Real Estate Exam Unit 12
"Subject To"
A clause in a contract specifying exceptions or contingencies of a purchase.
Satisfaction Of Mortgage
A document acknowledging the payment of a mortgage debt.
Discount Point
A unit of measurement used for various loan charges; one point equals 1% of the amount of the loan.
Assumption Of Mortgage
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.
Usury
Charging interest at a higher rate than the maximum rate established by state law.
Deed in Lieu of Foreclosure
Friendly Foreclosure mutual agreement rather than a lawsuit.
Novation
Substituting a new obligation for an old one or substituting new parties to an existing obligation.
At closing, the buyer paid discount points totaling $6,187.50 on a loan of $225,000. How many points did the buyer pay? A)3 B)2.75 C)1.75 D)2.25
The answer is 2.75. Divide the dollar amount of the discount points paid by the amount borrowed, and move the decimal point in the resulting figure two places to the right to find the number of discount points paid. $6,187.50 ÷ $225,000 = 0.0275, which is 2.75% or 2.75 points
Alienation Clause
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.
Acceleration Clause
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.
nonjudicial foreclosure
no court action is required because of power-of-sale clause
Shortsale
sales price is less than the remaining indebtedness.
Beneficiary
(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.
Duties of the borrower
-Payment of the debt in accordance with the terms of the promissory note Payment of all real estate taxes on the property used as security -Maintenance of adequate insurance to protect the lender in the event that the property is destroyed or damaged by fire, windstorm, or other hazard -Maintenance of the property in good repair at all times -Receipt of lender authorization before making any major alterations on the property
Trustor
A borrower in a deed of trust loan transaction; one who places property in a trust. Also called a grantor or settler.
Mortgagor
A borrower in a mortgage loan transaction.
Defeasance Clause
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
Mortgage
A conditional transfer or pledge of real estate as security for the payment of a debt. Also, the document creating a mortgage lien
Comprehensive Loss Underwriting Exchange (CLUE)
A database of consumer claims history that allows insurance companies to access prior claims information in the underwriting and rating process.
Release Deed
A document, also known as a deed of reconveyance, that transfers all rights given a trustee under a deed of trust loan back to the grantor after the loan has been fully repaid.
Loan Origination Fee
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.
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).
Mortgagee
A lender in a mortgage loan transaction.
Reverse Mortgage
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. 62 or orlder
Adjustable-rate Mortgage (ARM)
A loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index.
Straight Loan
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
Growing-equity Mortgage
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.
Amortized Loan
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.
Interest-only Loan
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.
Deficiency Judgment
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.
Margin
A premium added to the index rate representing the lender's cost of doing business.
Negotiable Instrument
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.
A $2,400 term loan has a 10% annual interest rate. What is the monthly payment?
A) $32 B) $20 C) $24 D) $12 The answer is $20. A term loan is interest only. $2,400 × 0.10 = $240 240 ÷ 12 = $20 per month
A lender uses which of the following to make a lending decision for a mortgage loan?
A) Borrower's credit report B) Borrower's credit score C) All of these D) Borrower's debt-to-income ratio The answer is all of these. To determine what a prospective buyer can afford, most home mortgage lenders use a computerized underwriting system that considers various factors, including the loan applicant's credit report and credit score. Lenders also generally look at a loan applicant's percentage of debt to income (DTI).
What does the loan origination fee cover?
A) Costs involved in generating the loan B) Seller's agreed upon repairs C) Broker's commission D) Attorney's opinion of title 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).
In one state, a lender holds a lien on real property offered as collateral for a loan. The borrower retains both legal and equitable title to real property. If the borrower defaults on the loan, the lender must go through formal foreclosure proceedings to recover the debt. This state can be BEST characterized as what kind of state?
A) Lien theory B) Intermediate theory C) Mortgage theory D) Title theory The answer is lien theory. This state is a lien theory state. The court is enlisted to order and oversee the mortgage foreclosure procedure.
In one state, a mortgagee holds legal title to real property offered as collateral for a loan, and the mortgagor retains the rights of possession and use. If the borrower defaults, the lender is entitled to immediate possession and rents. This state can be BEST characterized as what kind of state?
A) Lien theory B) Intermediate theory C) Title theory D) Mortgage theory The answer is title theory. In title theory states, the mortgagor actually gives legal title to the mortgagee (or some other designated individual) and retains equitable title. Legal title is returned to the mortgagor only when the debt is paid in full (or some other obligation is performed).
What document is available to the mortgagor when the mortgage debt is completely repaid?
A) Satisfaction of mortgage B) Defeasance certificate C) Mortgage estoppel D) Deed of trust The answer is satisfaction of mortgage. A document that indicates the mortgage has been fully paid off is a satisfaction of mortgage, sometime called a satisfaction piece.
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?
A) The buyer retains equitable title to the property. B) The buyer has given legal title to the seller. C) If the buyer defaults on the loan, the seller must undergo a formal foreclosure proceeding to recover the security. D) The seller has only a lien interest in 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.
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?
A) The seller is solely liable for $23,500. B) The buyer is solely liable for $23,500. C) The buyer and the seller are equally liable for $23,500. D) The buyer is solely liable for $30,000. 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.
What type of law limits the interest rate that is allowed to be charged?
A) Trustee law B) A usury law C) The statute of frauds D) Contract law The answer is a usury law. A law that set limits on rates of interest that may be charged is a usury law. Usury is charging a higher interest rate than the law allows for a specific kind of loan. Federal law currently exempts federally related residential first mortgage loans from state usury laws.
Which of the following allows a mortgagee to proceed to a foreclosure sale without going to court first?
A) Waiver of redemption right B) Alienation clause C) Possession rights D) Power of sale The answer is power of sale. A power-of-sale provision in a mortgage permits the lender to foreclose and sell a mortgaged property that is in default without petitioning to get the court to conduct the sale. Nevertheless, the procedure is often supervised—although not conducted—by the court.
All the following clauses in a loan agreement enable the lender to demand that the entire remaining debt be paid immediately EXCEPT
A) a defeasance clause. B) an alienation clause. C) a due-on-sale 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.
A loan in which the borrower makes only interest payments is called
A) a fixed-rate loan. B) a reverse mortgage. C) an adjustable-rate mortgage. D) a straight loan. The answer is a straight loan. A straight loan (also known as a term loan or interest-only loan) essentially divides the loan into two amounts to be paid off separately. The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term.
A mortgage document contains the clause: "In the event of Borrower's default under the terms of this Agreement, Lender may declare the entire unpaid balance of the debt due and payable immediately." This clause is called
A) a hypothecation clause. B) an acceleration clause. C) a release clause. D) a defeasance clause. The answer is an acceleration clause. An acceleration clause can be used to make the remaining balance of a loan due if the borrower defaults. Hypothecation is the act of offering the property as security without giving up possession. The defeasance clause in a mortgage defeats the granting clause. A release indicates that the loan has been repaid in full.
In an adjustable-rate mortgage (ARM), the interest rate is tied to an objective economic indicator called
A) a mortgage factor. B) an index. C) a discount rate. D) a reserve requirement. The answer is an index. The interest charged in an ARM varies with an outside economic indicator called an index. This index is beyond the control of either the borrower or the lender.
The fee charged to process a loan application is
A) a prepayment of mortgage insurance. B) a loan origination fee. C) a prepayment penalty. D) an advance interest payment. The answer is a loan origination fee. An origination fee is the fee charged to cover expenses involved with processing a loan application.
An existing mortgage loan can have its lien priority lowered through the use of
A) a reconveyance of mortgage. B) a subordination agreement. C) a satisfaction of mortgage. D) a hypothecation agreement. The answer is a subordination agreement. A subordination agreement can change the priority of an existing mortgage by the first lender agreeing to release its position as a first lien to that of a second lender.
The final payment on a home mortgage has just been made to the lender. There will still be a lien on the property until the lender records
A) a reversion of mortgage. B) a reconveyance of mortgage. C) an alienation of mortgage. D) a satisfaction of mortgage. The answer is a satisfaction of mortgage. A satisfaction of mortgage, also known as a release or discharge, is executed by the lender when the note has been fully paid. This document returns to the borrower all interest in the real estate originally conveyed to the lender. This release must be recorded in the public record to show that the debt has been removed from the property.
A borrower defaulted on a mortgage loan, leaving an unpaid balance of $95,000. After receiving only $85,000 from the sale of the property, the lender filed for
A) a satisfaction. B) a lis pendens. C) a deficiency judgment. D) a release deed. The answer is a deficiency judgement. A deficiency results when the foreclosed property does not bring enough money to fully repay the loan; the mortgagor may be entitled to a personal judgment against the borrower for the unpaid balance. Lis pendens gives notice that the property is the subject of legal action. A satisfaction indicates that the loan was fully repaid.
The amount of the loan as a percentage of the purchase price of a property is known as
A) acquisition cost. B) interest. C) loan-to-value ratio. D) mortgage insurance. The answer is loan-to-value ratio. The lower the LTV (the greater the down payment), the less risk is assumed by the lender.
The charge for the use of money is
A) based on the borrower's ability to pay. B) based on the ability of the borrower to repay the debt. C) always based on the original principal balance of the debt. D) interest on the remaining principal. The answer is interest on the remaining principal. Interest may be due at either the end (in arrears) or the beginning (in advance) of each payment period, as specified in the promissory note.
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
A) benefited from the defeasance clause in the seller's mortgage. B) assumed 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.
A mortgagor is the one who
A) can sue if the borrower defaults. B) forecloses on a mortgage. C) gives a promissory note and mortgage to the lender in exchange for a loan. D) lends money to a buyer. The answer is gives a promissory note and mortgage to the lender in exchange for a loan. The mortgagor is the borrower and the mortgagee is the lender.
Charging more interest than is legally allowed is called
A) commingling. B) usury. C) steering. D) leveraging. The answer is usury. Usury is charging interest in excess of the maximum rate allowed by law.
In a mortgage or lien theory state, the mortgagor retains
A) equitable title. B) both legal and equitable title. C) vested title. D) legal title. The answer is both legal and equitable title. In a mortgage or lien theory state, the mortgagor retains legal and equitable title to the property that is used as security for a loan.
A basic form homeowners insurance policy provides property coverage against
A) fire, lightning, and smoke damage. B) damage due to the weight of ice, snow, or sleet. C) falling objects. D) floods. The answer is fire, lightning, and smoke damage. A basic form policy covers fire, lightning, and smoke damage, among other hazards. A broad-form policy generally covers the hazards of falling objects and damage due to the weight of ice, snow, or sleet. Flood damage is covered under a separate flood insurance policy.
Lenders usually look at a loan applicant's percentage of
A) income to income potential. B) debt to income. C) principal to interest. D) principal, interest, taxes, and insurance. The answer is debt to income. A homebuyer may be expected to incur a monthly housing payment of no more than 28% of the borrower's gross monthly income, with monthly payments on all debts no exceeding 36% of gross monthly income.
A deed of trust involves all of these terms EXCEPT
A) lender. B) mortgagor. C) trustee. D) borrower. The answer is mortgagor. A mortgagor is the borrower in a mortgage. In a deed of trust, the borrower is the trustor, and the trustee holds legal title in trust for the beneficiary (lender).
A promissory note
A) may not be executed in connection with a real estate loan. B) makes the borrower personally liable for the debt. C) is a guarantee by a government agency. D) is an agreement to perform or not to perform certain acts. 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.
A deed in lieu of foreclosure is also known as
A) opting out. B) friendly foreclosure. C) rent to own. D) redemption foreclosure. The answer is friendly foreclosure. A deed in lieu of foreclosure is also called a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit.
The Consumer Financial Protection Bureau requires mortgage lenders to
A) resolve complaints within 90 business days. B) allow a borrower to seek review of a decision about a loan workout request. C) refrain from contacting a borrower who is having trouble making mortgage payments in order to avoid a charge of harassment. D) give a borrower three months' warning if an adjustable-rate mortgage will have a rate change. The answer is allow a borrower to seek review of a decision about a loan workout request. The rules of the Consumer Financial Protection Bureau allow a borrower to seek review of a decision about a loan workout request and require that the lender quickly resolve complaints, generally within 30 to 45 business days; give the borrower two months' warning if an adjustable-rate mortgage will have a rate change; and work with the borrower, if the borrower is having trouble paying the mortgage, including contacting the borrower to help.
A consumer's income, outstanding loans, and other financial factors, will be reflected in the consumer's
A) state of residence. B) withholding taxes. C) credit score. D) interest paid on overdue real estate taxes. The answer is credit score. A consumer's income, outstanding loans, payment history, and other factors are all reflected in the consumer's credit score. Even the number of credit inquiries can influence the score.
If a mortgagor defaults, the mortgagee can
A) sue on the note and foreclose on the mortgage. B) change the locks on the property to force out the debtor. C) garnish the mortgagor's wages. D) increase the interest rate on the debt. 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.
A prospective buyer needs to borrow money to buy a house. The buyer applies for and obtains a real estate loan from a mortgage company. Then the buyer signs a note and a mortgage. In this example, the buyer is called
A) the beneficiary. B) the mortgagee. C) the mortgagor. D) the vendor The answer is the mortgagor. A buyer who signs a mortgage—the document to be given to the lender—is a mortgagor. The buyer is also the maker (obligor) on the note.
The financing instrument that sets out the terms of a borrower's debt is
A) the debtor/lender form. B) the promissory note. C) the commitment letter. D) the payment contract. 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.
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
A) the lender. B) the closing agent. C) the borrower. 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.
The decision whether to buy or rent should involve consideration of
A) the terms of the security agreement. B) the availability of a reverse mortgage. C) the design and functionality of available properties. D) housing affordability and current mortgage interest rates. The answer is housing affordability and current mortgage interest rates. Other considerations include tax consequences, what might happen to home prices in the future, and a person's overall financial situation.
Negative Amortization
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.
Hypothecation
To pledge property as security for an obligation or loan without giving up possession of it.
Judicial Foreclosure
allows the property to be sold by court order after the mortgagee has given sufficient public notice
Strict Foreclosure
court orders legal transfer of title directly to lender without public sale