Chapter 14: Real Estate Financing: Principles Flashcards
acceleration clause
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
adjustable-rate mortgages (ARMs)
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
alienation clause
This clause prevents the borrower from letting someone else assume the debt without the lender’s approval
amortized loan
A loan in which principal as well as interest is payable in periodic installments over the term of the loan
balloon payment
A final payment of a mortgage loan that is larger than the required periodic payments because the loan amount was not fully amortized
beneficiary (financing)
A lender in a deed of trust loan transaction
debt service
The principal and interest payment on a loan
deed in lieu of foreclosure
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”
deed of trust
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
default
The nonperformance of a duty, whether arising under a contract or otherwise; failure to meet an obligation when due
deficiency judgment
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
direct reduction loans
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
discount points
Interest paid in advance; one point equals 1% of the loan amount for the borrower and increases the yield for the investor approximately ⅛%
due-on-sale clause
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
equitable title
(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.
equity
The interest or value that an owner has in property over and above any indebtedness
equity of redemption
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.
foreclosure
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.
graduated payment mortgage (GPM)
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
grantor/trustor
A borrower in a deed of trust loan transaction
hypothecation
The pledging of property as security for an obligation or a loan without losing possession of it
interest
A charge made by a lender for the use of money
judicial foreclosure
The form of foreclosure used in lien theory states
lien theory
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
loan origination fee
An administrative fee charged to the borrower by the lender for making a mortgage loan; usually computed as a percentage of the loan amount
loan-to-value ratio (LTV)
The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral
mortgage
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
mortgagee
The lender in a mortgage loan transaction
mortgagor
The borrower in a mortgage loan transaction
negative amotization
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
negotiable instrument
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
power of sale foreclosure
The form of foreclosure used in a title theory state, such as North Carolina; also called nonjudicial foreclosure
prepayment penalty
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
principal (as in a loan)
The original amount of the total balance due and payable at a certain date
promissory note
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
satisfaction of mortgage
A document acknowledging the full repayment of a mortgage debt
short sale
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
statutory redemption period
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
statutory right of redemption
The right of a defaulted property owner to recover the property after its sale by paying the appropriate fees and charges
term loan
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
title theory
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
usury
Charging interest at a higher rate than the maximum rate established by state law
yield
The return on investment; amount of profit
payment in arears
interest is due at the end of each payment period
payment in advance
interest is due at the beginning of each payment period
defeasance clause
When last payment is made, lender releases lien when note is repaired
subordination clause
One lender voluntarily surrendering their position of priority to a subordinate lien holder
