Financing Market and Loan Programs

Question 1

Who is involved in a primary mortgage market?

Answer 1

Lenders who originate loans

Question 2

What is the primary function of a savings and loan association?

Answer 2

To promote thrift and home ownership

Question 3

What is the primary function of a commercial bank?

Answer 3

To act as a depository for funds and as a lender for commercial activities

Question 4

Why does a borrower retain a mortgage broker?

Answer 4

To help obtain financing for a specific commercial property

Question 5

What are the most common types of repayment plans?

Answer 5

Straight (interest only)
Amortized
Balloon payment
Adjustable rate

Question 6

What is a balloon mortgage?

Answer 6

A loan that has one large final payment due when the loan matures

Question 7

What is an index

Answer 7

A measure of economic conditions

Question 8

What is a payment cap?

Answer 8

A set monthly payment that remains the same although the actual interest rate may fluctuate throughout the year

Question 9

List two advantages of conventional loans over government-backed loans.

Answer 9

Processing a conventional loan usually takes less time. Loan approval from a conventional lender can take 30 days or less, while approval on a government-backed loan seldom, if ever, can be done in less than 30 days.
There is usually no legal limit on loan amounts with conventional loans; however, government-backed loans have dollar limits that vary by agency.

Question 10

Most conventional loans require the borrower to make how much of a down payment?

Answer 10

Most conventional loans require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property’s sale price.

Question 11

What are the two distinct features of fixed-rate fully amortized loans?

Answer 11

The interest rate remains fixed for the life of the loan.

The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

Question 12

What does federal law say about the termination of private mortgage insurance?

Answer 12

Federal law requires that any loans originated after July of 1999 must have the PMI terminated after the borrower has accumulated 22% of equity in the property (loan-to-value ratio is 78%) and is current with all loan payments. However, the law also states that a borrower whose equity equals 20% of the purchase price or appraised value may request that the lender cancel the PMI.

Question 13

Greg and Joyce purchased a home from the builder who offered to pay $5,000 at closing as an incentive to get them to buy. What kind of mortgage will they get?

Answer 13

A buydown mortgage

Question 14

What is a release clause and in what type of mortgage would you find this clause?

Answer 14

This clause, found in a blanket mortgage, allows the borrower to obtain a release of any individual lot from the lien by repaying a certain part of the loan. The lender will issue the partial release for the one lot, with the provision that the mortgage will continue to cover the remaining lots.

Question 15

Define a purchase money mortgage

Answer 15

With a purchase money mortgage, the buyer borrows from the seller in addition to the lender. This is sometimes done when a buyer cannot qualify for a bank loan for the full amount, so the seller “takes back” a portion of the purchase price as a second mortgage.

Question 16

Describe a reverse annuity mortgage.

Answer 16

With this type of mortgage, the lender makes payments to the borrower. This system allows older property owners to receive regular monthly payments from the equity in their paid-off property without having to sell

Question 17

The primary mortgage market is made up of:

Answer 17

Savings Associations
Commercial Banks
Credit Unions
Insurance Companies
Investment Groups
Mortgage Bankers
Mortgage Brokers

Question 18

Mortgage

Answer 18

a financing instrument that creates a lien against a property. A promissory note establishes legal evidence of the debt incurred. A mortgage always needs a note to be legally valid.

Question 19

A monthly mortgage payment is generally made up of

Answer 19

four parts: principal, interest, taxes and insurance. Lenders refer to this as PITI.

Question 20

Foreclosure

Answer 20

If the purchaser defaults, the lender has the right to bring legal action through the courts to satisfy the debt. This is done through foreclosure – the process that leads up to selling the property that was pledged to secure the debt.

Question 21

In order to increase their investment

Answer 21

lenders often charge other fees when the borrower gets the loan. These fees are loan origination fee and points or discount points.

Question 22

Buyers can find out how much of a loan they can qualify for through

Answer 22

prequalification or preapproval

Lenders qualify buyers using what are called qualifying standards or loan underwriting standards.

Question 23

Underwriting

Answer 23

will determine whether a borrower and property meet the minimum requirements established by the lender, the investor, or the secondary market (into which the lender will probably sell the loan)

Question 24

To qualify for a mortgage loan

Answer 24

a borrower must meet the lender’s qualifications in terms of income, debt, cash, and net worth. In addition, the borrower must demonstrate sufficient creditworthiness to be an acceptable risk.

Question 25

Several types of repayment plans exist. The most common are:

Answer 25

Straight
Amortized
Balloon payment
Adjustable rate

Question 26

Straight (Interest Onlly)

Answer 26

Monthly payments are allocated only to interest

Question 27

Amortized

Answer 27

A borrower makes a periodic (usually monthly) payment of principal plus interest.

Question 28

A loan that has one large final payment due when the loan matures.

Answer 28

Balloon Payment

Question 29

Interest rates change periodically, usually every one, three or five years.

Answer 29

Adjustable rate

Question 30

There are basically two categories of loans available to buyers in the marketplace

Answer 30

conventional loans and government-backed loans.

Question 31

The conventional mortgage is the most common type of loan and is generally viewed as the most secure

Answer 31

Most conventional loans require the borrower to make a down payment of 20% or more, making the loan 80% or less of the property’s sale price.

Question 32

Conventional loans are typically

Answer 32

Uninsured

Question 33

Most conventional loans have traditionally been designed

Answer 33

as fixed-rate loans. The most common fixed-rate loans are 30-year mortgages, because the payment is stable and there is always the opportunity to pay the balance down or to refinance for a better rate at a later date.

Question 34

A borrower can get a conventional loan with a lower down payment by insuring the loan through

Answer 34

a private mortgage insurance program (PMI). The PMI payments will terminate once the loan has been repaid to a certain level.

Question 35

For buyers who may not be able to qualify for a standard fixed-rate mortgage, there are other options for conventional loans:

Answer 35

Graduated payment mortgage (GPM)
Pledged account mortgage(PAM)
Buydown
Open-end loan
Blanket mortgage
Wraparound mortgage
Bridge loan
Purchase money mortgage
Construction mortgage
Home equity loan
Package mortgage
Reverse annuity mortgage
Shared equity mortgage