Deed of Trust and Mortgage Instruments
Subordination Clause
A developer, Howard, has purchased land with the expectation of constructing an apartment building. He explains to his lender that he'll need a construction loan as well, so the mortgage they sign includes what kind of clause to allow the construction loan's lien position to take priority?
Exculpatory clause (exculpatory agreement)
A lender has foreclosed on Pam, but isn't allowed to ask for a deficiency judgment as well.
Deed of Trust
A third party may hold title on behalf of lender.
Allows the lender to make the loan immediately due and payable if the borrower doesn't abide by the terms of the agreement
Acceleration clause
Allows the lender to make the loan immediately due and payable if the property is transferred
Alienation clause Also known as the due-on-sale clause
Alienation Clause
Also known as the due-on-sale clause, This allows the lender to make the entire loan due and payable immediately if the property is sold or otherwise transferred.
Mortgage
Always creates a lien against property.
NON-RECOURSE CLAUSE
An investor purchased the mortgage, and the borrower has now defaulted, but the investor can't sue the original lender for reimbursement.
Ava will not be allowed to pre-pay the loan prior to the date specific in the loan agreement. The lock-in clause is a form of pre-payment penalty typically used only for high-yield loans.
Ava is borrowing money to buy some commercial property for her business. The loan agreement she signs includes a lock-in clause. What does that mean?
Bill
Bill's loan is secured by a mortgage. Who holds legal title when this security instrument is used?
Late Charge Provisions
Charges for loan payments that are received after their due date are usually stipulated in the promissory note attached to the security instrument.
Reconveyance Clause
Deeds of trust use a reconveyance clause. The trustee is required to execute a deed of reconveyance to give full title to the trustor.
Used in the mortgage to describe borrower's right to regain title when debt is repaid
Defeasance clause
Lock-in Clause
Dennis wishes he could pay his loan off early, but he would have to pay a penalty if he did.
If the existing finance instrument contains an alienation clause, an assumption isn't possible.
False
late charge provision
Gina's mortgage payment arrives late one month. What language in the promissory note allows the lender to charge her a fee as a result?
Acceleration Clause
If the borrower fails to make a payment or to abide by the terms of the agreement (for example, by not paying property taxes), this is the clause that describes this as a default, and which creates a consequence of making the entire debt immediately due and payable.
beneficiary
Lends money
Defeasance Clause
Mortgages use the defeasance clause. The lender is required to execute a satisfaction of mortgage.
Partial Release Clause
One lot in a new subdivision is finished and ready for sale to a new owner, so the developer will need clear title to transfer the property.
Pre-payment clause
Paula makes additional payments on her loan each year, and pays it off three years early. The lender can't charge a penalty.
If borrower defaults, allows the property to be sold using non-judicial foreclosure process
Power of sale
Standard in the deed of trust, but may be included in a mortgage
Power of sale
Pre-payment clause Pre-payment clauses are standard in government loans.
The ______ clause allows the borrower to pre-pay principal on the loan at any time without penalty.
Alienation
The ______ clause is also known as a due-on-sale clause.
Typical when a borrower defaults on a deed of trust
The beneficiary (lender) is more likely to use a non-judicial foreclosure than the mortgagee would.
Equitable Right of Redemption
The right of a defaulted property owner to recover the property prior to its sale by paying the appropriate fees and charges.
When a borrower has paid off the loan, how is the release handled if the security instrument is a deed of trust?
The trustee executes and records a deed of reconveyance and the lender returns the note to the borrower.
Power of Sale
This clause allows the trustee (or the mortgagee, in the case of a mortgage) to sell the property in order to recover losses from borrower default using a non-judicial foreclosure process Standard in the deed of trust, but may also be included in a mortgage.
Acceleration Clause
This clause states that the lender can call the loan immediately due and payable if the borrower defaults on the loan, so it is an acceleration clause.
Judicial foreclosure
Typical when a borrower defaults on a mortgage
Power of Sale
What is the name of the clause that's standard in a deed of trust and allows the lender to foreclose non-judicially? It can also be included in a mortgage if the state allows it.
Reconveyance
Which clause in the deed of trust is the equivalent of the defeasance clause in the mortgage?
Standard clauses in a security instrument include
a defeasance or reconveyance clause, late charge provisions, an acceleration clause, and the alienation clause, which is also known as a due-on-sale clause.
If a buyer can assume an existing loan, it's always better to do so rather than applying for a new loan.
false
When a buyer assumes an existing loan, the original borrower is no longer liable if that buyer defaults on the loan.
false
Trustee
holds legal title on behalf of the beneficiary until there is a default on the debt or the loan is paid off in full.
The beneficiary is the lender when a deed of trust is used.
is the lender when a deed of trust is used.
Mortgagee & beneficiary
lender
A deed of trust uses a
reconveyance clause, which requires the trustee to convey the deed to the homeowner when the loan has been repaid in full.
With a mortgage,
the lender records a satisfaction of mortgage when the loan has been paid in full.
A mortgage creates a lien against a property where legal title is held by
the mortgagor/borrower.
When an assumption is made,
the original borrower should request a release of liability or a novation from the lender.
Late charge provisions are found on
the promissory note rather than the security instrument.
A seller buydown can ______.
Help a borrower meet lender qualification standards
Morris still owes his lender for the financing obtained in purchasing his home. Several years later, Morris took out a home equity line of credit. This means that ______.
If Morris is foreclosed on, the home equity line of credit won't be paid until Morris's first loan is paid off
What is the purpose of a lifting clause?
It allows a borrower to refinance a first mortgage without affecting its lien position even when a junior mortgage is in place.
What's the purpose of a typical subordination agreement?
It allows a junior mortgage to move into first lien position.
What is the name for a loan that creates a lien against property that already has been pledged as collateral?
Junior loan
Which of the following clauses is included in Fannie Mae's multi-state note?
Late charge The note contains a description of when a late charge is payable.
What does the concept "first in time" refer to when discussing lien priority?
Liens are paid based on date of filing "First in time" means that a lien that was filed earlier than another lien will be paid first. However, property tax liens always take priority.
Denzel's loan payments have been reduced because his lender agreed to extend the amortization schedule stated on his note. This is the result of a ______.
Loan modification agreement
The Morris family home went into foreclosure December 15, 2016, and sold January 1, 2017. Their contractor had begun work on May 15, 2015, and was not paid, and finally filed a mechanic's lien on October 1, 2016. What date will be used for lien priority for the mechanic's lien?
May 15, 2015 Mechanic's liens are based on the date work began, not the time of filing.
Victor is selling his property to Sheila. He's acting as the lender, and the property is unencumbered. Which of the following options describes the type or types of financial instruments Victor may use for the loan agreement?
Note with a contract for deed, mortgage, or a note with a deed of trust
What paragraph in the sample note contains the required reference to the security instrument?
Paragraph 10
Which paragraph in the sample note describes the schedule of repayment?
Paragraph 3
Which paragraph in the sample note includes the late charge provision?
Paragraph 6A
Leslie has applied for a loan modification. As part of the process, her lender will likely ______.
Perform a title search
What information is found in paragraph four of the note?
Prepayment clause
A property has just been foreclosed on. Which of the following describes the rules regarding lien priority?
Property tax liens take priority, with all others following a "first in time" rule. Property tax liens take priority; all others are paid depending on the date they were filed—first in, first paid, regardless of amount owed.
A property has just been foreclosed on. Which of the following describes the rules regarding lien priority?
Property tax liens take priority, with all others following a "first in time" rule. Continue to Unit 6: Diving into the Finance Instruments Return to Unit 5: Subordinate Finance Instruments View Exam Results
Violet purchased a house from Nick, and assumed the existing loan. Nick wants to make sure he isn't liable if Violet ever defaults. What can he do to remove his name from the loan agreement?
Request a novation
When the borrower has fully paid off the loan, the lender will record that the note is satisfied.
Select the choice that best translates this clause into plain English. "Upon payment of all sums secured by this Mortgage, Mortgagee shall discharge this Mortgage without cost to Mortgagor. Mortgagor shall pay all costs of recordation, if any."
Assumption
- A novation can be used to remove the original borrower's liability. - The lender may charge a fee to the new borrower. - The lender may require the new borrower to meet qualification standards.
Deed of Trust includes
- Acceleration clause - Reconveyance clause - Power-of-sale clause
Ensures that the borrower will regain full title to the property once the loan is fully repaid
Defeasance/reconveyance
Subordination Clause
The borrower will need a second loan to develop the land purchased with this loan.
Defeasance Clause or Reconveyance Clause
This clause states that the borrower will regain full title once the debt is fully repaid.
With a deed of trust,
a trustee executes a deed of reconveyance when the loan has been paid in full.
The mortgage and the deed of trust are both
security instruments
* Accurate legal description of the property * Statement of loan details and repayment schedule in attached note * Notarized borrower's signature * Recorded in county land records
Both the mortgage and the deed of trust must include the following features in order to be considered valid security documents:
Promissory note includes
Late charge provision
exculpatory clause
The contract Jack is signing has a clause that protects his assets from a deficiency judgment in case of foreclosure. What is this called?
Non-judicial foreclosure
Typical when a borrower defaults on a deed of trust
The borrower is required to maintain the property and pay property taxes and insurance.
Which of the following features is shared by the mortgage and the deed of trust?
A buyer who assumes an existing loan may have to meet the lender's qualification standards.
true
Translation: The lender allows the borrower to obtain another loan that will take lien priority to cover the costs of construction on the property as long as it's not more than $100,000.
"Lender agrees that this instrument shall be subordinate to a lien to be given by Borrower to secure funds for the construction of improvements on the Property provided that said lien is duly recorded and the amount secured by said lien does not exceed $100,000."
What's the purpose of a loan modification?
- Avoid the need for foreclosure - Make the loan more affordable for the borrower
mortgage
- Judicial foreclosure - Borrower has statutory right of redemption - Mortgagee executes satisfaction of mortgage - - -
Mortgage includes
- Judicial foreclosure clause - Defeasance clause
Deed of Trust
- Non-judicial foreclosure - Time and cost to foreclose tend to be less - Trustee executes deed of re conveyance - - -
In which four of these property transfers does federal law prohibit a lender from enforcing an alienation clause?
- Parent to child - Spouse to spouse - Between parties in a divorce settlement - When a borrowers dies and a relative inherits
Removing Liability
- Release of liability - Notation
Mortgagor/Trustor
A borrower in a mortgage loan transaction.
Usually appears in the promissory note
Late charge provision
Subject to the existing mortgage lien
- The seller's credit score may improve although he's not making any mortgage payments. - The lender's permission is not requested.
To hold legal title to the property on behalf of the beneficiary until the loan is repaid When a deed of trust is used in a title theory state, the trustee holds legal title to the property on behalf of the beneficiary.
What is the trustee's role when a deed of trust is used to secure property for a loan?
Provisions that can be included in a finance instrument to address specific needs are
- lock-in, prepayment, - nonrecourse, - exculpatory, - subordination, - cross-default, - partial release.
With either the deed of trust or the mortgage,
the borrower is required to maintain the collateral by paying taxes and insurance and by maintaining the physical condition of the property.
Subordination clause
A lot in a new subdivision is finished and ready to be sold. The developer needs a clear title in order to transfer the property. Which of the following clauses must be included in a loan agreement?
Mortgagor
Borrows money to pay for property
Used in the deed of trust to describe borrower's right to regain title when debt is repaid
Reconveyance clause
Which of these are ways in which a loan may be modified when a borrower has had difficulty making payments?
Reduce required monthly payment Reduce interest rate Extend amortization schedule Reduce principal amount
The borrower is allowed to prepay the loan without penalty. This is an important clause for the borrower to look for. Most conventional residential loans don't allow the lender to charge a prepayment penalty.
Select the choice that best translates this clause into plain English. "Any partial prepayment shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent monthly installments or change the amount of such installments, unless the Note holder shall otherwise agree in writing."
power of sale clause
The clause is a powerful right given to the lender in the case of borrower default.
With a mortgage,
a judicial foreclosure is typical, and a borrower has a right to cure the default, an equitable right of redemption prior to auction, and a statutory right of redemption after the auction.
With a deed of trust,
a non-judicial foreclosure is typical, and a borrower has a right to cure the default prior to the auction. But the borrower has no statutory right of redemption after the sale.
In general, a deed of trust allows
a trustee to hold legal title on behalf of the beneficiary/lender.
A mortgage uses a defeasance clause,
which requires the lender to execute a satisfaction of mortgage when the loan has been repaid in full.
Alienation Clause
Albert wants to sell his house to his cousin, who's willing to assume his FHA loan. What clause in Albert's mortgage requires him to obtain the lender's permission to do this?
exculpatory clause
The ______ clause protects the borrower's assets that aren't part of the voluntary lien from a deficiency judgment in case of foreclosure.
Acceleration clause
What type of clause is this? "If any monthly installment under this Note is not paid when due and remains unpaid after a date specified by a notice to Mortgagor, the entire principal amount outstanding and accrued interest thereon shall at once become due and payable at the option of the Note holder."
late charge provision
What type of provision is standard with either the mortgage or the deed of trust, but is included in the promissory note rather than the security instrument?
late charge provision
What's the name of the clause in a promissory note where this language appears: "If the Note Holder has not received the full amount of any monthly payment by the end of ______ calendar days after the date it is due, I will pay a late charge to the Note Holder"?
Partial Release Clause
What's the name of the clause included in a finance instrument that requires the lender to release a portion of the property from the lien when a part of the debt has been paid?
The trustee executes and records a deed of reconveyance and the lender returns the note to the borrower.
When a borrower has paid off the loan, how is the release handled if the security instrument is a deed of trust?
The lender executes and records a satisfaction of mortgage and returns the note to the borrower.
When a borrower has paid off the loan, how is the release handled if the security instrument is a mortgage?
Power of sale The power of sale clause is standard in a deed of trust and allows the non-judicial foreclosure process to be used in case of default.
Which clause is standard in a deed of trust and affects the foreclosure process that can be used if the borrower defaults?
Subordination Clause
allows the security instrument's lien position to be placed in a lower priority to a new loan that's using the same property as collateral.
In the definitions listed on page one of the deed of trust, how is the lender described?
"The Beneficiary under this Security Instrument"
When the new buyer makes the payments on a loan as if nothing has changed, this is called a
"subject to" purchase.
Which of these are examples of junior finance instruments?
- Home equity loan - Second mortgage
What Type of Seller Financing
- Note with mortgage - Note with deed of trust - Contract for deed
with the note "Space above this line for recording data." Why is this space important? Select all that apply.
- The document isn't valid until it has been recorded. - The evidence of official recording is placed here.
A security instrument may include several standard provisions, including
- a power of sale clause, - defeasance clause, - acceleration clause, - alienation clause, - and late charge provisions.
A loan modification may use just one or a combination of strategies, such as
- reduced monthly payments, - reduced interest rate, - extended amortization schedule.
Which of the following is true about a home equity line of credit?
A borrower can use the funds as needed, repay them, and borrow them again.
A homeowner has been paying her mortgage for several years and has built up equity. She decides to take out a home equity line of credit because she needs some cash. This credit will create ______.
A junior lien on the property
A homeowner has been paying her mortgage for several years and has built up equity. She decides to take out a home equity line of credit because she needs some cash. This credit will create ______.
A junior lien on the property A new loan will create a junior lien on the property. The mortgage is the senior lien.
A foreclosure occurs January 1, 2016. Of the following, which lien takes priority?
A property tax lien filed January 1, 2014 Property tax liens take priority over all other liens.
What is a carryback loan?
A second loan financed by the seller
Suzy has lost her job and wasn't able to make last month's mortgage payment. How is her lender most likely to help Suzy stay in her home?
Agreeing to modify her loan
If you look at covenant number 18, what clause that was also seen in the promissory note is included?
Alienation clause
Subordination agreement
Allows a junior lien to take a lien position ahead of a senior lien
Lifting clause
Allows senior liens to be refinanced without affecting the lien position of the junior loan
Andrea can cure the default and reinstate the loan. The deed of trust gives Andrea the right to cure the default and reinstate the loan, but no rights of redemption after the sale.
Andrea's lender has notified her of its intent to foreclose. Her loan is secured with a deed of trust. What rights does she have to redeem her property?
In a deed of trust, who is the trustor?
Borrower
Who's the mortgagor in a mortgage?
Borrower Plain English for the mortgagor is "borrower." This is because the borrower establishes the mortgage as a security instrument for the loan. Retake this Exam Return to Unit 6: Diving into the Finance Instruments View Exam Results
Which of the following situations would make a borrower ineligible for a loan modification?
Borrower has filed for bankruptcy
Which of the following is one a way a loan may be modified when a borrower is having difficulty making payments?
Extend the amortization schedule.
For states that use a mortgage rather than a deed of trust as a security instrument,
Fannie Mae provides a uniform mortgage form for lenders to use.
Alienation clause
What clause allows the lender to make the entire loan due and payable immediately if the property is sold?
What is a statutory right of redemption?
What is a statutory right of redemption?
Junior loan
What is the name for a loan that creates a lien against property that already has been pledged as collateral?
Subject to existing financing
When a buyer takes over payments on a loan without telling the lender, this is called a purchase ______.
Brandon's home has been foreclosed on. He had an outstanding loan balance of $145,000, which he owed to his lender, XYZ Lending. There's also a lien against the property recorded in 2014 for an unpaid student loan of $25,000, and a HELOC established in 2012 of $30,000, of which he'd used $10,000. If his foreclosure nets $150,000, how much will each creditor be paid?
XYZ Lending will receive $145,000, the HELOC lender will receive $5,000, and the lien holder for his student loan will not be repaid. Priority of liens is dependent on date of recordation. Because the original home loan was in first position, it will be repaid first. That leaves $5,000 for the HELOC lender. The lien from the student loan was recorded last, and won't receive anything.
Loan modifications are used when
a borrower is having trouble making mortgage payments to help make the payments more affordable and avoid foreclosure.
Buydowns can be
a permanent reduction to the interest rate. or temporary reduction to the interest rate.
Statutory Right of Redemption
allows mortgagor (borrower ) a period of time after the property is sold at auction to pay off loan and associated costs and get the property title back.
The process, known as "statutory redemption,"
allows mortgagors (homeowners) a limited amount of time, often one year, to reclaim (or redeem) the property if they are able to pay what the property sold for at the foreclosure sale
Stephanie was having trouble making her mortgage prepayments. Now her payments are lower than they were, and she's able to pay them each month. This is because her lender ______. Now her payments are lower than they were, and she's able to pay them each month. This is because her lender ______.
Gave her a loan modification
When a real estate transaction is financed using a contract for deed, what advice should real estate agents give to their clients?
Have an attorney review the contract.
Maggie has a neighbor, Jim, who is facing foreclosure. She likes Jim and wants to help him out, so they agree to do a "subject to" purchase. What does this mean?
Maggie will take over Jim's loan payments without telling his lender she's doing so.
Statutory right of redemption
Regina has defaulted on the terms of her mortgage, and now her lender has foreclosed. The property was sold at a sheriff's sale three months ago. Regina suddenly learns that she has inherited a great deal of money. She wants her property back. Under a judicial foreclosure, what right might allow her to buy her property from the winner of the foreclosure auction?
Seller financing is flexible and can be used to finance an entire transaction,
as a second loan to supplement institutional financing, or as a wraparound mortgage.
Borrowers should stay on top of the application process to prevent
delays or mistakes created by the mortgage servicer.
Federal law prohibits the lender from
enforcing an alienation clause in certain transfers.
A subordination agreement
is a legal document that establishes one debt as ranking behind another in priority for collecting repayment from a debtor.
A second or third mortgage creates a junior lien against a property, meaning
it's junior to the first mortgage.
The ______ clause in a deed of trust allows the lender to foreclose non-judicially.
ower of sale
A transfer subject to existing financing is done without
requesting permission from the lender.
Assumption of an existing loan
requires lender approval and may be possible even when an alienation clause is present.
The seller retains legal title to the property while _____
the buyer possesses the property, makes payments, and has equitable title.
Fannie Mae provides uniform legal forms that lenders can use, including
the deed of trust.
Assumption usually requires
the new borrower to meet qualification standards and to pay an assumption fee.
The security instrument used
when a seller provides financing depends on the situation and the seller's choice.
Cross-default clause
The borrower has defaulted on this loan and is automatically in default on another loan.
Which of the following is a potential concern of a buyer who's entering into a contract for deed with a seller?
The buyer could lose the property after missing only one mortgage payment.
Who's the mortgagee in a mortgage?
The lender The lender is the mortgagee, and the borrower is the mortgagor. This is because the borrower establishes the mortgage as a security instrument on the lender's behalf.
Ronald is having his existing loan modified. During the application process, why will Ronald's lender perform a title search on his property?
The lender wants to ensure that an existing lien won't take priority over the modified loan.
Ricki's loan modification application is in process. Before approving, her lender performs a title search on her property. Why?
The lender wants to ensure that another lien won't take priority over the modified loan Lenders need to protect their investments, and another lien may put the kibosh on the loan modification.
What is a statutory right of redemption?
The right of a borrower to redeem the property by paying amounts owed plus costs, even after the foreclosure sale
Why do junior instruments usually have a higher interest rate than the senior loan?
The risk of the principal being lost is greater in case of default due to the junior loan's lower lien priority.
Which one of the following statements is true for a sale that's subject to an existing mortgage lien?
The seller's credit score may improve although he's not making any mortgage payments.
Which of the following statements about an assumption is NOT true?
The seller's credit score may improve although he's not making any mortgage payments. A seller's credit score may improve in a sale subject to the existing mortgage lien, not an assumption.
One difference between a judicial foreclosure and a non-judicial foreclosure is that with a non-judicial foreclosure, ______.
There is no statutory right of redemption A statutory right of redemption is one that occurs after the sale. This occurs only in judicial foreclosures, and isn't allowed in every state.
At the bottom of page two in your resource, there's a paragraph titled Transfer of Rights in the Property. To whom does the borrower convey the property?
Trustee