Unit 12: Real Estate Financing- 4%

Question 1

Acceleration Clause

Answer 1

The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or other obligation.

Question 2

Adjustable-rate Mortgage (ARM)

Answer 2

A loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index.

Question 3

Alienation Clause

Answer 3

The clause in a mortgage or deed of trust stating that the balance of the secured debt becomes immediately due and payable at the lender’s option if the property is sold by the borrower. In effect, this clause prevents the borrower from assigning the debt without the lender’s approval.

Question 4

Amortized Loan

Answer 4

A loan in which the principal, as well as the interest, is payable in monthly or other periodic installments over the term of the loan.

Question 5

Assumption Of Mortgage

Answer 5

Acquiring title to property on which there is an existing mortgage and agreeing to be personally liable for the terms and conditions of the mortgage, including payments.

Question 6

Balloon Payment

Answer 6

A final payment of a mortgage loan that is considerably larger than the required periodic payments because the loan amount was not fully amortized.

Question 7

Beneficiary

Answer 7

(1) The person for whom a trust operates or in whose behalf the income from a trust estate is drawn. (2) A lender in a deed of trust loan transaction.

Question 8

Comprehensive Loss Underwriting Exchange (CLUE)

Answer 8

A database of consumer claims history that allows insurance companies to access prior claims information in the underwriting and rating process.

Question 9

Debt To Income (DTI)

Answer 9

Information about an applicant’s gross income and total debt that lenders generally look at as a percentage to determine qualification for a loan.

Question 10

Deed In Lieu Of Foreclosure

Answer 10

A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage. If accepted by the mortgagee, this is a way for the mortgagor to avoid foreclosure.

Question 11

Reconveyance Deed

Answer 11

A deed used by a trustee under a deed of trust to return title to the trustor.

Question 12

Deed Of Trust

Answer 12

See trust deed.

Question 13

Defeasance Clause

Answer 13

A clause used in leases and mortgages that cancels a specified right upon the occurrence of a certain condition, such as cancellation of a mortgage upon repayment of the mortgage loan.

Question 14

Deficiency Judgment

Answer 14

A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full. In some states, a deficiency judgment cannot be sought when the mortgage debt was used to purchase, and is secured by, the borrower’s principal residence.

Question 15

Discount Point

Answer 15

A unit of measurement used for various loan charges; one point equals 1% of the amount of the loan.

Question 16

Equity

Answer 16

The interest or value that an owner has in property over and above any indebtedness.

Question 17

Foreclosure

Answer 17

A legal procedure whereby property used as security for a debt is sold to satisfy the debt in the event of default in payment of the mortgage note or default of other terms in the mortgage document. The foreclosure procedure brings the rights of the parties to a conclusion and passes the title in the mortgaged property to either the holder of the mortgage or a third party who may purchase the realty at the foreclosure sale. Depending on the priority of the foreclosed mortgage, the property may be sold free of all other encumbrances incurred prior to the sale.

Question 18

Growing-equity Mortgage

Answer 18

A loan in which the monthly payments increase annually, with the increased amount being used to directly reduce the principal balance outstanding and thus shorten the overall term of the loan.

Question 19

Homeowners Insurance

Answer 19

Insurance that covers a residential real estate owner against financial loss from fire, theft, public liability, and other common risks.

Question 20

Hypothecation

Answer 20

To pledge property as security for an obligation or loan without giving up possession of it.

Question 21

Interest

Answer 21

A charge made by a lender for the use of money.

Question 22

Interest-only Loan

Answer 22

A loan that only requires the payment of interest for a stated period of time with the principal due at the end of the term.

Question 23

Loan Origination Fee

Answer 23

A fee charged to the borrower by the lender for making a mortgage loan. The fee is usually computed as a percentage of the loan amount.

Question 24

Loan-to-value Ratio (LTV)

Answer 24

The relationship between the amount of the mortgage loan and the value of the real estate being pledged as collateral.

Question 25

Margin

Answer 25

A premium added to the index rate representing the lender’s cost of doing business.

Question 26

Mortgage

Answer 26

A conditional transfer or pledge of real estate as security for the payment of a debt. Also, the document creating a mortgage lien.

Question 27

Mortgagee

Answer 27

A lender in a mortgage loan transaction.

Question 28

Mortgagor

Answer 28

A borrower in a mortgage loan transaction.

Question 29

Negative Amortization

Answer 29

Process by which the amount of the loan increases. The mortgagor sets a payment cap, or maximum amount for payments, but the difference between the payment made and the full payment amount is added to the remaining mortgage balance.

Question 30

Negotiable Instrument

Answer 30

A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery. The transferee then has the original payee’s right to payment.

Question 31

Note

Answer 31

See promissory note.

Promissory Note

A financing instrument that states the terms of the underlying obligation, is signed by its maker, and is negotiable (transferable to a third party).

Question 32

Novation

Answer 32

Substituting a new obligation for an old one or substituting new parties to an existing obligation.

Question 33

PITI

Answer 33

The basic costs of owning a home—mortgage principal and interest, real estate taxes, and hazard insurance.

Question 34

Prepayment Penalty

Answer 34

A charge imposed on a borrower who pays off the loan principal early. This penalty compensates the lender for interest and other charges that would otherwise be lost.

Question 35

Reverse Mortgage

Answer 35

A loan by which a homeowner receives a lump sum, monthly payments, or a line of credit based on the homeowner’s equity in the property secured by the mortgage. The loan must be repaid at a prearranged date, upon the death of the owner, or upon the sale of the property.

Question 36

Satisfaction Of Mortgage

Answer 36

A document acknowledging the payment of a mortgage debt.

Question 37

Short Sale

Answer 37

Sale of property in which the sales price is less than the remaining indebtedness.

Question 38

Straight Loan

Answer 38

A loan in which only interest is paid during the term of the loan, with the entire principal amount due with the final interest payment.

Question 39

“Subject To”

Answer 39

A clause in a contract specifying exceptions or contingencies of a purchase.

Question 40

Trustor

Answer 40

A borrower in a deed of trust loan transaction; one who places property in a trust. Also called a grantor or settler.

Question 41

Usury

Answer 41

Charging interest at a higher rate than the maximum rate established by state law.

Question 42

When a deed of trust is the security instrument, which party usually chooses the trustee?

Answer 42

A)
The lender
 B)
The borrower
 C)
The devisee
 D)
The county government

The answer is the lender. The lender usually also reserves the right to substitute trustees in the event of death or dismissal.

Question 43

Which of the following is TRUE about a note?

Answer 43

A)
It is a negotiable instrument.
 B)
It is a nonnegotiable instrument.
 C)
It is common law.
 D)
It is required by statute.

The answer is it is a negotiable instrument. Promissory notes are always negotiable contracts between the lender and the borrower.

Question 44

The seller told the listing broker that the seller’s loan was assumable. Upon reviewing the seller’s loan documents the listing broker found the mortgage was not assumable and the seller would have to pay off the mortgage upon sale. What clause did the listing broker discover upon reading the mortgage document?

Answer 44

A)
Defeasance clause
 B)
Acceleration clause
 C)
Due-on-sale clause
 D)
Prepayment clause

The answer is due-on-sale clause. Upon sale of the property, the due-on-sale or alienation clause requires payment of the lien before the transfer of title and does not allow for assumption of the loan.

Question 45

If a mortgagor defaults, the mortgagee can

Answer 45

A)
change the locks on the property to force out the debtor.
 B)
increase the interest rate on the debt.
 C)
garnish the mortgagor’s wages.
 D)
sue on the note and foreclose on the mortgage

The answer is sue on the note and foreclose on the mortgage. When the loan is paid in full, the mortgagee (lender) issues a satisfaction of mortgage that can be filed in the public record to clear the title.

Question 46

The financing instrument that sets out the terms of a borrower’s debt is

Answer 46

A)
the debtor/lender form.
 B)
the promissory note.
 C)
the payment contract.
 D)
the commitment letter.

The answer is the promissory note. The promissory note, referred to as the note or financing instrument, is a borrower’s personal promise to repay a debt according to the agreed terms.

Question 47

A promissory note

Answer 47

A)
may not be executed in connection with a real estate loan.
B)
is a guarantee by a government agency.
C)
is an agreement to perform or not to perform certain acts.
D)
makes the borrower personally liable for the debt.

The answer is makes the borrower personally liable for the debt. A promissory note is the borrower’s personal promise to repay a debt according to agreed terms.

Question 48

In mortgage lending, a borrower is required to pledge specific real property as security (collateral) for the loan in a practice called

Answer 48

A)
equitable collateralization.
 B)
hypothecation.
 C)
debt-collateralization.
 D)
hypo-collateralization.

The answer is hypothecation. In mortgage lending, a borrower is required to pledge specific real property as security (collateral) for the loan, a practice called hypothecation.

Question 49

Parties to lending agreements are referred to by different terms. Which of these refers to the same party?

Answer 49

A)
Borrower = mortgagor
 B)
Trustee = borrower
 C)
Trustor = mortgagee
 D)
Borrower = beneficiary

The answer is borrow = mortgagor. The person who makes the payments to repay the loan is called the borrower. The person who gave the property as security is called the mortgagor. Both are the same person.

Question 50

What does the loan origination fee cover?

Answer 50

A)
Broker’s commission
 B)
Costs involved in generating the loan
 C)
Attorney’s opinion of title
 D)
Seller’s agreed upon repairs

The answer is costs involved in generating the loan. Most lenders charge origination fees to cover the expenses involved in generating the loan. A loan origination fee is not prepaid interest; it is a charge that must be paid to the lender. The typical loan origination fee is 1% of the loan amount, although origination fees may range from 1 to 3 points (1 point equals 1% of the loan amount).

Question 51

A buyer is purchasing a condominium unit in a subdivision and obtains financing from a local bank. In this situation, which of the following BEST describes this buyer?

Answer 51

A)
Grantor
 B)
Mortgagee
 C)
Lessor
 D)
Mortgagor

The answer is mortgagor. What is implied is a “mortgage loan.” A lender (mortgagee) always receives a mortgage (document); the borrower (mortgagor) always gives one in order to get the loan.

Question 52

A straight loan is

Answer 52

A)
an amortized loan.
 B)
an interest-free loan.
 C)
an interest-only loan.
 D)
an accelerated loan.

The answer is an interest-only loan. A straight loan is also known as a term loan or interest-only loan. The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the loan term.

Question 53

A buyer purchased a home under an agreement that made the buyer personally obligated to continue making payments under the seller’s existing mortgage. If the buyer defaults and the court sale of the property does not satisfy the debt, the buyer will be liable for making up the difference. The buyer has

Answer 53

A)
assumed the seller’s mortgage.
B)
benefited from the defeasance clause in the seller’s mortgage.
C)
benefited from the alienation clause in the seller’s mortgage.
D)
purchased the home subject to the seller’s mortgage.

The answer is assumed the seller’s mortgage. Purchasers who buy a property and formally assume an existing mortgage debt become liable for any deficiency arising from a foreclosure sale. Purchasers who buy a property subject to an existing mortgage are not liable for such a deficiency; the original borrower is still liable for the debt.

Question 54

o institute a nonjudicial foreclosure, the trustee or mortgagee may be required to record a notice of

Answer 54

A)
default at the state records office.
 B)
foreclosure at the state records office.
 C)
collection foreclosure at the county recorder's office.
 D)
default at the county recorder's office.

The answer is default at the county recorder’s office. To institute a nonjudicial foreclosure, the trustee or mortgagee will send a notice of default to the borrower indicating the amount that must be paid to make the debt current, as well as the action that will be taken if the required payment is not made.

Question 55

he seller agrees to sell the house to the buyer for $100,000. The buyer is unable to qualify for a mortgage loan for this amount, so the seller and the buyer enter into a contract for deed. The interest the buyer has in the property under a contract for deed is

Answer 55

A)
mortgagee in possession.
 B)
legal title.
 C)
joint title.
 D)
equitable title.

The answer is equitable title. Equitable title in a contract for deed gives the borrower rights of possession and use while the seller retains the legal title during the contract term. If the buyer defaults, the traditional view of a land contract (contract for deed) provides that the seller can evict the buyer and keep any money the buyer has already paid, which is construed as rent. The current view, which may be found in state law, is that the buyer who has made successful loan payments for a specified amount of time has an equitable interest in the property, and if there is a subsequent default, the seller must comply with the legal requirements for a foreclosure.

Question 56

When a property is mortgaged, the owner must sign which two separate instruments?

Answer 56

A)
Deed of trust and priority document
 B)
Promissory note and tax document
 C)
Deed of trust and alienation clause
 D)
Promissory note and mortgage/deed of trust

The answer is promissory note and mortgage/deed of trust. The promissory note is the financing instrument and the mortgage or deed of trust is the security instrument.

Question 57

After a foreclosure sale, what responsibility does the purchaser at the sale have for the mortgage and any junior liens?

Answer 57

A)
The mortgage holder receives funds from the sale, but the purchaser must pay off the junior lienholders to obtain title.
B)
The purchaser pays off the mortgage after the sale, but the junior lienholders receive nothing.
C)
The purchaser has no responsibility because the purchaser receives the property title without the mortgage and junior liens.
D)
The purchaser must pay off both the mortgage and junior lienholders after the sale.

The answer is the purchaser has no responsibility because the purchaser receives the property title without the mortgage and junior liens. The proceeds from the sale are used to pay off the mortgage and junior lienholders. If the proceeds are insufficient, and state law permits, these creditors can seek a deficiency judgment against the original owner for the remaining debt. The purchaser at the sale is not involved unless the purchaser is a mortgage or lienholder.

Question 58

The mortgage disclosure rules issued by the Consumer Financial Protection Bureau, which took effect in 2014, require a mortgage lender to do all of the following EXCEPT

Answer 58

A)
require maximum insurance coverage by the borrower.
B)
quickly resolve complaints, generally within 30 to 45 days.
C)
give two months’ warning if an adjustable-rate mortgage will have a rate change.
D)
respond quickly when a borrower asks about paying off the loan.

The answer is require maximum insurance coverage by the borrower. The lender may not charge for insurance the borrower doesn’t need or over-charge for insurance the lender provides if the borrower fails to do so.

Question 59

A promissory note used as a debt instrument without any related collateral is called

Answer 59

A)
an unsecured note.
 B)
a secured note.
 C)
a hypothecated note.
 D)
an equitable note.

The answer is an unsecured note. A promissory note used as a debt instrument without any related collateral is called an unsecured note.

Question 60

All the following clauses in a loan agreement enable the lender to demand that the entire remaining debt be paid immediately EXCEPT

Answer 60

A)
an alienation clause.
 B)
a due-on-sale clause.
 C)
a defeasance clause.
 D)
an acceleration clause.

The answer is a defeasance clause. A defeasance clause requires a lender to execute a satisfaction when the note has been fully paid.

Question 61

Discount points on a mortgage are computed as a percentage of

Answer 61

A)
the down payment.
 B)
the closing costs.
 C)
the selling price.
 D)
the loan amount.

The answer is the loan amount. Discount points are based on a percentage of the loan amount, not the purchase price.

Question 62

In a loan that requires periodic payments that do not fully amortize the loan balance by the final payment, what term BEST describes the final payment?

Answer 62

A)
Variable
 B)
Balloon
 C)
Adjustment
 D)
Acceleration

The answer is balloon. When the payments made have not paid off the debt, the last payment is a balloon payment.

Question 63

How does an acceleration clause help lenders?

Answer 63

A)
Lenders would rather foreclose on property than hold a long-term loan.
B)
Without the acceleration clause, lenders would have to sue the borrower for every overdue payment.
C)
It sets out the provisions for the impound account.
D)
It results in a deed in lieu of foreclosure rather than the default process.

The answer is without the acceleration clause, lenders would have to sue the borrower for every overdue payment. A lender’s purpose is to make long-term loans, not foreclose. The impound account is set up under a different provision of the loan.

Question 64

In a PITI loan payment, the funds collected to pay for the taxes and insurance that are held in the lender’s reserve or escrow account belong to

Answer 64

A)
the borrower.
 B)
the lender.
 C)
the closing agent.
 D)
the broker.

The answer is the borrower. The lender is holding the money in a reserve and will pay the bills for the borrower.

Question 65

Lenders charge a loan origination fee to

Answer 65

A)
cover the expenses involved in generating the loan.
B)
guard against charges of usury.
C)
guard against losses in the event of a short sale.
D)
cover the losses involved if the borrower repays the loan before the end of the loan term.

The answer is cover the expenses involved in generating the loan. The processing of a mortgage application is called loan origination. When a home loan is originated, a loan origination fee is charged by most lenders to cover the expenses involved in generating the loan.

Question 66

In a certain state, a mortgagee holds a lien on real property offered as collateral for a loan. The mortgagor retains both legal and equitable title to this real property. The state where this real property is located is BEST characterized as which type?

Answer 66

A)
Intermediate theory
 B)
Lien theory
 C)
Title theory
 D)
Mortgage theory

The answer is lien theory. The mortgagor retains both legal and equitable title to the real property. If the borrower defaults on the loan, the lender must go through formal foreclosure proceedings to recover the debt.

Question 67

A $2,400 term loan has a 10% annual interest rate. What is the monthly payment?

Answer 67

A)
$24
 B)
$32
 C)
$20
 D)
$12

The answer is $20. A term loan is interest only.

$2,400 × 0.10 = $240

240 ÷ 12 = $20 per month

Question 68

The database of consumer claims history available to insurance companies is the

Answer 68

A)
Comprehensive Loss Underwriting Exchange.
 B)
Consumer Claims History Database.
 C)
Policy Information Database.
 D)
Insurance Policy Information Exchange.

The answer is Comprehensive Loss Underwriting Exchange. This database, referred to as CLUE, gives insurance companies information that assists in the underwriting and rating process.

Question 69

Another name for a promissory note is

Answer 69

A)
capitalization.
 B)
hypothecation.
 C)
financing instrument.
 D)
obligatory instrument.

The answer is financing instrument. The promissory note is called the note or financing instrument that is the borrower’s personal promise to repay a debt.

Question 70

In a lien theory state, a buyer purchases property from a seller and gives the seller a mortgage as part of the purchase price. Which of these statements is FALSE?

Answer 70

A)
If the buyer defaults on the loan, the seller must undergo a formal foreclosure proceeding to recover the security.
B)
The buyer has given legal title to the seller.
C)
The seller has only a lien interest in the property.
D)
The buyer retains equitable title to the property

The answer is the buyer has given legal title to the seller. A borrower who gives a mortgage, even in the seller financing situation described in this question, retains both equitable and legal title to the property serving as security.

Question 71

The borrower of the note is called

Answer 71

A)
payor.
 B)
note holder.
 C)
mortgagor.
 D)
payee.

The answer is payor. The borrower is known as the maker or payor in the promissory note.

Question 72

A home is purchased using a fixed-rate, fully amortized mortgage loan. Which statement regarding this mortgage is TRUE?

Answer 72

A)
Each mortgage payment amount is the same.
B)
Each mortgage payment reduces the principal by the same amount.
C)
A balloon payment will be made at the end of the loan.
D)
The principal amount in each payment is greater than the interest amount.

The answer is each mortgage payment amount is the same. In a fully amortized loan, there will be no balloon payment. Each mortgage payment reduces the principal by a slightly different (increasing) amount, but each mortgage (principal plus interest) payment is the same

Question 73

A loan that provides for the full payment of the principal over the life of the loan is

Answer 73

A)
an indexed loan.
 B)
a reverse mortgage.
 C)
a balloon payment.
 D)
an amortized loan.

The answer is an amortized loan. An amortized loan is paid off in regular periodic payments that include both principal and interest over a term of years.

Question 74

In one type of financing, a third party holds legal title to real property offered as collateral for a loan, and the borrower retains the rights of possession and use. If the borrower defaults, the lender is entitled to ask that the third party sell the property. What type of security instrument has been used in this case?

Answer 74

A)
Mortgage with a power of sale
 B)
Deed of trust
 C)
Installment sales contract
 D)
Promissory note

The answer is deed of trust. With a deed of trust, the borrower/property owner deeds the property to a third party, called the trustee, to hold on behalf of the lender, called the beneficiary. If the owner (the trustor) defaults in payment of the underlying debt, the beneficiary can notify the trustee to begin foreclosure proceedings.

Question 75

A charge of three discount points on a $120,000 loan equals

Answer 75

A)
$4,500.
 B)
$3,600.
 C)
$116,400.
 D)
$450.

The answer is $3,600. A point is 1 percent of the amount borrowed (the loan amount). Three points would be three times as much: 3% × $120,000 = $3,600

Question 76

A buyer purchases property from a seller for $45,000 in cash and assumes the seller’s outstanding mortgage balance of $98,500. The lender executes a release for the seller. The buyer fails to make any mortgage payments, and the lender forecloses. At the foreclosure sale, the property is sold for $75,000. Based on these facts, who is liable, and for what amount?

Answer 76

A)
The buyer is solely liable for $30,000.
 B)
The buyer and the seller are equally liable for $23,500.
 C)
The seller is solely liable for $23,500.
 D)
The buyer is solely liable for $23,500.

The answer is the buyer is solely liable for $23,500. Because the lender released the original borrower, the second borrower is fully responsible for the deficiency.

Question 77

A buyer purchased a home for cash 30 years ago. Today the buyer receives monthly checks from a mortgage lender that supplement the buyer’s retirement income. The buyer MOST likely has obtained

Answer 77

A)
a reverse mortgage.
 B)
an adjustable-rate mortgage.
 C)
an overriding deed of trust.
 D)
a purchase-money mortgage.

The answer is a reverse mortgage. In a reverse mortgage, the lender pays the borrower regular monthly payments as long as the borrower lives in the home or until the property is sold, at which time the debt is paid off by the sale proceeds. Interest accrues and compounds until the loan is repaid. The terms vary with the age of the borrower and value of the property.

Question 78

A mortgage company charges borrowers a 1.5% loan origination fee. What will the mortgage company charge as a fee if the asking price of a house was $235,000, the sales price is $210,000, and the buyer is making a down payment of $50,000?

Answer 78

A)
$3,150
 B)
$3,525
 C)
$2,400
 D)
$3,750

The answer is $2,400. The buyer’s loan origination fee is $2,400: ($210,000 – $50,000) × 1.5% = $2,400. The asking price is not relevant to this problem.