Financing and Settlement Flashcards
Promissory Note
Actual promise to repay a loan. The note is evidence of the debt. The note creates the debt. It is a negotiable instrument and is considered personal property.
Mortgage
A document that creates the lien and conveys the property to the mortgagee as security for the debt. The pledge of property is security for the note and sets up collateral that the lender can sell if the note is not paid. A mortgage is a two-party instrument allowing for judicial foreclosure (going to court). The mortgagor borrows money and gives the mortgage to the mortgagee as security for the debt.
Hypothecate
Pledging of property as security for a loan. Possession of the property is not given up.
Loan Qualification
A lender’s decision to make a home loan is based on the borrower’s income, payments required on outstanding debts, assets, and credit history. A borrower is required to have adequate cash to pay the down payment, closing costs, prepaid expenses provided for in the
purchase contract, and an adequate reserve.
A Deed of Trust
is a three party instrument:
Lender (Beneficiary)
Borrower (Trustor) Retains equitable title to the property.
Trustee: A Bank Officer is commonly appointed as the trustee and the lender can substitute trustees at will. If a trustee dies, the property can still be immediately distributed.
non-judicial foreclosure
Deed of Trust allows for this. Under the power of sale clause contained in the document (the lender does not have to go to court). If the borrower defaults the beneficiary (lender) directs the trustee to offer the property for sale to extinguish the debt.
deficiency clause
Deed of Trust also has a deficiency clause. That allows the lender to seek an additional judgment against a borrower who defaults if the liquidation foreclosure sale fails to extinguish the debt. The addition of the power of sale and deficiency clauses is the primary difference between the deed of trust mortgage and the two party mortgages.
Three giants of the secondary market
Federal National Mortgage Association (FNMA)
Government National Mortgage Association (GNMA)
Federal Home Loan Mortgage Corporation (FHLMC
Primary responsibilities of Secondary Market
to maintain an active market for mortgages. Secondary lenders consist of investors who purchase pre-existing
mortgages. FNMA exchanges mortgage- backed securities for pools or blocks of mortgages
Acceleration Clause
A provision in a written mortgage or note that in the event of default, the whole amount becomes due and payable immediately. This helps the lender move quickly to foreclosure.
Alienation Clause
“Due on Sale” clause. In other words, the note is called due when the property sells; therefore the buyer cannot assume the existing loan. The lender requires the loan to be paid off at the sale of the property.
Amortization
Liquidation of a debt by installment payments consisting of principal and interest
Annual Percentage Rate (APR)
The “effective interest rate” or the “effect yield” the lender makes when giving the loan to the borrower. The APR is comprised of all the fees the lender makes
in addition to the interest rate; these are loan origination fees, discount fees or points and closing costs.
Default
Non-performance of a duty arising under a contract or a loan agreement.
Defeasance Clause
Clause in a mortgage stating that when the debt has been paid a satisfaction of mortgage is given by the mortgagee to the mortgagor showing the lien has been paid.
Escalation Clause
Raises the existing interest rate.
Judicial Foreclosure
A foreclosure proceeding where the lender must file a suit in a court of law to obtain a judgment ordering foreclosure of the lien.
Non-judicial Foreclosure
Foreclosure procedures through the power-of-sale clause contained in the deed of trust allowing the trustee to satisfy the debt without going through court proceedings.
Interest
Fee lenders charge for the use of their money. (Simple interest is computed on principal only, while compound interest is based on both principal and accrued interest).
Imputed Interest
Interest charged regardless of periodic payments made.
Leverage
Obtaining maximum financing with minimum cash (utilizing borrowed funds).
Lien Theory
Mortgagor holds interest in the title while the mortgagee holds the lien.
Prepayment Clause
Allows the purchaser to prepay a portion of the loan without penalty.
Seasoned Mortgage
A mortgage that has maturity or has been in existence for a number of years.
Usury
Charging an interest rate higher than is allowed by law. Also called illegal interest
Conventional Loan
A loan that is not underwritten by a federal agency. Lenders rely on their own appraisal of the security and their own credit reports and information concerning the credit history of the borrower. Conventional loans may be “conforming” or “non-conforming”.
Conforming loans
are those that meet FNMA or FHLMC guidelines so they can be sold in the secondary market.
Non-conforming loans
can be made by any lender to be held in its own portfolio or sold to private mortgage packagers that specialize in areas not serviced by FNMA or FHLMC or GNMC
Fixed Rate Payment
Known as an “amortized loan” payment, the mortgagor pays a constant amount, usually monthly, for a set period of time. Payment credited first to interest rate, then applied
to the loan balance.
Straight Payment
Also known as a “term loan”, the mortgagor pays periodic payments of interest, with the principal paid in full at the end of the loan term. This is an interest only loan.
Flexible Payment
The mortgagor makes low payments at the beginning of the loan. Larger payments are made for the remainder of the term. There are many different flexible payment loans such as ARMS
Balloon Payment
The loan is partially amortized. Payments are made for a few years and then the full amount balloons and is due. At that time the loan must be paid in full or refinanced
Adjustable-Rate Mortgages
Loans that are originated at one rate of interest, with the rate fluctuating up or down during the loan term based on a certain economic indicator. The movement of an index, such as Treasury notes or bills, governs the amount of interest-rate adjustment. ARMs have adjustment period caps, periodic rate caps, and aggregate rate caps.
Buydown Mortgages
The interest rate at the beginning is very low. The lender charges prepaid interest and this buys the interest rate down for a short time. After this time is up the interest rate goes up to the set rate and remains the same for the remainder of the loan. Also known as a graduated
payment mortgage
Purchase Money Mortgage
Is used where the seller of the property is willing to carry back the loan for the purchaser. Also called “seller financing”
Equity Loans
The owner borrows money against the equity in his home.
Reverse-Annuity Mortgages
Equity loans for persons aged 62 or older. The person can receive periodic payments to help them remain in their home.
Package Mortgage
Includes items of a personal nature (i.e. appliances/ washer-dryer) as part of the realty.
Blanket Mortgage
A loan that covers several houses or a number of lots
Participation Mortgage
When two or more parties or lenders are involved in a mortgage.
Wraparound Mortgage
A method of refinancing that preserves the current interest rate. New lender assumes payment of the existing loan and gives the borrower a new increased loan.
Open-End Mortgage
(Also called deed of trust loan.) A mortgage that is expandable by increments up to a maximum dollar amount, the full loan being secured by the same original mortgage. In other words, you can add on to the mortgage (add-on mortgage).
An Annuity
is any amount of money received at certain fixed intervals or payments that are expected to be received in the future. A mortgage is an annuity to the lender because the lender will receives payments at fixed intervals
Contract for Deed
A loan where the title to the property does not transfer to the purchaser until the loan has been paid in full. The buyer acquires equitable title, makes payments to the seller, lives in the property, and pays taxes, insurance, and maintenance. The seller remains in legal title until the debt is paid in full then transfers legal title to the buyer. Also called a “land contract”
Penal Sum
is an amount above the amount of a mortgage that the borrower is responsible for. In order to protect the lender in case the borrower defaults on the loan
Mortgage Bankers
(Service the loans they originate.) They loan their own money. They may then sell the note, keep it in their own portfolio, or sell the note but retain the servicing rights. Buyers will only know where the servicing rights are because that is where they make the payment.
Mortgage Brokers
(Do not service the loans they originate.) They bring together buyers and lenders but do not loan their money, simply put, they broker the deal.
FHA: Federal Housing Administration
Primary purpose is to insure loans for qualified buyers.
FHA insurance may be paid in cash by the borrower or the seller or financed with the loan.
Purchaser obtains financing through qualified lending institutions.
Mortgaged properties must be appraised by an FHA approved appraiser.
FHA 203b
is the standard fixed rate loan.
FHA 203k
is a rehabilitation loan.
VA: Veteran’s Administration
VA guarantees loans for eligible veterans with little or no down payment.
VA does not allow a prepayment penalty.
Mortgaged properties must be appraised by VA approved appraisers. They give a Certificate
of Reasonable Value to the lender and buyer which is what a VA appraisal is called.
VA sets limit on the loan amount of up to four times the veteran’s entitlement.
Farm Service Agency
The FSA is for farmers who cannot obtain other loans for buying farms and loans to operate their farms.
Assignment
A note is a negotiable instrument. It may be sold to a third party. When the note is sold, the holder of the note signs it over to the third party. The deed of trust must also be assigned to the third party. It must be recorded. When the loan is paid in full, the assignee holding the note and deed of trust is required to sign the release of lien. In the event of a foreclosure, the assignee
(not the original mortgagee) is required to file the suit.
Assumption
When the buyer not only purchases the property but assumes and agrees to pay the seller’s debt, the buyer becomes personally obligated for the payment of the entire debt. The buyer agrees to assume the sellers existing loan with the lender’s permission and agreement. The original borrower (seller) is released from liability and the new buyer becomes responsible for the remaining balance of the loan.
First and Second Mortgages
Mortgages and other liens have priority in the order in which they have been recorded. The first lien on a property has the first claim on a property. If a second lien is placed on the property it will be called a second lien and will have a lower priority.
Recording Mortgages
Although normally recorded, the mortgage does not have to be recorded to be valid. However, recording does give constructive notice to the world of the borrower’s obligations and establishes the lien’s priority. Priority is determined by the date the document was recorded. First in time is first in line. In the event of a default and foreclosure, the first lien would be the first to be paid, then the second and continuing until all liens are paid. If there were to be remaining monies, it
would be the owner’s remaining equity. Only acknowledged (notarized) documents may be recorded.
Deed in Lieu of Foreclosure
A borrower who is about to be foreclosed on may negotiate with the lender to transfer the title of the property to the lender. This will avoid a deficiency judgment.
Deficiency Judgment
If the foreclosure sale of real estate securing a deed of trust does not produce enough money to repay the loan plus all penalties and interest, the lender may file a personal judgment against the borrower for the balance.
Equitable Right of Redemption
If, after default but before the foreclosure sale, the borrower pays the lender or taxing authority the amount in default, plus costs, the debt will be reinstated and
the property will be pulled off of the foreclosure list.
Subordination Clause or Agreements
Changing the priority of a lien. The first lien holder goes to a second position and the new lien holder becomes first in priority
Discount Point
One discount point equals 1% of the LOAN amount. Increases the investors yield. Can be deducted in the year of the purchase
Discount Rate
Set by the Federal Reserve. It is the interest rate charged by the district banks for the member banks to borrow money from the Federal Reserve district banks. Closely tied to prime. Prime is what lenders give their most credit worthy borrowers
Federal Reserve Bank System
Created in 1913 to serve as the central bank of the United States. The Fed regulates the flow of money and the cost of credit to help stabilize the market
Loan-To-Value Ratio
Amount lender is willing to lend in relationship to the appraised value (expressed as %).
Origination Fee
The fee lenders charge to process the loan (Usually 1% of loan amount).
Warehousing
Temporary placement of a loan prior to permanent placement with a lender
Equal Credit Opportunity Act
Prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age or dependency on public
assistance. Lenders are required to make loans to all who are qualified regardless of the source of their
income as long as it is legal and verifiable.
Community Reinvestment Act
Ensures that financial institutions fulfill their responsibilities in servicing the credit needs of every member of the community. If they take money, they must loan money. It requires that lenders do business in the community where they derive their deposits/charters.
Sherman Anti-Trust Act
The most common anti-trust violations that can occur in real estate are price fixing, boycotting competitors, and allocating customers or markets. Violators of this act may be found guilty of a misdemeanor or a felony, depending on the severity of the violation, punishable by a maximum of $100,000 fine and three years’ imprisonment. For a corporation, the penalty may be
as high as $1,000,000. In a civil suit, a person who suffered a loss because of anti-trust activities
may recover triple damages plus attorney’s fees
Redlining
This is the illegal practice of refusing to originate mortgage loans in certain geographic areas. NOT based on individuals. Lenders would draw red lines around certain areas on a map and refuse to make loans to anyone desiring to purchase or rehab homes in that area (usually highly ethnic areas) thus contributing to the further and rapid decline of an already distressed neighborhood. The Home Mortgage Disclosure Act is the law that prohibits redlining.
