15. Real Estate Financing Practice

Question 1

ADJUSTABLE-RATE MORTGAGE (ARM)

Answer 1

A loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index.

Question 2

AMORTIZED LOAN

Answer 2

A loan in which the principal as well as the interest is payable in monthly or other periodic installments over the term of the loan.

Question 3

BALLOON PAYMENT

Answer 3

A final payment of a mortgage loan that is considerably larger than the required periodic payments because the loan amount was not fully amortized.

Question 4

BLANKET LOAN

Answer 4

A mortgage covering more than one parcel of real estate, providing for each parcel’s partial release from the mortgage lien upon repayment of a definite portion of the debt.

Question 5

BUYDOWN

Answer 5

A financing technique used to reduce the monthly payments for the first few years of a loan. Funds in the form of discount points are given to the lender by the builder or seller to buy down or lower the effective interest rate paid by the buyer, thus reducing the monthly payments for a set time.

Question 6

COMMUNITY REINVESTMENT ACT OF 1977 (CRA)

Answer 6

Under the Act, financial institutions are expected to meet the deposit and credit needs of their communities; participate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small businesses, and small forms.

Question 7

COMPUTERIZED LOAN ORIGINATION (CLO)

Answer 7

An electronic network for handling loan applications through remote computer terminals linked to various lenders’ computers.

Question 8

CONSTRUCTION LOAN

Answer 8

A short-term loan made during the construction phase of a building project. See also interim financing.

Question 9

CONVENTIONAL LOAN

Answer 9

A loan that requires no insurance or guarantee.

Question 10

EQUAL CREDIT OPPORTUNITY ACT (ECOA)

Answer 10

The federal law that prohibits discrimination in the extension of credit because of race, color, religion, national origin, sex, age, or marital status.

Question 11

FANNIE MAE

Answer 11

A quasi-government agency established to purchase any kind of mortgage loans in the secondary mortgage market from the primary lenders.

Question 12

FARM CREDIT SYSTEM (SYSTEM)

Answer 12

A federal agency of the Department of Agricultural that offers programs to help families purchase or operate family farms.

Question 13

FARM SERVICE AGENCY (FSA)

Answer 13

Formerly the Farmer’s Home Administration (FmHA). An agency of the federal government that provides credit assistance to farmers and other individuals who live in rural areas.

Question 14

FARMER MAC

Answer 14

An agency that operates similarly to Fannie Mae and Freddie Mac, but for agricultural loans.

Question 15

FREDDIE MAC

Answer 15

A corporation established to purchase primarily conventional mortgage loans in the secondary mortgage market.

Question 16

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)

Answer 16

An independent federal agency that insures the deposits in commercial banks.

Question 17

FEDERAL RESERVE SYSTEM

Answer 17

The country’s central banking system, which is responsible for the nation’s monetary policy by regulating the supply of money and interest rates.

Question 18

FHA LOAN

Answer 18

A loan insured by the Federal Housing Administration and made by an approved lender in accordance with the FHA’s regulations.

Question 19

GINNIE MAE

Answer 19

A government agency that plays an important role in the secondary mortgage market. It sells mortgage-backed securities that are backed by pools of FHA and VA loans.

Question 20

GROWING-EQUITY MORTGAGE (GEM)

Answer 20

A loan in which the monthly payments increase annually, with the increased amount being used to reduce directly the principal balance outstanding and thus shorten the overall term of the loan.

Question 21

HOME EQUITY LOAN

Answer 21

A loan (sometimes called a line of credit) under which a property owner uses his or her residence as collateral and can then draw funds up to a prearranged amount against the property.

Question 22

LOAN-TO-VALUE RATIO

Answer 22

The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral.

Question 23

OFFICE OF THRIFT SUPERVISION (OTS)

Answer 23

A government agency which governs the practices of fiduciary lenders. OTS was created by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

Question 24

OPEN-END LOAN

Answer 24

A mortgage loan that is expandable by increments up to a maximum dollar amount, the full loan being secured by the same original mortgage.

Question 25

PACKAGE LOAN

Answer 25

A real estate loan used to finance the purchase of both real property and personal property, such as in the purchase of a new home that includes carpeting, window coverings, and major appliances.

Question 26

PRIMARY MORTGAGE MARKET

Answer 26

The mortgage market in which loans are originated and consisting of lenders such as commercial banks, savings and loan associations, and mutual savings banks.

Question 27

PRIVATE MORTGAGE INSURANCE (PMI)

Answer 27

Insurance provided by private carrier that protects a lender against a loss in the event of a foreclosure and deficiency.

Question 28

PURCHASE-MONEY MORTGAGE (PMM)

Answer 28

A note secured by a mortgage or deed of trust given by a buyer, as borrower, to a seller, as lender, as part of the purchase price of the real estate.

Question 29

REGULATION Z

Answer 29

Implements the Truth-in-Lending Act requiring credit institutions to inform borrowers of the true cost of obtaining credit.

Question 30

REVERSE-ANNUITY MORTGAGE (RAM)

Answer 30

A loan under which the homeowner receives monthly payments based on his or her accumulated equity rather than a lump sum. The loan must be repaid at a prearranged date, or upon the death of the owner, or upon the sale of the property.

Question 31

SALE-AND-LEASEBACK

Answer 31

A transaction in which an owner sells his or her improved property and, as part of the same transaction, signs a long-term lease to remain in possession of the premises.

Question 32

SECONDARY MORTGAGE MARKET

Answer 32

A market for the purchase and sale of existing mortgages, designed to provide greater liquidity for mortgages; also called the secondary money market. Mortgages are first originated in the primary mortgage market.

Question 33

STRAIGHT LOAN

Answer 33

Also called straight (term) loan. A loan in which only interest is paid during the term of the loan, with the entire principal amount due with the final interest payment.

Question 34

TRIGGER TERMS

Answer 34

Specific credit terms, such as down payment, monthly payment, and amount of finance charge or term of loan.

Question 35

TRUTH-IN-LENDING ACT

Answer 35

Federal government regulates the lending practices of mortgage lenders through this Act.

Question 36

VA LOAN

Answer 36

A mortgage loan on approved property made to a qualified veteran by an authorized lender and guaranteed by the Department of Veterans Affairs in order to limit the lender’s possible loss.

Question 37

WRAPAROUND LOAN

Answer 37

A method of refinancing in which the new mortgage is placed in a secondary, or subordinate, position; the new mortgage includes both the unpaid principal balance of the first mortgage and whatever additional sums are advanced by the lender. In essence it is an additional mortgage in which another lender refinances a borrower by lending an amount over the existing first mortgage amount without disturbing the existence of the first mortgage.

Question 37

DISCOUNT RATE

Answer 37

Rate charged by the Federal Reserve when it lends to its member banks.

Question 38

FEDERAL FUNDS RATE

Answer 38

Rate recommended by the Federal Reserve for the member banks to charge each other on short-term loans

Question 39

PRIME RATE

Answer 39

Short-term interest are charged to a bank’s largest, most credit-worthy customers.