Financing Instruments

Question 1

List the three theories regarding who holds legal title to a mortgaged property.

Answer 1

1. The title theory title to the security interest rests with the mortgagee.
2. The lien theory under which the legal title remains with the mortgagor unless there is foreclosure.
3. Thee intermediate theory applies the lien theory until there is a default on the mortgage whereupon the title theory applies.

Question 2

An investor that lends money secured by a mortgage on real estate is known as a what?

Answer 2

Mortgage lender

Question 3

Which clause in a mortgage allows the mortgagee to declare that the entire mortgage debt is due and must be paid immediately?

Answer 3

This is accomplished through an acceleration clause in the mortgage

Question 4

Mortgages are also known as what?

Answer 4

Liens against property or claims on property

Question 5

Describe and define the two classifications of encumbrances

Answer 5

An encumbrance that affects the physical condition of the property, such as restrictions, encroachments and easements.
An encumbrance that affects the title, such as judgments, mortgages, mechanics’ liens and other liens.

Question 6

List and describe three provisions that are common to most notes. (See other correct answers on screen 5.)

Answer 6

Amount borrowed– This is the face amount of the note that is advanced when the note is executed.
Interest rate – The rate can be either fixed or adjustable. If it’s adjustable, the note should specify how the rate will change.
Amount of payments – The amount of the payments will be determined by the face amount of the loan, the length of the loan and the interest rate.

Question 7

What creates the forbearance period?

Answer 7

In addition to any monetary penalties, the lender can specify a grace period during which a borrower can make a late payment without the lender asserting that the borrower is in default.

Question 8

Once the mortgagor has paid off the mortgage in full, the lender will execute and record a document indicating that the loan terms have been met. What is the name of the document?

Answer 8

Mortgage release

Question 9

What is a deed of trust?

Answer 9

A deed of trust is a legal document which transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender).

Question 10

List two reasons that lenders prefer to use the deed of trust when making loans. (See other correct answers on screen 17.)

Answer 10

A trustee may be given the power to sell property after default without going through the time-consuming judicial foreclosure process.
A deed of trust can be used to secure more than one note.

Question 11

List two differences between a mortgage and a deed of trust? (See other correct answers on screen 20.)

Answer 11

A mortgage is a lien on the property being given as collateral, with the legal title remaining in the name of the borrower. In a deed of trust, the borrower conveys the property to the trustee, who holds the title to the collateral on behalf of the lender until the loan terms have been satisfied.
A mortgage may be discharged by a simple acknowledgement that the loan terms have been satisfied. A deed of trust is discharged using a reconveyance of title form.

Question 12

Define Acceleration

Answer 12

If the borrower violates any of the covenants of the contract, the beneficiary may call for payment of the loan in full and the trustee may sell the property after he or she has filed all the proper notices.

Question 13

What is Texas’ position regarding late payments on a loan?

Answer 13

Texas has no restrictions on late fees. The customary fee is the Fannie Mae standard of 5% after 15 days.

Question 14

According to Texas law, what is true about prepayment penalties?

Answer 14

Texas law prohibits prepayment penalties on residential mortgage loans secured by the homestead of the borrower if the interest rate on the loan is greater than 12% unless the charge or penalty is required by an agency created by federal law.

Question 15

What is a lock-in clause?

Answer 15

A very drastic form of a prepayment clause which actually prohibits the borrower from paying the mortgage loan in full before a specific date.

Question 16

What is the main advantage and what is the main disadvantage to a borrower to purchase a property “subject to” the mortgage?

Answer 16

Advantage: He cannot be held personally liable for the amount of the debt he assumed. The original owners are still personally and legally responsible for the loan and they may be held liable for any deficiency judgment that could be the result of a foreclosure sale.
Disadvantage: They risk losing all the equity they have in the property.

Question 17

A mortgage involves

Answer 17

the transfer of an interest in land as security for a loan or other obligation. It is the most common method of financing real estate transactions.

Question 18

Three theories exist regarding who has legal title to a mortgaged property

Answer 18

Title Theory
Lien Theory
Intermediate Theory

Question 19

Title Theory

Answer 19

title to the security interest rests with the mortgagee.

Question 20

Lien Theory

Answer 20

under which the legal title remains with the mortgagor unless there is foreclosure

Question 21

Intermediate Theory

Answer 21

applies the lien theory until there is a default on the mortgage whereupon the title theory applies.

Question 22

Mortgage Lender

Answer 22

is an investor that lends money secured by a mortgage on real estate

Question 23

Mortgagor

Answer 23

is the borrower in a mortgage—he owes the obligation secured by the mortgage.

Question 24

Failure to make payments results in

Answer 24

The foreclosure of the mortgage

Question 25

Foreclosure allows the mortgagee to declare that the entire mortgage debt is due and must be paid immediately

Answer 25

This is accomplished through an acceleration clause in the mortgage

Question 26

Mortgages are also known as

Answer 26

“liens against property” or “claims on property”.

Question 27

Leverage

Answer 27

is usually described as making use of other people’s money, such as, making a low down payment and borrowing the rest of the money for a home purchase.

Question 28

There are three basic legal documents that are used to finance real estate in Texas:

Answer 28

Note and mortgage
Note and deed of trust
Land contract

Question 29

A promissory note

Answer 29

(usually referred to as a “note”) establishes legal evidence of the debt incurred.

Question 30

Two most common promissory notes

Answer 30

Straight note

Installment note

Question 31

Straight Note

Answer 31

This is an interest-only note, whereby the borrower agrees to pay the interest periodically and to pay the entire principal when the note comes due.

Question 32

Installment Note

Answer 32

This note requires the periodic payment of both interest and principal and is the most common note.

Question 33

A note does not need to be tied to either a mortgage or a deed of trust to be valid

Answer 33

When a note has no related collateral, it is said to be unsecured.

Question 34

Once the mortgagor has paid off the mortgage in full

Answer 34

the lender will execute and record a document indicating that the loan terms have been met.

Question 35

A deed of trust is a legal document which

Answer 35

transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender). A deed of trust is also called a trust deed.

Question 36

The deed of trust conveys title rights in the property over to an assigned trustee

Answer 36

When the borrower repays the note secured by the deed of trust, the trustee will reconvey title back to the borrower using a deed of reconveyance, also called a release deed.

Question 37

Like a mortgage, a deed of trust document:

Answer 37

Identifies the parties.
Describes the property that will be the collateral.
Repeats the terms and conditions of the note.
Has a place for the signatures and notarization.
Unlike a mortgage, a deed of trust conveys the title to a trustee.

Question 38

Late Payment Penalty

Answer 38

This clause requires the borrower to pay a penalty or late charge for any payments that are considered to be late.

Question 39

Prepayment Privilege

Answer 39

If there is not a prepayment clause, the borrower can repay the balance of the loan at any time without being assessed a penalty.

Question 40

Prepayment Penalty

Answer 40

Lenders typically do not want loans that are bringing in high interest to be paid off early. Consequently, a lender will try to control prepayments by including a provision that allows the lender to assess a penalty to the borrower for paying early.

Question 41

Lock-In Clause

Answer 41

This is a very drastic form of a prepayment clause as it actually prohibits the borrower from paying the mortgage loan in full before a specific date.

Question 42

Due-On-Sale Clause

Answer 42

This is a form of acceleration clause that requires the borrower to pay off the entire mortgage debt when the property is sold. The due-on-sale clause is also known as an alienation clause, a nonassumption clause, a call clause or a right-to-sell clause.

Question 43

“Subject To”

Answer 43

If there is no due-on-sale clause, property loans are assumable by the new buyers of the property.

Whether a buyer assumes a loan or purchases “subject to” the existing loan, the seller is still the person primarily responsible to the lender until the note is fully paid. For the seller to “get off the hook,” the buyer must go through a process of full substitution, called novation.

Question 44

Subordination clause

Answer 44

If there is no due-on-sale clause, property loans are assumable by the new buyers of the property.

Whether a buyer assumes a loan or purchases “subject to” the existing loan, the seller is still the person primarily responsible to the lender until the note is fully paid. For the seller to “get off the hook,” the buyer must go through a process of full substitution, called novation.

Question 45

Release Clause

Answer 45

This clause is often used when two or more properties are pledged as collateral for a single loan. Many transactions that involve land development use release clauses. As the developer sells off each lot, a portion of the money from the sale is used to pay part of the mortgage. In return, the lender executes and records a release of the lot that was sold, so that the buyer can get a clear title. This is also known as a partial release cause.

Question 46

Exculpatory Clause

Answer 46

This clause is inserted in a financing document when the lender agrees to waive the right to a deficiency judgment.