FP- CHAPTER 12

Question 1

What is the difference between a mortgage and a chattle mortgage?

Answer 1

A mortgage is on real property (land/house) whereas a chattle mortgage is taken over moveable property (car/mobile home)

Question 2

Mortgagor

Answer 2

Is the borrower

Question 3

Mortgagee

Answer 3

Is the lender

Question 4

Define equity as it relates to home ownership

Answer 4

The value that the owner has in the property. (fair market value- outstanding debt)

Question 5

If a mortgager has both a first and second mortgage, when would the second mortgage become a first mortgage?

Answer 5

A second mortgage becomes a first mortgage once the first mortgage is paid off and discharged.

Question 6

How do first and second mortgages differ?

Answer 6

When both first and second mortgage exist, the first mortgage ranks ahead of the second which means they get paid first if the house is foreclosed on and sold

Question 7

Why do second mortgages carry higher interest rates?

Answer 7

Because there is more risk to a second mortgage. In the event of a foreclosure and “forced sale”, the house may not sell for full falue and there may not be enough $ to pay both mortgages. The second mortgage will be the one not paid in full

Question 8

What risk does mortgage insurance cover?

Answer 8

Default by the borrower

Question 9

What is a conventional mortgage?

Answer 9

An un-insured mortgage. Also called low-ration (Down payment of 20% or more)

Question 10

What is the maximum amount of mortgage financing provided by financial institutions when the mortgage will be insured by CMHC?

Answer 10

95% max for first time home buyers. and 90% for others, but there are products available that will allow 0% down with some lenders for some clients.

Question 11

How is CMHC mortgage insurance financed?

Answer 11

The borrower pays for CMCH insurance. The cost is usually 2.5%-5% of the amount borrowed. The amount charged depends on the % of the total house value being borrowed. This fee can be added to the mortgage. It is the only cost that can be added to the mortgage.

Question 12

Clients often complain about the fact that they must pay for insurance that provides risk coverage to the lender. How might you justify this cost to them?

Answer 12

Without this insurance financial institutions would not be able to take on the risk of lending such a high % of the purchase price. Therefore, people who could not afford 20% down would not be able to buy a house

Question 13

What is a high ratio loan?

Answer 13

Any mortgage 80% of the house value or more

Question 14

What does it mean for a purchaser to assume the mortgage of the vendor?

Answer 14

The purchaser takes over the existing mortgage from the current owner. Current payment arrangements, interest rates, term and amortization remain in tact.

Question 15

What risk does the vendor take when the purchaser assumes the mortgage of the vendor?

Answer 15

The risk here is that the purchaser will default on the payments to the bank and the vendor will still be responsible

Question 16

When might it be advantageous for a vendor to offer this option to a purchaser? (have them assume the mortgage of the vendor)

Answer 16

This type of arrangement is beneficial to sellers in markets when rates are very high and they have a good rate in pace on their mortgage.

Question 17

What service does a mortgage broker offer?

Answer 17

They match up borrowers and lenders for a fee. The lender usually pays this fee to the broker however in some circumstances when no lender can be found for the applicant the borrower may be charged a fee.

Question 18

When a mortgage application is considered, both the borrower and the property must be approved. How is the approval reached in each case?

Answer 18

Borrower – Credit history, income, assets and debts, are considered along with Employment history and TDSR / GDSR.

Property – Appraisal confirms house value

Question 19

Differentiate between TDSR and GDSR.

Answer 19

GDSR - % of buyer’s annual gross income needed to cover mortgage payment and taxes.

TDSR - % of buyer’s annual gross income needed to cover mortgage payment, taxes, heat and credit payments.

Question 20

Regardless of whether the mortgage is insured or not, a down-payment is required. What might a lender have to do regarding the down-payment?

Answer 20

The book advises that the lender may have to verify the down-payment came from the borrower’s own resources, but there are products now where the banks can lend the down-payment. All that is required is that the borrower’s TDSR be within the maximum limit including the repayment of any loan for the down-payment.

Question 21

What is the equity of redemption?

Answer 21

The borrower’s right to redeem the property and have ownership transferred back when the mortgage is paid in full and discharged.

Question 22

What are four covenants that may be made by the borrower through signing the mortgage document?

Answer 22

1) To keep taxes paid up to date
2) To insure the property
3) To maintain the property in good repair
4) The personal covenant – To pay principle and interest

Question 23

Why is it so important to the lender that property taxes be paid up to date?

Answer 23

Because taxes are a prior claim on property and take precedence over a first mortgage.

Question 24

What requirement may be made with regard to insurance on the home?

Answer 24

The mortgagee may require insurance for Fire and other possible risks and it will probably be required that the insurance company show the Financial Institution as lender so that in the event the house burns in a fire the mortgage would be paid first before any $ would be given to the homeowner

Question 25

When a mortgagor fails to carry out any of the promises agreed to in the mortgage contract, they are considered in default. In what five ways may the mortgagor default?

Answer 25

a) Not making payments on time b) Not paying taxes c) Not maintaining insurance on the property d) Failure to Maintain the property in good condition e) Selling the property without permission

Question 26

When is a mortgage discharge requested? What is done with the discharge?

Answer 26

It is registered with Land Titles.

Question 27

What is the difference between the term and amortization period?

Answer 27

Term – The length of time before the lender can demand payment in full. This is the period for which the interest rate is in effect. Amortization- Total time allowed to repay the mortgage

Question 28

When does the maturity date fall? What happens at this point in the contract?

Answer 28

The maturity date falls at the end of the term At this point the balance of the mortgage is renegotiated. (New term, interest arte, amortization or paying off in full with cash or another mortgage)

Question 29

Can a borrower change banks or lending institutions during the life of their mortgage? When?

Answer 29

Yes a borrower can change banks without penalty at the maturity date of the mortgage. They can do so anytime but a penalty will be imposed if the maturity date has not been reached.

Question 30

What is the difference between an open and closed mortgage?

Answer 30

An open mortgage allows prepayment and early payout at any time A closed mortgage does not. In reality, closed mortgages usually allow a certain percentage prepayment with no penalty (usually 10% of the amount borrowed can be paid extra per year)

Question 31

26) When is a prepayment penalty levied? Why do lenders charge them? Generally how are they calculated?

Answer 31

A prepayment penalty is levied when a prepayment is made in excess of the allowable amount (ex: 10%) This penalty is charged to help the lender recoup their lost interest The penalty is usually 3 months interest or the interest differential

Question 32

List four costs that may be paid by the borrower at closing

Answer 32

1) Cost to purchase the house 2) Legal fees 3) Taxes (GST, HST, Property Tax) 4) Adjustment costs ( fuel, insurance)

Question 33

What is the benefit of a pre-approved mortgage to the borrower?

Answer 33

Buyers with pre-approved mortgages already know that they have financing approved and for how much so they can focus on finding a house in that range.

Question 34

If the date of approval differs from the date of closing, what commitment will most financial institutions make regarding interest rates?

Answer 34

Rates will be guaranteed even if rates increase before funds are advanced. (usually for a period of time ie: 3 months

Question 35

What is the interest adjustment date?

Answer 35

This is the first date the interest begins to calculate monthly. IE: Purchase date: January 17th IAD would be Feb 1st (only interest from Jan 17 to Feb 1st is paid) First full Payment: March 1st

Question 36

What are the benefits and drawbacks of variable rate mortgages to the borrower?

Answer 36

Benefits - Variable rate mortgages are open so you can pay them off anytime without penalty. - Rates can decrease which causes payments to decrease Drawbacks: - Rates can increase causing payments to increase.

Question 37

When mortgages are renewed prior to maturity, an interest differential is charged. Why is this so? What is the interest differential based on?

Answer 37

The interest differential is charged to compensate the lender for lost interest from the contract that has been broken. The interest differential is based on the balance outstanding on the mortgage, the spread between the old rate and the new one, and the time left on the contract.

Question 38

What are the advantages and disadvantages of a reverse mortgage to the borrower?

Answer 38

Disadvantages – - Could outlive Mortgage - Nothing to leave heirs Advantages – - $ now when you need it