Unit 7: Financing Documents

Question 1

How is a promissory note secured in a title theory state?

Answer 1

By a deed of trust. The borrower gives legal title to the lender and retains equitable title. In theory, the lender actually owns the property until the debt is paid.

Question 2

How is a promissory note secured in a lien theory state?

Answer 2

By a mortgage. The borrower retains both legal and equitable title. The lender simply has a lien on the property.

Question 3

What are the two ways a promissory note is secured?

Answer 3

1. Mortgage

2. Deed of trust

Question 4

What is a promissory note?

Answer 4

Legal instrument that evidences the debt.

Question 5

Who holds the promissory note?

Answer 5

The lender

Question 6

T/F A key element of the promissory note is that it is signed by the lender.

Answer 6

False. A key element of the promissory note is that it is signed by the BORROWER.

Question 7

What is an acceleration clause?

Answer 7

If the borrower defaults, the lender can demand immediate payment of the entire balance.

Question 8

What is created once a mortgage or deed of trust is recorded?

Answer 8

Lien

Question 9

T/F Interest on the majority of home loans is compounded.

Answer 9

False. Interest on the majority of home loans is SIMPLE. This means that what you pay in interest is pre-determined. You don’t pay interest on top of interest.

Question 10

How many parties are involved in a mortgage?

Answer 10

2 parties: Borrower & Lender

Question 11

How many parties are involved in a deed of trust?

Answer 11

3 parties: Borrower, Lender & Trustee

Question 12

Besides the number of parties, what is another difference between a mortgage and a deed of trust?

Answer 12

The foreclosure process is different. With a mortgage, the foreclosure goes through the courts (judicial). A foreclosure on a deed of trust does not go through the courts and is conducted by the trustee.

Question 13

In a mortgage, what is another name for the borrower?

Answer 13

Mortgagor

Question 14

In a mortgage, what is another name for the lender?

Answer 14

Mortgagee

Question 15

In a deed of trust, what are the 2 other names for the borrower?

Answer 15

1. Trustor

2. Grantor

Question 16

In a deed of trust, what is another name for the lender?

Answer 16

Beneficiary

Question 17

What does the defeasance clause?

Answer 17

When the debt is paid, the lien must be removed.

Question 18

When a mortgage is fully paid, what does the mortgagee provide?

Answer 18

Satisfaction

Question 19

When a deed of trust is fully paid, what does the trustee provide?

Answer 19

Deed of reconveyance

Question 20

What is the due on sale clause?

Answer 20

The borrower is required to pay the entire loan balance if the property is being sold.

Question 21

What is another name for the due on sale clause?

Answer 21

Alienation Clause

Question 22

What is the prepayment clause?

Answer 22

It sets the terms of how and when the borrower can pay off the loan.

Question 23

Who is protected by the prepayment clause?

Answer 23

The lender. The lender will be compensated for the interest income lost over the life of the loan.

Question 24

What is the power of sale clause?

Answer 24

Gives the trustee/mortgagee the power to foreclose without going to court.

Standard for deed of trust but optional for mortgage.

Question 25

Why is waste a reason for loan acceleration and foreclosure?

Answer 25

A home owners lack of maintenance would lower the value below what is owed.