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Real Estate Broker > Chapter 3: Real Estate Finance II > Flashcards

Chapter 3: Real Estate Finance II Flashcards

0
Q

Mortgagor

A

The borrower who gives the mortgage

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1
Q

Mortgage

A

A two-party legal document pledging a described property as security for the repayment of a loan under certain terms and conditions.

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2
Q

Mortgagee

A

The lender who receives the mortgage.

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3
Q

Acceleration Clause

A

Enabling the lender to declare the entire balance remaining immediately due and payable if the borrower is in default.

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4
Q

Prepayment Penalty Clause

A

A note stating either that the borrower is permitted to pay off the loan any time before expiration of the full mortgage term without incurring a financial penalty for the early payoff, or that a prepayment penalty will be imposed on the borrower if the debt is satisfied before expiration of the full term.

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5
Q

Defeasance Clause

A

Giving the borrower the right to defeat and remove the lien by paying the indebtedness in full.

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6
Q

Alienation Clause

A

Also known as a due-on-sale clause. This clause entitles the lender to declare the principal balance immediately due and payable if the borrower sells the property during the mortgage term and making the mortgage unassumable without the lender’s permission.

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7
Q

Novation

A

When an alienation clause provides for release of the original borrower from liability if an assumption is permitted. Or substituting a new contract for a prior one.

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8
Q

Note or Bond

A

Borrower is personally liable for mortgage debt.

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9
Q

Promissory Note or Bond

A

The note, which must be in writing, provides evidence that a valid debt exists. The note contains a promise that the borrower is personally liable for paying the amount of money set forth in the note. The note specifies how the debt is to be paid and is typically in monthly installments.

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10
Q

Interest

A

The money paid for using someone else’s money.

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11
Q

Mortgage Principal

A

The amount of money borrowed on which interest is either paid or received.

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12
Q

Interest-Only Note

A

Interest is paid periodically until the note matures and the entire principal balance is paid at maturity.

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13
Q

Single-Payment Loan

A

Requires no payments on principal or interest until the note matures, and the entire principal and interest are paid at maturity.

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14
Q

Amortized Note

A

Periodic payments are made on both principal and interest until the principal is completely paid. Most mortgage loans are of this type.

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15
Q

Tax Deductable

A

Expenses for home ownership that are mortgage interest (not principal) and real property taxes.

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16
Q

Loan-to-Value (LTV)

A

The ratio of the loan amount to the property value. The value of the property for mortgage purposes is the appraised value or the purchase price, whichever is less. In New York, if the LTV ratio is greater than 80 percent, a purchaser must obtain private mortgage insurance (PMI).

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17
Q

The Borrower’s Ability to Pay Loans Consists of

A

Income/Salary and Qualifying Ratios. Overtime and bonus income are not usually counted unless the borrower verifies stability over the prior two years. Part-time income can count if there is stability over two years and seems likely to continue.

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18
Q

Qualifying Ratios

A

The underwriter calculates the borrower’s two debt ratios:
A) Monthly housing expense to income - Principal and interest of mortgage payment plus escrow deposits, real estate taxes and mortgage insurance. Great savings and great credit could be considered as well.
B) Total payment obligations to income

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19
Q

Underwriter

A

Someone who reviews the loan documentation and evaluates the borrower’s ability and willingness to repay the loan and the collateral value of the property. Underwriting is broken up into three categories: buyer’s ability to pay, buyer’s willingness to pay, and property evaluation.

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20
Q

Discount Points

A

A percentage of the loan amount a lender requires for making a mortgage loan. Each point that the lender chargers costs someone (the buyer or the seller) 1 percent of the loan amount, paid at the loan closing.

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21
Q

Usury Laws

A

Charging a rate of interest higher than that of the allowable law. The maximum rate is subject to fluctuation.

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22
Q

Buy Down

A

When borrowers volunteer to pay discount points to reduce a mortgage interest rate when the loan is made.

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23
Q

Conventional Loans

A

Involve no participation by an agency of the federal government.

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24
Government Loans
Guaranteed, insured or funded by a government agency, such as the Federal Housing Administration (FHA), Department of Veteran Affairs (VA), Rural Housing Service (RHS) and the State of New York Mortgage Agency (SONYMA).
25
The Department of Veteran Affairs (VA) Guaranteed Loan Program
Offers a guaranteed loan program that guarantees repayment of the top portion of the loan to the lender in the vent the borrower defaults. A VA loan guarantees to the lender a maximum of 25 percent of a home loan up to $104,250 in case the borrower defaults. A VA mortgage limits the maximum loan amount with no payment to $417,000. Must be a veteran.
26
Rural Housing Service (RHS)
An agency of the Department of Agriculture (USDA). RHS makes direct loans, guarantees loans made by private lenders, and provides a limited number of grants. Borrowers must reside in rural areas. Loan of up to 100 percent of appraised value.
27
State of New York Mortgage Agency (SONYMA)
Also known as Sonny Mae, raises money from the sale of New York tax-free bonds, which is then used for mortgage loans. Sonny Mae mortgages are available through participating lenders at lower interest rates than most convention loans. Non target area loan can be made to first-time buyers or borrowers who have been non-owners for 3, years. Insured by a private mortgage insurance.
28
Fixed Rate Loan
A loan that carries the same rate of interest for the entire term of the loan.
29
Straight-Term Mortgage
The borrower pays interest only for a specified term and at the end of the term the borrower is required to pay the principal.
30
Adjustable Rate Mortgage (ARM)
The parties agree to float mortgage rates based on the fluctuations of a standard index. For this, the lender designates an index and then adds a margin (measure of profit) above this index.
31
Escalator Clause
It allows the lender to increase monthly payments or interest based on the T-Bill index or other economic fluctuations.
32
Negative Amortization
When the loan payment is not sufficient to cover interest due the shortfall is added back into the principal causing the principal to grow larger after payment is made. Many ARMs prohibit this.
33
Balloon Mortgage
Provides for installment payments that are not enough to pay off the principal and interest over the term of the mortgage, so the final payment (called a balloon payment is much larger than any previous payment to satisfy the remaining principal and interest. Refinancing can be done if the lender allows it.
34
Amortized Mortgage
Mortgages that retire the debt. FHA will only insure these types of mortgages. This is the typical home mortgage loan. The interest always is applied against only the outstanding principal balance unpaid at the time of an installment payment. The interest rate is an annual percentage rate.
35
Reverse Annuity Mortgage
Often used by older people who need additional income and want to take advantage of the equity in their homes. The lender makes payments to the borrower for a contracted time. Upon the homeowner's death or property sale, the lender recaptures the equity or amount paid during the mortgage term.
36
Disadvantage to Reverse Annuity Mortgages
Closing costs and finance fees for taking out this type of loan can be expensive - sometimes 5 to 6 percent of the property's value. A short-term loan can have a high rate and it must be a first mortgage on the house, so other debts must be paid off first. Failure to pay property taxes may put the loan in default, and the lender may demand immediate repayment.
37
Installment Land Contract
Also known as contract for deed, is a contract of sale and a financing instrument. The seller provides a method of purchasing the property and the buyer makes installment payments. Under this type of contract, the purchaser has equitable title, ownership right to the property being purchased even though the title is still in the name of the seller. Once all payments are made, title is transferred to the purchaser. Unlike mortgages, installment land contracts cannot be foreclosed for nonpayment since the purchaser does not generally hold title until the final payment is made.
38
Blanket Mortgage
Two or more parcels of real estate are pledged as security for payment of the mortgage debt. This mortgage usually contains a release clause that allows certain parcels of property to be removed from the mortgage lien if the loan balance is reduced by a specific amount. Real estate developers usually use this.
39
Shared Appreciation Mortgage (SAM)
Allows the lender to benefit from the appreciation of property value in exchange for a lower rate of interest to the borrower.
40
Commercial Mortgage
Usually made to a business enterprise. Examples are residential subdivisions, shopping centers, apartment complexes, mobile home parks, and recreational centers.
41
Package Mortgage
Personal property in addition to real property is pledged to secure payment of the mortgage loan. Ex: Large household appliances. This mortgage is used in the sale of furnished condo apartments and includes all furnishing in the unit. This is common in commercial real estate lending where the business assets are offered as collateral.
42
Purchase Money Mortgage
A mortgage given by a buyer to the seller to cover part of the purchase price. The seller becomes the mortagee and the buyer becomes the mortgagor.
43
Gap Financing
Usually a short-term loan, or one that provides funds over and above an already existing loan until more permanent financing is in place. It can also provide necessary temporary funds to a purchaser until permanent financing is available. An example is a bridge loan. This type of financing is available for commercial projects.
44
Bridge Loan
A loan for a short period of time. They typically run 90 days in maturity because of the prediction that the buyer's property will close soon.
45
Swing Loan
Also known as an interim or bridge loan, is usually not secured by a mortgage. A borrower uses the equity that he has in one property to obtain the funds to buy another property. When the property borrowed against is sold, the money from the sale is used to pay back the loan. A solid credit background is generally needed to obtain this loan.
46
Wraparound Mortgage
A junior mortgage in an amount exceeding a first mortgage against the property.
47
Junior Mortgage
Also known as a subordinate mortgage, describes any mortgage that is lower in priority to another mortgage.
48
Convertible Mortgage
Generally used in commercial type projects, this is a provision in the mortgage that gives the lender the option of converting the outstanding balance into an agreed-upon percentage of ownership in the property.
49
Home Equity Loan
A loan against the equity in the home.
50
Construction Loan
A form of interim or temporary short-term financing for creating improvements on land.
51
Sale leaseback
A transaction in which a property owner sells a property to an investor who immediately leases back the property to the seller as agreed in the sales contract.
52
Ground Lease
A lease of unimproved land, usually for construction purposes. This normally contains a provision that the lessee will construct a building on the land. It is a long-term lease.
53
Subordinate Lease
A lease that can be canceled by a lender if the borrower defaults on a mortgage loan.
54
Federal Housing Administration (FHA)
Created in 1937 for the purpose of insuring mortgage loans to protect lending institutions in case of borrower default. FHA does not make mortgage loans.
55
Upfront Mortgage Insurance Premium (UFMIP)
A payment for insurance to protect the lender and/or insurer against loss if default occurs. FHA-insured loans include this.
56
Primary Mortgage Market
Loans generated by lenders directly
57
Secondary mortgage market
Buys and sells mortgages created in the primary mortgage market, which free the banks to have more available funds to lend.
58
Federal National Mortgage Association (FNMA) (Fannie Mae)
The oldest secondary mortgage institution and the single largest holder of home mortgages. A privately owned profit-making corporation and its stock is listed on the New York Stock Exchange. Purchases VA, FHA, RHS and conventional loans.
59
Government National Mortgage Association (GNMA) (Ginnie Mae)
Insures and guarantees the timely payment of principal and interest from government insured mortgages including those insured by the FHA, VA and RHS. Owned by the US Department of Housing and Urban Development.
60
Federal Home Loan Mortgage Corporation (FHLMC) (Freddie Mac)
Exists to increase the availability of mortgage credit and provide greater liquidity for savings associations. Purchases mortgages and packages them into securities that can be sold to investors. Owned primarily by savings and savings and loan banks.
61
Disintermediation
The loss of funds available to lending institutions for making mortgage loans. It is caused by the withdrawal of funds by depositors for investment in higher yield securities in times of higher interest rates.
62
Truth-In-Lending Act (TILA)
Aimed at promoting the informed use of consumer credit by requiring disclosures about its terms and costs. The disclosures include: annual percentage rate, finance charge, amount financed, and total amount of money to be paid toward the mortgage in both principal and interest.
63
Disclosure Statement
At the time of application or within three days thereafter, the lender must provide the borrower with this. This must set forth the true, or effective, annual interest rate on a loan, called the annual percentage rate (APR).
64
Regulation Z
Requirement used by the Federal Reserve Board in implementing the Truth-in-Lending Act, which is a part of the Federal Consumer Protection Act.
65
Redlining
Refusing to make loans to purchase, construct or repair a dwelling by discriminating on the basis of race, color, religion, sex, national origin, handicap or familial status.
66
Bull Market
The value of stocks is constantly rising, therefore, investment in real estate becomes less attractive.
67
Non-Income Verification Loan
Verifies the nature of the borrower's employment but not the dollar amount. A borrower must have higher than average credit and be employed in the same way for at least 3-5 years. There is usually higher interest, but lenders don't usually do this because it doesn't always meet their best interest.
68
Recession
A moderate and temporary decline
69
Depression
The lowest possible point in an economic cycle
70
Inflation
An increase in money and credit relative to available goods, resulting in higher prices.
71
Stagflation
An economic condition in which economic growth is at a standstill (stagnant), but inflation still exists. In this situation, economic climate, production and employment levels go down. Properties are way overpriced. The secondary market is good to get a loan.
72
First-Time Home Buyers
SONYMA is great, has low down payment requirements, flexible loan underwriting, etc. May not have had any ownership in the previous 3 years before the application.
73
Predatory Lending
Lenders or mortgage brokers taking advantage of the customer
74
Subprime
These borrowers with a less than perfect credit report. These lenders are companies that provide loans to homebuyers who do not have good credit histories or because of their income are riskier candidates for loans. There are much higher closing costs and interest rates.
75
New York Anti-Predatory Lending Law
Places many restrictions on high cost (subprime) loans that are first or junior (second) mortgages.

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