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Real Estate Financing Terms and Examples

By Edited Feb 1, 2014 0 0

1) Promissory Note-

Definition: A note that promises to pay back a debt.

Example: Sarah leant Tom $40,000 to use as a down payment on a house. At the time Tom signed a not that promised Sarah he would repay her.

Elements:

a)     Promise to pay back debt- Tom signed a note that promises Sarah he will pay back the $40,000 she leant him.

b)    Maker- Tom is the person who borrows the money.

c)     Payee- Sarah is the person who lends the money.

2) Security Agreement-

Definition: A deal that makes real property collateral in case of a default on a loan.

Example: Ted sold his house to Mary for $300,000.  Mary got a loan for $300,000 to pay for the house and she signed a security agreement. After 6 months in the house Mary stopped making payments for the house. The bank then takes Mary’s house away, sells it, and pays off the money owed to them with the money.

Elements:

a)     Signing a contract- Mary signs a security agreement that gives the bank the right to take her property.

b)    Owing of money- Mary owes the bank money.

c)      Property becomes collateral- Mary must sell her house and use the money from the sale to pay the loan money.

3) Maturity Date-

Definition: The date when a loan should be fully paid off.

Example: Sarah took out a 30-year mortgage on her home for $160,000 and with monthly payments of $1100 a month on March 25, 2010. After 30 years on March 25, 2040 Sarah must pay off her entire loan.

Elements:

a)     Borrowing of money- Sarah took out a 30-year mortgage on her home for $160,000.

b)    Time limit- Sarah’s mortgage must be paid off in 30 years.

c)     Date- Sarah must have he loan completely paid off on March 25, 2040.

4) Straight Note-

Definition: A note that allows for borrowers of a loan to pay for the interest only in their monthly payments and then pay the loan amount in a lump sum at the end of the loan term.

Example: Paul took out a school loan of $1,000 to pay for a computer that must be paid back within one year. His monthly payments were only $20, which only paid for the interest on the loan. At the end of the year Paul must pay $1,000 to pay off the loan.

Elements:

a)     Borrowing of money- Paul took out a school loan of $1,000.

b)    Interest only payments- His monthly payments were only $20, which only paid for the interest on the loan.

c)     One lump sum payment at the end of the loan term- At the end of the year Paul must pay $1,000 to pay off the loan.

5) Full Reconveyance-

Definition: A document that states the debt on a deed of trust has been paid off.

Example: James pays the last payment on his home that his daughter Tammy is the beneficiary to. James requests a note that states he owes no more money on the home and that Tammy will own the home debt free if he passes away.

Elements:

a)     The paying off of a debt- James makes his last payment on his home.

b)    Beneficiary- Tammy is the beneficiary of James’ home.

c)     Document that states the deed is debt free- James got a note that says Tammy will own the house debt free if he passes away.

6) Prepay-

Definition: When a borrower has the right to make larger payments that required or to pay off a loan before it’s maturity date.

Example: Henry took out a loan of $200,000 over 30 years to pay for his new home. After being in his home for 3 years, Henry gets a new job where he is paid twice as much as his old job. Henry decides to pay double his mortgage each month and ends up paying off his mortgage in 15 years instead of 30 years.

Elements:

a)     Borrowing of money- Henry took out a loan for $200,000 over 30 years.

b)    Making bigger payments- Henry got a raise and started paying double his mortgage each month.

c)     Pay off loan before its maturity date- Henry paid off his loan in 15 years instead of 30 years.

7) Locked in-

Definition: When a borrower is not given the option to pay off the loan before its maturity date.

Example: Holly bought a home for $400,000. She took out a loan for $365,000 over 30 years. Holly cannot make higher monthly payments than her fixed payments and she cannot pay off her loan before the 30 years are up.

Elements:

a)     Borrowing of money- Holly took out a loan for $400,000.

b)    Not allowed to prepay- Holly must pay her fixed payments and cannot pay off the loan before the 30 years are up.

c)     Maturity date- Holly must honor her maturity date on the loan.

8) Acceleration Clause-

Definition: The clause that gives a lender the right to demand the entire amount of a loan be paid back in the occurrence of default.

Example: Rob took out a loan for $350,000 over 30 years.  He paid his payments for 3 months and then stopped paying for 4 months. At the end of the 4 months the bank demanded that he pay back the entire loan amount because he defaulted.

Elements:

a)     Borrowing of money- Rob took out a loan for $350,000.

b)    Defaulting on a loan- Rob stopped paying his payments after 3 months of borrowing.

c)     Pay back of loan in full before maturity date- The bank demanded Rob pay back the loan immediately because he defaulted.

9) Notice of Default-

Definition: A notice that states a borrower has breached a term in a contract and the foreclosure process must start.

Example: Peter bought his home for $200,000 and stopped making his payments to the bank for 4 months. After 4 months Peter received a note in the mail saying he was in “default” and he would have his home taken away from him if he did not pay the money immediately.

Elements:

a)     Breaking of a contract- Peter took out a loan for $200,000 and promised to pay that amount monthly, but he stopped making his payments.

b)    Notice- Peter received a letter telling him he was in default.

c)     Start of foreclosure- The notice of default is the first step in the foreclosure process for Peter.

10) Mortgagor-

Definition: The borrower in a mortgage.

Example: Lauren bought her house for $600,000. She took out a mortgage of $550,000 to pay for the home over 30 years. She borrowed the money from Bank of America.

Elements:

a)     Buying of property- Lauren bought a house for $600,000.

b)    Borrower- Lauren is the borrower in the mortgage.

c)     Mortgagee- Bank of America is the lender of her mortgage.

 

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