Chapter 11: Real Estate Finance (Part B)

Question 1

An eligible veteran made an offer of $52,000 to purchase a home contingent upon his obtaining a 100% VA-guaranteed loan. Four weeks after the offer was accepted, a CRV for $50,000 was issued, and the veteran was found to be qualified for a VA loan. In this case, A. The veteran may withdraw from the transaction without penalty. B. The veteran may purchase property by making a $2,000 down payment.
A. A only
B. B only
C. Both A and B
D. Neither A nor B

Answer 1

C. Both A and B
(In both FHA and VA loans the borrower has a right to withdraw from the transaction without penalty if the property does not appraise. This is called an Exculpatory or Escape clause under federal loan. The borrower can also agree to close the transaction and pay the difference between the appraisal and the purchase price at closing. The borrower could also attempt to renegotiate the purchase price with the seller)

Question 2

Fannie Mae:
A. originates FHA loans in the primary mortgage market
B. purchases FHA loans in the secondary mortgage market
C. provides farm loans
D. provides funds for FHA loans

Answer 2

B. purchases FHA loans in the secondary mortgage market
(FNMA, the Federal National Mortgage Association, also known as Fannie Mae operates in the secondary market where loans are bought and sold)

Question 3

The type of real estate loan that allows the borrower to increase the outstanding balance of a loan up to a predetermined sum set by the lender and receive periodic additional funds is referred to as what type of financing?
A. subordinate
B. open-end
C. growing equity
D. graduated payment

Answer 3

B. open-end
(This is called a home equity line of credit, an open-end mortgage or a HELOC)

Question 4

The Truth in Lending Act sets forth requirements regarding real estate loans to individuals for all of the following purposes, EXCEPT:
A. equity lines of credit
B. commercial purposes
C. additions to residential properties
D. installation of a backyard swimming pool

Answer 4

B. commercial purposes
(The Truth in Lending Act (aka TILA or Regulation Z) applies to loans on 1-4 family residential properties, but does not apply to commercial loans, cash transactions or the purchase of vacant land)

Question 5

Which of the following statements is TRUE?
A. The priority of a mortgage is determined by the execution date.
B. A mortgage document contains no covenants on the part of the borrower.
C. A deed of trust is typically conveyed by the trustor to the beneficiary.
D. A promissory note has to be in writing to be enforceable, but it is not normally recorded.

Answer 5

D. A promissory note has to be in writing to be enforceable, but it is not normally recorded.
(Promissory notes are in writing. They are usually not recorded. While the Promissory Note is not typically recorded both the mortgage and the deed of trust are recorded to evidence the lender’s lien on the property)

Question 6

A borrower obtained a $7,000 second mortgage loan for five years at 6% interest per annum. Monthly debt service payments were $41.97 on a 30-year loan. The final payment included the remaining outstanding principal balance. What type of loan is this?
A. a fully amortized loan
B. a straight loan
C. a partially amortized loan
D. an accelerated loan

Answer 6

A. a fully amortized loan
(This is a fully amortized loan because each payment includes a portion of principal and interest so that the loan is fully repaid with the last payment over the 30 year amortized period)

Question 7

A loan from the seller to a buyer that allows the buyer to complete the transaction is called a:
A. growing equity mortgage
B. purchase money mortgage
C. package mortgage
D. blanket mortgage

Answer 7

B. purchase money mortgage
(A seller may provide all or part of the financing for a purchase. This may be called seller financing, a seller carryback or a purchase money mortgage. The seller is acting as the lender and the borrower will execute a promissory note and a mortgage or deed of trust between the seller and the buyer)

Question 8

Presume the interest rate on an FHA-insured mortgage loan to be 6.5% with a current monthly interest payment of $846. What would be the current principal?
A. $65,988.39
B. $147,339.48
C. $156,184.62
D. $164,97.82

Answer 8

C. $156,184.62
(The amount of annual interest is $10,152 ($846 x 12). $10,152/ .065 (6.5%) = $156,184.615 (rounded up to $156,184.62))

Question 9

Which of the following is NOT a required chief disclosure for compliance with the Truth in Lending Act?
A. loan-to-value ratio
B. annual percentage rate
C. total of all finance charges
D. total amount financed

Answer 9

A. loan-to-value ratio
(The Truth in Lending Act requires the disclosure of the true costs of obtaining credit. It is also known as TILA or Regulation Z. It includes the disclosure of the APR, the finance charges and the total amount financed. It does not include disclosure of the LTV)

Question 10

Regulation Z applies to:
A. all cash transactions
B. credit transactions secured by a residence
C. loans in excess of $25,000 secured by commercial properties
D. the sale of vacant land financed with a purchase money mortgage

Answer 10

B. credit transactions secured by a residence
(TILA is a federal law that applies to financing on 1-4 unit residential properties)

Question 11

Using the 28/36 ratios, how much annual income must the borrower have to qualify for a $98,000 loan at 8% for 30 years if the proposed P&I payments will be $719.32, taxes and insurance will be $135 per month and the borrower’s other monthly recurring debts total $500?
A. 28,478.32
B. 36,613.71
C. 45,144
D. 58,042

Answer 11

C. 45,144
(The total housing obligation will be $854.32 ($719.32 + $135.00). If the housing ratio is 28%, they must have $3,051.14 ($854.32 divided by .28) monthly income or $36,613.68 annually. Their total debt will include the housing payment of $854.32 + $500.00 = $1,354.32. $1,354.32 divided by .36 = $3,762 per month or $45,144 ($3,762 x 12) annually. They must qualify for both ratios so they will need $45,144 in annual income)

Question 12

The Federal Home Loan Mortgage Corporation was established as a secondary mortgage market entity to assist the:
A. Federal Housing Administration
B. Federal National Mortgage Association
C. the Wall Street derivatives market
D. federal banks in selling mortgage obligations

Answer 12

D. federal banks in selling mortgage obligations
(FHLMC is the Federal Home Loan Mortgage Corporation better known as Freddie Mac. It exists in the secondary market where mortgage obligations are bought and sold)

Question 13

A buyer obtained a 30-year fixed rate loan for $72,000 at a 5% annual interest rate. If the monthly debt service payment is $386.64, how much interest rounded to the nearest dollar would the buyer pay over the lifetime of the loan?
A. $31,190
B. $67,190
C. $98,380
D. $108,000

Answer 13

B. $67,190
(The borrower will pay the lender a total of $139,190.40 ($386.64 x 360). Of the $139,190.40 paid, $72,000 was for repayment of the principal. $139,190.40-$72,000 = $67,190.40 (rounded to $67,190))

Question 14

Last month’s debt service payment included $412.50 interest on a $60,000 loan balance. What is the annual rate of interest?
A. 7.5%
B. 7.75%
C. 8.25%
D. 8.5%

Answer 14

C. 8.25%
($412.50 x 12 = $4,950 annual interest. $4,950 divided by $60,000 = .0825 (8.25%))

Question 15

A lender is charging a below market interest rate of 6.5% with 6 discount points. What is the lender’s effective rate of interest?
A. 7.25%
B. 7.125%
C. 5.75%
D. 6.25%

Answer 15

A. 7.25%
(Each discount point represents a .125 yield. 6 points x .125 = .75. The lender’s effective rate of interest is 6.5% + .75% = 7.25%)

Question 16

Bill & Betty received $19,000 from the sale of their house to apply to a new townhome costing $90,000. They assumed an existing mortgage of $49,500 and borrowed $24,000 at 12% to be secured by a second mortgage. The lender charged them a 1/2% assumption fee, a 2% origination fee on the second mortgage and 5.5 points on the new loan. How much was the lender paid in fees?
A. $2,226
B. $3,092
C. $2,047.50
D. $2,470

Answer 16

C. $2,047.50
(The assumption fee is charged on the loan that they assumed. $49,500 x .005 (1/2%) = $247.50. Both the origination fee and the points are paid on the new loan of $24,000. $24,000 x 2% = $480. $24,000 x 5.5% = $1,320. Their total lender fees are $247.50 + $480 + $1,320 = $2,047.50)

Question 17

The type of loan that will most likely have the highest loan-to-value ratio is a:
A. VA loan
B. FHA loan
C. assumption loan
D. conventional loan

Answer 17

A. VA loan
(VA loans involve a 100% LTV with no required downpayment from a qualified veteran)

Question 18

Which of the following terms may appear in an advertisement for a real estate loan without triggering Regulation Z full disclosure requirements?
A. “$499 monthly payments”
B. “only one penny down”
C. “8% interest rate or lower”
D. “assumable mortgages available”

Answer 18

D. “assumable mortgages available”
(The advertising regulations of TILA require disclosure of the APR when any term of the loan is used in the advertising. An assumable loan does not involve a new loan and there is no term of the loan provided so this statement is not regulated by TILA)

Question 19

A developer had a mortgage loan on an entire development. When a lot was sold to the buyer, the developer was able to deliver title to that lot free of the mortgage lien by utilizing a partial release. What type of loan did the developer have?
A. blanket mortgage
B. purchase money mortgage
C. package mortgage
D. open-end mortgage

Answer 19

A. blanket mortgage
(A blanket loan is a loan that covers more than one property. They are commonly used in real estate development and often contain a release or partial release clause to release parcels from the loan in exchange for a specified reduction in the loan’s principal balance)

Question 20

In a title theory state, a borrower’s default could result in the collateral property being sold at auction as part of a:
A. judicial foreclosure
B. non-judicial foreclosure
C. deed in lieu of foreclosure
D. strict foreclosure

Answer 20

B. non-judicial foreclosure
(The trustee would begin the sale at the direction of the beneficiary since the trustee holds the power of sale pursuant to the deed of trust)

Question 21

What type of loan includes the financing of both real and personal property?
A. package
B. blanket
C. term
D. RAM

Answer 21

A. package
(A package loan is a loan that covers both real and personal property. They are most commonly used in commercial transactions where the sale of a business is involved and the buyer acquires both real estate and personal property necessary to operate the business)

Question 22

James earns $46,000 per year and his wife Judy earns $60,000 per year. Recurring obligations include monthly credit card payments of $800 and automobile loan payments of $650. The couple has a monthly grocery bill of approximately $400 and monthly medical expenses that average $200. What is the maximum monthly mortgage payment (principal and interest) that this couple can qualify for using an expense-to-income ratio of 28% of gross income for housing and 36% for housing expenses plus recurring obligations?
A. $2,473.33
B. $1,729.88
C. $1,130
D. $2,325

Answer 22

B. $1,729.88
(Their gross monthly income is $8,833 ($46,000 + $60,000 = $106,000 divided by 12). The maximum housing payment is $2,473.33 ($8,833.00 x .28). Their total maximum debt allowance is $3,179.88 ($8,833x.36). From their total debt obligations they must deduct the $800 in credit card payments and the $650 in auto loans. The medical bills and groceries are not counted in recurring debt. $3,179.88-$800-$650 = $1,729.88 remaining for housing. This is the answer because they must meet both ratios)

Question 23

Using the 28/36 ratios, how much annual income must the borrower have to qualify for a $98,000 loan at 8% if the proposed P&I payments will be $719.32, taxes and insurance will be $135 per month, and the borrower’s other monthly recurring debts total $500?
A. $28,478.32
B. $36,613.71
C. $45,144
D. $58,042

Answer 23

C. $45,144
(The total housing obligation is $854.32 ($719.32 + $135.00). $854.32 divided by .28 = $3,051.24 monthly income or $36,613.71 annually. The total debt including the housing is $854.32 plus $500 = $1,354.32. $1,354.32 divided by .36 = $3,762 monthly or $45,144 annually. The borrower must qualify for both ratios, so they will need $45,144 annually)