chapter 5 review

The commission split agreement between a broker and his salesperson gives the salesperson 60% of the broker's fee. If the salesperson sells a house for $465,000 and the broker's fee is 7% of the selling price, what is the salesperson's commission?

$19,530 $465,000 x 7% = $32,550.00 total commission $32,550 x 60% = $19,530.00 salesperson's commission

If a lender's loan to value ratio is 85%, what is the maximum amount a promissory note could carry on the sale of a $245,000 property?

$208,250 $245,000 x 85% = 208,250

An owner of a rental property grosses $35,000 a year in rent. The mortgage payments on the rental property are $1650 a month. Insurance premiums are $2400 annually. Property taxes are $5000 a year. How much will the property manager earn if he is paid 10% of gross?

$3,500 $35,000 x 10% = $3,500

onverting 34.7% to a decimal would be ____.

.347

The maximum amount a promissory note could carry on the sale of a $300,000 property if a lender's loan to value is 70% is $____.

210,000

Converting .225 to a percentage would be:

22.5%

How many courses must you complete before applying for your real estate license?

3 with 30 hours each

An FHA loan requires as little as ____% as down payment.

3.5

Minnesota usury law applies to loans for which type of property owner?

A homeowner with a conventional loan

DVA or VA

A mortgage made by an approved lender that is guaranteed by the Department of Veterans Affairs • The loan to value (LTV) ratio can be 100% • There is no mortgage insurance premium • The veteran must occupy the home • There are no due-on-sale (alienation) clauses prior to 3/1/1988 - lender's approval for assumption is required on loans originated after March 1, 1988 • An escape clause MUST be part of the purchase agreement • Veterans need to have a Certificate of Eligibility • The property value must be substantiated with a Certificate of Reasonable Value

What is a financial instrument whose interest and principal payments are derived directly from the cash flow of an underlying pool of mortgages?

A mortgage-backed security

Other Basic Facts about Mortgages

A promissory note is a contract; a mortgage is not. • Negotiable promissory notes are used in combination with mortgages in the financing of real estate transactions. The mortgage is the security document for the loan; the promissory note is the evidence of the debt. • The two documents involved with financing of real estate are a promissory note and a mortgage. • An amortized loan is a type of payment plan in which the payments are the same for each period (i.e.: monthly) for a specified number of months or years. When you make the last payment, the loan and interest are fully paid. This is sometimes referred to as a fully-amortized loan. • Equal payments and a final balloon payment The borrower makes equal payments (usually monthly) and then must pay the remaining principal and interest in one large payment, called a balloon payment. This is sometimes referred to as a "partially amortized" loan. • Interest-only payments and a final balloon payment With an interest-only loan, you repay the lender by making regular payments of interest-only over a number of months or years. The principal does not decrease. At the end of the loan term, you must make a balloon payment. This is sometimes referred to as a "term" or "straight" loan.

______ mortgage interest rate adjustments are limited with a "cap".

Adjustable rate

Liability for contamination under CERCLA includes which of the following as potentially responsible parties?

All of these answers are correct The owner of the property when the contamination was discovered Real estate agents and companies or individuals handling the waste disposal or transportation The owners of the site during the contamination

What do you call a change to a contract after it was originally accepted by all parties?

Amendment Correct. It "mends" the agreement that was already agreed to.

When would the deed be transferred in a foreclosure process?

At the end of the statutory redemption period

What is the type of contract that calls for a promise in exchange for a promise?

Bilateral contract Correct. A great example of a bilateral contract is a purchase agreement.

Other Types of Financing

Construction loans - for new construction or remodeling projects where interim financing is involved. • A wraparound mortgage is junior financing in which the buyer makes payments to another party—usually the seller—who, in turn, continues to make payments on the first loan. • An adjustable rate mortgage (ARM) is a loan in which the interest rate adjusts at pre-determined times, and the adjustment is based on an economic index or indicator. The interest and payment amount adjusted may be limited (known as a "cap"). • A graduated payment mortgage loan is a type of mortgage loan that commonly results in a negative amortization for the first few years. The initial monthly payments are less than the amount of interest owed each month, so the loan balance increases each month. • Reverse mortgage (or reverse annuity mortgage) is an arrangement in which the lender pays the homeowner a monthly payment. • When the mortgage payment includes tax and insurance (PITI payment) paid to the lender each month, it is sometimes called a budget mortgage. • Bridge or swing loan - A sum of money lent by a bank to cover an interval between two transactions, typically the buying of one house and the selling of another. It fills a gap. • Rural Housing Service (RHS) Loans - the RHS originates and insures loans in rural communities, and also guarantees loans made by private lenders.

What does Freddie Mac—the Federal Home Loan Mortgage Corporation (FHLMC)—purchase?

Conventional mortgages

The rules for condominium government, or management, are established in a document and are commonly called the:

Declaration of condominium

Which municipal service cannot be billed as a special assessment?

Electrical bill

What is the period of time between default and foreclosure that allows the mortgagor to get caught up on payments and avoid foreclosure?

Equitable redemption period

Ginnie Mae insures securities backed by ______ loans and _______ loans.

FHA /DVA

True or False: A veteran doesn't have to occupy a home purchased with a DVA loan.

False

True or False: It doesn't matter what number you plug into your calculator when dividing.

False

True or False: A deed and a mortgage are related to the financing of real estate.

False (A deed is unrelated to mortgage financing.)

True or False: A loan insured by the Federal Housing Administration (FHA) is only available to veterans.

False (All qualified home purchasers can access FHA loans.)

Conventional Financing

If a loan is not an FHA Insured or a Guaranteed VA loan, it is called a Conventional Loan • Requires a down payment of 20% or more; a loan-to-value (LTV) ratio of 80% or less • Does not require escape clauses • They are generally more lenient regarding appraisals • Common types of conventional loans: Package mortgage - includes personal property Blanket mortgage - more than one parcel pledged Open-end mortgage - allows the borrower to obtain further money advances at a later date Purchase money mortgage - a type of financing where the buyer borrows from the seller instead of a bank - the title transfers to the buyer, but the seller has a lien on the property With an insured conventional loan (in which the down payment is less than 20%), the mortgagor (buyer) pays a private mortgage insurance (PMI) premium to protect the lender in case of default

A married couple purchased a house, and they want to make sure that if one of them dies, all ownership interests goes to the surviving spouse. What kind of ownership structure should they have?

Joint tenancy

Which does NOT have to be disclosed by the seller?

Knowledge of suicide on the property

Which type of freehold estate cannot be inherited?

Life estate Correct. It is the only one that cannot be inherited.

What type of legal description has the words "point of beginning" in it?

Metes & bounds

What kind of fee does an FHA loan charge?

Mortgage insurance premium (MIP)

Which is NOT a disclosure that Minnesota sellers are required to provide?

Neighboring Sex Offenders Disclosure

As a real estate agent, you are responsible for providing the information on which disclosure statement?

None of these

The holder of a fee simple absolute estate provides for all of the following EXCEPT:

Ownership termination upon death

Foreclosure Process

Point of Default: Non-payment of the mortgage Non-payment of taxes Non-payment of insurance Removal of improvements Waste Alienation Equitable Redemption Period: A period of time between default and foreclosure that allows the mortgagor to get caught up on payments and avoid foreclosure; in other words, to cure the default. Nationally, the equitable redemption period is as long as the lender allows. In Minnesota, the equitable redemption period is six weeks • Sheriff's sale - public auction • Statutory redemption period: A period of time that allows the mortgagor to redeem the mortgage, even after a foreclosure sale, by paying the amount the property sold for plus expenses and interest In Minnesota, the statutory redemption period is six months Exceptions to the six month redemption period are: • 12 months if 1/3 of the mortgage loan has been paid, or • if there are more than 40 acres, or • if there are more than 10 acres and in agricultural use, or • if there are more than 10 acres and the mortgage loan originated before 7/1/1987, or • 5 weeks if property has been abandoned

PITI is an acronym for:

Principal, interest, taxes, and insurance These make up a mortgage payment.

Minnesota Usury Laws

Provides a limit for the amount of interest rate that can be charged • This law applies to all real estate loans EXCEPT: Loans to corporations, estates, partnerships, a coop, a joint venture, or an LLC Contracts of $100,000 or more FHA and VA Loans • If the usury law has been violated, the contract is cancelled and penalties are incurred

What is the type of mortgage where a mortgagee makes payments to a mortgagor?

Reverse annuity

A bank lends money to a homeowner, and then sells the rights to the mortgage loan to an entity. The entity then sells securities that are backed by a group of such loans. What is that kind of exchange called?

Secondary mortgage market

At the point of a mortgage default, what is the lender's typical first action toward the borrower?

Sending late notices and letters

What is the public auction where the highest bidder gets a certificate that states he/she will receive title after the statutory redemption period expires?

Sheriff's sale

What is the period of time that allows the mortgagor to redeem the mortgage even after a foreclosure sale by paying the entire balance of the loan?

Statutory redemption period

Prorations, Payment Factors, and Other Calculations

Take Note - If you want additional review with calculations, review Section 5, Chapter 5 in the course. • To convert a fraction into a decimal number, divide the top number by the bottom number (i.e.: ¼ = .25 [1 ÷ 4 = .25]). • To convert percentages into decimals, move the decimal point two places to the left and eliminate the percent sign (i.e.: 75.75% = .7575). • To convert decimals into percentages, move the decimal point two places to the right and insert a percent sign (i.e.: .6 = 60%). • When asked to find a percentage of a number, the "of" means you should multiply (i.e.: 7% of $350,000 means: $350,000 x 7% = $24,500). • A broker fee (or brokerage fee), otherwise known as sales commission, could be a flat fee, but is usually a percentage of the sales price of a property. • A cooperating broker fee is paid as a percentage of the total broker fee. This is a commission split and will be shown as a ratio. • When property rights are transferred between buyers and sellers at closing, certain costs might be split, or prorated. Examples would be utilities, taxes, and rent on income producing properties to be prorated based on the month and/or day of closing. Remember, taxes are paid in arrears. • If a property's value has increased it is referred to as appreciation. If a property's value has decreased it is referred to as depreciation. • "Net" or "Net Proceeds" refers to the amount of money the seller will receive from the sale after all the selling expenses have been paid. • The following terms are used to calculate the area of real estate: Perimeter equals the distance around an area Rectangle area equals length x width Volume equals length x width x height Trapezoid area equals half the height x the sum of the bases One linear yard equals 3 linear feet One square yard equals 9 square feet One acre equals 43,560 square feet One section equals 640 acres • The property value is usually different from the loan amount. For example, the loan might be 80% of the value. In this case the loan to value ratio (LTV) would be 80%. LTV's are sometimes referred to as mortgage ratios. • A mortgage point is when interest is paid in a lump sum to get a lower rate on a mortgage (1 point = 1%). • The monthly payment calculated from a payment factor table includes only the principal and interest payment. It does not include taxes or insurance payments that might be included in a total PITI (principal-interest-taxes-insurance) payment.

Who receives the "satisfaction of mortgage" document?

The mortgagor

The Mortgage Document

The power of sale clause is an optional provision that gives the lender the power to foreclose without going to court. • The acceleration clause makes the entire balance of the loan due and payable even though it has not fully amortized if specified conditions exist. Examples of conditions that can trigger an acceleration clause are: Non-payment of taxes Insurance coverage lapse Not keeping up on repairs/upkeep Removal of improvements Non-payment of principal and interest • An alienation or due-on-sale clause allows the lender to accelerate the loan (declare the balance due and payable) if the property is sold or transferred. • A subordination clause states that the current claim on any debts will take priority over any other claims formed in other agreements that are made in the future. Subordination is the act of yielding priority. • A "defeated" mortgage is one that is paid in full. The borrower will receive a "satisfaction" or "release" from the mortgagee. • If a mortgage loan is assumable, then a new buyer of the property can take over the loan obligations and continue making payments.

Secondary Mortgage Market

The secondary mortgage market is a market in which existing mortgages and mortgage-backed securities are traded • The three largest secondary mortgage market institutions are: "Fannie Mae" - The Federal National Mortgage Association (FNMA) - purchases all types of mortgages "Freddie Mac" - Federal Home Loan Mortgage Corporation (FHLMC) - purchases conventional mortgages "Ginnie Mae" - Government National Mortgage Association (GNMA) - guarantees investors the timely payment of principal and interest on mortgage securities backed by federally insured (FHA) or guaranteed (DVA) loans

An agent transfers her license to another broker. What happens to any listings that agent had with the first broker?

They stay with the first broker

What is the main difference between a purchase money mortgage (PMM) and a contract for deed (CD)?

Timing of transfer of title With a PMM, title transfers at the time of sale. With a contract for deed, it transfers when the debt is paid in full.

True or False: The Federal National Mortgage Association, also known as Fannie Mae, is a private company.

True

he main advantage of a(n) ______ loan are that no down payment or mortgage insurance is required.

VA

In MN, a lender initiates a foreclosure by ______ by preparing a notice of mortgage foreclosure sale.

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A(n) ______ is a payment plan in which each payment is for the same amount each period.

amortized loan

In MN, a person discovers that the interest rate for her contract for deed exceeds MN state usury limit, and as a result she can ______ the contract.

cancel

MN usury laws applies to loans for homeowners with ______ and ______.

contract for deed/conventional loans

A(n) ______ loan is neither insured by the FHA nor guaranteed by the Department of Veteran Affairs.

conventional

Freddie Mac purchases ______.

conventional mortgages

The period of time between default and foreclosure that allows the mortgagor to get caught up on payments and avoid foreclosure is called the ______ period.

equitable redemption

Basic Facts about Mortgages

f the property is financed with a mortgage loan, the owner-borrower gives the lender a document known as a mortgage as collateral. • The two documents included in a mortgage are a promissory note and the mortgage doc. • Because the owner gives the mortgage, the owner-borrower is the mortgagor. The lender receives the mortgage, and is therefore the mortgagee. • After the mortgage is recorded, it becomes a lien (an encumbrance) on the property. When the mortgage is paid off, the lien is released by the lender through a satisfaction of mortgage document.

True or False: Secondary mortgage market describes when a bank sells whole mortgages to other banks.

false

The statutory redemption period is the period of time that allows the mortgagor to redeem the mortgage even after a(n)______ sale by paying off the entire balance of the loan.

foreclosure

PITI is an acronym for principal, interest, taxes and ______.

insurance

Generally, the first action a lender takes upon the point of a mortgage default is sending ______ and ______.

late notices/letters

After a mortgage is recorded, it becomes a(n) ______ on the property.

lien

FHA

loan insured by the Federal Housing Administration • A low down payment - as little as 3.5% down • The FHA does not make home loans—it insures them; mortgage insurance premium (MIP) is attached to the payments • Lenders must approve the assumption of an FHA loan that has been originated after December 15, 1989 • There are no due-on-sale (alienation) clauses, in mortgages prior to December 15, 1989 • The interest rate for FHA loans is exempt from state usury (limiting the interest rate) regulations • The purchase agreement must contain an escape clause

An FHA loan charges a(n) ______ (MIP) fee.

mortgage insurance premium

A financial instrument whose interest and principle payments are derived directly from the cash flow of an underlying pool of mortgages is called a(n) ______.

mortgage-backed security

The ______ receives the satisfaction of mortgage document.

mortgagor (or owner)

Another name for a mortgage-based security is ______ security.

pass-through

A lender can foreclose without going to court due to the ______ clause.

power of sale

When buyers and sellers split costs according to a certain time period, it's called ______

prorating

A mortgage where a mortgagee makes payments to a mortgagor is called a(n) ______.

reverse annuity or reverse mortgage

When a loan is paid in full, the homeowner will obtain a(n) ______.

satisfaction of mortgage

After bidding highest at a(n) ______, that person will receive a certificate stating they receive a property's title after the statutory redemption period expires.

sheriff's sale

True or False: A mortgage is not considered a contract.

true

With the ______ mortgage, junior financing is involved.

wraparound

Securities Act

• A security is a note, stock, bond, or certificate of participation in a profit-sharing agreement, or an investment contract • The Minnesota Securities Act states that any security sold in Minnesota must either be a federally covered security or must be registered under the Minnesota Securities Act • Real estate licensees, if involved with investment properties, will need to research who owns the property and what the ownership agreement is prior to listing the property Mortgage Backed Securities (MBS) • A mortgage backed security (MBS) is a financial instrument whose interest and principal payments are either derived directly from the cash flows of an underlying pool of mortgages, or are "collateralized" by such a pool