Section 7: Texas Real Estate Finance Instruments

Voluntary Lien

-Mortgage loan

Which of the following describes a mechanic's lien?

It's a specific involuntary lien.

Which of the following is an example of an involuntary, specific, statutory lien?

Materialman's lien

Krista is obtaining a loan to buy a home. Her loan agreement consists of one document called a note and one called a deed of trust. What's the role of the note?

States who owes money to whom, how much, and how it will be repaid

Voluntary Specific Lien

The homebuyer uses a mortgage loan

Late charge provision

Usually appears in the promissory note

A mortgage lien is a(n) ______ lien.

Voluntary and specific

Release of liability

A signed agreement between the lender and the original borrower

Novation

A substitution of the maker of the note

Deed of trust

A third party may hold title on behalf of lender. -Non-judicial foreclosure -Time and cost to foreclose tend to be less -Trustee executes deed of reconveyance

A vendor and vendee are the parties involved when the finance instrument is a ______.

Contract for deed

Deed of trust II

Reconveyance clause

Subordination

The borrower will need a second loan to develop the land purchased with this loan.

Which statement correctly describes a contract for deed?

The contract for deed is usually used in a seller-financed transaction.

Non-judicial foreclosure

Typical when a borrower defaults on a deed of trust

What is an encumbrance?

A defect on a title that can be monetary or physical

Acceleration clause

Allows the lender to make the loan immediately due and payable if the borrower doesn't abide by the terms of the agreement

Non recourse

An investor purchased the mortgage, and the borrower has now defaulted, but the investor can't sue the original lender for reimbursement.

When a promissory note is sold, what is recorded in county land records?

Assignment of the note

Mortgagor

Borrows money to pay for property

Which of the following statements about liens is true?

Both mechanic's and materialman's liens are junior liens.

Mortgage II

Defeasance clause

Promissory note

Late charge provision

Defeasance clause

Used in the mortgage to describe borrower's right to regain title when debt is repaid

A loan agreement may be documented using any one of the three basic finance instruments. In order for any of these to be valid contracts, which three of these items must be included?

-Statement of the amount of the loan, and how it will be repaid -Signatures from the parties to the agreement -Accurate legal description of property being pledged as collateral

Both mortgage and deed of trust

-The borrower is required to maintain the property -The lender has right to inspect the property.

General Lien

-Unpaid income tax -Unpaid estate tax

Alienation of clause

Allows the lender to make the loan immediately due and payable if the property is transferred

Mortgage

Always creates a lien against property. -Judicial foreclosure -Borrower has statutory right of redemption -Mortgagee executes satisfaction of mortgage

The three types of finance instruments that can be used when financing a real estate purchase are the note with mortgage, note with deed of trust, and ________.

Contract for deed

Victoria has just purchased a home. The security instrument used to obtain her loan lists her as the vendee. Which instrument is used for this loan?

Contract for deed

Which real estate finance instrument includes the promise to repay and the security instrument within the same document?

Contract for deed

Stacy is preparing to sell her home, but learns she can't transfer the property until she removes an encumbrance. Which of these is encumbering her property?

Her existing mortgage

Jessica hasn't paid the roofing company that replaced the roof on her home. The contractor placed a mechanic's lien on her property, which is a/an ______ lien.

Involuntary and specific

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

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?

Late charge provision

Beneficiary

Lends money

Adam has lost his job and used up his savings. He's no longer able to make his house payments. He applies for a loan modification at the same time that he files for bankruptcy. Will the lender approve the loan modification?

No -A borrower who has filed for bankruptcy won't be eligible for a loan modification, which is only viable if the borrower has the financial ability to continue making payments.

A beneficiary, trustor, and trustee are the parties involved when the finance instrument is a ______.

Note w deed of trust

Partial release

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.

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?

Partial release

Pre payment

Paula makes additional payments on her loan each year, and pays it off three years early. The lender can't charge a penalty.

Jody is concerned about the ______ that doesn't allow her to start her gardening greenhouse because it sits next to a nature conservancy.

Physical encumbrance

The mortgage and the deed of trust are ______ that pledge property as collateral for a loan.

Security instruments

Travis made the final payment on his loan according to the loan terms. What must the note holder do to acknowledge that the debt has been repaid?

Sign the note, mark it "paid in full," and return it to Travis.

Power of sale

Standard in the deed of trust, but may be included in a mortgage -If borrower defaults, allows the property to be sold using non-judicial foreclosure process

Cross default

The borrower has defaulted on this loan and is automatically in default on another loan.

Select the choice that best translates this clause into plain English. "Mortgagor may prepay the principal amount outstanding in whole or in part. The Note holder may require that any partial prepayments (i) be made on the date monthly installments are due and (ii) be in the amount of that part of one or more monthly installments which would be applicable to principal. 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."

The borrower is allowed to prepay the loan without 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."

The borrower is allowed to prepay the loan without penalty.

Involuntary Specific Lien

The homeowner doesn't pay property tax

Involuntary General Lien

The judge has found an individual guilty and awarded monetary damages

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.

Judicial foreclosure

Typical when a borrower defaults on a mortgage

Reconveyance clause

Used in the deed of trust to describe borrower's right to regain title when debt is repaid

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."

When the borrower has fully paid off the loan, the lender will record that the note is satisfied.

Who holds the promissory note while it's being repaid?

The payee

What is an Encumbrance?

-A lien on the property due to an unpaid tax bill -A neighbor's fence built so that it crosses the property line -An easement that allows the power company to access a power pole

Specific Lien

-Unpaid property tax -Mortgage loan

Lock in

Dennis wishes he could pay his loan off early, but he would have to pay a penalty if he did.

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.

Power of sale

Janice is obtaining a loan to buy a home. Her loan agreement includes two documents, and she's careful to review the amount of the principal and how it will be repaid. Which document is Janice reviewing?

Promissory Note

The document that describes the loan amount and the terms for repaying and is attached to a security instrument is called the ______.

Promissory note

A lender and a borrower sign a mortgage agreement, placing a _________ lien against the borrower's home.

Voluntary and specific

Rich wants to add a room to his house, so he takes out a home equity loan. This creates a/an __________ lien.

Voluntary and specific

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."

When the borrower has fully paid off the loan, the lender will record that the note is satisfied.

This time, select the choice that best reflects the legal version of this plain English statement. 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."

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.

Ruby is reviewing her note with deed of trust before she signs the loan agreement. Can you identify which items she may find in her documents?

-Acceleration clause -Reconveyance clause -Power-of-sale clause

Which five items must be included in a promissory note?

-Borrower name(s) -Promise to repay -Amount of loan -Borrower signature -Date of signature(s)

A note is a negotiable instrument, and a mortgage-backed security is a common investment in today's market. What's required to transfer ownership of a note?

-Endorsement of the note to the new owner -Assignment of the security instrument to the new owner

Which of these statements about the assumption process are true?

-If the existing finance instrument contains an alienation clause, an assumption is possible. -A buyer who assumes an existing loan may have to meet the lender's qualification standards. -There's only an advantage to assumption in cases where the existing loan has a lower interest rate than the current market rate. -With an assumption, the original borrower can still be pursued by the lender if the new borrower defaults.

Security Instruments and Additional Provisions

-Lock in clause -Subordination -Cross default -Pre payment clause -Exculpatory -Partial release clause -Non recourse clause -Non disturbance clause

What's the purpose of a loan modification?

-Make the loan more affordable for the borrower -Avoid the need for foreclosure

Note

-Must refer to the mortgage or deed of trust -Describes who owes money to whom -States the amount of the loan

Security Instrument

-Pledges the property as collateral for the loan -Allows the property to be sold to pay off debt if the borrower defaults

Loan Modification Strategies

-Reduce required monthly payment -Reduce interest rate -Extend amortization schedule -Reduce principal amount

Which five items must be included in a promissory note attached to a mortgage or a deed of trust?

-Reference to security instrument -Term of loan -Schedule of payments -Interest rate of loan -Lender identity

Which of the following entities has the authority to place an equitable lien on a property?

Court order by judge

Financing for a real estate transaction can use a note with a _________ or a note with a deed of trust.

Mortgage

Which of the following is a true statement about when a promissory note is sold?

The promissory note is endorsed to the new owner of the loan.

In which four of these property transfers does federal law prohibit a lender from enforcing an alienation clause?

-Spouse to spouse -Between parties in a divorce settlement -When a borrowers dies and a relative inherits -Parent to child

A borrower who applies for a loan modification should be watchful for mistakes in processing the application to ensure that the lender offers the best possible resolution. What are some common mistakes that occur when the mortgage servicer processes an application for a loan modification?

-The application isn't processed in a timely manner. -The processor gives incorrect information to the borrower. -The processor tells the borrower that a down payment is required.

Subject to

-The seller's credit score may improve although he's not making any mortgage payments. -The lender's permission is not requested.

Note Facts

-There's no requirement for a promissory note to be recorded. -The maker gives the note to the payee to hold. -A note doesn't need a security instrument to be a valid contract. -When the debt is paid in full, the payee signs the note and returns it to the maker.

Involuntary Lien

-Unpaid property taxes -Unpaid bill for electrician's services -Mechanic's -Real property tax lien -Special assessment loan -Income tax -Judgment tax -Deceased person's debt -Estate and inheritance tax lien

Exculpatory

A lender has foreclosed on Pam, but isn't allowed to ask for a deficiency judgment as well.

Max has a dog that bit his neighbor. The neighbor sued Max, which resulted in a judgment against him. Max refused to pay the neighbor according to the judgment. The neighbor placed a lien against Max. How is this lien classified?

Involuntary, general

What information is listed on the promissory note?

Loan amount and schedule of repayment

When Brett borrows money to purchase a home, he signs a security instrument called a mortgage, which grants a lien on the property to his lender. Brett is a __________.

Mortgagor

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."

Acceleration clause

You may see a ________ named as a land contract, real estate contract, contract for sale, agreement for deed, or as articles of agreement.

Contract for deed

When Don reviews the document that says he pledges the property he just purchased as collateral for his loan, he notices the terms "trustor," "beneficiary," and "trustee." What type of security instrument is being used?

Deed of Trust

When a promissory note is sold, how is ownership transferred?

Endorsement of the note

Defeasance/reconveyance

Ensures that the borrower will regain full title to the property once the loan is fully repaid

The ______ clause protects the borrower's assets that aren't part of the voluntary lien from a deficiency judgment in case of foreclosure.

Exculpatory

Sean hasn't paid his property tax. The tax collector places a lien on his property. How is this lien classified?

Involuntary, specific

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

Helen has missed a couple of mortgage payments on her home, and her lender is threatening to foreclose. An investor offers to purchase her home subject to her existing financing. Helen agrees, and the transfer takes place without the lender's knowledge. The buyer brings Helen's mortgage up to date and continues making the monthly payments. Eventually the lender becomes aware of the situation, but does nothing to accelerate the loan. Why would the lender choose to allow the unapproved transfer in spite of an alienation clause in Helen's mortgage?

The lender benefits more from having someone paying Helen's mortgage than it would from foreclosure.

Encumbrance

Any claim or lien on the property held by another person or entity that limits the owner's use or rights or decreases the value of the property. Encumbrances impact the title to real estate, but in most cases, real estate can be transferred even with the encumbrance.

Which parties must be identified on the promissory note?

The borrower and the lender