Chapter 14: Real Estate Financing: Principles

Question 1

acceleration clause

Answer 1

The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or another covenant

Question 2

adjustable-rate mortgages (ARMs)

Answer 2

A loan characterized by a fluctuating interest rate, usually one tied to a published index. Caps for adjustments on periodic interest, lifetime interest, and payment amounts are normal

Question 3

alienation clause

Answer 3

This clause prevents the borrower from letting someone else assume the debt without the lender’s approval

Question 4

amortized loan

Answer 4

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

Question 5

balloon payment

Answer 5

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

Question 6

beneficiary (financing)

Answer 6

A lender in a deed of trust loan transaction

Question 7

debt service

Answer 7

The principal and interest payment on a loan

Question 8

deed in lieu of foreclosure

Answer 8

A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage. This avoids foreclosure but does not remove liens from the property; “friendly foreclosure”

Question 9

deed of trust

Answer 9

An instrument used to create a mortgage lien by which the borrower conveys title to a trustee, who holds it as security for the benefit of the note holder (the lender); also called a trust deed

Question 10

default

Answer 10

The nonperformance of a duty, whether arising under a contract or otherwise; failure to meet an obligation when due

Question 11

deficiency judgment

Answer 11

A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full; a general lien

Question 12

direct reduction loans

Answer 12

A mortgage loan that requires a fixed amount of principal payment in each period; the total debt service payment starts higher than with a level payment loan since interest portion will reduce with each payment

Question 13

discount points

Answer 13

Interest paid in advance; one point equals 1% of the loan amount for the borrower and increases the yield for the investor approximately ⅛%

Question 14

due-on-sale clause

Answer 14

A provision in a mortgage that states that the entire balance of the note is immediately due and payable if the mortgagor transfers (sells) the property

Question 15

equitable title

Answer 15

(1) The interest held by the grantor in a deed of trust that allows possession and use of the pledged property
(2) The interest held by a vendee under a contract for deed or an installment contract; the equitable right to obtain absolute ownership to property when legal title is held in another’s name.

Question 16

equity

Answer 16

The interest or value that an owner has in property over and above any indebtedness

Question 17

equity of redemption

Answer 17

The right of a borrower in default on a mortgage loan to reclaim the forfeited property prior to the foreclosure sale through payment in full of all debt and associated costs.

Question 18

foreclosure

Answer 18

A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of all parties to a conclusion and passes the title in the mortgaged property to either the holder of the mortgage or a third party who may purchase the realty at the foreclosed sale, free of all liens affecting the property subsequent to the mortgage.

Question 19

graduated payment mortgage (GPM)

Answer 19

A loan in which the monthly principal and interest payments increase by a set amount each year for a certain number of years and then level off for the remaining loan term; probable negative amortization in early years

Question 20

grantor/trustor

Answer 20

A borrower in a deed of trust loan transaction

Question 21

hypothecation

Answer 21

The pledging of property as security for an obligation or a loan without losing possession of it

Question 22

interest

Answer 22

A charge made by a lender for the use of money

Question 23

judicial foreclosure

Answer 23

The form of foreclosure used in lien theory states

Question 24

lien theory

Answer 24

Some states interpret a mortgage as being purely a lien on real property. The mortgagee thus has no right of possession but must foreclose the lien and sell the property if the mortgagor defaults

Question 25

loan origination fee

Answer 25

An administrative fee charged to the borrower by the lender for making a mortgage loan; usually computed as a percentage of the loan amount

Question 26

loan-to-value ratio (LTV)

Answer 26

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

Question 27

mortgage

Answer 27

A conditional transfer or pledge of real estate as security for the payment of a debt. Also, the document creating a mortgage lien in a lien theory state

Question 28

mortgagee

Answer 28

The lender in a mortgage loan transaction

Question 29

mortgagor

Answer 29

The borrower in a mortgage loan transaction

Question 30

negative amotization

Answer 30

When the debt service payment on a loan is not large enough to pay the interest due; the principal balance actually grows with each payment

Question 31

negotiable instrument

Answer 31

A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee’s right to payment

Question 32

power of sale foreclosure

Answer 32

The form of foreclosure used in a title theory state, such as North Carolina; also called nonjudicial foreclosure

Question 33

prepayment penalty

Answer 33

A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost due to payments made ahead of schedule

Question 34

principal (as in a loan)

Answer 34

The original amount of the total balance due and payable at a certain date

Question 35

promissory note

Answer 35

A financing instrument that states the terms of the underlying obligation, is signed by its maker, and is negotiable (transferable to a third party); a personal IOU

Question 36

satisfaction of mortgage

Answer 36

A document acknowledging the full repayment of a mortgage debt

Question 37

short sale

Answer 37

When a lender allows a borrower in default on mortgage loan payments to sell the mortgaged property for less money than necessary to satisfy the loan to avoid the delay and expense of a foreclosure sale; lender usually “forgives” the balance owed after the sale; although the IRS will frequently consider the forgiven amount to be taxable income for the borrower

Question 38

statutory redemption period

Answer 38

A 10-day period of time after a foreclosure auction during which a property owner in default has the right to redeem the pledged real estate by paying the loan balance plus interest, and costs; also called the upset big period

Question 39

statutory right of redemption

Answer 39

The right of a defaulted property owner to recover the property after its sale by paying the appropriate fees and charges

Question 40

term loan

Answer 40

A loan in which only interest is paid during the term of the loan, with the entire principal due with the final interest payment; also called a straight loan

Question 41

title theory

Answer 41

Describing those states like North Carolina that interpret a mortgage to mean that the lender is the owner of mortgaged land who vests the legal title with the trustee while borrower holds equitable title. Borrower regains legal title upon full payment of the mortgage debt

Question 42

usury

Answer 42

Charging interest at a higher rate than the maximum rate established by state law

Question 43

yield

Answer 43

The return on investment; amount of profit

Question 44

payment in arears

Answer 44

interest is due at the end of each payment period

Question 45

payment in advance

Answer 45

interest is due at the beginning of each payment period

Question 46

defeasance clause

Answer 46

When last payment is made, lender releases lien when note is repaired

Question 47

subordination clause

Answer 47

One lender voluntarily surrendering their position of priority to a subordinate lien holder