Chapter 8: Financing Real Estate

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 3-5 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 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.

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/Interim loan

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

Impound Account.

A trust account established by a lender for accumulation of borrower funds to pay taxes and other 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 the home; regulated by the CA 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 nonlicensee to a salesperson or bank.

Balloon 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 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

CA 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 U.S.

FICO score

Consumer credit score developed by the Fair Isaac Corporation.

Deed of Reconveyance

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

Satisfaction

Discharge of an obligation before the end of its term by payment of the total debt owed.

Certificate of discharge

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

Federal Housing Finance Agency (FHFA)

Federal agency created following the merger of the Federal Housing Finance Board and the Office of Federal Housing Enterprise and Oversight.

Fair Credit Reporting Act (FRCA)

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

Equal Credit Opportunity Act (ECOA)

Federal law intended to ensure that all consumers are given an equal chance to obtain credit

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 that lenders or servicers provide certain disclosures and notifications concerning private mortgage insurance (PMI) on residential mortgage transactions completed on or 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 Reg 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 1980's; established requirement for state appraiser licensing.

Standby fee

Fee payed by builder to mortgage banker in exchange for agreement to 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 (GPARM)

Financing instrument that carries an interest rate that is subject to change based on a specified 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 borrowers.

Discount rate

Interest rate charged member banks by Federal Reserve Banks.

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 a security interest in the property.

California Finance lender

Licensee under the CA 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 lienholder.

Fixed-rate mortgage

Loan secured by mortgage or deed of trust on rel 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 guaranty 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 customers three 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 three business 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.

Beneficiary

One on whose behalf a trustee holds property conveyed by a trustor; the lender under a deed of trust.

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.

Trustor

One who conveys property to a trustee to hold on behalf of a beneficiary to secure the performance of an obligation; borrower under a deed of trust.

Trustee

One who holds property conveyed by a trustor on behalf of the beneficiary, to secure the performance of an obligation.

Real Property Loan Law

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

California Residential Mortgage Lending Act

Part of the CA Financial Code that regulates mortgage bankers.

Redemption period

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

Judicial foreclosure

Proceeding in which a mortgagee, a trustee, or another lienholder on property requests a court-supervised sale of the property to cover the unpaid balance of a delinquent debt.

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 or rate, such as the 11th District Cost of Funds.

Mortgagor

Property owner who gives security interest in the property to a lender (mortagee) 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.

Trustee's sale

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

Shared appreciation mortgage (SAM)

Security instrument in which 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, if any.

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.

Usury

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

Principal

The employer of an agent; one of the parties to a transaction; the amount of money borrowed.

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. A loan has negative amortization when the loan payments do not cover all of the interest due, which then is added to the remaining loan balance.

Interest rate

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

Power of sale

The power that may be given by a promissory note to a trustee, a mortgagee, or another lienholder to sell secured property without judicial proceedings if the borrower defaults.

Annual Percentage rate (APR)

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

Mortgage bankers

Those who make mortgage loans and may also serve as mortgage brokers; in CA, mortgage bankers are licensed by the CA Department of Business Oversight and subject to the CA Residential Mortgage Lending Act, found in the CA 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 it repaid.

Hypothecation

Use of real property as collateral for a debt.

Subject to

When a grantee takes title to real property "subject to" a mortgage or trust deed, the grantee is not responsible to the holder of the promissory note for the payment of the amount due, and the original maker of the note retains primary responsibility for the underlying debt.