Unit 6: Instruments of Real Estate Finance
When the economy slows, what is the typical impact on home equity loans?
Higher default rate
A single, complete financing and sales agreement between a buyer and a seller may be called
The answer is a contract for deed. Also known as a land contract, agreement for deed, or installment sale, a contract for deed does not have an accompanying note. It is a single, complete financing and sales agreement.
The strongest foreclosure power is found in
The answer is a contract for deed. In the event of a default, a lender under a contract for deed may be able to recover property pledged as collateral in as little as 30 days.
A lender might prefer to use a deed of trust instead of a mortgage to establish collateral for a real estate loan because
The answer is a foreclosure can be accomplished more quickly. The amount of paperwork and control are not really issues. There are actually more parties involved with a deed of trust (borrower/trustor, trustee, beneficiary/lender). The major benefit of a deed of trust is that foreclosure can be accomplished more quickly because no court action is required.
Which of the following is sufficient to provide adequate legal evidence of a debt?
The answer is a note. Though the note alone is legal evidence of a debt, either a mortgage or deed of trust must accompany the note to be a legally enforceable lien against the property used as collateral for the loan.
A young couple is attempting to purchase a property for $200,000. They are told they can qualify for a mortgage loan of $180,000, but will need $20,000 for a down payment. Since they only have $5,000 available for a down payment, they could ask the sellers to provide a carryback loan of $15,000 as
The answer is a second deed of trust. With tighter qualifying standards today, this may not be a feasible alternative, but there is a market for resale of junior financing such as second mortgages or deeds of trust.
Upon default on the part of the borrower, the lender may demand immediate payment of the entire balance of the loan under the terms of the
The answer is acceleration clause. Default is a breach of the loan agreement. When this occurs, the lender may accelerate all future debt service payments to the date of default. The lender is required to give 30 days' notice of acceleration.
Which of the following statements regarding the note used in a real estate financing transaction is FALSE?
The answer is all copies of the note must be signed. Only one copy of the note should be signed, since every signed note is a negotiable instrument. Delivery of the signed note to the lender is adequate evidence of ownership.
A bank makes a loan of $2,000 to one of its account holders to be used to pay income taxes. This would MOST likely be
The answer is an unsecured note. A note used as a debt instrument without any related collateral is described as an unsecured note; this is mostly used for a short-term personal loan.
When a nonrecourse clause is included in a loan agreement, the seller of the security is NOT liable if the
The answer is borrower defaults. The nonrecourse clause protects the purchaser of loan agreements and makes the seller more diligent in providing financing to borrowers with the ability to repay the loan.
A buyer is more likely to use a contract for deed if the
The answer is buyer lacks sufficient cash or credit for traditional financing. Contracts for deed provide an opportunity for people to access a home when other financing is not available, so sellers/lenders can set terms in their favor.
When a buyer has insufficient cash for the entire amount required to purchase a house, the seller may provide a portion of the sales price in the form of a junior encumbrance, called a
The answer is carryback loan. The seller is carrying back a portion of the sales price to make the transaction work.
Which clause states that the mortgagor will regain full, free, and clear title upon the repayment of the debt?
The answer is defeasance. A defeasance clause defeats foreclosure by stating that the mortgagor will regain full, free, and clear title upon the repayment of the debt.
All of the following statements would be true about a contract for deed EXCEPT
The answer is equal rights are provided to buyers and sellers. Because buyers typically only pursue a contract for deed if they cannot obtain traditional financing, the seller is in the driver's seat. Buyers need to pay special attention to the terms and take precautions to have a collection escrow account and provisions for the delivery of the deed at the beginning of the contract.
As the system for lending money using property as collateral evolved, the procedure was changed to allow borrowers to remain in possession as long as they met the terms of the agreement. Legal ownership was still transferred to the lender by placing the title in the lender's name. The borrower retained
The answer is equitable rights. The lender held the title and legal rights to the property. The borrower had equitable (anticipated future) rights to the property.
Because the second loan is in a subordinate position, the junior lienholder is in a
The answer is high-risk position. If the first mortgage is not paid according to its terms and foreclosure occurs, the second lienholder may not be paid.
Which of the following is an example of a voluntary lien?
The answer is mortgage lien of $180,000. A mortgage loan secured by a parcel of real estate becomes a specific voluntary lien against the subject property at the time it is recorded at the courthouse of the county where the property is located.
Involuntary liens would include all of the following EXCEPT
The answer is mortgage liens. Involuntary liens are imposed by law, whereas, a mortgage lien is voluntary.
A lender never wants a borrower to prematurely pay off a high-yield loan such as one with a high interest rate. To avoid this, the lender may wish to include a prepayment penalty clause in the loan contract. This is no longer allowed by all of the following EXCEPT
The answer is nonconforming jumbo loans. Nonconforming jumbo loans—especially those with adjustable-rate mortgages—may still include a prepayment penalty. Some states do not allow any type of prepayment penalty.
The borrower's promise to pay the lender a designated sum under specified terms and conditions is described in the
The answer is note. The note accompanies a deed of trust and identifies the security of a specific deed of trust given to the trustee as collateral for the loan.
An individual has purchased a home subject to an existing FHA mortgage lien. If the purchaser should default on the loan, the lender will hold personally responsible the
The answer is original borrower. A buyer may purchase a property with an existing encumbrance but stipulate that the purchase is subject to the lien. Only the original borrower and any subsequent assumers are liable. Under this agreement, a buyer may simply walk away from the property, forfeit any equity that has accumulated, and avoid any future responsibility in the transaction.
What type of clause in a financial instrument allows a borrower to repay the balance of a loan at any time without any restriction or penalty?
The answer is prepayment. Lenders participating in the secondary market have restrictions on using prepayment penalties based on guidelines of the specific loan product.
When the purchaser of a real estate loan wants to be protected in the event the loan goes into default, the loan is sold with a(n)
The answer is recourse clause. Loans sold with recourse require the seller of the security to reimburse the purchaser of the security if the borrower defaults.
A homeowner is considering purchasing an investment property, but she does not have sufficient cash to cover the down payment. She decides to pledge the equity as collateral to secure funds for a short term. When these equity loans come due, the borrower usually
The answer is refinances the entire property to secure a new loan to pay all liens in full. This allows the homeowner to purchase another property with an equity loan with less money out of pocket.
Certain other interests in real property can be owned independently from the land itself and can be pledged as collateral for a loan. Examples include all of the following EXCEPT
The answer is rights to hunt on the property. Hunting rights would be granted through a private easement or license. Air rights, such as for an elevated train over streets in Chicago, water rights in western states with limited water, or oil and mineral rights in the mountains of West Virginia can all be pledged as collateral for a loan—either singly, collectively, or jointly with other properties.
The escrow agent for a first-time purchaser is showing the survey and easements from the local electric utility company along the front edge of the property. The title agent explains that this easement is a covenant that
The answer is runs with the property. Almost every parcel of real property has some form of physical encumbrance imposed on it. Most common is the utility easement. These recorded encumbrances become "covenants that run with the land" and follow the title through its various owners.
The increased activity of buying and selling junior loans on a regular basis has created a
The answer is secondary market. Some companies see the benefit in buying and selling these second securities.
The parties involved in a deed of trust include all of the following EXCEPT
The answer is settlement agent. The primary function of the settlement agent is to see that all terms of the contract are met, regardless of whether a mortgage or a deed of trust is used as collateral.
When a developer purchases a large tract of land on which he plans to build a subdivision of 150 houses, he will want to see which of the following clauses in the mortgage agreement?
The answer is subordination clause. He will need to have the owner of the land be willing to subordinate her mortgage agreement to that of a construction lender, making the original mortgage a second or junior lien.
Which of the following liens would have priority in the event of a foreclosure sale?
The answer is tax lien for nonpayment of county property tax. Lender rights are usually superior to other liens with the exception of liens for nonpayment of state or local taxes.
There are two ways for a buyer to purchase a property arranging responsibility for an existing loan. The loan can be assumed, or the property can be purchased subject to any existing encumbrance. If the loan is assumed, then
The answer is the buyer, along with the original borrower and any subsequent assumers, becomes personally liable to the lender for full repayment. If the buyer purchases the property subject to the lien of the debt, only the original borrower and any subsequent assumers are liable.
The parties to a trust include all of the following EXCEPT
The answer is the executor. The trustor grants rights to a trustee, who holds property in trust for a beneficiary through use of a trust deed.
Under a contract for deed, the seller remains the legal fee owner of the property and is referred to as
The answer is the vendor. The buyer (vendee) agrees to pay the seller a specific price under certain terms and conditions, gaining possession of the property—but does not receive full legal title until the terms of the contract are met.
A homeowner might use junior financing for any of the following EXCEPT
The answer is to reduce the balance due on his first mortgage. Junior financing is a second mortgage or deed of trust that is entirely separate from the first trust or mortgage.
The basic instruments used to finance real estate include all of the following EXCEPT
The answer is unsecured note. All borrowers and lenders throughout the United States must observe general requirements to protect their rights when making a loan transaction. Real estate loans are contractual agreements and must contain certain basic elements to be valid. The three basic instruments used to finance real estate are the note and deed of trust, the note and mortgage, and the contract for deed.
One of the BEST reasons to recommend that the buyer have an attorney review a contract for deed is that
all conditions of the sale are described in the contract.
A common clause found in financing agreements today is the due-on-sale clause. The main purpose for this clause is to prevent the borrower from
allowing the loan to be assumed.
A systematic repayment program of principal and interest over the life of the loan is described as
amortization
The U.S. Supreme Court ruling in the California case Fidelity Federal Savings and Loan Association v. de la Cuesta confirmed the lender's right to enforce the
due-on-sale clause.
In the event of a default under a note with a deed of trust, the power of sale
gives the lender the opportunity to more readily secure legal title.
A homeowner who uses the equity in his home to pay off a five-year car loan with a high interest rate would BEST be described as using home equity to create a
junior loan.
A couple is purchasing their first house for $150,000. They are making a down payment of $15,000 with a mortgage loan of $135,000. The mortgage establishes a financial encumbrance on the property called a
lien
The BEST answer for why a lender may include a prepayment penalty on a high-interest loan is that the lender will
lose the opportunity for high earnings.
The Garn-St. Germain Act of 1982 limited the enforcement of the due-on-sale clause in special situations, such as
passing of title by inheritance.
The Smiths have obtained a mortgage loan for $200,000. To be considered on time, their monthly payment should be made on
the 1st day of the month.
Obtaining adequate hazard and liability insurance for the mortgaged property has become more difficult in recent years due to
the occurrence of natural disasters.
