Unit 14 Financing

Question 1

Define acceleration clause

Answer 1

The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or other obligation. 245

Question 2

Define adjustable-rate mortgage (ARM)

Answer 2

A loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index. 249

Question 3

Define alienation clause

Answer 3

The clause in a mortgage or deed of trust stating that the balance of the secured debt becomes immediately due and payable at the lender’s option if the property is sold by the borrower. In effect, this clause prevents the borrower from assigning the debt without the lender’s approval. 247

Question 4

Define amortized loan

Answer 4

A loan in which the principal, as well as the interest, is payable in monthly or other periodic installments over the term of the loan. 248

Question 5

Define beneficiary

Answer 5

(1) The person for whom a trust operates or in whose behalf the income from a trust estate is drawn. (2) A lender in a deed of trust loan transaction. 244

Question 6

Define Comprehensive Loss Underwriting Exchange (CLUE)

Answer 6

A database of consumer claims history that allows insurance companies to access prior claims information in the underwriting and rating process. 257

Question 7

Define debt to income (DTI)

Answer 7

Information about an applicant’s gross income and total debt that lenders generally look at as a percentage to determine qualification for a loan. 238

Question 8

Define defeasance clause

Answer 8

A clause used in leases and mortgages that cancels a specified right upon the occurrence of a certain condition, such as cancellation of a mortgage upon repayment of the mortgage loan. 246

Question 9

Define deficiency judgment

Answer 9

A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full. In some states, a deficiency judgment cannot be sought when the mortgage debt was used to purchase, and is secured by, the borrower’s principal residence. 254

Question 10

Define discount point

Answer 10

A unit of measurement used for various loan charges; one point equals 1% of the amount of the loan. 241

Question 11

Define equity

Answer 11

The interest or value that an owner has in property over and above any indebtedness. 238

Question 12

Define growing-equity mortgage

Answer 12

A loan in which the monthly payments increase annually, with the increased amount being used to directly reduce the principal balance outstanding and thus shorten the overall term of the loan. 250

Question 13

Define homeowners insurance

Answer 13

Insurance that covers a residential real estate owner against financial loss from fire, theft, public liability, and other common risks. 256

Question 14

Define index

Answer 14

An objective economic indicator to which the interest rate for an adjustable-rate mortgage is tied. 249

Question 15

Define interest

Answer 15

A charge made by a lender for the use of money. 232

Question 16

Define interest-only loan

Answer 16

A loan that only requires the payment of interest for a stated period of time with the principal due at the end of the term. 248

Question 17

Define lien theory

Answer 17

Principle in which the mortgagor retains both legal and equitable title to property that serves as security for a debt. The mortgagee has a lien on the property, but the mortgage is nothing more than collateral for the loan. 243

Question 18

Define loan origination fee

Answer 18

A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount. 241

Question 19

Define loan-to-value ratio (LTV)

Answer 19

The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral. 270

Question 20

Define margin

Answer 20

A premium added to the index rate representing the lender’s cost of doing business. 249

Question 21

Define mortgage

Answer 21

A conditional transfer or pledge of real estate as security for the payment of a debt. Also, the document creating a mortgage lien. 3

Question 22

Define negotiable instrument

Answer 22

A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee’s right to payment. 239

Question 23

Define PITI

Answer 23

The basic costs of owning a home—mortgage principal and interest, real estate taxes, and hazard insurance. 237

Question 24

Define prepayment penalty

Answer 24

A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost. 242

Question 25

Define promissory note

Answer 25

A financing instrument that states the terms of the underlying obligation, is signed by its maker, and is negotiable (transferable to a third party). 239

Question 26

Define release deed

Answer 26

A document, also known as a deed of reconveyance, that transfers all rights given a trustee under a deed of trust loan back to the grantor after the loan has been fully repaid. 246

Question 27

Define reverse mortgage

Answer 27

A loan by which a homeowner receives a lump sum, monthly payments, or a line of credit based on the homeowner’s equity in the property secured by the mortgage. The loan must be repaid at a prearranged date, upon the death of the owner, or upon the sale of the property. 252

Question 28

Define satisfaction of mortgage

Answer 28

A document acknowledging the payment of a mortgage debt. 243

Question 29

Define short sale

Answer 29

Sale of property in which the sales price is less than the remaining indebtedness. 108

Question 30

Define straight loan

Answer 30

A loan in which only interest is paid during the term of the loan, with the entire principal amount due with the final interest payment. 248

Question 31

Define subject to

Answer 31

Buyer takes title of property and makes payments on the existing loan but is not personally obligated to pay the debt in full. Original seller might continue to be liable for debt. 247, 260

Question 32

Define trustor

Answer 32

A borrower in a deed of trust loan transaction; one who places property in a trust. Also called a grantor or settler. 73

Question 33

Define usury

Answer 33

Charging interest at a higher rate than the maximum rate established by state law. 241

Question 34

Define redemption

Answer 34

The right of a defaulted property owner to recover property by curing the default. 227