Unit 12 Quiz Questions

Question 1

A couple are married, 65 years old, and retired. They have almost $800,000 in equity in their home, but limited pension income which doesn’t provide enough cash to travel as they have always dreamed of doing. The couple should consider which of these financing alternatives?

a. Novation
b. An adjustable-rate mortgage
c. A reverse mortgage
d. A growing equity mortgage

Answer 1

A reverse mortgage

A reverse mortgage allows a homeowner aged 62 or older to borrow money against the equity built up in the home. The money may be used for any purpose and is not repaid until
the homeowner(s) die or move out of the home

Question 2

A document that indicates that a loan has been made is called a

a. promissory note.
b. mortgage.
c. deed of trust.
d. satisfaction

Answer 2

Promissory Note

The evidence that a loan has been made is found in the promissory note. A mortgage or deed of trust provides security for the loan. A satisfaction or release indicates that the loan has been repaid in full.

Question 3

A homeowner defaults on a mortgage and the lender forecloses. The lender’s foreclosure suit is filed on March 15, and a court-ordered sale is to occur on August 10. If the homeowner attempts to redeem the property on August 1, which of these statements applies?

a. The homeowner is exercising a statutory right of redemption.
b. The homeowner is exercising an equitable right of redemption.
c. The homeowner’s attempt to redeem the property is too early; by statute, the homeowner
must wait until after the sale.
d. The homeowner cannot redeem the property after a foreclosure suit is filed

Answer 3

The homeowner is exercising an equitable right of redemption.

The homeowner has an equitable interest in the property until the foreclosure sale is complete; thus, the homeowner has the right to exercise the equitable right of redemption. In
some states, the homeowner may retain a statutory right of redemption for a period of time after the foreclosure sale.

Question 4

A house is listed for $250,000. It is purchased for $230,000, with a 20% down payment and the balance financed with a fixed-rate mortgage at 5%. The lender charges four points. If there
are no other closing costs involved, and the buyer made an earnest money deposit of $2,000, how much money does the buyer need at closing?

a. $7,360
b. $26,000
c. $46,000
d. $51,360

Answer 4

$51,360

The buyer needs $51,360 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
(4) Subtract the earnest money deposit: $53,360 - $2,000 = $51,360.

Question 5

One afternoon, a client calls a real estate broker. “My lender just told me that my note and mortgage is a negotiable instrument,” says the client. “What does that mean?” Which of these
would be the broker’s BEST response?

a. “That’s great! It means the lender is willing to negotiate on the interest rate.”
b. “Oh no! That means the mortgage can’t be assumed by the next person you sell to.”
c. “Don’t worry. That means the mortgage can be sold by the lender, but your terms are not
affected.”
d. “Uh-oh! That means we have to go back to the sellers and ask them to pay the points.”

Answer 5

“Don’t worry. That means the mortgage can be sold by the lender, but your terms are not affected.”

Negotiable instruments are transferable. A note and mortgage will often be sold on the secondary market

Question 6

A deed of trust involves all of these terms EXCEPT

a. lender.
b. borrower.
c. trustee.
d. mortgagor.

Answer 6

Mortgagor

A mortgagor is the borrower in a mortgage. In a deed of trust, the borrower is the trustor, and the trustee holds naked title in trust for the beneficiary (lender).

Question 7

In a lien theory state a buyer purchases property and gives the seller a mortgage as part of the purchase price. The buyer is the borrower and the seller is the lender. Which of these
statements is true?

a. The buyer retains only equitable title to the property.
b. If the buyer defaults on the loan, the seller always must undergo a formal foreclosure
proceeding to recover the security.
c. The buyer has given legal title to the seller.
d. The seller has only a lien interest in the property.

Answer 7

The seller has only a lien interest in the property.

In a lien theory state, a borrower who gives a mortgage, even in the seller financing situation described in this question, retains both equitable and legal title to the property serving as
security. A mortgage may provide a power of sale to the lender in the event of borrower default

Question 8

A basic form homeowners insurance policy provides coverage against

a. floods.
b. fire, lightning, and smoke damage.
c. damage due to the weight of ice, snow, or sleet.
d. falling objects.

Answer 8

Fire, lightning, and smoke damage.

A basic form policy covers fire, lightning, and smoke damage, among other hazards. A broad-form policy generally covers the hazards of falling objects and damage due to the weight of
ice, snow, or sleet. Flood is covered under a separate flood insurance policy.

Question 9

A mortgage company charges borrowers a 1.5% loan origination fee. A house is purchased for $210,000, with a $50,000 down payment. The buyer applies for a mortgage to cover the
balance. What will the mortgage company charge as a fee if the asking price of the house was $235,000?

a. $2,400
b. $3,150
c. $3,525
d. $3,750

Answer 9

$2400

The loan origination fee is $2,400: $210,000 – $50,000 × 1.5% = $2,400. The asking price is not relevant to this problem.

Question 10

A mortgage document contains the clause: “In the event of Borrower’s default under the terms of this Agreement, Lender may declare the entire unpaid balance of the debt due and payable immediately.” This clause is called

a. a hypothecation clause.
b. an acceleration clause.
c. a defeasance clause.
d. a release clause.

Answer 10

An Acceleration Clause.

Hypothecation is the act of offering the property as security without giving up possession. The defeasance clause in a mortgage requires the lender to execute a satisfaction of mortgage when the note has been fully paid. A release indicates that the loan has been repaid in full.

Question 11

This month, a homeowner made the last payment on a mortgage loan. The lender must execute a

a. release deed.
b. promissory note.
c. possessory note.
d. satisfaction of mortgage.

Answer 11

Satisfaction of Mortgage

The promissory note shows that a loan was made. The satisfaction indicates that the loan was fully repaid. Satisfaction of mortgage is also sometimes called a release, but not a release
deed.

Question 12

A growing equity mortgage is also called a

a. straight loan.
b. balloon payment loan.
c. rapid-payoff mortgage.
d. reverse mortgage.

Answer 12

Rapid-Payoff Mortgage

A growing equity mortgage is also called a rapid-payoff mortgage because the interest rate remains the same but the principal payments increase over the loan term.

Question 13

A buyer purchases property 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, unless state law provides anti-deficiency protection,
who is liable, and for what amount?

a. The seller is solely liable for $23,500.
b. The buyer is solely liable for $23,500.
c. The buyer and the seller are equally liable for $23,500.
d. The buyer is solely liable for $30,000.

Answer 13

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 14

The decision whether to buy or rent should involve consideration of

a. whether or not the property is located in a title theory state.
b. the terms of the security agreement.
c. housing affordability and current mortgage interest rates.
d. the availability of a reverse mortgage.

Answer 14

Housing affordability and current mortgage interest rates

Other considerations include tax consequences, what might happen to home prices in the future, and a person’s overall financial situation.

Question 15

A borrower defaulted on a mortgage loan, leaving an unpaid balance of $95,000. After receiving only $85,000 from the sale of the property, the lender filed for a

a. lis pendens.
b. release deed.
c. satisfaction piece.
d. deficiency judgment.

Answer 15

Deficiency Judgment

A deficiency results when the foreclosed property does not bring enough money to fully repay the loan; the mortgagor may be entitled to a personal judgment against the borrower for the unpaid balance. Lis pendens gives notice that the property is the subject of legal action. A satisfaction indicates that the loan was fully repaid.

Question 16

The owner of a parcel of property defaulted on the purchase loan and the trustee immediately sold the property to recover the debt. The trustee acted under the terms of the security
instrument. Based on these facts, which of these statements is TRUE?

a. The exercise of this power of sale clause is an example of strict foreclosure.
b. The trustee’s sale of the property was illegal unless the owner’s state permits a so-called
friendly foreclosure.
c. The exercise of this power of sale clause is an example of nonjudicial foreclosure.
d. The owner could have exercised the statutory right of redemption at any time prior to the
trustee’s sale of the property.

Answer 16

The exercise of this power of sale clause is an example of nonjudicial foreclosure.

Strict foreclosure and friendly foreclosure do not involve a sale. The statutory right of redemption applies only after the sale. A nonjudicial foreclosure does not involve the courts.

Question 17

The difference between the interest rate that the lender charges and what the investor demands can be made up by charging

a. discount points.
b. loan origination fees.
c. satisfaction fees.
d. underwriting fees

Answer 17

Discount Points

Loan origination fees are charged to cover the cost of making the loan. The satisfaction indicates that the loan has been fully repaid.

Question 18

What is the term that refers to a lender charging an interest rate that is higher than that permitted by law?

a. Alienation
b. Usury
c. Hypothecation
d. Defeasance

Answer 18

Usury

To protect consumers from unscrupulous lenders, many states have enacted laws limiting the interest rate that may be charged on loans.

Question 19

Parties to lending agreements are referred to by different terms. Which of these refers to the same party?

a. Borrower = beneficiary
b. Borrower = mortgagor
c. Trustee = borrower
d. Trustor = mortgagee

Answer 19

Borrower = mortgagor

The person who makes the payments to repay the loan is called the borrower. The person who gave the property as security is called the mortgagor. Both are the same person.

Question 20

The lender wants to call the entire note due and payable if the borrower stops making payments, so the security instrument must include

a. an acceleration clause.
b. a defeasance clause.
c. an alienation clause.
d. a prepayment clause.

Answer 20

An acceleration clause

The acceleration clause permits the lender to declare the entire note due upon default by the borrower. The alienation clause is also called the due on sale clause, permitting the lender to
declare the entire note due if the property is sold, thus preventing a loan assumption.

Question 21

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

a. The borrower
b. The lender
c. The devisee
d. The county government

Answer 21

The lender

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

Question 22

Lenders charge a loan origination fee to

a. guard against charges of usury.
b. cover the losses involved if the borrower repays the loan before the end of the loan term.
c. cover the expenses involved in generating the loan.
d. guard against losses in the event of a short sale.

Answer 22

Cover the expenses involved in generative the loan.

The processing of a mortgage application is called loan origination. When a home loan is originated, a loan origination fee is charged by most lenders to cover the expenses involved in generating the loan.

Question 23

How does an acceleration clause help lenders?

a. Without the acceleration clause, lenders would have to sue the borrower for every overdue payment.
b. Lenders would rather foreclose on property than hold a long-term loan.
c. It results in a deed in lieu of foreclosure rather than the default process.
d. It sets out the provisions for the impound account.

Answer 23

Without the acceleration clause, lenders would have to sue the borrower for every overdue payment.

A lender’s purpose is to make long-term loans, not foreclose. The impound account is set up under a different provision of the loan.

Question 24

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

a. The purchaser pays off the mortgage after the sale, but the junior lienholders receive nothing.
b. The mortgage holder receives funds from the sale, but the purchaser must pay off the junior lienholders to obtain title.
c. The purchaser must pay off both the mortgage and junior lienholders after the sale.
d. The purchaser has no responsibility because the purchaser receives the property title unencumbered by the mortgage and junior liens.

Answer 24

The purchaser has no responsibility because the purchaser receives the property title unencumbered by 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, unpaid creditors can seek a deficiency judgment against the original owner for the remaining debt. The purchaser is not involved unless the purchaser is a mortgage or lienholder.

Question 25

What is a major consideration for a lender accepting a deed in lieu of foreclosure?

a. The lender takes the real estate subject to all junior liens.
b. The lender gains rights to private mortgage insurance.
c. The process is lengthy and involves a lawsuit.
d. It is an adverse element in the borrower’s credit history.

Answer 25

The lender takes the real estate subject to all junior liens.

The lender loses rights to FHA or private mortgage insurance or VA guarantees. The process is called friendly foreclosure because a lawsuit is not involved. It is an adverse element for
the borrower, but that does not affect the lender.

Question 26

A charge of three discount points on a $120,000 loan equals

A. $450.
B. $3,600.
C. $4,500.
D. $116,400.

Answer 26

$3600

The answer is $3,600. A point is 1 percent of the amount borrowed (the loan amount). Three points would be three times as much: 3% × $120,000 = $3,600.

Question 27

A prospective buyer needs to borrow money to buy a house. The buyer applies for and obtains a real estate loan from a mortgage company. Then the buyer signs a note and a mortgage. In this example, the buyer is called

A. the mortgagor.
B. the beneficiary.
C. the mortgagee.
D. the vendor.

Answer 27

The mortgagor

The answer is the mortgagor. A buyer who signs a mortgage—the document to be given to the lender—is a mortgagor. The buyer is also the maker (obligor) on the note.

Question 28

A prospective buyer needs to borrow money to buy a house. The buyer applies for and obtains a real estate loan from a mortgage company. Then the buyer signs a note and a mortgage. In this example, the mortgage company is

A. the mortgagor.
B. the beneficiary.
C. the mortgagee.
D. the vendor.

Answer 28

The mortgagee

The answer is the mortgagee. Because it receives the mortgage document, the mortgage company is the mortgagee.

Question 29

The borrower under a deed of trust is known as

A. the trustor.
B. the trustee.
C. the beneficiary.
D. the vendee.

Answer 29

The trustor

The answer is the trustor. A borrower gives a deed of trust to a trustee and a note to the lender, thus becoming a trustor on the deed of trust and a maker—or obligor—on the note. The deed is held by the trustee, and the lender is the beneficiary of the trust.

Question 30

A loan in which the borrower makes only interest payments is called

A. a fixed-rate loan.
B. an adjustable-rate mortgage.
C. a straight loan.
D. a reverse mortgage

Answer 30

A straight loan.

The answer is a straight loan. A straight loan (also known as a term loan or interest-only loan) essentially divides the loan into two amounts to be paid off separately. The borrower makes periodic payments of interest only, followed by the payment of the principal in full at the end of the term.

Question 31

What type of law limits the interest rate that is allowed to be charged?

A. Trustee law
B. A usury law
C. The statute of frauds
D. Contract law

Answer 31

A usury law.

The answer is a usury law. A law that set limits on rates of interest that may be charged is a usury law. Usury is charging a higher interest rate than the law allows for a specific kind of loan. Federal law currently exempts federally related residential first mortgage loans from state usury laws.

Question 32

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?

A. Equitable redemption
B. Defeasance
C. Usury
D. Statutory redemption

Answer 32

Statutory Redemption

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.

Question 33

Which clause would give a lender the right to have all future installments become due upon default?

A. Escalation
B. Defeasance
C. Alienation
D. Acceleration

Answer 33

Acceleration

The answer is acceleration. The acceleration (speedup) clause allows the lender to declare the entire loan balance due upon borrower default. The alienation clause allows the lender to accelerate the balance due if borrowers alienate (transfer) their mortgaged property. The defeasance clause requires the lender to release its lien claim against the property when the entire debt has been paid.

Question 34

What document is available to the mortgagor when the mortgage debt is completely repaid?

A. Satisfaction of mortgage
B. Defeasance certificate
C. Deed of trust
D. Mortgage estoppel

Answer 34

Satisfaction of mortgage

The answer is satisfaction of mortgage. A document that indicates the mortgage has been fully paid off is a satisfaction of mortgage, sometime called a satisfaction piece.

Question 35

Who is entitled to a reverse mortgage?

A. A homeowner age 62 or older
B. The owner of an unencumbered home
C. A homebuyer who cannot qualify for a regular loan
D. An investor who rents a home only to senior citizens

Answer 35

A homeowner age 62 or older.

The answer is a homeowner age 62 or older. Reverse mortgages are available to homeowners age 62 or older.

Question 36

A loan that provides for the full payment of the principal over the life of the loan is

A. a reverse mortgage.
B. an indexed loan.
C. an amortized loan.
D. a balloon payment.

Answer 36

An amortized loan.

The answer is an amortized loan. An amortized loan is paid off in regular periodic payments that include both principal and interest over a term of years.

Question 37

The provision in a financing instrument thatrequires the lender to execute a satisfaction ofmortgage when a note has been fully paid is

A. a due-on-sale clause.
B. a defeasance clause.
C. an acceleration clause.
D. an alienation clause.

Answer 37

A defeasance clause.

The answer is a defeasance clause. A defeasance clause requires a lender to execute a satisfaction when the note has been fully paid.

Question 38

Which of the following allows a mortgagee to proceed to a foreclosure sale without going to court first?

A. Waiver of redemption right
B. Power of sale
C. Alienation clause
D. Possession rights

Answer 38

Power of Sale

The answer is power of sale. A power-of-sale provision in a mortgage permits the lender to foreclose and sell a mortgaged property that is in default without petitioning to get the court to conduct the sale. Nevertheless, the procedure is often supervised—although not conducted—by the court

Question 39

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?

A. Sue for damages
B. Sue for specific performance
C. Seek a judgment by default
D. Seek a deficiency judgment

Answer 39

Seek a deficiency judgment

The answer is 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 40

Discount points on a mortgage are computed as a percentage of

A. the selling price.
B. the loan amount.
C. the closing costs.
D. the down payment.

Answer 40

The loan amount.

The answer is the loan amount. Discount points are based on a percentage of the loan amount, not the purchase price.

Question 41

In one state, a lender holds a lien on real property offered as collateral for a loan. The borrower retains both legal and equitable title to real property. If the borrower defaults on the loan, the lender must go through formal foreclosure proceedings to recover the debt. This state can be BEST characterized as what kind of state?

A. Lien theory
B. Mortgage theory
C. Intermediate theory
D. Title theory

Answer 41

Lien theory

The answer is lien theory. This state is a lien theory state. The court is enlisted to order and oversee the mortgage foreclosure procedure

Question 42

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?

A.Lien theory
B. Mortgage theory
C. Intermediate theory
D. Title theory

Answer 42

Title theory

The answer is 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 43

A homebuyer has a mortgage that provides for increasing payments over the life of the loan so that it can be paid off earlier than would be the case with a regular amortized loan. The homebuyer has

A. a mortgage with power of sale.
B. a growing-equity mortgage.
C. a balloon payment loan.
D. a reverse mortgage.

Answer 43

A growing-equity mortgage

The answer is a growing-equity 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

Question 44

A junior lien may become first in priority if the original lender agrees to execute

A. a deed of trust.
B. a subordination agreement.
C. a second mortgage agreement.
D. a call clause.

Answer 44

A subordination agreement.

The answer is a subordination agreement. If the original (first mortgage) lender signs a subordination agreement, another loan made more recently (later) may be allowed to take first place; the original loan then drops to second place in priority

Question 45

A buyer purchased a home under an agreement that made the buyer personally obligated to continue making payments under the seller’s existing mortgage. If the buyer defaults and the court sale of the property does not satisfy the debt, the buyer will be liable for making up the difference. The buyer has

A. purchased the home subject to the seller’s mortgage.
B. assumed the seller’s mortgage.
C. benefited from the alienation clause in the seller’s mortgage.
D. benefited from the defeasance clause in the seller’s mortgage.

Answer 45

Assumed the seller’s mortgage

The answer is assumed the seller’s mortgage. Purchasers who buy a property and formally assume an existing mortgage debt become liable for any deficiency arising from a foreclosure sale. Purchasers who buy a property subject to an existing mortgage are not liable for such a deficiency; the original borrower is still liable for the debt.