Unit 15
37 cards · 0 marked known
Acceleration Clause
A provision in a mortgage or note that allows the lender to demand immediate payment of the entire balance if the borrower defaults on payments or violates other terms.
After missing three mortgage payments, the lender invokes the acceleration clause and demands the full remaining balance.
Alienation Clause
A clause in a mortgage that prevents the borrower from transferring the property without the lender's consent, or allows the lender to accelerate the loan upon sale. Also called a due-on-sale clause.
The alienation clause requires the borrower to pay off the loan if they sell the property.
Beneficiary
The lender (or entity) that benefits from a deed of trust. The party to whom the debt is owed.
In a deed of trust, the bank is the beneficiary and the borrower is the trustor.
Certificate of Sale
A document issued to the highest bidder at a foreclosure sale, giving them the right to the property after any redemption period expires.
The winning bidder at the sheriff's sale receives a certificate of sale and must wait for the redemption period to end.
Deed in Lieu of Foreclosure
A deed given by the borrower to the lender to satisfy the debt and avoid foreclosure proceedings. The lender takes ownership of the property.
Instead of going through foreclosure, the homeowner voluntarily deeds the property to the bank to settle the mortgage.
Deed of Trust
A security instrument used in some states where the borrower conveys title to a trustee who holds it as security for the lender (beneficiary).
In states that use deeds of trust, a third-party trustee holds title until the loan is paid off.
Defeasance Clause
A clause in a mortgage that states the mortgage lien will be released and title will be clear once the debt is fully paid.
Upon final payment of the mortgage, the defeasance clause requires the lender to issue a satisfaction of mortgage.
Deficiency Judgment
A court order requiring the borrower to pay the difference between the foreclosure sale price and the remaining loan balance plus costs.
After a foreclosure sale brings only $180,000 on a $220,000 mortgage, the lender may obtain a deficiency judgment for the $40,000 shortfall.
Discount Point
A fee paid to the lender at closing to reduce the interest rate on the loan. One point equals 1% of the loan amount.
The borrower pays two discount points ($4,000 on a $200,000 loan) to lower the interest rate by 0.5%.
Equitable Right of Redemption
The borrower's right to redeem the property by paying the full debt plus costs before the foreclosure sale is finalized.
Even after foreclosure proceedings begin, the homeowner can still redeem the property by paying everything owed before the sale.
Equitable Title
The borrower's interest in the property under a land contract or installment sale. The buyer has the right to possession and equity but legal title remains with the seller until paid in full.
Under a land contract, the buyer has equitable title and can live in the home while making payments, but the seller retains legal title.
Escrow Account
An account held by the lender for collecting and paying property taxes and insurance on behalf of the borrower. Also called an impound account.
The monthly mortgage payment includes principal, interest, taxes, and insurance (PITI), with taxes and insurance going into escrow.
Foreclosure
The legal process by which a lender takes possession of a property after the borrower defaults on the loan, usually through a court proceeding or power of sale.
After repeated missed payments, the lender begins foreclosure to recover the outstanding loan balance by selling the property.
Hypothecation
The pledging of property as security for a debt without giving up possession. The borrower keeps using the property while it secures the loan.
When a homeowner takes a mortgage, they hypothecate the house as collateral but continue living in it.
Interest
The cost of borrowing money, expressed as a percentage of the loan amount. Paid to the lender over the life of the loan.
On a $300,000 mortgage at 6% interest, the borrower pays the lender for the use of the money over 30 years.
Intermediate Mortgage Theory
A hybrid theory used in some states where the borrower holds title but the lender has a lien that can become ownership upon default. Illinois generally follows intermediate theory.
Illinois generally follows intermediate theory, where the borrower holds title until default triggers lender rights.
Judicial Foreclosure
A foreclosure process that requires court action and supervision. The lender files a lawsuit to foreclose the mortgage lien.
In judicial foreclosure states, the lender must go through the court system to obtain a judgment and order the property sold.
Land Contract
An installment sales contract where the seller retains legal title while the buyer makes payments and gains equitable title. Also called contract for deed.
A buyer with poor credit purchases a home under a land contract, making monthly payments directly to the seller who still holds the deed.
Lien Theory
The legal theory that a mortgage creates only a lien on the property, not a transfer of title. The borrower retains both possession and title.
In lien theory states, the mortgage is simply a lien that the lender can foreclose upon default.
Loan Origination Fee
A fee charged by the lender for processing and originating the mortgage loan, usually expressed as a percentage of the loan amount.
The lender charges a 1% loan origination fee ($3,000 on a $300,000 loan) to cover underwriting and processing costs.
Mortgage
A legal document that creates a lien on real property as security for repayment of a loan. The borrower (mortgagor) pledges the property to the lender (mortgagee).
The homeowner signs a mortgage giving the bank a lien on the house until the loan is repaid.
Mortgagee
The lender who receives the mortgage as security for the loan. The party to whom the debt is owed.
The bank is the mortgagee and holds the mortgage lien on the borrower's property.
Mortgagor
The borrower who gives the mortgage as security for the loan. The owner of the property who pledges it as collateral.
The homeowner is the mortgagor who signs the mortgage promising to repay the loan.
Negotiable Instrument
A written document (such as a promissory note) that can be transferred to another party and is legally enforceable. Must meet specific requirements under the UCC.
A promissory note signed by the borrower is a negotiable instrument that the lender can sell to another investor.
Nonjudicial Foreclosure
A foreclosure process that does not require court action. The lender can foreclose under a power of sale clause in the mortgage or deed of trust.
In nonjudicial foreclosure states, the lender can sell the property after proper notice without going to court.
Novation
The substitution of a new contract or new party for an existing one, releasing the original party from liability. Often used when assuming a loan.
When a buyer assumes the seller's mortgage with the lender's approval, a novation releases the original borrower from liability.
Prepayment Penalty
A fee charged by some lenders if the borrower pays off the loan early. Restricted or prohibited on many residential mortgages under federal law.
An investor pays off a commercial loan early and incurs a prepayment penalty equal to six months of interest.
Promissory Note
A written promise to pay a specific sum of money to a designated party under agreed terms. The primary evidence of the debt in a mortgage transaction.
The borrower signs a promissory note agreeing to repay the $250,000 loan at 5.75% interest over 30 years.
Release Deed
A document executed by the lender that releases the mortgage lien on the property once the loan is paid in full. Also called a satisfaction of mortgage.
After the final mortgage payment, the lender records a release deed clearing the title.
Satisfaction of Mortgage
A document recorded by the lender stating that the mortgage debt has been paid in full and the lien is released.
Upon payoff, the lender must provide a satisfaction of mortgage to be recorded in the public records.
Sheriff's Deed
A deed given to the purchaser at a foreclosure sale, conveying whatever interest the borrower had in the property.
The highest bidder at the foreclosure auction receives a sheriff's deed after the redemption period expires.
Sheriff's Sale
The public auction of a property conducted by the sheriff or other authorized official after a foreclosure judgment.
The foreclosed home is sold at the sheriff's sale to the highest bidder, with proceeds applied to the mortgage debt.
Statutory Right of Redemption
The borrower's legal right, after a foreclosure sale, to redeem the property by paying the sale price plus costs within a specified time period.
In Illinois, the borrower generally has a statutory right of redemption for a period after the foreclosure sale.
Statutory Right of Reinstatement
The borrower's right to reinstate the loan by paying all past-due amounts plus costs before the foreclosure sale occurs.
Before the foreclosure sale, the homeowner can reinstate the loan by bringing all payments current plus lender costs.
Strict Foreclosure
A rare type of foreclosure where the court transfers title directly to the lender without a sale, used only in limited circumstances.
In very limited cases, a court may allow strict foreclosure, giving the lender title without auctioning the property.
Title Theory
The legal theory that a mortgage transfers legal title to the lender until the debt is paid, with the borrower retaining equitable title and possession.
In title theory states, the lender technically holds title to the property as security until the loan is satisfied.
Usury
The charging of an illegally high interest rate on a loan. Usury laws set maximum allowable interest rates.
A lender who charges 40% interest on a personal loan may be guilty of usury under state law.