OnCourse Real Estate Flash Cards: Finance

Delayed Exchange

A 1031 exchange in which a sale is made by a taxpayer, and the sale proceeds are held by a facilitator until they are used to pay for replacement property, identified within 45 days and actually purchased within 180 days after the date of the transfer of title to the property sold.

Fair Credit Reporting Act (FCRA)

A Federal law requires persons taking adverse actions based upon a credit report received from a credit reporting agency, to reveal to the potential borrower, the name of the credit reporting agency that provided with the credit report, and giving consumers rights to have errors in their credit files corrected.

Escalator Clause

A clause in a contract providing for the upward or downward adjustment of certain items to cover specified contingencies, usually tied to some index or event. Often used in long term leases to provide for rent adjustments to cover tax and maintenance increases.

Alienation Clause

A clause in a contract, mortgage or trust deed giving the lender certain rights (e.g., the right to call the loan due, approve a buyer, or change the interest rate) in the event of a transfer of mortgaged property.

Acceleration Clause

A condition in a mortgage, trust deed or contract giving the lender the power to declare all sums owing immediately due and payable upon default, such as a delinquency in the repayment of the note.

Conditional Sale Contract

A contract for the sale of property stating that possession is to be given to the buyer, but title is to remain vested in the seller until the conditions of the contract have been fulfilled. Also called a land sale contract, agreement for sale, contract for deed, or real estate contract.

Estoppel Deed

A deed given by a delinquent borrower to the lender in order to avoid foreclosure (a deed in lieu of foreclosure).

Deed in Lieu of Foreclosure

A deed to real property accepted by a lender from a defaulting borrower to avoid the necessity of foreclosure proceedings by the lender. Also called an estoppel deed.

Federal Land Bank System

A federal mechanism providing long term loans to farmers.

Federal Reserve Bank (The Fed)

A government entity that monitors economic and financial conditions, such as the volume of bank deposits and withdrawals, the cost of money and credit, unemployment levels, inflation rates and world economic conditions, and applies various controls or pressures to influence the supply of money and credit available in the economy.

Federal Department of Veteran's Affairs (VA)

A government organization that guarantees loans from private lenders to enable eligible veterans, reservists, or National Guard members to finance homes they intend to occupy.

Estoppel

A legal theory under which a person is barred from asserting or denying a fact because of his previous act or words.

Assumption Fee

A lender's charge for processing records for a new owner who is assuming an existing loan.

Amortized Loan

A loan in which loan principal is repaid entirely during the loan term, instead of entirely at the end of the term.

Construction Mortgage

A loan made to finance construction or improvement of land. Funds are usually dispersed in increments as the construction progresses.

Closed-End Mortgage

A loan of a fixed amount, so that additional funds cannot be borrowed without a new note or mortgage.

Economic Obsolescence

A loss in value due to factors away from the subject property but adversely affecting its value.

External Obsolescence

A loss in value resulting from conditions outside the property, such as deterioration of the neighborhood caused by changes in uses of neighboring properties, blight, changes in zoning and legislative restrictions, or fumes from a factory. Also, called economic obsolescence.

Capital Loss

A loss realized upon disposition of property. The amount by which the adjusted cost basis exceeds the net sale proceeds.

Exchange

A means of trading equities in two or more real properties, so that the transactions are treated as a single transaction through a single escrow.

Adjustable Rate Mortgage (ARM)

A mortgage loan which bears interest at a rate subject to change during the term of the loan.

Conventional Loan

A mortgage securing a loan made by investors without governmental underwriting, i.e.m which is not FHA or VA guaranteed.

Balloon Payment

A payment on a promissory note, usually the final one for discharging the debt, which is significantly larger than any installment payments.

Buy-Down

A payment to the lender from the buyer, the seller, and/or third party, causing the lender to reduce the interest rate during the first 1-5 years of the loan.

Debt-to-Income Ratio

A percentage of a borrower's current debt load and income that lenders use to determine the amount to lend to a borrower.

Beneficiary

A person entitled to the benefit of a trust; the lender in deed of trust transaction.

Assignment of Rents Provision

A provision in a deed or trust (or mortgage) under which the lender may, upon default by the borrower, take possession of the property, and collect income from the property and apply it to the loan balance and the costs incurred by the lender.

FICO Score

A rating of how the applicant has handled his credit. Scored close to 800 indicate excellent credit, and result in favorable terms. Those close to 600 or below indicate poor credit, and result in higher interest rates, higher downpayments, or rejection of the application.

Blanket Mortgage

A single mortgage which covers more than one piece of real property.

Anticipation, Principle of

Affirms the value is created by anticipated benefits to be derived in the future.

Federal Deposit Insurance Corporation (FDIC)

Agency of federal government that insures deposits at commercial banks and savings banks.

Budget Mortgage

Also called a PITI mortgage (for Principal, Interest, Taxes, and Insurance), this financing arrangement provides that an amount equal to 1/12 of the estimated annual property insurance premiums, property taxes, homeowners' association dues and/or special assessments, if any, will be paid to the mortgagee together with the monthly installment of principal and interest.

Consumer Protection Act

Also known as the truth-in-lending act, it assures that applicants for consumer credit are given sufficient information aboutthe cost of credit so they can easily compare credit terms offered by various creditors.

Due on Sale Clause

An acceleration clause granting the lender the right to demand full payment of the mortgage upon a sale of the property. Also called the alienation clause.

Federal Housing Administration (FHA)

An agency of the federal government that insures lenders against loss in the event of default on mortgage loans financing new and existing homes and home repairs.

Assumption of Mortgage

An agreement by a purchaser (grantee) to take over personal liability for payment of existing note secured by a mortgage or deed of trust against the property.

Appraisal

An analysis of facts about a property resulting in an estimate or opinion of the value by an appraiser.

Appreciation

An increase in value of real property due to positive physical or economic changes or a decrease in or elimination of negative elements in the surrounding area.

Compensating Factors

Aspects of a person's financial situation that provide a reason to go outside the normal guidelines for making a loan, such as evidence of an ability to afford the payments, a better than average credit history, a high fico score, job security, etc.

Capital Gain

At resale of a capital item, the amount by which the net sale proceeds exceed the adjusted cost basis (book value). Used for income tax computations. Gains are called short or long term based upon length of holding period after acquisition. Usually taxes at lower rates than ordinary income.

Fannie Mae

Created as the Federal National Mortgage Association in 1938 to buy mortgages on residential property.

Adjustments

Decreases or increases to sales price, by dollar amounts or percentages, to reflect the differences between sold properties and a property being appraised.

Effective Demand

Demand for an item from those who have a desire or need for it and the purchasing power to acquire it.

Comperative Cost Methods

Estimate of the replacement cost of a subject property based on cost per square foot of cubic foot. Also known as the square foot method or cubic foot method.

Capitalization

Estimating value of property based on its net income and a reasonable return on the investment, by dividing annual net income by the capitalization rate.

Deferred Maintenance

Existing but unfulfilled requirements for repairs and rehabilitation. Postponed or delayed maintenance causing decline in a building's physical condition.

Equal Credit Opportunity Act (ECOA)

Federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, sexual preference, marital status, or receipt of income from public assistance programs.

Competition, Principle of

Holds that profits tend to breed competition and excess profits tend to breed ruinous competition.

Conformity, Principle of

Holds that the maximum of value is realized when a reasonable degree of homogeneity of improvements is present.

Cap

In an adjustable rate mortgage, the maximum percentage the interest rate can increase each year and/or a maximum total increase in the rate over the life of the loan.

Compound Interest

Interest paid on original principal and also on the accrued and unpaid interest which has accumulated as the debt matures.

Certificate of Eligibility

Issued by the government, bearing evidence of individual's eligibility to obtain a federal VA loan.

Curable Depreciation

Items of physical deterioration and functional obsolescence which are customarily repaired or replaced by a prudent property owner.

Deficiency Judgement

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.

Amortization

Liquidation of a financial obligation on an installment basis; also recovery over a period of cost or value.

Conforming Loans

Loans meeting Fannie Mae and Freddie Mac standards.

Depreciation

Loss of value of property brought about by age, physical deterioration or functional or economic obsolescence. Also, the decrease in value of an asset that is allowed as an expense for income tax purposes.

Collateral

Marketable real or personal property which a borrower pledged as security for a loan.

Credit Union

Members-only bank that specializes in short-term consumer loans, but may also provide funds for long-term financing of real estate, equity loans and home improvement loans to their members.

Age-Life Method

Method of depreciation, also called the straight-line method, that presumes the improvements depreciate at an equal rate each year until the end of their economic life, when the building would be torn down.

Boot

Money, unlike property or an assumption of a greater mortgage balance (mortgage relief) the taxpayer has received in the exchange of real property. The amount in the exchange subject to tax.

Cost Approach

One of three methods in the appraisal process. Estimates value based on the replacement cost of the improvements, less estimated accrued depreciation, plus the market value of the land.

Appraiser

One qualified by education, training and experience and licensed or certified to estimate the value of property using formal appraisal processes.

Arrears

Payment after an item is due but not paid, such as the payment of interest for the period between the last payment and present payment of a mortgage.

Direct Principal Reduction

Periodic loan payments that include a fixed amount of principal, plus interest on the unpaid balance.

Assemblage

Putting several parcels of land under one ownership.

Discount

Sale of a promissory note before maturity at a price less than the outstanding principal balance of the note at the time of sale. Also, an amount deducted in advance by the lender from the normal principal of a loan as part of the borrower's cost of obtaining the loan.

Amenities

Satisfaction of enjoyable living to be derived from a home.

Effective Gross Income

Scheduled gross income less vacancies and collection losses.

Discounting

Selling loans for less than the outstanding balance.

Fair Market Value

The amount of money that would be paid for a property offered on the open market for a reasonable period of time with both buyer and seller knowing all the uses to which the property could be put and with neither party being under undue pressure to buy or sell.

Discount Points

The amount of money the borrower or seller must pay the lender to get a mortgage at a lower interest rate.

Defeasance Clause

The clause in a mortgage that gives the mortgagor the right to redeem his property upon the payment his obligations to mortgagee.

Buyer's Market

The condition which exists when a buyer is in a more commanding position as to price and terms because real property offered for sale is in plentiful supply in relation to demand.

Adjusted Basis

The cost basis decreased due to such items as allowable depreciation and property losses, and increased by the cost of improvements and special assessments.

Accrued Depreciation

The difference between the value of an item at the time of the appraisal and the current replacement cost of the item in new condition.

Finance Charge

The dollar amount credit will cost the borrower over the term of a loan.

Certificate of Reasonable Value (CRV)

The federal Department of Veteran's Affairs appraisal of property value.

Equity

The interest or value which an owner has in real estate over and above liens against it. A branch of remedial justice by and through which relief is afforded to suitors in courts of equity.

Discount Rate

The interest rate the Federal Reserve charges on loans to member banks to enable those banks to have adequate funds in reserve.

Actual Age

The length of time improvements have been standing, or existed.

Effective Age

The number of years of age as indicated by the condition of the structure, distinct from chronological age.

Basis

The owner's cost of his asset, deducted from the amount realized in calculating capital gains.

Downpayment

The part of the purchase price not financed.

Effective Interest Rates

The percentage if interest actually being paid by the borrow for the use of the money, distinct for nominal interest.

Economic LifE

The period over which a property will yield a return on the investment over and above the economic or ground rent due to the land.

Cost Basis

The purchase price of the property plus certain closing costs, such as legal fees and title insurance.

Capitalization Rate

The rate which is considered a reasonable return on the investment, and used in the process of estimating value based upon net income. The rate necessary to attract the average investor to a particular kind of investment.

Economic Rent

The reasonable rent expected if the property were available for rent at the time of its valuation.

Escalation

The right reserved by the lender to increase the amount of the payments and/or interest upon the happening of a certain event.

Equitable Right of Redemption

The right to pay off the mortgage debt plus interest and costs prior to the foreclosure.

Amount Realized

The selling price less selling expenses, such as commissions, advertising, legal fees, loan placement fees or discount points paid by the seller.

Annual Percentage Rate (APR)

The total finance charge expressed as an annual percentage of the amount financed, in accordance with regulation z and the federal truth in lending act.

Appraised Value

The value of a property at a given time, based on facts regarding the location, improvements, etc., of the property and surrounding, by an appraiser.

Contribution, Principle of

The value of any component part of a property is what it contributes to the value of the whole.

Capitalization Approach

Used to appraise property that produces income, by evaluating its net income and converting it to a value estimate.

Correlation

Weighing the data from different appraisal approaches. The final step in estimating the market value. Also called reconciliation.

Assume and Agree to Pay

When a buyer assumes primary responsibility for an existing mortgage and agrees to make the payments per the terms of the note directly to the lender.

Bond

Written evidence of an obligation given by a corporation or government entity.