Closing Prep-XL Flashcards
A borrower closes in April. His first payment is due June 1. If his insurance is due on November 1st, how many months of insurance premiums must be collected at closing to properly fund the escrow account (not accounting for any cushion)?
A.Six
B.Five
C.Four
D.Seven
The answer is seven. In order to ensure that the escrow account has a full year’s worth of money by November 1st, the account needs to be “front loaded” at closing with the number of months needed to total 12 months.
Let’s assume that the annual premium is $1200.
Each month, $100 is going into the account starting June 1.
Here’s how much will be in the escrow account month by month:
JUNE 1 = $100
JULY 1 = $200
AUG 1 = $300
SEPT 1 = $400
OCT 1 = $500
NOV 1 = (-) 1200 ***This is how much is needed by 11/1. Since there will be $500 in the account by that time, the borrower will need to bring $700 or 7 months’ worth of insurance to the closing to ensure that there is enough in the account to pay for the insurance premium.
You’re absolutely correct. To ensure that the escrow account has a full year’s worth of insurance premiums by November 1st, the account needs to be “front-loaded” at closing with enough funds to cover the upcoming premium payment. Given the example:
- Annual Premium: $1200
- Monthly Contribution: $100
- First Payment: June 1st
Starting June 1st, $100 will be added to the escrow account each month. By November 1st, the account will have accumulated $500 (from June to October). Since the insurance premium of $1200 is due on November 1st, the borrower must have an additional $700 in the account by that time.
Therefore, to have $1200 by November 1st, 7 months of premiums ($700) need to be collected at closing.
Answer: D. Seven
Which of the following would not be found on the promissory note?
A.Interest rate
B.Loan terms
C.Borrower name
D.Legal description
The answer is Legal description. The promissory note is both a promise to repay the money borrowed with interest and evidence of the debt. It shows the payor and payee, the amount owed, the rate of interest and whether it is fixed or adjustable, the due date(s) for payment, and the terms of the loan.
Which of the following best describes the process of releasing a lien from the title of a property after a loan has been paid off?
A.Deed transfer
B.Deed release
C.Reconveyance
D.Conveyance
The answer is reconveyance. To provide public notice that a mortgage loan has been repaid and to clear it from the public record, a satisfaction or release is recorded to clear a mortgage lien, or a deed of reconveyance is recorded to clear a trust deed lien.
Which of the following is considered to be a security instrument?
A.A promissory note
B.A trust deed
C.A hard money note
D.An equitable title
The answer is A trust deed. A promissory note is a borrower’s promise to pay. That promise to pay is secured by a security instrument, such as a mortgage or trust deed.
Which of the following would not be considered a prepaid finance charge?
A.Title insurance premium
B.Flood certification fee
C.Discount points
D.Upfront mortgage insurance premium
The answer is title insurance premium. A prepaid finance charge is any finance charge paid separately, in cash or by check, before or at consummation of the loan or withheld from the proceeds. They include loan origination, discount, and commitment fees, any prepaid private mortgage insurance premium, upfront mortgage insurance premium, VA funding fee, or USDA guaranty fee, underwriting, processing, and courier fees, if paid to the creditor, buydown funds, and prepaid interest. The cost of a title insurance premium is NOT a prepaid finance charge.
Which of the following documents is most likely to disclose the amount of a prepayment penalty?
A.Closing Disclosure
B.Loan Estimate
C.HUD-1 Settlement Statement
D.The Loan Estimate and the Closing Disclosure
The answer is The Loan Estimate and the Closing Disclosure. Whether a mortgage loan has a prepayment penalty, and its amount, is disclosed on both the Loan Estimate and the Closing Disclosure.
If a borrower has a fixed-rate mortgage and her taxes and insurance are included in her monthly payments, which of the following does not change over the life of the loan?
A.Principal amount combined with interest amount in payment
B.Interest amount in payment
C.Tax amount in payment
D.Principal amount in payment
The answer is principal amount combined with interest amount in payment. The payment amount related to principal and interest on a fixed-rate mortgage loan will not change. However, if the borrower is paying property taxes and/or insurance through an escrow account established by the lender, if either of those mortgage-related expenses increase or decrease, the monthly payment amount will change accordingly.
Private mortgage insurance insures which of the following?
A.The lender
B.The borrower
C.The underwriter
D.The seller
The answer is The lender. Private mortgage insurance insures the lender against default by the borrower.
Which of the following would most likely be found on a mortgage or trust deed?
A.A defeasance clause
B.The due date for the periodic payment
C.Annual percentage rate
D.Parameters for imposition of late payments
The answer is A defeasance clause. A mortgage or trust deed secures repayment of a note. In addition to stating the name of the borrower, lender, and trustee, a trust deed might contain a due-on-sale clause, which allows the lender to require the entire balance of the loan be paid off at sale, and/or a defeasance clause, which provides for the release of the lien when the borrower pays off the debt.
