pt 2 vocab

Question 1

Describe a promissory note

Answer 1

Evidence of debt
Secured by mortgage or trust deed
A negotiable instrument considered personal property; cannot be recorded

Question 2

Describe a Mortgage and deed of trust

Answer 2

Security instruments
Include covenants– causes foreclosure

Question 3

Describe a mortgage

Answer 3

two party instrument where the borrower = mortgagor, lender = mortgagee
Most common financing instrument in United States; California, however, favors deed of trust

Question 4

Describe a deed of trust/trust deed

Answer 4

.Three party instrument where the borrower= trustor; lenders= beneficiary; third party=trustee
. Property is conveyed by borrower to a third party (trustee) as security for loan
.Trustee holds naked (bare legal) title on behalf of the lender (beneficiary)

Question 5

Describe satisfaction in respect of real estate

Answer 5

.When a mortgage note is paid, the mortgagee records the satisfaction to release the lien
. When a trust deed note is paid, the trustee records the deed of reconveyance to release the lien (do not confuse this with a trustees deed, which is used in the event of foreclosure)

Question 6

Describe assumption vs. subject to

Answer 6

If a buyer purchases property “subject to” a mortgage, the seller remains liable
.If a buyer assumes a loan, the buyer becomes primarily liable for the debt and the original borrower retains secondary liability unless the lender releases the original borrower from liability
. There are no loan origination fees or points when a borrower assumes or purchases subject to a mortgage

Question 7

INFO. Land contract/real property sales contract/ installment contract/ contract for deed

Answer 7

1) Form of owner financing and security arrangement
2) Seller (vendor) keeps legal title; buyer (vendee) has equitable title, takes possession and makes payments, receiving deed when payments are complete
3) Process used for CalVet loans, where department of Veterans Affairs (VA) purchases property and sells to veteran under a land contract
4) Vendor must use payments from vendee to make any existing loan payments before using it for another purpose

Question 8

What are the financing instruments

Answer 8

Promissory note, Mortgage and deed of trust, mortgage, Deed of trust/trust deed, satisfaction, assumption vs. subject to, land contract/ real property sales contract/ installment contract/ contract for deed

Question 9

Describe a judicial foreclosure/ equitable action (for mortgages)

Answer 9

1) A lawsuit is brought by a mortgagee in superior court to obtain a court order to sell
2) The property is sold by the sheriff to the high bidder at a public sale
3) If the sale proceeds exceed the cost cost of the sale and foreclosing lien, the excess goes to pay off junior liens in order of priority
4) The property owner (borrower) retains possession during foreclosure proceeding
5) If the sale does not cover the loan amount, the lender may file for a deficiency judgement. But no deficiency judgement can be obtained for purchase money loans used to finance owner-occupied homes of four units or less.

Question 10

Describe a trustee’s sale (trust deeds)

Answer 10

1) No lawsuit necessary; foreclosure made by public sale
2) Requires three months’ notification of default; also within 10 days of recording notice of default, must copy must be sent to trustor
3) Notice of sale
4) Property sold to high bidder at trustee’s sale; title transferred under a trustee’s deed
5) Deficiency judgements not allowed on nonjudicial foreclosures

Question 11

Describe a deed in lieu of foreclosure

Answer 11

1) Alternative to foreclosure– mortgagor/trustor deeds to mortgagee/ beneficiary
2) Disadvantage to lender– does not wipe out junior liens

Question 12

Methods of debt repayment and debt service

Answer 12

Term (straight). Fully amortized, Partially amortized/balloon, Graduated payment, Adjustable-rate mortgage(ARM)/ trust deed, Reverse annuity mortgage/trust deed

Question 13

Describe a Term (straight)

Answer 13

1)Interest only until maturity at end of term
2) Entire principal in one lump sum

Question 14

Define Fully amortized

Answer 14

1)Equal payments of principal and interest such that the balance becomes “zero”
2) Interest usually paid in arrears

Question 15

Describe Partially amortized/balloon

Answer 15

1) Equal payments of principal and interest
2) Balloon before end of term

Question 16

Describe graduated payment

Answer 16

1) lower payments in beginning, then they increase, then they level off
2) May have negative amortization (principal may increase)

Question 17

Describe Adjustable-rate mortgage (ARM)/ trust deed

Answer 17

1) rate subject to change based on changed in an economic index
2) May include interest and/ or payment caps

Question 18

Describe reverse annuity mortgage/ trust deed

Answer 18

1) Payments paid to mortgagor over specific term
2) Due upon sale of property, death of mortgagor(s), or at the end of the term

Question 19

Describe PACKAGE in respect to mortgages

Answer 19

1) Personal property included as security in addition to real property
2) May be used to finance the purchase of a furnished condominium, etc.

Question 20

describe blanket in respect to mortgages

Answer 20

1) More than one property is pledged as security
2) A release clause allows a subdivider to remove individual parcels as they are sold

Question 21

describe seller carryback purchase money

Answer 21

1) Owner financing where title transfers to buyer
2) Seller “takes back” a trust deed/ mortgage as partial payment; seller has lien

Question 22

Describe conventional/ insured conventional

Answer 22

1) Debt repayment is based solely on the borrower’s ability to pay; loans are not insured or guaranteed by the government
2) Depending on the loan-to-value ratio, the lender may require private mortgage insurance (PMI)
3) If required, the PMI premium is paid to Mortgage Guarantee Insurance Corporation (MGIC)

Question 23

Describe construction in respect to mortgage

Answer 23

1)Interim financing made available in installments as improvements are completed
2) Typically adjustable rate/ short term from commercial banks
3) Lender may require a commitment for “take out”, a takeout loan replaces the construction loan with longer-term financing

Question 24

Describe Loan-to-value ratio/mortgage ratio

Answer 24

maximum percentage of value lender will loan
Based on price or appraisal, whichever is less

Question 25

Describe equity

Answer 25

1)Market value today
-total debt today
Equity today
2)Leverage is the use of debt financing of an investment to maximize the return per dollar of equity invested

Question 26

Describe point/loan origination fee

Answer 26

1) discount points are charged by the lender to increase the lender’s yield. (one point= 1% of loan amount
2) a loan origination fee is charged by the lender to process and issue a loan.
3) Points can be used to lower the interest rate

Question 27

Describe Subordination clause and prepayment penalty clause

Answer 27

SC: allows change in the order/ priority of mortgages
PPC: allows a borrower to pay off the loan early, but the lender can change punitive interest, which is taxed as interest and not cost of sale

Question 28

Describe commercial banks

Answer 28

Prefer short-term loans for commercial, business, and new construction

Question 29

Describe savings and loan association

Answer 29

Conventional, Federal Housing Administration (FHA), and VA home loans

Question 30

describe Mortgage bankers and mortgage brokers

Answer 30

1) Mortgage brokers act as intermediaries between borrowers and lenders, but they don’t usually service loans
2) Mortgage bankers originate and service loans with deposits and personal money

Question 31

What do Life insurance companies/ credit unions/ pension funds

Answer 31

Prefer long-term commercial and industrial participation loans
Lender receives interest plus an equity position in income-producing properties

Question 32

Describe FHA fully insured financing

Answer 32

1) FHA insures lender against loss due to foreclosure
2) Enables high loan-to-value ratio
3) Mutual mortgage insurance (MMI) premiums may be paid at closing or financed
4) Property must meet minimum property requirements (MPRs)

Question 33

Describe VA fully guaranteed financing

Answer 33

1) Guarantees lenders against loss on loans to veterans
2) Can have up to 100% loan-to-value ration
3) Two certificates of eligibility and certificate of reasonable value (CRV)

Question 34

Describe Miscellaneous aspects of FHA/VA

Answer 34

1)Rules regarding assumption depend on the date of the loan
2) No prepayment penalty
3) Nonveterans may assume VA loans

Question 35

Describe Regulation Z/Truth in lending-federal reserve Board Regulates

Answer 35

Purpose: promote the informed use of consumer credit by requiring meaningful disclosures about its terms and cost
Applies only to loans from institutional lenders to consumers for personal, family, household purposes