Chapter 8 - Financing Real Estate Key terms

Promissory Note

A borrower's personal promise to pay a debt according to the agreed terms.

Alienation Clause

A clause in a contract giving the lender certain rights in the event of a sale or other transfer of mortgaged property.

Acceleration Clause

A condition in a real estate financing instrument giving the lender the power to declare all sums owing lender immediately due and payable upon the happening of an event, such as sale of the property, or a delinquency in the repayment of the note.

Land Contract

A contract used in a sale of real property whereby the seller retains title to the property until all or a prescribed part of the purchase price has been paid.

Judicial Foreclosure

A court proceeding requiring that property be sold to satisfy a mortgage lien.

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.

Real Estate Settlement Procedures Act (RESPA)

A federal law requiring the disclosure to borrowers of settlement (closing) procedures and costs by means of a pamphlet and forms prescribed by the United States Department of Housing and Urban Development.

Deed of Trust

A legal document by which a borrower pledges certain real property or collateral as guarantee for the repayment of a loan. It differs from the mortgage in a number of important respects. For example, instead of their being two parties to the transaction there are three. There is the borrower who signs the trust deed and who is called the trustor. There is the third, neutral party, to whom trustor deeds the property as security for the payment of the debt, who is called the trustee. And, finally, there is the lender who is called the beneficiary, the one who benefits from the pledge agreement in that in the event of a default the trustee can sell the property and transfer the money obtained at the sale to lender as payment of the debt.

Home Equity Loan

A loan against the equity in a home.

VA Loan

A loan made to qualified veterans for the purchase of real property wherein the Department of Veteran's Affairs guarantees the lender payment of the mortgage.

Purchase Money Mortgage

A mortgage given by a buyer to a seller to secure payment of all or part of the purchase price.

Fixed-rate Mortgage

A mortgage in which the interest rate does not change.

Balloon Mortgage

A mortgage in which the scheduled payment will not amortize the loan over the mortgage term; therefore, for the debt to be fully satisfied, a final payment called a balloon payment, larger than the uniform payments, is required.

FHA-insured Loan

A mortgage loan in which payments are insured by the Federal Housing Administration.

Adjustable Rate Mortgage (ARM)

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

Conventional Loan

A mortgage securing a loan made by investors without governmental underwriting, i.e., which is not FHA insured or VA guaranteed. The type is customarily made by a bank or savings and loan association.

Freddie Mac

A nickname for the Federal Home Loan Mortgage Corporation (FHLMC), a corporation wholly owned by the Federal Home Loan Bank System that purchases FHA, VA, and Conventional mortgages.

Ginnie Mae

A nickname for the Government National Mortgage Association (GNMA), a U.S. government agency that purchases FHA and VA mortgages.

Foreclosure

A procedure whereby property pledged as security for a debt is sold to pay the debt in event of default in payments or terms.

Release Clause

A stipulation that upon the payment of a specific sum of money to the holder of a trust deed or mortgage, the lien of the instrument as to a specifically described lot or area shall be removed from the blanket lien on the whole area involved.

Assignment

A transfer by a person of that person's rights under a contract.

Reserves

An accumulation of funds, collected by the lender from the borrower as part of each monthly mortgage payment, an amount allocated to pay property taxes and insurance when they are done.

PITI

An acronym denoting that a mortgage payment includes, principal, interest, taxes, and insurance.

Mortgage

An instrument recognized by law by which property is hypothecated to secure the payment of a debt or obligation; a procedure for foreclosure in event of default is established by statute.

Redemption

Buying back one's property after a judicial sale.

Subsidy Buydown

Funds provided usually by the builder or seller to temporarily reduce the borrower's monthly principal and interest payment.

Private Mortgage Insurance

Mortgage guaranty insurance available to conventional lenders on the first, high risk portion of a loan (PMI).

Negative Amortization

Occurs when monthly installment payments are insufficient to pay the interest accruing on the principal balance, so that the unpaid interest must be added to the principal due.

Usury

On a loan, claiming a rate of interest greater than that permitted by law.

Mortgagee

One to whom a mortgagor gives a mortgage to secure a loan or performance of an obligation; a lender or creditor.

Trustor

One who borrows money from a trust deed lender, then deeds the real property securing the loan to a trustee to be held as security until trustor has performed the obligation to the lender under terms of a deed of trust.

Mortgagor

One who gives a mortgage on his or her property to secure a loan or assure performance of an obligation; a borrower.

Trustee

One who holds property in trust for another to secure the performance of an obligation. Third party under a trust.

Straight Loan

Periodic payments of interest that are only for the life of the loan, with payment of the principle in full at the end of the loan.

Primary Mortgage Market

The activity of lenders making mortgage loans to individual borrowers.

Principle

The amount of money borrowed, or the amount of the loan.

Secondary Mortgage Market

The buying and selling of existing deeds of trust and promissory notes.

Interest

The charge in dollars for the use of money for a period of time.

Prepayment Penalty

The charge payable to a lender by a borrower under the terms of the loan agreement if the borrower pays off the outstanding principal balance of the loan prior to its maturity.

Federal Reserve System

The federal banking system of the United States under the control of central board of governors (Federal Reserve System) involving a central bank in each of twelve geographical districts with broad powers in controlling credit and the amount of money in circulation.

Beneficiary

The lender on the security of a note and deed of trust.

Amortization

The liquidation of a financial obligation on an installment basis.

Truth in Lending

The name given to the federal statutes and regulations (Regulation Z) which are designed primarily to insure that prospective borrowers and purchasers on credit receive credit cost information before entering into a transaction.

Fannie Mae

The shortened name for the Federal National Mortgage Association (FNMA), a privately owned corporation that purchases FHA, VA, and conventional mortgages.

Assumption of Mortgage

The taking of a title to property by a grantee wherein the grantee assumes liability for payment of an existing note secured by a mortgage or deed of trust against the property, becoming a co-guarantor for the payment of a mortgage or deed of trust note.

Conforming Loan

Those loans processed on uniform loan forms according to FNMA/FHLMC guidelines.

Reverse Annuity Mortgage

Used by older people who need additional income and want to take advantage of the equity in their homes.

"Subject To" a Mortgage

When a grantee takes title to real property subject to a mortgage, grantee is not responsible to the holder of the promissory note for the payment of any portion of the amount due.