California Real Estate Principles - Chapter 8 - Financing Real Estate

power-of-sale clause

A provision in a financing instrument that allows the property used as security for a debt to be sold in the event of the borrower's default without a judicial proceeding.

acceleration clause

A provision in a real estate financing instrument that allows the lender to declare the remaining indebtedness due and payable on the happening of certain conditions, such as the sale of the property or the borrower's default in payment

construction loan

A short-term temporary loan used until permanent financing is available, typically during building construction.

certificate of discharge

Document that is recorded by a mortgagee as evidence of the release of the mortgagee's lien rights.

discount rate

Interest rate charged member banks by Federal Reserve Banks.

California Residential Mortgage Lending Act

Part of the California Financial Code that regulates mortgage bankers.

trustee's sale

Sale of property held as security for payment of a loan on default of the trustor.

usuary

The charging of a rate of interest on a loan that is greater than the rate permitted by law.

subject to

When you purchase property and existing finance is in place, along with any other liens or encumbrances already attached. You do not formally assume the loan through the bank.

institutional lenders

A financial intermediary or depository, such as a savings and loan association, commercial bank, or life insurance company, that pools the money of its depositors and then invests funds in various ways, including trust deeds and mortgage loans.

renegotiable-rate mortgage (RRM)

A financing instrument in which the interest rate is adjusted after an agreed-to period following origination, such as 3 or 5 years.

deficiency judgment

A judgment given by a court when the value of security pledged for a loan is insufficient to pay off the debt of the defaulting borrower.

nonamortized

A loan that includes payment of interest and may include payment of principal, but not enough principal to bring the outstanding balance of the loan to zero at the end of the loan term.

open-ended mortgage

A mortgage that permits additional amounts to be borrowed according to the note terms.

straight note

A note in which a borrower repays the principal in a lump sum at maturity, with interest due in installments or at maturity.

impound account

A trust account established by a lender for accumulation of borrower funds to pay taxes and recurring costs.

security instrument

A written document executed by a debtor by which the described property is made security for the underlying debt.

promissory note

A written promise to repay a loan under stipulated terms; establishes personal liability for payment by the person making the note.

home equity sales contract

Agreement to sell a homeowner's equity in a home; regulated by the California Civil Code, which requires specific notice, including right of cancellation, to homeowner.

loan-to-value ratio

Amount of loan divided by purchase or market value of property.

alienation or due-on-sale-clause

An acceleration clause in a real estate financing instrument granting the lender the right to demand full payment of the remaining indebtedness on a sale of the property.

kickback

An illegal fee paid by a non licensee to a salesperson or bank.

ballon payment

An installment payment on a promissory note--usually the final payment--that is significantly larger than the other installment payments.

negotiable instrument

An instrument, such as a promissory note, that is capable of being assigned or transferred in the ordinary course of business.

assumption

An undertaking or adoption of a debt or an obligation resting primarily on another person.

credit-bid

Bid by a lender at a foreclosure sale represented by the amount of the outstanding indebtedness owed to the lender by the defaulting borrower.

Unruh Civil Rights Act

California law that prohibits discrimination against persons in one of the identified groups in accommodations and business establishments.

Federal Reserve Bank System (the Fed)

Central banking system of the United States.

FICO score

Consumer credit score developed by Fair Isaac Corporation.

deed of reconveyance

Deed from trustee to trustor, at the request of beneficiary of trust (lender), that returns title to the trustor on payment of the indebtedness secured by the deed of trust.

Federal Housing Finance Agency (FHFA)

Federal agency created following the merger of the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO)

Fair Credit Reporting Act (FCRA)

Federal law detailing consumer rights in loan transactions involving credit reports.

Real Estate Settlement Procedures Act (RESPA)

Federal law requiring certain disclosures by lenders in federally related mortgage loans involving the sale or transfer of residences of one to four dwelling units.

Homeowner's Protection Act of 1998 (HPA)

Federal law requiring lenders or servicers provide certain disclosures and notifications concerning private mortgage insurance (PMI) on residential mortgage transactions completed on of after July 29, 1999.

Fair and Accurate Credit Transactions Act of 2003 (FACTA)

Federal law that amended the Fair Credit Reporting Act (FCRA) to create procedures to assist consumers who are victims of identity theft.

Truth in Lending Act (TILA)

Federal law that requires certain disclosures in consumer credit transactions; implemented by Regulation Z that is now subject to the Consumer Financial Protection Bureau.

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)

Federal legislation passed in response to the savings and loan crisis of the 1980s; established requirement for state appraiser licensing.

standby fee

Fee paid by builder to mortgage banker in exchange for agreement to make make mortgage loans available at a stated price at a future time.

reverse annuity mortgage (RAM)

Finance instrument that creates an increasing amount of debt secured by the borrower's residence, based on the amount paid out to the borrower, typically monthly.

adjustable-rate mortgage (ARM)

Finance instrument whose interest rate will vary according to the change in an identified index or rate, such as the 11th District Cost of Funds.

graduated payment mortgage (GPM)

Financing instrument in which payments are increased during the first five years of the loan term and then remain fixed for the remainder of the term.

growing equity mortgage (GEM)

Financing instrument in which payments of principal are increased based on the movement of a stated index, thereby decreasing the loan term.

graduated payment adjustable-rate mortgage (GRARM)

Financing instrument that carries an interest rate that is subject to change based on a specific index, with loan payments limited to increases permitted at specific intervals.

basis point

For financing and investment purposes, 1/100 of 1%

negative amortization

Increase in principal balance that occurs when monthly loan payment does not cover entire interest owed for the payment period.

Federal Deposit Insurance Corporation (FDIC)

Insures savings, checking, and other deposit accounts in insured institutions, up to $250,000 per depositor, per insured bank, for each ownership category.

prime rate

Interest rate banks charge their most favorably rated commercial borrowesr

unlawful detainer

Legal action that may be brought to evict a tenant who is in unlawful possession of leased premises,

mortgagee

Lender to whom a property owner (mortgagor) gives security interest in the property.

California finance lender

Licensee under the California Finance Lenders Law who is in the business of making consumer loans or commercial loans in which personal property may be used as collateral.

junior lienor

Lienholder whose rights are subordinate to those of another lien holder.

fixed-rate mortgage

Loan secured by mortgage or deed of trust on real estate that carries an interest rate that does not change over the life of the loan.

standby commitment

Mortgage banker's promise, for which builder pays a standby fee, to make loans available to prospective purchasers on stated terms.

private mortgage insurance (PMI)

Mortgage guarantee insurance available to conventional lenders on the high-risk portion of a loan, with payment included in the borrower's loan installments.

Closing Disclosure

New form mandated by the TILA-RESPA rule that helps consumers to understand all the costs of the transaction. It must be provided to consumers 3 business days before closing.

Loan Estimate

New form mandated by the TILA-RESPA rule that helps consumers to understand the key features, costs, and risks of a mortgage loan. It must be provided to consumers no later than 3 days after they submit a loan application.

notice of default

Notice by trustee of the trustor's default in payment of the debt underlying the deed of trust and stating intention of the trustee to sell the property being held by the trustee as security for the debt.

notice of trustee's sale

Notice of a sale of property under the terms of a deed of trust securing a debt on which the borrower has defaulted.

declaration of default

Notice, accompanied by original note and trust deed, provided by lender (beneficiary) to trustee on default of trustor (borrower), stating the reason for the default.

joint and several liability

Obligation of all cosigners of a promissory note to repay the entire note, even if one defaults.

points / aka discount points

One point represents one percentage point of a loan amount; may be charged by lenders at the time of loan funding to increase the loan's effective interest rate.

Real Property Loan Law

Part of the California Real Estate Law that covers loans solicited or negotiated by a real estate broker.

redemption period

Period following a court-ordered sale of mortgaged property in which the judgment debtor's successor in interest can buy back the property.

installment note

Promissory note that provides regular payments over the loan term, usually including both principal and interest.

adjustable-rate note

Promissory note that serves as evidence of a debt that carries an interest rate that will vary according to the change in an identified index rate, such as the 11th District Cost of Funds

mortgagor

Property owner who gives security interest in the property to a lender (mortgagee) in exchange for a loan.

lock-in clause

Provision in a promissory note or land contract that prohibits the promissor from paying off the debt prior to the date set forth in the contract.

reinstatement

Revival of defaulted mortgage by payment of all delinquencies, including court costs and fees, before foreclosure sale.

shared appreciation mortgage (SAM)

Security instrument in which the borrower receives below market rate of interest and resulting lower payments in exchange for giving the lender an agreed-on portion of future property appreciation.

holder in due course

Someone who takes a negotiable instrument for value, in good faith, and without notice of any defense against its enforcement that might be made by any person.

Uniform Residential Loan Application

Standard form developed and required by Fannie Mae and Freddie Mac.

federal funds rate

The interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

take-out loan

The loan arranged by the owner or builder/developer for a buyer; the permanent financing that pays off and replaces the interim loan used during construction.

amortized loan

The payment of a financial obligation in installments; recovery over a period of time of cost or value.

interest rate

The percentage of a sum of money borrowed that is charged for its use.

annual percentage rate (APR)

The relative cost of credit as determined in accordance with Regulation Z of the Consumer Financial Protection Bureau for implementing the federal Truth in Lending Act

mortgage bankers

Those who make mortgage loans and may also serve as mortgage brokers; in California, they are licensed by the California Department of Business Oversight and subject to the California Residential Mortgage Lending Act (CRMLA), found in the California Financial Code.

leverage

Use of debt financing to purchase an investment, thus maximizing the return per dollar of equity invested; enables a purchaser to obtain possession for little or no initial cash outlay and relatively small periodic payments on the debt incurred.

pledged

Use of property as security for a debt by allowing lender to take possession of it until debt is repaid.

hypothecation

Use of real property as collateral for a debt.