Principles of Real Estate Exam 3 Questions With Correct Answers

Mortgage Debt - Answer A loan secured by a lien on real property Why mortgages are the best debt - Answer Secured by the place where the borrower lives, so more secure (lower interest rates due to lower default risk), longer loan terms, all of which leads to lower payments. Also, tax favored (deductible interest, lower effective interest rate) Promissory Note - Answer Promise to repay (the legal obligation), terms of repayment (interest, frequency, duration), negotiable instrument (holder entitled to payment). Mortgage deed or trust - Answer Pledges the real property as security (collateral) for the promissory note, conveys a lien...a non possessory property right/interest, instrument of conveyance of a real property right or interest. Two elements of a mortgage loan - Answer 1. Promissory note. 2. Mortgage deed or trust Interest payable for the period - Answer = Rate x Outstanding principle balance for the period. Paid in arrears - Answer Paid at the end of the period. Adjustable Rate - Answer Index rate + margin. Index Rate - Answer Objective variable rate beyond the control of either the borrower or lender. Margin - Answer Fixed markup over index rate. Change date - Answer Date that interest rates adjust. (used index rate published x # of days before the date) Rate caps - Answer Limit changes in interest rate, applicable for ARMs Payment Caps - Answer Limit changes in payment, applicable for ARMs. Permanent loans with long terms - Answer These loans last 5 to 30 years and usually with require monthly payments with a grace period of 15 days. Prepayment - Answer Payment of principal prior to a schedule or maturity. Traditionally, this was not allowed in the past, but it is currently for conforming loans. Loans with restricted rights of prepayment - Answer Jumbo, sub-prime, institutional commercial loans. Recourse - Answer Full personal liability of the borrower. Always the case for residential loans, where the borrower is the person. This is sometimes the case for institutional loans, where the borrower is either a person or the firm. Non recourse - Answer No personal liability of the borrower. Single asset bankruptcy remote entity - Answer An asset that the borrower loses in the event of bankruptcy, that only that asset is lost. Ends up being a non recourse loan. Key mortgage provisions - Answer Right of foreclosure (upon default), description (of the debt and property), preservation and maintenance clause, insurance clause (casualty), escrow clause (property tax and insurance), acceleration clause, due on sale clause. Judicial Foreclosure - Answer Court ordered public auction, usually required for mortgages. Deeds of trust - Answer Public auction conducted by trustee. Default - Answer Failure to fully perform the obligations of the mortgage/deed of trust/promissory note. Non foreclosure responses to default - Answer 1. Temporary cessation or reduction in payments 2. Sale for less than amount owed 3. Deed in lieu of foreclosure Deficiency - Answer Unpaid balance after foreclosure/short sale. Generally still owed by the borrower, lender can sue for this after foreclosure/default. If forgiven, a liability for the balance still exists. Foreclosure - Answer Legal process of selling the property and applying the proceeds to pay the obligations secured by the property. Terminates inferior, subordinate, junior liens.