Chapter 12 - Financing Contingencies Flashcards
Hypothecation
Places a home as collateral for a loan.
Mortgage
Places the house as security for the loan. Not normally used in California.
Deed of Trust
An instrument placing the real property being purchased or refinanced as collateral for the loan.
Secures a promissory note.
Foreclosure
Procedure whereby property pledged as security for a debt is sold to pay the debt in the event of default in payments or terms.
Nominal Interest Rate
Rate named in the promissory note.
Effective Interest Rate
Actual rate of interest the borrower pays including loan fees, discount points and other loan costs. Also represents the annual percentage rate (APR).
Discount Points
Allows a borrower to pay a certain amount of money upfront to reduce the loan interest rate.
Fixed Rate Loan
The monthly principal and interest payment is the amount the borrower will pay throughout the life of the loan.
Adjustable Rate Loan
A loan that adjusts to some predetermined index that measures the cost of money and changes over the life of the loan.
Equity
Fair market value of a property minus the loans against it.
Debt
That which is due from one person or another.
Obligation, liability (e.g., money that is owed by a borrower to a lender.)
Loan-to-Value Ratio (RTV)
The loan amount divided by a property’s purchase price or appraised value - whichever is lower.
Loan Amount ÷ Price of Property = Loan-to-Value Ratio
Private Mortgage Insurance (PTI)
Used to insure a lender for the loan amount made above the 80% loan-to-value ratio.
80-10-10 Loan
80% first deed of trust
10% owner-carry second deed of trust
10% down payment
Impounds
Reserve account for property taxes and insurance that a lender usually collects from a borrower.
The lender then on behalf of the borrower, pays the property taxes and property insurance as they become due each year.
Interest Only/ Straight Note
Only interest is paid during the term of the loan.
Types of Real Estate Loans
- Interest Only Loan/ Straight Note
- Amortization and Fully-Amortized Loan
- Partially-Amortized Loan
- Negative Amortization
- Shared appreciation loan
- Reverse mortgages
Partial Amortization Loan
Loan that is paid off like a fully amortized loan, except the loan becomes due and payable sometime before the end of the amortization period. Usually 5-7 years from the loan origination date.
Lump sum payment is called balloon payment
Balloon Payment
Lump sum that is due at the end of a partially amortized loan.
Negative Amortization
Loan requires monthly payments that are not sufficient to cover the monthly interest that is due on the loan.
It does not reduce the principal balance of the loan.
Shared Appreciation Loan
Allows the lender to participate in the increase in value of a borrower’s property.
Reverse Mortgage
Allows a senior citizen to stay in their home while taking the equity out of the home each month through a reverse mortgage.
Promissory Note & Types of Promissory Notes
Evidence of a debt obligating that is an unconditional promise to pay the loan back with interest.
An “IOU” that specifies the amount and terms of the loan, but there is no collateral securing a note that is by itself.
Promissory Note (evidence of debt & is an IOU) + Deed of Trust (collateral for the loan & security for the promissory note)= Home Loan
- Seasoned note
- Holder in due course
- Note endorsements
- Joint and several note
- Negotiable Instrument
- Promotional Note
Seasoned Note
A promissory note with a previous history of prompt loan payments.
Holder in Due Course
A lender or person who PURCHASES a loan (promissory note / deed of trust) FROM THE ORIGINAL lender or someone the original lender sold the loan to (subsequent holder).
Note Endorsements
A promissory note can be endorsed (signed) as a blank endorsement, restricted endorsement, or a qualified endorsement.
Joint and Several Note
Makes each borrower responsible jointly and severally for the promissory note.
Each borrower is responsible together with the other borrowers on the note, along with each borrower severally (separately).
Negotiable Instrument
A document that can be used as an item of exchange and negotiated.
Examples – checks drafts, installment notes
Promotional Note
Provides borrowers with attractive financing to stimulate sales in a subdivision.
Who are the 3 parties in a trust deed.
Trustor vs Trustee vs Beneficiary
Trustor - borrower, signs the note and deed of trust
Trustee - 3rd party who holds a basic legal title to the property, has power of sale in the event of foreclosure.
Beneficiary - Lender
Deeds of Trust / Trust Deeds
An instrument placing the real property being purchased or refinanced as collateral for the loan.
Secures the PROMISSORY NOTE and COLLATERALIZES the LOAN.
Trust Deed vs Grant Deed
Grant deed - convey a property’s title to someone else
Quitclaim deeds - remove someone from title
Trust deed - used to place the house as collateral for a real estate loan being made to the borrower who owns the property. 3 parties include the trustor, trustee, and beneficiary
Alienation Clause/ Due-on-Sale Clause
Provides that the principal amount of the loan plus accrued interest is due in the event of the sale of the property.
Prepayment Penalty
Provides for a certain sum to be paid by the trustor (borrower) if the loan is paid off before it matures.
Formal Loan Assumption
Assigns all loan rights, obligations, and responsibilities of the seller to the buyer.
Subject To
Lender does not approve the assumption and the seller continues to remain primarily liable for repayment of the loan for 5 years.
Open-End Mortgage
A loan that allows additional borrowing at a later date
Seller Financing
A loan made by the seller to the buyer.
All-Inclusive Trust Deed (AITD) / Wraparound Mortgage
Used when prevailing interest rates are higher than the interest rate a property owner is presently paying on a property loan.
Subordination
Allows a loan or lien to take priority over another loan or lien that was recorded prior to it.
Used for both construction loans and refinancing a first deed of trust when there is an existing second deed of trust already on the property.
Discounting
Selling a promissory note for less than the face value of the note.
The buyer of the note waits until the note is due and then collects the face value.
After-Acquired Title
Buildings that are built on a property that is already encumbered by a loan will be acquired by the lender if the property is foreclosed in the future.
Deed of Reconveyance
Transfers the basic legal title held by the trustee back to the trustor.
Blanket Trust Deed / Blanket Encumbrance
Several parcels of land under one trust deed.
Release Clause / Partial Release Clause
Clause that allows the subdivider to sell lots within a subdivision and remove them from under an existing blanket encumbrance.
Foreclosure procedures for a deed of trust
- Power of sale
- Acceleration clause
notice of default
Power of Sale
The trustor gives the power of sale in a deed of trust to the trustee.
Acceleration Clause
Makes the loan due and payable upon the default of the borrower.
Notice of Default
Recorded by the trustee when the trustor defaults on the loan payments made to the beneficiary. Occurs when the trustee moves forward with foreclosure proceedings.
Request for Notice of Default
Alerts a holder (beneficiary/lender) of the second trust deed when the trustor has defaulted on the first trust deed.
Reinstatement
Trustor has up to 5 days before the trustee’s sale to pay up the back interest due on the loan and other lender fees and costs.
Deficiency Judgement
A judicial foreclosure allows a lender to pursue a deficiency judgment against the borrower.
Redemption Period
When a lender forecloses using a deficiency judgment, the borrower has a one-year redemption period to redeem the property.
Deed in Lieu of Foreclosure
A trustor informs the beneficiary (lender) that he/she does not want to go through with the foreclosure process, so the trustor deeds the property directly to the beneficiary/lender.
Trustee’s Sale
Nonjudicial foreclosure of a deed of trust.
Short Sale
When the loan balance is greater than the value of the home, the borrower may ask the lender to voluntarily take a loss before the trustee’s sale.
Real Estate Owned (REO)
Occurs when a lender receives a property through a trustee’s sale.
Good Title
Accomplished with a grant deed and title insurance.
Trustee’s Deed Upon Sale
Deed used to convey title from the trustee to the buyer.
Mortgagor vs Mortgagee
Mortgagor - Borrower for a mortgage
Mortgagee - Lender for a mortgage
Real Property Sales Contract / Land Contract / Installment Contract
The seller sells the property to a buyer and extends credit to the buyer using a real property sales contract.
Vendor vs Vendee
Vendor - Seller for a real property sales contract. holds legal title to the property.
Vendee - Buyer/borrower for a real property sales contract. Holds equitable title (possession) to the property.
5 Loan Types
"HPCGC" Hard Money Purchase Money Conventional Government Construction
Hard Money Loan
Usually secured by real estate and given to a 3rd party to obtain a cash loan.
Usury
When a lender charges an interest rate that is higher than allowed by law.
Purchase Money Loan
A loan used to purchase real property
Conventional Loan
Loans made by institutional lenders such as commercial banks and savings banks that do not have government insurance or guarantees.
Federal Housing Administration (FHA) Loan
High loan-to-value government-insured loan
Department of Veteran’s Affairs (VA) Loan
High loan-to-value government guaranteed loans for veterans.
California Veterans Farm and Home Purchase Program (CalVet) Loan
Provides low-cost, low-interest financing for eligible veterans who purchase a home, farm or mobile home as a primary residence in CA.
California Housing Finance Agency (CalHFA) Loan
Supports the needs of renters and homebuyers by providing financing and programs so that low to moderate income Californians can buy a home.
US Dept. of Agriculture (USDA) Loan
Providing financial assistance to farmers and others living in rural areas where finacing is not available on reasonable terms from private sources.
Construction Loan
aka Interim loan / Loan for obligatory advances
A loan used during the construction of a property. Usually short term and is usually replaced after completion of the project with a permanent, long-term take-out loan.
Take-Out Loans
Long term financing used after a home has been built on a property.
Standby Loan
A commitment from a lender to provide funds if needed by the borrower.
Primary Mortgage Market
Lenders that make loans to borrowers.
Mortgage Bankers vs Mortgage Brokers
Bankers - lenders that loan their own funds and sell them on the secondary mortgage market
Broker - lenders that do not loan their own funds but sell originated loans to lenders that operate on the secondary mortgage market.
Secondary Mortgage Market
Primary market lenders sell their loans to lenders that operate on the secondary mortgage market.
Fannie Mae
Lender that operates on the secondary mortgage market
Secondary Mortgage Market
These lenders purchase pools of mortgages from primary mortgage market lenders (who make loans directly to borrowers)
securitize them through the issuance of mortgage-backed securities (securities that are collateralized by home loans and traded on the stock exchange)
then sells them to investors all over the world.
Loan Correspondent
A lender that makes loans and sells them to lenders that operate on the secondary mortgage market.
Loan Portfolio
The loans a lender keeps and continues to collect interest.
Mortgage Yield
The return an investor will receive from a loan.
Debt-Income Ratio
A loan qualifying tool:
Monthly Principal + Interest divided by the borrower’s gross monthly income
or
Monthly principal + interest + taxes + insurance + HOA fees + PMI + other recurring costs divided by gross monthly income.
Liquidity
The ability of a borrower to convert assets into cash.
Loan Commitment
A lender makes a formal commitment to make a loan to a borrower.
Loan Estimate
Designed to provide disclosures that will help consumers to understand the key features, costs and risks of the mortgage for which they are applying.
Closing Disclosure
Designed to provide disclosures that will be helpful to consumers in understanding all the costs of the loan.
USA Patriot Act
A loan applicant is to be identified to determine if there exists an association with terrorism, narcotics trafficking and/or money laundering.
