Chapter 12

Question 1

What is Lien theory?

Answer 1

Florida is a lien theory state
Mortgage theory in which the borrower retains ownership of the home during the loan period

Question 2

What is title theory?

Answer 2

Mortgage theory where only the temporary ownership is conveyed to the borrower during the loan period

Question 3

What is a mortgage?

Answer 3

A document recorded by the lender that creates a lien against a property

Secures the promissory note

Question 4

What is a Deed of Trust?

Answer 4

Document used to convey temporary ownership in a title theory state

Question 5

Who owns the real estate property in a lien theory state?

Answer 5

The mortgagor (borrower)

Question 6

Who owns the real estate property in a title theory state?

Answer 6

The lender (mortgagee)

Question 7

What happens when a borrower defaults on the loan in a title theory state?

Answer 7

The lender can take possession of the property

Question 8

What happens when a borrower defaults on the loan in a lien theory state?

Answer 8

The lender can foreclose on the borrower’s property through a judicial process

Question 9

What is a promissory note?

Answer 9

Legal document that includes the borrower’s promise to pay according to the terms

Question 10

What is Hypothecation?

Answer 10

borrower put house as collateral as security for the loan

Question 11

Who is the mortgagor?

Answer 11

The borrower

Question 12

Who is the mortgagee?

Answer 12

The lender

Question 13

What are the requirements for a valid mortgage?

Answer 13

Must be in writing
Must be signed by the mortgagor
Must be for a valid contract
Must contain a legal description of the property
Must be witnessed by 2 people

Question 14

What does the mortgagor receive when their loan is paid in full in a lien theory state?

Answer 14

Letter of Satisfaction

Question 15

What is a defeasance clause?

Answer 15

Mortgage clause stating that if the borrower is performing as required (making payments on time), the lender cannot foreclose on the home

Question 16

What is a prepayment clause?

Answer 16

Mortgage clause that allows the borrower to pay the loan off early, avoiding interest that would have been paid

Question 17

What is the acceleration clause?

Answer 17

Mortgage clause that allows the lender to declare the outstanding loan balance immediately due whenever a default occurs

Question 18

What is the alienation clause? or due-on-sale clause

Answer 18

Mortgage clause that requires the borrower to pay off the entire loan balance whenever the property is sold

Question 19

What is an open-end clause?

Answer 19

Mortgage clause that permits the borrower to borrow additional funds based on the original mortgage after the loan balance is paid down, similar to a HELOC

Question 20

What is an escalator clause? or escalation clause?

Answer 20

Mortgage clause that allows the lender to increase the interest rate based on change in the use of the property, or consistently late payments

Question 21

What is a subordination clause?

Answer 21

Mortgage clause where a lender voluntarily agrees to allow a new mortgage to be placed in a superior lien position to a mortgage recorded earlier

Question 22

When is a subordination clause typically used?

Answer 22

Commonly used to finance vacant land when development is planned so the developer can obtain a construction loan to complete the project

Question 23

What is the receivership clause?

Answer 23

Mortgage clause used with income-producing properties where a trustee is appointed to manage the property and collect rents if the investor defaults

Question 24

What is the exculpatory clause?

Answer 24

Mortgage clause that limits the lender’s rights in a foreclosure to the amount received from the sale of the foreclosed property. Meaning, they can’t go after the borrower for the remaining portion.

Question 25

What is a release clause?

Answer 25

Mortgage clause for a loan covering more than one parcel of land, allowing individual parcels to be released from the original mortgage for a specified amount of money

Question 26

What is a right-to-reinstate clause?

Answer 26

Mortgage clause that gives a borrower the right to cure a loan that is in default by paying missed loan payments, accrued interest, and any fees

Question 27

What is the maintenance clause?

Answer 27

Mortgage clause that requires the borrower to maintain the property during the term of the loan to protect the property's value

Question 28

What is equity?

Answer 28

Difference between market value of a property and the amount the owner still owes on the mortgage

Question 29

What is an escrow account? (in a mortgage)

Answer 29

Lender's account for reserving funds collected from the borrower to pay insurance and property taxes

Question 30

What is PITI?

Answer 30

Principal, interest, taxes, insurance Monthly payment collected by the lender that includes the insurance and real estate tac in addition to the mortgage payment

Question 31

What is a loan origination fee?

Answer 31

One time administrative fee charged by the lender to cover the administrative costs of processing the loan

Question 32

What is the value of one point in a loan?

Answer 32

1% of the loan amount

Question 33

What are discount points?

Answer 33

Points paid by the borrower in exchange for a lower interest rate (1/

Question 34

What is the effective yield? in a mortgage

Answer 34

The rate the lender receives considering the cumulative effect of points paid, the amount of any discount, and the length of time the borrower keeps the loan

Question 35

What is mortgage underwriting?

Answer 35

Lender's process of risk evaluation to qualify the applicant and the property for a loan

Question 36

What is the Federal Equal Credit Opportunity Act (ECOA)?

Answer 36

Requires lenders to qualify every loan applicant on their own merit without discrimination based on race, color, religion, national origin, sex, marital status, age, or income from public programs

Question 37

What is a property appraisal? (for a mortgage)

Answer 37

Method by which property is evaluated to determine if there is sufficient value to support it being a collateral for the loan

Question 38

What is redlining?

Answer 38

Illegal practice of refusing to loan based on racial or economic factors of a certain neighborhood

Question 39

What is the criteria used by a lender when qualifying an applicant for a loan?

Answer 39

Credit history Income Assets

Question 40

What income ratios are used to evaluate a borrower's ability to repay the loan?

Answer 40

Housing expense ratio Total obligations ratio

Question 41

How do you calculate Housing expense ratio?

Answer 41

Monthly PITI / Monthly gross income

Question 42

How do you calculate total obligations ratio?

Answer 42

(Monthly PITI + other obligations) / Monthly gross income

Question 43

What are the maximum allowed expense ratios for a conventional loan?

Answer 43

28% housing expense 36% total obligations

Question 44

What are the maximum allowed expense ratios for an FHA loan?

Answer 44

31% housing expense 43% total obligations

Question 45

What are the maximum allowed expense ratios for a VA loan?

Answer 45

no max for housing (not calculated) 41% total obligations

Question 46

What is loan-to-value ratio used for?

Answer 46

To determine the lender's risk of loss The higher the LTV, the higher the risk to the lender

Question 47

How do you calculate the Loan to Value ratio?

Answer 47

Loan amount / purchase price (or appraised value)

Question 48

What is Novation?

Answer 48

Substituting the sellers name with the borrower's name on an assumed loan

Question 49

Who is responsible for repayment of an assumed mortgage without novation?

Answer 49

Primary responsibility: the buyer that assumed it Secondary: the seller that was the OG borrower

Question 50

Who is responsible for repayment of an assumed mortgage with novation?

Answer 50

The buyer

Question 51

Who is responsible for repayment of a mortgaged property that is sold subject to the mortgage?

Answer 51

The original borrower remains responsible for their loan

Question 52

What is an Estoppel certificate? or estoppel letter

Answer 52

Document obtained from the lender that verifies the current loan balance

Question 53

What is Default?

Answer 53

When a borrower fails to perform as agreed in the promissory note

Question 54

What is equity of redemption?

Answer 54

Right of a borrower to reinstate a loan by bringing the past due balance current before foreclosure

Question 55

What is statutory right of redemption?

Answer 55

Right of a borrower to reinstate a loan for up to 1 year after foreclosure Not recognized in Florida

Question 56

What is a foreclosure?

Answer 56

Enforcement of a mortgage by a lender Judicial process available to a lender when the borrower is in default

Question 57

What is Lis Pendens?

Answer 57

Court filing that gives notice that the property specified is the subject of litigation

Question 58

What is writ of execution?

Answer 58

Final order of the court in a foreclosure process

Question 59

What is a deficiency jugement?

Answer 59

Court filing available to lien holders who were not paid from the proceeds of the foreclosure sale

Question 60

What are the types of foreclosures?

Answer 60

Strict Foreclosure - nor used in FL Judicial Foreclosure Deed in lieu of foreclosure

Question 61

What is deed in lieu of foreclosure

Answer 61

Borrower in default voluntarily deeds a property to a lien holder in lieu of payment