Loan Officer Practice Exam

What is a financial encumbrance described as a nonpossessory financial interest in property?

1. lien

2. mortgage

3. note

4. deed

The correct answer is: lien

A financial encumbrance that is described as a nonpossessory financial interest in property is termed a lien. A lien represents a legal right or interest that a lender or creditor has in another's property, granted until the obligation associated with the lien is satisfied. This means that the lienholder does not have physical possession of the property but holds a claim that can secure the payment of a debt or obligation. In contrast, a mortgage is a specific type of lien where property is pledged as security for a loan. While mortgages are indeed liens, the term "lien" encompasses a broader range of financial claims beyond just mortgages. A note refers to the written promise to repay a loan and is not an interest in the property itself, while a deed pertains to the legal document that conveys ownership of the property. These distinctions clarify why the correct term for a nonpossessory financial interest is a lien.