Section 14: Financing in CA

Question 1

mortgage

Answer 1

a legally binding instrument that creates a lien on a piece of property

Question 2

acceleration clause

Answer 2

a clause in a mortgage that makes the entire debt due immediately in the case of borrower default

Question 3

due-on-sale clause

Answer 3

a requirement that the borrower repay the loan when transferring ownership to another

Question 4

promissory note

Answer 4

a promise by a borrower to repay the loan

Question 5

prepayment penalty

Answer 5

an amount charged by the lender for interest lost when a borrower sells or pays off a loan early

Question 6

mortgagor

Answer 6

the borrower in a mortgage

Question 7

mortgagee

Answer 7

the lender in a mortgage

Question 8

fixed rate loan

Answer 8

a loan whose principal and interest payment remain the same over the life of the loan

Question 9

adjustable rate mortgage

Answer 9

loan whose rate is adjusted (usually annually) based on the behavior of the economic index with which it is associated

Question 10

bridge loan

Answer 10

a temporary loan often used by buyers who have not yet closed on their prior property

Question 11

swing loan

Answer 11

a loan of equity in a property obtained to use to purchase another property

Question 12

graduated payment mortgage

Answer 12

payments gradually adjust (usually upward) based on a predetermined schedule and amount over 5-10 years, and then remains consistent for the rest of the loan term

Question 13

growing equity mortgage

Answer 13

fixed rate mortgage where the monthly payments increase over time according to a set schedule or index

Question 14

reverse mortgage

Answer 14

allows a person to stay in one’s home while living off of the equity by “selling” it to a lender who makes payments to the homeowner in exchange for ownership interest in the property

Question 15

renegotiable-rate mortgage

Answer 15

long-term loan made up of short-term loans; at specified periods, borrowers have the option to renew their loan or immediately pay the remaining loan balance and interest due

Question 16

rollover mortgage

Answer 16

a type of renegotiable loan in which the interest rate is renegotiated at specified intervals (usually every 5 years)

Question 17

shared appreciation mortgage

Answer 17

mortgage in which the borrower initially receives an interest rate below the going market rate; in exchange, the lender receives equity or a percentage of the appreciation in the property’s market value

Question 18

discount point

Answer 18

upfront charge to make up for difference between the rate the borrower is receiving and the rate the lender normally requires; can be seen as the amount a lender charges to initiate a loan

Question 19

promissory note

Answer 19

a promise from the borrower (the obligor) to repay a certain sum of money to another party (the lender/holder of the note–obligee) under specified terms; negotiable instrument

Question 20

bond/mortgage bond

Answer 20

can be used to secure the mortgage instead of a promissory note; when this is used and borrower defaults, the borrower may face foreclosure

Question 21

lien theory

Answer 21

a state that adopts a lien theory goes under the presumption that a lender’s mortgage is a lien on the property

Question 22

deed of trust

Answer 22

(similar to a mortgage) document in which the borrower conveys title for the property to a trust, which holds it as security for the lender

Question 23

judicial foreclosure

Answer 23

foreclosure process requiring court proceedings

Question 24

non-judicial foreclosure

Answer 24

when a lender is able to sell a property (in the event of buyer default) without going through the court system; usually granted via a power-of-sale clause in the security instrument

Question 25

title theory

Answer 25

a title theory state says that the lender owns the property until the loan is paid off

Question 26

buydown

Answer 26

financing technique in which the buyer obtains a TEMPORARILY lower interest rate by buying down the interest rate (with a lump sum prepayment of interest) at the time that the loan is made

Question 27

principal (mortgage)

Answer 27

balance on the loan-- the actual amount owed

Question 28

Interest (mortgage)

Answer 28

the "fee" paid back to the lender for the use of their money; generally decreases over the life of the mortgage

Question 29

Taxes (mortgage)

Answer 29

includes property taxes-- which is the cost of public services divided by the value of property for the area)

Question 30

Insurance (mortgage)

Answer 30

may include mortgage, homeowner's, and/or flood insurance

Question 31

amortization schedule

Answer 31

document or chart that outlines the amount of each monthly payment of a mortgage

Question 32

fully amortized loans

Answer 32

also called "constant payment method"--the borrower's installment payment remains the same throughout the loan term; when a borrower makes mortgage payments based on the numbers outlined in an amortization schedule

Question 33

straight-line loan

Answer 33

type of mortgage wherein the portion of the payment applied to the principal remains the same with each payment, and the interest amount varies according to the outstanding loan balance; also called straight-line amortization or constant amortization

Question 34

Fannie Mae

Answer 34

Federal National Mortgage Association or FNMA; can purchase ANY type of loan, but primarily deals with conventional loans from commercial banks

Question 35

Freddie Mac

Answer 35

Federal Home Loan Mortgage Corporation or FHLMC; can purchase any type of loan, but primarily deals with conforming conventional loans from smaller lending institutions (thrifts)

Question 36

Farmer Mac

Answer 36

Federal Agricultural Mortgage Corporation; purchases agricultural loans and loans from rural lenders

Question 37

Ginnie Mae

Answer 37

Government National Mortgage Association or GNMA; guarantees mortgage-backed securities (MBSs) that contain loans insured or guaranteed by a U.S. government agency; does NOT purchase loans

Question 38

secondary mortgage market players

Answer 38

Fannie Mae, Freddie Mac, Farmer Mac, Ginnie Mae, or any lending institution that buys loans from other lenders

Question 39

Federal Reserve System

Answer 39

(also called the Fed) keeps the U.S.'s finances in check (avoiding runaway inflation and serious deflation) by regulating the flow of available funds and interest rates at each of its banks-- aka. Fed controls how much money is available and what banks can charge for that money

Question 40

primary mortgage market

Answer 40

where banks that originate loans operate; they have cash and loan it to borrowers; main players are homebuyers (borrowers) and lenders (commercial banks, credit unions, savings and loans, etc.)

Question 41

secondary mortgage market

Answer 41

a marketplace where investors buy and sell mortgages that have been securitized and packaged into groups

Question 42

qualified mortgage

Answer 42

a mortgage loan that meets specific ability-to-repay rules, including a prohibition on interest-only loans, negative amortization, balloon payments, or excessive loan terms (>30 years)

Question 43

ability-to-repay rule

Answer 43

lenders must research and document a borrower's income, assets, employment, credit history, and loan ratios to help ensure that the borrower has the ability to repay the loan

Question 44

CalVet loan requirements

Answer 44

no residency required; currently serving or honorably discharged; buying an owner-occupied home or farm in CA

Question 45

CalVet Loan Characteristics

Answer 45

max. loan amts. vary by county; term of 30 yrs; no prepayment penalty; below-market interest rates; low or no down payment; up-front funding fees, but no monthly mortgage insurance premiums; 1% loan origination fee

Question 46

private mortgage insurance (PMI)

Answer 46

an insurance requirement that protects the lender when it approves a loan with more than 75-80% of the purchase being financed

Question 47

negative amortization

Answer 47

type of loan in which the payments do not cover the interest due, which increases the amount owed over time

Question 48

balloon mortgage

Answer 48

a nontraditional mortgage product that has lower initial payments that do not amortize and request a "catch up" lump sum payment to be paid at a specific time, usually at the end of a loan period

Question 49

savings and loan associations (thrifts)

Answer 49

specialize in taking in savings deposits and then lending out through mortgages and other loans; required to keep their commercial lending at or under 20%-- so they're tied to consumers and mortgage loans

Question 50

commercial banks

Answer 50

Bank of America, Chase, Citigroup, etc make consumer and business loans, offer investment products, and take deposits

Question 51

Credit unions

Answer 51

member-based cooperatives that provide credit for auto and home loans; they take deposits and offer savings vehicles, money markets, etc; tend to be very competitive

Question 52

mortgage bankers

Answer 52

actually DO the lending; they have in-house loan processors and underwriters; can close pretty quickly because they fund their own loans, but their range of offerings is narrow because they're limited to their own products

Question 53

mortgage brokers

Answer 53

work with multiple lenders to search for and negotiate the best deal for a particular borrower's circumstances; don't loan the money out themselves

Question 54

investment groups

Answer 54

financier that lend specifically to people who want to avoid conventional financing-- such as other investors; they also purchase mortgage-backed securities

Question 55

land contract

Answer 55

contract between a seller and buyer in which the seller acts as the lender for the buyer, who purchases the property for an agreed-upon price. The seller retains the title to the property while the buyer gets the right of possession-- until the loan balance is paid in full.; aka "contract for deed", "land installment contract", or "installment sale agreement"

Question 56

purchase money mortgage

Answer 56

type of seller financing in which the seller issues a mortgage to the buyer (toward the purchase price) that buyers use as down payment financing; seller = mortgagee/lender, buyer=mortgagor/borrower

Question 57

wraparound mortgage

Answer 57

type of seller financing that wraps the new buyer's mortgage around the seller's existing mortgage; seller continues to make payments on the 1st mortgage and the buyer makes their own mortgage payments to the seller

Question 58

sale-leaseback

Answer 58

when an investor buys a property for cash and then leases it back to the seller; often occurs when a property is difficult to finance or when a business is strapped for cash; this provides income for the investor and allows the building owner to remain in the building while also freeing up capital that was "stuck" in real estate.