Defeasance Clause to Delinquency

 

Defeasance Clause

In title theory states, the defeasance clause is a mortgage deed provision or clause allowing the borrower to regain his or her property when the loan is fully paid. Unlike lien theory states, in which the lender only receives a lien to the property, title theory states give the title to the lender, much like a car loan. The defeasance clause stipulates that if the borrower has paid the debt by a certain date, the lender will return to the borrower the title to the property.

Defect in Title

See the Title Defect entry.

Deferred Capital Gain

Any realized gain whose capital gain tax is deferred, usually through a tax-deferred real estate exchange.

Deferred Interest

When the monthly payment is insufficient to satisfy the interest rate charge, the difference is added to the principal balance as negative amortization. This deferred interest increases (rather than decrease) the principal balance.

Deferred Interest Mortgage

The deferred interest mortgage (DIM) loan that involves deferred interest, because the interest actually charged and collected is insufficient to satisfy the interest due on the loan. This typically results in negative amortization. Some GPM and ARM loans with payment caps may have deferred interest characteristics.

Deferred Maintenance

Deferred maintenance refers to property repair, maintenance and improvement requirements that have been delayed. Such maintenance are ones that are considered mandatory, but have not been performed. Deferred maintenance often occurs in properties that are under-performing or do not generate enough cash to meet all repair and maintenance needs.

Deferred Maintenance Account

The deferred maintenance account is an impound or reserve account that a lender may require of a borrower, to ensure that there will be sufficient funds to take care of deferred maintenance.

Deficiency Judgment

The deficiency judgment is a court order stating that the borrower’s obligations continue to be in default and payable, usually after a foreclosure judgment. For example, if a lender forecloses a property and sells it for a loss, that lender may apply for a deficiency judgment against the former borrower to recoup the loss. The deficiency judgment is a general judgment against the individual, rather than a specific judgment against a single property.

Defined Benefit Plan

The defined benefit plan is a retirement plan that provides a defined pension benefit or payout. The actual amount is typically based on the retiree’s number of years of employment and the salary immediately prior to retirement. Defined benefit plans reached its zenith during the 1970s, as companies thereafter sought to encourage stability. However, they are no longer in favor, because of their unpredictability and potentially higher costs (as people are living longer and retiring younger). They are being replaced with defined contribution plans (such as 401K accounts), if any retirement benefits are even offered at all. With mortgage loan applications, income from defined benefit plans can be used for income qualification as long as it is documented with an award letter or similar verification.

Defined Contribution Plan

The defined contribution plan is a retirement plan in which the employer agrees to contribute a specified amount into the employee’s retirement fund. The eventual payout will depend on the performance of the fund’s investment. The most common examples of defined contribution plans are 401K, 403B and profit sharing programs. With mortgage loan applications, funds in the applicant’s 401K may be used to support asset requirements. However, they cannot be used for income qualifications, as income from 401K accounts can be difficult to predict.

Degree of Operating Leverage

The degree of operating leverage (DOL) is a financial measurement that increased revenues will have on operating income. In the commercial real estate industry, it is used as a rental property management calculation that displays the effect of new tenants on operating income. This measurement indicates the percentage change in net operating income that comes from a change in occupancy level. There are several ways to calculate the DOL. Here’s one example: Melanie’s apartment building is 90% full and doing well. She has 10 more units still vacant. Each new tenant will increase her gross monthly rental revenue by $800; but they will increase her operating income by only $600 per month. So the degree of operating leverage would be 1.33% ($800 / $600).

DOL

See the Degree of Operative Leverage entry.

Delayed Exchange

The delayed exchange refers to a tax-deferred real estate exchange in which the exchanger does not directly exchange a current property for a target exchange property. Most real estate exchanges are delayed exchanges, giving the exchanger up to six months from the initial date of sale or transfer to acquire the target exchange property. For example, Robert sells his office building and realizes capital gains (profits) of $1 million. In order to avoid paying capital gains taxes, he must use that money to buy another investment property, in a structured delayed exchange. See the Real Estate Exchange entry.

Delinquency

A delinquency is a failure or inability to make loan payments according to the terms of the promissory note and mortgage deed. A delinquency can result in a finding and notice of default, which can eventually result in foreclosure. From a mortgage loan application standpoint, delinquencies negatively affect the applicant’s credit history and scores.