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Real Estate Finance


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mortgage
a two-party instrument used to finance real estate. the borrower pledges the property as collateral
mortgagor
the borrower in a mortgage Y65
lien theory state
a state that use a mortgage as the primary financing instrument; NC is not one Y65
deed of trust
a three-party instrument used to finance real estate. the borrower pledges the property as
trustor
aka grantor, the borrower in a deed of trust Y65
beneficiary
the lender in a deed of trust Y65
trustee
the holder of legal title in a dead of trust loan transaction on behalf of a beneficiary (lender) B623
title theory state
a state that uses the deed of trust as the primary financing instrument. NC is one Y65
promissory note
a legal instrument that evidences the debt that is secured by the deed of trust. lender holds note
key elements of a promissory note (3)
1. borrower promises to repay a fixed amount of money and agrees to be
alienation clause
prevents the borrower from letting someone else assume the debt without the lender's
prepayment penalty
requires the borrower to pay a penalty to the lender if the loan is paid off prematurely.
fixed rate level payment plan
interest rate and monthly payment (principal & interest) are fixed throughout the
amortization
the gradual liquidation or elimination of a debt over a period time through regular payments of
arrears
payments are made for the previous time period (ex. mortgage made on May 1 is for the month of April) Y66
graduated payment plan
monthly payments start out at a fixed amount that is lower than normal and then increase at
ARM
adjustable (variable) interest rate plan; the initial interest rate is lower than the current rate; lender
anniversary cap
aka periodic interest rate cap; limits the amount of increase or decrease in the interest rate at
lifetime cap
aka life of loan cap; establishes a ceiling that the interest rate cannot exceed during the life of
payment cap
limits the actual amount of increase in the borrower's monthly payment at each payment adjustment
term loan payment plan
aka straight loan - an interest-only loan with the principal repaid in full at the end of
balloon payment plan
a short term loan (usually 3-5 years) with a fixed rate of interested. at the end of the
buydown loan
the borrower pays a reduced interest rate and a lower monthly payment either temporarily or
power of sale clause
gives the trustee (3rd party) the power to foreclose if default occurs; trustee does not
rights of trustor in a deed of trust
1. has equitable title
rights of beneficiary in a deed of trust
1. has legal title
right of defeasance
the right of a borrower to clear the title by paying off the debt in full Y68
right of redemption
aka equity of redemption; the borrower's right to come forward at any time during the
statutory redemption period
the period in which the trustee holds the high bid open in a foreclosure sale
deficiency judgment
if the proceeds of a foreclosure sale do not cover the debt and expenses, the lender can sue
surplus of foreclosure
if the proceeds of a foreclosure sale net a surplus, the buyer will get the surplus Y68
cash sale
when a seller receives the full purchase price less any closing costs. any existing mortgage is paid
assumption of an exisitng mortgage/deed of trust
the buyer assumes the existing loan on the property and
purchase subject to existing mortgage
when a buyer takes title but does not become personally liable to either the
conventional loan
a loan made by an institutional lender; not insured or guaranteed by any government agency;
noninsured conventional loan
the loan-to-value ratio is 80% or less of the purchase price or appraised value,
insured conventional loan
the loan-to-value ration may be as high as 95% if it is insured by PMI; only covers
PMI
private mortgage insurance; for conventional loans; used to cover the shortfall, up to 20% of the loan-to-
MIP
mortgage insurance premium, for FHA loans; used to insure the entire loan amount Y70
discount points
when buyers prepay interest at closing; used to increase the yield on the load to the
FHA loan
made by an institutional lender and insured by the federal housing administration (FHA); borrowers
FHA 203(b) program
used on qualified 1-to-4 family homes; maximum loan amount is set locally and is based on
FHA 245(a) and (b)
provides mortgage insurance for graduated payment mortgages Y70
FHA 234(c)
used to purchase individual condominium units where the condo project complies with the HUD/FHA
VA loan
a loan made to an eligible military veteran that is guaranteed by the veteran's administration; can get 100%
entitlement
the maximum amount that the VA will guarantee; no maximum VA loan amount but the lender will lend
entitlement restoration (2)
1. veteran can sell the home and pay off the loan in full
CRV
certificate of reasonable value - a form completed by the VA appraiser that establishes the maximum value
rural economic and community development
aka USDA loan; the farm service agency helps farmers obtain credit
purchase money mortgage
a loan made directly from the seller to the buyer; the seller is not entitled to a
take out commitment/loan
a guarantee from a lender to make a longer term, amortizing loan to a builder if
open end mortgage
it allows the borrower to secure additional funds as he/she pays off the initial loan Y73
package mortgage
covers the real property and chattel of the borrower - usually used for sale of model homes,
reverse annuity mortgage
aka RAM when a property owner with equity in the property pledges it as security to
junior mortgage
any mortgage that is subordinate to another mortgage on the same property Y73
wraparound mortgage
when there are two different blocks of money within one mortgage. like a credit card with
mortgage brokers
usually represents multiple sources of funds; receives a fee or commission for services in
Fannie Mae
Federal National Mortgage Association a private for profit corporation and regulated on a limited
Ginnie Mae
Government National Mortgage Corporation aka GNMA; it approves loan poolers who buy large blocks of
borrower analysis
credit characteristics; adequacy of assets to close the transactions; stability of income;
recurring obligations
aka debt ratio; other mortgage payments, car loans, personal loan payments, credit card
Truth in Lending Act
provides a full disclosure of credit charges to the American consumer Y77
Truth in Lending Simplification and Reform Act (TILSRA)
a revision of the truth in lending act Regulation Z which
main disclosures of TILSRA (4)
Truth in Lending Simplification and Reform Act
credit advertising disclosures
if there is any number in the ad, it triggers regulation Z which states that all
ECOA
Equal Credit Opportunity Act - regulation B; creditors cannot discriminate because of:
fair credit reporting act
individuals have right to examine credit reports and update incorrect data; negative
leverage
using borrowed money to invest (the higher the loan-to-value ration, the higher the leverage) Y78
usury
the lending of money at an interest rate higher than maximum legal rate. currently 34.99% Y78
Administered Price System
Fannie Mae's method for purchasing mortgages according to daily economic indicators.
MBS
Mortgage backed securities.
Subprime Market
Mortgages granted using liberal qualifying standards.
Hypothecation
Borrower pledges collateral for a loan, while retaining ownership of the assets and enjoying the
Equitable Interest
A right in equity that, if violated (suffers a harm), is subject to satisfaction by an
Reserve Requirements
Member banks are required to keep a specific percentage of deposits in reserve with the
Commercial Paper
Loans issued by commercial banks. The Fed resells this paper in secondary market, thus
Discount Rate
Interest charged by member banks on funds borrowed from the Fed.
Prime Rate
Fed discount rate that banks use to determine the interest rate given to their prime customers.
Federal Funds Rate
Interest rate the Fed charges member banks for short-term (sometimes over night) loans that
Open-Market Operations
Used by Fed to balance economy. Purchase or sale of government securities by lots.
FHA
Federal Housing Administration
TILA
Truth in Lending Act - Reg Z. Requires lenders to reveal total cost of loan and APR.
APR
Annual Percentage Rate = Total loan cost.
Right of Rescission
Borrower has 3 days to resend on loans secured by primary residence (excluding home loans).
US Treasury
The Nation's fiscal manager.
Treasury Bonds, Notes & Bills
US long-term debt instruments, 30 year, 10 year and short term.
FDIC
Federal Deposit Insurance Corporation - Insures member accounts up to $250,000.
FHLB
Federal Home Loan Bank - 12 U.S. sponsored banks offering low-cost funding to banks for home mortgage loan
HUD
Housing & Urban Affairs - Supervises the FHA, directs Ginnie Mae, enforces Fair Housing & RESPA
RESPA
Real Estate Settlement Procedures Act - Protects consumers by providing closing cost
NSP
Neighborhood Stabilization Program - Help stabilize homes in areas with many foreclosures. Grants provided
ILSFDA
Interstate Land Sales Full Disclosure Act - Developer selling out-of-state must provide statement of record
GFE
Good Faith Estimate must be provided to consumer within 3 days of filling out loan application. RESPA
AFBA
Affiliated business disclosure when referred to business with ownership.
HUD-1 Settlement Statement
Must be given to borrower if requested it within 24 hours of closing.
Initial Escrow Statement
Must be given to borrower at closing or in 45 days after closing.
CMO
Collateralized Mortgage Obligation - secondary market
GSE
Freddie Mac and Fannie Mae - Government Sponsored Enterprises
FHFA
Federal Housing Finance Agency - Independent agency regulates Fannie Mae, Freddie Mac & Federal Home Loan
Fannie Mae Underwriting
80% LTV, min 3-5% downpayment
Jumbo Loans
Noncomforming Loans issued in excess of limits by GSEs.
REMIC
Real Estate Mortgage Investment Conduit - Administered by Ginnie Mae.
Who Makes RE Loans?
Primary Lenders and Financial Intermediaries
Demand Deposits
Checking Accounts
Interim Financing
construction loans.
Participation Financing
Lender requires partnership with developer.
Mortgage Bankers
Originate new loans and collect payments, inspect collateral, supervise foreclosure, manage
Warehouse Funds
Loan until loan goes through.
SAFE Act
Secure and Fair Enforcement Mortgage Licensing Act - Minimum standards for licensing.
Registered Bonds
Issued to a specific owner and cannot be transferred without owners signature.
Bearer Bonds
Interest paid to person possessing the bond.
Coupon Bonds
have interest coupons attached which are removed and become due and cashed by bearer.
Revenue Bonds
Funds specific community improvement projects for cities.
IRBs
Industrial Revenue Bonds used to finance industrial projects that will generate revenue used to pay the
Industrial Development Bonds
Allows investors to finance apt. and commercial developments tax exempt.
Mortgage Revenue Bonds
Tax exempt for investors limited to low-income buyers, first-time buyers, etc...
Zero Coupon Bonds
Discounted price held until maturity.
Encumberances
A right or interest in property held by one other than the legal owner. Includes easements,
Lien
Financial encumbrance.
Title Theory
Lender has greater rights until property paid off.
Lien Theory
Gives the borrowers more rights, equitable right of redemption
Legally enforceable lien
Mortgage + Note
Defeasance Clause
Defeats foreclosure by stating mortgagor wil get full title upon repayment
I=PRT
I = Interest
Interest Rate Caps
Highest amount that an adjustable rate mortgage will go.
Index
Adjustable rate mortgage goes by an index to which a margin can be applied.
GPM
Interest rates lower in early years of the loan. Neg amort will increase
Home Equity Loans
Were prohibited. CLTV
HELOC
Home Equity Line of Credit.
Reverse Annuity Mortgage RAM
Borrower owns home.
Fannie Mae / Freddie Mac Conforming
PITI shall not exceed 28% of borrowers gross monthly income / 36% long-term
Sale & Leaseback
Owner sells to investor then leases it back.
Minimum down payment FHA
3.5 %
loan origination fee
fee charged by a mortgage broker to arrange a loan
types of foreclosures
(1) judicial - uses court
statutory right of redemption
defaulted owners right to recover property by paying fees and charges AFTER SALE
equitable right of redemption
defaulted owners right to recover property by paying fees and charges BEFORE SALE
note
(promissory note)
owner financing
seller is primary lender.
payments in arrears
end of pay period, first of following month.
payments in advance
beginning of pay periods
mortgage lien
lien theory - judicial - uses court.
floating rate
prime lending rate
subject to
getting property from someone with mortgage
federal reserve system
creates good economic climate
primary mortgage market
lenders that originate mortgage loan.
second mortgage market
loans are bought/ sold after they are funded. assembles mortgages into packages (pools).
sale and leaseback
seller sells to investor then investor leases it back to seller. used for large commercial
CLO
electronic network for handling loan applications through remote computer terminals linked to many lenders.
computerized loan origination
CLO stands for...
amortized loan
pays off principal and interest at same time in equal installments.
certificate of reasonable value
CRV stands for...
package loan
real estate loan for real and personal property
open-end loan
debt can be opened back up after certain amount is paid back to increase debt. interest on initial
straight loan
(interest only mortgage) (term loan)
wraparound loan
new loan encompasses existing loan so it makes payments on old loan while you make payments on this
blanket loan
mortgage covers more than one parcel of real estate.
partial release clause
in blanket loan; one parcel released from blanket lien when certain amount is paid.
construction loan
finance the construction of improvements.
draws
for construction loan; smaller installments lender makes after inspecting previous work done and if
take out loan
for construction loan; borrower arranges permanent loan at end of construction loan to pay back
conforming loan
description of loan;
LTV
loan to value ratio is how mortgages are classified.
adjustable rate mortgage
ARM stands for...
red caps
used for ARM; limits amount interest rate can change in one year and limits change overall.
growing equity mortgage
monthly payments increase annually. increased part of monthly installment goes straight to
home equity mortgage
(line of credit)
PMM
seller financing
private mortgage insurance
PMI stands for...
mortgage insurance premium
MIP stands for...
buy down
financing technique that reduces interest rate for first few years - low monthly payments.
balloon payment
large payment at the end of loan to pay off loan.
Adjustable-Rate Mortgage (ARM)
A loan characterized by a fluctuating interest rate, usually one tried to a bank or
Buydown
A financing technique used to reduce the monthly payments for the first few years of a loan. Funds in the
Certificate of Reasonable Value (CRV)
A form indicating the appraised value of a property being financed with a VA
Community Reinvestment Act of 1977 (CRA)
Under the act, financial institutions are expected to meet the
Computerized Loan Organization (CLO)
An electronic network for handling loan applications through remote
Equal Credit Opportunity Act (ECOA)
The federal law that prohibits discrimination in the extension of credit
Federal Deposit Insurance Corporation (FDIC)
An independent federal agency that insures the deposits in
Federal Reserve System (Fed)
The country's central banking system, which is responsible for the nation's monetary
Growing-Equity Mortgage
A loan in which the monthly payments increase annually, with the increased amount being used
Home Equity Loan
A loan (sometimes called a line of credit) under which a property owner uses his or her
Interest-Only Mortgage
A mortgage that only requires the payment of interest for a stated period of time with the
Loan-To-Value (LTV) Ratio
The relationship between the amount of the mortgage loan and the value of the real
Mortgage Insurance Premium (MIP)
The FHA insurance that the borrower is charged with a percentage of the loan
Private Mortgage Insurance (PMI)
Insurance provided by private carrier that protects a lender against a loss
Purchase-Money Mortgage (PMM)
A note secured by a mortgage or deed of trust given by a buyer, as borrower, to a
Real Estate Settlement Procedures Act (RESPA)
The federal law that requires certain disclosures to consumers about
Regulation Z
Implements the Truth in Lending Act requiring credit institutions to inform borrowers of the true
Sale-and-Leaseback
A transaction in which an owner sells his or her improved property and, as part of the same
Secondary Mortgage Market
A market for the purchase and sale of existing mortgages, designed to provide
Straight (term) Loan
A loan in which only interest is paid during the term of the loan, with the entire principal
Trigger Terms
Specific credit terms, such as down payment, monthly payment, and amount of finance charge of term
Truth in Lending Act (TIL)
Federal government regulates the lending practices of mortgage lenders through this
adjustable rate mortgage (ARM)
a loan characterized by fluctuating interest rate, usually one tied to a published
amortized loans
a loan in which principal as well as interest is payable in periodic installments over the term of
debt service
the principal and interest payment on a loan.
deficiency judgement
a personal judgement levied against the borrower when a foreclosure sales deos not produce
direct reduction loans
a mortgage loan that requires a fixed amount of principal payment in each period; the total
discounts points
interest paid in advance; one point equals 1 percent of the loan amount for the borrower and
foreclosure
a legal procedure whereby property used as security for a debt is sold to satisfy the debt in the
graduated payment mortgage (GPM)
a loan in which the monthly principal and interest payments increase by a
grantor/trustor
the property owner that is transferring title to or an interest in real property to a grantee. A
interest
a charge made by a lender for the use of money.
judicial foreclosure
the form of foreclosure used in lien theory states.
mortgagee/mortgagor
a mortgagee is the lender in a mortgage loan transaction; a mortgagor is the borrower in a
negative amoritization
when the debt service payment on a loan is not large enough to pay the interest due, the
negotiable instrument
a written promise or order to pay a specific sum of money that may be transferred by
power of sale foreclosure
the form of foreclosure used in a title theory state, such as NC; also called
satisfaction of mortgage
a document acknowledging full repayment of a mortgage debt.
short sale
when a lender allows a borrower in default on mortgage loan payments to sell the mortgaged property
term loan
a loan in which only interest is paid during the term of the loan, with the entire principal due
yield
the return on investment; amount of profit. yield rate should always be higher than the interest rate.
non-judicial foreclosure
Type of foreclosure used in title theory states includes NC.
2-parts to a mortgage loan
the debt itself and the security for the debt. promissory note is written promise to
3-types of amortized loans
fully fixed-rate; partially fixed-rate; and straight-line (as in a direct reduction
calculating interest
interest = principal x rate x time
fixed-rate mortgage
most popular repayment plan. fully amortized. also known as a level-payment, simple interest
PITI
Principal, Interest, Taxes and Insurance.