Financing the Transaction and Settlement

A purchaser is qualified to obtain an FHA loan for his new home. Which of the following would he apply to?

An FHA lender The answer is an FHA lender. The FHA does not negotiate loans. The FHA insures loans, which means the loan is backed by the government. Loans are made through an FHA-approved lending institution. Fannie Mae does not lend money directly to homebuyers but purchases mortgages in the secondary market. Freddie Mac is a federally chartered corporation that purchases mortgages in the secondary market.

A promissory note

makes the borrower personally liable for the debt. 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-on terms. A promissory note is a contract, an agreement to perform a certain act. A borrower of real estate securing a mortgage loan will sign a promissory note agreeing to repay the loan.

A fixed-rate home loan that is fully amortized according to the original payment schedule

permits the borrower to pay the same amount each payment period. The answer is permits the borrower to pay the same amount each payment period. A fully amortized loan is a level-payment loan, with the same amount being paid by the borrower each payment period (usually monthly). The loan can be sold in the secondary market. An adjustable-rate mortgage has an interest rate that in fluctuates based on an economic index.

An owner wants to receive a net of $82,000 after selling her home. She has an existing mortgage of $32,500 and will have selling expenses of $444. If the broker is to receive a 7% commission, what is the lowest offer that she can accept for the property?

$123,595.70 The answer is 123,595.70. $82,000 + $32,500 + $444 = $144,944 $144,944 ÷ 93% (.93) = $123,595.70

When a loan requires payments that do not fully pay off the loan balance by the final payment, which term BEST describes the final payment? A) Balloon B) Variable C) Adjustment D) Acceleration

Balloon The answer is balloon. When the term of the loan is over and the payments made have not paid off the debt, the last payment is a balloon payment. The loan is called a balloon loan. Acceleration occurs when a lender calls for full payment of a loan before its term has ended. The adjustment in an adjustable rate mortgage establishes how often the rate may be changed. A variable payment is one that may change over time depending on the mortgage agreement.

The borrower discovers that the loan is not assumable. What clause did the borrower find?

Due on sale The answer is due on sale. The alienation/due on sale clause requires when the property is sold the loan must be paid off and is not assumable. Acceleration is used when the borrower is in default and allows the lender to call the note due and payable.

Three years ago a couple moved from the house they had owned for 20 years but did not sell it. They decided to travel and bought a mobile home as their residence. They now decide to sell the house. How much of their capital gain on the house will be taxable?

None of it, if the capital gain is less than $500,000 The answer is none of it, if the capital gain is less than $500,000. Federal law requires that the couple must have lived in the house for two out of the last five years to receive the $500,000 exemption from capital gains tax. The couple lived in the house for two years before they purchased the mobile home three years ago. The couple qualifies for the capital gain exception of $500,000.

All the following clauses in a loan agreement enable the lender to demand the entire remaining debt be paid immediately EXCEPT A) a due-on-sale clause. B) a defeasance clause. C) an acceleration clause. D) an alienation clause.

a defeasance clause. The answer is a defeasance clause. A defeasance clause requires a lender to execute a satisfaction when the note has been fully paid. An alienation clause, also known as a due-on-sale clause, provides that when the property is sold the lender may declare the entire debt due immediately. An acceleration clause permits the lender to demand payment of a loan balance immediately if the buyer defaults on the loan payments.

A mortgage broker generally

brings the borrower and the lender together. The answer is brings the borrower and the lender together. A mortgage broker is an intermediary who brings borrowers and lenders together. A mortgage broker locates potential borrowers, processes preliminary loan applications, and submits the applications to lenders for final approval. Mortgage brokers do not provide loans, handle escrow funds, or check borrowers' creditworthiness for loans.

A lender offers to take over the title of a property that is in foreclosure without going through the foreclosure process. This is called a(n)

deed in lieu of foreclosure. The answer is deed in lieu of foreclosure. A deed in lieu of foreclosure is an alternative to foreclosure and is carried out by mutual agreement between the lender and the borrower rather than by a lawsuit. A reconveyance deed is used by a trustee under a deed of trust to return title to the trustor. In an assumption, a buyer purchases a property by assuming the seller's debt and becoming personally obligated for the payment of the entire debt. A subordination agreement moves a first mortgage lien to a secondary position by mutual agreement of the two lenders.

A purchaser negotiates a mortgage loan in which she will make equal monthly payments over a period of 30 years, with the balance of the loan being zero at the end of that term. The purchaser has negotiated a(n)

fully-amortized loan. The answer is fully-amortized loan. A loan with equal, constant payments which result in a zero balance at the end of the term is a fully-amortized loan. A balloon mortgage is one type of partially-amortized loan. In a partially-amortized loan, the principal and interest payments do not pay off the entire loan; a balance remains and is due at the end of the term. A straight mortgage is a loan that requires periodic interest payments to the lender but nothing is applied to the principal balance. A construction loan is a type of straight loan in which the borrower receives money in draws and makes periodic payments of interest on those draws.

A purchaser cannot qualify for conventional financing and negotiates a contract for deed with a seller. The buyer in this arrangement

has possession and pays the property expenses and taxes. The answer is has possession and pays the property expenses and taxes. In a contract for deed arrangement, the buyer takes full possession of the property and gets equitable title to the property. The buyer agrees to pay real property taxes, insurance premiums, and for the upkeep of the property. The seller is not obligated to execute and deliver the deed for the property to the buyer until all the terms of the contract have been satisfied.

A mortgage loan in which the borrower only pays interest for a stated period of time and pays off the principal balance at the end of that term is a(n)

interest-only loan. The answer is interest-only loan. Interest-only mortgages require payment of interest only for a certain period of time with the principal balance and interest recalculated over the remaining years of the loan. A balloon payment loan is a partially amortized loan in which the periodic payments are not enough to fully amortize the loan by the time the final payment is due so that the final payment (called a balloon payment) is larger than the others. In a package loan the borrower secures the loan with both personal and real property. In an amortized loan the monthly payment partially pays off both principal and interest so that both are paid off slowly, over time, in equal payments.

The charge for the use of the lender's money in a loan is the

interest. The answer is interest. Interest is the sum paid or accrued in return for the use of a lender's money. Interest on a promissory note is usually due in arrears at the end of each payment period. The rate of return is the return on the investment in a property. An owner's equity is the amount of money remaining once current liens, including the mortgage, are subtracted from the current value of the property. The principal is the balance owed on the original loan amount.

The term of a loan is the

length of time the borrower has to repay the loan. The answer is length of time the borrower has to repay the loan. For residential loans, a borrower generally negotiates with the lender a term of between fifteen to thirty years. A longer term to repay the loan results in a lower monthly payment. A shorter term results in a higher monthly payment.

Laws that determine the maximum interest rate a lender can charge are known as

usury laws. The answer is usury laws. Usury is the act of charging an interest rate in excess of limits permitted by law. Laws that set the maximum interest rate are known as usury laws. Some states have set a specific interest limit, while others have set what is known as a floating interest rate, usually pegged each month at a certain percent above a fluctuating economic indicator. Truth in lending laws and fraud statutes are designed to provide honesty and disclosures in lending transactions but do not set minimum interest rates.

All of the following clauses in a loan agreement enable the lender to demand that the entire remaining debt be paid immediately EXCEPT A) an acceleration clause. B) a due-on-sale clause. C) an alienation clause. D) a defeasance clause.

a defeasance clause. The answer is a defeasance clause. A defeasance clause requires the lender to execute a satisfaction of the loan when the loan has been fully paid. A due-on-sale clause provides that when the property is sold, the lender may declare the entire debt due or permit the buyer to assume the loan. An alienation clause states that the lender may collect full payment on a loan if the property is conveyed to another party without the lender's consent. An acceleration clause permits the lender to declare the entire debt payable immediately if the borrower defaults on payments on the loan.

When a mortgage loan has been paid in full, it is important for the borrower to be sure that

a satisfaction of the mortgage is recorded in the public record. The answer is a satisfaction of the mortgage is recorded in the public record. When a note has been fully paid, the lender is required to execute a satisfaction (also known as a release or discharge). This document returns all ownership interest in the real estate originally conveyed to the lender. Entering the release in the public record shows that the debt has been removed from the property.

The clause in a trust deed or mortgage that permits the lender to declare the entire unpaid balance immediately due and payable upon default is the

acceleration clause. The answer is acceleration clause. An acceleration clause gives the lender the right to declare the entire debt due and payable immediately if the borrower has defaulted. The alienation/due-on-sale clause allows the lender to accelerate the balance due if borrowers alienate/sell their mortgaged property. A forfeiture clause in a contract for deed requires the borrower to forfeit all amounts paid if the borrower defaults. A judgment clause permits a lender to file a lien against a borrower without having to initiate court proceedings.

In determining whether a prospective buyer can afford a mortgage, a lender will typically use percentages based upon the

buyer's gross monthly income, total housing expense, and debt expenses. The answer is buyer's gross monthly income, total housing expense, and debt expenses. In addition to reviewing a borrower's credit score, loan underwriters and automated underwriting programs use a formula allowing a maximum percentage of the buyer's gross monthly income for the monthly cost of buying and maintaining a home (for example, 28%). That cost includes mortgage principal and interest, plus amounts for taxes and property insurance. In addition, the formula sets a maximum percentage of the buyer's gross monthly income allowed for long-term debts such as car payments, credit cards, student loans, and other mortgages (for example , 36%).

An eligible veteran made an offer of $225,000 to purchase a home contingent upon obtaining a no-down-payment VA-guaranteed loan. Three weeks after the offer was accepted, the VA issued a certificate of reasonable value (CRV) for $222,000 for the property. In this case, the veteran may

purchase the property by making a $3,000 cash payment. The answer is purchase the property by making a $3,000 cash payment. When the purchase price of a property is greater than the VA-issued certificate of reasonable value, the veteran may pay the difference in cash to purchase the property because secondary financing is somewhat restricted under VA regulations. Since the veteran's contract in this case was contingent on a no-down-payment VA-guaranteed loan, the veteran could also choose not to purchase the home and to seek another property to buy with no penalty.

Federal income tax regulations allow homeowners to reduce their taxable income by amounts paid for

real estate property taxes. The answer is real estate property taxes. Real estate property taxes, mortgage interest, points for loans, and some origination fees can be deducted on income tax returns. The law does not permit tax deductions for ordinary repairs, home maintenance, and hazard insurance premiums.

A homeowner purchased her home for cash 30 years ago. Today she receives monthly checks from a mortgage lender that supplement her retirement income. The homeowner MOST likely has obtained a(n)

reverse mortgage. The answer is reverse mortgage. A reverse mortgage allows people 62 or older to borrow money against the equity they have built in their homes. The equity diminishes as the loan amount increases. Reverse mortgages have a fixed rate of interest and are not adjustable. In a shared appreciation mortgage, the lender in exchange for a favorable interest rate participates in the profits the borrower receives upon selling the property. A package mortgage secures both real and personal property typically used in resort purchase where the unit is fully furnished.

Under a contract for deed or installment contract, the legal title to the property is held by the

seller/vendor. The answer is seller/vendor. A contract for deed or installment contract is also known as a land contract. Under the contract, the buyer/vendee holds equitable titles and agrees to make a down payment and a monthly loan payment that includes interest and principal. The seller/vendor retains legal title to the property during the contract term.

When a seller takes back a purchase money mortgage from a buyer the

terms and conditions of the mortgage must be set forth in writing. The answer is terms and conditions of the mortgage must be set forth in writing. In order for the purchase money mortgage to be enforceable, the terms and conditions, such as principal and interest, must be set forth in detail in writing. The mortgage contract is made directly between the buyer and the seller. An oral agreement is not enforceable. The buyer makes payments directly to the seller.

In an adjustable-rate mortgage, the interest rate is tied to an objective economic indicator called a(n)

index. The answer is index. The interest charged in an adjustable rate mortgage varies with an outside economic indicator called an index. This index is beyond the control of either the borrower or the lender. The discount rate is the interest rate set by the Federal Reserve that member banks are charged when they borrow money. The mortgage factor is the number multiplied by the thousands of an amount borrowed to arrive at a monthly principal and interest payment. The Federal Reserve System requires that each member bank keep a certain number of assets on hand as reserve funds, which are unavailable for loans or any other use.

The ratio of debt to the value of the property is the

loan-to-value ratio. The answer is loan-to-value ratio. The loan-to-value ratio (LTV) is the ratio of debt to the value of the property, value being the sales price or appraisal value, whichever is less. The amortization rate is the interest rate in an amortized loan.

If the amount realized at a sheriff's sale as part of a mortgage foreclosure is more than the amount of the indebtedness and expenses, then the excess belongs to the

mortgagor The answer is mortgagor. The mortgagor, or borrower, receives any money remaining from a foreclosure sale after paying the debt and any other liens.

A person who assumes an existing mortgage loan is

personally responsible for paying the principal balance. The answer is personally responsible for paying the principal balance. A buyer who purchases property and assumes the seller's debt becomes personally obligated for the payment of the entire debt. If the buyer defaults on the loan the buyer is in danger of losing the property.

The provision in a mortgage or deed of trust that permits the lender upon the default of the borrower to proceed to a foreclosure sale without a court action is the

power-of-sale clause. The answer is power-of-sale clause. A power-of-sale clause in a mortgage permits the lender to foreclose and sell a mortgaged property that is in default without any court action. An acceleration clause permits the lender to demand payment of a loan balance immediately when a buyer defaults on mortgage payments. An alienation clause permits the lender to require payment of a loan balance when a buyer sells the property to another purchaser. Hypothecation is the pledging of specific real property as security for a debt while maintaining possession of the property.

The total balance due on a mortgage loan is the

principal. The answer is principal. In finance terminology the principal is the balance owed on the original loan amount. The interest is the charge for the use of the money. The rate of return is the return on the investment in a property, one way to measure its profitability. An owner's equity is the amount of money remaining once current liens, including the mortgage, are subtracted from the current market value of the property. Reference: Financing the Transaction and Settlement > Financing components

The process through which a lender agrees to accept less from a distressed homeowner than the current principal balance on the outstanding loan is a(n)

short sale. The answer is short sale. When a lender agrees to accept less from a distressed homeowner than the current balance on the outstanding loan, the process is known as a short sale. In a strict foreclosure, the court establishes a deadline for the defaulted balance on a mortgage to be paid, and if not paid, awards full legal title to the lender. A judicial foreclosure allows a property in default to be sold by a court order after the mortgagee has given sufficient public notice. Redemption is the right of a defaulted borrower to redeem a property either before a foreclosure sale (the equitable right of redemption) or for a specific period of time after a foreclosure sale (a statutory right of redemption).

With a VA-guaranteed mortgage

the borrower must apply for a certificate of eligibility. The answer is the borrower must apply for a certificate of eligibility. A borrower must apply for a certificate of eligibility which sets forth the maximum guarantee to which the veteran is entitled. Discount points can be paid by either the buyer or the seller. Prepayment penalties are prohibited. Funding fees are determined by the VA (Veterans Affairs).