14. Real Estate Financing Principles

Question 1

ACCELERATION CLAUSE

Answer 1

The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or other covenant.

Question 2

ALIENATION CLAUSE

Answer 2

The clause in a mortgage or deed of trust that states that the balance of the secured debt becomes immediately due and payable at the lender’s option if the property is sold by the borrower. In effect this clause prevents the borrower from assigning the debt without the lender’s approval.

Question 3

ASSUMPTION OF MORTGAGE

Answer 3

Acquiring title to property on which there is an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including payments.

Question 4

BENEFICIARY

Answer 4

(1) The person for whom a trust operates or in whose behalf the income from a trust estate is drawn. (2) A lender in a deed of trust loan transaction.

Question 5

DEED IN LIEU OF FORECLOSURE

Answer 5

A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage. This is a way for the mortgagor to avoid foreclosure.

Question 6

DEED OF TRUST

Answer 6

The means by which a trustor conveys real estate to a trustee for the benefit of a beneficiary. See trust deed.

Question 7

DEFEASANCE CLAUSE

Answer 7

A clause used in leases and mortgages that cancels a specified right upon the occurrence of a certain condition, such as cancellation of a mortgage upon repayment of the mortgage loan.

Question 8

DEFICIENCY JUDGMENT

Answer 8

A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full.

Question 9

DISCOUNT POINT

Answer 9

A unit of measurement used for various loan charges; one point equals 1 per cent of the amount of the loan.

Question 10

EQUITABLE RIGHT OF REDEMPTION

Answer 10

The right of a defaulted property owner to recover the property prior to its sale by paying the appropriate fees and charges.

Question 11

FORECLOSURE

Answer 11

A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of all parties to a conclusion and passes the title in the mortgaged property to either the holder of the mortgage or a third party who may purchase the realty at the fore closure sale, free of all encumbrances affecting the property subsequent to the mortgage.

Question 12

HYPOTHECATE

Answer 12

To pledge property as security for an obligation or loan without giving up possession of it.

Question 13

INTEREST

Answer 13

A charge made by a lender for the use of money.

Question 14

INTERMEDIATE THEORY

Answer 14

Adopted by a number of states, a theory based on the principles of title theory but requires the mortgagee foreclose to obtain legal title.

Question 15

LIEN THEORY

Answer 15

Some states interpret a mortgage as being purely a lien on real property. The mortgagee thus has no right of possession but must foreclose the lien and sell the property if the mortgagor defaults.

Question 16

LOAN ORIGINATION FEE

Answer 16

A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount.

Question 17

MORTGAGE

Answer 17

A conditional transfer or pledge of real estate as security for the payment of a debt. Also, the document creating a mortgage lien.

Question 18

MORTGAGEE

Answer 18

A lender in a mortgage loan transaction.

Question 19

MORTGAGOR

Answer 19

A borrower in a mortgage loan transaction.

Question 20

NEGOTIABLE INSTRUMENT

Answer 20

A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee’s right to payment.

Question 21

NOTE

Answer 21

The borrower’s personal promise to repay a debt according to agreed-upon terms. See also promissory note.

Question 22

PREPAYMENT PENALTY

Answer 22

A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost.

Question 23

PROMISSORY NOTE

Answer 23

A financing instrument that states the terms of the underlying obligation, is signed by its maker, and is negotiable (transfer able to a third party).

Question 24

RELEASE DEED

Answer 24

A document, also known as a deed of reconveyance, that transfers all rights given a trustee under a deed of trust loan back to the grantor after the loan has been fully repaid.

Question 25

SATISFACTION OF MORTGAGE

Answer 25

A document acknowledging the payment of a mortgage debt.

Question 26

STATUTORY RIGHT OF REDEMPTION

Answer 26

The right of a defaulted property owner to recover the property after its sale by paying the appropriate fees and charges.

Question 27

TITLE THEORY

Answer 27

Some states interpret a mortgage to mean that the lender is the owner of mortgaged land. Upon full payment of the mortgage debt, the borrower becomes the landowner.

Question 28

TRUSTOR

Answer 28

A borrower in a deed of trust loan transaction.

Question 29

USURY

Answer 29

Charging interest at a higher rate than the maximum rate established by state law.