Section 14: Financing in CA Flashcards
mortgage
a legally binding instrument that creates a lien on a piece of property
acceleration clause
a clause in a mortgage that makes the entire debt due immediately in the case of borrower default
due-on-sale clause
a requirement that the borrower repay the loan when transferring ownership to another
promissory note
a promise by a borrower to repay the loan
prepayment penalty
an amount charged by the lender for interest lost when a borrower sells or pays off a loan early
mortgagor
the borrower in a mortgage
mortgagee
the lender in a mortgage
fixed rate loan
a loan whose principal and interest payment remain the same over the life of the loan
adjustable rate mortgage
loan whose rate is adjusted (usually annually) based on the behavior of the economic index with which it is associated
bridge loan
a temporary loan often used by buyers who have not yet closed on their prior property
swing loan
a loan of equity in a property obtained to use to purchase another property
graduated payment mortgage
payments gradually adjust (usually upward) based on a predetermined schedule and amount over 5-10 years, and then remains consistent for the rest of the loan term
growing equity mortgage
fixed rate mortgage where the monthly payments increase over time according to a set schedule or index
reverse mortgage
allows a person to stay in one’s home while living off of the equity by “selling” it to a lender who makes payments to the homeowner in exchange for ownership interest in the property
renegotiable-rate mortgage
long-term loan made up of short-term loans; at specified periods, borrowers have the option to renew their loan or immediately pay the remaining loan balance and interest due
rollover mortgage
a type of renegotiable loan in which the interest rate is renegotiated at specified intervals (usually every 5 years)
shared appreciation mortgage
mortgage in which the borrower initially receives an interest rate below the going market rate; in exchange, the lender receives equity or a percentage of the appreciation in the property’s market value
discount point
upfront charge to make up for difference between the rate the borrower is receiving and the rate the lender normally requires; can be seen as the amount a lender charges to initiate a loan
promissory note
a promise from the borrower (the obligor) to repay a certain sum of money to another party (the lender/holder of the note–obligee) under specified terms; negotiable instrument
bond/mortgage bond
can be used to secure the mortgage instead of a promissory note; when this is used and borrower defaults, the borrower may face foreclosure
lien theory
a state that adopts a lien theory goes under the presumption that a lender’s mortgage is a lien on the property
deed of trust
(similar to a mortgage) document in which the borrower conveys title for the property to a trust, which holds it as security for the lender
judicial foreclosure
foreclosure process requiring court proceedings
non-judicial foreclosure
when a lender is able to sell a property (in the event of buyer default) without going through the court system; usually granted via a power-of-sale clause in the security instrument
title theory
a title theory state says that the lender owns the property until the loan is paid off
buydown
financing technique in which the buyer obtains a TEMPORARILY lower interest rate by buying down the interest rate (with a lump sum prepayment of interest) at the time that the loan is made
principal (mortgage)
balance on the loan– the actual amount owed
Interest (mortgage)
the “fee” paid back to the lender for the use of their money; generally decreases over the life of the mortgage
Taxes (mortgage)
includes property taxes– which is the cost of public services divided by the value of property for the area)
Insurance (mortgage)
may include mortgage, homeowner’s, and/or flood insurance
amortization schedule
document or chart that outlines the amount of each monthly payment of a mortgage
fully amortized loans
also called “constant payment method”–the borrower’s installment payment remains the same throughout the loan term; when a borrower makes mortgage payments based on the numbers outlined in an amortization schedule
straight-line loan
type of mortgage wherein the portion of the payment applied to the principal remains the same with each payment, and the interest amount varies according to the outstanding loan balance; also called straight-line amortization or constant amortization
Fannie Mae
Federal National Mortgage Association or FNMA; can purchase ANY type of loan, but primarily deals with conventional loans from commercial banks
Freddie Mac
Federal Home Loan Mortgage Corporation or FHLMC; can purchase any type of loan, but primarily deals with conforming conventional loans from smaller lending institutions (thrifts)
Farmer Mac
Federal Agricultural Mortgage Corporation; purchases agricultural loans and loans from rural lenders
Ginnie Mae
Government National Mortgage Association or GNMA; guarantees mortgage-backed securities (MBSs) that contain loans insured or guaranteed by a U.S. government agency; does NOT purchase loans
secondary mortgage market players
Fannie Mae, Freddie Mac, Farmer Mac, Ginnie Mae, or any lending institution that buys loans from other lenders
Federal Reserve System
(also called the Fed) keeps the U.S.’s finances in check (avoiding runaway inflation and serious deflation) by regulating the flow of available funds and interest rates at each of its banks– aka. Fed controls how much money is available and what banks can charge for that money
primary mortgage market
where banks that originate loans operate; they have cash and loan it to borrowers; main players are homebuyers (borrowers) and lenders (commercial banks, credit unions, savings and loans, etc.)
secondary mortgage market
a marketplace where investors buy and sell mortgages that have been securitized and packaged into groups
qualified mortgage
a mortgage loan that meets specific ability-to-repay rules, including a prohibition on interest-only loans, negative amortization, balloon payments, or excessive loan terms (>30 years)
ability-to-repay rule
lenders must research and document a borrower’s income, assets, employment, credit history, and loan ratios to help ensure that the borrower has the ability to repay the loan
CalVet loan requirements
no residency required; currently serving or honorably discharged; buying an owner-occupied home or farm in CA
CalVet Loan Characteristics
max. loan amts. vary by county; term of 30 yrs; no prepayment penalty; below-market interest rates; low or no down payment; up-front funding fees, but no monthly mortgage insurance premiums; 1% loan origination fee
private mortgage insurance (PMI)
an insurance requirement that protects the lender when it approves a loan with more than 75-80% of the purchase being financed
negative amortization
type of loan in which the payments do not cover the interest due, which increases the amount owed over time
balloon mortgage
a nontraditional mortgage product that has lower initial payments that do not amortize and request a “catch up” lump sum payment to be paid at a specific time, usually at the end of a loan period
savings and loan associations (thrifts)
specialize in taking in savings deposits and then lending out through mortgages and other loans; required to keep their commercial lending at or under 20%– so they’re tied to consumers and mortgage loans
commercial banks
Bank of America, Chase, Citigroup, etc make consumer and business loans, offer investment products, and take deposits
Credit unions
member-based cooperatives that provide credit for auto and home loans; they take deposits and offer savings vehicles, money markets, etc; tend to be very competitive
mortgage bankers
actually DO the lending; they have in-house loan processors and underwriters; can close pretty quickly because they fund their own loans, but their range of offerings is narrow because they’re limited to their own products
mortgage brokers
work with multiple lenders to search for and negotiate the best deal for a particular borrower’s circumstances; don’t loan the money out themselves
investment groups
financier that lend specifically to people who want to avoid conventional financing– such as other investors; they also purchase mortgage-backed securities
land contract
contract between a seller and buyer in which the seller acts as the lender for the buyer, who purchases the property for an agreed-upon price. The seller retains the title to the property while the buyer gets the right of possession– until the loan balance is paid in full.; aka “contract for deed”, “land installment contract”, or “installment sale agreement”
purchase money mortgage
type of seller financing in which the seller issues a mortgage to the buyer (toward the purchase price) that buyers use as down payment financing; seller = mortgagee/lender, buyer=mortgagor/borrower
wraparound mortgage
type of seller financing that wraps the new buyer’s mortgage around the seller’s existing mortgage; seller continues to make payments on the 1st mortgage and the buyer makes their own mortgage payments to the seller
sale-leaseback
when an investor buys a property for cash and then leases it back to the seller; often occurs when a property is difficult to finance or when a business is strapped for cash; this provides income for the investor and allows the building owner to remain in the building while also freeing up capital that was “stuck” in real estate.
