Term
|
Definition
| a financing instrument that creates a lien against a property. |
|
|
Term
|
Definition
| The lender who gives the money |
|
|
Term
|
Definition
| borrower who gets the mortgage |
|
|
Term
| promissory note, a "note" or a "bond" |
|
Definition
| a document that describes the amount of money borrowed, the terms under which it will be repaid, and any conditions that relate to either the borrowing of the money or the consequences in event of default. |
|
|
Term
|
Definition
| A mortgage always needs a note to be legally valid. In the event of default by the purchaser, the lender has the right to bring legal action through the courts to satisfy the debt. |
|
|
Term
|
Definition
Identification of participants - The names of the mortgagor (borrower) and the mortgagee (lender) are listed on the mortgage document.
Property description - This should be a proper legal description of the property. In addition to the real property, many forms include a statement that pledges the property, anything permanently attached to it and all of the mortgagor's rights in the property as collateral for the loan.
Attachment of note - Most mortgages do not describe in detail all the terms of the note. The mortgage document simply refers to the note, stating in some way that the borrower will pay the full sum due according to the terms of the note. |
|
|
Term
| Preservation and maintenance of property |
|
Definition
| his clause requires the borrower to maintain the physical condition of the property and to not allow any abuse or destructive use that would reduce the value of the property. |
|
|
Term
|
Definition
| This clause states that if the borrower repays the debt when due, the words of grant are void, the mortgage is canceled and the title is given back to the borrower. |
|
|
Term
|
Definition
| This is a form of acceleration clause that requires the borrower to pay off the entire mortgage debt when the property is sold. The due-on-sale clause is also known as an alienation clause, a non-assumption clause, a call clause or a right-to-sell clause. |
|
|
Term
|
Definition
| A monthly mortgage payment is generally made up of four parts: principal, interest, taxes and insurance |
|
|
Term
|
Definition
| Sometimes lenders allow a grace period to make the monthly payments. The grace period is an agreed-upon time period after the payment is due in which the borrower can still make the payment and not be considered in default. |
|
|
Term
|
Definition
| The lender also has the right to assign the mortgage. This right of assignment allows the lender to sell the mortgage at any time and free up the money that the lender has invested. |
|
|
Term
| Sale "Subject To" a Mortgage |
|
Definition
| If a grantee takes title to a property "subject to" a mortgage, that person is not personally liable to the lender for payment of the mortgage. The seller is still responsible for making the mortgage payments. |
|
|
Term
|
Definition
| he act of acquiring title to a property that already has an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including the payments |
|
|
Term
|
Definition
| When a mortgage is paid in full, the lender will issue a certificate called a satisfaction of mortgage. This document is also called a release of mortgage. It describes the mortgage, says where it is recorded, certifies that it has been paid and consents that the mortgage is discharged. It is vital that this document of satisfaction also be recorded. |
|
|
Term
| what is a straight loan or term mortgage? |
|
Definition
| also called an interest-only loan, the monthly payments are allocated only to interest. No principal is paid off. At the end of the term, the borrower must be able to pay off the entire principal amount or get another loan. |
|
|
Term
| what is an amortized loan? |
|
Definition
| With an amortization plan, a borrower makes a periodic (usually monthly) payment of principal plus interest. These payments result in the loan being paid off gradually over time. |
|
|
Term
| the borrower has the same payment amount every month with what type of loan? |
|
Definition
|
|
Term
|
Definition
| With a straight amortized loan, the borrower pays a different amount with each payment. A fixed amount goes to the principal with each payment. The interest amount changes as the principal balance declines. |
|
|
Term
|
Definition
| is a loan that has one large final payment due when the loan matures. Balloon payment loans are partially amortized loans. This means that the monthly payments are not large enough to fully amortize the loan by the end of the term, leaving the large balloon payment due. |
|
|
Term
|
Definition
|
|
Term
| what is the index in regards to an ARM? |
|
Definition
| An index is a measure of economic conditions. Some of the most popular ones are the one-year Treasury Bill, the five-year Treasury note, the Cost of Funds Index and the Federal Home Loan Bank average. The lender selects an index and uses that as the starting point for the rate calculation. The interest rate is typically the index plus the margin. |
|
|
Term
| what is the margin in regards to an ARM? |
|
Definition
| The lender sets a margin, usually between two percent and three percent, at the time of a loan's origination. The margin is added to the current index to set the interest rate, providing the lender the desired yield on the loan. |
|
|
Term
| what is the calculated rate or note rate in an ARM? |
|
Definition
| The index plus the margin establishes the calculated rate, or note rate. Since borrowers share the risk with the lender in an ARM, the interest rates tend to be less than fixed rate loans. Further, to increase the marketability of ARMs, lenders often offer a lower initial or "teaser" rate. |
|
|
Term
| what is the initial rate in an ARM? |
|
Definition
| The initial rate is lower than the current market rate and is fixed only for the first adjustment period set by the lender at the origination of the loan. In all probability, the interest rate will increase in the second adjustment period. This sudden increase in payment may create a serious problem for the borrower. |
|
|
Term
| what is the adjustment period on an ARM? |
|
Definition
| An ARM loan specifies a specific time at which the interest rate may change. The adjustment period may be for any period of time but one year, three years and five years are the most common. A multi-year ARM usually converts to a one-year adjustable after the first adjustment period. An ARM is still a 15- or 30- year loan with specific adjustment periods. |
|
|
Term
| what is the mortgage payment adjustment period for an ARM? |
|
Definition
| This determines when the lender will change the amount of the monthly payment to reflect the change in the interest rate. Typically, this period corresponds to the interest rate adjustment period. In such a case, the payment will go up when the interest rate goes up. Conversely, if the interest rate goes down, the monthly payment will go down as well. |
|
|
Term
| what are interest rate caps on an ARM? |
|
Definition
| To protect borrowers from unlimited increases in the interest rate, lenders establish "rate caps." The first cap (the periodic cap) sets the amount of increase (or decrease) allowed in each adjustment period. The second cap (overall or aggregate cap) sets a maximum interest-rate increase over the life of the loan. A two percent increase in the interest rate results in approximately a 15 percent increase in the monthly payment. These rate caps are also known as ceilings or lifetime caps. |
|
|
Term
| what is a payment cap on an ARM? |
|
Definition
| It is important to understand the difference between an interest rate cap and a "payment" cap. A payment cap ensures a set monthly payment that remains the same although the actual interest rate may fluctuate throughout the year. A common payment cap is 7.5 percent of the initial payment. In this instance a monthly payment of $900 could not vary either up or down by more than $67.50 per month in any one-year period. |
|
|
Term
| what is a negative amortization cap on an ARM? |
|
Definition
| This cap limits the amount of unpaid interest that the lender can actually add to the principal balance. Usually a negative amortization cap limits the total amount the borrowers can owe to 125% of the original loan amount. |
|
|
Term
| government-backed loans include: |
|
Definition
The Federal Housing Administration (FHA)
The Department of Veterans Affairs (DVA) - sometimes simply referred to as VA
Rural Housing Service (RHS) |
|
|
Term
| true or false: Some conventional loans carry prepayment penalties, while government-backed loans do not. |
|
Definition
|
|
Term
| Fixed-rate fully amortized loans have two distinct features. |
|
Definition
The interest rate remains fixed for the life of the loan.
The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. |
|
|
Term
| what is PMI on a conventional loan? |
|
Definition
| a borrower can get a conventional loan with a lower down payment than 20% by insuring the loan through a private mortgage insurance program (PMI). |
|
|
Term
| when does PMI terminate on a conventional loan? |
|
Definition
The PMI payments will terminate once the loan has been repaid to a certain level. A federal law called the Homeowners Protection Act requires that any loans originated after July 1999 must have the PMI terminated after the borrower:
Has accumulated 22% of equity in the property (loan-to-value ratio is 78%).
Is current with all loan payments. |
|
|
Term
| What kind of problem can result from a straight loan? |
|
Definition
| A straight loan is an interest-only loan. If the property doesn't appreciate in value over time, the borrower could end up with less in proceeds on the sale than what he needs to pay off the loan. |
|
|
Term
| What kinds of limits are placed on the interest rate in an adjustable rate mortgage? |
|
Definition
| Interest rate caps limit the amount of interest the borrower can be charged. Periodic caps limit the amount the rate can change at any one time. Overall (or aggregate) caps limit the amount the interest can increase over the life of the loan. |
|
|
Term
| List two advantages of conventional loans over government-backed loans. |
|
Definition
Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days.
There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency. |
|
|
Term
| What does federal law say about the termination of private mortgage insurance? |
|
Definition
| Federal law requires that any loans originated after July 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments. However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI. |
|
|
Term
| graduated payment mortgage (GPM) |
|
Definition
| the monthly payment for principal and interest gradually increases by a certain percentage each year for a certain number of years and then it levels off for the remaining term of the mortgage. This type of plan might be especially attractive to someone who is just starting a career and expects that his or her income will increase over time. |
|
|
Term
| pledged account mortgage (PAM) |
|
Definition
| is a type of graduated payment mortgage under which the owner/borrower contributes a sum of money into an account that is pledged to the lender. The account is drawn on during the first three to five years of the loan to supplement the periodic mortgage payments, thereby reducing the borrower's monthly payments in the initial years. Once the account is empty, the borrower makes the full mortgage payment. |
|
|
Term
|
Definition
is an expandable loan which gives a borrower a limit up to which he or she may borrow. Each incremental advance must be secured by the same mortgage and any advances may not exceed the original borrowing limit.
The interest rate on the original amount borrowed is fixed. But the interest rate on any future advances can be at the prevailing rate at the time of the advance. |
|
|
Term
|
Definition
loan covers more than one piece of property. Land developers commonly use blanket mortgages when they buy a plot of land and divide it into many separate lots.
A blanket loan usually includes a clause called a partial release clause. This clause allows the borrower to obtain a release of any individual lot from the lien by repaying a certain part of the loan. The lender will issue the partial release for the one lot, with the provision that the mortgage will continue to cover the remaining lots. |
|
|
Term
|
Definition
| allows a borrower who has an existing loan to get another loan from a second lender without paying off the first loan. The second lender issues a new larger loan to the borrower at a higher interest rate. The new loan is a combination of the first loan and the second loan. The borrower makes the new higher payments to the second lender and then the second lender pays the first lender out of those funds. |
|
|
Term
|
Definition
is a short-term loan that covers the period between the end of one loan and the beginning of another. Bridge loans are typically used in two situations.
To cover the time period between the end of a construction loan and the issue of a permanent loan on a property.
When a person needs to borrow money on his or her unsold home (a second mortgage of sorts) to fund the acquisition of a new home. This is useful when a seller will not accept a property sale contingency. |
|
|
Term
|
Definition
| A purchase money mortgage is most commonly a technique in which the buyer borrows from the seller in addition to the lender. The purchase money mortgage is created at the time of the purchase and delivered at the time the property is transferred as part of the sale transaction. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount, so the seller "takes back" a portion of the purchase price as a second mortgage. |
|
|
Term
|
Definition
| As we discussed in an earlier chapter, with an installment land sales contract, also called a contract for deed, the buyer does not receive legal title until the final payment is made. The seller keeps legal title until the debt is paid in full. The buyer receives equitable title until the debt is fully paid. |
|
|
Term
|
Definition
| to finance the construction of improvements to property, such as homes, apartments and office buildings. The lender commits to the full amount of the loan, but disburses payments over the life of the construction project. The payments are made to the general contractor or the owner for the parts of the construction completed since the last payment. |
|
|
Term
|
Definition
Owners have the ability to borrow against the equity they have built up in their home. Homeowners can use a home equity loan for:
Purchasing high dollar items.
Taking a vacation.
Consolidating other loans or credit card debt.
Paying medical expenses.
Paying college tuition.
Making home improvements. |
|
|
Term
|
Definition
| is one that includes all the personal property and appliances that are installed on the property. This type of loan has been used extensively in the sale of furnished condominiums. |
|
|
Term
| Reverse Annuity Mortgage (RAM) |
|
Definition
| is quite different from the others. With a reverse annuity mortgage, the lender is making payments to the borrower. This system allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell. The borrower pays a fixed rate of interest and then repays the loan either when the home sells or from the borrower's estate upon his or her death. |
|
|
Term
|
Definition
| s a form of participation mortgage in which the lender shares in the appreciation of a mortgaged property if and when the property sells. The borrower agrees to the lender's participation in the income, inducing the lender to make the loan. This is more common with commercial properties, but can also be done with residential mortgages. |
|
|
Term
| sale and leaseback arrangement |
|
Definition
s typically used by commercial enterprises to free up money that has been tied up in the real estate to use as working capital in the business.
The owner of the real estate sells the property and then leases it back from the buyer. The buyer becomes the owner and the former owner becomes the tenant. |
|
|
Term
| Greg and Joyce purchased a home from the builder who offered to pay $5,000 at closing as an incentive to get them to buy. What kind of mortgage will they get? |
|
Definition
|
|
Term
| What is a release clause and in what type of mortgage would you find this clause? |
|
Definition
| This clause, found in a blanket mortgage, allows the borrower to obtain a release of any individual lot from the lien by repaying a certain part of the loan. The lender will issue the partial release for the one lot, with the provision that the mortgage will continue to cover the remaining lots. |
|
|
Term
| Define a purchase money mortgage. |
|
Definition
| With a purchase money mortgage, the buyer borrows from the seller in addition to the lender. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount; so the seller "takes back" a portion of the purchase price as a second mortgage. |
|
|
Term
| when was the federal housing admin (FHA) established? |
|
Definition
| The Federal Housing Administration (FHA) was established in 1934 during the great depression to stimulate the housing market in the United States. |
|
|
Term
|
Definition
| The Department of Housing and Urban Development (HUD) oversees the FHA |
|
|
Term
|
Definition
FHA does not build homes or loan money directly. They insure loans made by approved lending institutions, including qualified mortgage companies, savings and loan associations and commercial banks. FHA-insured loans protect lenders against any loss they would suffer from a borrower's default.
The maximum loan fee is 1 percent of the loan amount and is typically paid by the buyer. |
|
|
Term
| what is MIP on an FHA loan? |
|
Definition
| As of 2006, the borrower must pay two insurance premiums. The first is the "upfront" Mortgage Insurance Premium (MIP), which is a percentage of the loan amount. The borrower can pay this one-time premium at closing or the charge could be financed with the loan. This premium could be paid by some other party, such as the seller. The second premium, called Mutual Mortgage Insurance (MMI), is a monthly premium that is paid with the monthly principal, interest, taxes and insurance payment. |
|
|
Term
| for an FHA loan, what kind of appraisal do you need? |
|
Definition
| The mortgaged real estate must be appraised by an approved FHA appraiser. These appraisals are called "conditional commitments" and are good for six months on existing property and one year on new construction. |
|
|
Term
| true or false: The borrower must occupy the property. |
|
Definition
|
|
Term
|
Definition
In order to make this VA mortgage loan acceptable to lenders, the VA agreed to guarantee the top portion of the loan. Since lenders were now protected in the event of a default by the borrower, lenders agreed to loan four times the current DVA Entitlement.
The basic entitlement of a DVA loan is $36,000; although some loans are eligible for up to $60,000 if they are over $144,000. |
|
|
Term
| what is a Certificate of Eligibility in regards to a VA loan? |
|
Definition
| The veteran must provide a Certificate of Eligibility showing the amount of entitlement available. The entitlement is the maximum number of dollars that DVA will pay if the lender suffers a loss. The following veterans are eligible, based on time spent in the service. |
|
|
Term
| true or false: The loan origination fee cannot exceed 1 percent of the loan amount. |
|
Definition
|
|
Term
| what is the VA funding fee? |
|
Definition
The funding fee is a percentage of the loan amount charged for the privilege of obtaining a VA loan. This fund is used for administrative costs and to offset losses incurred in cases of default by the borrower. It is very similar in function to FHA mortgage insurance premiums.
The veteran can pay the fee up front or choose to finance it as part of the loan, as long as it does not increase the loan amount beyond the maximum allowed. If so, it must be paid separately by either the veteran or the seller. |
|
|
Term
|
Definition
The following persons are exempt from paying the funding fee:
Veterans receiving VA compensation for service-connected disabilities
Veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay
Surviving spouses of veterans who died in service or from service-connected disabilities (whether or not such surviving spouses are veterans with their own entitlement and whether or not they are using their own entitlement on the loan) |
|
|
Term
| what is a Certificate of Reasonable Value (CRV)? |
|
Definition
An approved VA appraiser must issue a Certificate of Reasonable Value (CRV) showing the value of the property to be equal to or greater than the sales price. The CRV is valid for six months on existing property and 12 months on new construction.
The DVA will never issue a certificate that shows the value to be greater than the sales price. For example, if a home is selling for $300,000 and the appraisal comes in at $325,000 the CRV will be $300,000. On the other hand, if the sales price is $300,000 and the appraisal is $275,000, the CRV will be $275,000. |
|
|
Term
|
Definition
Rural Housing Service (RHS) was created in 1994 as a result of the Department of Agriculture Reorganization Act to meet housing and community development needs of rural America.
The USDA Rural Housing Service has various programs available to aid low-to-moderate-income rural residents to purchase, construct, repair, or relocate a dwelling and related facilities. Qualified homebuyers can get loans with minimal closing costs and no down payment. |
|
|
Term
|
Definition
| Applicants for direct loans from RHS must have very low or low incomes. Even though there is no required down payment, families must be able to afford the mortgage payments, including taxes and insurance. In addition, applicants must be without adequate housing and be unable to obtain credit elsewhere, yet have acceptable credit histories. Loans are typically made for up to 33 years. |
|
|
Term
| Guaranteed Loan Program (RHS) |
|
Definition
The Rural Housing Service guarantees loans made by private sector lenders. This means that if the individual borrower defaults on the loan, RHS will pay the private financier for the loan.
The purpose of this loan program is to enable eligible low-and moderate-income rural residents to acquire modestly priced housing for their own use as a primary residence. The program is available for the purchase and repair of existing and newly constructed homes. |
|
|
Term
| FHA and VA loans differ from conventional loans in what important way? |
|
Definition
| FHA and VA do not loan funds directly. FHA insures loans and VA guarantees loans, but the loans themselves are made by approved, qualified lenders. |
|
|
Term
| What kind of insurance does FHA require borrowers to pay? |
|
Definition
| As of 2006, the borrower must pay two insurance premiums. The first is the "upfront" Mortgage Insurance Premium (MIP), which is a percentage of the loan amount. The borrower can pay this one-time premium at closing or the charge could be financed with the loan. The second premium, called Mutual Mortgage Insurance (MMI), is a monthly premium that is paid with the monthly principal, interest, taxes and insurance payment. MMI premiums may be dropped when the remaining loan balance is 80 percent loan-to-value ratio or less. |
|
|
Term
| What is a Certificate of Reasonable Value and what is it used for? |
|
Definition
| A Certificate of Reasonable Value (CRV) shows the value of a property in relation to its sales price. It is issued by an approved VA appraiser when a veteran is seeking a DVA loan. |
|
|
