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Flashcards in Financing and Settlement Deck (70)
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Promissory Note

Actual promise to repay a loan. The note is evidence of the debt. The note creates the debt. It is a negotiable instrument and is considered personal property.



A document that creates the lien and conveys the property to the mortgagee as security for the debt. The pledge of property is security for the note and sets up collateral that the lender can sell if the note is not paid. A mortgage is a two-party instrument allowing for judicial foreclosure (going to court). The mortgagor borrows money and gives the mortgage to the mortgagee as security for the debt.



Pledging of property as security for a loan. Possession of the property is not given up.


Loan Qualification

A lender's decision to make a home loan is based on the borrower's income, payments required on outstanding debts, assets, and credit history. A borrower is required to have adequate cash to pay the down payment, closing costs, prepaid expenses provided for in the
purchase contract, and an adequate reserve.


A Deed of Trust

is a three party instrument:
Lender (Beneficiary)
Borrower (Trustor) Retains equitable title to the property.
Trustee: A Bank Officer is commonly appointed as the trustee and the lender can substitute trustees at will. If a trustee dies, the property can still be immediately distributed.


non-judicial foreclosure

Deed of Trust allows for this. Under the power of sale clause contained in the document (the lender does not have to go to court). If the borrower defaults the beneficiary (lender) directs the trustee to offer the property for sale to extinguish the debt.


deficiency clause

Deed of Trust also has a deficiency clause. That allows the lender to seek an additional judgment against a borrower who defaults if the liquidation foreclosure sale fails to extinguish the debt. The addition of the power of sale and deficiency clauses is the primary difference between the deed of trust mortgage and the two party mortgages.


Three giants of the secondary market

Federal National Mortgage Association (FNMA)
Government National Mortgage Association (GNMA)
Federal Home Loan Mortgage Corporation (FHLMC


Primary responsibilities of Secondary Market

to maintain an active market for mortgages. Secondary lenders consist of investors who purchase pre-existing
mortgages. FNMA exchanges mortgage- backed securities for pools or blocks of mortgages


Acceleration Clause

A provision in a written mortgage or note that in the event of default, the whole amount becomes due and payable immediately. This helps the lender move quickly to foreclosure.


Alienation Clause

"Due on Sale" clause. In other words, the note is called due when the property sells; therefore the buyer cannot assume the existing loan. The lender requires the loan to be paid off at the sale of the property.



Liquidation of a debt by installment payments consisting of principal and interest


Annual Percentage Rate (APR)

The “effective interest rate” or the “effect yield” the lender makes when giving the loan to the borrower. The APR is comprised of all the fees the lender makes
in addition to the interest rate; these are loan origination fees, discount fees or points and closing costs.



Non-performance of a duty arising under a contract or a loan agreement.


Defeasance Clause

Clause in a mortgage stating that when the debt has been paid a satisfaction of mortgage is given by the mortgagee to the mortgagor showing the lien has been paid.


Escalation Clause

Raises the existing interest rate.


Judicial Foreclosure

A foreclosure proceeding where the lender must file a suit in a court of law to obtain a judgment ordering foreclosure of the lien.


Non-judicial Foreclosure

Foreclosure procedures through the power-of-sale clause contained in the deed of trust allowing the trustee to satisfy the debt without going through court proceedings.



Fee lenders charge for the use of their money. (Simple interest is computed on principal only, while compound interest is based on both principal and accrued interest).


Imputed Interest

Interest charged regardless of periodic payments made.



Obtaining maximum financing with minimum cash (utilizing borrowed funds).


Lien Theory

Mortgagor holds interest in the title while the mortgagee holds the lien.


Prepayment Clause

Allows the purchaser to prepay a portion of the loan without penalty.


Seasoned Mortgage

A mortgage that has maturity or has been in existence for a number of years.



Charging an interest rate higher than is allowed by law. Also called illegal interest


Conventional Loan

A loan that is not underwritten by a federal agency. Lenders rely on their own appraisal of the security and their own credit reports and information concerning the credit history of the borrower. Conventional loans may be “conforming” or “non-conforming”.


Conforming loans

are those that meet FNMA or FHLMC guidelines so they can be sold in the secondary market.


Non-conforming loans

can be made by any lender to be held in its own portfolio or sold to private mortgage packagers that specialize in areas not serviced by FNMA or FHLMC or GNMC


Fixed Rate Payment

Known as an “amortized loan” payment, the mortgagor pays a constant amount, usually monthly, for a set period of time. Payment credited first to interest rate, then applied
to the loan balance.


Straight Payment

Also known as a “term loan”, the mortgagor pays periodic payments of interest, with the principal paid in full at the end of the loan term. This is an interest only loan.