Chapter 2: Mortgage Lending Basics Key Mortgage Terms

Question 1

A loan in which the interest rate is allowed to move periodically during the loan, typically tied to a stated cost-of-funds index.

Answer 1

Adjustable Rate Loan

Question 2

Typically, a 5 to 7-year loan in which the principal is not fully paid off at the end of its life. The interest rate is fixed, and the payments are level each month and are designed to amortize the loan over a longer 15 to 30-year period. If the loan reaches maturity, the principal balance is due and payable, however, it is often refinanced or converted into a longer-term fixed rate loan.

Answer 2

Balloon Loan

Question 3

A loan in which the borrower makes one-half of their normal monthly payment every other week instead of one payment each month. This produces the equivalent of 13 payments per year instead of 12 so the loan balance is paid off early.

Answer 3

Bi-Weekly Mortgage

Question 4

Also known as a buyer or mortgagor.

Answer 4

Borrower

Question 5

A loan in which the borrower or another party pays a lump sum at closing to reduce the interest rate and monthly payments. Permanent buy downs lasting the entire term of the loan can be done by paying discount points to lower the actual interest rate. There are also temporary buy downs, such as a 3-2-1 buy down where the lender is paid a lump sum, typically by a builder-developer, to lower the interest rate by three percentage points in the first year, two percentage points in the second year, and one percentage points in the third year. Temporary buy downs help to sell new homes and allow more borrowers to qualify for this type of loan.

Answer 5

Buy Down Loans

Question 6

A loan that conforms to Fannie Mae or Freddie Mac underwriting standards. The loan amount must be below the annual loan limit set by the Federal Housing Finance Agency (currently $548,250 in 2021) for single family loans in Contiguous States, District of Columbia, and Puerto Rico and must meet all other underwriting standards.

Answer 6

Conforming Conventional Loan

Question 7

A type of seller financing where the buyer takes possession of the property, but title is not transferred to the buyer until sometime in the future after an agreed amount of the purchase price has been paid through monthly installments. This is a very old form of financing that allows a buyer with little or no down payment to occupy the home and begin paying the seller for it. Legally, it is treated differently than a lease-purchase option, but it looks similar.

Answer 7

Contract for Deed

Question 8

A loan not guaranteed or insured by a government program such as VA, FHA or USDA.

Answer 8

Conventional Loan

Question 9

A legal document that transfers property rights and most often ownership from one party to another, that is, grantor to grantee.

Answer 9

Deed

Question 10

Process where lender allows borrower in default of loan to transfer ownership rights back to lender in return for agreeing not to proceed with a foreclosure action.

Answer 10

Deed-in-Lieu of Foreclosure

Question 11

Following foreclosure, this is an additional lawsuit on behalf of the lender asking the court to place a lien on the assets of all signers of the Promissory Note. Only certain states allow a lender to pursue a deficiency judgment, and only if the proceeds from the foreclosure and forced sale are not sufficient to pay off the borrower’s total obligation.

Answer 11

Deficiency Judgment

Question 12

The law recognizes this form of estate (ownership) in real estate as the highest form. The property owner is entitled to full enjoyment of the property, limited only by zoning laws, deed or subdivision restrictions or covenants.

Answer 12

Fee Simple

Question 13

A loan in which the interest rate stays constant throughout the life of the loan.

Answer 13

Fixed Rate Loan

Question 14

When a lender postpones foreclosure in order to give the borrower time to make up for overdue payments.

Answer 14

Forbearance

Question 15

The legal process by which an owner’s right to a property is terminated, usually due to default. Typically involves a forced sale of the property at public auction, with the proceeds being applied to the mortgage debt.

Answer 15

Foreclosure

Question 16

Property rights held by owner(s) for an indefinite amount of time.

Answer 16

Freehold Estate

Question 17

A deed in which the grantor conveys ownership rights along with a guarantee to protect against any claims on the title, even for the period prior to when the grantor owned the property. There are three unique covenants (promises) given with a general warranty deed; quiet enjoyment—title will withstand challenges in court, further assurance—any documents needed in the future will be provided, and warranty forever—will reimburse any financial loss from a defective title.

Answer 17

General Warranty Deed

Question 18

A loan that allows borrowers to pay a lower amount in the early years but then to increase the monthly payments at later intervals to fully amortize the loan by the end of the term.

Answer 18

Graduated Payment (Growing Equity) Mortgage

Question 19

An individual who receives a grant of property rights or ownership.

Answer 19

Grantee

Question 20

An individual who transfers ownership in a property.

Answer 20

Grantor

Question 21

The act of pledging property as security for a debt without transferring title or possession. This is what a mortgage document does when in a lien theory state.

Answer 21

Hypothecation

Question 22

An option for two or more owners to hold title to property in equal shares; it further guarantees their shares will pass in equal amounts to the surviving owners upon an owners’ death.

Answer 22

Joint Tenants

Question 23

A loan that exceeds the Fannie Mae and Freddie Mac annual residential loan limits. The single-family limit for calendar year 2021 is $548,250 in the contiguous states, DC and Puerto Rico for single family loans. Also called non-conforming.

Answer 23

Jumbo Loan

Question 24

Rights held by a tenant for a specified amount of time to occupy and use a property.

Answer 24

Leasehold Estate

Question 25

Also known as an investor, mortgagee, banker, and mortgage banker.

Answer 25

Lender

Question 26

Property owners in a lien theory state retain title to their property during the entire time they own it. When receiving a mortgage loan, the borrower pledges the property as collateral in a mortgage document.

Answer 26

Lien Theory State

Question 27

Securities issued by financial institutions to investors with the payments of interest and principal distributions backed by the payments on the underlying mortgage collateral. Investment bankers, structure MBSs to have multiple classes of claims, or tranches, of different seniority and risk level based on the cash flows of remaining loan terms and other characteristics of the underlying mortgages. When MBS home borrowers decide to prepay or pay off their loans (refinancing typically) it creates prepayment risk for the bond holder who gets an early return of principal and lower interest than expected.

Answer 27

Mortgage Backed Security (MBS)

Question 28

Defined by the The SAFE Act as any loan other than a 30-year fixed rate mortgage loan.

Answer 28

Non-Traditional Mortgage Products

Question 29

A loan used to finance the purchase of both real and personal property.
For example a resort condominium set up to be rented with a turnkey furniture and kitchen package.

Answer 29

Package Loan

Question 30

A type of seller financing, typically used as a secondary source of financing to supplement another mortgage loan and is secured with a junior lien on the property.

Answer 30

Purchase Money Mortgage (PMM)

Question 31

A deed that transfers any property rights held by the grantor to the grantee in a specific property but makes no guarantee about any other claims against the property or that the grantor actually holds any property rights. They are useful and efficient documents for quickly handing over a grantor’s property rights, however, they are given up with absolutely no guarantees.

Answer 31

Quitclaim Deed

Question 32

A loan available to homeowners who are at least 62 years of age by converting some or all of their principal home equity into cash. Unlike regular (forward) mortgages, reverse mortgages build debt and consume equity over time. Reverse mortgages do not have to be paid back for as long as the homeowner chooses to live in the home. They cannot lose their home. There is no personal guarantee, so the lender has no recourse on home owner’s other assets. The borrowed money must be paid back with interest, typically within one year of vacating the home.

Answer 32

Reverse Mortgage

Question 33

Process where lender agrees to release the mortgage lien for an amount less than the outstanding debt.

Answer 33

Short Sale

Question 34

A deed in which the grantor conveys ownership rights along with a guarantee to protect against any claims on the title, but only for the period in which the grantor owned the property.

Answer 34

Special Warranty Deed

Question 35

A highly unethical practice where loan originators place poorly informed borrowers into a costlier loan than they would otherwise qualify for, in order to earn a higher commission or fee.

Answer 35

Steering

Question 36

Refers to higher interest rate and higher cost loans made to borrowers who do not qualify for the (prime) best interest rates and terms. This is usually due to lower creditworthiness, a high loan-to-value ratio, and/or the riskiness of the loan.

Answer 36

Sub-Prime Lending

Question 37

An option for husband and wife only to hold title to property in equal, overlapping interests and guarantees one’s share will pass to the surviving spouse upon their death.

Answer 37

Tenants by the Entireties

Question 38

An option for two or more owners to hold title to a property in unequal shares that allows each owner to designate his/her heirs.

Answer 38

Tenants in Common

Question 39

A loan typically for small businesses with an amount and repayment schedule tailored to the financials and needs of the business. The duration depends on need and can be a short term, intermediate term or long-term loan.

Answer 39

Term Loan

Question 40

A legal concept that signifies ownership of property.

Answer 40

Title

Question 41

Where the lender or a designated third party (attorney or other trustee) holds title to the property until the loan is fully repaid. The borrower signs a deed of trust to the trustee which is similar to a mortgage.

Answer 41

Title Theory State

Question 42

A form of seller financing. The seller creates a new (junior) mortgage loan that the buyer is obligated to pay, while the seller maintains and makes payments on the original, first lien mortgage. The original mortgage must be assumable for this to be legal and carry an attractive interest rate to be worthwhile. The larger, new mortgage “wraps around” the smaller existing mortgage.

Answer 42

Wrap Around Mortgage