Real Estate Financing Principles

70 vocabulary flashcards summarizing the essential terms and concepts from the Real Estate Financing Principles lecture, covering loan types, security instruments, clauses, and market participants.

Primary Market

The marketplace where mortgage loans are originated, underwritten, and serviced directly to borrowers by lenders such as banks and mortgage banking companies.

Secondary Market

The arena where existing mortgage loans are bought and sold by private investors and government-sponsored enterprises, providing liquidity to the primary market.

Federal National Mortgage Association (Fannie Mae)

A government-sponsored enterprise that buys conforming mortgages from lenders to create liquidity in the market.

Government National Mortgage Association (Ginnie Mae)

A U.S. government agency that guarantees mortgage-backed securities for FHA- and VA-insured loans to promote affordable housing.

Federal Home Loan Mortgage Corporation (Freddie Mac)

A government-sponsored enterprise that purchases conforming mortgages from lenders, similar to Fannie Mae.

Conforming Loan

A mortgage that meets the size and underwriting standards set by Fannie Mae and Freddie Mac and can be sold on the secondary market.

Nonconforming Loan

A mortgage that does not meet secondary-market guidelines and therefore cannot be sold to Fannie Mae or Freddie Mac.

Promissory Note

A written, legally binding promise by the borrower (maker) to repay a specified sum to the lender (payee) under agreed terms; evidence of a debt.

Maker

The borrower who signs a promissory note and promises to repay the debt.

Payee

The party—usually the lender—who is to receive payment under a promissory note.

Straight (Term) Note

A note that requires interest-only payments during the term with a balloon payment of principal at maturity.

Installment Note

A note requiring periodic payments of principal (and usually interest) with a final balloon payment of any remaining balance.

Fully Amortized Note

A note whose regular payments of principal and interest are calculated to pay off the entire balance by the end of the loan term.

Adjustable Rate Note

A promissory note that allows the interest rate to adjust periodically according to a specified index.

Simple Interest

Interest calculated only on the outstanding principal balance, not on accrued interest.

Security Instrument

A legal document—such as a mortgage, deed of trust, or land contract—that pledges property as collateral for a debt.

Hypothecation

Pledging property as security for a loan while retaining possession and use of it.

Lien Theory

Legal doctrine in which the borrower holds legal title and the lender has a lien on the property that can be foreclosed upon default.

Title Theory

Legal doctrine in which the lender or trustee holds legal title until the debt is repaid, while the borrower has equitable title.

Mortgage

A two-party security instrument that creates a voluntary lien on real property to secure repayment of a promissory note.

Mortgagor

The borrower who gives a mortgage as security for a loan.

Mortgagee

The lender who receives the mortgage and holds the lien interest in the property.

Deed of Trust (Trust Deed)

A three-party security instrument in which a borrower (trustor) conveys title to a trustee for the benefit of a lender (beneficiary).

Trustor

The borrower who conveys title to a trustee under a deed of trust while retaining equitable title and possession.

Trustee

The neutral third party who holds title under a deed of trust and may sell the property upon default under a power of sale clause.

Beneficiary

The lender or note holder who benefits from a deed of trust and is repaid from the collateral.

Land Contract

An installment sale in which the buyer makes payments to the seller, who retains legal title until the contract price is paid in full.

Acceleration Clause

A loan clause giving the lender the right to declare the entire loan balance due immediately upon borrower default.

Alienation Clause (Due on Sale Clause)

A clause allowing the lender to demand full repayment if the borrower transfers ownership without consent.

Condemnation Clause

A loan provision allowing the lender to take any condemnation proceeds to satisfy the debt.

Defeasance Clause

A clause stating that once the loan is repaid, the security instrument becomes void and the borrower regains clear title.

Occupancy Clause

A covenant requiring the borrower to occupy the property within a specified time and for a stated period.

Partial Release Clause

A clause obligating the lender to release portions of the collateral from the lien as certain payments are made.

Prepayment Clause

A provision allowing the lender to charge a fee or penalty if the borrower pays the loan off early.

Late Payment Clause

A loan provision permitting the lender to assess a penalty for payments not made by the due date.

Lock-In Clause

A clause that forbids the borrower from paying the loan off early for a specified period.

Power of Sale Clause

A clause, common in deeds of trust, that authorizes a nonjudicial foreclosure by allowing the trustee to sell the property upon default.

Covenant to Pay Taxes

The borrower’s promise to keep property taxes and assessments current.

Covenant of Insurance

The borrower’s promise to maintain adequate hazard insurance on the property.

Subordination Agreement

A contract in which a lender voluntarily places its lien behind another lien in priority.

Assignment of Rents

An agreement allowing the lender to collect rental income from a property if the borrower defaults.

Principal

The original amount borrowed on a loan, excluding interest.

Interest

The charge paid to a lender for the use of borrowed money, usually expressed as a percentage of principal.

Amortization

The systematic repayment of a loan through regular payments of principal and interest that reduce the balance over time.

Negative Amortization

A situation in which loan payments are insufficient to cover interest, causing unpaid interest to be added to principal.

Fixed Rate Loan

A mortgage with an interest rate that remains constant for the entire term, resulting in level payments.

Adjustable Rate Mortgage (ARM)

A loan whose interest rate may change periodically according to movements in a specified index plus a margin.

Index (ARM)

A published interest-rate indicator that reflects the cost of money and is used to adjust ARM rates.

Margin (ARM)

The fixed percentage added to an ARM index to establish the interest rate; represents the lender’s profit.

Cap (ARM)

A limit on how much the interest rate or payment on an ARM can increase in an adjustment period or over the life of the loan.

Hybrid Mortgage

A mortgage that starts with a fixed rate for a set number of years and then converts to an adjustable rate for the remainder of the term.

Graduated Payment Buydown

A temporary financing arrangement in which subsidies keep payments low in early years, with scheduled increases thereafter.

Growth Equity Mortgage (GEM)

A fixed-rate loan in which scheduled increases in principal payments accelerate amortization and build equity faster.

Home Equity Loan

A closed-end loan secured by a second mortgage on a homeowner’s principal residence, providing a lump sum repaid over a set term.

Home Equity Line of Credit (HELOC)

An open-end, revolving line of credit secured by a second mortgage on the borrower’s home, from which funds can be drawn as needed.

Reverse Mortgage

A loan that allows homeowners aged 62 or older to convert home equity into cash; repaid when the borrower dies, sells, or ceases to occupy the home.

Chattel Mortgage

A loan that uses personal property, rather than real estate, as collateral.

Package Mortgage

A mortgage that finances both real property and personal property, such as furnishings, in a single loan.

Blanket Mortgage

A single mortgage that covers two or more parcels of real estate and typically contains a partial release clause.

Bridge Mortgage

Short-term financing used between the end of one loan and the start of another, such as buying a new home before selling the current one.

Wraparound Mortgage

Secondary financing in which a new lender (often the seller) makes one larger loan that includes the existing loan; borrower pays the new lender, who pays the original lender.

Construction Loan

A short-term loan used to finance building improvements; funds are disbursed in stages and later replaced by permanent financing.

Takeout Loan

The long-term, permanent financing that replaces a construction loan when construction is completed.

Purchase Money Mortgage

A mortgage given by the buyer to the seller as part of the purchase price, allowing the seller to finance all or part of the sale.

Assumption

The act of a buyer taking over the seller’s existing mortgage and becoming primarily liable for the debt, usually with lender approval.

Subject To Financing

A method in which a buyer acquires property subject to the seller’s existing mortgage without assuming personal liability; the seller remains liable.

Balloon Payment

A large, lump-sum payment of principal (and potentially interest) due at the end of a loan term when earlier payments have not fully amortized the loan.

Equity

The owner’s unencumbered interest in property; the difference between market value and outstanding liens.

Uniform Commercial Code (UCC)

A standardized body of laws governing commercial transactions—including negotiable instruments—adopted by most states.

Negotiable Instrument

A written, transferable promise or order to pay money, such as a promissory note, that can be assigned to another party.