Finance Instruments Chapter 5

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

A refinance mortgage replaces an existing mortgage on the same property and is often used when interest rates increase.

False

An 'E-Bridge loan' is used when someone is purchasing one home and selling another at the same time.

True

A nonrecourse mortgage permits a deficiency judgment against the borrower.

False

With a shared appreciation mortgage the lender recieves a portion of any increase in the property's value.

True Signup and view all the answers

A construction loan is a long-term loan used to finance construction of improvements on land.

False Signup and view all the answers

In a promissory note, who is the maker?

The borrower Signup and view all the answers

What is the primary purpose of a security instrument accompanying a loan?

To secure the lender's interest in the property Signup and view all the answers

Which of the following describes hypothecation?

Pledging an asset as collateral while retaining possession Signup and view all the answers

What does an alienation clause, often found in finance instruments, primarily affect?

The option to assume a loan when a property is sold Signup and view all the answers

What is the main purpose of a security instrument in real estate financing?

To provide the lender with collateral for a loan. Signup and view all the answers

Which role does the trustee fulfill in a deed of trust?

To act as a neutral third party to manage the lien and foreclosure. Signup and view all the answers

What is a 'take-out loan' mainly used for?

To transition from a short-term construction loan to long term financing. Signup and view all the answers

What is the purpose of recording a 'lis pendens'?

To formally declare and publish an ongoing foreclosure action. Signup and view all the answers

Which of the following options is NOT a required element of a promissory note?

The location of the property itself. Signup and view all the answers

What is a key characteristic of a negotiable promissory note?

It can be freely transferred by the payee. Signup and view all the answers

When a promissory note is endorsed 'without recourse,' what is the implication for the original payee?

The original payee will not be liable if the maker fails to make payments to the third party. Signup and view all the answers

What is the key distinction between a mortgage and a deed of trust as security instruments?

A mortgage is a two-party instrument, while a deed of trust is a three-party instrument. Signup and view all the answers

What does an alienation clause in a conventional loan agreement typically allow a lender to do?

To call in the loan if the borrower sells the property. Signup and view all the answers

If a lender allows a new buyer to assume an existing loan, what are the possible conditions?

Either on the original terms or at an increased interest rate set by the lender. Signup and view all the answers

What is the key difference between simple interest and compound interest in real estate loans?

Simple interest is calculated only on the original loan amount; compound interest includes accrued interest. Signup and view all the answers

Study Notes

Learning Objectives

Students will be able to identify the parties and basic provisions of a promissory note.
Students will understand the difference between a straight note and an installment note.
Students will know the purpose of a security instrument accompanying a loan.
Students will define hypothecation and its relation to collateral.
Students will compare mortgages and deeds of trust.
Students will contrast judicial and nonjudicial foreclosure.
Students will describe three alternatives to foreclosure.
Students will list clauses found in real estate finance instruments and describe effects.
Students will explain how an alienation clause impacts loan assumption.
Students will name major mortgage loan types and identify their characteristics.

Suggested Lesson Plan

Students will complete Exercise 5.1 to review the previous chapter on the Mortgage Industry.
Students will review Chapter 5: Finance Instruments, and the learning objectives for the chapter.

Promissory Notes

A promissory note is evidence of a borrower's legal debt to pay.
The borrower (usually a buyer) is the maker of the note; the lender is the payee.
The note specifies the parties, loan amount, interest rate, and repayment details.
Promissory notes used in real estate loans are negotiable to enable secondary market resale.
A negotiable instrument is freely transferred by the payee to a third party.
"Without recourse" notes protect the payee from liability if the maker fails to make payments to a third party.
A holder in due course is a third party purchaser who buys a note in good faith without knowledge of flaws.
Straight note: interest-only payments, balloon payment at the end.
Installment note: includes principal and interest in each payment.

Security Instruments

A security instrument makes the borrower's property collateral for the loan.
Lender has right to foreclose if the borrower defaults.
Under hypothecation, the borrower transfers property title as loan security.
Now, most jurisdictions use a mortgage which is a lien on borrower's property.
Mortgage: a two-party agreement between borrower (mortgagor) and lender (mortgagee).
Deed of trust: a three-party agreement — borrower (trustor), lender (beneficiary), and third party trustee.
Trustee holds the power of sale in case of default.

Foreclosure

Judicial foreclosure: lender files a lawsuit, the court orders property sale.
Proceeds used to pay the mortgage, any exceeding funds go to the borrower.
If proceeds are insufficient, a deficiency judgment is issued against the borrower.
Statutory right of redemption allows the borrower, during a set time after the sale, to redeem the property by repaying the outstanding amount.
Nonjudicial foreclosure: lender doesn't need court order; a trustee sells the property at a sale.
Borrower has no redemption right in nonjudicial foreclosure.

Alternatives to Foreclosure

Loan workouts: lender and borrower agree on alternative repayment plan.
Deed in lieu of foreclosure: borrower agrees to give the property to the lender.
Short sale: lender approves sale of the property for less than the amount owed.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz focuses on key concepts from Chapter 5 regarding finance instruments in real estate. Students will explore topics such as promissory notes, mortgage types, and foreclosure alternatives. By the end of the quiz, participants will have a solid understanding of the essential provisions and terms associated with real estate finance.