Financing Flashcards
(46 cards)
Title Theory
In title theory states, the borrower must give legal title to the lender
Lien Theory
In lien theory states, the mortgagor retains title and give the mortgagee a lien as a security for the debt
Promissory Note
Promise to repay; can include a prepayment clause & an acceleration clause; secured by a mortgage or deed of trust
Prepayment Clause
Privilege to pre-pay
Acceleration Clause
Speeds up the note when the borrower is in default
Mortgage and deed of trust (security instruments)
Contract that pledges property as security for repayment without giving up possession
Causes of Foreclosure & Default
- Nonpayment of principal & interest
- Nonpayment of taxes
- Inadequate or no insurance
- Waste
- Due on sale clause/alienation
Due on Sale Clause/Alienation
Stops assumption without the lender’s consent; allows the lender to accelerate the loan if the borrower sells the property without paying off the loan
Mortagor
Borrower
Mortgagee
Lender
Deed of Trust as a 3 Party Instrument
Trustor = borrower, beneficiary = lender, trustee = third party
Satisfaction (Defeasance)
- when a mortgage note is paid, mortgagee gives satisfaction to release lien
- when dee of trust is paid, trustee gives deed of reconveyance to release lien
Foreclosure
A legal procedure whereby property used as security for a debt is taken by a creditor is sold to pay off the debt
Insufficient proceeds from a foreclosure sale could result in a deficiency or personal judgment
A foreclosure removes all liens from the property
Deed in Lieu of Foreclosure
An alternative to foreclosure (mortgagor deeds to mortgagee); DOES NOT wipe secondary liens, if a lender accepts a deed in lieu of foreclosure, then the lender would take title subject to any junior liens
Short Sales
Occurs when a seller is in default prior to foreclosure; a broker sells the property for a price lower than what is on the loan and the lender may require the seller to pay the deficiency
Term/straight/interest-only loan
Only interest is paid until maturity at the end of the term, this loan has a SMALL monthly payment but a LARGE balloon payment; the full amount of the principal (balloon) is due at the end
Partially Amortized
Repaid in equal payments of principal and interest; LARGER payment than a term loan but SMALLER than a fully amortized loan; has a balloon payment at the end of the term that will be smaller than the original loan amount
Fully Amortized
Loan is repaid in equal payments of principal and interest with the balance paid in the last payment so there is no balloon; payments are large than a term or partially amortized and are made at regular intervals; interest is paid in arrears
Adjustable-Rate Mortgage (ARM)
- Rate subject to change based on changes in an economic index
- May include interest and/or payment caps;
- Interest rate = Index + Margin (e.g., 5% index + 2% margin = 7% interest)
Budget (PITI)
The borrower pays P&I plus 1/12 taxes and 1/12 insurance into the lender’s impounded escrow account (interest & taxes are deductible)
Reverse Mortgage
- Mortgagee makes payments to mortgagor over a specific term;
- Used to obtain money from the equity in the home when a senior does not want to sell but needs cash (MUST be 62 or older);
- Is due upon sale of the property (death of the mortgagor(s), or at the end of the term
Line of Credit
Allows the borrower to obtain further advances at a later date (future advance limited to the difference between original loan amount and current amount owed)
Subprime Loans
Borrower is at higher risk, so the loan is more likely to default; a higher-than-prime rate is charged because the borrower and/or the property is used as security is a higher risk than a prime borrower (e.g., prime rate might be 6% and the subprime would be 8%)
Contract for Deed/Land Contract/Installment Contract
- Seller (vendor) who retains legal title holds the deed; buyer (vendee) has equitable title;
- Buyer takes possession when the contract is signed;
- Seller transfers title via a deed when the buyer makes the final payment
