Florida Real Estate Chapter 12

29. A borrower has applied for a loan. The purchase price of the property is $280,000. If the borrower has $70,000 as a down payment, what is the loan-to-value ratio? (a) 25% (b) 33% (c) 66% (d) 75%

(d) 75%

What are the three financial details on a note or IOU

1) interest rate 2) amount of money borrowed 3) loan repayment terms

What is FHA Debt-to-Income Ratio Requirements for housing-related debt?

31%

What is Conventional Debt-to-Income Ratio Requirements for Total debt?

36%

What is accelerated clause?

A provision that allows the lender to demand that the borrower repay the entire loan after a default

what are three items for qualifying a loan?

Credit, income, assets

what is the most important of the 3 items to qualify for a loan

Income must be able to show 2 years job stability

What is formula for Total obligation ratio?

Monthly PITI payment + other monthly obligations/ Monthly gross income

What is formula for Housing Expense Ratio?

Monthly PITI payment / monthly gross income

Who decides whether you qualify for the mortgage based on your credit history, income, and overall financial situation.

Mortgage underwriter

In a lien theory state who holds title to mortgage of real property?

Mortgagor

what is equity of redemption?

allows the mortgagor to prevent foreclosure by paying the mortgagee the principal and interest due plus any fees

What is a defeasance clause?

when the debt is paid, the lien must be removed.

23. Which would offer a potential borrower the most favorable interest rate over the life of the loan? (a) 4.0% plus 8 points (b) 4.5% plus 6 points (c) 4.75% plus 4 points (d) 5% plus 2 points

(a) 4.0% plus 8 points, A simple rule of thumb can be used to approximate the change in interest as a result of the loan discount points paid: For each point charged by the lender, the rate of interest increases approximately 1/8 percent. For 4% plus 8 points: 8 points x 1/8% = 8/8% or 1% increase in interest rate; 4% (Rate paid by borrower) + 1% (Increase due to the discount) = 5% (Effective yield)For 4.5% plus 6 points: 6 points x 1/8% = 6/8% or 3/4% or .75% increase in interest rate ; 4.5% (Rate paid by borrower) + .75% (Increase due to the discount) = 5.25% or 5 1/4% (Effective yield)For 4.75% plus 4 points: 4 points x 1/8% = 4/8% or 1/2% increase in interest rate; 4.75% (Rate paid by borrower) + .50% (Increase due to the discount) = 5.25% or 5 1/4% (Effective yield).

8. Which term refers to the right of a mortgagor in default to pay all money owed and prevent the sale of the property at foreclosure? (a) Equity of redemption (b) Estoppel (c) Defeasance right (d) Right of release

(a) Equity of redemption, Failure to perform as agreed in the promissory note is called default. When default occurs, the lender has the right under the mortgage contract to pursue legal action against the borrower for payment of the debt. Under lien theory of lending, the lender must file a foreclosure suit in court and prove to the court that default has occurred. Equity of redemption is the right of a borrower to cure the default before foreclosure rather than lose the property. The borrower must pay the entire balance of the debt plus any interest and costs that have accrued since the default. Equity of redemption exists in Florida up to the moment of foreclosure.

7. What is the purpose of a receivership clause in a mortgage? (a) It is used to protect the value of property during the foreclosure process. (b) It conveys the ownership of mortgaged property to the rightful heirs of a decedent. (c) It allows an owner to charge rent when a property is mortgaged. (d) It specifies the party entitled to ownership of mortgaged property when a loan has been fully paid.

(a) It is used to protect the value of property during the foreclosure process.

30. A borrower has applied for a loan. The purchase price of the property is $280,000. The borrower has $70,000 as a down payment. If the lender approves the loan subject to the payment of 2 points and the interest rate on the loan is 9%, what is the amount of the loan discount and what is the effective yield to the lender? (a) Loan discount = $4,200; Effective yield = 9 1/4% (b) Loan discount = $5,600; Effective yield = 9 1/4% (c) Loan discount = $4,200; Effective yield = 8 3/4% (d) Loan discount = $5,600; Effective yield = 9 1/2%

(a) Loan discount = $4,200; Effective yield = 9 1/4%, Loan amount = $280,000 (purchase price) - $70,000 (down payment) = $210,000 one point is equal to 1% of the loan in dollars. So, two points is 2% of the loan or: $210,000 x .02 = $4,200 (Loan discount) For each point charged by the lender, the rate of interest increases approximately 1/8 percent. 2 points x 1/8% = 2/8% or 1/4%9% (Rate paid by borrower) + 1/4% (Increase due to discount) = 9 1/4% Effective yield. Reference:

1. Which legal instrument evidences the debt and states the interest rate, term, payment requirement, and other information related to the loan? (a) Promissory note (b) Contract (c) Lien (d) Mortgage

(a) Promissory note, When money is borrowed to purchase real estate, the lender requires the borrower to sign a promissory note, also called a note or bond. The promissory note is a legal instrument that includes the borrower's promise to repay the loan with interest according to the terms of the note. The note is evidence of a personal debt and contains the names of the parties, the rate of interest, the amount of money borrowed and the loan repayment terms. The note is a contract between the lender and the borrower.

3. When financing the purchase of real estate, what is the role of the mortgagor? (a) The mortgagor gives a mortgage to a mortgagee. (b) The mortgagor takes a mortgage from a mortgagee. (c) The mortgagor gives a mortgage to a borrower. (d) The mortgagor takes a mortgage from a lender.

(a) The mortgagor gives a mortgage to a mortgagee, Mortgagor is also the borrower

20. Two discount points on a 7% loan will increase the effective rate of interest on the loan to approximately what rate? (a) 7 1/8%. (b) 7 1/4%. (c) 7 1/2%. (d) 7 3/4%.

(b) 7 1/4%., A simple rule of thumb can be used to approximate the change in interest as a result of the loan discount points paid: For each point charged by the lender, the rate of interest increases approximately 1/8 percent. Step 1: Two discount points x 1/8% = 2/8% or 1/4% increase in interest rate Step 2: 7% (Rate paid by borrower) + 1/4% (Increase due to the discount) = 7 1/4% (Effective yield).

6. Which statement best describes a short sale? (a) A real estate transaction that closes in under 30 days (b) A settlement agreement where the lender agrees to a sales price that is below the outstanding loan balance (c) A real estate transaction where the seller agrees to assist the buyer by taking a second mortgage (d) A transaction that does not close due to a buyer's shortage of funds at closing

(b) A settlement agreement where the lender agrees to a sales price that is below the outstanding loan balance

12. A borrower is consistently late on their mortgage payments, so the bank exercises its ability to raise the interest rate. Which clause in the mortgage document allows the lender to do this? (a) Default Rate Mortgage Clause (b) Escalation Clause (c) Late Payment Clause (d) Due-on-Sale Clause

(b) Escalation Clause,

10. What are the two ratios under which a borrower must qualify in order to receive a FHA insured mortgage loan? (a) Housing expense and monthly gross income ratios (b) Housing expense and total monthly obligations ratios (c) Gross income and total obligations ratios (d) Housing expense net ratio and total monthly obligations net ratio

(b) Housing expense and total monthly obligations ratios, FHA loans are made based on a housing expense ratio of 31% and a total obligations ratio of 43%.

2. What is the function of a mortgage? (a) It conveys title to real property. (b) It secures the repayment of the debt. (c) It creates a personal pledge to repay a loan. (d) It creates a lien on the mortgagee's property.

(b) It secures the repayment of the debt. A mortgage accompanies a note and is security for its repayment. A mortgage is the borrower's pledge of the mortgaged property to secure the repayment of the note.

19. In a lien theory state such as Florida, title to property is held by whom during the time period that the resident is making monthly mortgage payments? (a) Bank (b) Mortgagor (c) Trustee (d) Trustor

(b) Mortgagor, Lien theory allows the borrower who is making the monthly mortgage payments (mortgagor) to retain the ownership of the property during the loan period. The lender (mortgagee) records the mortgage, creating a lien against the property.

9. What is the primary purpose of discount points? (a) To subsidize the purchase of homes by low-income borrowers (b) To decrease the monthly payment required (c) To stop disintermediation (d) To decrease the lender's yield

(b) To decrease the monthly payment required, Discount points are an upfront payment to the lender in exchange for a lower mortgage rate for the life of the loan. One discount point is an upfront payment of 1% of the loan amount in dollars. The payment of discount points reduces the borrower's interest rate, resulting in a lower monthly mortgage payment. Paying discount points does not reduce the amount borrowed. The breakeven point for the borrower is dependent on the discount amount paid and the length of time of the loan.

24. If the loan amount is $850,000.00 and the loan to value ratio is 65%, what is the purchase price of the property? (a) $552,500 (b) $852,351 (c) $1,307,692 (d) $2,428,571

(c) $1,307,692; $850,000 (Loan Amount) ÷ .65 (Loan-to-Value) = $1,307,692 (Price).

18. What is the approximate effective rate of interest (APR) if a mortgage loan is based on an interest rate of 5% per annum, and the lender charges 8 discount points? (a) 4% (b) 5.13% (c) 6% (d) 13%

(c) 6%, A simple rule of thumb can be used to approximate the change in interest as a result of the loan discount points paid: For each point charged by the lender, the rate of interest increases approximately 1/8 percent. Step 1: Eight discount points x 1/8% = 8/8% or 1% increase in interest rate Step 2: 5% (Rate paid by borrower) + 1% (Increase due to the discount) = 6% (Effective yield).

4. Which clause in a mortgage requires the lender to acknowledge performance by the borrower? (a) Estoppel (b) Acceleration (c) Defeasance (d) Release

(c) Defeasance, The defeasance clause provides protection for the mortgagor (the borrower who gives the mortgage to the lender to secure the loan) as it requires the lender to acknowledge performance by the borrower. The lender's rights are held in check as long as the borrower performs as agreed in the note and mortgage. It is the only legally necessary clause in a mortgage.

16. Which of the following would allow Which mortgage clause i a foreclosure proceeding by paying any amount due, including fees and interest prior to the completion of the foreclosure process? (a) Statutory right of redemption (b) Right of defeasance (c) Equity of redemption (d) Right of reliction

(c) Equity of redemption, Failure to perform as agreed in the promissory note is called default. When default occurs, the lender has the right under the mortgage contract to pursue legal action against the borrower for payment of the debt. Under lien theory of lending, the lender must file a foreclosure suit in court and prove to the court that default has occurred. Equity of redemption is the right of a borrower to cure the default before foreclosure rather than lose the property. The borrower must pay the entire balance of the debt plus any interest and costs that have accrued since the default.

28. George has applied for a loan with Acme Savings and Loan. His gross monthly income averages $4,100. He has a monthly car payment of $425 and owes a balance on two credit card accounts with payments totaling $75 per month. If approved, his monthly mortgage payment will be $825. What is George's monthly housing expense ratio? What is his total obligations ratio? (a) Housing expense ratio = 20%; Total obligations ratio = 12% (b) Housing expense ratio = 32%; Total obligations ratio = 20% (c) Housing expense ratio = 20%; Total obligations ratio = 32% (d) Housing expense ratio = 32%; Total obligations ratio = 12%

(c) Housing expense ratio = 20%; Total obligations ratio = 32%, Housing expense ratio = Monthly PITI ÷ Monthly gross income $825 ÷ $4,100 = .201 or 20% housing expense ratio. Total obligations ratio = (Monthly PITI + Other monthly obligations) ÷ Monthly gross income ($825 + $425 + $75) ÷ $4,100 = $1,324 ÷ $4,100 = .323 or 32% Total obligations ratio.

13. How was title taken if a seller remained solely liable for the balance of a mortgage loan subsequent to transfer of ownership? (a) Novation (b) Assumption (c) Subject to (d) Agreement for deed

(c) Subject to, if a mortgaged property is sold subject to the mortgage, the new owner acquires ownership without assuming personal responsibility for the balance of the promissory note. The existing mortgage continues to use the property as security for the debt. When a property is sold subject to the mortgage, only the original borrower remains liable for the balance of the promissory note. The buyer acknowledges the existence of the mortgage. If the buyer should default on the mortgage, the lender would foreclose and the property would be sold to satisfy the balance due on the note. if a deficiency exists following a foreclosure sale, the buyer would not be responsible; only the former seller would be liable for the deficiency.If the existing mortgage contains a due-on-sale clause, the property cannot be sold subject to the mortgage.

14. After all liens have been paid following a foreclosure sale, who do any remaining funds belong to? (a) The sheriff of the county in which the property is located (b) The clerk of the circuit court (c) The mortgagor (d) The mortgagee

(c) The mortgagor, If all lien holders have been paid from the proceeds of the foreclosure sale, any excess remaining is paid to the mortgagor (borrower).

25. Using the information below, what is the buyer's housing expense ratio? Spouse 1 salary = $8,000 Spouse 2 salary = $6,000 Monthly mortgage payment (Principal and Interest) = $3,000 Interest rate = 5% Loan term = 30 years Annual property taxes = $8300 Annual property insurance = $6800 Monthly credit card bill = $450 Car payment = $573 (a) 39% (b) 30% (c) 25% (d) 21%

(d) 21%, Monthly housing expense (PITI) = $3,000 (Mortgage payment) + $692 (Monthly property tax) + $567 (Monthly Property Insurance) = $4,259 Housing expense ratio = $4,259 (Monthly PITI) ÷ $14,000 (Monthly Gross Income) = .304 or about 30%.

27. Lenders are required to judge loan applicants on the basis of credit rating, income, expenses and assets, without regard to their age, race, religion, sex, marital status, or nationality. Which Act prohibits this discrimination? (a) Truth-in-Lending Act (b) RESPA (c) Fair Housing Act (d) ECOA

(d) ECOA, The Equal Credit Opportunity Act (ECOA) requires lenders to judge every loan application on the basis of the applicant's own credit rating and income. The ECOA allows the lender to question applicants on the stability and source of income, but the lender cannot refuse to consider income because of the source. Lenders are prohibited from discriminating against borrowers on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of income from public assistance programs.

31. Which of the following statements regarding a deed of trust is correct? (a) It is only used when the parties trust each other. (b) It is never used in title theory states. (c) It is used in lien theory states. (d) It temporarily conveys title to a third party.

(d) It temporarily conveys title to a third party, A deed of trust is used in title theory states in place of a mortgage. The deed of trust temporarily conveys title to a property to a third party, called a trustee, until the mortgage loan debt is repaid or until default occurs. The borrower is called a trustor; the lender is called the beneficiary. Upon satisfaction of the debt, the title is returned to the borrower using a reconveyance deed.

17. Where would information such as the loan amount, interest rate, term of the loan, and responsible parties be found? (a) Sales contract (b) Mortgage deed (c) Mortgage (d) Promissory note

(d) Promissory note, When money is borrowed to purchase real estate, the lender requires the borrower to sign a promissory note, also called a note or bond. The promissory note is a legal instrument that includes the borrower's promise to repay the loan with interest according to the terms of the note. The note is evidence of a personal debt and contains the names of the parties, the rate of interest, the amount of money borrowed and the loan repayment terms. The note is a contract between the lender and the borrower. Reference:

15. Which mortgage clause is the borrower's promise to pay the property taxes during the period of the loan? (a) Maintenance (b) Defeasance (c) Receivership (d) Tax

(d) Tax,

What is VA Debt-to-Income Ratio Requirements for Total debt?

41%

What is FHA Debt-to-Income Ratio Requirements for total debt?

43%

What is a mortgage?

Legal document that the Mortgagor/borrower pledges the property as security (= collateral) for debt