Real Estate Real Estate Law & Regulations 2 — Questions and Answers
Question 1: What distinguishes lender's title insurance from owner's title insurance?
- Lender's policy protects the buyer's equity; owner's policy protects only the mortgage
- Lender's policy covers only the loan amount and decreases as the loan is paid down; owner's policy covers the full property value (Correct answer)
- They cover the same risks but different parties
- Only owner's title insurance is required by law
Correct answer: Lender's policy covers only the loan amount and decreases as the loan is paid down; owner's policy covers the full property value
Lender's title insurance protects the lender's interest up to the loan amount and typically decreases as the loan balance falls, while owner's policy covers the full purchase price.
Question 2: A cloud on title refers to:
- A property located in a flood zone
- Any outstanding claim, lien, or encumbrance that may impair the owner's clear title (Correct answer)
- Digital title records stored online
- Undisclosed easements only
Correct answer: Any outstanding claim, lien, or encumbrance that may impair the owner's clear title
A cloud on title is any defect, claim, or encumbrance in the title records that casts doubt on the owner's right to the property and must be resolved before sale.
Question 3: Under a race-notice recording statute, a subsequent purchaser is protected if they:
- Record first regardless of knowledge of prior interests
- Record first AND had no notice of prior unrecorded interests at the time of purchase (Correct answer)
- Simply pay fair market value
- File with the court within 30 days
Correct answer: Record first AND had no notice of prior unrecorded interests at the time of purchase
Under race-notice statutes (most common in the US), a subsequent bona fide purchaser who had no prior knowledge of an earlier claim and records first wins priority.
Question 4: A lis pendens is a recorded notice that:
- Indicates a property is for sale
- Provides public notice that the property is subject to pending litigation (Correct answer)
- Creates a tax lien on the property
- Transfers title during probate
Correct answer: Provides public notice that the property is subject to pending litigation
Lis pendens ('suit pending') is a notice recorded in the county records alerting potential buyers and lenders that the property is involved in active litigation.
Question 5: A mechanic's lien can be filed by a:
- Mortgage lender only
- Contractor, subcontractor, or supplier who performed work or supplied materials for the property (Correct answer)
- Property appraiser
- Real estate agent for unpaid commission
Correct answer: Contractor, subcontractor, or supplier who performed work or supplied materials for the property
Mechanic's liens give contractors, subcontractors, and material suppliers a security interest in the property when they are not paid for improvements.
Question 6: A short sale occurs when the property sells for:
- Less than the asking price after a price reduction
- Less than the outstanding mortgage balance, with lender approval (Correct answer)
- Quickly within 30 days of listing
- Under assessed value for tax purposes
Correct answer: Less than the outstanding mortgage balance, with lender approval
In a short sale, the lender agrees to accept less than the full loan balance owed, allowing the owner to sell and avoid foreclosure.
Real Estate Real Estate Law & Regulations 2
What distinguishes lender's title insurance from owner's title insurance?