Chapter 3. Finance Flashcards
Arrears
The borrower has the benefit of the service and then pays the intrest due
Loan-to-value Ratio
The relationship between the amount of a loan and the appraised value (sale price) of a property.
ex.) if a borrower has a 10% down payment, the loan-to-value ratio is 90%.
Usury Laws
Limit the maximum interest rate that a lender can charge on certain types of loans.
Nonconforming loan
One that does not meet secondary market specifications.
Return on Investment (ROI)
The ratio of the property’s net income after taxes (ATCF) to the money invested (equity)
Amortize
To repay the loan in monthly or other periodic payments that include principal and intrest.
Fully amortized loan
Direct reduction loan, at the end of the loan period the principal balance is zero.
Partially amortized loan or Balloon mortgage
The principal and interest payments do not pay off the entire loan. A balance remains when the final payment is made.
Nonamortized loan
Periodic interest payments are made to the lender, but nothing is applied to the principal balance. (term mortgage or straight mortgages).
Ex.) Construction Loan.
Straight mortgage (term loan)
Periodic payments of the interest only and the principal is paid in full at the end of the term.
Adjustable-rate mortgage (ARM)
Contains and escalation clause that allows the interest to adjust over the loan term.
Construction Loan
Used to finance the erection of improvements on land. The borrower pays interest only on the loan.
Equity
Difference between the market value and any existing mortgages on the property.
Home equity line of credit (HELOC)
Line of credit that the borrower can access whenever the borrower chooses.
Unconventional mortgage
A loan that is backed by the government, such as an FHA loan that is insured by the government of a VA loan that is guaranteed by the governement.
Conventional mortgage
Not insured or guaranteed by the government.
Conventional uninsured mortgage
Typically, the borrower has a 20% or greater down payment, and the lender accepts the creditworthiness of the borrower and the property as security for the loan.
Conventional insured mortgage
typically, the borrower has less than a 20% down payment and the lender requires private mortgage insurance.
Private Mortgage Insurance
If a borrower has less than 20% down payment, the lender may require that the borrower purchase private mortgage insurance (PMI).
Purchase-money Mortgage (PMM)
Creative financing technique that developed when interest rates were high. The Seller agrees to finance a portion or the entire purchase price.
Land Contract
The sellor/vendor agrees to finance the sale of the property. Typically the buyer/ Vendee makes the down payment, then monthly payments until the balance is paid in full. Seller normally remains title to the property until the final payment. Should the buyer defualt, the seller can evict the buyer and regain possession.
Blanket Mortgage
May be used by a builder or developer. This mortgage covers more than one tract of land and contains a partial release clause, which allows the borrower to obtain a release of any one lot or parcel, and thus gives the buyer a marketable title.
Buydown Mortgage
Allows the borrower to buy down the interest rate, thus reducing the monthly payment for a number of years. To buy down the interest rate, the borrower must pay interest in advance.
3 general categories of risk that a Homeowners’ Policy Should include:
- Destruction of the premises
- Injury to others on the premises
- Theft of personal property of the homeowner or family members
Budget Mortgage
Includes principal, intrest, taxes, and insurance payments (PITI)
Graduated-Payment Mortgage (GPM)
Borrower makes lower monthly payments for the first few years and larger payments for the remainder of the loan term.
Negative amortization
Loan balance increases instead of decreases.
Growing- equity mortgage (GEM)
Periodic increases in the monthly payment. However, the increase is applied directly to the principal, thus reducing the term of the loan.
Package mortgages
Used in the sale of new homes in a subdivision in condominium sales. This type of loan covers both real and personal property.
Open-end mortgage
Allows the mortgagor to borrow additional funds, up to a max dollar amount, all of which are secured by the same original mortgage.
Shared-appreciation mortgage (SAM)
The lender agrees to originate the loan at below-market interest rates in return for a guaranteed share of the appreciation the borrower will realize when the property is sold. (Typically Commercial projects)
Reverse annuity mortgage (RAM)
Allows homeowners 62 years of age or older to borrow against equity in their homes without income or credit ratio qualifications.
Wraparound Mortgage
A junior loan that wraps around an existing senior loan.
Prime Loan
Borrowers with a good credit history will be classified as A Paper.
Subprime Loan
Borrowers with poor credit history will be classified as B,C, or D Paper.
Lock-in clause
In a note typically means that upon loan application, the lender has agreed to lock the rate for a specified time period, or it could mean that the loan cannot be prepaid unless all interest is paid.
Hypothecation Clause
Means to pledge property to the lender as collateral, without giving up possession of it.
Due-on-sale Clause
In a mortgage allows the lender to collect full payment from the mortgagor when the property is sold.
Alienation Clause
Provide that if the property is conveyed to any party without the lender’s consent, the lender can collect full payment.
Escalation Clause
Found in an adjustable-rate mortgage and in certain leases. In a mortgage, it allows the interest rate to adjust over the life of the loan.
Acceleration Clause
Allows the lender to call the entire balance due, not just the months the borrower is behind. The lender can enforce this clause if the borrower defaults on the payments, destruction of the premises, or there is a sale of the property to another party.
Title-theory state
The law construes the lender to have legal title to the property and the borrower to have an equitable title.
Intermediate-theory states
Are a combination of lien theory and title theory. The law interprets the lender as having a lien on the property unless the borrower defaults. On default, the title passes to the lender.
Defeasance Clause
Stipulates that when the final payment is made, the lender’s intrest is defeated and a deed of reconveyance is given from the trustee to the trustor.
Novation
A substitution of one contract for another.
Redlining
The lender’s refusal to negotiate loans in certain geogrpahic areas, even to qualified borrowers.
