Chapter 11 - Lending Practices

Question 1

Term Loan

Answer 1

Requires interest payments only until the last day of its life
- 3-5 years
- Borrower agrees to pay interest on loan every 6 months
- Agrees to repay the entire loan amount upon maturity

Question 2

Amortized Loan

Answer 2

Loan requiring periodic equal payments that include both interest and partial repayment of principal

Question 3

Variables on an Amortization Table

Answer 3

1) Frequency of payment
2) Interest Rate
3) Maturity
4) Amount of the loan
5) Amount of the periodic payment
* If you know 4 variables, you can figure out the 5th

Question 4

What are amortization tables used for

Answer 4

Used to determine the amount of loan a borrower can support

Question 5

Impound or Reserve account

Answer 5

an account into which the lender places monthly tax and insurance payments (aka Escrow)

Question 6

Balloon Loan

Answer 6

Any loan in which the final payment is larger than the preceding payments
- Final payment called balloon payment
- Gives the borrower 3-5 years to find a cheaper and long term financing elsewhere

Question 7

Partially Amortized Loan

Answer 7

A portion of the debt is paid with regular monthly payments, then a balloon payment on the loan maturity date
Advantage: Payments are smaller
Disadvantage: Large payment may be borrowers downfall

Question 8

Loan Balance Table

Answer 8

Shows the balance remaining to be paid on an amortized loan

Question 9

Loan-to-Value Ratio (L/V or LTV ratio)

Answer 9

A percentage reflecting what a lender will lend divided by the sale price or market value of the property (whichever is less)
- Prevents lenders from over lending on a property just because the borrower overpaid for it

Question 10

Equity

Answer 10

The market value of a property less the debt against it

Question 11

Point

Answer 11

1% of the loan amount

Question 12

Origination Fee

Answer 12

• The expenses a lender incurs in processing a mortgage loan
• Upfront fee charged by lender to process a new loan application

Question 13

Discount Points

Answer 13

• Points charged to raise the lender’s monetary return on a loan
• Each point of discount raises the effective yield by about 1/8 of 1%

Question 14

Effective Yield

Answer 14

A return on investment calculation that considers the price paid, the time held and interest rate

Question 15

Tight Money

Answer 15

Periods where discount points are most often charged
- Mortgage money is in short supply

Question 16

Loose Money

Answer 16

Periods when lenders have adequate funds to lend are are actively seeking borrowers

Question 17

Conventional Loans

Answer 17

Real estate loans that are not insured by FHA or guaranteed by the VA

Question 18

Federal Housing Administration (FHA)

Answer 18

• Purpose of encouraging new construction as a means of creating jobs
• Offered to insure lenders against losses due to nonrepayment when they have loans on both new and existing homes
• Charged borrower an annual insurance fee of about 0.5% of the balance owed to the loan

Question 19

Simple Assumption

Answer 19

• The property is sold and the loan is assumed by the buyer without notification tot he FHA or its agents
• Seller remains fully liable to the FHA for full repayment

Question 20

Formal Assumption

Answer 20

The property is not conveyed until the new buyer’s creditworthiness has been approved by the FHA or its agents
- Once a buyer assumes the loan, the seller may obtain a full release of liability from the FHA

Question 21

Up-Front Mortgage Insurance Premium (UFMIP)

Answer 21

• A one time charge by FHA for the insuring of a loan
• 1% of the loan amount

Question 22

FHA Loan Requirements

Answer 22

1) 2 years of steady employment (preferable with same employer)
2) The last 2 years income should be the same or increasing
3) The borrowers credit report should typically have less than two 30-day late payments in the past 2 years - with a minimum score of 620
4) If borrower has declared bankruptcy it must be at least 2 years old with perfect credit since the bankruptcy discharge
5) If borrower has been through foreclosure proceedings, it must be at least 3 years old with perfect credit since
6) The new mortgage payment should be about 30% of the gross income before taxes
***requirements are the most flexible. Easiest type of real estate mortgage loan to qualify for

Question 23

Department of Veteran Affairs (VA)

Answer 23

Government would be held liable for a portion of the first mortgage real estate loans made to veterans
- Objective to allow a veteran to buy a home with no cash down payment

Question 24

VA Loan Requirements

Answer 24

Must have completed:
- At least 24 months
- The full period of ordered active duty (90 day during wartime & 180 day during peacetime)
Needed to Obtain:
- Certificate of eligibility
- A copy of veteran’s discharge papers

Question 25

Certificate of Reasonable Value (CRV)

Answer 25

Reflects the estimated value of the property as determined by the VA staff appraiser

Question 26

VA Fixed-Rate Loans

Answer 26

- Up to 30 years - No prepayment penalty - No due-on-sale clause

Question 27

VA Loans

Answer 27

- In the event of default or foreclosure, the veteran is required to repay the VA on the loan - If property is sold and buyer assumes VA loan, veteran is still financially responsible if the buyer defaults

Question 28

To be release from liability in a VA loan

Answer 28

- Loan payment must be current - Prospective purchasers must meet credit worthiness standards held by VA - Prospective purchaser must assume full liability for repayment of the loan - including indemnity liability to the VA

Question 29

Funding Fee

Question 30

Private Mortgage Insurance (PMI)

Answer 30

- Insures lender against foreclosure loss - Only up to 20-25% of loan

Question 31

A loan where the principal is all repair but the final payment is larger than any of the previous payments on the loan is an example of a

Answer 31

Balloon Note

Question 32

The last day of a loan's life is known as the

Answer 32

Maturity date

Question 33

The amount of each periodic payment needed to amortize a loan in a given time can be determined by consulting a

Answer 33

Amortization Table

Question 34

When a loan is fully amortized...

Answer 34

Principal payments are scheduled so that the entire principal is repaid by the loan's maturity date

Question 35

A buyer borrowed money to purchase a home under terms which require him to make monthly payments which included loan amortization plus 1/12 of the insurance premium and annual real property tax. What is this type of loan called?

Answer 35

A budget loan

Question 36

The relationship between the amount of money a lender is willing to loan and the lender's estimate of the market value of the property that will serve as security is called

Answer 36

the loan-to-value ratio

Question 37

A borrower wants to know what portion of a 30 year, fully amortized loan would be paid off by the 4th year of the loan's life. she should consult a

Answer 37

Loan to balance table

Question 38

Would a higher or lower interest rate be more effective in reducing interest paid by the borrower for mortgage loan repayments?

Answer 38

The higher the interest rate, the more effective earlier mortgage loan repayments would be in reducing interest payments.

Question 39

Compared to monthly payments, biweekly payments of one-half of the monthly payment will

Answer 39

shorten the life and amount of interest paid over the life of the loan

Question 40

A lender will make a loan on a residential property at an 80% loan-to-value ratio. The house is appraised at $98,000, but the actual sales price is $96,000. What would be the cash down payment?

Answer 40

$96,000 x 80% = $76,800 $96,000 - $76,800 loan = $19,200 down payment

Question 41

The difference between a property's market value and the debts against it is known as

Answer 41

Owner's equity

Question 42

The loan origination fee stated to a purchaser for setting up a loan may be charged as a percentage of the loan or

Answer 42

An itemized billing for expenses incurred by the lender

Question 43

Discount points on mortgage loans will tend to do what during periods of tight money

Answer 43

Increase

Question 44

When a lender charges discount points to make a loan, the

Answer 44

Yield to the lender will increase

Question 45

Does the FHA operate at the taxpayers expense?

Answer 45

No, it charges borrowers a mortgage insurance premium

Question 46

The premium for FHS mortgage insurance is based on what?

Answer 46

The loan amount

Question 47

Regarding the loan amount the FHA will insure. The maximum FHA -insured loans...

Answer 47

Change from time to time as average sales prices increase and the amount that the FHA will insure varies city by city

Question 48

Both FHA & VA loans are assumable

Answer 48

with prior approval

Question 49

Does the FHA rules allow for a junior mortgage on the property at loan origination?

Answer 49

No

Question 50

The FHA has played a major role in

Answer 50

Formulating loan qualification criteria and the imposition of minimum construction standards

Question 51

Does the FHA lend money

Answer 51

NO. They only insure loans

Question 52

Under the VA loan guarantee programs,

Answer 52

the VA loan guarantee is a substitute for the protection normally provided a lender by a down payment requirement

Question 53

A home-selling veteran who took out a VA loan can be sure of being relieved of liability to the loan by

Answer 53

Requiring the buyer to obtain new financing.

Question 54

Because of loan default losses being suffered by the VA, the VA now charges new VA borrowers

Answer 54

a one-time funding fee when the loan is made

Question 55

A buyer purchased a home for $90,000 and secured a 90% L/V loan which was protected by a private mortgage insurance, the premium for which was 1/2 of 1% for the first year and 1/4 of 1% annually thereafter. What is the premium for the first year?

Answer 55

$90,000 x 90% = $81,000 $81,000 x .005 = $405

Question 56

The Rural Housing Service Administration makes loans on farms and rural homes as well as

Answer 56

Guaranteeing loans on farms and rural homes.