CHAPTER 12:

Which would offer a potential borrower the most favorable interest rate over the life of the loan?

4.0% plus 8 points

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?

6%

Two discount points on a 7% loan will increase the effective rate of interest on the loan to approximately what rate?

7 1/4%.

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?

75%

Which statement best describes a short sale?

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

Which clause in a mortgage requires the lender to acknowledge performance by the borrower?

Defeasance * The defeasance clause provides protection for the borrower as it requires the lender to acknowledge performance by the borrower. The defeasance clause holds 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. *

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?

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 cannot descriminate against borrowers on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of income from public assistance programs. *

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?

Equity of redemption

Which of the following would allow a homeowner to exit a foreclosure proceeding by paying any amount due, including fees and interest prior to the completion of the foreclosure process?

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. *

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?

Escalation Clause *The escalation (or escalator) clause allows a lender to increase the interest rate based on the occurrence of an event, such as a change in the use of the property or consistently late payments. *

Which clause found in a mortgage would state that the lender could only look to the property itself for satisfaction of the mortgage debt?

Exculpatory clause *The exculpatory clause limits the lender's rights in a foreclosure to the amount received from the sale of the foreclosed property. If the balance of the promissory note has not been paid in full from the proceeds of the sale, the lender cannot obtain a deficiency judgment for the unsatisfied amount. This is referred to as nonrecourse financing since the lender has no recourse against the borrower for the unsatisfied portion of the loan.*

What are the two ratios under which a borrower must qualify in order to receive a FHA insured mortgage loan?

Housing expense and total monthly obligations ratios

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?

Housing expense ratio = 20%; Total obligations ratio = 32%

What is the purpose of a receivership clause in a mortgage?

It is used to protect the value of property during the foreclosure process. *A receivership clause is used in mortgages on income-producing real estate. If the investor should default, the lender may ask the court to appoint a trustee, referred to as a "receiver", to manage the property during the foreclosure process, collect the rents, and maintain the property. This serves to protect the asset that serves as security for the loan. Without this provision the borrower could pocket the rents and allow the property to deteriorate, thereby reducing its value. *

What is the function of a mortgage?

It secures the repayment of the debt.

Which of the following statements regarding a deed of trust is correct?

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 by using a reconveyance deed. *

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?

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. *

What process is used by loan underwriters to determine if applicants are satisfactory credit risks?

Qualifying

How was title taken if a seller remained solely liable for the balance of a mortgage loan subsequent to transfer of ownership?

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 id not responsible; only the former seller is liable for the deficiency.*

If the loan amount is $850,000.00 and the loan to value ratio is 65%, what is the purchase price of the property?

$1,307,692

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

30%

In order to qualify for an FHA 203b insured mortgage loan, an applicant's housing expense ratio cannot exceed what percentage?

31% To qualify for an FHA loan, a borrower must not exceed a housing expense ratio of 31% and a total obligations ratio of 43%.

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?

Mortgagor

Where would information such as the loan amount, interest rate, term of the loan, and responsible parties be found?

Promissory note

Which legal instrument evidences the debt and states the interest rate, term, payment requirement, and other information related to the loan?

Promissory note

Which mortgage clause is the borrower's promise to pay the property taxes during the period of the loan?

Tax *A tax clause, or covenant to pay taxes, consists of the borrower's promise to pay the property taxes during the period of the loan. Should the borrower fail to pay the taxes as required, the property could be sold in a tax foreclosure sale, which would remove the lien created by recording the mortgage. The lender would have to seek enforcement of the promissory note and hope to collect any deficiency on the basis of a personal judgment. *

After paying mortgage payments for many years, a homeowner finally pays the last payment. How does the lender extinguish the mortgage lien on the property?

The lender would file a Satisfaction of Mortgage in the county records where the property is located.

After all liens have been paid following a foreclosure sale, who do any remaining funds belong to?

The mortgagor *If all lien holders have been paid from the proceeds of the foreclosure sale, any surplus funds remaining are paid to the mortgagor (borrower). *

If a property owner is foreclosed upon, and the foreclosure results in a sale price greater than the amount of the outstanding liens, the excess will likely be paid to which of the following?

The mortgagor *If all lien holders have been paid from the proceeds of the foreclosure sale, any surplus funds remaining are paid to the mortgagor (borrower). *

When financing the purchase of real estate, what is the role of the mortgagor?

The mortgagor gives a mortgage to a mortgagee. *The property owner, the mortgagor, is the party who gives the mortgage to the lender to secure the loan. The lender, the mortgagee, is the party who receives the mortgage from the property owner. The mortgagor pledges the property as security to the mortgagee. The mortgagor owns the real property, while the mortgagee owns the mortgage, which is personal property.*

What is the primary purpose of discount points?

To decrease the monthly payment required *Discount points are an upfront payment to the lender in exchange for a lower mortgage rate, which decreases the monthly mortgage payment for the life of the loan. One discount point is an upfront payment of 1% of the loan (not the purchase price) which is paid at closing. 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. *