Chapter 14: Real Estate Financing Principles

Front 1

mortgage

Back 1

lien on real property of a mortgagor

Front 2

mortgagor

Back 2

borrower who receives a loan and in return gives a note and mortgage to the mortgagee

Front 3

mortgagee

Back 3

lender

gives a satisfaction of mortgage when the mortgage is paid in full

Front 4

title theory

Back 4

where the mortgagor gives legal title to the mortgagee and retains equitable title

MA is a title theory state

Front 5

What's the difference between having legal title and equitable title?

Back 5

When you have legal title, you have full ownership of the property. When you have equitable title you only have an interest in ownership.

Front 6

lien theory

Back 6

mortgagor retains both legal and equitable title, but has a lien on the property as security for a mortgage debt

Front 7

hypothecation

Back 7

the act of pledging specific real property as collateral for a loan

Front 8

promissory note

Back 8

financing instrument; the borrower's promise to pay back the loan under agreed conditions

Front 9

note

Back 9

a negotiable instrument (check or bank draft)

Front 10

interest

Back 10

charge for the use of money

Front 11

payments in arrears

Back 11

payments made at the end of a period

Front 12

payments in advance

Back 12

payments made at the beginning of a period

Front 13

usury

Back 13

interest charged exceeds the maximum rate allowed by law

Front 14

loan origination

Back 14

process of mortgage application

Front 15

loan origination fee

Back 15

transfer fee charged when the mortgage loan is originated

will cover the expenses involved in generating the loan

Front 16

point

Back 16

1% of the amount borrowed

Front 17

discount points

Back 17

prepaid interest charged at the closing of a sale

can be used to buy down the interest rate of a mortgage

lender uses it to increase the lender's yield (rate of return) on its investment

Front 18

prepayment penalty

Back 18

a penalty charged against a mortgagor if he/she pays ahead of schedule

used to protect the lender's return

is outlawed in MA

Front 19

Loans that are exempt from prepayment penalties

Back 19

Any loans insured or guaranteed by the federal government or on those loans sold to Fannie Mae and Freddie Mac

Front 20

deed of trust

Back 20

conveys bare legal title

the beneficiary (lender) gives loan to the trustor (the borrower) in exchange for a note

the trustor then gives a deed of trust to the trustee (a 3rd party)

When the trustor pays back the loan to the beneficiary, the trustee releases the deed to the trustor

Front 21

bare legal title

Back 21

title without the right of possession

Front 22

Mortgagor responsibilities

Back 22

-pay the debt by the agreed terms
-pay all real estate taxes
-maintain property
-maintain insurance for property
-get lender authorization before making any major alterations on the property

Front 23

acceleration clause

Back 23

the right to accelerate the maturity of the debt if the borrower defaults

the lender can declare the entire debt due and payable immediately

Front 24

assignment of mortgage

Back 24

where a note may be sold to a 3rd party

Front 25

defeasance clause

Back 25

where the lender is required to discharge mortgage lien when the note (mortgage) has been fully paid

Front 26

release deed

Back 26

deed of reconveyance

a written request that the trustee conveys the tile to the property back to the grantor when the loan has been completely repaid

Front 27

escrow account

Back 27

aka impound

money put in a reserve fund to meet future real estate taxes and property insurance premiums

lenders usually require this from borrowers

Front 28

National Flood Insurance Act

Back 28

1994;

imposes certain obligations on lenders to set aside escrow for flood insurance for property in flood prone areas

Front 29

What does it mean when a property is sold "subject to" the mortgage?

Back 29

The buyer is not obligated to pay the debt in full, yet takes title.
However, if the buyer does not pay up the existing loan, the lender is able to foreclose the property in order to pay the debt. If the foreclosed property does not fully pay off the debt, the buyer is not responsible for the difference.

Front 30

alienation clause

Back 30

aka resale clause, due-on-sale clause, or call clause

clause that allows lenders to prevent a future purchaser from assuming a loan (usually when the original loan interest was low)

will either be able to declare the entire debt due when the property is sold or permit the buyer to assume the loan at an accepted interest rate

Front 31

In terms of mortgages, deeds of trust and other liens, which holds priority?

Back 31

Whichever mortgage/deed of trust was recorded first, and then other liens after it

Front 32

land contract

Back 32

contract for deed or installment contract

the buyer (vendee) agrees to make down payments and a monthly loan payment that includes interest, principal, and possibly real estate tax and insurance reserves; buyer holds equitable title

the seller (vendor) retains legal title to the property during the contract term; when debt is fulfilled, the vendee is granted clear title and if the vendee defaults in payments, he or she, may be evicted from the property

Front 33

owner financing

Back 33

the seller is the lender and secures his/her interest in the use of a deed, note, mortgage, deed of trust or land contract

Front 34

foreclosure

Back 34

legal procedure in which property pledged as security is sold to satisfy a debt

Front 35

3 types of foreclosure proceedings?

Back 35

judicial, nonjudicial, strict foreclosure

Front 36

judicial foreclosure

Back 36

goes through the courts; allows the selling of property after the mortgagee has been given sufficient notice

Front 37

nonjudicial foreclosure

Back 37

foreclosure that does not go through the courts

Front 38

strict foreclosure

Back 38

full legal title given to the lender if the borrower is not able to pay the debt off before the court given deadline; sufficient notice must be given to the borrower

Front 39

deed in lieu of foreclosure

Back 39

friendly foreclosure

mutual agreement between the lender and the borrower; does not eliminate junior liens like a normal foreclosure and the borrower has a note of bad credit in his/her credit report

Front 40

equitable right of redemption

Back 40

the borrower is able to redeem their property by paying whatever they owe, plus costs, after default but before the foreclosure sale

Front 41

statutory right of redemption

Back 41

the borrower is able to redeem property by paying redemption money within a set period of time after the foreclosure; the property then has no remaining debt and the borrower is able to take possession free from the defaulted loan

Front 42

deficiency judgment

Back 42

the mortgagee is entitled to a personal judgment against the mortgagor in the event the foreclosure did not produce enough money to pay off the debt