Topic 9

Question 1

Since few buyers have sufficient financial resources to allow them to pay cash for the entire purchase price of a property, most buyers pay for real property through one form or another of ____.

Answer 1

debt financing

Question 2

The ______ was a carefully structured pyramid of lords, knights, vassals, and serfs which gradually evolved into the FREEHOLD SYSTEM of land ownership and which allowed ownership in FEE SIMPLE, that is, the private ownership of real property.

Answer 2

feudal system

Question 3

We now have the _____ of land ownership which allows individuals to own land absolutely, without obligation to political superiors.

Answer 3

allodial system

Question 4

In time, it became possible for the borrower to petition a court of equity or a church court (chancery) for an extension of his loan. The borrower, in a phrase still in use today, could hope to be allowed an ______, that is, additional time within which to pay his debt.

Answer 4

“equitable right of redemption”

Question 5

This promise to repay and its specific conditions and stipulations are contained in the central instrument of the loan agreement is the _______. Proof of the debt.

Answer 5

the promissory note

Question 6

the promise to repay has been traditionally backed up by some sort of security arrangement, a second loan instrument with which the borrower pledges an interest of one kind or another in the property he is financing to the lender. The pledged property is called ______.

Answer 6

collateral

Question 7

Most states follow what is known as the _____ (the lender holds a lien)

Answer 7

lien theory

*In LA, the title is in the borrower’s name, but the lender has a lien.

Question 8

Some states follow the ____ (the lender holds the title).

Answer 8

title theory

A few states use a mixture of both concepts.

Question 9

The lender receives a limited form of legal title to the pledged property. The borrower is held to have conveyed, or alienated, limited legal title to the lender. This conveyance is valid as long as the mortgage debt is unpaid. Paying off the debt is said to DEFEAT the conveyance. The borrower, of course retains possession of the mortgaged property as long as he does not default on the debt. If the borrower defaults by falling behind in his payments or breaking some other covenant of the mortgage agreement, the lender, as under the lien theory, must go through foreclosure proceedings to recover his full interest in the collateral property. Has been adopted, at least partially, by 17 states.

Answer 9

the title theory

Question 10

Characteristics of a title theory:

Answer 10

1. Lender’s rights are manifested by contract for deed.
2. Lender remains the legal owner of the property until the debt is paid.
3. Borrower retains equitable rights in the property.

Question 11

Used in most states, including LA. In states which apply this theory to real property pledged as collateral, the borrower is said to hypothecate title to the lender.
However, until default occurs, this theory grants the borrower full rights to the property. He holds legal and equitable title. Retaining equitable title is important because doing so permits the borrower who falls behind in his payments to redeem his property before the lender actually forecloses.

Answer 11

the lien theory

Question 12

A _____ simply confers the legal right to attach a claim against a property, to go into court, if necessary, to enforce that claim, and to secure whatever compensation the court deems just and appropriate.

Answer 12

lien

Question 13

the lender is given a lien against the borrower’s collateral property and, if default occurs, the lender can file foreclosure proceedings in order to recover his interest in the property.

Answer 13

Hypothecation

Question 14

Characteristics of Lien Theory:

Answer 14

1. Borrower’s and lender’s rights are described in a promissory note and mortgage agreement.
2. Borrower holds legal title with the lender having a lien or security interest.
3. The defaulted borrower is allowed to retain possession, title and rights in the property until the lien is perfected by foreclosure.
4. Borrower, after default, may have equitable right of redemption. After foreclosure sale, borrower may have statutory period of redemption.

*In LA, we only have equitable right of redemption. This right is extended from the notice of foreclosure until the property actually is sold at sheriff’s sale.

Question 15

The major difference between the title theory and the lien theory…

Answer 15

In the title theory, the borrower deeds his property to the lender. The mortgage conveys title to the borrower when the property is paid for.

In the lien theory, the borrower gives only a lien right to the lender. The borrower retains title to the property.

Question 16

A few states have adopted a ____ of collateral property midway between the lien and the title theories. In these states, the mortgage is considered to be a lien, but if the borrower defaults, title is conveyed to the lender.

Answer 16

mixed or intermediate theory

Question 17

Under either theory, or a mixture of these theories, the borrower actually retains possession of the mortgaged property until the debt is paid off, at which time the mortgage is said to be ____.

Answer 17

defeated

Question 18

A ______ is a security instrument that creates a lien, or in other words, it is a document that makes property security for the repayment of a debt. This collateral interest is created on behalf of the lender.

Answer 18

mortgage (or trust deed)

Question 19

The participants of a real estate loan are the _____ and the _____.

Answer 19

mortgagor

mortgagee

Question 20

The ____ is a person or entity who makes a mortgage, the borrower. They convey a lien on his or her property to another person, bank or other institution.

Answer 20

mortgagor

Question 21

The ____ is the party receiving the mortgage, the lender. They receive a lien on the borrower’s property as security for the debt.

Answer 21

mortgagee

Question 22

Elements of a Mortgage:

Answer 22

1. The provisions of the agreement.
2. Legally competent parties.
3. Mutual consent.
4. Exchange of consideration.
5. Legal purpose.

Question 23

The ____ is the borrower’s personal, unconditional promise to repay the loan. The borrower’s promise to repay is construed to be an unconditional promise, that is, it makes the note a negotiable instrument, one which may be assigned freely by the lender to another party, in much the same way as a check can be endorsed to make it payable to another party.

Answer 23

promissory note

Question 24

A promissory note can be a debt instrument without a mortgage. If so, it is an _____.

Answer 24

unsecured note

Question 25

A _____ is one having no mortgage and no collateral.

Answer 25

signature loan

Question 26

gives the lender the right to demand payment in full of the entire unpaid debt in the event of default. Without this clause the lender would have to go into court month by month to collect a delinquent borrower’s obligation. This process could conceivably last as long as the duration of the loan itself.

Answer 26

acceleration clause

Question 27

pushes the interest rate up to the highest rate allowed by law if default occurs and the debt is accelerated

Answer 27

interest escalation clause

Question 28

The practice of charging more that the legally allowable interest is termed ____

Answer 28

usury

Question 29

This clause both encourages the borrower to make his payments on time and compensates the lender for delays in receiving his expected payments.

Answer 29

late pay clause

Question 30

Many notes include a penalty for prepayment or restrict loan prepayment, following the legal reasoning that the lender has contracted to perform no more and no less than stated in the note. Since accepting payments larger than their agreed upon amount or before their due dates in effect deprives the lender of a portion of the interest which the borrower has promised to pay, lenders protect their yield through the _____.

Answer 30

prepayment clause or the prepayment penalty clause

absent in FHA and VA loans

Prepayment penalties are usual in the first few years of existence of the note.

Question 31

If the borrower is not permitted to pay off any or all of the loan’s balance before the regularly scheduled payment dates, the prepayment penalty clause is called a ____.

Answer 31

lock-in clause

Question 32

The security instrument, that is, ____, gives the lender legal recourse in the event of the borrower’s failing to meet his obligations as contained in the promissory note, and they also contain certain covenants regarding how the borrower may or may not use the collateral property.

Answer 32

the mortgage or trust deed

Question 33

a contract between the borrower and the lender.

Answer 33

mortgage

Question 34

borrower is referred to as the…

The giver of his pledge of his property as collateral. he gives a lien or sometimes a title interest in it to the lender or mortgagee.

Answer 34

mortgagor

Question 35

the lender is referred to as the…

The lender’s lien or title interest allows him to foreclose if the borrower defaults.

Answer 35

mortgagee

Question 36

In the mortgage agreement, the mortgagor (borrower) is said to _____ an interest in his property to the mortgagee (lender).

Answer 36

hypothecate

Question 37

To pledge a specific property as collateral without actually giving up possession or the other rights associated with ownership.

Answer 37

hypothecate an interest in real property

The mortgagee’s rights of hypothecation allow him to go into court and obtain a judgment against the mortgagor in the event of his default.

Question 38

In order to give notice of the lien, the mortgage must be …

Answer 38

recorded at the office of the county or parish recorder in which the property is located.

Question 39

A real estate mortgage always requires an _____ that is identified by the legal action of a notary.

Answer 39

accompanying promissory note

Question 40

When the mortgagor’s debt is completely satisfied, the mortgagee cancels the note by executing a ____, which cancels the debt and defeats any interest the mortgagee has had in the collateral property. Like the mortgage itself, the satisfaction should be recorded to insure its legal effectiveness.

Answer 40

satisfaction of judgment

Question 41

Because mortgage law varies from state to state and mortgage practice is partially a matter of the needs and preferences of the various lenders and borrowers, there is no such thing as a ____

Answer 41

“standard” mortgage form.

Question 42

ELEMENTS OF A MORTGAGE:

Answer 42

Clause #1: contains date, place and names of parties.
Clause #2: amount of mortgagor’s debt and schedule of payments.
Clause #3: the granting clause, pledging the collateral property to the mortgage. In lien theory states, this clause will read “mortgage and pledge”; in title theory states, it will read “mortgage and grant”.
Clause #4: legal description of mortgaged property, also listing any personal property included in the mortgage.
Clause #5: the warranty of title clause, affirms that mortgagor holds good and clear title to the property and has the right to convey it.
Clause #6: the defeasance clause removes the mortgage when the debt is paid.

Question 43

There may also be an ____ which gives the lender the right to increase the rate of interest during the length of the mortgage.

Answer 43

escalation clause

Question 44

COVENANTS:

Answer 44

1. ) covenant to pay taxes and special assessments
2. ) insurance covenant
3. ) covenant of good repair
4. ) covenant against removal
5. ) property inspection covenant
6. ) alienation clause
7. ) receiver clause
8. ) owner’s rent clause
9. ) subordination clause

Question 45

Obligates the borrower to maintain adequate hazard insurance to protect the property.

Answer 45

insurance covenant

Question 46

In some mortgages called ___, the mortgagor agrees to assign a certain portion of each monthly payment for insurance and taxes. These funds are placed in escrow accounts.

Answer 46

PITI Mortgages

principal, interest, taxes, and insurance

Question 47

a covenant against waste. Keeping the property in good repair and not allowing it to go to ruin

Answer 47

covenant of good repair

Question 48

prohibits the mortgagor from removing any property covered by the mortgage

Answer 48

covenant against removal

Question 49

permits the mortgagee to inspect the property covered by the mortgage

Answer 49

property inspection covenant

Question 50

makes the mortgage non-assumable by giving the lender the following rights:

Answer 50

alienation clause or due on sale clause

1. ) right to demand payment in full
2. ) right to investigate credit and approve any buyer who wishes to assume the mortgage
3. ) allows lender to raise the interest rate on alienated property above that of the original loan

Question 51

provides for a receiver to oversee the operations of income producing properties while in foreclosure. This prohibits the borrower from collecting rents while neglecting to pay property taxes, and perform maintenance, etc.

Answer 51

Receiver clause

In trust deeds, this clause is called the assignment of rents clause

Question 52

Applies to owner occupied residences in foreclosure

Answer 52

owner’s rent clause

Question 53

a feature in certain types of mortgages. Gives the lender permission for a subsequent lender to assume first mortgage lien rights. If the mortgage goes into foreclosure, the holder of a second, or junior mortgage, can take first priority for satisfaction of his claim at the foreclosure proceeding.

Answer 53

subordination clause

most common in the sale of vacant land

Question 54

the right of a title company to receive any damages available to the insured when the title company has made a payment to settle a claim covered by a policy

Answer 54

subrogation

Question 55

an instrument that is employed to pledge an interest in real property in exchange for a loan or other consideration.

Answer 55

trust deed

Question 56

Trust deed includes three parties…

Answer 56

• the borrower is the TRUSTOR
• the lender is the BENEFICIARY
• the added third party is the TRUSTEE

Question 57

an impartial party appointed to oversee the trust agreement. May be a private institution, such as a title company, or it may be a private person

Answer 57

trustee

Question 58

The mechanics of the trust deed:

Answer 58

1. The owner of a property (trustor) transfers title to a third party (trustee) in exchange for a loan or other consideration from the lender or beneficiary. The borrower or trustor executes both a promissory note and a trust deed. The borrower’s signature is required on both documents.
2. The trustee holds the title for the benefit of the lender or beneficiary to secure the loan the lender has made to the trustor.
3. The trust deed is said to convey “bare” or “naked” title which is held by the third party, the trustee. As long as the trustor does not go into default, he retains full legal rights to the property. The trust deed conveys along with the title, a power of sale. If the trustor does not pay his debt, the trustee may sell the property and turn the proceeds of the sale over to the lender.
4. When the trust deed is paid off, the trustee must give the trustor a deed of reconveyance which transfers the title back to the original owner. (The clause of reconveyance is analogous to the defeasance clause in a mortgage).

Question 59

If the borrower or trustor does default, the beneficiary _____

Answer 59

conveys the trust deed to the trustee and instructs him to sell the property

Question 60

Because of the trust deed’s ___, the property can be sold without the necessity of going through the court action of a foreclosure.

Answer 60

power of sale clause

Question 61

The primary difference between a mortgage and a trust deed…

Answer 61

a mortgage

• creates a lien
• two parties must be named

a deed

• conveys title
• three parties must be named
• contains a power of sale clause, warranty to title clause, reconveyance clause, acceleration clause, receiver clause, and owner’s rent clause

Question 62

In this type of financing, the sale and financial agreement are generally in one document. The buyer gives a downpayment plus a promissory note and mortgage or trust deed in exchange for certain rights to the seller’s property. No third party lender need be involved. The buyer does not receive full title until the terms of the contract have been met. The seller delivers the deed when all of the payments have been made. The purchaser, however, has all of the privileges of ownership in the meantime.
Because the seller retains legal title until the debt is satisfied, in most states he does not need to go through foreclosure proceedings if the buyer defaults. In some strict jurisdictions, the buyer may be evicted if he falls behind on payments and will forfeit all payments if he breaches the contract. Also, he may not have absolute guarantee that the seller will be able to deliver good and marketable title once the debt has been paid. The advantage to the buyer is that he may be able to purchase property without a large cash output and without going through a lending institution.

Answer 62

CONTRACT FOR DEED or Installment Land Contract, Conditional Sales Contract, Agreement to Convey

In LA, called Bond for Deed

Question 63

The basic elements of a Contract for Deed are:

Answer 63

1. A description of the deed for the property.
2. Conditions of the sale, such as purchase price and terms of the loan.
3. The buyer is responsible for paying taxes and insurance.
4. Signatures of both parties, dated and notarized.
5. Escrow provisions and prepayment privilege.
6. Protections for the seller, such as the right to declare entire purchase price due if buyer defaults.

Question 64

The seller accepts a promissory note and mortgage or trust deed from the buyer in partial or complete payment for the property. The buyer in turn receives legal title to the property and all the accompanying rights of ownership. In effect, the property becomes the buyer’s collateral for the loan.

Answer 64

purchase money mortgage or purchase money trust deed

Question 65

Purchase money agreements may be either _____ mortgages.

Answer 65

first or second

Question 66

If a first purchase money mortgage is executed simultaneously with a deed to the property…

Answer 66

the purchase money mortgage has first claim against the property, superseding any homestead rights which might normally prevail in the state in which the property is located.

Question 67

The primary difference between the purchase money mortgage and the contract for deed is….

Answer 67

contract for deed

• the seller retains legal title to the property until part or all of the debt is paid
• Until this time the buyer holds equitable title only.

purchase money mortgage
-the buyer receives full legal title at the time of sale.

Question 68

If the borrower fails to meet the obligations of the mortgage, the lender has the right to ____ on the collateral property and sell the property to redeem the debt.

Answer 68

foreclose

Question 69

Under the method termed _____, if the amount received from the sale exceeds the borrower’s debt, the lender profits. This method has gradually been modified to treat the borrower more fairly.

Answer 69

strict foreclosure

Question 70

Under the practice which has evolved, _____, the lender is required to refund to the borrower any profit realized on the sale of the foreclosed property.

Answer 70

foreclosure by sale

Question 71

If the lender is unable to recover his full interest in the collateral property, he may, in some states, be permitted to seek a _____ against the borrower in order to recover the remaining debt.

Allows the lender to attach and seize the borrower’s unsecured personal and real property to make up the difference between the amount realized at the foreclosure sale and the borrower’s remaining outstanding obligation.

Answer 71

deficiency judgment

However, if the buyer has acquired the property “subject to” an existing mortgage he can not have a deficiency judgment entered against him.

Question 72

Because of the trust deed’s “power of sale” clause, the property can be sold without the necessity of going through the court action of a foreclosure. The lender or its trustee has the right to sell the collateral property upon default, rather than having to file expensive legal proceedings.

Eliminates the statutory period of redemption.

The most common form of sale foreclosure.

Answer 72

deed of trust foreclosure

Question 73

Steps in a deed of trust foreclosure…

Answer 73

1. ) The lender/beneficiary notifies the trustee in writing of the delinquency of the trustor/borrower and instructs the trustee to start foreclosure proceedings.
2. ) A 90 day notice is forwarded to the trustee and the sale is advertised in the newspaper.
3. ) The trustee or any junior lienholders have the right to bring the loan up to date with payment of delinquent payments plus accrued collection costs, delinquency fees, etc.

Question 74

Upon default, the property is sold at the Sheriff’s sale and proceeds, up to the amount of the debt, go to the lender.

Answer 74

mortgage foreclosure

Question 75

Louisiana permits this type of foreclosure. If the property does not sell for the full amount owed, the creditor may obtain a deficiency judgment for the amount owed by the borrower above the proceeds of the sheriff’s sale. The debtor has the right to bid for the property only if the bid equals at least two-thirds of the appraised value.

Answer 75

sale with appraisement

Question 76

If no appraisal has been made, the lender forfeits the right to obtain a deficiency judgment.

Answer 76

sale without appraisement

Question 77

Under this process the borrower, “sells” the property to the lender in return for the lender canceling the note. The lender does not retain the right of a deficiency judgment if the property sells for less than the borrower owed.

Answer 77

Deed in Lieu of Foreclosure or a “friendly foreclosure”

In LA, called dation en paiement

Question 78

Foreclosure may take place by either _____.

Answer 78

ordinary process or executory process

Question 79

much quicker because it does not have to go through the judicial process. It already includes a waiver of notice, that is, the legal delay of foreclosure have been waived.

Answer 79

executory process

Question 80

occurs during the period of time after the borrower goes into default but before the actual foreclosure sale. During this period, the borrower, or other lien holder, can redeem the property by paying the current indebtedness. If the mortgage contains an acceleration clause, the entire debt may have to be paid in order to redeem the property.

Answer 80

equitable redemption

Question 81

ccurs after the actual foreclosure sale. Depending on the state, the borrower may have up to two years to redeem his property by paying off the debt in full, and he may be permitted to remain in possession of the property. During this period, the court may appoint a receiver to pay operating costs, collect rents, and otherwise look after the property. The time limit varies from state to state.

Answer 81

statutory redemption

*In LA, there is no statutory redemption except for tax sales which is 3-5 years.

Question 82

Foreclosure by power of sale is referred to as ___. The borrower is allowed only a period of reinstatement, extending only to the time the property is sold.

Answer 82

non-judicial foreclosure

Question 83

Loans may be divided into two general categories:

Answer 83

1. ) conventional loans

2. ) government backed loans

Question 84

The process of determining the risk a lender is incurring by lending a sum of money to a certain borrower to finance a particular property is referred to as ____

Answer 84

underwriting, or loan qualification

Question 85

When underwriting a loan, the lender concentrates on three areas:

Answer 85

1. the borrower
2. the property
3. the location of the property

Question 86

How is a borrower evaluated?

Answer 86

1. ) a variety of factors are taken into consideration including:
   - income
   - character
   - expenses
   - savings and other assets
   - occupation
   - income stability
   - length of time at current employment
   - desire to repay.
2. ) Standard procedure is to obtain a credit report from which the lender determines the borrower’s credit history.
3. ) The lender usually uses a ratio of 2 ½ to 1 in verifying the ability to repay the loan. In other words, the purchaser should be able to afford a home loan that is 2 ½ times as large as his or her annual gross income.

Question 87

How is the property evaluated?

Answer 87

1. ) An appraisal and title report are usually ordered to establish the property’s present value and to uncover any unsatisfied liens or other encumbrances against it.
2. ) The appraisal establishes the fair market value of the property, which may or may not be the same as the purchase price.

Question 88

How is the location evaluated?

Answer 88

1. ) The lender takes into consideration such factors as:
   - the presence of adequate utilities
   - street paving
   - proximity to schools, churches, shopping and recreational facilities.
2. ) Economic obsolescence

Question 89

forces outside the property itself which cause a decline in its value, is also considered.

Answer 89

economic obsolescence

Question 90

This is the term used to describe the relationship between the amount of the downpayment and the amount of the loan.

Answer 90

LOAN TO VALUE RATIO (LTVR)

divide the amount of the loan by either the appraised value or the selling price, whichever is less.

Before the Depression, LTVR’s ranged from 40% to 60%.
Conventional loans of today normally have an LTVR of 80% because the use of public and private loan insurance and guarantee programs.

Question 91

Generally, any loan approved for more than 80% LTVR must have ______. The borrower pays an insurance premium for an insurance policy which covers the top portion of the loan proceeds advanced over and above the standard 80%. This insurance covers the potential deficiency in proceeds which the lender might experience after foreclosure and sale of the collateral.

Answer 91

private mortgage insurance (PMI)

Question 92

Government backed loans:

Answer 92

1. ) Federal Housing Administration Loan Program (FHA)

2. ) Veteran’s Administration Guaranteed Loan

Question 93

• Created in 1934
• an alternative to conventional lending practices
• rarely provides mortgage funds directly to borrowers
• doesn’t build houses
• doesn’t set interest rates
• it is a large federal mortgage insurance agency
• loans are insured by the federal government through the DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD)
• insures lenders against loss from borrower default
• main objective is to assist in providing housing opportunities for low- and moderate-income families.
• doesn’t have income limits to determine who’s eligible for assistance
• anyone who is a U.S. citizen, permanent resident, or non-permanent resident with a work visa and who meets the lending guidelines can obtain a loan
• sets a max mortgage amount that it will insure

Answer 93

Federal Housing Administration Loan Program (FHA)

Question 94

Government backed loans are exempt from the ____.

Answer 94

federal usury laws

Question 95

set the maximum interest rate that can be charged

Answer 95

usury laws

Question 96

Requirements for FHA loans:

Answer 96

1. ) Downpayment of at least 3.5% of the purchase price, but closing costs can be included in the loan
2. ) Borrower is charged a mortgage insurance premium
3. ) Property must be appraised by an approved FHA appraiser
4. ) Max mortgage limits are set for various regions of the country
5. ) Borrower must meet standard FHA credit qualifications
6. ) Includes financing for manufacture or factory-built housing

Question 97

provides a function similar to private mortgage companies: insuring private lenders against losses caused by borrower defaults on FHA insured loans.

Under the plan, lenders approved by the FHA either submit applications from prospective borrowers to the regional HUD Homeownership Center for approval or may act as Direct Endorsers.

Answer 97

Mutual Mortgage Insurance Fund (MMI)

Question 98

lenders authorized to underwrite their own FHA loan applications. They are responsible for the entire mortgage process, through closing, and perform underwriting functions themselves (credit examination, appraisal review, etc.). When they approve and close a loan, the application for mortgage insurance is then submitted to the FHA.

Answer 98

Direct Endorsers (Des)

Question 99

The FHA established guidelines for approving borrower and property, as well as other loan regulations, for FHA loans; and their regulations have the force and effect of law. These guidelines generally apply to all standard ____ loans on single-family homes.

Answer 99

FHA 203(b)

Question 100

Difference between FHA and conventional…

Answer 100

FHA

• have more liberal income qualifying standards
• Although an underwriter likes to see a stellar credit history, some prior credit issues might not be a problem as long as there are no open collections, outstanding judgments, etc. on the credit report.
• a borrower who has defaulted on a student loan would not qualify for an FHA loan
• many lenders impose minimum credit score requirements when approving a borrower.
• less stringent when it comes to a borrower’s level of income

Question 101

the relationship of the borrower’s total monthly housing expense to income, expressed as a percentage.

Answer 101

housing expense ratio

When you know a borrower’s stable monthly income, you can multiply that by the housing expense ratio to determine the maximum monthly housing expense the borrower can afford.

Question 102

FHA considers a borrower’s income adequate for a loan if the proposed total mortgage payment does not exceed ___of gross stable monthly income.

Answer 102

31%

Question 103

FHA’s maximum mortgage payment includes ____ as well as any monthly homeowners association dues. This allows the FHA to get a better picture of the borrower’s true total housing cost.

Answer 103

principal, interest, taxes, and insurance (PITI)

Question 104

FHA downpayment…

Answer 104

• no pre-payment penalties or lock in clauses on its insured loans
• only insures first mortgages
• can be assumed without an interest increase
• permit only loans that have a “subject to transfer” clause to be taken over through a formal assumption process.
• Can be sold in the secondary mortgage market
• to qualify for financing, the property must meet min. property standards and the buyer must be qualified

Question 105

required for all FHA loans, regardless of downpayment size. Has an initial premium and an annual premium.

Answer 105

Mortgage Insurance Premium (MIP)
or
Upfront Mortgage Insurance Premium (UFMIP)

Question 106

MIP for a new home purchase with a 30 year mortgage…

Answer 106

Initial is 1.75% of the loan amount

annual premium of 0.55% of the outstanding loan balance, divided into 12 monthly payments

Question 107

MIP for a new home purchase with a 15 year mortgage…

Answer 107

Initial is 1.75% of the loan amount

annual premium of 0.25% of the outstanding loan balance, divided into 12 monthly payments

Question 108

FHA loan review…

Answer 108

1. ) Less stringent qualifying standards
2. ) Higher property standards
3. ) Low down payments
4. ) MIP is required
5. ) Long-term loans
6. ) Loans are assumable
7. ) No prepayment penalty

Question 109

est. in 1944 to aid veterans or their surviving spouses in obtaining financing for the purchase or construction of owner occupied homes and farms. Also available for owner-occupied mobile homes and condos

Answer 109

VA program

veteran can’t buy another house using a VA loan until the 1st loan is paid off

Question 110

FHA and VA loans aren’t really loans, they’re…

Answer 110

loan insurance

Question 111

FHA loans are insured, VA loans are ____

Answer 111

guaranteed

veteran borrowers pay no insurance premium on VA loans

Question 112

The loan guarantee amount which the veteran is eligible to receive on a VA loan is referred to as his ____

Answer 112

entitlement

Question 113

To determine what portion of a mortgage loan the VA will guarantee, a veteran must apply for a _____. It establishes the maximum guarantee entitlement of the veteran.

Answer 113

certificate of eligibility

Question 114

The VA will also issue a ____ for the property being purchased stating the current market value based on a VA-approved appraisal

Answer 114

certificate of reasonable value (CRV)

Question 115

Is there a limit on VA loans?

Answer 115

there’s no limit on the amount of the loan a veteran can obtain. The VA limits the amount it will guarantee

Question 116

If a mortgagor defaults on a VA loan…

Answer 116

the VA will pay the lender the following amounts toward the remaining balance after the foreclosure sale. After the property has been foreclosed, the VA may elect to make full restitution to the lender and take title to the property.

Question 117

The dollar amount of interest paid is calculated as a percentage of the ____.

Answer 117

loan’s principal

Question 118

_____ is always calculated on a yearly basis. To calculate the amount of interest in any given month, ______.

Answer 118

interest

multiply the interest rate by the principal balance and divide by twelve.

Question 119

used to lower the interest rate on the loan while increasing the yield to the lender. Can be thought of as pre-paid interest, as they are paid as a lump sum at the time of closing. They are also considered to be increased yield to the lender since the lender is getting more money at the time of sale.

Answer 119

Discount points or equalization factors

Question 120

covers several properties, but each may be released from the mortgage separately. This is the type of mortgage that is usually used by a developer constructing tracts of homes.

Answer 120

blanket mortgage

Question 121

A _____ drafted into the blanket mortgage permits each parcel to be released from the mortgage as it is sold.

Answer 121

partial release clause

Question 122

secured by both real and personal property, that is, both movables and immovables. This type of loan is commonly used to finance new homes along with major household appliances.

Answer 122

the package mortgage

Question 123

used for owner financing and is originated by a second lender combining equity and money owed into a second mortgage. In a common transaction, a second lender agrees to assume payments on the borrower’s original loan and also to lend the borrower the additional funds he requires. The loan may be at a higher interest rate than the original loan, but still below the current market rate.

Answer 123

the wrap around mortgage

Question 124

used for building or repairing either residential or commercial property and is a type of INTERIM FINANCING. The loan is committed for the total cost of the construction project, but is paid out in draws at regular intervals after each stage of construction has been completed. Interest is paid only on the total amount of disbursements. Are generally made for periods of three years or less.

Answer 124

construction loan

Question 125

Other forms of owner/seller financing which were mentioned earlier are …

Answer 125

1. ) the purchase money mortgage

2. ) the installment land contract, or bond for deed.

Question 126

calls for payments of interest only for the term of the loan. At the end of the term, the entire sum of the principal is due in one balloon payment plus any remaining interest.

Answer 126

straight loan 
or 
term loan 
or 
straight term loan

Question 127

this loan type features a schedule of equal payments consisting of both principal and interest. This is normally a long term loan, up to thirty years. The portion of the monthly payment that is applied toward the principal increases each month, and the amount applied toward the interest decreases each month. In other words, as the loan matures, more and more of each payment is applied toward the principal, so that, in the beginning you are paying mostly interest, and at the end of the loan, you are paying mostly principal.

Answer 127

fully amortized loan or

direct reduction loan

Question 128

Payments are typically calculated over a 20 or 30 year amortization period with a loan term of 5 years. Is repaid in regular installments of principal and interest, but one or more payments is a balloon payment, that is, a payment larger than the loan’s regular payment amounts. The effect of the balloon payments is to reduce the amount of the regular payments.

Answer 128

The partially amortized loan
or
limited reduction loan
or
renegotiable rate mortgage

Question 129

A mortgage in which the interest rate fluctuates according to some external index, such as the open market interest rate, prime lending rate, or consumer price index. Normally, the rate is adjusted once a year and can not change more than 2% in any one year period. There is also a ceiling or upper limit on the interest rate, and a lower limit.

Answer 129

The adjustable rate mortgage or

variable rate mortgage

Question 130

Payments start small and become larger as the mortgage goes on. Generally used for commercial loans enabling a new business to defer a portion of their mortgage payments in the expectation of increased income in the future. In some, the borrower pays only interest for the first few years.

Answer 130

graduated payment mortgage (GPM)

Question 131

In this type of loan the borrower increases his existing mortgage to the original amount. This is, in effect, a way of borrowing against your equity without taking out a second mortgage. This usually results in the borrower having a higher monthly note since the full amount must be repaid by the original expiration date of the loan.

Answer 131

the open end loan

Question 132

Mortgage is tailored for older homeowners, retired, or near retirement, who own a home free and clear and wish to use some of the equity they have in their home. Regular monthly payments are made to the borrower based on the equity the homeowner has invested in the property. The loan is eventually paid from the sale of the property or from the borrower’s estate upon his or her death.

Answer 132

Reverse mortgages

Question 133

arrangements are used to finance large commercial or industrial properties. The land and building, usually used by the seller for business purposes, are sold to an investor, such as an insurance company. The real Estate is then leased back by the buyer to the seller, who continues to conduct business on the property as a tenant. The buyer becomes the lessor, and the original owner becomes the lessee. This enables a business firm with money invested in the real estate to free that money so it can be used as working capital.

Answer 133

Sale-and-leaseback

Question 134

a way of temporarily lowering the initial interest rate on a mortgage or deed of trust loan. By “pre-paying” some of the interest to the lender on the borrower’s behalf, one can “buy down” the original interest rate for a period of time. Typical arrangements reduce the interest rate by 1 to 3 percent over the first one to three years of the loan.

Answer 134

buydown

Question 135

Charged by most lenders for generating a loan. Aren’t prepaid interest. They are paid to the lender and are usually 1 percent of the loan amount.

Answer 135

A loan origination fee

Question 136

Sources of financing:

Answer 136

1. ) Institutional lenders
2. ) Non-institutional lenders
3. ) The secondary mortgage market

Question 137

Institutional lenders:

Answer 137

1. ) Savings and loans
2. ) Commercial banks
3. ) Mutual Savings Banks
4. ) Life Insurance Companies

Question 138

Non-institutional lenders:

Answer 138

1. ) Mortgage brokers
2. ) Mortgage bankers
3. ) Pension funds
4. ) Trust funds
5. ) Private individuals
6. ) Foreign investors
7. ) University and hospital endowment funds, credit unions

Question 139

do not use their own funds. They find money to lend, acting as intermediaries between the borrower and the lender. He has nothing to do with servicing the loan.

Answer 139

mortgage brokers

Question 140

set up loan transactions using their own capital, and also service the loan.

Answer 140

mortgage bankers

Question 141

facilitates the buying and selling of mortgages that have been made by the primary mortgage market. Any time a lender takes over a loan that he himself did not originate, he is engaging in this. The secondary lender buys mortgages from primary lenders, thereby supplying him with the cash needed to originate more new loans.

Answer 141

The secondary mortgage market

Question 142

the original purpose of this program was to establish a market for the buying and selling of government insured mortgages and thereby to assist holders of certain residential mortgages. Buys conventional and FHA and VA backed loans. In September 2008, it became a government-owned enterprise. Until that time it was a privately owned corporatin that issued its own stock.

Answer 142

Federal National Mortgage Association (FNMA)

Nicknamed “Fannie Mae”

Question 143

this organization is sponsored and administered by the federal government and is under the auspices of the department of Housing and Urban Development. Acquires loans for urban renewal projects, housing for the elderly, and other federal housing programs which assist low and moderate income households.

Answer 143

Government National Mortgage Association (GNMA)

Known as “Ginnie Mae”

Question 144

was founded in 1971 to allow savings and loans liquidity for their mortgage assets. Buys mortgages from these institutions and supplies them with cash to originate new mortgages. Like FNMA, is now a government-owned enterprise that provides a secondary market for mortgage loans, primarily conventional loans.

Answer 144

Federal Home Loan Mortgage Corporation (FHLMC)

“Freddie Mac”

Question 145

similar to Fannie Mae and Freddie Mac except that it deals with agricultural loans. Purchases agricultural loans from original lenders and issues guaranteed mortgage-backed securities. The Farm Service Agency (FSA), formerly the Farmers Home Administration is a federal agency of the Department of Agriculture. The FSA offers programs to help families purchase or operate family farms. It also provides loans to help families purchase or improve single family homes in rural areas

Answer 145

Farmer Mac

formerly the Federal Agricultural Mortgage Corporation

Question 146

In 1968, the _____ was passed because of problems with consumer confusion regarding interest charges, points, misleading advertising practices, and confusion as to the actual cost of consumer credit.

Answer 146

FEDERAL CONSUMER PROTECTION ACT

Question 147

A portion of this legislation, known as The Truth In Lending Law, is enforced by _____.

Answer 147

regulation “Z”

Question 148

Regulation “Z” establishes guidelines for three aspects of the lending process:

Answer 148

1. Disclosure of Loan Cost
2. Borrower’s Right of Rescission
3. Fair Advertising Practice

Question 149

Real estate loans for personal, family, and agricultural purposes are covered by _____. Business and commercial loans are not covered.

Answer 149

Regulation “Z”

Question 150

The Truth in Lending Law requires that the lender provide the borrower with a formal disclosure statement containing the following items:

Answer 150

1. Date finance charge will begin to accrue
2. annual percentage rate (APR)
3. number of monthly payments
4. due date of payments
5. prepayment penalties
6. balloon payments
7. default and delinquency charges
8. legal description of property
9. amount of credit which will be made available to the borrower
10. credit sales, cash price and total unpaid balance

Question 151

Note that the lender is _____ to reveal the total amount of interest which will be payable during the full term of the loan.

Answer 151

NOT required

Question 152

The law also deals with the way in which credit terms may be advertised. If an ad reveals any one specific credit term of the loan, then _____

Answer 152

all other pertinent credit terms must be revealed.

Question 153

Regulation “Z” allows borrowers seeking ___ to rescind the loan contract up to midnight of the third business day following the signing of the contract, or three days after the lender disclosed the rate and amount of the loan’s finance charges, whichever is later.

Answer 153

second mortgages only

Question 154

When a sale is closed, a settlement statement is used to show the items and amounts charged or credited to each party. The ____ covers the disclosure of settlement costs, the expenses a buyer must pay at the closing before he receives actual possession of the property.

Answer 154

Real Estate Settlement Procedures Act (RESPA)

Question 155

applies only to first mortgage transactions which are financed by federal programs including FHA and VA backed loans, HUD administered programs, loans from lenders with federally insured deposits, and loans that are to be bought by FNMA, GNMA, FHLMC, or other federally controlled secondary mortgage market institutions.

Answer 155

RESPA

Question 156

The RESPA requirements are:

Answer 156

1. Borrower must be given a copy of the HUD settlement booklet
2. Lender must prepare a good faith estimate of closing costs within 3 days of the loan application.
3. Borrower must be given a copy of HUD’s Uniform Settlement Statement.
4. No overcharging on escrow accounts for property taxes and insurance.
5. No kickbacks or fees for services not performed during the sale closing.

Question 157

to maintain sound credit conditions, help counteract inflationary and deflationary trends and create a favorable economic climate. Divides the country into twelve federal districts, each served by a federal reserve bank. All nationally chartered banks must join and purchase stock in its district reserve banks. Regulates the flow of money and interest rates in the marketplace indirectly, through its member banks, by controlling their reserve requirements and discount rates.

Answer 157

The Federal Reserve System

Question 158

Homeowners may deduct from their gross income:

Answer 158

1. mortgage interest payments on most first and second homes
2. real estate taxes (but not interest paid on overdue taxes)
3. certain loan origination fees
4. loan discount points (whether paid by buyer or seller)
5. loan prepayment penalties

Question 159

the profit realized from the sale or exchange of an asset, including real property. It is figured as the adjusted basis of the property (initial cost plus any physical improvements minus any depreciation) minus its net selling price.

Answer 159

capital gain

Question 160

To stimulate investment, Congress at various times has allowed part of a taxpayer’s capital gain to be _____

Answer 160

free from income tax

Question 161

Current tax law specifies what percentage of capital gains is taxable as income. To determine the taxable amount, an investor ___

Answer 161

multiplies the total capital gain by the current percentage

Question 162

Real estate investors can defer taxation of capital gains by ____. A property owner will incur tax liability on a sale only if additional capital or property is also received. Note that the tax is deferred not eliminated. When the property is sold the capital gain will be taxed.

Answer 162

making property exchanges

Question 163

All or part of the gain on the sale of a personal residence is exempt from immediate taxation if ____

Answer 163

another residence is bought and occupied within 24 months (before or after) the sale of the old residence

Question 164

An unmarried individual may exclude from income up to $250,000 of gain realized on the sale or exchange or a residence….

Answer 164

1. ) The individual must have owned and occupied the residence for an aggregate of at least two of the five years before the sale or exchange.
2. ) The exclusion can be used on a continuing basis – but not more frequently than once every two years.
3. ) Effective for sales and exchanges after May 6, 1997, this exclusion replaces the one-time $125,000 exclusion for taxpayers age 55 or older.

Question 165

For married individuals, the excludable gain is increased to $500,000 if filing jointly and if:

Answer 165

1. Either spouse meets the ownership test;
2. Both spouses meet the use test; and
3. Neither spouse is ineligible for exclusion by virtue of a sale or exchange of a residence within the last two years.

Question 166

Regulation Z

Disclosure requirements:

Answer 166

1. cost of credit transactions

2. right to rescind in some types of credit transactions

Question 167

Regulation Z

Coverage:

Answer 167

1. loans to individuals for all real estate credit transactions for personal, family, and household purposes up to $25,000.
2. loans to individuals covered for non-real estate credit transactions for personal, family and household purposes up to $25,000.

Question 168

Regulation Z

Agreements NOT covered:

Answer 168

1. personal property credit transactions above $25,000.
2. real estate purchase agreements
3. business or commercial loans
4. loans with 4 or fewer installments
5. loans made without interest charges
6. loans to government agencies
7. assumptions with no change in terms
8. agricultural loans for amount above $25,000

Question 169

Regulation Z

Requirements regarding finance charges:

Answer 169

1. all finance charges as well as true annual interest rate must be disclosed.
2. finance charges must include interest, loan fees, points, service charges, finder’s fees, credit fees and property and credit insurance.
3. finance charge must be stated as annual percentage rate.

Question 170

Regulation Z

Requirements regarding liens on residences:

Answer 170

1. “cooling off” period required when liens will be placed on a principal residence; borrower has right to rescind the transaction up to midnight of the third business day following the transaction or until delivery of the disclosure statement, whichever is later.
2. right to rescind does not apply to loans to finance the purchase or initial construction of a house.

Question 171

Regulation Z

Advertising:

Answer 171

1. does not require brokers to advertsie credit terms; if lenders advertise some credit details, they must fully disclose terms.
2. full disclosure of terms:
   a. amount of down payment
   b. amount of loan or cash price
   c. finance charges as annual percentage rate
   d. number, amount and due dates of paymentse.
   e. total of all payments except where advertisement relates to first mortgage

Question 172

Regulation Z

Administered by…

Answer 172

Federal Trade Commission (FTC)

Question 173

Regulation Z

Penalties for noncompliance:

Answer 173

1. violation of an administration order enforcing Regulation Z is $10,000 for each day the fiolation continues.
2. engaging in unfair or deceptive practice may result in a fine of up to $10,000.
3. creditor may be liable to consumer for twice the amount of the finance charge, from a minimum of $100 to a maximum of $1000 plus court costs, attorney’s fees and any actual damages.
4. willful violation punishable by fine up to $5,000 or one year’s imprisonment or both.

Question 174

Ensures buyer and seller have knowledge of all settlement costs before closing.

Answer 174

Real Estate Settlement Procedures Act (RESPA)

Question 175

Real Estate Settlement Procedures Act (RESPA)

Requirements:

Answer 175

1. lenders must give copy of special information booklet, Settlement Costs and You to each loan applicant.
2. borrower must be provided with a good-faith estimate of settlement costs by lender no later than three business days after the receipt of the loan application.
3. loan closing must be prepared on a Uniform Settlement Statement (HUD 1).
4. RESPA explicitly prohibits the payment of kickbacks and prohibits referral fees
   when no services are actually rendered.

Question 176

Real Estate Settlement Procedures Act (RESPA)

regulations apply only to transactions involving ______.

Answer 176

new first mortgage referral loans for one family to four family dwellings generally financed by the federally related mortgage loan.

Question 177

Foreign Investment and Real Property Tax Act (IRC Section 1445).

Ensures that nonresident aliens and foreign corporations pay U.S. income tax based on gains from the disposition of U.S. real property interest…

Answer 177

1. in real property located in the United States
2. in any domestic corporation that was a U.S. real property holding corporation during the period that the taxpayer held the interest after June 18, 1980, or at any time during the five year period ending on the date of the disposition of the property, if earlier.

Question 178

Foreign Investment and Real Property Tax Act (IRC Section 1445)

A ____is required to withhold a tax equal to 10 percent of the amount realized by the foreign transferor on the disposition of the property.

Answer 178

transferee of any U.S. real property interest

Question 179

Foreign Investment and Real Property Tax Act (IRC Section 1445)

If a transferor’s or transferee’s agent fails to furnish the notice required, ____, except that the agent’s liability is limited to the amount of compensation that he or she derives from the transaction.

Answer 179

the agent, for example, a broker, is required to withhold in the same manner as would be required of the transferee

Question 180

Foreign Investment and Real Property Tax Act (IRC Section 1445)

A buyer or other transferee of a U.S. real property interest and any corporation, partnership or fiduciary required to withhold tax must file an ____ to report and transmit the amount withheld.

Answer 180

IRS Form 8288

Question 181

Foreign Investment and Real Property Tax Act (IRC Section 1445)

Buyers or other transferees of a U.S. real property interest also must file an ____ to show the amount withheld.

Answer 181

IRS Form 8288-A

Question 182

Foreign Investment and Real Property Tax Act (IRC Section 1445)

Generally, the amount required to be withheld with respect to any disposition of a U.S. real property interest cannot exceed _____.

Answer 182

the amount of the transferor’s maximum tax liability

Question 183

Foreign Investment and Real Property Tax Act (IRC Section 1445)

Brokers involved in listing or selling a U.S. real property interest for nonresident aliens or foreign corporations should contact ____

Answer 183

the IRS to establish the appropriate procedures

Question 184

IRS Regulations

Generally do not apply to purchases where the property will be used ____

Answer 184

as a residence and the sale price is under $300,000

Question 185

IRS Regulations

Independent Contractor and Employee - under the “qualified real estate agent” category in the Internal Revenue Code, meeting three requirements can establish independent contractor status…

Answer 185

1. must have current real estate license.
2. must have a written contract with the broker that contains the following clause: “The salesperson will not be treated as an employee with respect to the services performed by such salesperson as a real estate agent for federal tax purposes.”
3. 90% or more of the individual’s income as a licensee must be based on sales production, not on the number of hours worked.
4. broker should have a standardized agreement drafted or reviewed by an attorney.

Question 186

IRS Regulations

1099 forms…

Answer 186

1. IRS rules require closing agents to report details of closing to the IRS using IRS Form 1099 S.
2. Reports must be submitted for sales or exchanges of residences with 4 or fewer units.
3. commissions paid to salespeople by brokers also must be reported on IRS Form 1099 MISC.

Question 187

IRS Regulations

Declarations of value…

Answer 187

1. documents or statements of value that accompany every deed or contract to be recorded in the registrar of deeds office.
2. statements of value are used by local and state tax officials for assessment purposes.

Question 188

IRS Regulations

Imputed interest…

Answer 188

1. IRS will impute, or assign, interest at a prescribed rate, computed monthly, on an installment contract that fails to include an interest rate or states an unreasonably low rate.
2. although no interest is paid, buyers may deduct for tax purposes imputed interest per annum on unpaid balances.
3. rate for determining whether interest should be imputed and the amount of interest that should be imputed is based on the applicable federal rate (AFR).
4. AFR is one of 3 rates, depending on whether the debt instrument is
   a. short term - not more than 3 years
   b. midterm - more than 3 years but not more than 9 years.
   c. long term - more than nine years.
5. IRS issues alternative AFRs on a monthly basis
6. Installment sales less than $3,000 are not covered by the imputed interest law.

Question 189

IRS Regulations

1031 tax-deferred exchange…

Answer 189

1. under Section 1031 of the IRC, real estate investors can defer taxation of capital gains by making a property exchange.
2. a property owner may exchange one property for another property and have tax liability on the sale only if additional capital or property is received.
3. tax on an exchange is deferred rather than eliminated.
4. properties involved in exchange must be of like kind.
5. “like kind” refers to any real property to be held for income purposes or investment; it excludes dealer property and residences.
6. additional capital or personal property included in a transaction to even out the exchange is considered boot; the party receiving boot is taxed at the time of the exchange.

Question 190

Antitrust Law

Prohibitions:

Answer 190

1. allocation of customers or markets
2. price fixing
3. boycotting
4. people violating the Sherman Antitrust Act may be found guilty of a felony punishable by a maximum $100,000 fine and three years in prison.
5. in a civil suit a broker found guilty of violation of the Sherman Antitrust Act will be liable for 3 times the actual damages plus attorney’s fees and costs.

Question 191

agreement among brokers to divide their markets and refrain from competing for each other’s business; division may take place on a geographic basis or on a certain price range of homes.

Answer 191

allocation of customers or markets

Question 192

conspiracy among brokers to set prices for their services, rather than negotiate such fees.

Answer 192

price fixing

Question 193

two or more businesses conspire against other businesses to reduce competition.

Answer 193

boycotting