Unit 12: Real Estate Financing

Comprehensive practice flashcards covering real estate financing concepts, terminology, loan types, and foreclosure procedures from Unit 12.

PITI

The basic costs of owning a home, consisting of principal, interest, taxes, and insurance.

FICO® score

A credit score developed by Fair Isaac and Company that ranges from a low of $300$ to a high of $850$.

Debt-to-income (DTI) ratio

A formula used by lenders to determine a homebuyer's ability to pay; for instance, a monthly PITI payment should not exceed $28\%$ of gross monthly income, and total debts should not exceed $36\%$.

Loan-to-value ratio (LTV)

The amount of a loan expressed as a percentage of the purchase price of the property; a lower LTV indicates less risk for the lender.

Promissory note

A borrower’s personal promise to repay a debt according to agreed terms; it is a contract with the lender that states the amount of debt, time, method of payment, and interest rate.

Negotiable instrument

An instrument of debt, such as a promissory note or check, that can be transferred to a third party by signing it over or delivering it.

Usury

The act of charging interest in excess of the maximum rate allowed by law.

Loan origination fee

A charge paid to the lender, typically about $1\%$ of the loan amount, to cover the expenses involved in generating and processing a mortgage application.

Discount points

Charges used to increase the lender's yield on an investment; each point equals $1\%$ of the loan amount and acts as prepaid interest at closing.

Prepayment penalty

A fee required by some mortgage notes if a borrower repays the loan ahead of schedule, ensuring the lender earns a certain level of income.

Hypothecation

The lending practice where a debtor retains possession and control of secured property while the creditor receives an equitable right in the property as collateral.

Mortgagor

The borrower who receives a loan and gives a promissory note and mortgage as security to the lender.

Mortgagee

The lender who receive a mortgage and promissory note from a borrower as security for a loan.

Satisfaction of mortgage

A document issued by the mortgagee when a loan is paid in full, serving as evidence that the security interest has been removed.

Deed of trust

A three-party security instrument that conveys bare legal title from the borrower to a third-party trustee to hold on behalf of the lender.

Trustor

The borrower in a deed of trust transaction who conveys legal title to a trustee.

Trustee

A third party who holds bare legal title on behalf of the lender (beneficiary) in a deed of trust.

Beneficiary

The lender in a deed of trust transaction who holds the promissory note.

Acceleration clause

A provision that gives the lender the right to declare the entire principal balance due and payable immediately if the borrower defaults.

Defeasance clause

A provision in a financing instrument that requires the lender to execute a satisfaction or release when the note has been fully paid.

Deed of reconveyance

A document executed by a trustee to return legal title to the trustor after a real estate loan secured by a deed of trust is repaid.

Alienation clause

Also known as a due-on-sale clause, it provides that when a property is sold, the lender may declare the entire debt due immediately or require an acceptable interest rate for assumption.

Straight loan

An interest-only loan where the borrower makes periodic payments of interest followed by the full principal payment at the end of the term.

Amortized loan

A loan where the principal is gradually paid back over the loan term (usually $10$ to $30$ years), with each payment covering both principal and interest.

Adjustable-rate mortgage (ARM)

A mortgage that begins at one interest rate and fluctuates up or down during the loan term based on a specified economic indicator (index).

Negative amortization

A situation where the loan balance increases because the payment made is less than the full amount of interest due.

Growing-equity mortgage

Also known as a rapid-payoff mortgage, it uses a fixed interest rate but scheduled increases in principal payments to pay off the loan quickly.

Balloon payment

A final loan payment that is significantly larger than the others, typically at least twice the amount of any other payment.

Reverse mortgage

A loan for homeowners aged $62$ or older that allows them to borrow against their home's equity, with repayment typically only required when the home is sold or the owner dies.

Judicial foreclosure

A legal procedure where property is sold by court order after the mortgagee provides public notice following a borrower's default.

Nonjudicial foreclosure

A foreclosure procedure that does not require court action because the security instrument contains a power-of-sale clause.

Deed in lieu of foreclosure

A 'friendly foreclosure' carried out by mutual agreement between the lender and borrower to eliminate the homeowner's equity without a lawsuit.

Deficiency judgment

A personal judgment against a borrower for the unpaid balance of a loan if a foreclosure sale does not produce enough cash to pay the debt in full.

Short sale

A transaction in which a lender permits the property to be sold for a price lower than the amount outstanding on the mortgage debt.

Comprehensive Loss Underwriting Exchange (CLUE)

A database containing up to five years of consumer personal property claims history used by insurance companies in the underwriting process.

Coinsurance clause

A provision requiring a homeowner to maintain insurance equal to a specific percentage (usually $80\%$) of the replacement cost of the dwelling.