Real Estate Investing Real Estate Financing Strategies 2 — Questions and Answers
Question 1: What is a 'subject-to' real estate deal?
- Buyer takes title while the seller's existing mortgage stays in place (Correct answer)
- Buyer assumes full legal liability for the seller's mortgage
- Seller finances the purchase directly for the buyer
- Buyer obtains a new loan subject to appraisal approval
Correct answer: Buyer takes title while the seller's existing mortgage stays in place
In a subject-to deal, the buyer takes ownership of the property but the existing mortgage remains in the seller's name and the buyer makes the payments.
Question 2: What is the primary risk to the seller in a 'subject-to' transaction?
- Losing equity if the buyer defaults and the lender forecloses (Correct answer)
- Being unable to deduct mortgage interest on taxes
- Having to pay capital gains tax immediately at closing
- Losing the right to sell the property again in the future
Correct answer: Losing equity if the buyer defaults and the lender forecloses
If the buyer stops making payments, the lender can foreclose on the property, damaging the seller's credit since the mortgage is still in their name.
Question 3: What does LTV stand for in real estate financing?
- Loan-to-Value ratio (Correct answer)
- Long-Term Valuation
- Lender's Total Verification
- Liability-to-Value index
Correct answer: Loan-to-Value ratio
LTV (Loan-to-Value) ratio is calculated by dividing the loan amount by the appraised property value, expressed as a percentage.
Question 4: A DSCR loan qualifies a borrower primarily based on:
- The property's rental income relative to its debt payments (Correct answer)
- The borrower's personal W-2 income and credit score only
- The borrower's net worth and liquid assets
- The property's location and neighborhood grade
Correct answer: The property's rental income relative to its debt payments
DSCR (Debt Service Coverage Ratio) loans are underwritten based on the property's income potential rather than the borrower's personal income.
Question 5: Which financing strategy involves borrowing against the equity in an existing investment property to fund a new purchase?
- Cash-out refinance (Correct answer)
- FHA 203(k) loan
- Wraparound mortgage
- Blanket loan
Correct answer: Cash-out refinance
A cash-out refinance replaces an existing mortgage with a larger one and gives the investor the difference in cash to deploy into a new deal.
Question 6: What is a 'blanket mortgage' used for in real estate investing?
- Financing multiple properties under a single loan (Correct answer)
- Covering unpaid taxes on foreclosed properties
- Providing bridge financing until a permanent loan closes
- Insuring a lender against borrower default
Correct answer: Financing multiple properties under a single loan
A blanket mortgage allows an investor to finance two or more properties with one loan, often with a release clause that allows individual properties to be sold.
Question 7: What is the purpose of a 'release clause' in a blanket mortgage?
- It allows one property to be sold and removed from the loan without paying off the entire balance (Correct answer)
- It releases the borrower from personal liability upon default
- It allows the lender to call the full balance due at any time
- It permits the borrower to skip payments during vacancy periods
Correct answer: It allows one property to be sold and removed from the loan without paying off the entire balance
A release clause lets investors sell individual properties from the portfolio and have the lien removed on that property after paying a portion of the loan.
Real Estate Investing Real Estate Financing Strategies 2
What is a 'subject-to' real estate deal?