Chapter 14 - Mortgage Basics

Question 1

Acceleration Clause

Answer 1

Lender has right to declare entire balance due because of borrow default or violation of contract provisions

Question 2

Adjustable Rate Mortgage

Answer 2

Allows lenders to periodically adjust interest rate to respond to the market. Easier to qualify for than fixed rate mortgages.

Question 3

Alienation / Due on Sale Clause

Answer 3

Gives lender certain rights when there is a transfer of ownership. FHA/VA loans cannot include an alienation clause.

Question 4

Annual Percentage Rate (APR)

Answer 4

Actual interest rate charged including loan fees and points.

Question 5

Blanket Mortgage

Answer 5

Subdivision development - mortgage for multiple parcels/lots, partial release clause allows lots to be released one at a time

Question 6

Bridge Mortgage

Answer 6

Bridge between two mortgages (buying/selling) - repaid with a later mortgage.

Question 7

Construction Mortgage

Answer 7

Temporary loan to finance building.

Question 8

Debt to Income Ratio

Answer 8

For evaluating lendee for a mortgage. All recurring debts cannot exceed, for Fannie Mae loan, 36% of stable monthly income - 43% for FHA insured loan, 41% for VA guaranteed loan.

Question 9

Default

Answer 9

Failure to make payments on a loan.

Question 10

Deficiency Judgment

Answer 10

Involuntary general lien imposed when a foreclosed property does not bring in enough money at a foreclosure sale to cover debt.

Question 11

Equitable Right of Redemption

Answer 11

Right to save or redeem a foreclosed property before it is resold.

Question 12

Graduated Payment Mortgage

Answer 12

Smaller payments earlier in the mortgage and then loan escalates because interest wasn’t getting paid early on.

Question 13

Home Equity Line of Credit / Home Equity Loan

Answer 13

Junior mortgages. HELOC is money available to homeowner as expenses arise, HEL is a one time loan for specific amount/purpose.

Question 14

Interest Rate Cap

Answer 14

Adjustable rate mortgage. Limits number of percentage points interest rate can increase during term of loan.

Question 15

Judicial Foreclosure

Answer 15

Procedure in the event of default requiring a court-ordered sheriff’s sale of property to repay debt.

Question 16

Mortgage Banker

Answer 16

Any company who originates at least 5 mortgage loans in a year must be licensed by New York State Banking Department.

Question 17

Mortgage Broker Dual Agency Disclosure Form

Answer 17

Must get permission from both buyer and seller if you, real estate licensee, are also MLO and are serving buyer.

Question 18

Mortgage Loan Originator

Answer 18

Mortgage Broker. Intermediary bringing together lendor and lender, especially nonconforming loans.

Question 19

Open-End Mortgage

Answer 19

Allows borrowers to request additional funds to a predetermined limit.

Question 20

Package Mortgage

Answer 20

Includes personal property - typical in vacation homes

Question 21

Payment to Income Ratio

Answer 21

Used to evaluate lender for a mortgage. PITI (Principal / Interest / Taxes / Insurance) vs. borrower’s stable monthly income. Traditionally 28% for Fannie Mae loans and 31% for FHA insured loans.

Question 22

Pre-Approval/Pre-Qualfication

Answer 22

Pre-qualification determines size of loan a potential buyer is eligible for - does not guarantee approval and does not bind lender. Pre-approval is when lender determines if and for what amount lendee can be financed - if the buyer’s circumstances stay the same, lendor will loan a certain amount of money. Shows sellers that buyer is serious, prepared/able to make purchase.

Question 23

Prepayment Penalty Clause

Answer 23

Gives lender right to charge borrowers a penalty for paying off the loan early and depriving them of interest income. Subprime loans mostly - not in Fannie Mae/Freddie Mac loans, prohibited in FHA and VA loans.

Question 24

Purchase Money Mortgage

Answer 24

Generically any mortgage loan used to buy real estate, specifically when seller finances part or all of sale price.

Question 25

Regulation Z

Answer 25

Implements the Truth in Lending Act (TILA)

Question 26

Release Clause

Answer 26

x

Question 27

Reverse Equity Mortgage

Answer 27

House pays you - for 62+ year olds with little to no debt.

Question 28

Sale and Leaseback Financing

Answer 28

Typically used by commercial tenants - tenant buys property and fixes it up, then sells it and leases the property back from its new owners. Frees up capital for the company and investor gets tax benefits.

Question 29

Straight Mortgage

Answer 29

Term/interest only mortgage. Pay interest only and then principal in a lump sum as a balloon payment at the end o the term - good for investors because they’ll be selling/flipping and can write off interest.

Question 30

Subordination Agreement

Answer 30

Gives later date mortgage priority over earlier mortgage - made between lien holders.

Question 31

Truth in Lending Act (TILA)

Answer 31

Prevents abuses is consumer credit disclosures so consumers know what they are paying for. Implemented by Regulation Z.

Question 32

Wraparound Mortgage

Answer 32

Seller keeps existing loan and pays on it, while buyer has another mortgage. All are treated as a single obligation and the buyer pays the seller back. DANGEROUS!