher than simple interest.
Assumable Mortgage Mortgage that does not contain an alienation (due-on-sale)clause.
Certification of Eligibility A statement provided to veterans of military service setting forth the amount of loan guarantee to which they are entitled at that time.
Collateral Property pledged as security for the payment of a debt.
Commitment A promise, such as a promise by a lending institution to make a certain mortgage loan.
Debt service Principal and interest payments on a debt.
Department of Housing and Urban Development (HUD) A federal agency involved with housing.
Discount Points A percentage of the loan amount required by the lender for making a mortgage loan at a more attractive interest rate. There will be 1 pt. charged for every 1/8 of 1% between the interest rate and the desired yield. Each pt. will cost 1% of the loan amt.
Effective Interest Rate The actual rate of interest being paid.
First Mortgage Mortgage that is superior to later recorded mortgages. Also known as a senior mortgage.
Fixed-Rate Loan Loan in which the interest does not change.
Gross Income Income received without the subtraction of expenses.
Housing and Urban Development (HUD) An agency of the federal government concerned with housing programs and laws.
Interim Financing Short-term or temporary financing, such as a construction loan.
Interim Interest Interest paid on the loan amount from the date of closing through the end of the closing month inclusive. Typically is prepaid at the time of closing.
Insured Conventional Loan Loan in which the payment is insured by private mortgage insurance to protect the lender.
Junior Mortgage Mortgage that is subordinate to a prior mortgage. Any loan in which there is another loan of higher priority.
Loan Commitment The obligation of a lending institution to make a certain mortgage loan.
Mortgage Satisfaction Full payment of a mortgage loan.
Mortgaging Clause The clause in a mortgage or deed of trust that demonstrates the intention of the mortgager to mortgage the property to the mortgagee.
Origination Fee A service charge made by a lending institution or making a mortgage loan.
Pledge To provide property as security for the payment of a debt or for the performance of a promise.
Primary Mortgage Market The activity of lenders making mortgage loans to individual borrowers.
Prime Rate The interest rate a lender charges the most creditworthy customers.
PITI Letters following the amount of a mortgage payment designating that the payment includes principal, interest, taxes, and insurance.
Principal Residence The home the owner or renter occupies most of the time.
Refinancing Obtaining a new mortgage loan to pay and replace an existing mortgage.
Release clause A provision in a mortgage to release certain properties from the mortgage lien when the principal is reduced by a specific amount.
Residual Method Method used by the U.S. Department of VA to determine the veteran's ability to meet the financial obligations of his/her house payment. Gross income - residual income remaining after taxes, debts, and housing expense.
Conforming vs. Non-Conforming Conventional Loans Conforming: mort. loans that comply w/ FNMA/FHLMC guidelines & made using standardized loan forms. Making conforming conv. loans lets lenders sell loan in secondary market (frees up funds for future loans). Nonconforming: don't meet guidelines/standards.
Second Mortgage Mortgage next in priority after 1st mortgage. Often referred to as junior mortgage.
Yield The return on an investment.
Created by: laurenk1996
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