Finance 30 Clock Hours Table of Contents Chapter Topic Major Areas Covered Introduction Chapter 1 Mortgages, Deeds of Trust Foreclosure Documents, Procedures, Security Chapter 2 Clauses, Types of Loans, Loan Typical Clauses, Variables Chapter 3 Government’s Role Truth in Lending, Fair Housing Chapter 4 Types of Buyers Buyers & Pre-Qualification Chapter 5 Real Estate Investment & Taxation Buying & Selling Property Chapter 6 Short Sales, Loss Mitigation, Foreclosure Buying Short Sales, Loss Mitigation Chapter 7 Creative Financing Ten Techniques to be Aware of Chapter 8 Finance & Escrow Formulas Math, RESPA, and Settlement Chapter 9 Property Evaluation & Appraisal Market Value, Price, Cost Chapter 10 Escrow & Title Insurance Closing and Settlement Chapter 1 Lien and Title, Mortgage, and Promissory Note Glossary Acceleration Clause A clause that accelerates the payments so the full amount of principle and interest becomes due all at once Adjustable- rate loan The rate of interest that is adjusted periodically according to changes in the cost of borrowing money Agreement of Sale A type of seller financing where there is no note and the seller keeps legal title until paid in full. Alienation Clause The same as a “due on sale” clause. This means the loan is not assumable without lender's approval Amortization A method of repaying the principle and interest of a loan through periodic payments APR Annual percentage rate. This is the computation of an accurate interest rate of interest figuring in all loan costs Assignment of Rent Clause If the borrower defaults, the lender can collect the rent from income producing property Buy Down The payment of additional money to reduce the rate of interest for the borrower Call Clause A clause that specifies a certain date that the entire balance must be paid in full Cash flow analysis A method used in qualifying for a VA loan, that determines how much money the borrower has left after expenses and taxes (residual income) Certificate of No Defense A borrower’s statement of the balance owing on a loan Contract for Deed A type of seller financing where the seller holds legal title until paid in full Conventional loan A loan that is not insured or guaranteed by government agencies Deed of Trust A security instrument that is executed by a Trustor in favor of a beneficiary and is held by a trustee Deed of Reconveyance The instrument that is recorded to give public notice that payment has been made in full Defeasance Clause A clause that releases the borrower at the end the mortgage Deficiency Judgment When there is a foreclosure, this allows the lender to recover additional money from the borrower if the sale of the property was not enough to cover the debt Discount Point A percentage of the loan charged as a fee by the lender to increase the yield on the loan Discount Rate The rate of interest charged to member banks by the Federal Reserve District Banks Equity of Redemption The right of the borrower to have a specific amount of time to pay all back payments, charges, fees, and redeem property before a foreclosure sale Estoppels’ Certificate A borrowers statement of the balance of the loan amount that is owing Fixed-rate loan A loan that has an unchanging rate of interest Fully amortized loan The first part of each payment is interest with the balance applied to the principal, paid in level payments Hypothecation The use of property as security for a loan without giving up possession Installment Contract A type of seller financing paid in periodic installments Index A reliable indicator of the present cost of borrowing money Junior Mortgage A mortgage that is not in a first lien position Land Contract A type of seller financing, like an installment contract Loan-to-value ratio (LTV) Determining the amount the lender will loan using a percentage of the property's appraisal or sales price Margin The amount of difference between the index value on an adjustable rate mortgage and the interest rate the borrower is actually charged. MIP Mortgage Insurance Premiums. A charge required for an FHA-insured loan. Mortgage A pledge of property as security Mortgagee The lender Mortgagor The borrower Negative amortization When payments are not sufficient to cover the interest, the unpaid interest that is added back to the loan balance Non-conforming loan A loan that does not meet the standards of underwriting in the major secondary market Novation Substitution of a borrower, or substitution of the note “Or More” Clause A clause which allows the borrower to make larger payments in advance without a pre-payment penalty Origination Fee A lender's charge for originating, processing, and any administrative costs Point One percent of the original loan amount Power of Sale A clause that gives the mortgagee or trustee to sell the property in case of default PMI Private Mortgage Insurance – this is an insurance policy that protects the lender when there is increased risk due to low down payment Prepayment Penalty The amount of money charged as a penalty if the borrower pays off the loan in full before the end of the term Prime Rate The interest rate that is charged by commercial banks to the highest rated lenders and customers Purchase Money Mortgage Seller financing in the form of a mortgage Redlining Illegal practice of refusing to make loans in a specific neighborhoods Reduction Certificate The lender’s statement of the balance remaining on loan Residual income The amount of income a VA borrower has left after deducting monthly expenses and taxes Satisfaction Piece An instrument that should be recorded to give public notice that a mortgage has been paid in full Secondary financing A loan to help pay the down payment or closing costs of another loan Short Sale The lender allows a property to be sold for less than the amount owed on a mortgage and takes a loss. Subordination Agreement An agreement that allows for another lien to be put in a position higher than a lien that was recorded prior Street Rate The average interest rate currently charged in an area Trustee A neutral third party in a trust that holds legal title under a trust deed Trustor The borrower under a trust deed. The borrower holds equitable title Truth in Lending Federal legislation that requires disclosure to the borrower Warehousing Packaging loans and holding them until they are sold to investors Lien Theory and Title Theory Many western states are lien theory states. This means that the borrower pledges his/her property as security for the loan, but does not give up possession or legal title to the property. This process is called hypothecation. The mortgage or deed of trust creates a lien that is used as security until the promissory note is repaid, but it does not transfer title. The lender has only the right to foreclose the lien if the borrower defaults. The lien theory is used in most of the United States. The title theory is used in only a few states today. The states are called "title theory" states. In a title theory state, the mortgage or a deed of trust is still considered to be a transfer of legal title to the lender. This means the lender actually holds legal title to the property until the loan is paid in full. Legal title reverts to the owner/borrower, when the loan is repaid. There are very few differences between the foreclosure procedures in title theory states and lien theory states. Both mortgages and Deeds of Trust make the borrower's property the collateral for the loan and both give lenders the power to foreclose if the debt is not paid. The most common documents used in real estate financing are the promissory note and a type of security instrument. The security instrument can be a mortgage or a deed of trust. The security instrument contains the granting clause using words such as "grant, convey, or sell. It also clearly indicates that this particular property is being pledged as security for the loan. Mortgage The word "mortgage" is a generic term, for a legal document in which a borrower pledges property as security for a debt. The borrower is called the mortgagor and the lender is called the mortgagee. This can seem confusing at times because the meanings seem to be reversed. Use the old real estate rule to help remember the order of these words: --- Words that end in “OR” are the givers, the ones making the payments --- Words that end in “EE” are the receivers, the ones who receive the payments The “MORTGAGOR” is the person who makes/gives the pledge or promise, while the “MORTGAGEE” is the person who receives the payments. The mortgage is the pledge and the note, is the promise to pay the mortgage. They are considered to be “construed together”, which means as if they were one agreement. The note always has precedence over the mortgage if there is any discrepancy in the terms between the two instruments. The borrower should carefully read and understand the terms of the mortgage and note before signing. The mortgage has precedence if the note omits an alienation clause that was included in the mortgage. Although mortgages do not have to be recorded to be valid, recording is the only way the lender and borrower would know the lien exists. The lender should always record the note and the mortgage document immediately after the loan is made. If another person acquires an interest in the property without notice of the mortgage than the person would have priority over the mortgage.