Unit 12 Review Questions Real Estate Financing

A house is listed for $250,000. It is purchased for $230,000, with a 20% down payment. The balance is financed by a fixed-rate mortgage at 6%. The lender charges four points. If there are no other closing costs involved, how much money does the buyer need at closing? A) $26,000 B) $7,360 C) $46,000 D) $53,360

The answer is $53,360. The buyer needs $53,360 at closing. Three steps: 1. Calculate down payment: $230,000 × 20% = $46,000 2. Determine points charge: $230,000 × 80% × 4% = $7,360 3. Total the two amounts: $46,000 + $7,360 = $53,360.

A document that indicates that a loan has been made is called A) a promissory note. B) a deed of trust. C) a mortgage deed. D) a satisfaction.

The answer is a promissory note. The evidence that a loan has been made is found in the promissory note. A mortgage or deed of trust provides security for the loan. A satisfaction or release indicates that the loan has been repaid in full.

A married couple, both 65 years old, have retired. They have almost $800,000 in equity in their home, but they don't have enough cash to travel as they have always dreamed of doing. The couple could consider which of the following financing alternatives? A) Novation B) A reverse mortgage C) An adjustable-rate mortgage D) A growing-equity mortgage

The answer is a reverse mortgage. A reverse mortgage allows a homeowner aged 62 or older to borrow money against the equity built up in the home. The money may be used for any purpose.

A mortgage is a security instrument in which a mortgagee pledges real property to the mortgagor as security for a debt.

The answer is false. A mortgage is a financing agreement in which a mortgagor pledges real property to the mortgagee as security for a debt.

A mortgage is classified as an involuntary lien on real estate.

The answer is false. A mortgage is classified as a voluntary lien on real estate.

A point is 1% of the purchase price of the property being offered as security for the loan.

The answer is false. A point is 1% of the amount being borrowed. For borrowers, one discount point equals 1% of the loan amount and is charged as prepaid interest at the closing.

When a real estate loan secured by a deed of trust has been repaid in full, the beneficiary executes a discharge that releases the property back to the trustor.

The answer is false. After a real estate loan that is secured by a deed of trust has been repaid in full, the trustee executes a release deed or deed of reconveyance that releases the property back to the trustor.

An assignment of mortgage occurs when the borrower pays off the loan.

The answer is false. An assignment of mortgage occurs when the lender sells the loan to an investor or other mortgage company.

In the event of a borrower's default, a subordination clause makes foreclosure easier by giving a lender the right to declare the entire debt due and payable.

The answer is false. In the event of a borrower's default, an acceleration clause makes foreclosure easier by giving a lender the right to declare the entire debt due and payable.

Lenders are allowed to charge prepayment penalties on mortgage loans insured or guaranteed by the federal government.

The answer is false. Mortgage lenders also cannot charge prepayment penalties on loans that have been sold to a government-sponsored enterprise.

PITI refers to principal, interest, time, and insurance.

The answer is false. PITI refers to principal, interest, taxes, and insurance. These are the basic costs of owning a home.

When a mortgage lender finds that a borrower has not made necessary repairs to the property, the lender usually immediately proceeds to foreclosure.

The answer is false. The loan documents may provide for a grace period, such as 30 days, within which the borrower can meet the obligation and cure the default.

A borrower defaults on a mortgage, and the lender forecloses. The lender's foreclosure suit is filed on March 15, and the sale is to be held on May 10. If the borrower attempts to redeem the property on May 1, which of the following statements applies? A) The borrower's attempt to redeem the property is too early; by statute, the borrower must wait until after the sale. B) The borrower is exercising the equitable right of redemption. C) The borrower cannot redeem the property after a foreclosure suit is filed. D) The borrower is exercising the statutory right of redemption

The answer is the borrower is exercising the equitable right of redemption. The borrower has an equity interest in the property until the foreclosure sale is complete; thus, the borrower may exercise the equitable right of redemption. In some states, the borrower may retain a statutory right of redemption for a period of time after the foreclosure sale.

In one form of security instrument, the borrower actually turns over legal title to the secured property, while retaining equitable title.

The answer is true. A deed of trust gives actual title to secured property to a trustee for the benefit of the lender. Legal title is returned to the borrower only when the debt is repaid in full (or some other obligation is fulfilled).

In states that permit strict foreclosure, the court simply awards full legal title to the lender and no sale of the property takes place.

The answer is true. After appropriate notice is made to the delinquent borrower, in some states, the lender may acquire mortgaged property through strict foreclosure. The court awards full legal title to the lender, and no sale takes place.

After the redemption period (if applicable), the successful bidder at a foreclosure sale receives a deed that conveys whatever title the borrower had, with no warranties.

The answer is true. After the redemption period, if the delinquent borrower does not repay the loan, an official, such as a sheriff, executes a deed to the person who paid the debts. The deed conveys whatever title the borrower had prior to the redemption period.

In most mortgage documents, the defeasance clause requires the mortgagee to execute a satisfaction when the note has been fully paid, returning to the mortgagor all interest in the real estate.

The answer is true. By the defeasance clause, the lender is required to execute a satisfaction when the note has been fully paid. The lender is then divested of all interest in the property.

If the lender must obtain insurance on property located in a flood hazard area because the borrower has not, the lender can add the premium cost to the unpaid debt.

The answer is true. If the lender purchases flood insurance on behalf of the borrower, the cost of the insurance may be charged back to the borrower.

When a property is mortgaged, the owner must execute both a promissory note and a security instrument.

The answer is true. The borrower signs a promissory note pledging to repay the debt and gives the lender a mortgage, which is security for the property.

An adjustable-rate mortgage begins at one rate of interest, then fluctuates up or down during the loan term.

The answer is true. The fluctuation is based on a specified economic indicator. Details of how and when the interest rate will change are included in the note.

In a typical deed of trust, the mortgagee is the beneficiary, and the borrower is the trustor.

The answer is true. There are three parties to a deed of trust: the trustee holds the deed of trust on behalf of the lender, who is called the beneficiary, the holder of the note. The borrower is the trustor.

A buyer who purchases real property and assumes the seller's debt becomes personally obligated for the repayment of the entire debt.

The answer is true. Unlike buying subject to the mortgage, a buyer who purchases a property and assumes the seller's debt becomes personally obligated for the payment of the entire debt.

Usury is defined as the act of charging interest in excess of the maximum legal rate.

The answer is true. Usury is the practice of charging interest at a higher rate than the maximum rate allowed by state law.

A reverse mortgage allows a homeowner aged 62 or older to borrow money against the equity built up in the home.

The answer is true. With a reverse mortgage, the homeowner's equity diminishes as the loan amount increases.