15: Real Estate Financing Principles

Unit 15: Real Estate Financing: Principles

Acceleration Clause

The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or other covenant

Alienation Clause

The clause in a mortgage or deed of trust that states that the balance of the secured debt becomes immediately due and payable at the lender’s option if the property is sold by the borrower. In effect, this clause prevents the borrower from assigning the debt without the lender’s approval.

Beneficiary

A lender in a deed of trust loan transaction. Also called a legatee.

Certificate of Sale

The document generally given to the purchaser of delinquent property taxes at a tax foreclosure sale.

Deed in Lieu of Foreclosure

A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage. This is a way for the mortgagor to avoid foreclosure

Deed of Trust

An instrument used to create a mortgage lien by which the borrower conveys title to a trustee, who holds it as security for the benefit of the note holder (the lender). Aka trust deed.

Defeasance Clause

A clause used in leases and mortgages that cancel a specified right upon the occurrence of a certain condition, such as cancellation of a mortgage on repayment of the mortgage loan.

Deficiency Judgement

A personal judgement levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full.

Discount Point

A unit of measurement used for various loan charges; one point equals 1% of the amount of the loan.

Equitable Right of Redemption

The right of a defaulted property owner to recover the property before its sale by paying the appropriate fees and charges

Equitable Title

The interest held by the vendee under a contract for deed or an installment contract; the equitable right to obtain absolute ownership to property when legal title is held in another’s name.

Escrow Account

The trust account established by a sponsoring broker under the provisions of the license law for the purpose of holding funds on behalf of the sponsoring broker’s principal or some other person until the consummation or termination of a transaction. Also called a trust account.

Foreclosure

The legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. This procedure brings the rights of all parties to a conclusion and passes the title in the mortgaged property to either the holder of the mortgage or a third party, who may purchase the realty at the foreclosure sale, free of all encumbrances affecting the property subsequent to the mortgage.

Hypothecation

To pledge property as security for an obligation or loan without giving up possession of it.

Interest

A charge made by a lender for the use of money

Intermediate Mortgage Theory

Theory based on the principles of title theory states but still requiring the mortgagee to formally foreclose to obtain legal title.

Judicial Foreclosure

Type of foreclosure that allows the property to be sold by court order after the lender has given sufficient public notice to the defaulting borrower

Land Contract

A contract for the sale of real estate whereby the purchase price is paid in periodic installments by the purchaser, who is in possession for the property even though title is retained by the seller until all payments are received in full. Also called a contract for deed or an articles of agreement for warranty deed.

Lien Theory

A right given by law to certain creditors to have their debts paid out of the property of a defaulting debtor, usually by means of a court sale.

Loan Origination Fee

A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount.

Mortgage

1. A conditional transfer or pledge of real estate as security for the payment of debt

2. The document creating a mortgage lien

Mortgagee

A lender in a mortgage loan transaction

Mortgagor

A borrower in a mortgage loan transaction

Negotiable Instrument

A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee’s right to payment.

Nonjudicial Foreclosure

Some states allow nonjudicial foreclosure procedures to be used when the security instrument contains a power-of-sale clause. In this case, no court action is required.

Novation

Substituting a new obligation for an old one or substituting new parties to an existing onligation

Prepayment Penalty

A charge imposed on a borrower who pays of the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise become lost.

Promissory Note

A financing instrument that states the terms of the underlying obligation is signed by its maker and is negotiable (transferable to a third party)

Release Deed

A document, also called a deed of reconveyance, that transfers all rights given a trustee under a deed of trust loan back to the grantor after the loan has been fully repaid.

Satisfaction of Mortgage

A document acknowledging the payment of a mortgage debt.

Sheriff’s Deed

In Illinois, a specialized quitclaim deed issued to the purchaser of a foreclosed home, the owner of which exercise the equitable right of redemption.

Sheriff’s Sale

Occurs when a default is not cured by redemption or reinstatement and a decree of foreclosure is entered

Statutory Right of Redemption

The right of a defaulted property owner to recover the property after its sale by paying the appropriate fees and charges

Statutory Right of Reinstatement

In Illinois, an option available when the defaulting mortgagor wishes to cure the default and reinstate the loan as if no acceleration had occured.

Strict Foreclosure

A way for a lender to acquire mortgaged property as an alternative to judicial foreclosure.

Title Theory

Some states interpret a mortgage to mean that the lender is the owner of mortgaged land. On full payment of the mortgage debt, the borrower becomes the landowner.

Usury

Charging interest at a higher rate than the maximum rate established by state law.