Ch 21: Real Estate Financing Instruments

Question 1

Bare Legal Title best describes the interest of the:

a. Trustee under a trust deed
b. Trustor under a trust deed
c. Beneficiary under a trust deed
d. Vendee under a land contract

Answer 1

a. Trustee under a trust deed

The trustee holds Bare Legal Title, which is also known as the Power of Sale Clause or Naked Legal title. The trustee has the power to sell the property and foreclose on the trustor if the trustor does not pay the beneficiary as agreed in the trust deed.

Question 2

A builder purchased a lot with a very low down payment which he intended to pay off after he built and sold a house. He intended to obtain a construction loan to cover his building costs. Most likely the loan for the lot purchase had:

a. A subordination clause
b. A maintenance clause
c. A subrogation clause.
d. A release clause

Answer 2

a. A subordination clause

The subordination clause allows the builder to obtain a construction loan. Construction loan lenders generally demand to be in first position, so the builder would require the seller of the lot to include a subordination clause in the lot acquisition financing.

Question 3

Arizona is considered to be:

a. A mortgage state
b. A promissory note state
c. A lien theory state
d. A title theory state

Answer 3

c. A lien theory state

Arizona is a lien theory state.

Question 4

A deed of reconveyance would be signed by the:

a. Trustor
b. Trustee
c. Vendor
d. Beneficiary

Answer 4

b. Trustee

When the final payment is made on a loan secured by a trust deed, the beneficiary (lender) notifies the trustee that the loan has been paid and the trustee reconveys the bare legal title to the trustor. The document used to reconvey the bare legal title is the Deed of Reconveyance.

Question 5

Written evidence of a personal promise to repay money borrowed is a/an:

a. Security instrument
b. Note
c. Mortgage
d. Trust deed

Answer 5

b. Note

The written promise to pay is known as a promissory note

Question 6

The seller holds legal title to a real property sold under a:

a. Mortgage (lien theory)
b. Security agreement
c. Land contract
d. Trust deed

Answer 6

c. Land contract

A Land Contract is different than a purchase contract in that legal title is not transferred to the buyer until the total contract is paid. Until full payment of the contracted purchase amount the buyer only has Equitable Title and the seller maintains legal title.

Question 7

In a promissory note, which of the following would NOT benefit the lender?

a. Prepayment penalty
b. Acceleration clause
c. Late fees
d. Non-recourse clause

Answer 7

d. Non-recourse clause

A non-recourse clause in a mortgage or trust deed note limits the collateral available to the lender to the specific real property pledged in the mortgage or trust deed. In other words, the lender cannot attempt to foreclose against other personal assets of the borrower.

Question 8

An acceleration clause in a loan allows:

a. Prepayment penalties.
b. The lender to declare the entire debt due and payable
c. Prepayment without penalty.
d. Interest payments to be deferred.

Answer 8

b. The lender to declare the entire debt due and payable

The acceleration clause enables the lender to call the loan due and payable. This clause may be evoked because the mortgagor has defaulted by not making payments as agreed or by not complying with provisions of the security instrument.

Question 9

A lender that funds a secured loan for the purchase of real estate is known as:

a. The mortgagee
b. The mortgagor
c. The vendor
d. The trustee

Answer 9

a. The mortgagee

The mortgagee is the lender. The lender receives the mortgage as security for the loan.

Question 10

A feature of a graduated payment mortgage is:

a. Lower interest rate in early years
b. Negative amortization in early years
c. Constant principal payment, but a variation in interest payment
d. An interest rate related to a sliding index.

Answer 10

b. Negative amortization in early years

The graduated payment mortgage is a loan, which begins with low payments, but increases at regular intervals for a set number of years, then levels out for the balance of the term. The loan payments in the early years of a GPM can result in Negative Amortization. Negative amortization occurs when the monthly loan payment is insufficient to pay the interest due and the excess is added to the balance owed, thereby creating an increasing loan balance rather than an mortising or decreasing loan balance.

Question 11

In order to sell individual lots in a subdivision, a developer would want which of the following clauses included in the blanket mortgage encumbering the subdivision?

a. Default
b. Partial release
c. Due on sale
d. Acceleration

Answer 11

b. Partial release

A mortgagor in a blanket mortgage would pledge more than one property to secure the note. When a developer wishes to develop a large tract of land he would pledge all the land as collateral with a release clause that the lender will, with a partial payment on the loan, release the lot that has been sold so that clear title may pass to the lot purchaser.

Question 12

A mortgage loan which allows additional money advances using the same mortgage is known as:

a. An open end mortgage
b. A package mortgage
c. A graduated mortgage
d. A blanket mortgage

Answer 12

a. An open end mortgage

An open-end mortgage enables a borrower to have a pre-approved loan available for future money requirements. It is a line of credit.

Question 13

A seller carrying back a first mortgage on commercial property would least likely want a/an:

a. Assignment of rents clause
b. Subordination clause
c. Maintenance clause
d. Due on sale clause

Answer 13

b. Subordination clause

A subordination clause in the purchase money mortgage would allow the new owner to obtain additional first mortgage financing and the seller would have agreed to be placed in second position. The other answer choices all enhance the security of the seller/lender.

Question 14

A VA guaranteed loan would NOT have:

a. A $50,750 limit on the guarantee
b. A funding fee
c. No down payment
d. A prepayment penalty

Answer 14

d. A prepayment penalty

VA loans cannot have a prepayment penalty.

Question 15

A proposed loan under the USDA Single Family Housing Guaranteed Loan Program must comply with all of the following EXCEPT:

a. Applicant must meet income eligibility
b. Applicant must be a U.S. Citizen, U.S. non-citizen National or Qualified Alien
c. The residence must be located on a 40 acre parcel that is cultivated
d. The property must be located in an eligible rural area identified by the Department of Agriculture

Answer 15

c. The residence must be located on a 40 acre parcel that is cultivated

Although this is a Department of Agriculture program it does not require the residence to be located on cultivated land.

Question 16

Monthly payments on a VA loan would MOST likely increase due to:

a. A change in the loan principal
b. The lender’s shortening the term of the loan
c. A rise in taxes
d. A rise in interest rates

Answer 16

c. A rise in taxes

A rise in taxes would increase the monthly payment of a VA loan because VA loans are Budget Mortgages. The monthly payment for budget mortgages include: Principal, Interest, Taxes and Fire Insurance often referred to a PITI.

Question 17

The following is NOT a characteristic of FHA loans:

a. Guaranteed
b. Residential
c. Minimum deposit required
d. Amortized

Answer 17

a. Guaranteed

FHA loans are insured not guaranteed.

Question 18

FHA insured loans provide insurance coverage against default to the:

a. Mortgagee
b. Mortgagor
c. Federal government
d. Seller

Answer 18

a. Mortgagee

The insurance coverage against default is to protect the lender; the Mortgagee.

Question 19

Which of the following would NOT apply to FHA loans?

a. Loan discount points paid by the buyer
b. Residential only
c. No prepayment penalty
d. Balloon payments

Answer 19

d. Balloon payments

Balloon payments are NOT allowed in FHA loans.

Question 20

VA loans are:

a. Available only for war veterans from WWI, WWI, Korea and Vietnam
b. Made directly by the Veterans Administration
c. Guaranteed by the government
d. Fully insurable loans

Answer 20

c. Guaranteed by the government

VA loans are available for qualified veterans not just certain war veterans and are guaranteed by the government not insured. VA loans are made by mortgage bankers and other authorized originators of mortgage loans.

Question 21

Which of these statements is FALSE regarding a VA loan?

a. The loan is not insured
b. If it is for housing in must be owner occupied.
c. The loan would be amortized
d. The veteran cannot pay more than the amount of the Certificate of Reasonable Value

Answer 21

d. The veteran cannot pay more than the amount of the Certificate of Reasonable Value

A veteran may pay more for a home than stipulated on the CRV if he/she signs a statement acknowledging (1) that the price is more than shown on the CRV and (2) the required difference is being paid by the Veteran from his/her own non-borrowed fund

Question 22

The buyer under a VA loan tells the broker he does NOT have the cash to pay the closing costs. The broker should:

a. Make a loan out of the commission
b. Notify the seller
c. Delay the closing until the buyer can find the money.
d. Arrange for the buyer to borrow the money

Answer 22

b. Notify the seller

The buyer not having the cash to pay the closing costs is a material fact that MUST be disclosed to the seller.

Question 23

Commercial income property loans generally include all of the following terms EXCEPT:

a. 5 to 7 year term with payments based on a 30 year amortization
b. Loan to value ratio of 100 percent
c. Prepayment penalty
d. Personal guarantee

Answer 23

b. Loan to value ratio of 100 percent

Commercial loan to value ratios generally fall into the 65% to 80% range.

Question 24

Commercial lending includes loans on all of the following properties, EXCEPT:

a. Shopping center
b. Hotel
c. Office building
d. Apartment complex with 100 units

Answer 24

d. Apartment complex with 100 units

Commercial real estate is income producing property used solely for business purposes rather than residential.

Question 25

A ratio that helps commercial lenders decide on the maximum loan size is the:

a. Loan to Value Ratio
b. Current Ratio
c. Land to Improvements Ratio
d. Debt-service Coverage Ratio

Answer 25

d. Debt-service Coverage Ratio

A Debt Service Ratio is computed by dividing the Net Operating income by the Annual Mortgage Debt Service. The ratio helps lenders determine the maximum loan size based on the cash flow generated by the property.