Acceleration Clause – A contract clause requiring the purchaser to immediately pay the entire principal due if certain conditions are violated. Some examples of these violations could be failing to make regular payments, non-payment of property taxes, or failing to pay insurance premiums. Understand the consequences of alienation clause in contracts.
Accrued Interest – Interest on a note that has been earned but not yet paid.
Addendum – An addition to a written contract.
Amortization – The time that it will take to pay off a debt at a mutually agreed upon payment amount and interest rate. Here is an example of the first three payments of a $100,000 note being paid over 30 years at 5% interest:
|Payment number||Total Payment||Interest||Principal||Balance|
Appreciation – An increase in value of a property or item. The opposite is depreciation.
Assignment – A transfer of something of value from one party to another.
Balance Due – The current unpaid balance on a debt. In other words, it is the amount due today.
Balloon – The final payment on a loan to bring the balance due to zero. Often, this payment is much larger than the preceding payments.
Clear Title – Title on a property or other item that is not encumbered by mortgages, unpaid taxes, or other liens.
Closing Statement – In real estate, it is also called a settlement statement or HUD-1. It is a financial statement showing the funds that were received and expected at the closing of a transaction.
Contract for Deed – Also called a land contract, it is an installment sale where the buyer has full rights to use the property but no deed is given by the seller until a certain price has been paid.
Deed – A written documents that transfers title (ownership) from one party to another. Common deeds used in real estate are grant deeds, warranty deeds, and quit claim deeds.
Deed In Lieu – A deed given by the buyer of a property to the former seller of the property to avoid foreclosure.
Deed Of Trust – An instrument used in some states instead of a mortgage. The legal title to the property is vested with one or more trustees to secure the loan repayment.
Default – Failure on the part of the payer to meet one or more obligations of a note. Most often, this refers to payments missed or that are made after the grace period.
Delinquent Payment – A payment that is not made by a specific date. For example, a payment that is received on the second of the month but was due on the first would be considered delinquent. If there was a 15-day grace period, then the payment would be considered delinquent on the 16th day of the month.
Direct Note Buyer – A note buying company that buys the purchase money mortgage directly from the note holder rather than using a broker or other source.
Discount – As it relates to mortgage notes, the discount is the different between the unpaid note balance and the amount offered to purchase the note. The purpose of the discount is to allow the note buyer to obtain a higher yield, and will be affected by risk factors like the payer’s credit, the type of property, and the terms of the note.
Equity – The difference between the fair market value of a property and the amount that is due. For instance, if a property is worth $200,000 and $120,000 is owed by the buyer, there is $80,000 of equity
Escrow – An agreement between at least two parties that a neutral 3rd-party will maintain certain instruments or property. It can also refer to an escrow account for managing property taxes and insurance or the act of having a 3rd-party manage a closing of a transaction.
Fair Market Value – The value of a property in which a willing seller and a willing buyer would transfer a property, with each having full knowledge of all relevant facts and with neither being under duress.
First Mortgage – A real estate loan that is the primary lienholder on a real property.
Foreclosure – A legal action for taking back a property when the paying party has failed to perform a specific obligation.
Grace Period – A contractually allowed period where one party may fail to perform their obligation with being considered in default. For instance, if a payment is due on the 1st of the month but there is a 10-day grace period, the payer would be considered to be in default only after the 10th of the month.
Hazard Insurance – An insurance policy to protect a property against fire damage and sometimes against other hazards. Most mortgages require the payer to carry hazard insurance if the structures have value.
Hypothecate – With a mortgage or deed of trust, the property is pledged as security for a debt.
Improvements – Any additions to a property that could increase the value of the property.
Interest Rate – The percentage rate charged for the use of the lender’s money. For instance, a note may carry a 5% interest rate on the unpaid balance.
Judicial Foreclosure – A foreclosure where the defaulted debtor’s property is sold at a price approved by the court
Junior Mortgage – A lien that is subordinate (more junior) to other liens. A 2nd or 3rd lien would be a junior lien.
Land Contract – See Contract for Deed
Late Charge – A fee that is charged to the paying entity for a payment that is delinquent. The fee may be a fixed amount or a percentage of the payment.
Legal Description – A description of a property that is recognized by the law to identify the location and characteristics of a property.
Leverage – Using borrowed money to increase one’s return on a cash investment. The use of leverage can magnify the amount of both gains and losses.
Lien – A charge against a property that makes it security for the payment of a debt, such as a mortgage or taxes.
Loan-To-Value Ratio – The amount remaining on a mortgage loan expressed as a percentage of a property’s appraised value.
Mortgage – The pledging of real property as security for the payment of a debt. The mortgage typically accompanies a note, and allows the payer to retain possession of the property.
Mortgagee – The party that lends the money and receives payments
Mortgagor – That party that borrows the money and provided the mortgage.
Note – The document showing the terms of repayment. It is sometimes referred to as a mortgage note, a deed of trust note, a promissory note, or an installment note.
Note Buyer – An individual or entity that purchases mortgages and deeds of trust from individuals or entities as a normal course of business.
Opinion of Title – A certificate showing the validity of the title of a property being sold. An Opinion of Title is most often provided by an attorney.
Owner Financing – A transaction is which the seller of a property finances the purchase directly with the buyer of the property, either in whole or in part. This removes the costs and inconveniences of dealing with banks.
PITI – An acronym standing for principal, interest, taxes, and insurance. While the principal and interest often remain the same for the term of the loan, the taxes and insurance may vary from year to year.
Power Of Attorney – A written instrument giving a person the right to act as the agent of another person.
Principal – The original amount of the note or the amount of a payment that is not interest, taxes, or insurance.
Purchase Money Mortgage – A mortgage given by the purchaser of real property to the seller of the property as consideration in the transaction.
Real Estate – Land and everything attached to it.
Recording – The documented noting at a registrar’s office of an executed legal document such as a mortgage or deed of trust. This makes it a part of the public record.
RESPA – The Real Estate Settlement Procedures Act is a federal law requiring that lenders provide home mortgage borrowers with information about expected or known settlement costs, as well as limiting some fees
Sales Price – The mutually agreed upon price for a piece of property between a buyer and a seller.
Secondary Financing – Real estate financing in which a loan(s) is subordinate behind a first lien.
Secured Party – The individual or entity that holds a security interest or lien. This party can also be referred to as the mortgagee.
Subordinate – Moving to a lower priority. For instance, a first lien becoming a second lien would become subordinate.
Term – The period of time in months or years until the balance of a mortgage is due.
Title – Evidence that the owner of a property is in lawful possession.
Title Policy – A type of insurance that is purchased to protect against any losses or defects in the title of a specified piece of property.
Trustee – An entity or person who holds property in trust for another until an obligation is completed.
Underlying Debt – A prior loan that is still in existence and may be owed on a mortgage.
Underwriting – Reviewing an opportunity in an effort to match the risk of a transaction with an appropriate rate of return.
Warranty Deed – A deed that transfer title between two parties, and includes covenants stating that the property is free of encumbrances.
Wrap-Around – Also known as a “wrap”, it is commonly used in owner-financed transactions for the purchase of real property. The seller offers to the buyer a junior mortgage which is in addition to superior mortgages already securing the property. The parties will want to make sure that there is no existing alienation clause with the senior lien.