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Chapter 11 Real Estate Finance
Terms in this set (51)
If the lender is not paid according to the terms of a promissory note and they hold a security interest in the property through a mortgage or trust deed, which of the following options may the lender pursue?
I. Renegotiate the terms and conditions of the promissory note with the borrower
II. Foreclose on the property
III. File for a deficiency judgment after the foreclosure if state law permits
A) I only
B) II only
C) Both I and II
D) I, II, and III
I, II, and III
(When a borrower defaults the lender and borrower may always mutually agree on a resolution. The lender also has the right to foreclose and if the sale does not produce sufficient proceeds they may be able to pursue the borrower for a deficiency judgment.)
Which of the following statements is/are true if a buyer purchases property subject to the seller's loan and then defaults on the loan?
l. The buyer is personally liable for the underlying debt.
ll. The seller remains personally liable for the underlying debt.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
The borrower utilizing a mortgage document is known as the:
(The borrower gives a right or interest to the lender called a mortgage. The borrower is the mortgagor and the lender or bank is the mortgagee.)
Gary bought a house for $180,000 with an 85% LTV ratio. The term of the loan is 30 years at a 7% rate of interest. It will take a loan factor of 6.65 per 1,000 to amortize the loan. The annual real property taxes are estimated to be $996. The annual premium for the homeowner's policy is estimated to be $480.
What is the monthly PITI?
153,000*.00665=1,017.45<--principal and interest
How many discount points would the lender need to charge if the lender wishes to increase the yield on the loan from 9% to 10.25%?
A) two points
B) eight points
C) six points
D) ten points
each discount point increases the yield .125)
A lender is charging a borrower 6% fixed interest rate and 4 discount points. What is the yield to the investor?
Bill and Betty just received $25,000 profit from the sale of their home. They are in the process of buying a new home for $185,500 with an 80% LTV ratio. The lender is charging the normal loan origination fee and is lending the money at 1.5 discount points. Bill and Betty pay an attorney $400 to handle the closing, and they must also pay for the excise tax. How much money will the lender be paid in fees?
Andy purchased a new home for $180,000. He paid 20% down and financed the balance at 9% for 30 years. Two discount points are charged. How much money will Andy actually pay at closing for the two discount points?
The lender is willing to make an 80% loan on the purchase of a home. The home is listed at $190,000. The purchase price is $175,000, and the appraised value of the home is $180,000. How much is the buyer's down payment?
Under a contract for deed, the title to the property is held by the:
(A contract for deed is not the standard Offer to Purchase and Contract. It is an arrangement where the buyer will make payments to the seller and the seller retains title. The seller is referred to as the vendor and the buyer is the vendee.)
A mortgagor is the one who:
A) gives the mortgage
B) holds the mortgage
C) provides the mortgage funds
D) forecloses on the mortgage
Gives the mortgage
The mortgagor is the borrower and they give a right or interest in the property to the bank/lender who is referred to as the mortgagee.)
A contract for deed provides for the:
A) sale of unimproved land only
B) sale of real property under an option agreement
C) conveyance of legal title at a future date
D) immediate transfer of reversionary interests
Conveyance of legal title at a future date
(A land installment contract, land contract or contract for deed is an agreement where the buyer is makng payments to the seller and the seller retains title. Title will be transferred to the buyer at some future date, usually with completion of the last payment.)
A homebuyer recently financed his first home with a fixed-rate conventional loan. The type of interest he will pay over the life of the loan is probably:
A) simple interest
B) variable interest
C) compound interest
D) discounted interest
(Interest charged on home loans is typically simple interest, as opposed to compound interest. Simple interest means that interest in being charged only the amount of the outstanding principal balance.)
The loan amount expressed as a percentage of the value of the real estate offered as collateral is the:
A) amortization ratio
B) loan-to-value ratio
C) debt-to-equity ratio
D) capitalization ratio
(The loan-to-value (LTV) ratio is the percentage of the loan as measured against the property's value. The difference between the LTV and the value of the property is referred to as equity.)
A homebuyer financed his home five years ago with a high loan-to-value, fixed-rate loan. Due to a job transfer, the owner must move, but his home has suffered significant depreciation in value since purchase. Which of the following would be the least acceptable contractual obligation to handle the disposition of the property?
A) ask the lien holder to participate in a short sale transaction
B) utilize other assets to make up the shortfall between the outstanding mortgage loan balance and the proceeds
C) abandon the house and stop making the payments
D) convert the house into a rental property and use the rent to make the mortgage payments
abandon the house and stop making the payments
(A borrower who has a home where the value of the home is less than the amount of liens on the property has many options, but is still obligated to pay the debt to the lender. If the borrower simply abandons the home, the lender will likely foreclose and the borrower may be subject to a deficiency judgment.)
An existing mortgage loan can have its lien priority lowered through the use of a:
A) hypothecation agreement
B) satisfaction of mortgage
C) subordination agreement
D) reconveyance of mortgage
(A subordinated loan is a junior loan with superior loans in higher lien position. A lender in a higher lien position can agree to subordinate their loan to a lower priority.)
If the monthly interest payment at 6% is $1,050, the principal amount of the loan is:
( 1,050*12=12,600<--annual interest
The purpose of a mortgage is to:
A) provide security for loan
B) convey title of the property to the lender
C) restrict the borrower's use of the property
D) create a lien on the property
Provide security for the loan
(When money is borrowed the borrower signs a promissory note to repay the debt. The promissory note is secured by a collateral or securitizing document called a mortgage.)
The clause in a deed of trust or mortgage that permits the lender to declare the entire unpaid balance immediately due and payable upon default by the borrower is the:
A) alienation clause
B) escalator clause
C) forfeiture clause
D) acceleration clause
(Acceleration means pay all of the money due immediately. Acceleration occurs when a borrower defaults on a loan and the lender is no longer willing to accept the late payments. The lender is requiring the borrower to pay off the full amount of the loan rather than bring it current)
A building was sold for $115,000. Down payment was made in the amount of $15,000 and deposited in escrow. The buyer obtained a new loan for the balance of the purchase price. The lender charged two discount points. What was the total amount charged to the buyer for points in this purchase?
When a mortgage loan has been paid in full, it is important for the borrower to be sure that:
A) the paid note is place in a safe deposit box
B) a deed of partial reconveyance is obtained
C) the paid mortgage is returned to the seller
D) the satisfaction of mortgage is recorded
The satisfaction of mortgage is recorded
(When a promissory note is supported by a mortgage the payoff document that the mortgagee provides to the the mortgagor is called a satisfaction of mortgage. The satisfaction of mortgage should be recorded to evidence the release of the lender's right or interest in the collateral.)
The right a grantor has to regain property ownership by paying the debt after a foreclosure sale is called:
A) equity right of redemption
B) statutory right of redemption
Statutory right of redemption
(When trust deeds are utilized to secure a debt, the grantor (trustor/borrower) has a right to regain the property at any time prior to the sale by paying the full debt. This is called an equity right of redemption. There is also a 10 day statutory right of redemption after the sale.)
The defeasance clause in a deed of trust requires the trustee in a specified situation to execute:
A) an assignment of mortgage
B) a deed of reconveyance
C) a satisfaction of mortgage
D) a partial release agreement
A deed of reconveyance
(Defeasance comes from the word defeated. The defeasance clause states that if the borrower repays the debt then the lender's interest in the property is defeated. The payoff document used in conjunction with a deed of trust is called the deed of reconveyance.)
Pledging property as security for repayment of a loan without giving up possession is known as:
(Hypothecation occurs in every lending situation. It means that the borrower has pledged the property as collateral for the loan without giving up rights of use or possession. The borrower retains legal title to the property.)
When a borrower makes regular interest payments to the lender in a construction loan and at the end of the loan must repay the entire loan balance, the term that best describes this type of a loan is:
D) negative amortization
(A term loan is also known as a straight loan or an interest only loan. Most construction loans are term or interest only loans)
The primary obligation of a borrower under a promissory note that is signed in regard to real property is to:
A) keep the property insured
B) obtain permission from the lender prior to any improvements
C) pay the debt
D)follow certain procedures regarding the collateral in the event of default
Pay the debt
(The promissory note is the evidence of the debt and obligates the borrower to repay the loan. All of the terms and conditions that relate to payment of the debt; interest rate, loan amount, payment are all contained in the promissory note.)
The borrower utilizing a trust deed is best referred to as the:
(When a trust deed (or deed of trust) is utilized the borrower is referred to as the trustor, the bank is the beneficiary and the trustee is a neutral third party who holds the power of sale.)
In a title state, what is the process for initiating a foreclosure?
A) the filing of a lawsuit by the mortgagee
B) the filing of a lawsuit by the trustee
C) the beneficiary instructing the trustee to deliver proper notices and set a sale date
D) the trustee instructing the beneficiary to deliver proper notices and set a sale date
the beneficiary instructing the trustee to deliver proper notices and set a sale date
(A title state is a state which utilizes deeds of trust. The foreclosure of a trust deed begins with the lender (beneficiary) instructing the trustee to deliver a notice of default and a notice of sale)
An eligible veteran made an offer of $52,000 to purchase a home contingent upon his obtaining a 100% VA-guaranteed loan. Four weeks after the offer was accepted, a CRV for $50,000 was issued, and the veteran was found to be qualified for a VA loan. In this case,
l. The veteran may withdraw from the transaction without penalty.
ll. The veteran may purchase property by making a $2,000 down payment.
A) I only
B) II only
C) both I and II
D) neither I nor II
Both I and II
(In both FHA and VA loans the borrower has a right to withdraw from the transaction without penalty if the property does not appraise. This is called an Exculpatory or Escape clause under federal loan. The borrower can also agree to close the transaction and pay the difference between the appraisal and the purchase price at closing. The borrower could also attempt to renegotiate the purchase price with the seller.)
A) originates FHA loans in the primary mortgage market
B) purchases FHA loans in the secondary mortgage market
C) provides farm loans
D) provides funds for FHA loans
purchases FHA loans in the secondary mortgage market
(FNMA, the Federal National Mortgage Association, also known as Fannie Mae operates in the secondary market where loans are bought and sold.)
The type of real estate loan that allows the borrower to increase the outstanding balance of a loan up to a predetermined sum set by the lender and receive periodic additional funds is referred to as what type of financing?
C) going equity
D) graduated payment
(This is called a home equity line of credit, an open-end mortgage or a HELOC.)
The Truth in Lending Act sets forth requirements regarding real estate loans to individuals for all of the following purposes, EXCEPT:
A) equity lines of credit
B) commercial purposes
C) additions to residential properties
D) installation of a backyard swimming pool
(The Truth in Lending Act (aka TILA or Regulation Z) applies to loans on 1-4 family residential properties, but does not apply to commercial loans, cash transactions or the purchase of vacant land.)
Which of the following statements is TRUE?
A) The priority of a mortgage is determined by the execution date.
B) A mortgage document contains no covenants on the part of the borrower.
C) A deed of trust is typically conveyed by the trustor to the beneficiary.
D) A promissory note has to be in writing to be enforceable, but it is not normally recorded.
A promissory note has to be in writing to be enforceable, but it is not normally recorded.
(Promissory notes are in writing. They are usually not recorded. While the Promissory Note is not typically recorded both the mortgage and the deed of trust are recorded to evidence the lender's lien on the property.)
A borrower obtained a $7,000 second mortgage loan for five years at 6% interest per annum. Monthly debt service payments were $41.97 on a 30 year loan. The final payment included the remaining outstanding principal balance. What type of loan is this?
A) a fully amortized loan
B) a straight loan
C) a partially amortized loan
D) an accelerated
A fully amortized loan
(This is a fully amortized loan because each payment includes a portion of principal and interest so that the loan is fully repaid with the last payment over the 30 year amortized period.)
A loan from the seller to a buyer that allows the buyer to complete the transaction is called a:
A) growing equity mortgage
B) purchase money mortgage
C) package mortgage
D) blanket mortgage
Purchase money mortgage
(A seller may provide all or part of the financing for a purchase. This may be called seller financing, a seller carryback or a purchase money mortgage. The seller is acting as the lender and the borrower will execute a promissory note and a mortgage or deed of trust between the seller and the buyer.)
Presume the interest rate on an FHA-insured mortgage loan to be 6.5% with a current monthly interest payment of $846. What would be the current principal?
Which of the following is NOT a required chief disclosure for compliance with the Truth in Lending Act?
A) loan-to-value ratio
B) annual percentage rate
C) total of all finance charges
D) total amount financed
(The Truth in Lending Act requires the disclosure of the true costs of obtaining credit. It is also known as TILA or Regulation Z. It includes the disclosure of the APR, the finance charges and the total amount financed. It does not include disclosure of the LTV.)
Regulation Z applies to:
A) all cash transactions
B) credit transactions secured by a residence
C) loans in excess of $25,000 secured by commercial properties
D) the sale of vacant land financed with a purchase money mortgage
Credit transactions secured by a residence
(TILA is a federal law that applies to financing on 1-4 unit residential properties)
Using the 28/36 ratios, how much annual income must the borrower have to qualify for a $98,000 loan at 8% for 30 years if the proposed P&I payments will be $719.32, taxes and insurance will be $135 per month and the borrower's other monthly recurring debts total $500?
854.32/.28<--monthly income needed for housing-28%
1,354.32/.26=3,762 monthly income needed for debt-36%
3,762*12=45,144<--annual income needed)
The Federal Home Loan Mortgage Corporation was established as a secondary mortgage market entity to assist the:
A) Federal Housing Administration
B) Federal National Mortgage Association
C) the Wall Street derivatives market
D) federal banks in selling mortgage obligations
Federal banks in selling mortgage obligations
(FHLMC is the Federal Home Loan Mortgage Corporation better known as Freddie Mac. It exists in the secondary market where mortgage obligations are bought and sold.)
A buyer obtained a 30-year fixed rate loan for $72,000 at a 5% annual interest rate. If the monthly debt service payment is $386.64, how much interest rounded to the nearest dollar would the buyer pay over the lifetime of the loan?
(The borrower will pay the lender a total of $139,190.40 ($386.64 x 360). Of the $139,190.40 paid, $72,000 was for repayment of the principal. $139,190.40-$72,000 = $67,190.40 (rounded to $67,190).)
Last month's debt service payment included $412.50 interest on a $60,000 loan balance. What is the annual rate of interest?
($412.50 x 12 = $4,950 annual interest. $4,950 divided by $60,000 = .0825 (8.25%))
A lender is charging a below market interest rate of 6.5% with 6 discount points. What is the lender's effective rate of interest?
(Each discount point represents a .125 yield. 6 points x .125 = .75. The lender's effective rate of interest is 6.5% + .75% = 7.25%)
Bill & Betty received $19,000 from the sale of their house to apply to a new townhome costing $90,000. They assumed an existing mortgage of $49,500 and borrowed $24,000 at 12% to be secured by a second mortgage. The lender charged them a 1/2% assumption fee, a 2% origination fee on the second mortgage and 5.5 points on the new loan. How much was the lender paid in fees?
(The assumption fee is charged on the loan that they assumed. $49,500 x .005 (1/2%) = $247.50. Both the origination fee and the points are paid on the new loan of $24,000. $24,000 x 2% = $480. $24,000 x 5.5% = $1,320. Their total lender fees are $247.50 + $480 + $1,320 = $2,047.50.)
The type of loan that will most likely have the highest loan-to-value ratio is a:
A) VA loan
B) FHA loan
C) assumption loan
D) conventional loan
(VA loans involve a 100% LTV with no required downpayment from a qualified veteran)
Which of the following terms may appear in an advertisement for a real estate loan without triggering Regulation Z full disclosure requirements?
A) "$499 monthly payments"
B) "only one penny down"
C) "8% interest rate or lower"
D) "assumable mortgages available"
"assumable mortgages available"
(The advertising regulations of TILA require disclosure of the APR when any term of the loan is used in the advertising. An assumable loan does not involve a new loan and there is no term of the loan provided so this statement is not regulated by TILA.)
A developer had a mortgage loan on an entire development. When a lot was sold to the buyer, the developer was able to deliver title to that lot free of the mortgage lien by utilizing a partial release. What type of loan did the developer have?
A) blanket mortgage
B) purchase money mortgage
C) package mortgage
D) open-end mortgage
(A blanket loan is a loan that covers more than one property. They are commonly used in real estate development and often contain a release or partial release clause to release parcels from the loan in exchange for a specified reduction in the loan's principal balance.)
In a title theory state, a borrower's default could result in the collateral property being sold at auction as part of a:
A) judicial foreclosure
B) non-judicial foreclosure
C) deed in lieu of foreclosure
D) strict foreclosure
(The trustee would begin the sale at the direction of the beneficiary since the trustee holds the power of sale pursuant to the deed of trust.)
What type of loan includes the financing of both real and personal property?
(A package loan is a loan that covers both real and personal property. They are most commonly used in commercial transactions where the sale of a business is involved and the buyer acquires both real estate and personal property necessary to operate the business.)
James earns $46,000 per year and his wife Judy earns $60,000 per year. Recurring obligations include monthly credit card payments of $800 and automobile loan payments of $650. The couple has a monthly grocery bill of approximately $400 and monthly medical expenses that average $200. What is the maximum monthly mortgage payment (principal and interest) that this couple can qualify for using an expense-to-income ratio of 28% of gross income for housing and 36% for housing expenses plus recurring obligations?
(Their gross monthly income is $8,833 ($46,000 + $60,000 = $106,000 divided by 12). The maximum housing payment is $2,473.33 ($8,833.00 x .28). Their total maximum debt allowance is $3,179.88 ($8,833x.36). From their total debt obligations they must deduct the $800 in credit card payments and the $650 in auto loans. The medical bills and groceries are not counted in recurring debt. $3,179.88-$800-$650 = $1,729.88 remaining for housing. This is the answer because they must meet both ratios.)
Using the 28/36 ratios, how much annual income must the borrower have to qualify for a $98,000 loan at 8% if the proposed P&I payments will be $719.32, taxes and insurance will be $135 per month, and the borrower's other monthly recurring debts total $500?
(The total housing obligation is $854.32 ($719.32 + $135.00). $854.32 divided by .28 = $3,051.24 monthly income or $36,613.71 annually. The total debt including the housing is $854.32 plus $500 = $1,354.32. $1,354.32 divided by .36 = $3,762 monthly or $45,144 annually. The borrower must qualify for both ratios, so they will need $45,144 annually.)
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