Chapter 3. Finance

Question 0

Arrears

Answer 0

The borrower has the benefit of the service and then pays the intrest due

Question 1

Loan-to-value Ratio

Answer 1

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%.

Question 2

Usury Laws

Answer 2

Limit the maximum interest rate that a lender can charge on certain types of loans.

Question 3

Nonconforming loan

Answer 3

One that does not meet secondary market specifications.

Question 4

Return on Investment (ROI)

Answer 4

The ratio of the property’s net income after taxes (ATCF) to the money invested (equity)

Question 5

Amortize

Answer 5

To repay the loan in monthly or other periodic payments that include principal and intrest.

Question 6

Fully amortized loan

Answer 6

Direct reduction loan, at the end of the loan period the principal balance is zero.

Question 7

Partially amortized loan or Balloon mortgage

Answer 7

The principal and interest payments do not pay off the entire loan. A balance remains when the final payment is made.

Question 8

Nonamortized loan

Answer 8

Periodic interest payments are made to the lender, but nothing is applied to the principal balance. (term mortgage or straight mortgages).
Ex.) Construction Loan.

Question 9

Straight mortgage (term loan)

Answer 9

Periodic payments of the interest only and the principal is paid in full at the end of the term.

Question 10

Adjustable-rate mortgage (ARM)

Answer 10

Contains and escalation clause that allows the interest to adjust over the loan term.

Question 11

Construction Loan

Answer 11

Used to finance the erection of improvements on land. The borrower pays interest only on the loan.

Question 12

Equity

Answer 12

Difference between the market value and any existing mortgages on the property.

Question 13

Home equity line of credit (HELOC)

Answer 13

Line of credit that the borrower can access whenever the borrower chooses.

Question 14

Unconventional mortgage

Answer 14

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.

Question 15

Conventional mortgage

Answer 15

Not insured or guaranteed by the government.

Question 16

Conventional uninsured mortgage

Answer 16

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.

Question 17

Conventional insured mortgage

Answer 17

typically, the borrower has less than a 20% down payment and the lender requires private mortgage insurance.

Question 18

Private Mortgage Insurance

Answer 18

If a borrower has less than 20% down payment, the lender may require that the borrower purchase private mortgage insurance (PMI).

Question 19

Purchase-money Mortgage (PMM)

Answer 19

Creative financing technique that developed when interest rates were high. The Seller agrees to finance a portion or the entire purchase price.

Question 20

Land Contract

Answer 20

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.

Question 21

Blanket Mortgage

Answer 21

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.

Question 22

Buydown Mortgage

Answer 22

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.

Question 23

3 general categories of risk that a Homeowners’ Policy Should include:

Answer 23

1. Destruction of the premises
2. Injury to others on the premises
3. Theft of personal property of the homeowner or family members

Question 24

Budget Mortgage

Answer 24

Includes principal, intrest, taxes, and insurance payments (PITI)

Question 25

Graduated-Payment Mortgage (GPM)

Answer 25

Borrower makes lower monthly payments for the first few years and larger payments for the remainder of the loan term.

Question 26

Negative amortization

Answer 26

Loan balance increases instead of decreases.

Question 27

Growing- equity mortgage (GEM)

Answer 27

Periodic increases in the monthly payment. However, the increase is applied directly to the principal, thus reducing the term of the loan.

Question 28

Package mortgages

Answer 28

Used in the sale of new homes in a subdivision in condominium sales. This type of loan covers both real and personal property.

Question 29

Open-end mortgage

Answer 29

Allows the mortgagor to borrow additional funds, up to a max dollar amount, all of which are secured by the same original mortgage.

Question 30

Shared-appreciation mortgage (SAM)

Answer 30

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)

Question 31

Reverse annuity mortgage (RAM)

Answer 31

Allows homeowners 62 years of age or older to borrow against equity in their homes without income or credit ratio qualifications.

Question 32

Wraparound Mortgage

Answer 32

A junior loan that wraps around an existing senior loan.

Question 33

Prime Loan

Answer 33

Borrowers with a good credit history will be classified as A Paper.

Question 34

Subprime Loan

Answer 34

Borrowers with poor credit history will be classified as B,C, or D Paper.

Question 35

Lock-in clause

Answer 35

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.

Question 36

Hypothecation Clause

Answer 36

Means to pledge property to the lender as collateral, without giving up possession of it.

Question 37

Due-on-sale Clause

Answer 37

In a mortgage allows the lender to collect full payment from the mortgagor when the property is sold.

Question 38

Alienation Clause

Answer 38

Provide that if the property is conveyed to any party without the lender’s consent, the lender can collect full payment.

Question 39

Escalation Clause

Answer 39

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.

Question 40

Acceleration Clause

Answer 40

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.

Question 41

Title-theory state

Answer 41

The law construes the lender to have legal title to the property and the borrower to have an equitable title.

Question 42

Intermediate-theory states

Answer 42

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.

Question 43

Defeasance Clause

Answer 43

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.

Question 44

Novation

Answer 44

A substitution of one contract for another.

Question 45

Redlining

Answer 45

The lender’s refusal to negotiate loans in certain geogrpahic areas, even to qualified borrowers.