CH 16-4: Types of Loans & Loan Clauses

A contract clause that gives the lender the right to declare all outstanding payments immediately due upon a default by the borrower.

Acceleration clause

A type of loan structure that permits the lender to periodically change or vary the interest rate charged, based on a standard index.

Adjustable-rate mortgage (ARM)

A mortgage clause allowing the lender to demand the full and immediate payment of the mortgage because the owner transferred or pledged to transfer ownership of the property.

Alienation clause (due-on-sale clause)

When one party takes over the payments and primary liability for the loan of another party; usually lender approval is needed; also, a release is needed, or the original party remains secondarily liable for the loan.

Assumption

A mortgage loan that covers more than one parcel of real estate, usually used to finance entire subdivision developments rather than an individual unit or lot.

Blanket mortgage

A mortgage loan that occurs between the termination of one mortgage and the commencement of another.

Bridge mortgage

A loan that uses only personal property as security.

Chattel mortgage

A temporary loan used to finance the construction of improvements and buildings on land.

Construction loan

Failure to fulfill an obligation, duty, or promise.

Default

A clause used to cancel a certain right upon the occurrence of a specific event.

Defeasance clause

An owner's unencumbered interest in their property.

Equity

Available money that can be borrowed by a homeowner, secured by a second mortgage on the principal residence; can be accessed at any time up to a predetermined borrowing limit and may be used for non-housing expenditures.

Home equity line of credit (HELOC)

A loan taken by a homeowner that is secured by a second mortgage on their principal residence.

Home equity loan

The charge a borrower pays to a lender for the use of the lender’s money.

Interest

A mortgage where personal property (e.g., appliances) is included in a real estate sale and financed with one contract.

Package mortgage

A clause that allows the trustee to sell trust deed property, without court supervision, when terms of the trust deed are not kept.

Power of sale clause

A contract clause that gives a lender the right to charge the borrower a penalty for paying off a loan early.

Prepayment clause

A mortgage where the seller finances all or part of the sale price of a piece of property for the buyer.

Purchase money mortgage

Allows qualified homeowners aged 62 or older to convert equity in the home into a lump sum, a monthly cash stream, or a line of credit; becomes due when the last surviving borrower dies, sells the home, or ceases to live in the home for 12 consecutive months.

Reverse mortgage

A written agreement between lienholders on a property that changes the priority of mortgages, judgments, and other liens.

Subordination agreement

A loan that provides permanent financing after construction is complete.

Takeout loan

A financing arrangement in which an existing loan on a property is retained while the lender gives the borrower another, larger loan.

Wraparound mortgage

TRUE or FALSE: Construction loans are typically paid out to the borrower in full upon completion of the construction.

FALSE: A construction loan is a short-term or temporary loan that is used to finance the construction of improvements and buildings on land. Funds are advanced in regular installments as the construction progresses and replaced by a permanent take-out loan when complete.

TRUE or FALSE: The term that BEST describes the type of loan where a seller finances all or part of the sale of property for the buyer is a bridge loan.

FALSE: Purchase money mortgage is a general term used to describe seller financing, referring to the promissory note and mortgage that the buyer gives the seller in a seller-financed transaction.

TRUE or FALSE: Jeff is retiring soon and plans to sell his property and use the proceeds to buy a cabin in the woods. If his loan contains an acceleration clause, he would be required to repay the entire loan amount when he sells the property.

FALSE: It is an alienation clause, also called a due-on-sale clause, that requires full repayment upon sale. An acceleration clause is used when the borrower defaults on payments.

Cathy has a mortgage with an alienation clause. She deeds her property to her brother John, and he assumes her mortgage. The alienation clause does NOT give the lender the right to:

Refuse to let Cathy give away the property.

Call for the entire loan balance to be paid off at transfer. 

Refuse to let Cathy give away the property.

TRUE or FALSE: An occupancy clause helps to ensure that the borrower is not using financing intended for owner-occupied with no intention of residing on the property.

TRUE: An occupancy clause requires the borrower to occupy the property as a principal residence for a specified time after receiving the loan.

TRUE or FALSE: A prepayment clause allows a borrower to pay off a loan early without penalty.

FALSE: A prepayment clause gives lenders the right to charge a prepayment penalty for paying off the loan early or making large principal reductions, protecting the lender’s expected interest income.

Match the loan clause with its description: The lender can declare the entire loan balance due if the borrower defaults.

Alienation clause

Conveyance clause || Partial Release

Defeasance clause

Acceleration clause

Acceleration clause

Match the loan clause with its description: The lender can declare the entire loan balance due if the borrower sells the property.

Alienation clause

Conveyance clause || Partial Release

Defeasance clause

Acceleration clause

Alienation clause

Match the loan clause with its description: This releases part of the property from lien when certain criteria are met.

Alienation clause

Conveyance clause || Partial Release

Defeasance clause

Acceleration clause

Conveyance clause || Partial Release

Match the loan clause with its description: At final payment, the mortgage is satisfied, canceled, or void.

Alienation clause

Conveyance clause || Partial Release

Defeasance clause

Acceleration clause

Defeasance clause