Chapter 11: Real Estate Finance (Part A)

Question 1

If the lender is not paid according to the terms of a promissory note and they hold a security interest in the property through a mortgage or trust deed, which of the following options may the lender pursue?
A. Renegotiate the terms and conditions of the promissory note with the borrower
B. Foreclose on the property
C. File for a deficiency judgment after the foreclosure if state law permits
A. A only
B. B only
C. Both A and B
D. A, B and C

Answer 1

D. A, B and C
(When a borrower defaults the lender and borrower may always mutually agree on a resolution. The lender also has the right to foreclose and if the sale does not produce sufficient proceeds they may be able to pursue the borrower for a deficiency judgment)

Question 2

Which of the following statements is/are true if a buyer purchases property subject to the seller’s loan and then defaults on the loan? A. The buyer is personally liable for the underlying debt. B. The seller remains personally liable for the underlying debt.
A. A only
B. B only
C. Both A and B
D. Neither A nor B

Answer 2

B. B only
(A “subject to” assumption means that the borrower is not signing a new promissory note and therefore is not creating any personal liability. The seller will remain personally liable for the debt. If payments are not received the lender may foreclose, but only the seller would be liable for any deficiency)

Question 3

The borrower utilizing a mortgage document is known as the:
A. vendee
B. mortgagee
C. mortgagor
D. beneficiary

Answer 3

C. mortgagor
(The borrower gives a right or interest to the lender called a mortgage. The borrower is the mortgagor and the lender or bank is the mortgagee)

Question 4

Gary bought a house for $180,000 with an 85% LTV ratio. The term of the loan is 30 years at a 7% rate of interest. It will take a loan factor of 6.65 per 1,000 to amortize the loan. The annual real property taxes are estimated to be $996. The annual premium for the homeowner’s policy is estimated to be $480. What is the monthly PITI?
A. $1,017.45
B. $1,100.45
C. $1,140.45
D. $1,320

Answer 4

C. $1,140.45
($180,000 x 85% = $153,000 loan amount. $153,000 x .00665 (6.65 per 1,000) = $1,017.45 principal and interest. The annual property taxes are $996/12 = $83 monthly taxes. The insurance is $480/12 = $40 monthly insurance. $1017.45 + $83 + $40 = $1,140.45)

Question 5

How many discount points would the lender need to charge if the lender wishes to increase the yield on the loan from 9% to 10.25%?
A. Two points
B. Eight points
C. Six points
D. Ten points

Answer 5

D. Ten points
(10.25 – 9.0 = 1.25 x 8 = 10 points)

Question 6

A lender is charging a borrower 6% fixed interest rate and 4 discount points. What is the yield to the investor?
A. 6¼%
B. 6½%
C. 5½%
D. 5¾%

Answer 6

B. 6½%
(Each point provides a .125 yield to the investor. 4 x .125 = .50 additional yield. 6% + .50 = 6.5%)

Question 7

Bill and Betty just received $25,000 profit from the sale of their home. They are in the process of buying a new home for $185,500 with an 80% LTV ratio. The lender is charging the normal loan origination fee and is lending the money at 1.5 discount points. Bill and Betty pay an attorney $400 to handle the closing, and they must also pay for the excise tax. How much money will the lender be paid in fees?
A. $1,484
B. $4,2226
C. $3,710
D. $4,1581

Answer 7

C. $3,710
(The loan origination and discount points are paid on the loan amount. The loan amount is $148,400. $148,400 x 1% origination fee = $1,484. $148,400 x 1.5% discount points = $2,226. $1,484 + $2,226 = $3,710)

Question 8

Andy purchased a new home for $180,000. He paid 20% down and financed the balance at 9% for 30 years. Two discount points are charged. How much money will Andy actually pay at closing for the two discount points?
A. $2,880
B. $3,600
C. $1,800
D. $3,100

Answer 8

A. $2,880
(The loan amount is $144,000 ($180,000 x 80%). $144,000 x 2% discount points = $2,880)

Question 9

The lender is willing to make an 80% loan on the purchase of a home. The home is listed at $190,000. The purchase price is $175,000, and the appraised value of the home is $180,000. How much is the buyer’s down payment?
A. $36,000
B. $40,000
C. $35,000
D. $38,000

Answer 9

C. $35,000
(Lenders base the LTV on either the purchase price or the appraised value, whichever is less. The purchase price is $175,000. $175,000 x 20% (required down payment) = $35,000)

Question 10

Under a contract for deed, the title to the property is held by the:
A. vendor
B. vendee
C. trustor
D. trustee

Answer 10

A. vendor
(A contract for deed is not the standard Offer to Purchase and Contract. It is an arrangement where the buyer will make payments to the seller and the seller retains title. The seller is referred to as the vendor and the buyer is the vendee)

Question 11

A mortgagor is the one who:
A. gives the mortgage
B. holds the mortgage
C. provides the mortgage funds
D. forecloses on the mortgage

Answer 11

A. gives the mortgage
(The mortgagor is the borrower and they give a right or interest in the property to the bank/lender who is referred to as the mortgagee)

Question 12

A contract for deed provides for the:
A. sale of unimproved land only
B. sale of real property under an option agreement
C. conveyance of legal title at a future date
D. immediate transfer of reversionary interests

Answer 12

C. conveyance of legal title at a future date
(A land installment contract, land contract or contract for deed is an agreement where the buyer is making payments to the seller and the seller retains title. Title will be transferred to the buyer at some future date, usually with completion of the last payment)

Question 13

A homebuyer recently financed his first home with a fixed-rate conventional loan. The type of interest he will pay over the life of the loan is probably:
A. simple interest
B. variable interest
C. compound interest
D. discounted interest

Answer 13

A. simple interest
(Interest charged on home loans is typically simple interest, as opposed to compound interest. Simple interest means that interest in being charged only the amount of the outstanding principal balance)

Question 14

The loan amount expressed as a percentage of the value of the real estate offered as collateral is the:
A. amortization ratio
B. loan-to-value ratio
C. debt-to-equity ratio
D. capitalization rate

Answer 14

B. loan-to-value ratio
(The loan-to-value (LTV) ratio is the percentage of the loan as measured against the property’s value. The difference between the LTV and the value of the property is referred to as equity)

Question 15

A homebuyer financed his home five years ago with a high loan-to-value, fixed-rate loan. Due to a job transfer, the owner must move, but his home has suffered significant depreciation in value since purchase. Which of the following would be the least acceptable contractual obligation to handle the disposition of the property?
A. ask the lien holder to participate in a short sale transaction
B. utilize other assets to make up the shortfall between the outstanding mortgage loan balance and the proceeds
C. abandon the house and stop making the payments
D. convert the house into a rental property and use the rent to make the mortgage payments

Answer 15

C. abandon the house and stop making the payments
(A borrower who has a home where the value of the home is less than the amount of liens on the property has many options, but is still obligated to pay the debt to the lender. If the borrower simply abandons the home, the lender will likely foreclose and the borrower may be subject to a deficiency judgment)

Question 16

An existing mortgage loan can have its lien priority lowered through the use of a:
A. hypothecation agreement
B. satisfaction of mortgage
C. subordination agreement
D. reconveyance of mortgage

Answer 16

C. subordination agreement
(A subordinated loan is a junior loan with superior loans in higher lien position. A lender in a higher lien position can agree to subordinate their loan to a lower priority)

Question 17

If the monthly interest payment at 6% is $1,050, the principal amount of the loan is:
A. $63,000
B. $75,600
C. $126,000
D. $210,000

Answer 17

D. $210,000
($1,050 x 12 = $12,600 in annual interest. $12,600/.06 (6%) = $210,000)

Question 18

The purpose of a mortgage is to:
A. provide security for the loan
B. convey title of the property to the lender
C. restrict the borrower’s use of the property
D. create a lien on the property

Answer 18

A. provide security for the loan
(When money is borrowed the borrower signs a promissory note to repay the debt. The promissory note is secured by a collateral or securitizing document called a mortgage)

Question 19

The clause in a deed of trust or mortgage that permits the lender to declare the entire unpaid balance immediately due and payable upon default by the borrower is the:
A. alienation clause
B. escalator clause
C. forfeiture clause
D. acceleration clause

Answer 19

D. acceleration clause
(Acceleration means pay all of the money due immediately. Acceleration occurs when a borrower defaults on a loan and the lender is no longer willing to accept the late payments. The lender is requiring the borrower to pay off the full amount of the loan rather than bring it current)

Question 20

A building was sold for $115,000. Down payment was made in the amount of $15,000 and deposited in escrow. The buyer obtained a new loan for the balance of the purchase price. The lender charged two discount points. What was the total amount charged to the buyer for points in this purchase?
A. $2,000
B. $2,300
C. $3,000
D. $14,375

Answer 20

A. $2,000
($115,000-$15,000 = $100,000 loan amount. $100,000 x 2% = $2,000)

Question 21

When a mortgage loan has been paid in full, it is important for the borrower to be sure that:
A. the paid note is placed in a safe deposit box
B. a deed of partial reconveyance is obtained
C. the paid mortgage is returned to the seller
D. the satisfaction of mortgage is recorded

Answer 21

D. the satisfaction of mortgage is recorded
(When a promissory note is supported by a mortgage the payoff document that the mortgagee provides to the mortgagor is called a satisfaction of mortgage. The satisfaction of mortgage should be recorded to evidence the release of the lender’s right or interest in the collateral)

Question 22

The right a grantor has to regain property ownership by paying the debt after a foreclosure sale is called:
A. equity right of redemption
B. statutory right of redemption
C. reversion
D. recapture

Answer 22

B. statutory right of redemption
(When trust deeds are utilized to secure a debt, the grantor (trustor/borrower) has a right to regain the property at any time prior to the sale by paying the full debt. This is called an equity right of redemption. There is also a 10 day statutory right of redemption after the sale)

Question 23

The defeasance clause in a deed of trust requires the trustee in a specified situation to execute:
A. an assignment of mortgage
B. a deed of reconveyance
C. a satisfaction of mortgage
D. a partial release agreement

Answer 23

B. a deed of reconveyance
(Defeasance comes from the word defeated. The defeasance clause states that if the borrower repays the debt then the lender’s interest in the property is defeated. The payoff document used in conjunction with a deed of trust is called the deed of reconveyance)

Question 24

Pledging property as security for repayment of a loan without giving up possession is known as:
A. hypothecation
B. defeasance
C. amortization
D. alienation

Answer 24

A. hypothecation
(Hypothecation occurs in every lending situation. It means that the borrower has pledged the property as collateral for the loan without giving up rights of use or possession. The borrower retains legal title to the property)

Question 25

When a borrower makes regular interest payments to the lender in a construction loan and at the end of the loan must repay the entire loan balance, the term that best describes this type of a loan is:
A. amortized
B. term
C. blanket
D. negative amortization

Answer 25

B. term
(A term loan is also known as a straight loan or an interest only loan. Most construction loans are term or interest only loans)

Question 26

The primary obligation of a borrower under a promissory note that is signed in regard to real property is to:
A. keep the property insured
B. obtain permission from the lender prior to any improvements
C. pay the debt
D. follow certain procedures regarding the collateral in the event of default

Answer 26

C. pay the debt
(The promissory note is the evidence of the debt and obligates the borrower to repay the loan. All of the terms and conditions that relate to payment of the debt; interest rate, loan amount, payment are all contained in the promissory note)

Question 27

The borrower utilizing a trust deed is best referred to as the:
A. beneficiary
B. trustor
C. trustee
D. mortgagor

Answer 27

B. trustor
(When a trust deed (or deed of trust) is utilized the borrower is referred to as the trustor, the bank is the beneficiary and the trustee is a neutral third party who holds the power of sale)

Question 28

In a title state, what is the process for initiating a foreclosure?
A. the filing of a lawsuit by the mortgagee
B. the filing of a lawsuit by the trustee
C. the beneficiary instructing the trustee to deliver proper notices and set a sale date
D. the trustee instructing the beneficiary to deliver proper notices and set a sale date

Answer 28

C. the beneficiary instructing the trustee to deliver proper notices and set a sale date
(A title state is a state which utilizes deeds of trust. The foreclosure of a trust deed begins with the lender (beneficiary) instructing the trustee to deliver a notice of default and a notice of sale)