Chapter 10: Real Estate Financing Flashcards
Fiscal Policy
Federal fiscal policy is set by the President and Congress.
Fiscal policy is established through government spending, raising revenue through taxes, and management of the federal debt.
Monetary Policy
Monetary policy is determined by the Federal Reserve Board.
Monetary policy involves setting key interest rates, controlling reserve requirements, and buying and selling government securities.
Primary Market
The primary market consists of mortgage lenders that lend money directly to home buyers.
Secondary Market
n the secondary market, mortgage loans are bought and sold as investments.
Investors purchase the loans at a discount.
Freddie Mac and Fannie Mae
The major players in the secondary market are the government-sponsored enterprises, Fannie Mae and Freddie Mac.
They buy loans from primary market lenders, package them, and sell them to investors.
Straight Note
A straight note is a promissory note that requires the borrower to make interest-only payments during the term of the loan.
At the end of the term, the principal amount is due in one lump sum, which is called a balloon payment.
Installment Note
An installment note is a promissory note in which the regular payments are applied partly to principal and partly to interest.
In this way, the entire debt will be paid off by the end of the loan term.
Promissory Note
A promissory note is a written promise to repay a debt.
The parties are the maker and the payee.
A promissory note is typically a negotiable instrument, which means that the payee can endorse it over to a third party.
Title Theory vs. Lien Theory
In a title theory state, a security instrument gives the lender legal title to the secured property while the debt is being repaid.
In a lien theory state, a security instrument does not transfer title, but only creates a lien against the property.
There is little practical difference between the two approaches anymore.
Acceleration Clause
An acceleration clause allows the lender to demand immediate payment of the entire debt if the borrower defaults on any part of the loan agreement.
Alienation Clause
An alienation clause gives the lender the right to demand immediate payment in full if the borrower sells the property or otherwise alienates an interest in it without the lender’s approval.
Assumption
In an assumption, the borrower sells the property to a new purchaser, who takes over the responsibility of repaying the loan.
Because this is an assignment, the borrower remains secondarily liable to the lender.
Subordination Clause
A subordination clause is a provision in a mortgage that allows a subsequent mortgage to take a higher lien priority.
Deed of Reconveyance
A deed of reconveyance is a document that a lender gives a borrower when a debt secured by a deed of trust has been paid off.
It indicates that the lien created by the deed of trust has been released.
Sherrif’s Sale
After a judge orders a mortgaged property to be sold, the property is auctioned off at a sheriff’s sale.
Equitable Redemption Period
Until the mortgaged property is sold, the borrower may redeem the property by paying off the full amount of the debt and any costs incurred.
This redemption period before the sale is called the equitable redemption period.
Statutory Redemption Period
For a certain period after the sheriff’s sale, the borrower may still redeem the property.
This is called the statutory redemption period.
Once this period is over, the person who bought the property at the sheriff’s sale receives a sheriff’s deed. The borrower can no longer redeem the property.
Nonjudicial Foreclosure
A deed of trust can be foreclosed nonjudicially.
On the beneficiary’s behalf, the trustee auctions off the property in a trustee’s sale.
At that point, the grantor (borrower) has no further rights in the property.
However, any time before the trustee’s sale, the grantor may cure the default and reinstate the loan.
The grantor need only repay the delinquent amount, not the entire loan amount
Deed in Lieu
A defaulting borrower may be able to avoid foreclosure by offering the lender a deed in lieu of foreclosure.
The lender takes title subject to any existing liens.
Short Sale
A short sale is another alternative to a foreclosure proceeding.
A short sale requires all lienholders to consent to the sale of the house for a price that is something “short” of (less than) the amount owed, due to a decline in market value.
Loan Workout
As an alternative to foreclosure, a lender may agree to a new payment plan for a loan.
Or a lender may agree to modify the original loan terms to make the loan more affordable, including reducing the interest rate or principal amount.
Land Contract
Under a land contract, the buyer takes possession immediately but pays the seller in installments.
The buyer does not take title until the full contract price has been paid.
Land and equitable title
Under a land contract, the vendor retains legal title while the vendee is making payments.
The vendee’s interest in the property is called equitable title.
When the contract is paid off, the vendor delivers the deed to the vendee, transferring legal title to the vendee.
Forfeiture
If a vendee defaults on a land contract, the vendor may have the right to declare a forfeiture.
In a forfeiture, the vendee loses her equitable interest in the property.
The vendor is allowed to keep the property and the payments made on the contract.
Purchase Money Mortgage
A purchase money mortgage refers to a mortgage loan that the property seller offers to the buyer.
Budget Mortgage
With a budget mortgage, prorated shares of the property taxes and insurance premiums are added to the monthly mortgage payment.
Package Mortgage
A package mortgage finances the purchase of personal property together with real property, all with one loan.
Construction Loan
A construction loan is a temporary loan to finance construction on the borrower’s property.
The loan funds are released to the borrower as construction progresses, often according to a fixed disbursement plan.
When construction is complete, the construction financing is replaced with permanent financing.
Blanket Mortgage
A blanket mortgage uses several pieces of property to secure one loan.
This arrangement is most commonly used by developers, since it allows individual lots to be released from the mortgage as the loan is repaid.
Participation Mortgage
In a participation mortgage, the lender receives a portion of the mortgaged property’s earnings or ownership.
Shared Appreciation Mortgage
In a shared appreciation mortgage, the lender receives a share of the appreciation as the property’s value increases over time.
Wraparound Mortgage
A wraparound mortgage secures a loan made by a property seller to a buyer. The buyer takes title subject to the seller’s existing mortgage, but does not assume it.
The seller uses part of the buyer’s payments on the wraparound loan to make the payments on the existing loan.
Open-end Mortgage
An open-end mortgage allows a borrower who has paid off part of the loan to re-borrow some of the money
Graduated payment mortgage
A graduated payment mortgage calls for lower payments in the first years of the loan term, then steps up to the full payment amount.
Swing Loan
A swing loan can be used to provide funds for the purchase of a new home, when the sale of the buyer’s current home hasn’t yet closed.
Reverse Mortgage
A reverse mortgage enables an elderly homeowner to draw on his equity for additional income, without having to sell the home.
The property usually must be sold to repay the debt when the borrower dies.
