Law & Practice 12 Test
Which of the following statements is not correct? A: A mortgage's priority is determined by the date on which it was executed B: A mortgage instrument pledges the real estate as security for the loan C: A deed of trust is usually conveyed by the trustor to the trustee D: In Colorado a deed of trust and a promissory note are executed at the same time
A: A mortgage's priority is determined by the date on which it was executed Explanation The key word making A the correct answer was the word "executed." A mortgage is "executed" on the date it is signed by both parties. Yet its priority, should the loan go into default, is determinedby the date it was "recorded" at the County Clerk's office. Since nobody does closings at the Clerk's office the recording date is almost always after the date upon which it was signed. Therefore A was the correct answer as the only statement that was wrong.
An installment land contract: A: A way for the vendor to help the vendee finance the property B: Is a contract on land C: Conveys title from the vendor to the vendee D: None of the above
A: A way for the vendor to help the vendee finance the property ExplanationThe vendor retains title to the property - this is a bit of a misnomer, becasue an installment land contract is for all properties, not only land. It can be used to help the buyer purchase a property they usually could not qualify for. More on test....
In Colorado, a property subject to general ad valorem taxes is assessed on the first day of January of the current year, and the lien against the property for the taxes attaches: A: On the same date - Jan 1st of the current year B: The following January 1st C: The following February 28th D: The following April 30th
A: On the same date - Jan 1st of the current year Explanation Since taxes are paid in arrears the lien attaches at that time and it does not have to be recorded.
The clause in a deed of trust, mortgage or promissory note which permits the lender to declare the entire unpaid balance due and payable at once upon default of the borrower, is a(n): A: acceleration clause B: escalator clause C: forfeiture clause D: default clause
A: acceleration clause Explanation The acceleration clause gives the lender the right to "accelerate" the loan's due date to the present, usually for nonpayment or some other form of default.
The legal procedure in which property that is pledged as security is sold to satisfy the debt is known as: A: foreclosure B: actual eviction C: constructive eviction D: deficiency judgment
A: foreclosure Explanation Foreclosure brings the rights of the parties and all junior lien holders to an end.
The purpose of the alienation clause in a mortgage is to: A: prevent the loan from being assumed B: prevent the loan from being sold C: allow for interest rate changes to be made D: allow negative amortization to accrue
A: prevent the loan from being assumed Explanation A clause closely associated in meaning with Due-On-Sale Clause and Acceleration Clause. An alienation clause in a mortgage can give the lender the option to call the loan (declare the entire balance due) when the property owner transfers ownership, title or interest without the lender's consent. An Acceleration Clause is a contract provision that allows a lender to require a borrower to repay all or part of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment.
Ms. Nation, an eligible veteran, made an offer of $95,000 to purchase a condo she will finance with a VA-guaranteed loan. Four weeks after the offer was accepted, a certificate of reasonable value (CRV) for $92,000 was issued for the property. In this case: A: the veteran may withdraw from the transaction without penalty or negotiate with the seller to reduce the price to $92,000 B: the seller can finance a second mortgage for the remaining balance C: the veteran can purchase the property, provided she can get an additional loan for a $3,000 down payment D: the veteran can wrap the $3,000 into the financed loan costs
A: the veteran may withdraw from the transaction without penalty or negotiate with the seller to reduce the price to $92,000 Explanation The seller would need to come down on the purchase price, the buyer can put the $3,000 down, or the veteran may withdraw from the transaction. Definition of Certificate of Reasonable Value (CRV) A document issued by the Department of Veterans Affairs as a prerequisite for a VA loan; it is based on anapproved appraisal. It establishes the maximum value of the property for VA purposes and, as a result, themaximum size of the VA loan.
In Title Theory states the mortgagor (buyer) pledges property to the lender who retains title to secure the loan. In a lien theory state (FYI Colorado), the trustor (borrower) has legal title and a lien is placed on the property to secure the loan. A: true B: false C: the mortgagor has only equitable title D: none of the above
A: true Explanation In the United States, some states are "title theory" states while most are "lien theory" states. In lien theory states, a a deed of trust will create a lien upon the title to the real property being mortgaged, while the trustor (AKA borrower) still holds both legal and equitable title. In title theory states, a mortgage is a transfer of legal title to secure a debt, while the mortgagor still retains equitable title. More on test...
A deed of trust may be used to provide security for a real estate loan in Colorado. Which of the following is correct if the deed of trust is set up with a private trustee? A: Any foreclosure will be handled by the public trustee B: Any foreclosure will be handled in the appropriate court C: The private trustee will hold legal title to the property and be shown on the deed D: Any foreclosure will be handled by the private trustee
B: Any foreclosure will be handled in the appropriate court Explanation A deed of trust set up with a private trustee must be foreclosed through the court like a mortgage, whereas a deed of trust using the public trustee would be foreclosed through the public trustee's administrative process.
A mortgage broker usually offers which of the following services? A: Sells the mortgage-backed securities on the second market B: Brings borrower and lender together C: Provides easement for general use extending across the property D: Donuts for realtors, free credit reports, and lower interest rates
B: Brings borrower and lender together Explanation A mortgage broker usually brings buyers and lenders together, typically on a commercial transaction.
A real estate contract or land contract is described as a method of financing often substituted for mortgage or trust deed financing. Consequently a land contract can be: A: the same as a mortgage B: a security device C: similar to a lease D: a lease with an option to buy
B: a security device Explanation The real estate land contract secures the debt for the seller (vendor).
A court order that authorizes and directs the proper officer of the court to sell the property of a defendant as required by the judgment or decree of the court is known as: A: a writ of attachment B: a writ of execution C: constructive eviction D: actual eviction
B: a writ of execution Explanation A writ of execution is a court order authorizing the sale of a property whose proceeds will be used to satisfy a creditor who has won a court judgement. Don't confuse this with writ of attachment, which is an action taken by a creditor in which the court simply retains custody of the property while a lawsuit is being decided.
The clause in a mortgage that can be enforced to make the entire debt due immediately if the mortgagor defaults on the loan is the: A: alienation clause B: acceleration clause C: due-on-sale clause D: a satisfaction
B: acceleration clause Explanation The acceleration clause allows the lender to move up the date when the entire sum is due.
An acceleration clause allows the lender to: A: increase the number of payments made in a year to accelerate payment on the loan B: make the entire amount due and payable immediately upon buyer's default C: increase the interest rate D: all of the above
B: make the entire amount due and payable immediately upon buyer's default Explanation The acceleration clause is what allows the lender to pursue foreclosure. When the borrower defaults, the lender makes the full balance of the loan due and payable. If the borrower cannot pay, the lender will foreclose. This is a clause closely associated in meaning with Due-On-Sale Clause and Alienation Clause. An alienation clause in a mortgage can give the lender the option to call the loan (declare the entire balance due) when the property owner transfers ownership, title or interest without the lender's consent.
Discount points are charged by the lender to: A: To reduce the price of the property B: To reduce the down payment C: To reduce the interest rate D: To reduce the closing costs
C: To reduce the interest rate Explanation A discount point is one percent of the loan amount and is used to buy down the interest rate. Each discount point paid reduces the interest rate by 1/8 of one percent. Definition of 'Discount Points' Discount Points are a form of prepaid interest. A borrower buys a point and in return gets a lower interest rate on the loan. Each discount point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of your interest rate. As the IRS considers discount points to be prepaid interest they are tax deductible in the year in which they were paid. For example, on a $300,000 loan, each point would cost $3,000. Assuming the interest rate on the mortgage is 5% and each point lowers the interest rate by 0.25%. Buying 2 points will cost $6,000 and will result in an interest rate of 4.50%. Both lenders and borrowers gain benefits from discount points. Borrowers gain the benefit of lowered interest payments down the road, but the benefit applies only if the borrower plans on holding onto the mortgage long enough to save money from the decreased interest payments. Lenders benefit by receiving cash upfront instead of waiting for money in the form of interest payments over time, which enhances the lenders liquidity situation. On a practical basis; discount points are most often purchased by sellers as an incentive to prospective buyers. For most sellers, discount points are a cost of selling and thus tax-deductible. Buyers usually do not see enough benefit to purchase discount points. In the earlier example; spending $6,000 to reduce the interest rate to 4.5%, would have reduced the monthly payment by about $90. It would have taken a buyer 67 months to cover the cost of the points.
An existing mortgage loan may be changed to a junior lien by: A: court order B: satisfaction of the first mortgage loan C: a subordination agreement D: exchanging before the first mortgage was recorded
C: a subordination agreement Explanation Subordination is the process of allowing another lien to take priority in the event of foreclosure.
The assessed value is 35% of a property valued at $250,000. The mill rate is 40. What are the monthly taxes on the property? A: 3500 B: 933.32 C: 4721.28 D: 291.66
D: 291.66 Explanation $250,000 X .35 = $87,500 Assessed Value X .04 Mill Rate = $3500 / 12 = $291.66 monthly taxes
You lease a storeroom on a percentage basis. The lease calls for a minimum rental of $300 per month and 5% of the gross annual sales over $80,000. How much is the annual rent with a gross annual business of $150,000? A: 7500 B: 3500 C: 3600 D: 7100
D: 7100 Explanation 1) Calculate minimum annual rent - $300 (monthly minimum rent) x 12 (months) = $3,600 (annual minimum rent) 2) To calculate rent from percentage of gross sales a. $150,000 (annual gross sales) - $80,000 = $70,000 (amount of gross sales to be applied towards percentage rent) b. $70,000 X .05 (5%) = $3,500 (5% of gross sales over $80,000) 3) $3,600 (annual minimum rent) + $3,500 (5% of gross sales over $80,000) =$7,100 annual rent
Which of the following best describes an installment land contract? A: A contract to buy land only B: A mortgage on land C: A means of conveying title immediately while the buyer pays for the property D: A means of selling a property whereby the buyer pays for the property in regular installments while the seller retains title to the property
D: A means of selling a property whereby the buyer pays for the property in regular installments while the seller retains title to the property Explanation An installment land contract can be very risky for the buyer but does allow the buyer to get into a property which they may not qualify for. Can be used to avoid the acceleration clause in a mortgage. More info on test...
Which of the following documents accompanies the deed of trust? A: A deed B: An abstract of title C: A contract of sale D: A promissory note
D: A promissory note Explanation The promissory note is secured by a deed of trust or mortgage.
Which of the following is (are) correct concerning the parties of a trust deed? The trustee has naked title B: The lender is named the beneficiary C: The trustor has legal title D: All of the above
D: All of the above Explanation Trustee oversees the provisions of the Trust Deed. The lender benefits from any action taken by the Trustee. The trustor is the borrower and has legal title in a lien theory state.
Which of these is (are) correct? A: Under a trust deed the trustor is the borrower, maker, payor, and the lender is the mortgagee, the beneficiary, the owner, and holder of the note B: The trustee is a third party such as a public official that holds title in trust C: The beneficiary is the lender; the trustee is a public official D: All of the above are correct
D: All of the above are correct Explanation The trustor is the borrower; the trustee could be a lender, title company, trust company or public trustee. The trustee holds property in trust for another.
A release clause in a mortgage: A: Provides for an option to extend its due date B: Releases a guarantor from further liability under specified conditions C: When part of a document creates a lien second only to the lien of taxes and assessments D: Allows portions of the property, given as security, to be released from the mortgage lien upon performance of a specified act
D: Allows portions of the property, given as security, to be released from the mortgage lien upon performance of a specified act Explanation When a blanket mortgage is used to secure a debt, there is usually a provision in the mortgage which provides for the "release" of part of the property held as security.
Einstein bought a property from Plato. Einstein agreed to pay Plato $1615 per month for the next 15 years. Then the total balance will be due and legal title will change hands at that time. This is called a: A: Blanket mortgage B: Amortized mortgage C: Wrap around mortgage D: Land contract
D: Land contract Explanation If title does not pass until the property has been paid in full, then it is a land contract and the payments are going directly to the seller.
A three-day right of rescission can be invoked for which contract? A: Residential contract to buy/sell real estate B: Commercial contract to buy/sell real estate C: Exclusive right-to-buy contract (buyer's agency) D: Refinancing of your primary residence
D: Refinancing of your primary residence Explanation There is no 3-day right on any of the approved contracts. 3-day right of recission is valid only on refinances.
Davis defaulted on his mortgage and the lender began foreclosure proceedings. At the foreclosure sale Davis's house was sold for $115,000 while the unpaid balance of the loan was $121,000. What can the lender do about the $6,000 difference? A: Sue for specific performance B: Sue for injunctive relief C: Sue for monetary damages D: Sue for a deficiency judgment
D: Sue for a deficiency judgment Explanation Suit can be brought for the deficiency from what was owed to what was received by the lender, it is a deficiency judgment.
A clause in a deed or trust, mortgage or promissory note which permits the lender to call the outstanding balance due and payable should the property be sold by the borrower is a(n): A: acceleration clause B: balloon payment clause C: exculpatory clause D: alienation clause
D: alienation clause Explanation The alienation clause is closely associated in meaning with Due-On-Sale Clause and Acceleration Clause. An alienation clause in a mortgage can give the lender the option to call the loan (declare the entire balance due) when the property owner transfers ownership, title or interest without the lender's consent. An Acceleration Clause is a contract provision that allows a lender to require a borrower to repay all or part of an outstanding loan if certain requirements are not met. An acceleration clause outlines the reasons that the lender can demand loan repayment.
A clause which provides for deeds to portions of land to be conveyed as certain percentages of the contract price are paid, is : A: escrow clause B: declaration C: purchase price clause D: partial release clause
D: partial release clause Explanation This is used most times in a blanket mortgage so that individual properties can be released.
One purpose of RESPA (Real Estate Settlement Procedures Act) is to: A: see that buyers do not borrow more than they can repay B: make real estate brokers more responsible to buyer's needs C: help buyers know how much money is required D: see that buyers and sellers know all settlement costs
D: see that buyers and sellers know all settlement costs Explanation The purpose of RESPA is to eliminate kickbacks and provide full disclosure of closing costs to buyer and seller.
A promissory note calling for payment of interest only during its term is called a(n): A: amortized note B: installment note C: simple interest D: straight note
D: straight note Explanation This is a promissory note evidencing a loan in which payments of interest only are made periodically during the term of the note. The principal is due in a lump sum upon maturity.
When using a deed of trust in a real estate loan, title to the property is held by the: A: seller B: lender C: trustor D: trustee
D: trustee Explanation With a Deed of Trust an impartial 3rd party, the Public Trustee, holds "naked title" (title without possession) to the property. The owner of the property who mortgaged the property (a voluntary lien) to secure the loan is called the "Trustor." The lender to whose benefit the lien was placed on the property to secure the loan is called the "Beneficiary."
In an installment sales contract when does title usually pass? A: upon closing B: upon signing a preliminary agreement C: upon signing of the installment land contract D: upon satisfaction of the installment land contract
D: upon satisfaction of the installment land contract Explanation Title does not pass until the loan has been paid off. More info on test...
