Chapter 8 - Real Estate Finance

Question 1

Leverage is the practice of purchasing real estate using a small amount of _____ money and a larger proportion of _____ funds.

Answer 1

your money; borrowed funds.

Question 2

To utilize the “_______ of leverage” an investor would use the maximum amount of borrowed money.

Answer 2

principle of leverage

Question 3

To __________ is to provide title to a property as security for a loan without giving up possession. You do it through the trust deed in California (and even less likely, the common mortgage). Each of these instruments uses the PROMISSORY NOTE as the primary evidence of debt, which creates a lien on the property.

Answer 3

hypothecate

Question 4

An installment note with a balloon payment is also known as what?

Answer 4

A partially amortized note

Question 5

What is the most common way real estate is financed in California and can be either fixed or adjustable?

Answer 5

Full amortized installment note; you’re paying the same amount each month, but as you get closer to the end the payment towards interest decreases and the payment towards your principal increases.

Question 6

A _________ note is a short-term note and includes a term of 36 months. A ______ note is longer than 36 months.

Answer 6

promotional note; seasoned note

Question 7

A _________ ________ is any financial document (promissory note, check or other) that can be passed easily from one present o another, if it meets certain legal requirements.

Answer 7

negotiable instrument

Question 8

An acceleration clause is always found within a _____ deed.

Answer 8

trust deed

Question 9

A late payment is a payment that is, unless otherwise stated, more than ___ days past due.

Answer 9

ten days

Question 10

An alienation clause = due on sale clause; It is in both trust deed as well as promissory note and is enforceable and benefits the _______.

Answer 10

lender

Question 11

A Substitution of Liability form is when the _____ has now assumed secondary responsibility and has given the loan to the ______.

Answer 11

seller; buyer

Question 12

A Subject To loan takeover is different from the Substitution of Liability in that the seller still remains liable, but the buyer (new owner) is the one paying.

Question 13

A __________ Clause is part of a trust deed or mortgage that allows for a future change in the priority of financial liens.

Answer 13

Subordination; Future Lien > Current Lien

Question 14

According to the Business and Professions Code, a prepayment penalty is only enforceable during the first _____ years of a one-to-four unit home loan.

Answer 14

five years

Question 15

Impound Accounts is also known as what?

Answer 15

reserves

Question 16

Assignment of rents clause allows the lender to do what?

Answer 16

Take Possession; upon default of the borrower, to take possession of the property, collect rents, and pay expenses. It benefits lender.

Question 17

The ________ interest rate is the rate stated in the note.

Answer 17

Nominal interest rate

Question 18

The ______ interest rate is the rate the borrower is actually paying (including interest, points, and loan fees).

Answer 18

Effective interest rate

Question 19

Formula for calculating interest is:

Answer 19

I = P x R x T
Interest = Principal x Rate x Time

Question 20

The _____ interest rate loan is a loan for which the payments are the same each month for the life of the loan.

Answer 20

Fixed interest rate loan. A biweekly mortgage (26 payments) is under a fixed interest rate.

Question 21

____________ is the repaying of a loan (principal and interest), in regular payments, over the term of the loan.

Answer 21

Amortization

Question 22

___________ ____________ means the interest rat charges are higher than the monthly payment. This means that the loan payment does not cover the interest charges, and the amount of unpaid interest is added to the unpaid loan balance.

Answer 22

Negative amortization

Question 23

An ARM (or trust deed) is a loan in which the interest rate fluctuates periodically, based on a specific index, which makes the payment amount also change.

Answer 23

Adjustable Rate Mortgage

Question 24

In an ARM, the ______ is the spread between the index rate and the initial contract rate from which the lender will make a profit and cover its costs.It is the agreed to amount of profit for the lender.

Answer 24

margin

Question 25

A GPM/GPAM (trust deed) is a type of fixed interest rate loan for which the monthly payments start out lower and then gradually increase (for example, after five years the payments will be higher for the remainder of the loan payment).

Answer 25

Graduated Payment mortgage

Question 26

A ___________ mortgage, also known as a reverse annuity mortgage (RAM), enables older homeowners (62+) to confer their home equity into tax-free income without having to sell their home, give up title, or take on a mortgage.

Answer 26

Reverse mortgage. The loan is not repaid until the last owner dies or the property is sold, at which time it is paid back through probate.

Question 27

The FHA charges a ___ percent loan fee, which is usually paid by the _____.

Answer 27

1% loan fee, paid by seller

Question 28

______ is charging more than the legally allowed percentage of interest. In CA the maximum interest rate charged for various loans is set by law.

Answer 28

Usury

Question 29

True/False
Nearly every conventional source of real estate financing has been exempted from the usury limit. This includes any transaction made through a licensed broker.

Answer 29

True; Usury usually applies to private individual loans.

Question 30

The three financial instruments (security devices to collateralize real property) used in California are:

Answer 30

Mortgages (rare), trust deeds (1st and 2nd), and land contract (not common).

Question 31

Mortgagee and trustee are the LENDERS who have the Power of _______ Clause.

Answer 31

Power of Sale

Question 32

Trust deeds are ________ property.

Answer 32

Personal

Question 33

A deed of __________ provides proof that a promissory note and the accompany trust deed have been paid in full.

Answer 33

Deed of reconveyance. It must be recorded by the county to remove the lien of a trust deed from the public record.

Question 34

Under California Civil Code Section _____, the beneficiary must forward a deed of reconveyance, within 90 days of receiving the “Request for Full Reconveyance,” to the trustee.

Answer 34

California Civil Code Section 2941.

Question 35

The _______ is the one who files the notice of default by the trustor.

Answer 35

Trustee.

Question 36

The trustor can reinstate a loan up to ___ day prior to foreclosure (after a 3 month minimum; the trustee’s sale). If reinstated, it is again in good standing.

Answer 36

5 days prior to foreclosure sale.

Question 37

After the Notice of Default, a trustee has to wait 3 months to post a Notice of _____, which lasts for 3 weeks and has to be in the newspaper.

Answer 37

Notice of Sale

Question 38

A Deed in _______ ___ ___________ is a deed given by an owner (borrower) to a lender to prevent the lender from bringing foreclosure proceedings.

Answer 38

Deed in Lieu of Foreclosure

Question 39

A ____ _______ is when a lender will accept less than the amount owed on a debt if the property is sold.

Answer 39

Short Sale

Question 40

Most junior liens are eliminated by a foreclosure, some liens not eliminated are:

Answer 40

• federal tax liens
• state, county, and city taxes or assessments
• mechanic’s liens for work begun before the trust deed was recorded.

Question 41

An AITD (_______ ___________ ______ ________; Wraparound) is a second trust deed with a face value of both the new amount it secures and the balance due under the first trust deed.

Answer 41

All Inclusive Trust Deed; you have the seller (who had the original trust deed) selling to the buyer at a slightly higher interest rate, and so the seller gets a margin of profit.

Question 42

An owner selling under a land contract is known as a _______. A ______ is a buyer using a land contract.

Answer 42

Vendor

Vendee

Question 43

APR stands for ?

When you include APR in an advertisement, nothing else needs to be disclosed.

Answer 43

Annual Percentage Rate