Real Estate National Test Ch 12

Question 1

The decision to buy or to rent a property involves what considerations?

Answer 1

1. How long a person wants to live in a particular area.
2. A persons Financial situtation.
3. Housing Affordability
4. Current Mortgage interest rates.
5. Tax Consequences of owning versus renting property.
6. What might happen to home prices and tax laws in the future.
7. Unfortunately, recent history has shown that there are those who will commit mortgage fraud in applying for a home loan by exaggerating income or assets, minimizing or concealing debt obligations, or providing a false employment history. Loan applicants have also been victims of predatory lending practices that result in too-high loan fees and abusive interest rates.

Question 2

D: P.I.T.I

Answer 2

The basic costs of owning a home—mortgage principal and interest, real estate taxes, and hazard insurance.

Question 3

D: Credit Score

Answer 3

is prepared by a credit reporting company and is based on a consumer’s past history of credit use, including income, outstanding loans, number of credit accounts open, outstanding credit lines, number of accounts opened and closed, payment history, and credit inquiries.

Often called the FICO score because it can be created from software developed by Fair Isaac and Company, can range from a low of 300 to a high of 850, the best score.

Question 4

Fill in the blank:

A homebuyer who is able to provide at least _1__% of the purchase price as a down payment, for instance, could be expected to incur a monthly PITI payment of no more than _2__% of the borrower’s gross (pretax) monthly income. Monthly payments on all debts—normally including long-term debt such as car payments, student loans, or other mortgages—would be expected to not exceed __3__% of gross monthly income. Expenses such as insurance premiums, utilities, and routine medical care would not be included in the __4___% figure but would be expected to be covered by the remaining __5___% of the buyer’s monthly income.

If actual monthly non-housing debts exceed __6__% of gross income (__7__%–__8__%), and the borrower is unable to reduce that amount, the monthly payment must be lowered proportionately because the debts and housing payment combined cannot exceed 36% of gross monthly income. Lower debts would not result in a higher allowable housing payment, but would be considered a factor for approval.

Answer 4

1. 10%
2. 28%
3. 36%
4. 36%
5. 64%
6. 8%
7. 36%
8. 28%

Question 5

D: Loan-To-Value Ration (LTV)

Answer 5

which is the amount of the loan as a percentage of the purchase price of the property.

Question 6

D: Promissory Note

Answer 6

AKA: Note or Financing Instrument

Is a borrower’s personal promise to repay a debt according to the agreed terms.

A promissory note executed by a borrower (the maker or payor) is a contract with the lender (the payee).

The note generally states the amount of the debt, the time and method of payment, and the rate of interest.

When signed by the borrower and other necessary parties, the note becomes a legally enforceable and fully negotiable instrument of debt.

When the terms of the note are satisfied, the debt is discharged.
If the terms of the note are not met, the lender may foreclose on any property that was used as security for the debt.

When a note is unsecured (there is no collateral provided for the debt), the lender can sue to collect on the note.

Question 7

D: Negotiable Instrument

Answer 7

A written promise or order to pay a specific sum of money that may be transferred by endorsement or delivery.

The transferee then has the original payee’s right to payment.

The payee who holds the note may transfer the right to receive payment to a third party in one of two ways:

1. By signing the instrument over (that is, by assigning it) to the 3rd party.
2. By Delivering the instrument to the 3rd party.

Question 8

The payee who holds the note may transfer the right to receive payment to a third party in one of two ways:

Answer 8

1. By signing the instrument over (that is, by assigning it) to the 3rd party.
2. By Delivering the instrument to the 3rd party.

Question 9

D: Interest

Answer 9

Is a charge for the use of money, expressed as a percentage of the remaining balance of the loan.

Interest may be due at either the end or the beginning of each payment period.

Payments made at the end of a period are known as payments in arrears.

Question 10

D: Payments in arrears

Answer 10

Payments made at the end of a period.

This payment method is the general practice, and home loans often call for end-of-period payments due on the first of the following month.

Question 11

D: payments in advance

Answer 11

Payments may also be made at the beginning of each period.

Question 12

D: Usury

Answer 12

Charging interest in excess of the maximum rate allowed by law.

As of March 31, 1980, federal law exempts federally related residential first mortgage loans made after that date from state usury laws.

A federally related transaction is one that involves a federally chartered or insured lending institution or an agency of the federal government.

Because federal law always preempts state law on the same subject, the federal law means that most home loans are not subject to state usury protections.

Private lenders are still subject to state usury laws, however.

Question 13

D: Loan Origination Fee

Answer 13

AKA: Transfer Fee

Is charged by most lenders to cover the expenses involved in generating the loan.

Will vary, depending on how competitive a lender chooses to be, but typically is about 1% of the loan amount.

Question 14

D: Loan Origination

Answer 14

The processing of a mortgage application.

Question 15

D: Discount Points

Answer 15

A unit of measurement used for various loan charges; one point equals 1% of the amount of the loan.

The points in a new acquisition may be paid in cash at closing by the buyer (or, of course, by the seller on the buyer’s behalf, as negotiated by the parties) rather than being financed as part of the total loan amount.

Question 16

The number of points charged depends on what two factors:

Answer 16

1. The difference between the loan’s stated interest rate and the yield required by the lender.
2. How long the lender expects it will take the borrower to pay off the loan.

Question 17

If the loan amount is $350,000 and the charge for points is $9,275, how many points are being charged?

Answer 17

$9,275 ÷ $350,000 = 0.0265 or 2.65% or 2.65 points

Question 18

D: Prepayment Penalty

Answer 18

A charge imposed on a borrower who pays off the loan principal early.

This penalty compensates the lender for interest and other charges that would otherwise be lost.

Lenders may not charge prepayment penalties on mortgage loans insured or guaranteed by the federal government or on those loans that have been sold on the secondary mortgage market to one of the government-sponsored enterprises, such as Fannie Mae.

Question 19

What are the two parts of a mortgage?

Answer 19

1. The debt

2. The security for the debt

Question 20

When a property is mortgaged, the owner must execute (sign) two separate instruments and explain each one.

Answer 20

1. The financing instrument that creates the debt. The financing instrument is the promissory note, which states the amount owed.
2. The security instrument that specifies the property that the debtor will use as collateral for the debt. Depending on the state, the security instrument will take the form of either a mortgage or a deed of trust.

Question 21

Explain the basic principle of property law is that no one can convey more than he actually owns.

Answer 21

This principle also applies to a mortgage.

The owner of a fee simple estate can mortgage the fee.

The owner of a leasehold or subleasehold can mortgage that leasehold interest.

The owner of a condominium unit can mortgage the fee interest in the condominium.

Even the owner of a cooperative unit may be able to offer that property interest (the owner’s stock in the underlying corporation) as security for a loan.

Question 22

D; Hypothecation

Answer 22

The debtor retains the right of possession and control of the secured property, while the creditor receives an equitable right in the property.

The right to foreclose on the property in the event a borrower defaults is contained in the security agreement, which takes the form of either a mortgage or a deed of trust, as discussed next.

Question 23

D: Mortgage

Answer 23

Is a lien on the real property of a debtor.

A conditional transfer or pledge of real estate as security for the payment of a debt.

Also, the document creating a mortgage lien.

The mortgage is a voluntary, specific lien.

If the debtor defaults, the lender can sue on the note and foreclose on the mortgage.

The judicial process for foreclosure of a mortgage depends on state law and on whether the state treats the mortgage as a lien or as a conveyance of some part of the title to the property.

Question 24

D: Mortgagor

Answer 24

A borrower in a mortgage loan transaction.

Receives a loan and in return gives a promissory note and mortgage to the lender.

Question 25

D: Mortgagee

Answer 25

A lender in a mortgage loan transaction.

Question 26

D: Satisfaction of Mortgage

Answer 26

A document acknowledging the payment of a mortgage debt.

Which can be filed in the public record as evidence of the removal of the security interest, which would otherwise continue to be an encumbrance on the ownership interest of the borrower.

This document returns to the borrower all interest in the real estate originally conveyed to the lender.

Question 27

D: Lien Theory

Answer 27

AKA: Mortgage state

The mortgagor retains both legal and equitable title to property that serves as security for a debt.

The mortgagee has a lien on the property but the mortgage is nothing more than collateral for the loan.

If the mortgagor defaults, the mortgagee must go through a formal foreclosure proceeding in court to obtain legal title.

If the foreclosure is approved by the court, the property is offered for sale at public auction, and the funds from the sale are used to pay the balance of the remaining debt.

In some states, a defaulting mortgagor may redeem (buy back) the property during a certain period after the sale, the statutory right of redemption.

A borrower who fails to redeem the property during that time loses the property irrevocably.

Question 28

D: Deed of Trust

Answer 28

AKA: Trust Deed

A trust deed conveys bare legal title (naked title)—that is, title without the right of possession—from the borrower to a third party, called the trustee.

Question 29

Explain Trustee of Trust Deed.

Answer 29

The trustee holds legal title on behalf of the lender, the holder of the promissory note, who is known as the beneficiary.

On full payment of the underlying debt, the lender/beneficiary notifies the trustee, who returns legal title to the trustor.

Question 30

D: Title Theory

Answer 30

AKA: Deed of Trust

The borrower is the trustor who conveys legal title to the trustee but retains equitable title and the right of possession.

Legal title is returned to the borrower/trustor only when the debt is paid in full (or some other obligation is performed).

The deed of trust establishes the actions that the trustee may take if the borrower, the trustor, defaults under any of the deed of trust terms.

In states where deeds of trust are generally preferred, foreclosure procedures for default, which must comply with state law, are usually simpler and faster than for mortgage loans.

On notification of the borrower’s default, the trustee is authorized to sell the secured property, providing the proceeds to the beneficiary, the lender.

If the sale proceeds are greater than the amount owed on the debt, the borrower receives the difference, less penalty fees and court costs.

Usually, the lender chooses the trustee and reserves the right to substitute trustees in the event of the trustee’s death or dismissal.

State law usually dictates who may serve as trustee.

Although the deed of trust is particularly popular in certain states, it is used all over the country.

See Deed of Trust for a diagram of how a deed of trust works.

A mortgage or deed of trust must clearly establish that the property is security for a debt, identify the lender and the borrower, and include an accurate legal description of the property.

Question 31

What are the obligations of the borrower whether a mortgagor or trustor?

Answer 31

1. Payment of the debt in accordance with the terms of the promissory note.
2. Payment of all real estate taxes on the property used as security.
3. Maintenance of adequate insurance to protect the lender in the event that the property is destroyed or DMGed by fire, windstorm, or other hazard.
4. Maintenance of the property in good repair at all times.
5. Receipt of lender authorization before making any major alteration on the property.

Question 32

What is the potential result to the borrower if they do not uphold all their obligations to the lender?

Answer 32

Failure to meet any of these obligations can result in a borrower’s default.

Question 33

D: Acceleration Clause

Answer 33

The clause in a mortgage or deed of trust that can be enforced to make the entire debt due immediately if the borrower defaults on an installment payment or other obligation.

Question 34

D: Defeasance Clause

Answer 34

A clause used in leases and mortgages that cancels a specified right upon the occurrence of a certain condition, such as cancellation of a mortgage upon repayment of the mortgage loan.

Question 35

D: Deed of Reconveyance

Answer 35

AKA: Release Deed

When a real estate loan secured by a deed of trust has been completely repaid, the beneficiary must make a written request that the trustee convey the title to the property back to the grantor.

The trustee executes and delivers a deed of reconveyance (sometimes called a release deed) to the trustor.

The deed to the trustor conveys the same rights and powers that the trustee was given under the deed of trust.

It should include a notarized acknowledgment and be recorded in the public records of the county in which the property is located.

Question 36

The National Flood Insurance Reform Act of 1994 imposes certain mandatory obligations on lenders and loan servicers to?

Answer 36

Set aside (escrow) funds for flood insurance on new loans for property in flood-prone areas.

This means that if a lender or servicer discovers that a secured property is in a flood hazard area, it must notify the borrower.

The borrower then has 45 days to purchase flood insurance.

If the borrower fails to procure flood insurance, the lender must purchase the insurance on the borrower’s behalf.

The cost of the insurance may be charged back to the borrower.

Question 37

D: Subject to

Answer 37

A clause in a contract specifying exceptions or contingencies of a purchase

Question 38

D: Assumption of Mortgage

Answer 38

In which the buyer assumes the mortgage or deed of trust and agrees to pay the debt.

This technical distinction becomes important if the buyer defaults and the mortgage or deed of trust is foreclosed.

Question 39

When the property is sold subject to the mortgage?

Answer 39

The buyer is not personally obligated to pay the debt in full.

The buyer takes title to the real estate knowing that she must make payments on the existing loan.

Upon default, the lender forecloses and the property is sold by court order to pay the debt.

If the sale does not pay off the entire debt, the purchaser is not liable for the difference. In some circumstances, however, the original seller might continue to be liable.

Question 40

A buyer who purchases a property and assumes the seller’s debt becomes

Answer 40

Personally obligated for the payment of the entire debt.

If a seller wants to be completely free of the original mortgage loan, the seller(s), buyer(s), and lender must execute a novation agreement in writing.

The novation makes the buyer solely responsible for any default on the loan.

The original borrower (seller) is freed of any liability for the loan.

Question 41

D: Alienation Clause

Answer 41

AKA: Resale Clause, Due-on-Sale Clause, Call Clause

Provides that when the property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender.

Land contracts that involve a due-on-sale clause also limit the assumption of the contract.

Question 42

D: Straight Loan

Answer 42

AKA: Interest-Only Loan

The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term.

Straight loans were once the only form of home loan available, but are now generally used for home improvements and second mortgages rather than for residential first mortgage loans.

A loan may provide for interest-only payments in the beginning years, to make payments affordable.

Question 43

D: Amortized Loan

Answer 43

AKA: Amortized Loan, Level-Payment Loan, direct reduction loans.

Partially pays interest as well as a portion of the principal owed.

Most mortgage and deed of trust loans are amortized loans.

The amount borrowed is gradually paid back over the loan term.

The payment period usually ranges from 10 to 30 years.

At the end of the loan term, the full amount of the principal and all interest due is reduced to zero.

The lender credits each payment first to the interest due, then to the principal amount of the loan.

Question 44

D: Adjustable-Rate Mortgage (ARM)

Answer 44

Begins at one rate of interest, then fluctuates up or down during the loan term, based on a specified economic indicator.

Because the interest rate may change, the mortgagor’s loan payment may change.

Details of how and when the interest rate will change are included in the note.

When there is not much difference in interest rate between a fixed and an adjustable-rate loan, the ARM is less appealing.

Question 45

What are the common components of an ARM?

Answer 45

1. The index is an economic indicator that is used to adjust the interest rate in the loan. Most indexes are tied to U.S. Treasury securities. The adjustment period establishes how often the rate may be changed, which could be monthly, quarterly, or annually. If interest rates are going up, the longest adjustment period benefits the borrower. If interest rates are going down, the borrower benefits from a shorter adjustment period.
2. Usually, the interest rate is the index rate plus a premium, called the margin. The margin represents the lender’s cost of doing business.
3. Rate caps limit the amount the interest rate may change. Most ARMs have two types of rate caps—periodic and life-of-the-loan (or aggregate). A periodic rate cap limits the amount the rate may increase over a stated term, usually a year. A life-of-the-loan rate cap limits the amount the rate may increase over the entire life of the loan.

Question 46

D: Negative Amortization

Answer 46

Process by which the amount of the loan increases.

The mortgagor sets a payment cap, or maximum amount for payments, but the difference between the payment made and the full payment amount is added to the remaining mortgage balance.

Question 47

D: Growing-Equity Mortgage

Answer 47

AKA: Rapid-Payoff Mortgage

The growing-equity mortgage uses a fixed interest rate, but payments of principal are increased according to an index or schedule.

The total payment thus increases, and the loan is paid off more quickly.

A growing-equity mortgage is most frequently used when the borrower’s income is expected to keep pace with the increasing loan payments.

Question 48

D: Balloon Payment

Answer 48

When the periodic payments on a loan are not enough to fully pay off the principal of the loan by the time the final payment is due, the final payment will be larger than the others.

State law will provide the definition, but typically a balloon payment is a final payment that is at least twice the amount of any other payment.

The loan will be considered a partially amortized loan because some of the principal has been paid, with some still owed at the end of the term.

It is frequently assumed that if payments are made promptly, the lender will extend the balloon payment for another limited term.

The lender, however, is not legally obligated to grant this extension and can require payment in full when the note is due.

Question 49

D: Reverse Mortgage

Answer 49

Allows a homeowner aged 62 or older to borrow money against the equity built up in the home.

The borrowed money may be used for any purpose and the borrower decides if the funds will be paid out in a lump sum, fixed monthly payments, an open line of credit, or another option.

The borrower is charged a fixed rate of interest on amounts paid out by the lender, but the lender does not need to be repaid until the property is sold or the borrow defaults (perhaps by failing to maintain the property), moves, or dies.

With the recent recession and volatility of the stock market, the reverse mortgage has become a popular method of providing more income for other expenses while allowing the homeowner to remain in the home.

It is important to remember, however, that the usual property tax, insurance, maintenance, and utility costs must still be paid by the homeowner, and these may be more substantial than the income produced by the reverse mortgage.

Also, with the equity in the home reduced, the homeowner will have fewer resources on which to draw in the event that a move to a smaller property, an assisted-living facility, or a nursing home becomes necessary.

The most popular reverse mortgages are those insured by FHA through its Home Equity Conversion Mortgage (HECM) program.

Question 50

D: Foreclosure

Answer 50

Is a legal procedure in which property pledged as security for a debt is sold to satisfy the debt when a borrower defaults on any required payment or fails to fulfill any of the other obligations set forth in the mortgage or deed of trust.

Any unpaid lienholder, regardless of priority position, can initiate foreclosure proceedings; however, foreclosure of a junior lien means that the liens with higher priority remain in place and the buyer takes title subject to those liens.

The foreclosure of a lien with highest priority brings the rights of the parties and all junior lienholders to a conclusion.

It passes title to the person holding the mortgage document, the beneficiary of a deed of trust, or a third party who purchases the property at a foreclosure sale.

The property is sold free of the foreclosing mortgage and all junior liens.

The purchaser on foreclosure of a debt secured by real property could be the mortgagee—the lender—and the property then becomes part of the lender’s REO (real estate owned) portfolio.

The lender then becomes responsible for maintaining the property and paying the expenses of ownership, including property taxes.

Question 51

D: Judicial Foreclosure

Answer 51

Allows the property to be sold by court order after the mortgagee has given sufficient public notice.

When a borrower defaults, the lender may accelerate the due date of the remaining principal balance, along with all overdue monthly payments and interest, penalties, and administrative costs.

The lender’s attorney can then file a suit to foreclose the lien.

After presentation of the facts in court, if the court grants the request, the property is ordered sold.

A public sale is advertised and held, and the real estate is sold to the highest bidder.

Question 52

D: Nonjudicial Foreclosure

Answer 52

Some states allow nonjudicial foreclosure procedures to be used when the security instrument contains a power-of-sale clause.

In nonjudicial foreclosure, no court action is required. In those states that recognize deed of trust loans, the beneficiary is generally given the power of sale, which is conducted by the trustee.

Some states allow a similar power of sale to be used with a mortgage loan, if specified in the terms of the mortgage.

To institute a nonjudicial foreclosure, the trustee or mortgagee will send a notice of default to the borrower indicating the amount that must be paid to make the debt current, as well as the action that will be taken if the required payment is not made.

If the borrower fails to cure the default within the specified time, a notice of foreclosure will be sent to the borrower, indicating when and where the property will be sold at public auction.

The notice of foreclosure will be recorded within a designated period to give notice to the public of the intended auction.

The notice is generally provided by newspaper advertisements that state the total amount due and the date of the public sale.

After selling the property, the trustee or mortgagee may be required to file a notice of sale or affidavit of foreclosure.

Question 53

D: Strict Foreclosure

Answer 53

In some states, a lender may acquire mortgaged property through a strict foreclosure process.

First, appropriate notice must be given to the delinquent borrower.

Once the proper documents have been prepared and recorded, the court establishes a deadline for the balance of the defaulted debt to be paid in full.

If the borrower does not pay off the loan by that date, the court simply awards full legal title to the lender.

No sale takes place.

Strict foreclosure is more common when personal property is used to secure a debt.

Question 54

D: Deed In Lieu of Foreclosure

Answer 54

This is sometimes known as a friendly foreclosure because it is carried out by mutual agreement rather than by lawsuit.

The deed in lieu of foreclosure eliminates any equity that the homeowner may have had in the property.

The disadvantage of the deed in lieu of foreclosure to the lender is that it does not eliminate junior liens.

In a foreclosure action, all junior liens are eliminated.

Also, by accepting a deed in lieu of foreclosure, the lender usually loses any rights pertaining to FHA or private mortgage insurance or VA guarantees. Finally, a deed in lieu of foreclosure is still considered an adverse element in the borrower’s credit history.

Question 55

D: Equitable Right of Redemption

Answer 55

Gives defaulting borrowers a chance to redeem their property

If, after default but before the foreclosure sale, the borrower (or any other person who has an interest in the real estate, such as another creditor) pays the lender the amount in default, plus costs, the debt will be reinstated. In some cases, the person who redeems may be required to repay the accelerated loan in full.

If some person other than the mortgagor or trustor redeems the real estate, the borrower becomes responsible to that person for the amount of the redemption.

Question 56

D: Statutory Right of Redemption

Answer 56

Allows defaulted borrowers a period in which to redeem their real estate after the sale.

During this period (which may be as long as one year), the borrower has a statutory right of redemption.

The mortgagor who can raise the necessary funds to redeem the property within the statutory period pays the redemption money to the court.

Because the debt was paid from the proceeds of the sale, the borrower can take possession free and clear of the former defaulted loan.

The court may appoint a receiver to take charge of the property, collect rents, and pay operating expenses during the redemption period.

Question 57

D: Deficiency Judgment

Answer 57

A personal judgment levied against the borrower when a foreclosure sale does not produce sufficient funds to pay the mortgage debt in full.

In some states, a deficiency judgment cannot be sought when the mortgage debt was used to purchase, and is secured by, the borrower’s principal residence.

Question 58

D: Short Sale

Answer 58

A prospective property seller may still be faced with a proposed sales price that is less than the amount outstanding on the seller’s mortgage debt. In such a situation, the lender may permit a short sale in which the sales price is less than the remaining indebtedness.

Contact the lender before marketing the property to determine whether or not the short sale would be accepted and, if so, how low a sales price the lender would be willing to approve.

The listing of a property for which a short sale has been approved should always disclose that fact.

The lender will expect to approve the sales contract negotiated by buyer and seller and will also be informed of the progress of the transaction, giving final approval before the closing.

Lender approvals will add several months or longer to the closing of the transaction, and the buyer should be aware of the lengthy period before the transaction can be completed.

This might be acceptable to a buyer who is satisfied that the sales price is worth the wait; another buyer might not be able to wait that long.

A lender’s willingness to approve a short sale may result in forgiveness of part of the borrower’s debt.

In addition to the seller’s loss of any equity in the property, the forgiveness of part of the seller’s mortgage debt has been considered by the IRS to be income to the seller/borrower and thus subject to income tax.

The widespread dismay at this outcome resulted in the passage by Congress of the Mortgage Forgiveness Debt Relief Act of 2007.

The law allows a taxpayer to exclude from income the forgiveness of part of the mortgage debt on the taxpayer’s principal residence on a sale of the property, restructuring of an existing mortgage loan, or foreclosure of a mortgage loan.

Subsequent legislation extended this provision through January 1, 2017.

Question 59

The lending must provide the borrower with what information as directed by Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), the Consumer Financial Protection Bureau (CFPB)?

Answer 59

1. Provide Billing Information in writing
2. Give the borrower two months’ warning if an adjustable-rate mortgage will have a rate change.
3. Respond quickly when the borrower asks about paying off the loan.
4. Not charge for insurance the borrower doesn’t need, or over-charge for insurance the lender provides if the borrower fails to do so (“force-placed insurance”);
5. Quickly resolve complaints, generally within 30 to 45 business days, and share information.
6. Have and follow good customer service policies and procedures.
7. Contact the borrower to help when the borrower is having trouble making payments.
8. Work with the borrower, if the borrower is having trouble paying the mortgage, before starting or continuing foreclosure.
9. Allow the borrower to seek review of the decision about a loan workout request.

Question 60

A homeowner’s insurance policy is for 80% of the replacement cost of the home, or $80,000. The home is valued at $100,000, and the land is valued at $40,000. The homeowner sustains $30,000 in fire damage to the house. The homeowner can make a claim for the full cost of the repair or replacement of the damaged property without a deduction for depreciation. If the owner has insurance of only $70,000, the claim will be handled in one of two ways.

Answer 60

The owner will receive either actual cash value (replacement cost of $30,000 less depreciation cost of say $3,000, or $27,000), or the claim will be prorated by dividing the percentage of replacement cost actually covered (0.70) by the policy’s minimum coverage requirement (0.80). So, 0.70 divided by 0.80 equals 0.875, and $30,000 multiplied by 0.875 equals $26,250.

Question 61

FEMA defines a flood as?

Answer 61

As “a general and temporary condition of partial or complete inundation of two or more acres of normally dry land or two or more properties from

1. an overflow of inland or tidal waves,
2. an unusual and rapid accumulation or runoff of surface waters,
3. mudflows or mudslides on the surface of normally dry land.
4. the collapse of land along the shore of a body of water (under certain conditions).”

Question 62

What is the coverages provided by the basic form of home insurance?

Answer 62

1. Fire & Lightning
2. Glass Breakage
3. Windstorm & Hail
4. Explosion
5. Riot & Civil Commotion
6. DMG by aircraft
7. DMG from vehicles
8. DMG from smoke
9. Vandalism & malicious mischief
10. Theft
11. Loss of property removed from the premises when it is endangered by fire or other perils.

Question 63

What is the coverages provided by the broad form of home insurance?

Answer 63

1. All the coverages from the basic form
2. Falling Objects
3. Collapse of all or part of the building
4. Collapse of all or part of the building.
5. Bursting, cracking, burning, or bulging of a steam or water heating system or of appliances used to heat water.
6. Accidental discharge, leakage, or overflow of water or steam from within a plumbing, heating, or air-conditioning system.
7. Freezing of plumbing, heating, and air-conditioning systems and domestic appliances.
8. DMG to electrical appliances, devices, fixtures, and wiring from short circuits or other accidentally generated currents.

Question 64

True or False & Why?

When a real estate loan secured by a deed of trust has been repaid in full, the beneficiary executes a discharge that releases the property back to the trustor.

Answer 64

False

After a real estate loan that is secured by a deed of trust has been repaid in full, the trustee executes a release deed or deed of reconveyance that releases the property back to the trustor.

Question 65

True or False & Why?

In states that permit strict foreclosure, the court simply awards full legal title to the lender and no sale of the property takes place.

Answer 65

True

After appropriate notice is made to the delinquent borrower, in some states, the lender may acquire mortgaged property through strict foreclosure.

The court awards full legal title to the lender, and no sale takes place.

Question 66

A house is listed for $250,000. It is purchased for $230,000, with a 20% down payment. The balance is financed by a fixed-rate mortgage at 6%. The lender charges four points. If there are no other closing costs involved, how much money does the buyer need at closing?

Answer 66

The answer is $53,360. The buyer needs $53,360 at closing. Three steps:

1. Calculate down payment: $230,000 × 20% = $46,000
2. Determine points charge: $230,000 × 80% × 4% = $7,360
3. Total the two amounts: $46,000 + $7,360 = $53,360.

Question 67

In one state, a mortgagee holds legal title to real property offered as collateral for a loan, and the mortgagor retains the rights of possession and use. If the borrower defaults, the lender is entitled to immediate possession and rents. This state can be BEST characterized as what kind of state?

Answer 67

Title Theory

In title theory states, the mortgagor actually gives legal title to the mortgagee (or some other designated individual) and retains equitable title.

Legal title is returned to the mortgagor only when the debt is paid in full (or some other obligation is performed).

Question 68

The mortgagee foreclosed on a property after the borrower defaulted on the loan payments. The unpaid balance of the loan at the time of the foreclosure sale was $140,000, but at the foreclosure sale, the house sold for only $129,000. If permitted by state law, what must the lender do to recover the $11,000 the borrower still owes?

Answer 68

Seek A Deficiency Judgment

A deficiency judgment entitles the mortgagee to a personal judgment against the borrower for the unpaid balance when a foreclosure sale does not produce enough cash to pay the loan balance in full after deducting expenses and accrued unpaid interest.

It may also be obtained against any endorsers or guarantors of the note and against any owners of the mortgaged property who assumed the debt by written agreement.

Question 69

When a deed of trust is the security instrument, which party usually chooses the trustee?

Answer 69

The Lender

The lender usually also reserves the right to substitute trustees in the event of death or dismissal.

Question 70

After a foreclosure sale, what responsibility does the purchaser at the sale have for the mortgage and any junior liens?

Answer 70

The purchaser has no responsibility because the purchaser receives the property title without the mortgage and junior liens.

The answer is the purchaser has no responsibility because the purchaser receives the property title without the mortgage and junior liens.

The proceeds from the sale are used to pay off the mortgage and junior lienholders.

If the proceeds are insufficient, and state law permits, these creditors can seek a deficiency judgment against the original owner for the remaining debt.

The purchaser at the sale is not involved unless the purchaser is a mortgage or lienholder.

Question 71

A buyer purchases property from a seller for $45,000 in cash and assumes the seller’s outstanding mortgage balance of $98,500. The lender executes a release for the seller. The buyer fails to make any mortgage payments, and the lender forecloses. At the foreclosure sale, the property is sold for $75,000. Based on these facts, who is liable, and for what amount?

Answer 71

The buyer is solely liable for $23,500.

Because the lender released the original borrower, the second borrower is fully responsible for the deficiency.

Question 72

After a foreclosure sale, the borrower who has defaulted on the loan may seek to pay off the mortgage debt plus any accrued interest and costs under what right?

Answer 72

The answer is statutory redemption.

The redemption of property by paying off the mortgage debt plus interest and other charges after foreclosure is the right of statutory redemption.

It is only possible in states that have statutes permitting it.

All states, however, permit redemption before the foreclosure sale; this right is the right of equitable redemption.