Chapter 12 Flashcards
What is Lien theory?
Florida is a lien theory state
Mortgage theory in which the borrower retains ownership of the home during the loan period
What is title theory?
Mortgage theory where only the temporary ownership is conveyed to the borrower during the loan period
What is a mortgage?
A document recorded by the lender that creates a lien against a property
Secures the promissory note
What is a Deed of Trust?
Document used to convey temporary ownership in a title theory state
Who owns the real estate property in a lien theory state?
The mortgagor (borrower)
Who owns the real estate property in a title theory state?
The lender (mortgagee)
What happens when a borrower defaults on the loan in a title theory state?
The lender can take possession of the property
What happens when a borrower defaults on the loan in a lien theory state?
The lender can foreclose on the borrower’s property through a judicial process
What is a promissory note?
Legal document that includes the borrower’s promise to pay according to the terms
What is Hypothecation?
borrower put house as collateral as security for the loan
Who is the mortgagor?
The borrower
Who is the mortgagee?
The lender
What are the requirements for a valid mortgage?
Must be in writing
Must be signed by the mortgagor
Must be for a valid contract
Must contain a legal description of the property
Must be witnessed by 2 people
What does the mortgagor receive when their loan is paid in full in a lien theory state?
Letter of Satisfaction
What is a defeasance clause?
Mortgage clause stating that if the borrower is performing as required (making payments on time), the lender cannot foreclose on the home
What is a prepayment clause?
Mortgage clause that allows the borrower to pay the loan off early, avoiding interest that would have been paid
What is the acceleration clause?
Mortgage clause that allows the lender to declare the outstanding loan balance immediately due whenever a default occurs
What is the alienation clause? or due-on-sale clause
Mortgage clause that requires the borrower to pay off the entire loan balance whenever the property is sold
What is an open-end clause?
Mortgage clause that permits the borrower to borrow additional funds based on the original mortgage after the loan balance is paid down, similar to a HELOC
What is an escalator clause? or escalation clause?
Mortgage clause that allows the lender to increase the interest rate based on change in the use of the property, or consistently late payments
What is a subordination clause?
Mortgage clause where a lender voluntarily agrees to allow a new mortgage to be placed in a superior lien position to a mortgage recorded earlier
When is a subordination clause typically used?
Commonly used to finance vacant land when development is planned so the developer can obtain a construction loan to complete the project
What is the receivership clause?
Mortgage clause used with income-producing properties where a trustee is appointed to manage the property and collect rents if the investor defaults
What is the exculpatory clause?
Mortgage clause that limits the lender’s rights in a foreclosure to the amount received from the sale of the foreclosed property. Meaning, they can’t go after the borrower for the remaining portion.
What is a release clause?
Mortgage clause for a loan covering more than one parcel of land, allowing individual parcels to be released from the original mortgage for a specified amount of money
What is a right-to-reinstate clause?
Mortgage clause that gives a borrower the right to cure a loan that is in default by paying missed loan payments, accrued interest, and any fees
What is the maintenance clause?
Mortgage clause that requires the borrower to maintain the property during the term of the loan to protect the property’s value
What is equity?
Difference between market value of a property and the amount the owner still owes on the mortgage
What is an escrow account? (in a mortgage)
Lender’s account for reserving funds collected from the borrower to pay insurance and property taxes
What is PITI?
Principal, interest, taxes, insurance
Monthly payment collected by the lender that includes the insurance and real estate tac in addition to the mortgage payment
What is a loan origination fee?
One time administrative fee charged by the lender to cover the administrative costs of processing the loan
What is the value of one point in a loan?
1% of the loan amount
What are discount points?
Points paid by the borrower in exchange for a lower interest rate (1/
What is the effective yield? in a mortgage
The rate the lender receives considering the cumulative effect of points paid, the amount of any discount, and the length of time the borrower keeps the loan
What is mortgage underwriting?
Lender’s process of risk evaluation to qualify the applicant and the property for a loan
What is the Federal Equal Credit Opportunity Act (ECOA)?
Requires lenders to qualify every loan applicant on their own merit without discrimination based on race, color, religion, national origin, sex, marital status, age, or income from public programs
What is a property appraisal? (for a mortgage)
Method by which property is evaluated to determine if there is sufficient value to support it being a collateral for the loan
What is redlining?
Illegal practice of refusing to loan based on racial or economic factors of a certain neighborhood
What is the criteria used by a lender when qualifying an applicant for a loan?
Credit history
Income
Assets
What income ratios are used to evaluate a borrower’s ability to repay the loan?
Housing expense ratio
Total obligations ratio
How do you calculate Housing expense ratio?
Monthly PITI / Monthly gross income
How do you calculate total obligations ratio?
(Monthly PITI + other obligations) / Monthly gross income
What are the maximum allowed expense ratios for a conventional loan?
28% housing expense
36% total obligations
What are the maximum allowed expense ratios for an FHA loan?
31% housing expense
43% total obligations
What are the maximum allowed expense ratios for a VA loan?
no max for housing (not calculated)
41% total obligations
What is loan-to-value ratio used for?
To determine the lender’s risk of loss
The higher the LTV, the higher the risk to the lender
How do you calculate the Loan to Value ratio?
Loan amount / purchase price (or appraised value)
What is Novation?
Substituting the sellers name with the borrower’s name on an assumed loan
Who is responsible for repayment of an assumed mortgage without novation?
Primary responsibility: the buyer that assumed it
Secondary: the seller that was the OG borrower
Who is responsible for repayment of an assumed mortgage with novation?
The buyer
Who is responsible for repayment of a mortgaged property that is sold subject to the mortgage?
The original borrower remains responsible for their loan
What is an Estoppel certificate? or estoppel letter
Document obtained from the lender that verifies the current loan balance
What is Default?
When a borrower fails to perform as agreed in the promissory note
What is equity of redemption?
Right of a borrower to reinstate a loan by bringing the past due balance current before foreclosure
What is statutory right of redemption?
Right of a borrower to reinstate a loan for up to 1 year after foreclosure
Not recognized in Florida
What is a foreclosure?
Enforcement of a mortgage by a lender
Judicial process available to a lender when the borrower is in default
What is Lis Pendens?
Court filing that gives notice that the property specified is the subject of litigation
What is writ of execution?
Final order of the court in a foreclosure process
What is a deficiency jugement?
Court filing available to lien holders who were not paid from the proceeds of the foreclosure sale
What are the types of foreclosures?
Strict Foreclosure - nor used in FL
Judicial Foreclosure
Deed in lieu of foreclosure
What is deed in lieu of foreclosure
Borrower in default voluntarily deeds a property to a lien holder in lieu of payment
